US mortgage firms safe, says Fed

US mortgage firms Fannie Mae and Freddie Mac are not at risk of collapse, Federal Reserve chairman Ben Bernanke has insisted.

The two pillars of the mortgage market were in "no danger of failing", he told a Congressional committee.

Shares in the two firms rebounded slightly on Wednesday, although doubts still surround their long-term future.

Fighting inflation, now rising at its fastest pace in 26 years, had become a top priority, the Fed boss added.

Mortgage crunch

In the second day of his semi-annual testimony to Congress, Mr Bernanke sought to allay fears that Fannie Mae and Freddie Mac, which between them guarantee nearly half of US mortgage debt, might run out of cash.

Policymakers have always insisted the two firms are adequately capitalised, but the US Treasury announced plans on Sunday to supply them with additional credit and buy shares in the firms, if needed.

"It's a top priority of the Federal Reserve to run a policy that is going to bring inflation to a acceptable level"
Ben Bernanke, Federal Reserve chairman

This was not enough to stabilise the firm's shares, which fell a further 17% on Tuesday on fears that investors may lose out in the event of a government rescue.

But on Wednesday, their shares rose 11% amid a general rally in the banking sector, after regulators vowed to crack down on the practice of "short-selling" shares.

President Bush has defended the plans to help Fannie Mae and Freddie Mac, but denied they were being bailed out.

He said the importance of the firms to the US economy meant there was a "special need" to help them to ensure confidence and stability in the mortgage market.

However, he has stressed that the two firms should remain shareholder-owned.

Bleak backdrop

Mr Bernanke's Congressional appearance comes against a bleak economic backdrop, with economic growth slowing and inflation rising.

Consumer prices rose 1.1% on a monthly basis in June, more sharply than expected.

Their climb, driven by soaring fuel prices, makes it far harder for the Fed to consider cutting borrowing again to counter the fear of a recession.

"It's a top priority of the Federal Reserve to run a policy that is going to bring inflation to a acceptable level consistent with price stability," Mr Bernanke said.

Recent figures have shown the impact of the housing slump and credit crunch on consumer confidence, with retail sales virtually flat last month.

With consumer spending accounting for nearly two-thirds of overall economic output, analysts believe growth could be minimal in the second half of 2008.

But there was also better news on Wednesday, with data indicating that the manufacturing sector remains resilient.

Industrial production rose by 0.5% last month, the best performance for nearly a year and a reversal of two previous months of decline.

EU to target rogue download firms

Hundreds of mobile phone download sites are expected to be investigated after an EU-wide sweep of services.

Some 80% of the 500 websites offering ringtones and phone wallpaper breached regulations, the European Commission is expected to reveal on Thursday.

Unclear pricing and misleading information about what was free led to "costly surprises" for consumers, commissioner Meglena Kuneva will say.

In 2007, European ringtone sales stood at 691 million euros (£548m).

Some 495 million mobile phones are owned by Europeans.

Probe

A sweep of 500 websites - many of which targeted young people - took place across 27 EU member states, Norway and Iceland to check for breaches of European regulations.

"Far too many people are falling victim to costly surprises from mysterious charges, fees and ringtone subscriptions"
European Commissioner Meglena Kuneva

It followed complaints from consumers who had been hit with bills they did not expect after downloading pictures or tunes on their mobile.

Results of the investigation, to be released on Thursday, are expected to show that 466 cases will be followed up.

Some 268 of these had some irregularities in the price, including some that did not even show the price at all. Others did not make it clear that consumers were entering into a subscription.

Some 399 failed to give complete contract details of the trader, while 344 presented information in what the authorities regarded as a misleading way.

"Far too many people are falling victim to costly surprises from mysterious charges, fees and ringtone subscriptions they learn about for the first time when they see their mobile phone bill," the commissioner will say.

National authorities are now expected to contact each of the traders and have powers to fine them or close websites.

Meanwhile, mobile phone users, and parents, are being urged to check the small print of deals.

Ringtones made up an estimated 29% of the mobile content market in the EU in 2007, up 10% on the previous year.

Weak debut for Macau casino firm

Casino king Stanley Ho plots his comeback

Shares in the casino operator owned by Macau tycoon Stanley Ho have fallen on their debut in Hong Kong.

Sociedade de Jogos de Macau (SJM) dropped 1.3% in a listing that comes after months of delay, due to legal wrangling with Mr Ho's sister.

The weaker economic climate, as well as challenges faced by Macau's gaming sector as China curbs visitor numbers, also put investors off, analysts said.

Mr Ho plans to use the funds from the listing to revamp his casinos.

Trading was scheduled to start last week, but was delayed by a last-minute legal challenge by Mr Ho's sister Winnie.

After losing the ruling on Tuesday, she pledged to take her case to the Court of Final Appeal in Hong Kong.

At the listing ceremony in Hong Kong, Mr Ho, 86, said: "You all know our path towards the listing has not been smooth.

"But we have successfully overcome a series of obstacles, turning challenges into opportunities," he added.

SJM, which owns the Lisboa casino, had a monopoly on gambling in Macau, the former Portuguese territory, for four decades until 2002.

But it has struggled to compete against its glitzy foreign rivals, operated by US firms Las Vegas Sands and Wynn Resorts, which are trying to dispel Macau's seedy image and turn it into a place for family entertainment.

Rio Tinto 'beats' iron ore record

The mining company Rio Tinto says that it mined a record amount of iron ore and aluminium, amid strong demand from emerging nations including China.

Rio Tinto said that despite profiting from the increasing demand, it was also facing rising costs and had to pay more for its staff, equipment and fuel.

The comments were made in a production report covering the second quarter running from April to the end of June.

They come as the firm is fighting off a takeover from rival BHP Billiton.

Demand

The chief executive of Rio Tinto, Tom Albanese, says that the cost of production at the firm's Australian mines means that it is not profiting as much as they could be from the runaway demand for metals.

One of the main problems is the limited number of experienced mining engineers available, which hampers production and pushes up the wage bill.

Rio Tinto says they have to pay higher salaries to attract talented workers.

The company expanded last year, after acquiring the Canadian aluminium maker, Alcan.

It is now facing an unsolicited takeover bid from its larger rival BHP Billiton.

---

Struggling to find a dog's house

Landlords are in the dog-house with a charity which claims that three in four do not allow pets into properties.

Growing demand for rented homes has led to a rise in the numbers of pets being abandoned or handed over to charities to re-home, said the Dogs Trust.

The charity wants landlords to be more open to allowing tenants to keep dogs.

The Association of Residential Letting Agents (Arla) said it was "broadly supportive" of the Trust but it would struggle to change attitudes.

"Pet owners who need to rent privately are being forced to live in unsuitable properties, or rent with their pets without consent from their landlord," said Dogs Trust chief executive Clarissa Baldwin.

Leading issues

Staff at the Dogs Trust in Leeds said the waiting list had grown from 75 to 640 in six months.

They highlighted the cost of keeping a dog when household spending was being tightened.

The charity also said that housing issues were among the main reasons why dogs were handed in, alongside pets' behavioural problems.

The charity claimed one couple, living in the Outer Hebrides, had to move islands to find somewhere to live with their Border Collies.

In the survey of 1,400 pet owners by the Dogs Trust, nearly eight in ten said they had difficulty finding accommodation that allowed pets.

The charity is now launching a campaign to encourage landlords to accept pets and is offering tips to tenants, such as getting a pet reference from former landlords.

Malcolm Harrison, spokesman for Arla, said some landlords had their hands tied by rules that banned pets from entire developments.

Others were reluctant to allow animals in their properties owing to cleaning costs, and consideration of allergies that subsequent tenants might suffer.

He added that the group was broadly supportive of the charity's stance, but it would struggle to change attitudes during a period of high demand.

The rental sector usually sees rising demand as house prices fall, with potential homeowners delaying their move into the market.

A bad run for Macau's casino king

By Katie Hunt
Business reporter, BBC News

Stanley Ho made his fortune from Macau's lucrative casino trade but the billionaire has struggled to adapt to the tiny territory's changing fortunes.

Mr Ho's firm, Sociedade de Jogos de Macau (SJM), which had a monopoly on gambling for four decades until 2002, has lost out to slicker, foreign rivals who are attempting to transform Macau into Asia's Las Vegas.

SJM's share of gambling revenue in the former Portuguese territory, which surpassed the Las Vegas strip in 2006, declined to 40% in 2007 from 75% in 2005, a year after the first foreign company set up shop.

Seedy past

Mr Ho's famous old casino, the Lisboa, which is closely associated with Macau's seedy past of gangster gunfights, has proved less popular with punters than the glitzy casinos operated by US firms Las Vegas Sands, MGM Mirage and Wynn Resorts.

However, Mr Ho is fighting back. His firm plans to use the $494m (£247m) it raised from a stock exchange listing in neighbouring Hong Kong this month to give the Lisboa a long-awaited facelift and re-develop several other casinos in the territory.

The cramped, gaudy Lisboa, where women clad in revealing clothes vie to attract male customers, is in stark contrast to the slicker new venues that are trying to turn Macau into a family-friendly entertainment destination.

Whether investors like his plans will be clearer on Wednesday when SJM shares begin trading.

The listing and ambitious expansion plans marks a big push by Mr Ho, who turns 87 this year, to claw back the market share lost to his competitors - and to secure his legacy.

"Stanley Ho is swinging for the changes. He recognises his own mortality," said David Green, gaming practise director for Pricewaterhouse Coopers in Macau.

Family feud

But the road to market has been dogged by controversies.

The company's shares were slated to begin trading last week but were delayed by a last-minute court challenge by Mr Ho's estranged sister Winnie, who questioned the legality of the share sale.

Some investors returned the shares they had bought because of the legal challenge, which was later quashed.

Ms Ho, who holds a stake in SJM's parent company, has filed more than 30 lawsuits against her brother in recent years.

The flotation has also been scaled back amid a weak stock market and delayed by queries from Hong Kong's stock market regulator about the shareholding structure of SJM's parent firm STDM - also controlled by Mr Ho.

The listing has also shed rare light on the workings of a secretive Chinese family empire, publicly revealing the 44 shareholders of SJM's parent company for the first time.

They include Mr Ho's third and fourth wives, three sisters in addition to Winnie Ho, and one of his 17 children - many of whom are also involved in Macau's gambling industry.

"It'll have to become more transparent because of continuous disclosure to the stock exchange," says Mr Green.

"They've already been lining up executives from overseas and there will be a different discipline in what they do."

Mr Ho has also been dogged by media reports of alleged associations with organised crime, repeatedly denied, that frustrated attempts to expand his empire in Canada and Australia.

His playboy life-style and the antics of his socialite children, that include film starlet Josie Ho, are mainstays of Hong Kong tabloids.

Bad timing

Some analysts say that the odds are stacked against Mr Ho and SJM, even though the stock market listing should enable the firm to compete better in the new Macau.

The industry faces a number of challenges.

Breakneck development in the territory has led to severe labour shortages.

The opening of five major new casinos in 2009 means that an additional 20,000 workers will be needed to staff them, says Gabriel Chan, an gaming industry analyst in Hong Kong with investment house Credit Suisse.

"Even a high-school dropout can get a job as a card dealer," says Mr Chan.

The credit crunch too has hit Macau, with plunging global stock markets hurting high-stakes gamblers.

What's more, Mr Chan says, many high-rollers come to Macau on trips organised by "junket operators". They offer credit to finance gambling but the cost and scarcity of credit is limiting the amount they can give.

New visa restrictions could also limit the number of mainland Chinese punters, who made up half of Macau's 27 million visitors in 2007.

The rules of the game have changed since Mr Ho's hey day, when the territory's dark, smoke-filled gambling dens were part of his cosy monopoly.

But the octogenarian is betting that the listing of his firm on the stock exchange will signal a turnaround in his fortunes.

Abu Dhabi emerges as aerospace major

By Jorn Madslien
Business reporter, BBC News, Farnborough

Five years after it was founded, Etihad Airways has emerged as the biggest buyer at the Farnborough airshow.

The Abu Dhabi airline announced orders for 100 Airbus and Boeing aircraft in deals valued at some $20bn (£10bn), along with option rights for the same again in the future.

However, given the notable lack of orders from other airlines, nobody at the show expects Etihad to be paying the full list price.

It is not known how deep discounts the rival aircraft makers have been forced to offer, though James Hogan, Etihad's chief executive said "the announcement is the result of many months of negotiations".

The deals are part of a growth strategy that will bring Etihad's fleet from 32 planes today to more than 80 by 2016, with continued growth thereafter.

"We are aiming to be one of the leading airlines in the world," says HH Dr Sheikh Ahmed bin Saif Al Nahyan, chairman of the airline, which already flies six million passengers per year.

Regional hub

Etihad's orders are not only set to elevate the airline into the top league. It also points to the emergence of Abu Dhabi, the capital of the United Arab Emirates (UAE), as a major force in the region, both as a travel destination in its own right and as a hub for travellers to other Arab nations.

"We are aiming to be one of the leading airlines in the world"
HH Dr Sheikh Ahmed bin Saif Al Nahyan, chairman, Etihad Airways

Boeing seals Arab aerospace deal

"It's a new hub that's emerging," says Etihad's chief executive, James Hogan.

"There are huge markets on our doorsteps that are currently regulated and that will eventually be deregulated."

Along with the gradual scaling back of regulation, there is tremendous growth in infrastructure, fuelled by the region's petroleum earnings expected to rise close to $1,000bn this year.

This will lead to the emergence of a "diverse customer base", predicts Mr Hogan, consisting of business travellers, people visiting friends and family, and holiday makers.

Tourist destination

Abu Dhabi is gearing up to become a major tourist destination, with a Formula One race track and a Warner Bros theme park, as well as a Guggenheim and a Louvre museum.

"The aircraft orders reflect the belief we have in the Emirates' plan," says Mr Hogan.

The city expects an annual flow of some three million tourists to the city by 2020, an extraordinary number given that only about one million people live there today.

But that number is also set to soar. Already, expats make up some 80% of Abu Dhabi's population.

Booming region

But the biggest reason for Mr Hogan's optimism lies in the region's incredibly rapid economic growth.

Stock markets in the region clocked up 20-30% returns last year, and during the past five years - before oil prices doubled - the region's economy grew 6% per year.

Growth is set to remain strong, and not only on the back of record oil prices.

Abu Dhabi is eager to diversify away from its dependence on oil, so last year - at the Paris airshow - its investment agency, Mubadala Development, agreed to partner with Boeing as part of efforts to become a major supplier of hi-tech aeroplane components.

This year, at Farnborough, Mubadala can announce that it is investing $161m in the first phase of a $500m factory that will make composite aeroplane parts for Airbus.

Taking risks for scrap metal

By Shilpa Kannan
BBC India Business Report

In 2004, 10 workers were killed in a steel factory outside Delhi when the scrap metal they were melting down in the furnace caused a blast.

The consignment was later thought to have included war scrap from Iran.

This led to the government considering a complete ban on the use of scrap metals from war zones in this trade, but four years on, the law is yet to be implemented.

In June this year, two boys were injured in an industrial estate in Tamil Nadu when they were handling old cartridges while looking for metal in a scrap pile.

The authorities seized the bags of ammunition and an investigation has been ordered.

But for those involved in the trade, the health risks continue to be more than ever before.

Metals prices

The scrap prices for iron and steel have doubled in less than a year, as rising world metals prices stoke demand for scrap.

That is proving to be big business for Indian companies who specialise in melting down everything from used cars to unused missiles.

A lot of that trade happens in an old industrial estate in Western Delhi called Mayapuri.

"There is a lot of money to be made but it's risky business"
Pawan Kumar

Small traders have set up shop along dirt roads and most of the shops overflow with metal waste: bits of old refrigerators, mangled iron from demolished buildings, machinery components, tractors, even children's bicycles and car doors find a place here.

As a group of men saw through a car, the engine falls out onto a puddle in the middle of the road.

They then haggle loudly to bring down the price for the various parts of the car that has just been taken apart. One picks up the headlights, another carries away the seats while the third bags the engine.

Within minutes, nothing of the old car remains. Everything has a price and use in this market.

Separating scrap

The easiest metals to recover are iron and steel and these account for the bulk of the trade at Mayapuri.

Pawan Kumar's family has been in the business for generations. Buying scrap metal from traders who import it from foreign countries, he gets it weighed and sorted to sell to bigger dealers and foundries.

Sitting on a platform of old car doors piled on top of each other, he keeps a watchful eye on his workers as they clear the dirt and waste from bags of metal that have just been brought in.

They are hunting for anything that can be re-sold. One man uses his bare hands to pull cables apart and to break bits of plastic off automobile parts. Another uses a hammer to break bigger metal rods.

When the metal comes in it is a mixture of the pure metal and impurities such as bits of demolished buildings that have not been separated from the metal.

'Risky business'

Segregating it brings in more money as the foundries they sell to can put it directly into furnaces to melt it down.

"I have been doing this for over 15 years and it's a highly volatile market," Mr Kumar says.

"I buy a lot in one price and by the time it's segregated and ready to be resold the prices have gone up again."

"Steel prices keep going up. There is a lot of money to be made but it's risky business."

At the Star Wire factory in Faridabad outside Delhi, scrap metal is being melted to make stainless steel.

As the bags of scrap go into the furnace, the high temperature melts them down and fuses them into a bubbling liquid.

The furnace is then tilted to pour it into huge vats to cool, after which it is poured into moulds to make identical ingots of clean metal.

War zones

Nearly 4,500 such foundries operate in India, melting down waste to feed the ever-increasing demand for metal.

A substantial amount of the scrap comes from war zones such as Iraq and Afghanistan.

War scrap is cheaper because most developed countries have banned imports from war zones while others have stringent rules for import.

"It's important that we get this scrap. I know it's from war zones but as an industry we are mature enough to self-regulate," says S K Goel, director of Star Wire India.

"Whether it's from Afghanistan or Iraq, we can get it checked while loading at the port of origin."

"There is so much demand for metal in India that we simply cannot do without this constant source of scrap."

Compulsory inspections

Booming construction across the country is one of the factors driving the scrap industry in India.

Using scrap metal brings the costs down, but this is pushing the price of recycled metal higher and higher, leading to fears that the existing regulations may not be enough to monitor just what kind of scrap is coming into the country.

Currently, Indian government rules state that any non-shredded scrap metal imported from a war zone has to have a pre-shipment certificate of inspection.

But critics say that these regulations can easily be flouted by unscrupulous traders who ship the consignments to other countries and then re-ship them to India.

This changes the port of origin and the consignment is not checked as thoroughly as it should be.

Dumping ground

Rakesh Johri, an environmentalist who specialises in Waste Management at The Energy Research Institute in Delhi says India is becoming a dumping ground for hazardous waste and is demanding action to prevent it.

"Without stringent import rules there is a danger that live ammunition and even nuclear material would be shipped in with the scrap metal."

"The industry has to be careful. When you melt metal scrap that has been in hazardous environments, it could release toxic gases. Independent organisations should be inspecting the shipments."

"The government should start by tightening the rules, then eventually they should completely ban scrap from war zones."

Even he agrees that India's rapidly growing economy needs this metal to build rail networks, flyovers and skyscrapers.

But this voracious appetite for metal may be at the expense of its workers.

The importance of Freddie Mac and Fannie Mae

By Simon Atkinson
Business reporter, BBC News

When UK lender Northern Rock hit difficulties last year, the queues forming outside its branches across the UK provided a very visual image of the problems that it faced.

A few months later the beleaguered bank was taken into government hands after it was nationalised, with loans worth £100bn on its balance sheet.

It was doubtless a disaster for shareholders, the Rock and the government - but is perhaps put into perspective by the troubles faced by Freddie Mac and Fannie Mae.

Together, the two firms own or guarantee about $5.3 trillion (£2.7 trillion) worth of home loans - about half the outstanding mortgages in the US.

That is about 25 times as big as the Rock's obligations, and twice the size of the UK economy.

"If they were unable to lend, the US housing market would probably implode - with dire consequences for the financial system and the entire global economy"
Robert Peston
BBC Business Editor

Now the worries about their financial health have intensified so much that the US government has been forced to come up with a promise that taxpayers will prop them up to prevent their problems becoming a crisis.

'Implode' risk

There will be no queues outside branches of Freddie Mac or Fannie Mae - quite simply because there are not any.

In fact, despite them guaranteeing or owning just under half of the entire US mortgage market, you cannot actually get a home loan from either firm.

But while they are invisible to the average borrower, the two firms are highly influential institutions and are key to the US housing market.

BAIL-OUT DETAILS
The US Treasury is proposing:

• Increasing the amount of credit Freddie Mac and Fannie Mae can access
• Allowing the Treasury to inject money into the company in return for shares

"If they were unable to lend," says BBC business editor Robert Peston, "well, the US housing market would probably implode - with dire consequences for the financial system and the entire global economy."

As one US Treasury official puts it, the two firms are "way too intertwined with everyone in the world" to fail.

Because the firms' debt is held by both central banks and small banks, there was a worry that "all hell would break loose" if their shares plunged again when the markets reopened, they added.

Affordability argument

As the value of US homes soared, the importance of these two institutions grew in allowing people to purchase property.

"It has been drawn to the Americans' attention in the past by regulators and financiers internationally that this is an unstable situation"
Howard Davies
FSA founding chairman

Fannie Mae and Freddie Mac are both shareholder-owned companies mandated by the US Congress to provide funding to the housing market - ensuring steady flow of mortgages.

The two firms do not lend directly to homebuyers, instead buying mortgage debt from approved lenders such as banks, and then selling it on to investors.

Almost all US mortgage lenders, from huge financial institutions such as Citigroup to small, local banks, rely on Fannie Mae and Freddie Mac, looking to them for the funds they need to meet consumer demand for mortgages.

The two firms argue that they make home ownership more affordable, lowering the interest rates on the 30-year mortgages that they guarantee.

But their peculiar status has left them in a grey area between being government owned and private sector, with potential risks to the taxpayer should they need bailing out.

'Time bomb'

"For decades the US government and international investors have conspired in a convenient fiction, that Fannie Mae and Freddie Mac are supported by the state and yet are not formally on the public sector balance sheet," the BBC's business editor says.

"That's allowed them to raise money for lending to US homeowners at much lower rates than would have been possible had they been normal commercial banks."

FREDDIE MAC & FANNIE MAE
The two firms:

• Buy mortgages from approved lenders and then sell them on to investors - rather than lending directly to borrowers
• Guarantee or own about half of the $12 trillion US mortgage market
• Are relied on by almost all US mortgage lenders
• Are looked to for funds to meet consumer demand for mortgages
• Link mortgage lenders with investors - keeping the supply of money widely available and at a lower cost
• Have no direct UK equivalent

Q&A: Freddie Mac/Fannie Mae

Meanwhile, Howard Davies, the founding chairman of the Financial Services Authority, describes them as "peculiar institutions".

The firms were "a time bomb that has been ticking" since they were sold off in the 1970s, he added.

"It has been drawn to the Americans' attention in the past by regulators and financiers internationally that this is an unstable situation but so far they have been unprepared to anything about it.

"It's about time they did."

Close links

The problems at Freddie Mac and Fannie Mae have overshadowed the collapse of California-based IndyMac Bank - the second-largest financial institution to fail in US history, regulators say.

IndyMac had been struggling to raise funds and stay in business in one of the states worst hit by the US housing market slump.

Without similar close links to government it could not weather the storm.

But it seems that Washington wants to keep Freddie Mac and Fannie Mae alive and kicking, not least so that they can play a key role in reinvigorating the housing market.

The cost to taxpayers will be large, observers predict, but they argue that the price of not intervening would be far worse.

From aid agency to cash machine?

By Gerry Northam
BBC File On 4

The Colonial Development Corporation (CDC) was a proud creation of the post-war Attlee government 60 years ago to promote industry and agriculture in the poorest parts of the empire.

But now there are fears since the partial privatisation of the one-time development agency, the CDC is chasing big profits rather than helping the poor.

The Mpongwe estate in Zambia's copper belt became a vital source of the nation's food thanks to help from a fund, which was a product of Britain's imperial past.

Held up as a model to the rest of Africa, Mpongwe was established on thousands of acres of dry bush using large scale irrigation with great success, thanks to investment from CDC (originally known as The Colonial Development Corporation and later The Commonwealth Development Corporation).

"When I tell people from other parts of the world that we've got something like this in Africa not many people believe it but when I show them the pictures they say 'wow I never knew something like this could happen in Africa,'" said Simba Moya a writer and a former labourer who eventually became a manager at the project.

"It was producing 50% of Zambia's soya crop, 40% of its wheat and was the largest single source of maize in the country," Geoff Tyler, CDC's former representative in Zambia told BBC File On 4.

FIND OUT MORE

• Listen to File On 4, Radio 4 Tuesday 15 July 2008 2000 BST, repeated Sunday 20 July 1700 BST
• Or catch up at Radio 4's Listen Again site
• 
  

He said private investors saw the project as too risky and would have found its rates of return of eight to ten percent a year as too low compared with their expected returns of 25% to 35% a year.

New ethos

But would that kind of return still satisfy the new management at CDC, now established as a company wholly-owned by the government, and its part-privatised fund management partnership Actis?

Former CDC officials detect a new commercial ethos sweeping the organisation, with talk of projects now deemed old hat, today the talk is of deals.

Estates like Mpongwe belong to yesteryear.

This year Actis sold off the last of its investments in the Mpongwe Development Company, which three months later went into liquidation.

The deals that attract CDC are its investment in businesses such as Moser Baer a hi-tech company in India which is one of the world's leading suppliers of CDs and DVDs earning more than £250m ($501m) a year.

Lucrative market

CDC has committed $35m (around £17m) as part of a portfolio of investors assembled by an Indian private equity company to help Moser Baer invest $3.2bn in the photo-voltaic devices used for solar panels - a market expected to be extremely lucrative.

"I'm concerned about the apparently knock-down price at which Actis was floated"
Tim Loughton, MP

The firm's executive director Ratul Puri told the BBC the new investment would have continued regardless of whether CDC joined in.

Malcolm Bruce, chair of the Commons Select Committee on International Development questions whether this is the best value for public money.

"They are operating within the parameters the government has set, so the question might arise whether the Department for International Development needs to set even tighter guidelines to focus them more sharply."

Actis - which still has a 40% government stake - has always aroused controversy.

A majority stake in the new company, which was set up to manage public funds of £1.5bn, was bought without competition for £373,000.

The arrangement attracted criticism, among others from one former fund manager at a British merchant bank, Tim Loughton now a Conservative MP.

" I'm concerned about the apparently knock-down price at which Actis was floated....and it's clearly now worth many millions.

"Also, there was a post-transaction bonus paid of £2.3m. So they [the management] didn't risk any of their own money.

"The taxpayer paid bonuses which enabled the managers to pay for the business and pocket a large amount left over. Nice work if you can get it."

Profit complaints

The price of a majority stake in Actis has come in for further criticism since figures emerged showing projected profits of $55m (£30m) over five years.

This projection turned up in Actis' Business Plan of April 2004, which was placed in the House of Commons library and went largely unnoticed until sought out by Richard Brooks a reporter working for Private Eye.

Richard Brooks was startled to find such large profits forecast, since he had understood that the government expected much more modest returns in Actis' early years.

"Shortly before the sale in March 2004, Hilary Benn answered a question in parliament in which he said that the fees that Actis would be paid by CDC would equate to the anticipated total operating costs of Actis on an approximately break-even basis over the first five years.

Capital need

"That means that he wasn't expecting Actis to make any profit for five years," said Mr Brooks.

The Department For International Development insists that CDC invests and reinvests in developing countries with demonstrable benefits for the some of the world's poorest people.

A DFID spokesman told File On 4 that business people in these countries say the lack of access to capital is a major constraint on their business.

"Actis operates on a break-even basis and after remuneration of members, is yet to make a profit. This is completely consistent with the then Secretary of State for International Development's written answers on March 1 2004.

"Should Actis make profits, DFID is entitled to receive 80% of them up to 2014."

UK jobless level increases again

Unemployment in the UK rose by 12,000 to 1.62 million in the three months to May, the Office for National Statistics (ONS) has said.

The rate of unemployment was 5.2%, unchanged on the previous quarter.

The number claiming unemployment benefit rose by 15,500 in June to 840,100 - the biggest jump since December 1992.

Employers have cut jobs in the face of rising energy costs, falling consumer confidence and a property slump.

"The claimant count is the biggest in more than 15 years... it is a sign of things to come over the next year as the economy weakens"
Philip Shaw, analyst, Investec

Job vacancies also fell by 32,200 to 655,100 between April and June.

Analysts said the sharp rise in the number of people claiming benefits was a worry.

"The claimant count is the biggest in more than 15 years. While not vastly different from what was expected, it is a sign of things to come over the next year as the economy weakens," said Philip Shaw at Investec.

The slowing economy has taken its toll in the financial and property sectors, with home builders cutting thousands of jobs over the past few months.

This month alone, house builders Bovis, Redrow, Barratt and Persimmon announced they would cut more than 2,000 jobs between them, although those redundancies are not included in the latest quarterly figures.

Wages worries

Annual average earnings growth over the period eased to 3.8% in May from 3.9% in April, the ONS said.

Analysts warned of further misery for consumers in the face of rising fuel and food bills.

"With wages failing to keep pace with the cost of living and unemployment rising, the outlook for consumer spending remains grim," said James Knightley, an analyst at ING.

Meanwhile, there was more evidence of subdued wage growth from a report from the Engineering Employers' Federation, which said pay settlements remained at 3.1% in the three months to June.

On Wednesday, thousands of local government workers went on strike in protest over wages which they say are not keeping pace with living costs.

The Bank of England is worried that the highest inflation in a decade - consumer price inflation currently stands at 3.8% - will encourage workers to ask for higher pay and make the problem worse.

Analysts said the data might reassure the Bank that the current inflation spike had not yet been reflected in wage demands.

'Rent now buy later' housing plan

A "rent first, buy later" scheme is heading a series of measures which the government hopes will breathe new life into the housing market.

The pilot project, being announced by Housing Minister Caroline Flint, will be open to some in England with household earnings under £60,000.

They would rent the property at a discounted rate for two or three years, with an option to buy part of it.

First-time buyers have been among the hardest hit by the credit crunch.

Other plans being outlined include the location of new local housing companies which would see councils and developers using surplus land for homes.

Tough times

The squeeze on mortgages caused by the credit crunch has made it difficult for first-time buyers to secure a mortgage deal, even though house prices are falling.

"The long-term need to provide more homes has not gone away"
Housing Minister Caroline Flint

Tough times for first-time buyers

Read buyers' stories

A first-time buyer couple on low incomes must save a year's worth of their take-home pay to buy their first home, the Royal Institution of Chartered Surveyors (Rics) said last week.

A couple in the bottom quarter of earners in the UK would need £27,738 to pay the upfront fees even before paying any of their mortgage, Rics said.

Under the government's plans, households earning £60,000 or less would be able to rent at 80% or less of the going rate for two or three years in order to save up for a deposit.

They would have an option to buy 25% or more of the property at any time under the scheme, called Rent to Home Buy.

The government had previously extended the shared ownership scheme from key workers to those households earning £60,000 or less.

Bids will have to be made for the rent first, buy later scheme through registered social landlords, but there were no specific numbers as to the number that would be granted.

Building plans

The government hopes that this scheme - only available in England - alongside others will help 75,000 first-time buyer households on to the property ladder.

James Rowlands, policy officer at Rics, said the scheme did not go far enough.

"This measure will only have a limited impact on the wider housing market unless it is rapidly expanded to include all first time buyers," he said.

Ms Flint was also announcing that Barking and Dagenham, Newcastle, Nottingham and Manchester will be the first areas to run local housing companies for housing developments on surplus council land.

The government has been warned by various groups that its target of three million new homes built by 2020 is under threat, with house builders cutting back on their operations in the current climate.

The Council of Mortgage Lenders is calling for construction projects to be tailored to the needs of different locations in the UK.

The glut of new city centre apartment blocks has led to criticism locally in some areas.

"The long-term need to provide more homes has not gone away. We have a growing and ageing population and will only see worsening affordability unless we increase the housing supply," said Ms Flint.

"That means being ambitious, but also practical and realistic, acknowledging not only the difficulties faced by individuals and families, but for those who work in the house building industry."

She said that funding, in addition to the £200m already announced, could be made available to buy unsold stock from house builders for affordable homes.

Using the Department of Communities and Local Government's own house price figures, £200m would buy 916 average priced homes.

Co-op buys Somerfield for £1.57bn

The Co-operative Group (Co-op), the UK's fifth largest supermarket chain, has agreed to buy rival Somerfield.

The Co-op said the £1.57bn ($3.1bn) purchase would strengthen its position in the UK retail market.

Manchester-based Co-op, a mutual outfit run on behalf of its 2.5 million members, also said the deal was done on a cash-free and debt-free basis.

With more than 4,300 UK retail outlets, it employs 85,000 people. Bristol-based Somerfield has about 900 stores.

The latest figures from research firm TNS, show that in the 12 weeks to the middle of June, the Co-op had 4.4% of the UK grocery market, and Somerfield 3.7%.

Stores sell-off?

Somerfield is owned by a consortium that includes private equity firm Apex, Barclays Capital and property magnate Robert Tchenguiz.

SUPERMARKET SHARE

• Tesco: 31.2%
• Asda: 16.8%
• Sainsbury's: 15.9%
• Morrisons: 11.4%
• Total Co-ops: 4.2%
• Waitrose: 3.9%
• Somerfield: 3.7%
• Aldi: 2.9%
• Lidl: 2.3%
• Iceland: 1.7%
• Netto: 0.6%
• Farm Foods: 0.5%

Source: TNS

They bought the chain for about £1.1bn three years ago.

Somerfield was put up for sale in January and the Co-op first expressed an interest in a possible purchase in April.

The Co-op may now be told by competition watchdogs to sell some of the stores it has purchased, with Morrisons, Waitrose and Iceland touted as potentially interested parties.

Co-op chief executive Peter Marks says Somerfield's acquisition will provide "rocket fuel" for his group's growth plans.

Profits target

Mr Marks said the deal, which is subject to regulatory approval, would "create a stronger fifth player in food and a convenience store chain with unrivalled geographic reach".

SOMERFIELD FACTS

• Founded as JH Mills in 1875
• Renamed Gateway in 1950
• Renamed Somerfield in 1994
• Floated on stock market in 1996

In April, the Co-op said it would spend £1.5bn to revamp its business and lift its fortunes, after 2007 profits fell 46% to £195.5m.

The firm also said then that it aimed to double its profits over the next three years.

It expanded in July 2007 when it merged with fellow mutual United Co-operatives.

'Big four'

Neil Saunders, consulting director at Verdict Research, told the BBC: "The benefits for the Co-op of this move are that they have a larger scale, and it propels them into a different league in terms of food retailing.

"Unless you have scale in the market, it is hard to compete with the big four grocers.

"Now it can compete more effectively, but it has to be said that the big four will still remain some bit ahead.

"For consumers, it probably means a slightly better standard of store. The Co-op has traditionally been better at that than Somerfield, although Somerfield has put a lot of effort into their stores recently."

Wolseley hit by housing slowdown

Building materials giant Wolseley has said its trading profit has fallen 28% in the past 11 months and warned market conditions in the UK may get worse.

As well as problems in the UK, the US housing slump has also hit profits as Wolseley makes half its sales there.

The world's biggest distributor of plumbing materials said it had cut 6,000 jobs since August last year.

The group, which operates Plumb Center and Build Center in Britain, has also axed its final dividend to cut costs.

"The deterioration in some of our key markets continues and it is likely that conditions will get tougher still"
Chip Hornsby, Wolseley chief executive
See Wolseley's share price

Wolseley said it was taking actions to ensure that it did not break its banking agreements.

Tough times

The company, which employs 75,000 people worldwide, has already cut about 10,000 jobs over the past 18 months, most of them in the US.

Wolseley's chief executive Chip Hornsby warned the company would continue its cost cutting plan in the UK, where the economic climate had worsened.

"The deterioration in some of our key markets continues and it is likely that conditions will get tougher still."

In its trading update, the Reading-based group said trading profits in the UK and Ireland fell 17%.

In Ireland, Wolseley has shed 150 jobs and closed 13 branches in the past few months.

"Slumping property markets are clearly taking their toll," said Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers.

"The fallout from the housebuilders is rippling out to the secondary building and plumbing merchants such as Wolseley."

Nigeria seeks to end 'blood oil'

An international cartel of oil smugglers steals billions of dollars in "blood oil" from Nigeria, trading it for guns, the president has said.

Speaking at the G8 summit in Japan, President Umaru Yar'Adua drew comparisons between oil "bunkering" and the trade in "blood diamonds".

He said an international effort must be made to stop the trade, which fuelled unrest in the Niger Delta.

The conflict means Nigeria is no longer Africa's largest oil exporter.

Militant attacks in the Delta have reduced production by around a quarter, allowing Angola to overtake Nigeria.

But no-one really knows exactly how much oil is pumped out of the ground, according to a Senate inquiry set up in March.

The smuggling cartel includes officials at the Nigerian state oil company, government, the military and international oil companies, according to Delta activists.

Cheap oil

Trying to stop the trade must be an international effort, the president says, because the people driving the market are companies looking for cheap crude to feed international markets.

Elusive peace in Nigeria's oil Delta

"Stolen crude should be treated like stolen diamonds because they both generate blood money," President Yar'Adua said.

"Like what is now known as 'blood diamonds', stolen crude also aids corruption, violence and can provoke war."

The trade in diamonds helped fuel the conflicts in Sierra Leone and Angola, prompting campaigners to put pressure on the industry to tighten regulations.

A Rivers State government spokesman told the BBC it was time to crack down on the international members of the cartel.

"Some smart alec comes to Nigeria with a vessel partly loaded with guns, partly with cash," said Ogbonna Nwuke.

"In return, he gets cheap oil and delivers the weapons to some boys who think they're fighting the Niger Delta cause."

"The result is confusion."

Tankers

But activists in the Delta say there is no way oil smuggling could be done without the compliance of corrupt elements of the Nigerian state.

"I have never seen this bunkering business as an illegal thing," says Anyakwee Nsirimovu, a Port Harcourt-based human rights lawyer.

"For God's sake, the waters around Nigeria are not a free area, where you can just pass without anyone asking any questions."

In order for tankers to dock and receive oil from boats coming from the creeks, there must be a high level of involvement from government and the military, he says.

"They are making billions of dollars and they don't want this thing to end."

US regulator curbs short-selling

The US regulator has passed an order to prevent some forms of "short-selling".

The rule will prevent traders from taking certain "short" positions in major financial companies, which some blame for the slump in share prices.

It will apply to US mortgage finance firms Fannie Mae and Freddie Mac, which have seen about half the value of their shares wiped out in the past week.

Short-selling occurs when an investor borrows shares from their owner and sells them, hoping the price will fall.

They then buy the shares back at a lower price, pocketing the difference.

Crack down

The rule, which will come into effect on 21 July, is part of efforts by the Securities and Exchange Commission to crack down on suspected manipulation of market prices.

It comes in the wake of the near-collapse of Wall Street giant Bear Stearns, following intense speculation that the bank was struggling to fund its daily business.

The rumours triggered a sudden collapse of confidence among clients, who rushed to withdraw their assets and forced the firm to agree to be bought by rival JP Morgan Chase for a fraction of what it was worth just weeks before.

A few months later, Lehman Brothers almost suffered the same fate and has struggled since then to overcome concerns about the health of its balance sheet.

Its shares have tumbled almost 80% this year.

VW chooses Tennessee for US plant

German carmaker Volkswagen (VW) has chosen to locate its new US car plant in Tennessee, a move that could pump $1bn (£498m) into the local economy.

VW opted for a site in the city of Chattanooga in preference to possible locations in Alabama and Michigan.

The euro's rise against the dollar has made it costly to make cars in Europe and export them to the US, leading VW to explore manufacturing again there.

The move is good news for a US car industry shedding thousands of jobs.

New car

Earlier on Tuesday, GM said it planned to make further cutbacks forced upon it by declining sales in its home market.

VW's decision, however, is disappointing news for Michigan - the home of the US car industry - which it suffering bitterly from the job cuts at GM and close rival Ford.

"This project will have a significant impact on the economy of Tennessee and the region for decades to come"
Phil Bredesen
Tennessee Governor

When it is up and running in 2011, the new plant will employ 2,000 people directly as well as offering business to hundreds of suppliers.

The new facility will eventually have an annual capacity of 150,000 vehicles and will be used to build a new midsized vehicle for the US market.

VW said its decision was based on a range of factors including financial incentives offered by the state linked to job creation, investment and training.

"This is a significant step forward in achieving our goals in the US market and a clear sign of VW's commitment to the North American consumer," Stefan Jacoby, president of Volkswagen's North American business, said of the project.

Economic impact

VW closed its last US plant, in Pennsylvania, in 1988.

Exchange rate movements in the past two years have made European carmakers look for cheaper production solutions, with VW also building plants in India and Russia.

On Tuesday, the euro hit a fresh high again against the dollar.

State officials welcomed the VW investment, claiming that it put Tennessee on course to eventually become the main site for US car production.

"This project will have a significant impact on the economy of Tennessee and the region for decades to come," said Tennessee Governor Phil Bredesen.

Japan keeps interest rate on hold

Japan's central bank has left interest rates on hold and cut its forecast for growth amid concerns about rising costs and signs of an economic slowdown.

The Bank of Japan voted to keep the benchmark rate at 0.5% - the same level it has been at since February 2007.

At the same time it lowered its economic growth forecast for the year to March 2009 to 1.2% from 1.5%.

Soaring gas and food prices and rising material costs are weighing on the world's second-largest economy.

There are also worries that Japan's heavy dependence on exports means it is vulnerable to the slowdown in the US.

"Economic growth is slowing further reflecting weaker growth in business fixed investment and private consumption against the backdrop of high energy and material prices," the BoJ said.

"With regard to risk factors, global financial markets remain unstable and there are downside risks to the US and the world economy," it added, saying that global inflationary pressure was increasing.

The BoJ said that growth in 2009/10 would be 1.5%, compared with 1.7% in April.

Eurozone inflation at record 4%

Rises in food and energy costs pushed up inflation in the 15-nation eurozone to 4% in June from 3.7% in May.

Confirming estimates made two weeks ago, the Eurostat statistics office said the inflation rate was the highest since measurements began in 1997.

A 16% year-on-year rise in energy costs as oil prices headed above $140 a barrel was to blame, Eurostat said.

The European Central Bank (ECB) raised interest rates to 4.25% at the start of the month to try to contain inflation.

The ECB's target for inflation growth is about 2%, but rising food and fuel prices are making it difficult for the central bank to bring inflation back to this level.

At its latest meeting, the ECB increased interest rates to 4.25% from 4% - its first rise in a year - despite evidence that eurozone economic growth is decelerating.

More rate rises?

Core inflation - that is, stripping out energy and food prices - edged up to 1.8% in June from 1.7% in May.

This has sparked fears from some analysts that rising costs of food and fuel are beginning to filter into other prices.

For this reason, many predict further interest rate rises in the region, as the ECB steps up efforts to prevent this from happening.

"Inflation pressures may ease as the economy slows, but the process of filtering through of price rises will not be stopped by the latest ECB interest rate rise - the ECB has more work to do to dampen inflationary expectations," said Nick Kounis, an economist at Fortis.

He expects two more rate rises - one in October and another one in early 2009.

Others were less convinced, arguing that a sharp decline in eurozone growth, in addition to the high cost of borrowing and the strong euro, would dilute inflationary pressures in the coming months.

Rising prices have sparked protests among fishermen, hauliers and farmers across Europe.

German tyre firm faces bid battle

Tyre maker Continental has received a 11.3bn euro (£8.9bn) bid from German counterpart Schaeffler, paving the way for a potential takeover fight.

Schaeffler, three times smaller than Continental in terms of sales, said it believed the two firms would make a "good combination".

Privately owned Schaeffler makes parts for car and plane systems, specialising in the manufacture of ball bearings.

Continental earlier urged regulators to ask Schaeffler to clarify its position.

'Growth possibilities'

Continental is concerned about the implications for jobs of a tie-up between the two firms as well as the level of control Schaeffler is seeking.

Reacting to the takeover approach, which valued Continental at 69.37 euros per share, the company said it was "examining" the bid and would respond in due course.

"We believe that we will both have good possibilities to grow in the future"
Jergen Geissinger, Schaeffler chief executive
See Continental shares
Continental has been affected by the weakness of the global car market, particularly in the US. The decision to spend 11bn euros in 2007 on buying car parts supplier VDO from Siemens, amassing a huge debt in the process, has also left it vulnerable to a takeover, analysts have warned.

Schaeffler said Continental had been willing to offer it a 20% stake but that it wanted a minimum of 30%, a figure which would precipitate a full takeover.

"We want to have a strategic stake in Continental," said Schaeffler chief executive Jergen Geissinger. "We believe that we will both have good possibilities to grow in the future."

Continental shares jumped more than 10% on news of the bid.