Securitisation

Fear and loathing, and a hint of hope
Feb 14th 2008 | LAS VEGAS
From The Economist print edition

Not all is lost for the structured-finance business. But it faces further discomfort before it can start to recover some of its past sheen

Otto

AS GAGS go, it was cheap. But irresistible. As a banker from Citigroup placed his chips on the roulette table, a watching wise-guy sniggered: “There goes another $15 billion.”

Even though it was held (as usual) in Las Vegas, this year’s conference of the American Securitisation Forum (ASF), between February 3rd and 6th, was a subdued affair. First staged only in 2004, the event has become a mecca for those whose job it is to spin mortgages, credit-card debt and other bread-and-butter financial assets into tradable securities. But this time attendance was down—and tension up, as the neck-masseuses in the exhibit hall could attest. Black humour and self-deprecation replaced the self-congratulation of past years. John Devaney, a hedge-fund manager who had to sell his 142-foot yacht, Positive Carry, and his Gulfstream IV after making bad bets on mortgage bonds, told an audience: “I’d like to thank the market for dealing me a direct hit. As a trader if you don’t get sucker-punched every once in a while, you don’t understand what risk is.”

You might suppose that meeting in America’s gambling capital would provide symbolism enough. But the conference Super Bowl party had plenty more. It was hosted by Countrywide, a big, troubled mortgage lender that has had to fall on the charity of Bank of America. And, as the guests digested the dramatic ending of the New England Patriots’ long winning streak by the New York Giants, they may have sensed an uncomfortable parallel. After a quarter-century of growth that turned structured finance from a capital-market cog into an engine of growth, their business has been buckled by the crash in subprime mortgages and the successive blows throughout credit markets. Worse, some blame securitisation for causing the pile-up in the first place.
The limits of gonzo finance

Securitisation has greatly enhanced the secondary market for loans, giving originators, mainly banks, more balance-sheet flexibility and investors of all sorts greater access to credit risk. Both have embraced it. By 2006 the volume of outstanding securitised loans had reached $28 trillion (see chart 1). Last year three-fifths of America’s mortgages and one-quarter of consumer debt were bundled up and sold on.

Along the way, banks cooked up a simmering alphabet soup. The ingredients included collateralised-debt obligations (CDOs), which repackage asset-backed securities, and collateralised-loan obligations (CLOs), which do the same for corporate loans, as well as structured investment vehicles (SIVs) and conduits, which banks used to keep some of their exposure off their balance sheets.

The breakneck growth of this business went into reverse last summer, when it became clear that defaults would undermine the structures built around America’s mortgage markets. So tarnished has the subprime-mortgage market become, because of shoddy loan underwriting and fraud, that investors are likely to shun securities linked to it for months if not years. Securitisation of better-quality “jumbo” mortgages—too big to be bought by government agencies—is also at a near-halt. “Mortgages were traditionally seen as very safe assets. Now all but the very best are stamped with a skull and crossbones,” says Guy Cecala, of Inside Mortgage Finance, a newsletter.

CDOs are unlikely to regain a following in a hurry (see chart 2). Still less popular are CDO-squareds (resliced and repackaged CDOs) and higher powers. CLOs have also been battered as the leveraged loans they are linked to have tumbled in value. However, their collateral is sounder than that backing subprime CDOs, being based on company financials rather than the blandishments of mortgage brokers.

The prospects for SIVs are bleaker still. SIVs borrow short-term to invest in long-dated assets; and investors will no longer tolerate such mismatches in vehicles shielded from standard banking regulation. With the disappearance of the SIVs’ funding sources, notably asset-backed commercial paper, banks had to bring over $136 billion-worth onto their books. That comes on top of over $160 billion, so far, of subprime-related write-downs, over a third of which has come at three banks: Citigroup, Merrill Lynch and UBS.

Though few bankers worked in structured finance, it was a huge earner, accounting for 20-30% of big investment banks’ profits before the crisis, according to CreditSights, a financial-research firm. Banks such as Bear Stearns, Lehman Brothers and Morgan Stanley, which bought or built mortgage-origination businesses to fuel the securitisation machine, have rushed to close or pare them. Merrill, whose fees from CDOs alone peaked at $700m in 2006, said recently that it would stop packaging mortgages altogether.

Alongside the banks, the “gatekeepers” who were supposed to lend stability and credibility to the new originate-and-distribute model of finance have also been found wanting. Rating agencies’ models underplayed the risk that loans from different lenders and regions could turn sour at the same time. Bond insurers, too, misjudged the risks lurking in CDOs. That failing has undermined the worth of their guarantees and strained their own credit ratings—and hence financial markets.

George Miller, the ASF’s executive director, accepts that this crisis of confidence will lead to a degree of “re-intermediation” for a time, as some banks go back to balance-sheet lending. But he insists that it highlights the dangers of lax lending standards in a particular market rather than fundamental faults in securitisation itself.

A study by NERA, an economic consultancy, commissioned by the ASF before the crunch, offers some support for this view. Preliminary results, based on data from 1990 to 2006, suggest that increased securitisation leads to lower spreads in consumer credit and softens interest-rate shocks for banks, especially smaller ones. On the other hand, in a recent paper two economists at the University of Chicago’s business school conclude that securitisation encouraged mortgage originators to lend to dodgy borrowers.
Stresses and strains

What is not in doubt is that the subprime crisis has exposed four deep flaws in the practice of securitisation. The first is that by severing the link between those who scrutinise borrowers and those who take the hit when they default, securitisation has fostered a lack of accountability.

A debate has been rumbling over how to ensure that lenders have more “skin in the game”. Some think they should set aside a sliver of capital even for loans they sell on. Andrew Davidson, a structured-finance consultant, suggests an “origination certificate”, guaranteeing the quality of the underwriting, issued by the lender and broker, which stays with the loan. Alex Pollock of the American Enterprise Institute thinks that securitisers should be required to guarantee the quality of their loan pools, as are America’s government-sponsored mortgage giants, Fannie Mae and Freddie Mac. Others counter that most such exposures can be neutralised these days through derivatives markets.

The second flaw is the sheer lack of understanding of some instruments. Not long ago investors took too much on trust. They are now clamouring for more “transparency”. Some want a central trade-quoting facility for lumpy asset-backed products: regulators have approached the New York Stock Exchange. CME Group, which runs the world’s largest futures exchange, is also looking to expand its clearing of over-the-counter securities.

Yet reams of information already accompany mortgage-backed securities sold in public markets. Even SIVs provide a steadier stream of data to investors than most of the banks backing them. So some interpret calls for greater disclosure as whimpering by investors who did not do their homework.

However, more information about the performance of loans after origination would help, particularly those in leveraged structures such as CDOs. This opens up opportunities: fewer banks were at the ASF conference this year, but more data-analytics firms turned up. Clayton, the largest mortgage-surveillance company, unveiled a partnership with Experian, an information-services firm, that will help mortgage-servicers to package subprime loans for modification under a plan backed by the ASF and America’s Treasury. Later, it hopes to offer a swathe of data to buyers of structured products.

Understanding the underlying assets is, or should be, at the core of securitisation. Securitisation is really an arbitrage: with surplus collateral, assets can be bundled into an entity with a supercharged credit rating. But if investors fail to spot the jiggery-pokery with credit scores and the outright fraud that permeated the subprime market, that cushion of safety quickly disappears. Witness the speed with which losses have spread into supposedly safe, “super senior” tranches of CDOs.

This points to the third flaw: that some securities were poorly structured, often because their risks were not fully understood. The upper layers of a well-designed securitisation vehicle should be all but impervious to loss. But poorly structured deals, like those stuffed with subprime and marginally less iffy “Alt-A” loans in 2006 and early 2007, have crumbled as the weakness of the collateral becomes clear.

The fourth flaw was the market’s over-reliance on ratings as a short cut to assessing risk. In the go-go years, people wrongly assumed that an AAA-rated mortgage bond—even one with a high yield—would never lose value. But the rating agencies, paid for their appraisals by the seller not the buyer, were compromised from the start. Moreover, their quantitative models appear to have ignored “fat-tail” risks—the possibility that large losses are likelier than standard statistical models predict.

Though the agencies do not have to suffer giant write-downs, they have paid a high price. Before the market imploded, almost half the revenue of Moody’s, a leading agency, came from structured finance. Now the agencies are revising their rating criteria in a bid to head off tougher regulation. “Either deals get less complex or we have to find a better shorthand for measuring risk,” says Ron Borod of Brown Rudnick, a law firm. The rating agencies say they were never supposed to substitute for investors’ own due diligence. That is disingenuous, given their past self-assuredness. Still, wise investors will take future ratings with a pinch of salt, as most hedge funds have long done.

As the market grapples with change, some is likely to be imposed from above. Separately, international regulators and the President’s Working Group (comprising America’s Treasury, the Federal Reserve and others) are looking into securitisation’s part in the crisis. By co-operating over loan modifications, the ASF may have gained favour with the working group.

The industry is more worried about two bills in America’s Congress. Securitisers can live with much of the one that has been passed by the House of Representatives. What alarms them is an “assignee liability” provision that would hold them partly responsible for lax lending by originators. This, they say, would send a chill through secondary markets, cutting credit to thousands of worthy borrowers. Precedent is on their side. Georgia introduced assignee liability, only to back-pedal after the state’s subprime market started to seize up. Not all bankers are against it: in Las Vegas, Bianca Russo of JPMorgan Chase argued that some form of it was needed to counter the perception, if not the reality, that securitisation was harmful.

The other bill would allow bankruptcy judges to alter the terms of struggling borrowers’ mortgages. The industry argues that this would be an intolerable violation of the sanctity of loan-pooling contracts. In addition, securitisers face probes by several state attorneys-general, the Internal Revenue Service, the Federal Bureau of Investigation, the Securities and Exchange Commission and the Justice Department, as well as lawsuits from investors and a rising number of stricken municipalities.

Bankers will tell you that the subprime meltdown was just that: the product of irresponsible lending to, and borrowing by, flaky consumers, not a broader crisis of securitisation. Maybe, but the severity of the credit crunch points to broader pain ahead. More will come from housing: much of the 30-40% of American home-equity loans that have been securitised looks wobbly, as does a growing chunk of the $800 billion of Alt-A paper outstanding. Loans for offices are an even bigger worry. The spread on the AAA tranche of an index tracking bonds backed by commercial mortgages has tripled since the turn of the year. New issuance is frozen.

Trouble is also brewing for securities tied to non-mortgage consumer assets, such as credit-card debt, car loans and student loans, which make up a good slice of the asset-backed market (see chart 3). Credit-card delinquencies are creeping up as the economy turns down. The sharp slowdown in card borrowing, reported recently by the Fed, will mean less raw material for securitisation. Standards for car loans dropped in 2006-07, though not as dramatically as they did for mortgages.

One ominous sign is that structured instruments tied to student loans are coming unstuck, although the loans typically carry a federal guarantee. Recent auctions of such securities by Citigroup, Goldman Sachs and others have failed. Normally the banks would have bought in whatever did not sell. But they have declined, because they dare not cram even more assets onto their already strained balance sheets.

Yet securities of these types should be more resilient than those tied to subprime loans. Their structures are tried and tested, having evolved, along with performance data in their markets, over many years. In contrast, subprime mortgages with only a short record were shoved into many-layered structures that depended on house prices holding up. “They started from the other end entirely, asking how can we create CDOs, backed by mortgage-backed securities, themselves backed by collateral with barely any history, and their stress tests assumed house prices would be stable and the loans in the pools uncorrelated,” says Mr Borod.

Encouragingly, credit-card receivables are still being bundled and sold. There are even shoots of hope in the mortgage market, thanks to a refinancing mini-boom in the wake of interest-rate cuts—though most new deals are backed by the giant agencies, Fannie Mae and Freddie Mac, not Wall Street (see chart 4).
Saunter down the strip

It is also worth remembering that securitisation has not been confined to consumer and corporate loans. In the past decade financial engineers have found ways to package and sell tobacco-settlement and mutual-fund fees, sports and fast-food franchise rights, life-insurance premiums, intellectual property, music royalties and much more. Hollywood studios use securitisation to help finance film-making. With intangible assets accounting for an ever-growing share of corporate value, this trend looks likely to continue.

That may be scant consolation to the banks whose bets have gone so spectacularly wrong. Their fingers are still being singed by mortgage-backed securities and CDOs that continue to burn. Those hoping for a recovery face a long wait, maybe 18 months or more for out-of-favour collateral such as non-agency mortgages. Some once-enthusiastic cheerleaders are turning gloomy: Bear Stearns said recently that its net short position on subprime loans and bonds had risen to $1 billion. Others are redeploying staff and capital to fee businesses that don’t put a strain on the balance sheet, such as merger advice.

But it would be a mistake to write the obituary of structured finance. Even its sternest critics accept that securitisation has brought real economic benefits, and that it would be wrong to throw away the whole barrel because of a few subprime apples. Some students of financial innovation think the market will come back even more inventive after scorching its less attractive pastures. “As with past forest fires in the markets, we’re likely to see incredible flora and fauna springing up in its wake,” says Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering.

So it may just be a matter of hanging on. As any punter in Las Vegas will tell you, every losing streak ends eventually, if you can only stay solvent for long enough.

Takeover battles

Just say no
Feb 14th 2008 | NEW YORK
From The Economist print edition

FOR firms with cash to spare, today’s market for mergers and acquisitions looks tempting. Share prices are down, making targets look cheap. And the seizure in the corporate-debt market means there is little competition from private-equity outfits in any deal worth over $1 billion. If you are a target, meanwhile, things could scarcely be worse. No doubt your low share-price is the result of irrational, non-exuberant investors lumping you in with the rest—wrongly of course. But what can be done to fight off a hostile bidder?

On either side of the Atlantic, big companies are discovering to what extent they can say no. On February 11th Yahoo!, a pioneering internet company, turned down a takeover offer worth $44.6 billion from Microsoft. The software giant had made the bid public a week earlier in a “bear hug” letter designed to press Yahoo! into accepting. But Microsoft’s bid, even at a 62% premium to the market price of Yahoo! shares at the time, “substantially undervalues” the company, Yahoo!’s board contended. In London Rio Tinto said much the same thing on February 6th when it rebuffed the latest offer, worth $147.5 billion, from BHP Billiton, a fellow mining giant.

Despite the similar reactions of the target boards, the two deals highlight big differences in takeover law on either side of the Atlantic. In Britain it is relatively straightforward. BHP has made a tender offer for Rio Tinto shares; if enough shareholders accept the offer, BHP will prevail, provided it wins antitrust approval.

Things are more complicated in America. For a start, Microsoft’s letter to the board of Yahoo! does not constitute a formal offer, or oblige it to make one. Under British rules, such a letter would require a bidder to make a formal offer by a deadline, as in BHP’s case. That said, going public with a letter in the way Microsoft has done is not without risk, as it may alert other potential buyers. But Microsoft appears to have concluded that publicising the premium it is willing to pay for Yahoo! is more likely to scare off other bidders.

Yahoo! has several options, depending on how determined it is to maintain its independence. Two decades ago the courts in Delaware ruled that a board could “just say no” to an offer it did not like, for whatever reason and however much shareholders disagreed, and that would be the end of the matter. But a series of court cases, and the growing power and activism of America’s institutional shareholders, have reduced the board’s freedom of action since those heady days.

In today’s litigious climate, Yahoo! must at least go through the motions of demonstrating that its decision to reject the bid is being done in the best interests of its shareholders, which means plenty of work for its investment bankers as they explain why the firm’s low share price is an aberration, and why Microsoft’s (non-binding) offer is not as generous as it looks.

Yahoo! has also been considering a defensive tie-up with Google, AOL or News Corp to keep Microsoft at bay. Failing that, it could encourage the antitrust authorities to intervene, as PeopleSoft did in 2003 when a rival software firm, Oracle, launched a hostile bid. Microsoft has been the target of the trustbusters before, after all. But it is a high-risk strategy, for if the buyer then makes a new offer that the board wants to accept, the antitrust authorities may not go away.

Yahoo! might also try another of PeopleSoft’s tactics: using a “poison pill” scheme to issue new shares and make a takeover impossibly expensive (which is banned in Britain). The legality of doing this when most shareholders want to accept a bid is not as clear as it was: an attempt to have PeopleSoft’s poison pill thrown out might have had a good chance of success, but the case was not decided in court because PeopleSoft bowed to its shareholders and accepted Oracle’s bid.

Most lawyers think that, one way or another, Yahoo!’s board will have to accede to the wishes of its shareholders, many of whom seem to be keener on squeezing a slightly higher offer out of Microsoft than scaring it away. In a letter on February 10th Bill Miller of Legg Mason, the second-largest shareholder in Yahoo!, said that his valuation of Yahoo! was in the region of $40 a share (compared with the $31 now on offer) and that he expects Microsoft to “do what it takes”. In short, by saying no, Yahoo!—like Rio Tinto—is probably just playing hard to get.

Feb 14th 2008
From The Economist print edition

It is time for America to evaluate Obama the potential president, not Obama the phenomenon

EPA

THIS has been an extraordinary week for the man who could become America’s first black president. Barack Obama has now won all eight of the primaries and caucuses held since Super Tuesday on February 5th, which ended, more or less, in a dead heat with Hillary Clinton. He has won by much larger margins than most people expected, trouncing his rival not just in heavily black states, such as Louisiana, but in ones that are almost completely white, such as Maine. On February 12th he took all three prizes in the “Potomac primary”—Washington, DC, Maryland and, by a socking 29-point margin, Virginia.

Mr Obama now has more pledged delegates than his rival—and he is likely to remain the front-runner for at least another three weeks (see article). Revealingly, Mrs Clinton made her Virginian concession speech from Texas—a state which votes alongside Ohio on March 4th and is already being billed as her last stand. Mr Obama is raising money at the rate of $1m a day, twice as fast as she is; indeed, she has been forced to lend her campaign $5m of her own cash and fire the two people who run her campaign (although her husband has a big say).

Whatever happens, Mr Obama is already that rare thing—a political phenomenon. It is not just that he has managed to survive the Clintons’ crude onslaught with grace. He has persuaded huge numbers of people around the world to reconsider politics in an optimistic way. To many Americans, a black man who eschews both racial politics and the conservative-liberal divide is a chance to heal the country’s two deepest divisions. To many foreigners, he represents an idealistic version of America—the hope of a more benevolent superpower. Although Mr Obama’s slogan “Yes We Can” has been turned into a pop video, the theme of his campaign echoes the Clintons’ old tune—“Don’t stop thinking about tomorrow”.

Optimism is a powerful emotion, but as that song warned, “tomorrow will soon be here.” That is why the real questioning of Mr Obama should begin now. With the brief exception of those four heady days after the Iowa caucuses, he has never been a front-runner; now he will be more fully scrutinised. The immediate focus will be on the horse race: can he win? But the bigger issue, which has so far occupied too little attention, is this: what would a President Obama, as opposed to Phenomenon Obama, really mean for America and the world?
Yes, you can; but not immediately

Begin with the horse race. Mrs Clinton is in a bad way—and deservedly so. The Clintons have fought a leaden and nasty campaign; at present, the prospect of a “Billary presidency” (even before you take into account the dynastic Bush-Clinton-Bush-Clinton aspect) is hardly enthralling. But Mrs Clinton is tough and smart, and now her rival will be under the media microscope. In debates she trumps Mr Obama on mastery of detail—and the race could well be a long, grinding one, perhaps decided in the end by the 796 “super delegates” from the Democratic Party’s establishment. These people have tended to be loyal to the Clintons—though many might defect if polls still showed Mr Obama doing better against John McCain.

Mr McCain, whose lock on the Republican nomination looks stronger than ever following his own triple victory in the Potomac primary, is another part of tomorrow Mr Obama’s euphoric supporters might think about. The Republicans are a mess, and the elderly Arizonan senator has plainly failed to stir up his party’s supporters in the same way as either of the main Democrats. But Mr McCain is a brave man, with huge experience of international affairs and a much longer record of reaching out to his opponents in politics. Why should independent voters, who have often backed Mr McCain in the past, turn to the less proven man?
Of magnets and magic dust

That question is partly answered by Obama the phenomenon. His immediate effect on international relations could be dramatic: a black president, partly brought up in a Muslim country, would transform America’s image. And his youthful optimism could work at home too. After the bitterness of the Bush years, America needs a dose of unity: Mr Obama has a rare ability to deliver it. And the power of charisma should not be underrated, especially in the context of the American presidency which is, constitutionally, quite a weak office. The best presidents are like magnets below a piece of paper, invisibly aligning iron filings into a new pattern of their making. Anyone can get experts to produce policy papers. The trick is to forge consensus to get those policies enacted.

But what policies exactly? Mr Obama’s voting record in the Senate is one of the most left-wing of any Democrat. Even if he never voted for the Iraq war, his policy for dealing with that country now seems to amount to little more than pulling out quickly, convening a peace conference, inviting the Iranians and the Syrians along and hoping for the best. On the economy, his plans are more thought out, but he often tells people only that they deserve more money and more opportunities. If one lesson from the wasted Bush years is that needless division is bad, another is that incompetence is perhaps even worse. A man who has never run any public body of any note is a risk, even if his campaign has been a model of discipline.

And the Obama phenomenon would not always be helpful, because it would raise expectations to undue heights. Budgets do not magically cut themselves, even if both parties are in awe of the president; the Middle East will not heal, just because a president’s second name is Hussein. Choices will have to be made—and foes created even when there is no intention to do so. Indeed, something like that has already happened in his campaign. The post-racial candidate has ended up relying heavily on black votes (and in some places even highlighting the divide between Latinos and blacks).

None of this is to take away from Mr Obama’s achievement—or to imply that he could not rise to the challenges of the job in hand. But there is a sense in which he has hitherto had to jump over a lower bar than his main rivals have. For America’s sake (and the world’s), that bar should now be raised—or all kinds of brutal disappointment could follow.

By KEVIN STACH
February 14, 2008; Page A17

After sweeping the Potomac primary, John McCain is now the de facto Republican nominee for president. But while Mr. McCain’s fight for the nomination is all but over, Mike Huckabee’s strong showing in Virginia suggests that Mr. McCain’s battle to unify the Republican Party is just beginning. One major task is to secure the GOP’s right flank, which remains cool to Mr. McCain over issues including taxes and economics.

The support of supply-siders Jack Kemp and Phil Gramm has not been enough to reassure some economic conservatives about the direction of economic policy in a McCain administration. Yet a look at Mr. McCain’s record in Congress over the past 25 years demonstrates a tax-cutting pedigree at least as strong as, if not stronger than, Mitt Romney’s or Mike Huckabee’s (they both raised taxes as governors).

Mr. McCain calls himself a proud foot soldier in the Reagan Revolution. He joined the House of Representatives too late to vote on President Reagan’s historic package of tax-rate cuts, but in 1983, the year he arrived in the House, Mr. McCain joined supply-siders by voting against legislation to place a “cap” on the third year of the Reagan tax cuts. (All votes come from the American Conservative Union’s list of “key votes,” used to compile its annual congressional rankings.)

A year later, Mr. McCain voted against a Democrat-sponsored tax reform bill that included $250 billion in tax increases and a deficit-reduction plan that contained another $51 billion in tax hikes. While serving in the House, Mr. McCain’s pro-tax cut votes helped him earn ACU rankings as high as conservative stalwarts such as Jack Kemp, Newt Gingrich, Henry Hyde and Vin Weber.

Mr. McCain took over Barry Goldwater’s Senate seat in 1987. In 1989 — in the face of rising deficits — Mr. McCain voted for a pro-growth cut in the capital-gains tax to 35% and to expand tax-advantaged Individual Retirement Accounts.

In 1990, those rising deficits led President George H.W. Bush to abandon his “no new taxes” pledge and seek out a budget deal with Senate Democrats. The negotiations were so politically sensitive that Office of Management and Budget Director Richard Darman and congressional leaders decamped to Andrews Air Force base. They ultimately brought back a deal that included a trade-off: supposedly binding budget levels in exchange for what was then the largest tax increase in history.

Many Republican budget hawks in the Senate — including Bob Dole, Pete Domenici, Warren Rudman, Alan Simpson, Strom Thurmond and Orin Hatch — strongly pushed this package. Yet Mr. McCain and other supply-siders such as Connie Mack, Trent Lott and Phil Gramm broke ranks with George H.W. Bush and the GOP leadership to vote “no.”

Throughout the 1990s, Mr. McCain was a reliable, down-the-line tax cutter. In 1992, he voted for an amendment by supply-side hero Sen. Bob Kasten to require a super-majority in Congress to raise taxes. That same year, he joined just 37 other senators in pushing for Sen. Connie Mack’s proposal to cut the capital gains tax to 15%.

Like every other Republican, Mr. McCain voted against President Clinton’s 1994 budget that shattered George H.W. Bush’s record for the largest tax increase in history. In 1995, he was one of just 31 senators to vote for a bill to establish a $500 per child tax credit, reduce the capital gains tax, expand IRAs and eliminate the tax penalty on married couples. He also voted for the Balanced Budget Act, which would have reduced spending by $894 billion while cutting taxes by $245 billion.

In 1996, Mr. McCain voted in favor of establishing Medical Savings Accounts, allowing Americans to save tax-free to pay for medical expenses — a proposal long-championed by supply-sider Steve Forbes. He also voted for another amendment to require a super-majority vote in Congress to raise taxes. In 1997, Mr. McCain voted on various tax cut bills that would have indexed the capital gains to inflation and allowed parents to invest up to $2,500 per year tax free in education savings accounts.

On April 1, 1998, Mr. McCain voted in favor of lifting income thresholds for the 15% and 28% tax brackets, which would have generated a tax cut of $195 billion over five years. In 2000, he again voted to eliminate the federal marriage penalty and to repeal the “death” tax by 2010. He also supported a bill to reduce the percentage of Social Security benefits taxed to 50% from 85%, restoring them to pre-Clinton levels.

In 2001, with the bitter primary battle still fresh, Mr. McCain voted against the final Bush tax-cut package. Why would he deviate from a pro-growth, tax-cutting position, built up over 17 years in Congress and dozens of votes, even after running on a tax-cut plan himself in 2000?

Mr. McCain’s protest that he wanted spending cuts to accompany the Bush tax cuts has persuaded few conservatives. But what is not remembered is that, two weeks earlier, Mr. McCain voted to approve the final version of the Budget Resolution — the blueprint used by congressional committees for spending and tax bills — which included $1.35 trillion in tax cuts (the Bush proposal) coupled with a $661 billion cap on discretionary spending. When the promised spending cap never materialized, Mr. McCain denounced the wasteful earmarks and pork-barrel spending that he felt jeopardized the budget, and lodged the now famous protest vote against the tax cuts.

By 2004, Mr. McCain was back on track. That year, he voted against rescinding portions of the Bush tax cut, voted in favor of extending the moratorium on Internet taxation, and voted against raising the top marginal tax rate to 36% from 35%. In 2006, Mr. McCain voted to extend AMT relief for millions of middle-class tax payers and to extend the cuts in dividend and capital-gains taxes. He also voted to end a filibuster that prevented a vote on a bill to permanently repeal the death tax.

Mr. McCain has tried to reassure economic conservatives by pledging to make permanent the tax cuts he initially opposed. Whether Mr. McCain can ultimately convince them remains to be seen, although his 25-year record of supporting pro-growth tax cuts weighs in his favor. If that’s not enough, they might consider that the Bush tax cuts are on auto-pilot to expire — and neither a President Clinton nor a President Obama will have to lift a finger to impose a crushing tax hike on America’s economy.

Mr. Stach is senior director of the White House Writers Group, Inc.

By PETER WEHNER
February 14, 2008; Page A16

On Tuesday Barack Obama crushed Hillary Clinton in Virginia, Maryland and the District of Columbia. He did this while winning significant support from older voters, women, lower income earners and Hispanics — groups that had sharply favored Mrs. Clinton in other states. And he did this after turning in decisive victories over the weekend in Louisiana, Nebraska, Washington state and Maine.

Mrs. Clinton was supposed to deliver the knockout blow on Super Tuesday. But instead, after being fought to a draw and now facing an Obama avalanche, she is taking a Giuliani Light approach. She is counting on winning in Ohio and Texas on March 4. The problem is that March 4 is nearly three weeks away, or about the same length of time between when Republicans voted in New Hampshire and when they voted in Florida. During that span Rudy Giuliani went from one of his party’s frontrunners to one of its also rans.

By the time voters in Ohio and Texas head to the polls, Mr. Obama could be on a 10-state winning streak and raising funds at a clip that far outpaces Mrs. Clinton. If so, Mrs. Clinton’s support could drop precipitously — and her party’s super delegates could hand their support to Mr. Obama.

So in the race for the Democratic nomination, the odds now favor the junior senator from Illinois. And if he wins, the presumptive Republican nominee, John McCain, will have his work cut out for him. Those who believe Mr. Obama will be an easy target because he is liberal and inexperienced haven’t followed his campaign. If Mr. Obama is the nominee, Mr. McCain will face a politician of enormous talent and personal grace. So what can Mr. McCain do about it?

- First, he can make use of the gift of time. Having all but locked down the GOP nomination, Mr. McCain can use the next few months to reintroduce himself to the American people. It is not safe to assume that most voters have closely followed the race thus far. What many people know about Mr. McCain they like, based on his valor, honor and love of country. Now he needs to build on this by retelling his life story in a vivid, moving way.

- Second, create a compelling narrative that explains his candidacy. So far the GOP race has had a “check-the-box” quality to it. Mr. McCain needs to put issues under a broader banner. Defending American ideals against our enemies abroad, and being worthy of those ideals at home, is one banner that could have broad appeal. If Mr. McCain advocates policies that advance liberty and individual responsibility, strengthen the family, and promote prosperity, he will give his candidacy the context it needs.

- Third, turn Mr. Obama’s strength into a weakness. Right now Mr. Obama is presenting himself as a figure who floats above politics. His allure is based on inspiring but vague calls for hope and unity. This airy appeal can and needs to be firmly strapped down to the policies Mr. Obama would put in place. This requires defining Mr. Obama’s invocation of “change” for what it is: orthodox liberalism.

Mr. McCain, meanwhile, can be the man of substance, specific policies and reform. Presenting himself as that man, however, won’t be easy. In the past, Mr. McCain has shown a lack of interest in economic and domestic issues. But it is essential now for his success. His policies need to be creative, aimed at everyday concerns, and show intellectual rigor. Remember that among the GOP’s greatest electoral successes in recent decades (Ronald Reagan’s election as president in 1980 and the Republican capture of Congress in 1994) were based on philosophical contrasts. Pale pastel campaigns (George H.W. Bush in 1992 and Bob Dole in 1996) are a road to defeat.

- Fourth, repair the breach with key conservatives. Mr. McCain can begin to do this by stopping advisers from making silly attacks on talk-radio hosts and instead offering specific, concrete governing commitments. Picking fights with the right people, instead of people on the right, would also help Mr. McCain. Conservatives may never love Mr. McCain. But he can strengthen ties to them by cultivating common interests.

- Fifth, broaden the national security debate beyond Iraq. Mr. McCain was right on Iraq, and he was right early. The success of the surge is a tribute to his wisdom and steadfastness on these matters. But Iraq is and will remain an unpopular war. Mr. McCain needs to speak more specifically about his policies beyond Iraq and the Middle East and articulate the philosophical core of his national security approach. And he needs to explain why he (unlike Mr. Obama) will keep America safe and on the offensive in our war against jihadism.

Mr. McCain’s task will not be easy. If he is the nominee, Mr. Obama will be a formidable candidate and Democrats will likely enjoy advantages in fundraising, enthusiasm and party identification. But John McCain has overcome more difficult challenges in his life.

Este Blog, e toda a sua vasta influência nos negócios internacionais, seu poder de persuasão e sua rede enorme de leitores (valeu, Urbano!), está em campanha aberta por John McCain para nosso Presidente.

Mais, depois.

Vários negócios começando, um monte de spams me esperando, uma certa preguiça e uma potencial nova filha fizeram esse blog ficar parado por um longo e tenebroso invervo. Vamos tentar retomar, falando de CDO. CDOs são as sementes da chamada bolha imobiliária americana.

(Ah, não é o escopo, mas a Bolsa tá de graça. Se você tem um troco, entre…)

Os derivativos conhecidos como CDOs -  Collateralized Debt Obligations – satisfazem todos os tipos de apetite por risco. Eles são como fundos mútuos que agregam bonds, empréstimos ou swaps. Mas, ao contrário dos fundos mútuos, os CDOS possuem diferentes tranches que outorgam ao seu possuidor diferentes direitos sobre o portfolio. Por exemplo, quando os pagamentos dos bonds são efetuados, eles são primeiramente alocados às senior tranches. Apenas quando essas forem pagas é que se começam a pgar as junior tranches. No caso de default, ocorre o contrário: ele é assumido primeiramente pelas tranches mais juniores. Esse empacotamento pode transformar lixo tóxico em investment grade de alta costura. Pegue-se um punhado de companhias com rating A e monte-se um portfolio com elas, dando a um grupo de securities direitos sobre os primeiros 80% do fluxo de caixa do portfolio, por exemplo, com proteção contra os 20% primeiros defaults. Uma vez que é imporvável que 20% de um punhado de companhias A entrem em default com seus bonds, com esse desenho uma agência de rating consegue dar às securities desta tranche do portfolio um rating AAA, melhor que os ratings individuais dos papéis do portfolio. Como são poucas as empresas no mundo que possuem um rating AAA, tal estrutura faz-se muito atraente. Logicamente, essa estrutura não faz o risco desaparecer. Apenas o “varre para debaixo do tapete”, concentrando-o nos tranches mais juniores dos portfolios, também conhecidas como equity, por carregarem a maior parte do risco – e oferecerem retornos compatíveis com os oferecidos por equity, também. Os tranches entre o AAA e o equity são conhecidos como mezzanino. Esses derivativos não são “intrinsicamente ruins”. Principalmente porque eles amenizam o risco sistêmico do sistema bancário: quando um banco sofre default, outros podem ser contagiados por uma corrida de saques, se a confiança no sistema for quebrada. Se os empréstimos sujeitos a default não estão mais nas mãos dos bancos, e sim com investidores como os hedge funds, em pools diversificados, o default corporativo deveria ter menos impacto no sistema, uma vez que cada investidor detém apenas uma pequena parte do risco. Por ouotro lado, derivativos de crédito dão origem a Riscos Morais. Alguém deve emprestar o dinheiro, em primeiro lugar. Se esse alguém sabe que vai se livrar do risco do empréstimo em questão de semanas, não há nenhum grande incentivo em assegurar-se de que o devedor tem capacidade de pagamento ao longo dos anos – passa-se a se preocupar mais com quantidade que com qualidade. Além disso, já que o risco é bem diversificado, quem vai arcar com o custo de monitoração da qualidade do crédito? Cada agente pode assumir que o outro está monitorando, sem que nenhum deles efetivamente esteja.Em outras palavras: agentes que se sentem mais seguros podem agir com menos responsabilidade – o chamado efeito cinto de segurança: motoristas com cinto tendem a correr mais, pois se sentem mais seguros. O risco geral do sistema permanece o mesmo que seria se estivesse sem cinto, mas correndo menos. E finalmente, temos que os derivativos acabaram por criar um suprimento de liquidez que não está sob controle dos bancos, nem dos Bancos Centrais.

Mercados em erupção, volatilidade de volta, pânico em todo lugar. 

Exagero? 

Talvez seja. 

Mas o que aconteceu ontem, a queda de mais de 8% no Ibovespa, traz dois fatos: 

a)     45,000 pontos é ponto de compra. Foi bater em 44,928 para o índice subir, seja com exercício forte de calls, seja com entradas long;b)     Deve-se prestar atenção, daqui por diante, nos dias de vencimento de puts (opções de venda), cujo exercício pode aumentar bastante a volatilidade;c)      Liquidez boa é a dos outros: “nuncanahiztóriadestimundo” houve tanta liquidez, blábláblá. Mas, como sempre, a liquidez só está presente até 3 para a meia-noite. Quando as abóboras surgem, ela faz o que sempre fez: seca. 

E traz também um sentimento: estamos em 2007. As duas últimas grandes crises nas bolsas foram em 1987 e 1997 – pode ser vodu, pode ser o estabelecimento claro de um ciclo econômico mais curto – mas, entrando em setembro, haverá um viés psicológico muito forte em campo, pois as duas crises e a de 1929 foram em setembro/outubro. Se eu fosse esperto, ficaria fora do mercado até meados de outubro. Talvez haja sangue nas ruas, para nos locupletarmos. 

E traz um grande, um enorme perigo: contrariando o livre mercado, alguns bancos centrais estão “salvando” fundos e bancos que deveriam quebrar. E por que isso é ruim? 

Sangue purifica o mercado. Depois da salvação, para “prestar contas”, os Estados exigem do mercado mais “regulamentação”. Como a regulamentação restringe as oportunidades de lucro, e a marcha das inovações financeiras não pára, é de se esperar que tenhamos instrumentos financeiros cada vez mais complexos, e a complexidade traz cada vez mais risco, seja ele de contra-parte, operacional, qualquer. E, além de tudo, há o moral hazard: se o papai sempre segura as pontas, porque o moçoilo vai se comportar?

Mexico’s Carlos Slim Discusses
Media Empire, Critics, Competition
August 4, 2007

Carlos Slim, who rivals Bill Gates as the world’s richest man, spoke June 26 with The Wall Street Journal’s David Luhnow. Over three and a half hours in his Mexico City offices, the industrialist talked about his pride in having built America Movil SAB, one of the world’s five biggest cellphone companies, defended himself from charges that his companies stifle competition in Mexico and said his critics are only out to make a buck from his telephone empire.

The interview was conducted in Spanish. Below are edited excerpts, as translated by The Wall Street Journal. (See related article.)

* * *

WSJ: You are probably the richest man in the world. Any reaction?

Mr. Slim: No. It’s paper money. That’s not the same thing as value.

WSJ: Well, Bill Gates has a lot of paper money, too.

Mr. Slim: Yes, but this isn’t a competition. Being a businessman isn’t about that kind of competition. It’s a competition for the marketplace.

WSJ: It would be a historic event for a person from the developing world to reach the world’s top spot in money.

Mr. Slim: That’s a morbid way of looking at it. I think what’s important, and this gives me a lot of pleasure, is that America Movil was worth zero 15 years ago. In other words, the value we have created in that company is very interesting; it’s a case study. I think one of the innovations at the company was having pre-paid phone cards. We were the first ones to do that. We even called it the “Gillette Plan.”

WSJ: Why Gillette?

Mr. Slim: Because they sell you the shaver in order to sell you the replacement razor blades. In our business, you subsidize the handsets [to sell the calls themselves]. Now the practice is used all over the world, mostly in developing countries. The percentage of the Mexican market using pre-paid phone cards is more than 90%.

WSJ: Why do you think you’ve gotten so rich? What attributes do you have?

Mr. Slim: America Movil has been a big part of it. The market likes the company, views it as well organized, well run, careful with its money, with healthy organic growth, a company that’s worried about its clients but also its investors and workers. The company has taken decisions to enter markets during times when others didn’t want to invest, like Argentina. It’s a young company that has had success in all its markets, and has reinvested its money to generate new growth. It hasn’t paid big dividends but has reinvested its money.

SEE RELATED ARTICLE

• Page One: The Secrets of the World’s Richest Man

WSJ: Some of your cellphone rivals don’t think the market in Mexico is too fair, because they pay about 12 U.S. cents per minute to connect calls between networks. Since the vast majority of the calls go to your network, you make the most money and make it hard for them to undercut your price.

Mr. Slim: It’s interesting that you say that, because they all agreed to the rate. I have to say that in the cellphone business, my rivals were the monopolies, not us. They started in the business before we did.

WSJ: You mean Iusacell [a small player owned by billionaire Ricardo Salinas Pliego]?

Mr. Slim: Them and Telefonica.

WSJ: But Telefonica didn’t even enter the market until 2002. And Iusacell operated mostly in central Mexico. Telcel [America Movil's Mexican unit] got the only nationwide concession during the Telmex privatization in 1990.

Mr. Slim: Telefonica bought existing monopoly concessions from Motorola in the north of Mexico. Iusacell was a monopoly and Telefonica was a monopoly.

WSJ: They had concessions in a limited area of the country, but they still had to compete with Telcel from very early on.

Mr. Slim: They had monopolies in their regions [for a year or two].

WSJ: Telcel, for instance, has operating profit margins of about 54%, according to Merrill Lynch. But many of its rivals here have profit margins in the teens. Telefonica had negative margins — it was losing money here until a few months ago. Is Telcel that much better run?

Mr. Slim: What are you trying to say, that my companies should be more inefficient?

WSJ: No, I’m asking whether Telcel is that much better run than its rivals or if there’s something else going on, if the playing field in Mexico is not level.

Mr. Slim: Nextel is doing a great business here. Their margins are similar to ours.

WSJ: But Nextel has a different business model. I’m talking about run-of-the-mill cellphone companies that try to compete with Telcel.

Mr. Slim: Our competitor is Nextel. They are the ones doing it right.

WSJ: And the rest are doing something wrong?

Mr. Slim: Look, for instance, when you are subsidizing your handsets too much and giving out too much free airtime, then your margins are smaller. We’re doing some of that in Chile, trying to build up market share. Before, some of these companies were investing without intelligence. When you sell for $16 a handset that’s worth $50 or $60 and has $80 of free airtime, then, tell me, who isn’t going to buy a telephone, talk for 80 times for free, and then throw it away?

WSJ: Actually, there is a case against your company at the anti-trust agency that says your company bought Telefonica handsets, replaced the chip with their own, and re-sold them on the market.

Mr. Slim: It could be. That happens to all of us when you sell like that. If there’s a handset that you sell at $50 or $20 and it’s worth $100, someone is going to buy it. It could be a distributor, or it could be an average guy. We’ve stopped giving things away. If it costs $40, we charge $40, don’t sell it at $20.

WSJ: Let’s talk about your fixed-line business, Telmex. Your rivals from the 1990s say Telmex wasn’t very cooperative in allowing them to connect to its network.

Mr. Slim: You have to compare how much the interconnection price was to the sale price. It didn’t amount to much, about 10%. And the interconnection cost today is less than one cent, compared to 10 cents years ago.

WSJ: But they say it cost them 70 cents of every dollar they made.

Slim: They lost money because they all built their own networks instead of sharing the networks. And they invested in long-distance, which went broke all over the world.

WSJ: Why do you think you are criticized as a monopolist?

Mr. Slim: Every time competition comes around, we get criticized. It happened when the long-distance market opened in 1997. Now digital convergence is opening up more possibilities to competitors, so I think we’re in for a new round of complaints. It reminds me of a company that makes food for kids, that when it wanted to get into a new market, it would say the local producer made bad food. It’s a dirty war.  

WSJ: But a lot of criticisms aren’t from competitors, but from impartial institutions. Mexico’s telephone industry has been criticized by the World Bank, the OECD and Mexico’s central bank. 

Mr. Slim: They are one and the same.

WSJ: So the head of Mexico’s central bank, Guillermo Ortiz, has a commercial agenda?

Mr. Slim: You’d have to ask him. But other Mexican officials like [former finance minister] Paco Gil have already shown they have. [Mr. Gil is now head of Telefonica in Mexico after his 2000-2006 tenure as minister.]

WSJ: What about economists, like Nobel Prize-winner Joe Stiglitz, who have criticized Mexico’s monopolies?

Mr. Slim: No, Stiglitz did it because somebody whispered something in his ear and simplified everything. Look, unfortunately this is the lack of mental development that we all have, and the inertia. We still have an agrarian mentality, we keep thinking the economy is zero sum.

WSJ: The OECD says your companies charge some of the highest average prices among their member nations. You have said you disagree with the way they measure prices.

Mr. Slim: Look, Mexico is about middle of the pack, cheaper than many OECD countries like Switzerland and Spain. So, are we the most expensive? There are some places that are cheaper: Bangladesh, China, India.

WSJ: Many economists say that Mexico’s monopolies, including private companies and state ones like Pemex, hold the country back by not creating jobs.

Mr. Slim: I think there are only two monopolies in Mexico: Pemex and [state electricity company] CFE. In regards to the private sector, there are groups, let’s not say monopolies, but there are a few oligopolies that are dominant.

WSJ: Beer, cement, telephony?

Mr. Slim: Whichever. But what’s important? What matters is what price they sell. Are they investing, do they have good technology, and what service do they offer? If a beer here costs one peso and in the U.S. it costs two, then there’s no harm. If it’s the reverse, then it’s bad. If according to Merrill Lynch my prices aren’t bad, then it’s not harmful.

WSJ: I pay a lot for my phone bills. I brought my bills to show you. We don’t make long distance calls at my house, and we pay about $85 a month, including broadband. Then I pay about $150 a month for my cellphone. Isn’t that too expensive?

Mr. Slim: Our basic telephone rental is cheaper than in the U.S. When you make more calls, then it becomes more expensive. We basically have two Telmex’s. One is for the poor, where we don’t make virtually any money and our rivals aren’t interested in going after that market. Then we have another for the clients who can afford more.

Look, here’s my bill from my parent’s old house. No one makes calls here, so it’s just rental of the line. I pay $15 bucks a month. That’s a gift. And here’s my home bill.

WSJ: Wow, you pay $450 a month. Why is it so expensive?

Mr. Slim: Well, I have a lot of maids, and my sons make calls.

WSJ: Some of your critics say you represent a certain way of doing business in Mexico, where who you know matters more than what you know. Bill Gates became the world’s richest man by inventing an operating system for computers. You became just as rich by operating a government concession for telephones.

Mr. Slim: I think that’s a stupidity. That way, we’d have to have good contacts with all the governments in the countries in which we operate, from the U.S. to Argentina. Historically, Grupo Carso [Mr. Slim's industrial holding company] didn’t depend on government contracts. We’ve been in consumer goods, fighting it out in the market. Our retail stores and cigarette company don’t depend on the government. You pick your telephone service here not because I’m friends with some government official but because it makes sense for you to have my products.

WSJ: Could it be that people in Mexico pick your cellphone company because your rivals have to pay you so much money they can’t undercut your price?

Mr. Slim: In all of Latin America? Look, I want to insist on this because it’s important to me. In many businesses we compete with other people. In banking, we compete. In insurance, we compete. And in telecommunications, we compete throughout the region. In many countries, we bought a license as the way in and had to start from the bottom. We started off as No. 4 in Argentina, No. 2 in Colombia, No. 2 in Ecuador. And in many cases we’re competing with the former monopolies. At America Movil, we only make a third of our revenues from Mexico.

WSJ: Your family members run most of your companies. Do you consider it a meritocracy?

Mr. Slim: It is a meritocracy. To get a job — it’s possible for someone [from my family] to get a job, but for them to prosper in the job and rise through the ranks is up to them. [My relatives who work in the companies] are leaders, they work well, they’re serious people.

WSJ: How do you shape your worldview? What do you read? Do you like to travel?

Mr. Slim: I like history a lot. If you begin to understand the evolution of man and society, it’s very revealing. What’s interesting to me is that our new civilization is very generous. It’s what [Alvin] Toffler says, that any big change makes people nervous, and there is resistance to change. But that happens because governments don’t know how to manage the change. Technology will multiply productivity.

WSJ: What else besides history?

Mr. Slim: Well, I like to think. I think about history, about people. Genghis Khan, for instance, probably changed civilization in the second millennium more than anyone else.

WSJ: You’re often described as a nationalistic businessman who says Mexico should have strong companies. Do you prefer the old system of a closed economy and import substitution?

Mr. Slim: I think competition makes you better. A company without competition is like a soccer team that never plays anyone else. I’d say one of the reasons America Movil is so successful is thanks to the entrance of Telefonica to Mexico. When they came in, we decided to go after them in other markets. Why sit here and let them have our market?

WSJ: You are now turning to philanthropy, yet you’ve criticized giving money away “like Santa Claus.” Which is it?

Mr. Slim: Many trillions of dollars have been given away in recent years and the problems still exist. Giving away money isn’t enough. The best way to attack poverty is through investment, development, education and jobs.

Mexico’s Carlos Slim makes his billions
the old-fashioned way: monopolies

By DAVID LUHNOW
August 4, 2007; Page A1

Mexico City

Carlos Slim is Mexico’s Mr. Monopoly.

It’s hard to spend a day in Mexico and not put money in his pocket. The 67-year-old tycoon controls more than 200 companies — he says he’s “lost count” — in telecommunications, cigarettes, construction, mining, bicycles, soft-drinks, airlines, hotels, railways, banking and printing. In all, his companies account for more than a third of the total value of Mexico’s leading stock market index, while his fortune represents 7% of the country’s annual economic output. (At his height, John D. Rockefeller’s wealth was equal to 2.5% of U.S. gross domestic product.)

As one Mexico City eatery jokes on its menu: “This restaurant is the only place in Mexico not owned by Carlos Slim.”

Mr. Slim’s fortune has grown faster than any in the world during the past two years, rising by more than $20 billion to about $60 billion currently. While the market value of his stake in publicly traded companies could decline at any time, at the moment he is probably wealthier than Bill Gates, whom Forbes magazine estimated at $56 billion last March. This would mark the first time that a person from the developing world held the top spot since Forbes started tracking the wealthy outside the U.S. in the 1990s.

“It’s not a competition,” Mr. Slim said in a recent interview, fiddling with an unlit Cuban cigar in a second-story office decorated with 19th century Mexican landscape paintings. A relatively modest man who wears ties from his own stores, the mogul says he doesn’t feel any richer just because he is wealthier on paper.

How did a Mexican son of Lebanese immigrants rise to such heights? By putting together monopolies, much like John D. Rockefeller did when he developed a stranglehold on refining oil in the industrial era. In the post-industrial world, Mr. Slim has a stranglehold on Mexico’s telephones. His Teléfonos de México SAB and its cellphone affiliate Telcel have 92% of all fixed-lines and 73% of all cellphones. As Mr. Rockefeller did before him, Mr. Slim has accumulated so much power that he is considered untouchable in his native land, a force as great as the state itself.

The portly Mr. Slim is a study in contradiction. He says he likes competition in business, but blocks it at every turn. He loves talking about technology, but doesn’t use a computer and prefers pen and paper. He hosts everyone from Bill Clinton to author Gabriel García Márquez at his Mexico City mansion, but is provincial in many ways, doesn’t travel widely, and proudly says he owns no homes outside of Mexico. In a country of soccer fans, he likes baseball. He roots for the sport’s richest team, the New York Yankees.

INTERVIEW EXCERPTS

“This isn’t a competition. Being a businessman isn’t about that kind of competition. It’s a competition for the marketplace.”

– Carlos Slim, in a discussion with The Wall Street Journal. Read the edited excerpts.

Admirers say the hard-charging Mr. Slim, an insomniac who stays up late reading history and has a fondness for reading about Ghengis Khan and his deceptive military strategies, embodies Mexico’s potential to become a Latin tiger. His thrift in both his businesses and personal life is a model of restraint in a region where flamboyant Latin American business tycoons build lavish corporate headquarters and fly to Africa on hunting jaunts.

To critics, however, Mr. Slim’s rise says a lot about Mexico’s deepest problems, including the gap between rich and poor. The latest U.N. rankings place Mexico at 103 out of 126 nations measured in terms of equality. During the past two years, Mr. Slim has made about $27 million a day, while a fifth of the country gets by on less than $2 a day.

“It’s like the U.S. and the robber barons in the 1890s. Only Slim is Rockefeller, Carnegie, and J.P. Morgan all rolled up into one person,” says David Martínez, a Mexican investor who lives in Manhattan.

Monopolies have long been a feature of Mexico’s economy. But in the past, politicians acted as a brake on big business to ensure that the business class didn’t threaten their power. But political control faded in the 1990s with the privatization of much of the economy and the slow death of the Institutional Revolutionary Party, which held power for 71 years until 2000.

“It is surprising how big companies have captured the Mexican state. This is a risk to our democracy, and is suffocating our economy,” says Eduardo Perez Motta, the country’s antitrust chief.

As the face of the new elite, Mr. Slim presents an acute challenge for the country’s young president, Felipe Calderón. He must decide whether to try and rein in Mr. Slim despite the mogul’s standing as the country’s largest private employer and taxpayer. Congress routinely kills legislation that threatens his interests, and his firms account for a chunk of the nation’s advertising revenue, making the media reluctant to criticize him.

During the past few months, Mr. Calderón has looked to cut a backdoor deal with Mr. Slim. In a series of face-to face meetings — the details of which have surfaced for the first time — the president has tried to convince Mr. Slim to accept greater competition, according to people familiar with the talks. The government holds an important card: Mr. Slim can’t offer video on his network — a big potential market — without government approval.

But even some within Mr. Calderón’s camp privately say the closed-door talks play into Mr. Slim’s hands by letting him circumvent the country’s regulators, underscoring the weakness of Mexico’s democratic institutions. Unless Mr. Calderón extracts big concessions from the mogul, they say, he may become too powerful to control. For his part, Mr. Slim says that his companies are “in constant contact” with regulators, but played down the notion of a secret negotiation.

A talkative man who is generally avuncular but who can easily lose his temper, Mr. Slim rejects the monopolist label. “I like competition. We need more competition,” he says, sipping a Diet Coke. He stressed that many of his companies operate in competitive markets, and pointed out that Mexico accounts for only a third of sales at his cellphone company América Móvil SAB, which has clients from San Francisco to Sao Paolo.

Mr. Slim’s strategy has been consistent over his long career: Buy companies on the cheap, whip them into shape, and ruthlessly drive competitors out of business. After Mr. Slim got control of Telmex in 1990, he quickly cornered the market for copper cables used by Telmex for telephone wires. He bought one of the two main suppliers and made sure Telmex didn’t buy any cable from the other big supplier, eventually prompting the owners to sell the company to him.

His control of Mexico’s telephone system has slowed the nation’s development. While telephones have long been standard in any American home, only about 20% of Mexican homes have them. Only 4% of Mexicans have broadband access. Mexican consumers and businesses also pay above-average prices for telephone calls, according to the Organization for Cooperation and Economic Development.

Mr. Slim agrees that many industries in Mexico are dominated by big companies. But he sees no harm as long as they offer good service and prices. “If a beer in Mexico costs 1 peso and in the U.S. it costs 2 pesos, then I don’t see the problem,” he says.

Despite countless measures over the years that show his companies charge high prices, Mr. Slim steadfastly rejects that notion. During an interview, he orders an aide to fetch his own telephone bills. “See? We charge $14 per month for basic phone rental, cheaper than the U.S.,” he says, pulling up a seat next to the reporter. That may be so, but additional fees in Mexico make most phone bills more expensive than in the U.S. Mr. Slim’s total phone bill at his own house was a whopping $470 last month. “I have a lot of maids and my sons make calls,” he says.

Mr. Slim says his success comes from spotting opportunity early, something he learned in part from reading futurist writer Alvin Toffler, who wrote the best-seller “Future Shock” in the 1970s, and who sends the mogul manuscripts to review. Pulling a dog-eared copy of Mr. Toffler’s last book, “Revolutionary Wealth,” Mr. Slim leafs through it and shows off his comments in the margins. “Some of his numbers were out of date,” he mutters.

Mr. Toffler says he first met Mr. Slim on a trip to Mexico in 1993. Mr. Slim approached him after a speech, surrounded by his family and carrying one of Mr. Toffler’s books, heavily underlined. The two have been friends ever since. “If you didn’t know he was the richest guy in the world, you’d just think he was a likeable and intelligent guy,” says Mr. Toffler.

The fifth of six children, Mr. Slim was born wealthy. His father, Julian Slim, made his fortune on a general store in downtown Mexico City called “The Orient Star.” His father died when Mr. Slim was only 13.

THE FOUR D’S

Companies that dominate their industries often resort to the four D’s to defend their turf when facing competition for the first time.

Deny — When Mexico’s long-distance market opened to competition in 1997, Telmex at first denied access to its network, arguing that rivals didn’t have the legal authorization to operate in the country, say rivals. In recent years, Telmex has tried to block Internet calling service Skype’s entry into Mexico, arguing it needs a government concession to enter the market. Telmex says it follows legal procedure.  

Delay — Telmex dragged its feet on allowing access to its network, often not returning calls from executives of rival companies or not showing up at meetings, rivals say. When Mexico’s telephone regulator, Cofetel, tried to regulate Telmex in the following years, the company took it to court nearly every single time, tying up the regulator’s rulings for years.

Deteriorate — Rivals complain that Telmex hurt competitors’ service. One small rival, MCM Telecom, says Telmex would route all of its calls through one particular station to overload the calls and create busy signals. Telmex says any such move was inadvertent.

Dump — Mr. Slim’s companies can put the squeeze on rivals. Since his Mexican cellphone company, Telcel, has more than 70% of the market, it collects high interconnection fees for calls between networks roughly seven in every 10 times. Rivals, however, have to pay the fee most of the time, making it hard for them to undercut Telcel’s prices and gain market share.

Early on, Mr. Slim showed an aptitude for numbers that would help his career. He taught algebra at Mexico’s largest public university while finishing his thesis, titled “Applications of Linear Theory in Civil Engineering.” His love of numbers also drew him to baseball, a lifelong hobby. “In baseball…numbers talk,” he once wrote. Even today, he enjoys discussing baseball, telling a reporter that slugger Barry Bonds should be remembered more for his walk ratio than his home runs.

After college, Mr. Slim and some friends became stockbrokers in the country’s fledgling market. Trading by day and playing dominoes by night, the clique became known as “Los Casabolseros,” or “The Stock Market Boys.” Despite the success, friends say Mr. Slim, less of a party boy and more private than the rest, wanted to run companies rather than trade. “He never liked money as much as the rest of us. He just wanted to be a good businessman,” says Enrique Trigueros, one of the casabolseros.

Mr. Slim soon got his chance. After turning around a soft-drink company and a printing firm in the late 1960s and mid 1970s, he made his first big move in 1981, buying a big stake in Mexico’s second-biggest tobacco company, Cigatam, maker of Marlboro cigarettes in Mexico. The company generated the cash Mr. Slim needed to go on a buying spree.

A good time to buy came in 1982, a year that would shape Mr. Slim’s destiny. That year, the collapsing price of oil threw Mexico into a tailspin. When departing president José López Portillo nationalized Mexico’s banks, the traditional business elite feared the country was becoming socialist, and ran for the exits. Companies were selling for as little as 5% of their book value. Mr. Slim picked up dozens of leading firms for bargain-basement prices, a move that paid off when the economy recovered in the following years. He bought Mexico’s largest insurer, Seguros de México, for $44 million. Today, the company is worth at least $2.5 billion.

“Countries don’t go broke,” an unflappable Mr. Slim told friends at the time. Indeed, Mr. Slim always says his inspiration to invest during the downturn came from his father, who bought out his partner in their general store during the worst days of the 1910-1917 Mexican revolution — a bet that made his father a fortune when the fighting ended.

Mr. Slim still spots good values. From 2002 to 2004, he amassed a 13% stake in bankrupt carrier MCI, later selling it to Verizon Communications Corp. for $1.3 billion. “He has never overpaid for anything,” says Hector Aguilar Camín, a historian and friend. While the pair were on holiday in Venice, Mr. Slim once haggled with a store owner for several hours to get a $10 discount on a tie.

Despite his abilities, many here believe his biggest break was the rise to power in 1988 of Carlos Salinas, a Harvard-educated technocrat bent on modernizing the country. The two men had struck up a friendship in the mid-1980s, and Mr. Salinas spoke of Mr. Slim as the country’s brightest young businessman. Local wags dubbed the pair “Carlos and Charlies,” after a popular local restaurant chain.

Under Mr. Salinas, hundreds of state companies were sold, including Telmex in 1990. Mr. Slim, together with Southwestern Bell and France Telecom, won the bid over one of his closest friends, Roberto Hernandez, who got together with GTE Corp. Mr. Hernandez later suggested the auction was rigged, something both Mr. Slim and Mr. Salinas have long denied. Regardless of whether there was favoritism in the sale of Telmex, the privatization process created a new class of super-rich in Mexico. In 1991, the country had two billionaires on the Forbes list. By 1994, at the end of Mr. Salinas’s six-year term, there were 24. The richest of them all was Mr. Slim.

In retrospect, it is easy to see why Messrs. Slim and Hernandez considered Telmex a prize worth losing their friendship. Although countries like Brazil and the U.S. broke up state monopolies into a number of competing firms, Mexico sold its monopoly intact, barring competition during the first six years. And while countries like the U.S. initially barred local “baby bell” carriers from offering long-distance and cellular service in their same area, Telmex got to do all three at once, and across the entire country. Indeed, it won the only nationwide cellular-telephone concession, while rivals had to settle for concessions that were limited to certain regions. When competition was allowed in long distance, foreign carriers were limited to a minority stake in the fixed-line business. Mexico didn’t even bother to set up a telephone regulator until three years after the sale.

Dan Crawford was one of those who took on Mr. Slim and lost. In 1995, the California native became chief operating officer of Avantel, a long-distance company partly owned by MCI and the bank of Mr. Hernandez, Mr. Slim’s erstwhile friend. Avantel spent around $1 billion building a new network, but it soon ran into trouble trying to connect to Telmex’s network — something it needed to complete calls to and from Telmex clients. Telmex executives simply ignored phone calls or failed to turn up for meetings, Mr. Crawford recalls.

When Telmex did connect the calls nearly a year later, the price was so high that Avantel paid 70 cents of every dollar it made to Mr. Slim’s company, according to Mr. Crawford. When Avantel took Telmex to court for monopolistic practices, Telmex responded by asking a judge to issue an arrest warrant for Avantel’s top lawyer in Mexico, Luis Mancera, on trumped up charges, Mr. Crawford says. Mr. Slim confirms the story, but says a Telmex lawyer acted rashly, and that the judicial proceeding was dropped. Mr. Mancera declined to comment.

“Slim is very aggressive,” says Mr. Crawford, who recently retired from MCI. Avantel eventually defaulted on its debts in 2001, much of which were scooped up by Mr. Slim and later sold for a profit. Avantel was sold recently to another Mexican firm for $485 million — a fraction of what it invested in Mexico.

For his part, Mr. Slim says Avantel and others mistakenly focused on the long-distance market, which was in decline, rather than wireless, which was growing.

It hasn’t been much easier taking on Mr. Slim in the wireless market either. In 2004, Spain’s Telefónica SA began selling handsets at a loss here to build market share. But it soon realized that tens of thousands of phones were purchased but never used. According to a case currently at Mexico’s antitrust agency, Telefónica says that Telcel distributors bought the phones to keep them off the market, in some cases swapping the phone’s existing chip with their own and reselling the handset.

When asked about this practice, Mr. Slim says “It could be. That happens to all of us. If you sell something for $50 or $20 that costs $100, someone’s going to buy it.” His spokesman and son-in-law, Arturo Elías, says the distributors acted without Telcel’s knowledge.

Attempts to regulate Mr. Slim’s companies have largely failed over the years. Mexico’s telephone regulator, Cofetel, was so weak in the 1990s that Telmex’s rivals dubbed it “Cofetelmex.” When the regulator did try to act, Mr. Slim’s lawyers blocked it in the country’s Byzantine courts.

The Telmex chief also had friends in high places. Vicente Fox, Mexico’s first opposition president when he won in 2000, tapped a former Telmex employee, Pedro Cerisola, to be his minister of communications and transport. During his tenure, Mr. Cerisola rarely moved against Telmex, say executives from rival telephone companies. Mr. Cerisola declined to comment.

Using money from his telephone empire, Mr. Slim has expanded into Latin American markets as well as new industries in Mexico. His cellphone company América Móvil has 124 million customers and operates in more than a dozen Latin American nations. In Mexico, he has focused on industries that depend on government contracts. His new construction company, Ideal SAB, is currently bidding to run some of Mexico’s biggest highways. His new oil-services company recently built the country’s biggest oil platform.

Some of Mexico’s business leaders say in private that they feel Mr. Slim has grown too greedy. The death of his wife, Soumaya, from kidney disease in 1999 left him without an anchor, says Mr. Trigueros, Mr. Slim’s friend from his stockbroker days. “She was a special woman, the kind who keeps a guy in line. Nowadays, he only has business to think about,” he says.

Mr. Slim’s empire is so vast here now that doing business without him can be difficult. Two years ago, Hutchison Port Holdings and U.S. railroad Union Pacific teamed up to bid on a $6 billion port and railway in Baja California to compete with Long Beach port. But Mr. Slim felt the project had been arranged behind closed doors and was against the idea of the country’s biggest project going to foreigners. He made his feelings known to the Baja California governor and the project was stalled. Mr. Slim has since worked to put together a rival consortium, which includes Mexican rail company Grupo Mexico and U.S. railroad Burlington-Northern. He says his potential bid is a better option for the country because the railroad will run along Mexico’s north and help spur development. Union Pacific and Hutchison both declined to comment.

Mr. Slim has recently given more money to philanthropy, but he has often said his most important legacy is his family. In 2000, a few years after heart surgery, he put his sons and sons-in-law in charge of his businesses. He also started a group called “Fathers and Sons” that invites Latin American billionaires and their heirs for annual meetings, where they sip fine wines and attend seminars like “How to Run a Family Business.”

There is no obvious successor to the patriarch’s empire. That gives some Mexican officials hope that one day the state can regulate his companies. Says one high-ranking official: “When Slim dies, we can finally regulate his kids.”

Write to David Luhnow at david.luhnow@wsj.com