News & Current Affairs

September 7, 2008

US lenders ‘face state takeover’

US lenders ‘face state takeover’

Home repossessed in US

US mortgage giants Freddie Mac and Fannie Mae are set to be put under government control in an attempt to rescue the firms, media reports say.

Treasury Secretary Henry Paulson will outline government plans at a news conference at 1100 (1600 BST).

The move to shore up the shareholder-owned firms, which hold or guarantee half the US mortgage debt, would be the US’s largest ever financial bail-out.

In July, Congress approved a plan aimed

at offering them more liquidity.

This followed huge losses by the two firms as result of a big increase in defaults and repossessions in the US housing market.

‘Management told’

On Saturday, a senior politician, Barney Frank, chairman of the House Financial Services Committee, said US Treasury Secretary Henry Paulson had told him the government would use its powers to ensure the continued and stable functioning of the companies.

The Washington Post, quoting senior administration sources, said the firms would be put under a legal status known as “conservatorship” which would greatly reduce the value of the two companies’ common stock.

BBC Business Editor Robert Peston
This is an event of profound significance for the global economy
BBC Business Editor Robert Peston

Other securities – including company debt and preferred shares – would be guaranteed by the government, the paper added.

The New York Times reported that senior executives at Freddie Mac and Fannie Mae were informed about the plan on Friday.

The Wall Street Journal said it would include changes in the top management.

There would also be quarterly infusions of cash to keep both firms afloat, the papers say. The total cost to taxpayers is not known but could amount to billions of dollars, they add.

The government was being forced to step in because it was dangerous for the US economy for doubts to persist about the two firms’ viability.

Struggling homeowners

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The two contenders for the US presidency, Barack Obama and John McCain, have been briefed on the takeover by Mr Paulson.

“We’ve got to keep people in their homes,” said the Republican candidate, John McCain.

“There’s got to be restructuring, there’s got to be reorganisation, and there’s got to be some confidence that we’ve stopped this downward spiral,” he added, saying that the takeover of Fannie Mae and Freddie Mac must not benefit executives at the two companies.

The Democratic Party candidate, Barack Obama, said any action should be focused “on whether it will strengthen our economy and help struggling homeowners”.

“We must not allow government intervention to protect investors and speculators who relied on the government to reap massive profits,” he said, adding “we must protect taxpayers, not bail out the shareholders and management of Fannie Mae and Freddie Mac”.

Fragile

On Friday, America’s Mortgage Bankers Association reported that at the end of June, about four million homeowners with a mortgage – representing a record 9% – either were behind in their payments or faced repossession.

In the past year, the financial crisis has taken a heavy toll on both Fannie Mae and Freddie Mac.

The country’s two largest buyers and backers of mortgages lost a combined $3.1bn between April and June.

Both companies say they have the resources to weather the losses, but their shares have fallen sharply on fears that they could go bankrupt as borrowers default.

The rescue plan passed by Congress in July gave the US government the authority to buy shares and offer liquidity to companies to keep them afloat.

Many analysts believe their collapse would be a major shock to the already fragile global financial system.

Together, the two firms own or guarantee about $5.3 trillion worth of home loans – about half the outstanding mortgages in the US.

That is about 25 times as big as the obligations of Northern Rock – which was nationalised by the UK government earlier this year, and twice the size of the UK economy.

August 5, 2008

Microsoft sees end of Windows era

Microsoft has kicked off a research project to create software that will take over when it retires Windows.

Called Midori, the cut-down operating system is radically different to Microsoft’s older programs.

It is centred on the internet and does away with the dependencies that tie Windows to a single PC.

It is seen as Microsoft’s answer to rivals’ use of “virtualisation” as a way to solve many of the problems of modern-day computing.

Tie breaking

Although Midori has been heard about before now, more details have now been published by Software Development Times after viewing internal Microsoft documents describing the technology.

Midori is believed to be under development because Windows is unlikely to be able to cope with the pace of change in future technology and the way people use it.

Windows worked well in an age when most people used one machine to do all their work. The operating system acted as the holder for the common elements Windows programs needed to call on.

“If you think about how an operating system is loaded,” said Dave Austin, European director of products at Citrix, “it’s loaded onto a hard disk physically located on that machine.

“The operating system is tied very tightly to that hardware,” he said.

That, he said, created all kinds of dependencies that arose out of the collection of hardware in a particular machine.

This means, he said, that Windows can struggle with more modern ways of working in which people are very mobile and very promiscuous in the devices they use to get at their data – be that pictures, spreadsheets or e-mail.

Equally, he said, when people worked or played now, they did it using a combination of data and processes held locally or in any of a number of other places online.

When asked about Midori by BBC News, Microsoft issued a statement that said: “Midori is one of many incubation projects underway at Microsoft. It’s simply a matter of being too early in the incubation to talk about it.”

Virtual machines

Midori is widely seen as an ambitious attempt by Microsoft to catch up on the work on virtualisation being undertaken in the wider computer industry.

Darren Brown, data centre lead at consulting firm Avanade, said virtualisation had first established itself in data centres among companies with huge numbers of servers to manage.

Putting applications, such as an e-mail engine or a database, on one machine brought up all kinds of problems when those machines had to undergo maintenance, needed updating or required a security patch to be applied.

By putting virtual servers on one physical box, companies had been able to shrink the numbers of machines they managed and get more out of them, he said.

“The real savings are around physical management of the devices and associated licensing,” he said. “Physically, there is less tin to manage.”

Equally, said Mr Brown, if one physical server failed the virtualised application could easily be moved to a separate machine.

“The same benefits apply to the PC,” he said. “Within the Microsoft environment, we have struggled for years with applications that are written so poorly that they will not work with others.

“Virtualising this gives you a couple of new ways to tackle those traditional problems,” he said.

Many companies were still using very old applications that existing operating systems would not run, he said. By putting a virtual machine on a PC, those older programs can be kept going.

A virtual machine, like its name implies, is a software copy of a computer complete with operating system and associated programs.

Closing Windows

“On the desktop we are seeing people place great value in being able to abstract the desktop from actual physical hardware,” said Dan Chu, vice president of emerging products and markets at virtualisation specialist VMWare.

Some virtual machines, he said, acted like Windows PCs to all intents and purposes. But many virtual machines were now emerging that were tuned for a particular industry, sector or job.

“People take their application, the operating system they want to run it against, package it up along with policy and security they want and use that as a virtual client,” he said.

In such virtual machines, the core of the operating system can be very small and easy to transfer to different devices. This, many believe, is the idea behind Midori – to create a lightweight portable operating system that can easily be mated to many different applications.

Microsoft’s licensing terms for Windows currently prohibited it acting as a virtual machine or client in this way, said Mr Chu.

Michael Silver, research vice president at Gartner, said the development of Midori was a sensible step for Microsoft.

“The value of Microsoft Windows, of what that product is today, will diminish as more applications move to the web and Microsoft needs to edge out in front of that,” he said.

“I would be surprised if there was definitive evidence that nothing like this was not kicking around,” he said.

The big problem that Microsoft faced in doing away with Windows, he said, was how to re-make its business to cope.

“Eighty percent of Windows sales are made when a new PC is sold,” he said. “That’s a huge amount of money for them that they do not have to go out and get.

“If Windows ends up being less important over time as applications become more OS agnostic where will Microsoft make its money?” he asked.

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