South Africa heads into uncertainty with Zuma victory

POLOKWANE, South Africa (Reuters) - South Africa faced deep uncertainty on Wednesday after the greatest political shake-up since the end of apartheid set populist Jacob Zuma on the road to leadership of the country.

Newspapers described Zuma's stunning victory in an election for leader of the ruling ANC as a tsunami, and said the defeated party boss, President Thabo Mbeki, had been humiliated. The tabloid newspaper Sowetan carried the headline "Zunami Rules".

Zuma not only defeated Mbeki but swept aside the entire old guard of the party, filling all top positions with his allies.

His victory was seen as ushering in a new era in Africa's biggest economy, sweeping aside the monolithic centralism of the ANC and opening the way for more democracy and dissent.

Despite fears by some investors that Zuma, who is backed by trade unions and the Communist Party, will push the country to the left, markets remained unmoved and there was little change in the rand. Investors said they had priced in a Zuma win.

The trade union federation COSATU said it would not push Zuma to change policy, which was up to the whole ANC anyway.

Zuma has given no clear idea of his economic policies.

Economists said the ANC would have to quickly convince investors that the policies that have led to nine years of continuous economic growth would not change under Zuma, and say whether respected financial leaders would remain in office.

There was also concern that Zuma's victory, splitting South Africa's two most powerful jobs for the first time since apartheid ended in 1994, could paralyze decision-making.

Mbeki now has no position in the party that dominates the country and could become a lame duck for his remaining 18 months in power.

Zuma is the prime candidate to succeed him at the next election in 2009 unless he is ambushed by pending corruption charges.

South Africa can ill-afford a period of paralysis as it faces an AIDS crisis, one of the world's worst crime rates, and poverty still blighting the lives of millions of blacks more than a decade after apartheid ended.

Mbeki's downfall was caused to a large extent by anger in the ANC rank and file at what they saw as neglect of these problems, particularly poverty, while he pursued business-friendly economic policies.

CORRUPTION CHARGES

Adding to the mood of uncertainty is the threat of charges against Zuma over an arms buying scandal, which could possibly see him jailed before he succeeds to the presidency.

"We expect a lengthy period of political noise and uncertainty in South Africa, characterized by tensions within the ANC and between the party and the government," said investment bank Goldman Sachs.

Prosecutors said this month they had new evidence that could lead to renewed charges against Zuma.

The ANC's traditional discipline, which critics called a Stalinist relic, was replaced by noisy barracking at the party conference from young militants representing millions of black South Africans who feel left behind as Africa's biggest economy has boomed.

The 65-year-old Zuma, an ethnic Zulu, has made a remarkable comeback after setbacks that would have buried most politicians.

Apart from the corruption scandal, he was acquitted of rape in 2006. Evidence in that case, including his admission that he showered after sex with an HIV-positive family friend to avoid infection, tarnished his reputation.

But these issues have not undermined Zuma's popularity in a traditional, male-dominated society. "I am happy Zuma won because under his rule women will have fewer rights," said Johannesburg parking attendant Brilliant Khambule.

(Additional reporting by Marius Bosch, Phumza Macanda, Paul Simao, Ron Derby and Thandi Lekeba; Writing by Barry Moody; Editing by Janet Lawrence)

Dow, S&P dip as credit concerns nag

NEW YORK - The Dow industrials and the S&P 500 declined slightly on Wednesday in light trading on concerns about more fallout from the housing slump.

Large-cap technology shares such as Intel Corp (INTC.O: Quote, Profile, Research) helped lift the Nasdaq for the session. After the bell, Oracle Corp shares gained almost 4 percent after the business software maker's results showed quarterly revenues that exceeded Wall Street's estimates.

During the regular session, deteriorating mortgage debt resurfaced as an issue driving the market after Standard & Poor's warned it is more likely to cut credit ratings of Ambac Financial Group Inc (ABK.N: Quote, Profile, Research) and MBIA Insurance Corp (MBI.N: Quote, Profile, Research), two of the world's biggest insurers of bonds.

If these two companies are downgraded, the $1.2 trillion of debt they insure will fall in value.

Despite the blow to the market's overall confidence, downtrodden bank stocks rebounded on news that a Chinese sovereign wealth fund had bought a $5 billion stake in U.S. investment bank and brokerage Morgan Stanley (MS.N: Quote, Profile, Research).

Morgan Stanley's shares rose 4.2 percent even after Morgan Stanley reported a quarterly loss driven by a larger-than-expected $9.4 billion of write-downs in mortgages and other assets.

"Investors are unsettled," said Sal Arnuk, co-manager of trading at Themis Trading in Chatham, New Jersey. "There just doesn't seem to be any end in sight for these credit problems. There are lots of intraday stock gyrations and no clear direction, and that's what keeps freaking people out."

The Dow Jones industrial average .DJI declined 25.20 points, or 0.19 percent, to end at 13,207.27. The Standard & Poor's 500 Index .SPX was down 1.98 points, or 0.14 percent, at 1,453.00. But the Nasdaq Composite Index .IXIC edged up 4.98 points, or 0.19 percent, to close at 2,601.01.

The renewed credit concerns offset earlier optimism sparked by the Federal Reserve reporting solid demand for a $20 billion auction that was part of a coordinated move by global central banks to thaw a freeze in money markets.

The energy sector provided a bright spot, in sync with a gain of more than $1 in U.S. crude oil futures prices. U.S. crude for January delivery gained $1.16 to settle at $91.24 a barrel.

An index of energy shares .OIX climbed 0.8 percent. Occidental Petroleum's (OXY.N: Quote, Profile, Research) stock jumped 2.3 percent to close at $71.95 on the New York Stock Exchange.

But more signs of credit turmoil added to volatility and colored the day. Student lender SLM Corp (SLM.N: Quote, Profile, Research), trying to bounce back from a $25 billion takeover deal gone sour, said it may face higher financing costs as a result of the credit crunch and noted that it would need to add capital. Shares of SLM, also known as Sallie Mae, plunged 20.7 percent to $22.89 and ranked among the biggest percentage losers on the NYSE.

Home builder Hovnanian Enterprises Inc (HOV.N: Quote, Profile, Research) tumbled 11.4 percent to $7.44 after the company posted a wider-than-expected loss.

MBIA's shares slid 2.4 percent to $27.02 and AMBAC Financial's stock lost 1.8 percent to $27.46.

Union Pacific Corp's (UNP.N: Quote, Profile, Research) shares fell 3.7 percent to $124.61 after the No. 1 U.S. railroad lowered its fourth-quarter earnings outlook due to rapidly rising fuel costs.

In Nasdaq trading, shares of dominant chip maker Intel gained 1.1 percent to $26.29, while shares of BlackBerry maker Research in Motion Ltd (RIM.TO: Quote, Profile, Research)(RIMM.O: Quote, Profile, Research) rose 1.4 percent to

$102.13.

Trading was thin on the NYSE, with about 1.35 billion shares changing hands, far short of last year's estimated daily average of 1.84 billion, while on Nasdaq, about 1.88 billion shares traded, shy of last year's daily average of 2.02 billion.

Declining stocks outnumbered advancers by a ratio of about 9 to 7 on the NYSE. On the Nasdaq, a total of 1,502 stocks fell, while 1,474 issues advanced.

Greenspan's '63 Essay Foretold Subprime Inaction: Jonathan Weil

Commentary by Jonathan Weil

-- Why did Alan Greenspan fail to act while the roots of the subprime-mortgage crisis spread? Here's one possible explanation: The Ayn Rand disciple held fast to his unwavering laissez-faire beliefs.

Yesterday's New York Times carried a front-page article chronicling the many warnings the former Federal Reserve chairman received about aggressive subprime lenders luring unsuspecting customers into crazy mortgages they never could afford. ``Where was Washington?'' the newspaper asked. And where was Alan?

There was Edward Gramlich, the late Fed governor, who urged Greenspan in 2000 to have Fed examiners investigate the industry. Greenspan said no. Activists from a California housing group, the Greenlining Institute, met with Greenspan in 2004, urging him to press lenders for a voluntary code of conduct. Greenspan wasn't interested and didn't give a reason.

He offered a weak defense: The Fed wasn't equipped to investigate and wasn't to blame for the housing bubble and bust.

Greenspan's recent memoir, ``The Age of Turbulence,'' offers no satisfactory answers either. Greenspan said he knew ``the loosening of mortgage credit terms for subprime borrowers increased financial risk.'' Yet he ``believed then, as now, that the benefits of broadened home ownership are worth the risk.''

No, I believe the best answer can be found in an August 1963 article called ``The Assault on Integrity'' that Greenspan, then 37, wrote for Rand's monthly journal, ``The Objectivist.'' Judging by how he rebuffed Gramlich and others, it looks like he followed his old instincts as the subprime mess festered.

Agent of Consumers

``Protection of the consumer against `dishonest and unscrupulous business practices' has become a cardinal ingredient of welfare statism,'' Greenspan began his essay, which Rand included in her 1967 book, ``Capitalism: The Unknown Ideal.''

``Left to their own devices, it is alleged, businessmen would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings. Thus, it is argued, the Pure Food and Drug Administration, the Securities and Exchange Commission, and the numerous building regulatory agencies are indispensible if the consumer is to be protected from the `greed' of the businessman.

``But it is precisely the `greed' of the businessman or, more appropriately, his profit-seeking, which is the unexcelled protector of the consumer.

``What collectivists refuse to recognize is that it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.''

``Reputation, in an unregulated economy,'' Greenspan said, ``is thus a major competitive tool.''

Do Nothing

This view of the world might well explain why Greenspan did nothing. Yet if he'd said these words anytime in the past 20 years, they would have rung false to many people familiar with the 1980s savings-and-loan crisis, the corporate scandals touched off by Enron Corp., or the housing bust.

``He still believes philosophically what he wrote 30, 40 years ago,'' says Greenspan biographer Jerome Tuccille, author of the 2002 book ``Alan Shrugged.'' ``But he must know we don't have a truly competitive free-market economy, and that's the context he was writing about. He must know the propensity of corporations to put greed ahead of their reputations.''

Greenspan wrote: ``It requires years of consistently excellent performance to acquire a reputation and to establish it as a financial asset. Thereafter, a still greater effort is required to maintain it: a company cannot afford to risk its years of investment by letting down its standards of quality for one moment or for one inferior product; nor would it be tempted by any potential `quick killing.'

Opposite Result

``Newcomers entering the field cannot compete immediately with the established, reputable companies, and have to spend years working on a more modest scale in order to earn an equal reputation. Thus the incentive to scrupulous performance operates on all levels of a given field of production. It is a built-in safeguard of a free enterprise system and the only real protection of consumers against business dishonesty.''

Government regulation, he went on, ``is not an alternative means of protecting the consumer. It does not build quality into goods, or accuracy into information. Its sole `contribution' is to substitute force and fear for incentive as the `protector' of the consumer.''

Minimum standards, he said, gradually become the maximums, and regulation undermines the moral base of business dealings.

``It becomes cheaper to bribe a building inspector than to meet his standards of construction. A fly-by-night securities operator can quickly meet all the S.E.C. requirements, gain the inference of respectability, and proceed to fleece the public. In an unregulated economy, the operator would have had to spend a number of years in reputable dealings before he could earn a position of trust sufficient to induce a number of investors to place funds with him.

Don't Stop Believin'

``Protection of the consumer by regulation is thus illusory,'' he said. ``Rather than isolating the consumer from the dishonest businessman, it is gradually destroying the only reliable protection the consumer has: competition for reputation.

``While the consumer is thus endangered, the major victim of `protective' regulation is the producer: the businessman.''

The largely unregulated subprime-lending industry, of course, didn't turn out this way. Countless mortgage brokers and lenders didn't care about their reputations. Wall Street banks, which packaged and pitched the loans as AAA securities, didn't care about theirs either. There were quick killings to be had.

Four decades later, Greenspan's argument seems almost childlike in its idealism. Yet, judging by his inaction, it looks like he never stopped believing.