Wednesday, October 12, 2011

Source: GARP

 

Regulators unveiled a ban on Wall Street banks' trading for their own profit, but the long-awaited Volcker rule was so complex that banks blasted it as unworkable and consumer groups dismissed it as too weak.  The rule, required by last year's Dodd-Frank financial oversight law, is aimed at avoiding a repeat of the 2007-09 financial crisis by curbing excessive risk-taking. Regulators are giving the public until Jan. 13 to comment on the rule. That is more time than expected and could result in more pressure to change the rule. "Only in today's regulatory climate could such a simple idea become so complex, generating a rule whose preamble alone is 215 pages, with 381 footnotes to boot," said American Bankers Association head Frank Keating. "How can banks comply with a rule that complicated, and how can regulators effectively administer it in a way that doesn't make it harder for banks to serve their customers and further weaken the broader economy?" he asked. On the other side of the issue, the consumer coalition Americans for Financial Reform said regulators warped a simple ban into a weak crackdown that is weighted toward preserving banks' flexibility. "Unfortunately, the proposal issued today falls well short of what the Volcker rule could and should achieve," the group said. The Federal Reserve and other regulators acknowledged in the proposal that it will be challenging for the government to identify "proprietary trading" -- banks trading with their own money -- which will be banned under the rule. The proposal said differentiating prohibited and permitted trading "often involves subtle distinctions that are difficult both to describe comprehensively within regulation and to evaluate in practice." The rule is expected to have the most impact on large banks such as Goldman Sachs, Morgan Stanley and JPMorgan Chase, and could shave off billions of dollars in annual revenues. The idea behind the rule, named after former Fed Chairman Paul Volcker, is to prevent banks that enjoy some sort of government safety net, such as deposit insurance on customer accounts or access to Fed money, from using that backstop to make money for themselves.

 

Wednesday, October 12, 2011

Source: GARP

 

Hong Kong and Shanghai Banking Corp. Ltd (HSBC), the fourth largest financial institution in the world by market capitalization, expects its retail operations in India to turn around after three years of losses, and plans to rebuild its credit card business in the country. It will partner local companies to ensure a "targeted, precise and data-oriented" widening of the credit card business, said Gannesh Bharadhwaj, head of retail banking and wealth management at HSBC in India. But the bank still plans to stay away from personal loans, as these are regarded as "risky".  HSBC's retail losses swelled to $219 million ('1,073 crore) in 2009 from $115 million in 2008. In 2010, this narrowed to $82 million and stood at $4 million in the first half of 2011. Data for the full year is expected to show that retail operations are no longer making losses. "Retail banking numbers are in line with our expectations," Bharadhwaj said. "That turnaround has been as per our expectations, and this year, we hope, will be a turnaround year." The bank's retail operations focus on mortgages, credit cards and personal loans, with the losses having mostly originated from the last two segments. The bank's credit card portfolio has halved to one million from a peak of two million in 2006. The bank plans to source customers directly or launch co-branded cards, Bharadhwaj said. "Over the last three years, we have stopped open-market sourcing, and attacked collections and focused on getting tight on limits, trying to get our money back," he said. "Now, loan impairment charges are under control and we feel that we can actually have a business that works, and rebuild the business." Bharadhwaj was earlier based in the US as managing director of HSBC's Prime Cards, a segment of its credit card business. "We have to do it differently than in the past, otherwise we will be back in the same boat. So, it will be far more measured, focusing on the quality of customers rather than quantity, on profitability rather than volumes," he said. The bank is keeping a close eye on return on equity (RoE) for its unsecured products. It's looking at an RoE of 20%. HSBC will use more data from credit information bureaus and will select customers to whom a card can be offered rather than making the offer first and conducting due diligence later. "We are looking at doing more of what is done in the West, which is find a way to be more targeted. For example, your best credit risk is somebody who has a liability relationship with you. That is why HDFC Bank has done so well," he said. A sharp fall in loan impariments has given the bank confidence to build the business again, Bharadhwaj said. "Getting new customers is an issue because we don't have branches; so now what we are relying on is partnerships. Partnering with someone who has a lot of data--on spending for example--and using that data to tell us something about spending and, hence, income, and take that to a credit bureau to check credit worthiness," he said. HSBC has 50 branches and 150 ATMs across 29 Indian cities. Chaitra Bhat, an analyst at LKP Securities Ltd, said banks have started doing more background checks because they burnt their fingers in the unsecured loan business earlier. "One way of doing this is through co-branded cards, because it means one of the partners has some relationship with the customer. But all banks are generally doing more checks, and the days of free cards at shopping malls are over," she said. Bharadhwaj said that despite the heightened vigilance, the bank continues to be cautious on personal loans because credit cards have more "utility value". "We are only giving it to our savings account or salary account customers now. Over time, we can figure out how we go, but that is not our focus now," he said. Bharadhwaj said HSBC's retail focus has changed from being revenue-driven to being guided by both revenue and profit, which means cutting costs.

Tuesday, October 11, 2011

Source: GARP

 

Wall Street is again losing jobs because of global economic woes, threatening tax revenue for a city and state heavily reliant on the financial industry, New York state Comptroller Thomas DiNapoli said Tuesday. After adding 9,900 jobs between January 2010 and this April, the industry shed 4,100 jobs through August and could lose nearly 10,000 more by the end of 2012, DiNapoli said. That would bring the total industry loss to 32,000 positions since the economic crisis of 2008. The sector employed 166,600 people in investment banks, securities trading firms and hedge funds as of August. DiNapoli said New York Stock Exchange firms earned $9.3 billion in the first quarter of this year, but declined sharply in the second quarter and are likely to reach $18 billion for the year, a third less than in 2010. "The securities industry had a strong start to 2011, but its prospects have cooled considerably for the second half of this year," he said. "It now seems likely that profits will fall sharply, job losses will continue, and bonuses will be smaller than last year." New York City Mayor Michael Bloomberg said DiNapoli's numbers were on target.

 

"We have a very conservative estimate of Wall Street profits," he said. "We think our estimates are probably still reasonably accurate. So I don't think it's dramatically worse than what we have in our budget, but it's certainly not better." Cash bonuses also declined last year. Securities activities drove 14 percent of state tax revenue and 7 percent of New York City's last year. DiNapoli warned that current and future collections are likely to fall short because of the weakness. "Excessive risk-taking on Wall Street was a major factor leading to the financial crisis and the recession," he said. "Regulatory changes that reduce risk and focus attention on long-term profitability rather than short-term gains will enhance stability. Despite the weaknesses we are seeing, the securities industry remains profitable and is a key component of the economies of New York City and New York state." Bloomberg said the losses will definitely impact the city. "We do know that we're going to have a tough time here. And we're going to make sure that we preserve the vital services of the city," he said. "In the long term I couldn't be more optimistic about New York City but we're going to have some short-term pain and it's going to be real pain."

Tuesday, October 11, 2011

Source: GARP

 

Slovakian lawmakers on Tuesday rejected participating in an expanded euro rescue fund that is aimed at shoring up confidence in the ability of euro members to survive the financial crisis. Slovakia's 1-year-old coalition government also fell with the vote because the prime minister had tied it to a confidence measure. After 10 hours of debate in Parliament, the measure calling on Slovakia to support the expansion of the bailout fund failed to pass by 21 votes. "Today we saved more than 300 billion euros for the European taxpayers that would have been used to bail out banks," said Parliament Speaker Richard Sulik, who led Parliament's opposition to the expansion of the bailout fund. Slovakia remains the only country in the 17-member eurozone that has not approved the package of measures, which requires unanimous support to go into effect. The euro stability fund is designed to boost Europe's firefighting capabilities in the financial crisis. Prime Minister Iveta Radicova had urged the lawmakers to back the bill, arguing that the country was losing its credibility. "It is the entire eurozone system which is under threat at the moment, not just a few small countries anymore," Radicova said in the debate in Parliament. "Our euro is under threat. The changing situation needs a quick and immediate reaction."

 

Earlier, Radicova had admitted that a coalition partner was not convinced. EU officials still could find a way of getting around the Slovakian rejection of the bill to boost the powers and size of the euro bailout fund, which is designed to contain debt market turmoil, but doing so would carry costs to European unity. The "no" vote will further complicate the eurozone's efforts to deal with the crisis, which already has seen three countries get bailouts and raised fears of a Greek default and massive losses for banks.

As the vote loomed, European Central Bank head Jean-Claude Trichet gave one of his most emphatic warnings yet about the need for swift action to quell the crisis, which he called "systemic." "The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion," Trichet told a committee of the European Parliament. "This threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond." In a desperate attempt to get her recalcitrant coalition partner to back her, Radicova said the vote will be linked to a "confidence vote" in the government, a move described as blackmail by Sulik, chairman of the Freedom and Solidarity party and the major opponent of the fund. In the debate, Sulik argued that the expanded fund made "no sense" because it would not have enough money to help big EU economies like Italy and Spain and that it would be "an honest solution to let Greece go bankrupt. It is not for the first time Slovakia has been against major eurozone policies since it adopted the currency in 2009. Last year, it rejected providing its euro800 million ($1.1 billion) share of the euro110 billion EU bailout plan for Greece. That rescue went ahead without Slovakia, but another exemption for the country would cast doubt over the eurozone's credibility and ability to function as a bloc.

Tuesday, October 11, 2011

Source: GARP

 

The eurozone debt crisis has reached a systemic dimension that threatens banks and the wider economy, European Central Bank president Jean-Claude Trichet warned Tuesday, as Greece awaited approval of bailout loans it needs to avoid bankruptcy. Trichet said "the crisis has reached a systemic dimension" and spoke out strongly in favor of boosting the continent's banks' health with new funds to weather the sovereign debt crisis. Speaking as head of the eurozone's new risk-watchdog, the European Systemic Risk Board (ESRB), he told a European parliament Committee in Brussels that market fear about government debt has spread to capital markets around the world and is drying up bank funding. "The banking sector in Europe needs recapitalization, that is part of our message," Trichet said. Now "it is a matter of urgency" that governments move "decisively to tackle" the crisis, he added. "The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion." Trichet's warning came as Jean-Claude Juncker, prime minister of Luxembourg and head of eurozone finance minister meetings, said Greece's bondholders would have to take sharp writedowns. He was quoted late Monday by Austrian state broadcaster ORF as saying that eurozone countries are "talking about more" than a 50 to 60 percent haircut for Greece, though his spokesman later corrected his statement to say he meant more than 21 percent. Experts and investors believe Greece's debt situation is untenable, even with more reforms and austerity measures, and will need to write off some of the money it owes bondholders. Greece's second bailout, which was agreed in July but has yet to be finalized, proposed a 21 percent cut in bond repayments. Economists, however, say a 50 percent reduction would be necessary. In the near-term, Greece depends on regular installments of bailout loans, but whether it gets the next euro8 billion ($10.9 billion) will depend on a review of its reforms by international debt inspectors to be wrapped up on Tuesday. The International Monetary Fund, European Central Bank and European Commission are checking whether Greece has done enough to qualify for the next batch of its vital international bailout loans. Without them, the country will run out of money to pay pensions and salaries by mid-Novemeber and could be unable to repay bondholders in December. As the debt inspectors concluded their talks, protests caused more disruption in the capital. Workers at a key refinery went on strike, sending motorists who feared a fuel shortage to form huge lines at gas stations to fill up. A strike by municipal workers has left garbage piling up in in mounds on city streets for days. Protesters have also staged sit-ins of state buildings, including those of the water company. Greece has been locked out of the international bond market for more than a year due to the high interest rates demanded for its bonds, but regularly issues short-term treasury bills. The country raised euro1.3 billion ($1.8 billion) on Tuesday in the auction of 26-week treasury bills at an interest rate of 4.86 percent, marginally higher than the 4.8 percent yield in a similar sale on Sept. 6, the debt management agency said. Demand was also slightly lower, with Tuesday's sale 2.73 times oversubscribed compared to 3.02 times in September. The country had initially been seeking to raise euro1 billion.

Monday, October 10, 2011

Source: GARP

 

Following the recent alleged fraud at UBS, questions have been raised over the use of securities lending in exchange-traded funds (ETFs). Kweku Adoboli, the trader at the centre of the UBS scandal, is accused of using sophisticated operations to fake ETF trades and hide speculative bets. But regulators argue that even straightforward, physical ETFs raise problems that need to be addressed, not least because they could put retail investors at risk. The Financial Stability Board (FSB) has expressed concerns that although physical ETFs invest directly in an index's underlying securities, they work with thin margins, which generate incentives to look for further sources of revenue. As a result, many of them are active participants in securities lending arrangements, which carry additional risks. According to Deutsche Bank, some ETFs derive up to one-third of their revenues from the fees borrowers pay for their securities.

 

In these transactions, ETFs lend their assets to some other player in the market, such as a bank or hedge fund, which will use them for a particular purpose, such as short-selling bets or repurchasing operations. The borrower pays a fee and sends back some form of collateral to the ETF as a guarantee that the value of the assets borrowed will be reimbursed. As the trades are collateralised, securities lending operations might seem a sensible way to derive additional profits. ETFs lend the underlying securities to large financial institutions which, once the lease of said assets is over, return them to the original owners. If everything goes to plan, stocks come and go out of their books, leaving a trail of fees in the process, which are partially or totally returned to the funds. If problems arise, the ETFs can liquidate the assets deposited as collateral and buy the assets that their investors expect to be holding. When it works efficiently, the operation seems low risk. But many regulators have concerns. Lehman Brothers, the former American investment bank, was a big operator in the market, as was American International Group (AIG). After the collapse of Lehmans, some lenders of securities struggled to get their assets back or to redeem collateral as they tried to reduce their connection with both firms.

 

Liquidity can also be a concern. In Europe, borrowers rarely send cash guarantees to securities lenders. As one of the main goals of borrowers in securities lending is to obtain greater liquidity, the assets offered as collateral are often less liquid than those that are borrowed. In the event of a market run, ETFs could find it hard to pay back clients if they have large amounts of illiquid assets on their books. Many investors in ETF-type products may not be alerted to the pitfalls of counterparty and liquidity risk. In a recent report, Morningstar noted that investors would be surprised to learn that up to 100% of their funds' assets are lent out to short sellers or hedge funds. Regulators have expressed particular concern over the possibility that banks that own ETF providers will use these transactions to tap cheap sources of liquidity. This could become a problem for ETF investors if dire predictions over the fate of European banks become reality. The FSB has also expressed concern about the use of ETFs as collateral in long chains of securities lending and rehypothecation (banks' use of collateral deposited by clients as collateral for other transactions), a practice that adds to risks in the financial markets. Regulators argue that the growth of collateralised structures and securities lending operations has contributed to turning many ETFs into complex products from the straightforward assets that they initially appeared. In July the European Securities and Markets Authority (ESMA) launched a consultation to assess whether such products should lose their Ucits status or even be prevented by law from being sold to retail investors. A particular concern is the need for more transparency over securities lending operations, although ESMA admits this is not an ETF-specific risk. Investors need to have more information. Last week BlackRock, the world's largest ETF provider and owner of iShares, expressed support for measures that would guarantee investors receive better information about the holdings and exposures of their funds. Liam Butler, the managing director at Northern Trust Securities Services, says that properly serviced ETFs have the capabilities to provide transparent and up-to-date information to investors and counterparties. As part of this, providers need to ensure that clearance, settlement and other back office operations are more efficient. Ben Johnson, a director of ETF research at Morningstar, agrees. He says that the post-trade, clearing and settlement processes are fragmented and inefficient, especially owing to the large number of jurisdictions where transactions are cleared. "It can create a good deal of confusion and costs for investors," he says. Some critics argue that Adoboli, a former back office employee, may have known about such inefficiencies and how to exploit them to set up fake ETF transactions. For the sake of transparency, cost- effectiveness and risk management, the ETF industry could make sure these problems are addressed and all funds adopt best practices in servicing assets.

Monday, October 10, 2011

Source: GARP

 

So-called "catastrophe bonds," a backup plan designed to protect insurers from the costs of Mother Nature's worst visitations, are getting new attention from investors following the recent wave of earthquakes, floods, tropical storms and other natural disasters. Investors, turned off by the turmoil in the financial markets, are instead taking their chances and betting against natural disasters like earthquakes and hurricanes. Most of the time, they get good returns on their money. If a catastrophe strikes, though, they can lose everything. Ironically, catastrophe bonds, or "cat bonds," are considered a relatively safe gamble compared to the volatile financial markets of late. For investors seeking shelter from the wild swings on Wall Street, the U.S. debt downgrade and the euro crisis savaging Europe, catastrophe bonds represent a move to diversify into a market facing completely unrelated risks. "The financial markets tanking don't increase the possibility that there's going to be an earthquake," said Judy Klugman, managing director and head of insurance-linked securities distribution at Swiss Re, a reinsurance company that issues catastrophe bonds for its client insurers. "Investors are just generally nervous about everything that's going on in the financial world. Right now, they think this is a safe haven. They don't know where else to put their money." The $11.5 billion cat bond market is still small compared to the global corporate bond market of $7.5 trillion, according to John Forney, managing director of public finance at Raymond James & Associates Inc. But demand is growing, and the catastrophe bond market has jumped 2.8 percent since Hurricane Irene made landfall in late August.

 

Swiss Re is trying to increase of the size of the market so it can pay interest rates for the bonds it sells. "As you create more and more demand," Ms. Klugman said, "the spread will go down." The task is becoming easier for Swiss Re because demand is up, as, it appears, is the supply of disasters to pay for. The tab in New Orleans from Hurricane Katrina was enormous. More recently, Japan was ravaged by an earthquake, a tsunami and a nuclear meltdown, while deadly tornadoes ripped through Joplin, Mo. Earlier this year, an earthquake and Hurricane Irene surprised much of the East Coast. But those disasters and near-misses don't scare investors as much as the world's volatile financial markets. Ms. Klugman said investors are savvy enough to know the risks they're taking when they get into the market. So a few rumbles here and there aren't going to push them away. "Investors in our market get paid to take those risks," she said. "Our investors, their eyes are very wide open about the risks they take." Furthermore, chances are slight that cat bonds will ever be redeemed by the issuer. The "triggers" on the bonds are so specific, covering things such as location, time and degree of destruction, that they are rarely used. For example, California could issue a catastrophe bond that covers Los Angeles from a magnitude 7.2 or greater earthquake for a period of three years. If there's a magnitude 8 earthquake in San Francisco, the bond wouldn't be redeemable. If there was a magnitude 7.1 earthquake in Los Angeles, it also wouldn't be redeemable. "They cover very specific areas," Ms. Klugman explained. For insurers, cat bonds can offer a cheaper backup option. Reinsurers serve as the backup to the backup, protecting insurers against claims so big and sudden that they can't repay their policyholders. The reinsurance industry, however, is less regulated than traditional insurance, said Erwann Michel-Kerjan, an industry specialist at the Wharton School of Business at the University of Pennsylvania, so reinsurers have an easier time raising prices on traditional insurers. He pointed out that the price of reinsurance doubled after the major hurricanes of 2004 and 2005. It went up another 90 percent to 95 percent in Chile after the earthquake there last year. "After every major disaster," he said, "the price of reinsurance increased very significantly." Hoping to deflect some of this cost, some traditional insurers are looking to cat bonds as a new form of reinsurance. The California Earthquake Authority just completed a $150 million deal in which it has issued three-year catastrophe bonds. "So they were like, 'Wow, is there any way we can get a more stable price?' " Mr. Michel-Kerjan said. "And that's what cat bonds provide."

Monday, October 10, 2011

Source: GARP

 

China's new lending for the rest of this year will continue to remain tight as a whole, but the credit support to certain sectors, such as small businesses and rural sector, will become loose, according to Xinhua analysts. In view of the overall tight liquidity expectation, Chinese banks may continue to enjoy rising net interest spread as from October. However, Chinese banks will face rising liquidity management pressure for the rest of this year, due to the difficulties in collecting deposits and the regulatory requirements. By the end of September, banks had taken measures to collect deposits in order to meet the regulatory requirements for banks' loan-to-deposits ratio. The deposits collected in September are expected to be withdrawn in early October. In order to prevent this phenomenon, the regulator has required banks to control the fluctuation of their deposits within 5 per cent in early October, according to market rumors. This rule will force banks to face rising liquidity management pressure. In addition, the regulator has taken window guidance for banks' short-term wealth management products, and required them to control the issuance of such products. The move will greatly affect banks' revenues from intermediary business and their efforts to collect deposits via the short-term wealth management products. In view of the rising risks in the private lending, Chinese regulator has issued many documents to warn of such risks in August and September. The regulator's efforts to crack down on illegal private lending will be reinforced in the future. The move will to certain extend challenge banks' liquidity management. Chinese Premier Wen Jiabao has urged stronger financial support for China's small businesses and better regulation of private lending activities to prevent risks of capital shortage from spreading. Small enterprises should be a priority of bank credit support and enjoy more tax preferences from the government, said Wen during his visit to east China's economic hub Zhejiang Province on October 3 and 4.

 

Monday, October 10, 2011

Source: GARP

 

Fears of liquidity problems and economic uncertainties in Europe will continue to trigger divestment of Indonesian state bonds held by foreign investors, a local official said. Foreign investors feel safer holding cash and did not want to face short-term risks, said Rahmat Waluyanto, the debt management director general. However, the condition will not last long and they will come back with their capital to the country, Waluyanto said. Waluyanto said the state bond market is still relatively stable although Bank Indonesia must intervene by buying state bonds in the secondary market. Waluyanto said although capital withdrawal is continuing from the bond market, state companies are not yet needed in the bond stabilization framework. A number of state companies have offered to buy state bonds to help maintain stability in the bond market. By September state bonds held by foreign investors were reduced to Rp218.09 trillion (US$24.42 billion) from Rp247.38 trillion in August and Rp248.87 trillion in July. In the fist week of October foreign capital withdrawn from bond market totaled Rp3.99 trillion. Meanwhile, state bonds bought by Bank Indonesia totaled Rp17.03 trillion in September up from only Rp3.99 trillion in August and in the first week of October, the amount rose to Rp22.22 trillion.

Tuesday, October 11, 2011

Source: GARP

 

Global markets were so volatile this summer that Cargill Inc. -- a trading giant that often thrives on market gyrations -- kept money on the sidelines, a move that eased risk but contributed to a significant drop in quarterly profit. Minnetonka-based Cargill, one of the world's largest privately held companies, Monday reported fiscal first-quarter profits from continuing operations of $236 million -- a 66 percent decrease from the $693 million earned in the same period last year. And that $693 million didn't include an additional $190 million in profits from Cargill's former majority investment in Mosaic Co., which was divested earlier this year. Cargill's fiscal first quarter, which ended Aug. 31, marked the second consecutive quarterly decline in profits after more than a year of steady increases. Also, only one of Cargill's five operating segments, the one led by its North American agricultural services business, reported higher earnings for the period. The company's revenue for the quarter rose 34 percent to $34.6 billion, a nice hike stemming from rising commodity prices. But those same higher prices, combined with global economic uncertainty, helped account for the agribusiness giant's falling profits. "It was a tough quarter," Cargill CEO Greg Page said in a press release. "With results down from recent levels, we're focused on regaining our earnings momentum." The downswing was largely due to "the persistently high degree of uncertainty in the global economic environment, which injected turbulence into commodity markets and limited prudent trading opportunities," Page said. Lisa Clemens, a Cargill spokeswoman, said the firm went into "risk-off mode" at times during the quarter. "We decided to reduce capital deployment and stay on the sidelines." With its experienced trading desks and deep institutional knowledge of commodity and financial markets, Cargill often profits nicely off of volatility. But the company indicated that its last quarter was marked by particular wildness. Europe, for example, grappled with a debt crisis that seemed to change -- and still seems to change -- daily. Capital rushed in and out of financial and commodity markets with stunning speed, causing big oscillations -- as any stock market investor can attest.

 

While Cargill's caution was limited to trading, many publicly traded U.S. companies have responded to the volatile environment by piling up cash on their balance sheets, essentially building rainy-day funds instead of investing in new equipment or research. Volatility hurt Cargill profits in its financial services and risk-management operations. Its global grain handling and processing operations were hurt by adverse weather, grain supply reductions and the weakening world economy. Profits in Cargill's industrial segment, home to its salt business, were softer on lower seasonal demand. And its sprawling food ingredients division nearly matched a record performance of a year ago, but was hampered by higher animal feed costs relative to domestic meat demand. Acquisition costs also contributed to the quarter's profit downswing, as did higher costs associated with flooding on U.S. inland waterways. The flooding led to higher freight costs, and caused Cargill to shore up facilities against rising water, notably at its Blair, Neb., corn mill.

 

Tuesday, October 11, 2011

Source: GARP

 

STRICTER FUNDING rules and more prescriptive stress tests are among the possibilities being considered by the Central Bank to enhance the management of liquidity risk among credit institutions. In a discussion paper published yesterday, the bank said a new regulatory liquidity framework would entail "some costs" for the Irish banking system. However, it said the benefits would exceed the costs, and "should be an objective that both industry and regulator can share". The paper highlights numerous issues under consideration, such as the importance of ensuring that banks have an adequately diversified funding structure. One approach being considered is the imposition of industry-wide regulatory ratios or limits. For instance, a bank could be required not to owe more than 15 per cent of total deposits to any one depositor, or that its 10 largest deposits cannot exceed 50 per cent of the total deposits. However, it conceded that because of the variety of business and ownership models in the industry, such a prescriptive approach might be "inappropriate". The regulatory authority has called for submissions from the industry and the public on this and other issues, and this feedback will enable it to draw up a consultation paper. The timing of the new liquidity requirements depends on the outcome of a proposed European Commission directive in this area. The Central Bank is also considering taking a more prescriptive approach when setting out the responsibilities of boards of directors in the area of governing liquidity risk. For example, the board could be required to undertake regular reviews of the internal controls relating to liquidity management. Furthermore, it is looking at the possibility of setting more specific requirements in relation to liquidity stress tests, such as prescribing minimum tests. The Central Bank is reviewing its liquidity framework in light of international initiatives such as directives from the European Commission, market developments and its own experience in supervising liquidity risk.

Monday, October 10, 2011

Source: GARP

 

Investors are bracing for a rough earnings season from banks. Turbulence in stock and bond markets, combined with waning confidence among business and consumers, hurt banks' business in the third quarter. IPOs were shelved, companies postponed plans to sell bonds, and acquisitions were put on ice. Consumers also held back on spending. The sharp drop in business activity hurt banks, which rely on borrowing by companies and consumers to make money. Most Wall Street analysts lowered their earnings estimates for large U.S. banks. JPMorgan Chase & Co. will be the first major bank to report results Thursday, followed by Citigroup, Wells Fargo, Bank of America and Goldman Sachs the week after. The intense global market turmoil during the third quarter has already taken a toll on bank stocks. The KBW index of leading banks plunged 27 percent during the third quarter. Howard Chen, an analyst at Credit Suisse, estimates that mergers and acquisitions volume in the third quarter plummeted 34 percent from the prior quarter, while stock underwriting sank 54 percent. Chen said it was the weakest quarter for total debt issuance since the financial crisis. Overall debt and loan underwriting volume fell 27 percent from the previous quarter, leading to a 35 percent decrease in fees. Worries about Europe's debt problems continued to hang over U.S. banks in the third quarter. Investors expect bank executives to offer more clarification on how exposed the banks are to the crisis when the banks host conference calls to discuss their earnings. Most large banks have disclosed the amount of European debt they own, but it's unclear how much exposure they have via more complex derivatives trades they conduct with their counterparts in Europe. For example, U.S. banks sell financial contracts that act as insurance to protect against defaults on riskier European bonds. Growth in U.S. business loans is expected to be a bright spot. According to the Federal Reserve, corporate borrowing grew rapidly during the third quarter. At the 25 largest banks by assets, commercial and industrial loans grew 15 percent, the Fed reported.

 

 

Here are the consensus earnings forecasts and highlights for each of the large U.S. banks from analysts surveyed by FactSet:- JPMorgan Chase & Co. reports Thursday. It is expected to earn 96 cents per share on revenue of $23.6 billion. Considered one of the strongest and most stable among the large banks, analysts expect JPMorgan to grab market share from competitors. However, it might be forced to once again to put aside more reserves to offset costs from increased litigation and repurchasing poorly written mortgage loans. - Citigroup Inc. reports on Monday, Oct. 17. The New York bank is expected to report earnings of 84 cents per share on revenue of $19.3 billion. Barclays Capital analyst Jason Goldberg reduced his estimates by 11 cents because of weakness in investment banking and the increasingly uncertain global economy. - Wells Fargo & Co. also reports Monday. The San Francisco bank is expected to earn 72 cents a share on revenue of $20.2 billion. Wells has one of the largest mortgage origination businesses of all banks and will likely have benefited from lower mortgage rates. Rates on 30-year mortgages hit a historic low of 4.08 percent in the third quarter. - Bank of America Corp. reports Tuesday, Oct. 18. Analysts expect the Charlotte, N.C. bank to report earnings of 26 cents per share on revenue of $25.8 billion. The bank has been battling lawsuits related to mortgages. It paid out $12.7 billion to settle claims in the first half of the year. Its Merrill Lynch investment banking and brokerage division helped lift earnings in the first half of 2011, but Merrill is unlikely not be of much help this quarter because of low trading volumes.

 

- Goldman Sachs Group Inc. also releases results Tuesday. It is expected to earn 23 cents per share on revenue of $5.3 billion. Chen, of Credit Suisse, is more negative than other analysts on the New York bank. Chen wrote in a report that the difficult market conditions and low appetite for risk among investment banking and trading clients could lead to a third quarter loss of 70 cents a share. If that happens, Chen notes that it would be only the second quarterly loss for Goldman since the bank went public in 1999. - Morgan Stanley will report on Wednesday, Oct. 19. Analysts estimate it will earn 31 cents per share on revenue of $7.5 billion. A sharp downturn in the investment advisory business is expected to hurt Morgan Stanley. Wells Fargo analyst Matthew Burnell lowered his earnings estimate to 26 cents from 56 cents per share because of weakness in trading. Executives are expected to shed more light on the bank's exposure to European debt and derivatives during their conference call. Worries about Europe have spooked Morgan Stanley investors lately, helping send the stock down 44 percent this year.

Monday, October 10, 2011

Source: GARP

 

The governments of France and Belgium agreed to nationalize Belgium's largest bank on Sunday as the Greek debt crisis took its biggest victim yet, while France and Germany's leaders promised far-reaching changes to the euro zone's economic governance in a bid to stabilize Europe's reeling finances. Dexia, a Franco-Belgian bank that had a debt exposure totaling more than $700 billion at the end of June - more than twice the size of Greece's annual economic output - had invested heavily in European government bonds whose value is now under question. The nationalization is a sign of the spiraling problems facing European banks and governments, and it may threaten Belgium's credit rating, making it one of the countries on shaky financial ground alongside Greece, Ireland, Italy, Portugal and Spain. German Chancellor Angela Merkel and French President Nicolas Sarkozy said after a meeting in Berlin on Sunday that they are ready to recapitalize banks that have been shaken by the debt crisis. Merkel and Sarkozy are trying to head off a contagion that could balloon as large as the 2008 credit crunch that followed the default of Lehman Bros., this time with government borrowing as the culprit, not subprime housing loans. The leaders said they will announce more fundamental reforms to the euro area's common economic governance by the end of the month. "We are determined to do what's necessary to secure the recapitalization of our banks," Merkel said at a joint news conference with Sarkozy. Of the broader issue of coordinating economic policies for countries that share the same currency, she said, "We must consolidate the system. We must develop better foundations." But she and the French leader declined to provide more specifics. "Europe chose a single currency without considering what its economic governance might have been, without considering the harmonization of fiscal and economic policies," Sarkozy said. "So now it's up to us, in the midst of this crisis, to tackle those problems."

 

Moody's Investors Service on Friday placed Belgium's Aa1 credit rating on review for a possible downgrade because of the expected costs involved in bailing out Dexia and guaranteeing that no investors' deposits are lost. France and Belgium became part owners of the bank in 2008 after an $8 billion bailout, and the bank has made extensive loans to local governments in France. The Belgian government had reached an agreement with France on Sunday night to buy as much as all of the bank's Belgian consumer banking division, Bloomberg News reported. The governments and the bank's leaders appear to be haggling over the price, but one person with knowledge of the talks said Belgium may pay about $5.4 billion, Bloomberg News reported. No specifics were made public. Belgian Prime Minister Yves Leterme and French Prime Minister Francois Fillon released a joint statement Sunday saying that a solution had been reached as "the result of intense consultations with all partners involved." Trading on the bank's stock was halted Thursday after it plunged more than 40 percent last week. Belgium's public debt, compared with the size of its economy, is the third-highest in the euro zone, after that of Greece and Italy. France is worried that its AAA credit rating may be jeopardized if it must spend large sums of money on recapitalizing its banks, which are significantly more exposed to Greek debt than banks in Germany. The International Monetary Fund has said that recapitalizing banks could cost $270 billion. France has appeared to favor using the $569 billion euro bailout fund, known as the European Financial Stability Facility, to recapitalize banks, rather than risking exclusively its own money. Markets have been pricing Greek bonds at only 40 percent of their face value, reflecting the expectation that the country will not be able to fully repay them. European policymakers speak privately of making lenders to the Greek government write off half of their loans.

 

Merkel said last week that she would be in favor of a coordinated effort to recapitalize shaky banks but that she would want to use the bailout fund only as a last resort if banks were unable to raise money on the open market and their governments were unable to shore them up. Merkel and Sarkozy played down any differences Sunday, saying that they were in agreement about what was needed. Surrendering any amount of sovereignty over economic issues has been a thorny topic for members of the European Union. But the financial turmoil in the euro area's weaker countries - Greece, Ireland and Portugal have all needed bailouts - has dramatized the need to tackle the problem of 17 countries that are bound to one another by a common currency but that have economies that move at different speeds in different directions.

 

Monday, October 10, 2011

Source: GARP

 

Consumers and businesses are stashing more money at local banks, showing a reluctance to spend amid continued economic uncertainty, according to newly released data from the Federal Deposit Insurance Corp. The agency's annual summary of deposits, a snapshot of holdings on June 30, revealed that deposits at metropolitan Washington banks rose $7 billion, or 5.2 percent, from a year ago (deposits from ETrade Financial were excluded from this calculation). Across the country, meanwhile, deposits shot up 7 percent, to $8.25 trillion from 2010 to 2011, outpacing the 2 percent deposit growth that occurred between 2009 and 2010. Consumers have become so risk-averse that they are pulling money out of mutual funds and staying away from the gyrating stock markets to accept low returns on checking and savings accounts, said Alexandria-based banking consultant Bert Ely. "Bank deposit interest rates are lousy," he said, "but people are looking at it from the standpoint of preservation of capital. Money in an insured bank account is as good as any to preserve principal and keep your powder dry for a better economic day." Lew Sosnowik, a bank analyst at Koonce Securities in Bethesda, put it more bluntly: "The public is scared; no one likes the unknown, so they are hoarding cash," he said. An influx of deposits, meanwhile, holds little value for banks right now. Ely said banks are in a "classic liquidity trap" whereby they are flush with cash but have few investment options at attractive yields. Many institutions complain that creditworthy borrowers are not in the market for loans, which is cutting into their profitability. Bank revenue has also taken a hit from the cap on credit card interchange fees, commonly known as swipe fees, and restrictions on overdraft fees. This pressure on profitability may lead smaller banks to close or sell off some of their branches, said Dennis Gibney, a managing director with FinPro, a financial consulting firm. "There are a number of institutions that are capital-constrained," he said.

 

Barring consolidation through mergers and acquisitions, most banks are unlikely to gain much market share nationwide, analysts said. That certainly appeared to be the case in the Washington area, where there was no change in the top 10 institutions, based on deposits. Wells Fargo, formerly known as Wachovia, held on to the top spot, with $20.5 billion at 152 local branches, an increase from $19.6 billion a year ago. The San Francisco-based bank wrapped up its conversion of Wachovia, which it purchased in 2008, late last month. Deposits at runner-up Bank of America's 180 regional locations grew 8 percent to $19.6 billion, even though the bank closed four locations. One of the most notable gains occurred at HSBC Bank, where deposits jumped 17 percent to $3.1 billion. The ninth-largest bank in the region has whittled down its U.S. operations in the past year, selling its Upstate New York branches to First Niagara Bank and trading its credit card portfolio to the region's fourth-largest bank, Capital One Financial of McLean.

Sunday, October 09, 2011

Source: GARP

 

Since January, Waukegan-based Northern States Financial Corp. has hosted a special guest at its board meetings: an official from the U.S. Treasury Department.  In February 2009, the publicly traded parent of NorStates Bank received $17.2 million from the government's Troubled Asset Relief Program, or TARP. The way the program worked, Treasury would infuse capital into a bank, in exchange for securities in the lender, in hopes that the institution would lend to credit-starved businesses and consumers. But continuing financial difficulties at $506 million-asset Northern States, whose roots date to 1919, caused it to miss eight quarterly dividend payments to Uncle Sam, records show. Technically, the government can take two board seats at a bank after six TARP misses, but in January, after Northern's fifth unpaid dividend, the bank agreed to let a Treasury "observer" attend its board meetings, company documents show. Northern States, which is behind on $1.7 million in dividend payments, is among more than 170 U.S. banks that have missed approximately $275 million in TARP dividend payments to the government through August. That includes 11 Illinois lenders that have missed more than $13 million in payments. In some cases, the banks are unprofitable and are trying to preserve capital, which serves as a cushion against unexpected losses. And, in some instances, their regulators say they can't pay dividends until they're on firmer financial footing. Under TARP, the Treasury invested $204.9 billion in 707 banks, with most keeping up with their dividends or even repaying the government in full. But the dividend deadbeats are symptomatic of broader national problems, said one former Treasury official. "The missed TARP dividend payments reflect the difficulties still facing the economy and the financial sector, especially community banks" that focused on commercial real estate lending, said Phillip Swagel, who was assistant secretary for economic policy at Treasury until Jan. 20, 2009. While there, Swagel was part of a five-member TARP investment committee.

 

The weak economy means that it's tougher for banks to get their existing loans repaid and to find creditworthy customers for new lending. "This, in turn, means that banks have difficulty with their obligations, including TARP payments to the Treasury," said Swagel, a senior fellow at the Milken Institute and a professor with the University of Maryland's School of Public Policy. "TARP was designed to give banks leeway -- they can pause their payments -- but the obligations build, and it becomes harder for the banks to exit from TARP," he said. The overall banking industry appears to be approaching a speed bump. Financial firms in the Standard & Poor's 500 are expected to see third-quarter profits rise 3 percent from a year earlier, according to an Oct. 5 report from Thomson Reuters Proprietary Research. That's down, however, from the 3.9 percent earnings growth expected on Oct. 3 and 15.6 percent on July 1. Proof of continuing troubles in the banking industry: Of the more than 170 banks that were past due on their TARP dividend payments at the end of August, about a dozen had missed their first dividend payments that month, said investment bank Keefe Bruyette & Woods. Another 70 have missed at least six payments. Of those, the Treasury has a representative at more than 30 banks monitoring board meetings. Besides Northern States, another local bank with a Treasury monitor is privately held Bridgeview Bancorp Inc. A Treasury spokesman confirmed Wednesday that a department representative has been attending the meetings in person or via conference call. Northern said its Treasury contact participates via telephone. So far, Treasury has taken the additional step of installing directors on the boards of only two banks, including St. Louis-based First Banks Inc., which exited the Chicago market last year. In the most extreme cases, the Treasury has invested in a bank only to see it fail. That's what happened to Melrose Park-based Midwest Banc Holdings, one of the first community banks to receive TARP money -- $85 million in late 2008 -- but it failed in 2010 before the government was repaid. With roots dating to 1865, $1.07 billion-asset Princeton National Bancorp Inc. received $25.1 million in TARP in January 2009.

 

The Princeton, Ill.-based parent of Citizens First National Bank has deferred three dividend payments on its preferred shares owned by the government, and owes $940,000, Treasury records show. The shares pay an annual dividend of 5 percent a year for the first five years and 9 percent thereafter. Many banks have completely repaid the money they received under TARP, not only to avoid the higher interest rates that are eventually triggered but also to avoid government restrictions involving everything from executive pay to client entertainment. Illinois banks that have repaid TARP include Northern Trust and Wintrust. Last month, the U.S. Office of the Comptroller of the Currency ordered Princeton, which lost $2.9 million in the second quarter, not to pay dividends without regulatory approval. It also ordered it to maintain adequate reserves for potential loan losses. Publicly traded Princeton has about 20 branches, including locations in Aurora and Plainfield. Thomas Ogaard, who joined Princeton in 2009 and was named CEO last year, said the bank is behind on dividend payments because one priority is to set aside more money to cover bad loans. Such reserves come right off a bank's bottom line. Tim McPeak, senior analyst for financial analysis firm Sageworks Inc., agrees that many banks with troubled loan portfolios are being forced to set aside more money for souring loans. "These actions further deplete the capital base of these institutions, and eventually they are forced to make some difficult choices, such as postponing payments like their TARP dividends," McPeak said. Also behind on dividend payments is $1.98 billion-asset Old Second Bancorp Inc., which, like Princeton, has been under more regulatory oversight. The Aurora-based bank, which received $73 million in TARP funds, has missed four payments and is behind on more than $3.6 million in dividend payments to the government. "Old Second Bank is taking advantage of our ability to postpone dividend payments on the TARP preferred shares" to help maintain the bank's capital levels, said William Skoglund, chairman and CEO of the 140-year-old bank, which is the deposit market share leader in Kane and Kendall counties. As signs of progress, he points to declining levels of bad loans and to a break-even second quarter, compared with a $23 million loss in the same period a year ago. Said Skoglund, "We intend to repay the U.S. government and taxpayers in full." Also deferring dividends is $2.84 billion-asset Metropolitan Bank Group Inc., which received $71.5 million in TARP money and is behind on nearly $1.7 million in dividend payments. A little-known fact about TARP is that banks may defer their dividend payments without risk of penalty, said CEO Peter Fasseas, whose company's five banks include Archer Bank, Metrobank and North Community Bank. Though his banks are under pressure by regulators to raise capital and restrict dividends, he said the company expects to resume payouts next year. "Until an economic recovery is under way, it's prudent for banks to preserve cash and capital," Fasseas said.

Saturday, October 08, 2011

Source: GARP

 

Federal bank regulators are suing 11 insiders at a failed Alpharetta bank, accusing them of gross negligence as the government widens its efforts to recoup losses related to failed lenders. The Federal Deposit Insurance Corp. accuses the executives and directors of of Alpha Bank & Trust of sloppy lending practices and strategy focused on "growth above all else, including safety and soundness," according to a lawsuit filed Friday in U.S. District Court in Atlanta. The lawsuit seeks $23.9 million in damages. Alpha Bank failed in October 2008, only about 30 months after it opened, and was one of the early casualties of the economic collapse. Georgia leads the nation with 70 failures since mid-2008. This is the fourth liability lawsuit filed by regulators seeking damages from bank insiders. More are expected as the FDIC tries to recoup losses to its Deposit Insurance Fund, which protects depositors in failed banks. The FDIC estimated in the suit that Alpha Bank's collapse cost $214.5 million. Among the defendants are: David Michael Sleeth, a former chief financial officer; Robert Skeen, a former chief lending officer; and Joseph Briner, the bank's founding president and CEO. The Atlanta Journal-Constitution obtained the suit late Friday, and efforts to reach defendants for comment were not immediately successful. The defendants were responsible for the safe operations of the institution, the suit claims.

 

The suit singles out 13 specific loans, totaling $44.5 million, which regulators claim showed severe flaws. Among the faults were violations of statutory lending limits, loans lacking adequate financial documentation and inadequate appraisals or analysis of collateral. All 13 loans were approved, the suit contends, "despite plainly inadequate, incomplete, or outdated financials of the borrowers and/or the guarantors" in the loans, resulting in loans to borrowers "with no apparently ability to repay or otherwise service the loans." The FDIC alleges that each loan "suffered from key deficiencies that should have been readily apparent to even a careless reviewer." The defendants allowed the bank to grow substantially faster than their regulator-approved business plan, the suit alleges, "at the expense" of sound underwriting. Regulators also criticized the bank for compensating loan officers based on making loans and not for quality. The insiders allowed lenders to fill the bank's portfolio with risky real estate loans, many of which went into default in the bank's first two years and depleted its capital reserves, causing it to fail, the suit says.

Saturday, October 08, 2011

Source: GARP

 

A struggling Sevier County lender has tapped a new leader. Sevier County Bank announced Friday that Matthew Converse has been named president and chief executive officer, the first permanent CEO in the bank's history. In its announcement, the bank said former President R.B. Summitt II will serve as director of business development and legislative liaison. The release said senior vice president Claude Huff had served as interim CEO during the search process. The release said Converse's primary focus will be improving credit quality and protecting capital. The banker graduated from the University of North Carolina at Charlotte in 1987 and previously served as president and CEO at The Bank of Currituck in Moyock, N.C. In an interview, Converse, 46, said it's important for the bank to "aggressively attack the issues that we have in front of us." Sevier County Bank lost more than $2.4 million in the first six months of the year and has faced pressure from regulators. Last year, the Federal Deposit Insurance Corporation issued a consent order to the bank, requiring it to submit a plan for improving earnings and reducing discretionary expenses; to correct credit underwriting and loan administration deficiencies; and to submit a plan for the reduction and collection of delinquent and/or nonaccrual loans.

 

"You never can determine what the future will bring, but I'm optimistic about our ability to address the items in the consent order and do the things necessary to have a successful bank going forward," Converse said. Summitt could not be reached for comment, but said in the announcement that he and his family agreed that the company had "selected the best person to lead our bank." Summitt's father, Ross B. Summitt Sr., previously served as president, and Converse said Friday the Summitt family owns a significant portion of the bank, although he declined to give an exact figure. In April of last year Converse's former employer, the Bank of Currituck, entered a written agreement with state and federal regulators requiring it, among other things, to submit plans for strengthening credit risk management and strengthening internal review of its loan portfolio. In July 2010, Virginia-based TowneBank announced a deal to acquire the deposit accounts of The Bank of Currituck, its six offices in northeastern North Carolina and other assets. Asked about that sale, Converse said each bank is unique and that at Sevier County Bank "our objective is to remain an independent community bank."

 

Friday, October 07, 2011

Source: GARP

 

The State Bank of Vietnam (SBV) has requested that commercial banks and credit institutions slash lending interest rates for the production sector to between 17 per cent and 19 per cent per year, as promised by Nguyen Van Binh, SBV Governor. At the first meeting between the central bank and the 12 major commercial banks (G12) - which account for 85 per cent of market shares - in Hanoi on Oct. 4, Governor Binh said the SBV would publish loan information to help domestic producers access credit more easily. The meeting also discussed issues such as falling deposits in Vietnamese dong, which affects a bank's' liquidity. To help increase bank liquidity, especially among small institutions, the SBV plans to access Open Market Operations to re-finance credit institutions, Binh said. The SBV is also planning to announce its 2012 credit growth plan at the beginning of next month. The central bank has asked commercial banks to review and tighten their lending in foreign currencies, while applying higher borrowing requirements for companies with revenue exclusively in Vietnamese dong. Deposits and foreign currency lending should be reduced, the SBV said. Last week, the SBV regulated that non-term deposit interest rates offered by commercial banks and other credit institutions would be capped at 6 per cent per year, from October 1. The cap on deposit interest rates for term deposits of one month or more will remain unchanged at 14 per cent at banks and 14.5 per cent at credit unions. In the past few months, a number of commercial banks have flouted the rule by offering higher interest or bonus interest to entice depositors. Some banks have also given depositors overnight interest of 14 per cent. These practices introduce a high element of risk into the nation's banking system, the SBV said.

 

Small banks have to increase their non-term rates to lure customers from larger banks. After the circular became effective, banks slashed their non-term deposit interest rates to under 6 per cent per year. Sai Gon Commercial Bank (SCB) announced on Monday a non-term deposit interest rate of 4.2 per cent per year. Western Bank posted a rate at 6 per cent for one - to six-day-terms, while ABBank listed rates of 3 per cent and 6 per cent for non-term and one, two, three-week terms. Customers en masse withdrew deposits after small banks reduced their non-term rates. At the meeting, the SBV also said it was mulling a draft to sanction banks which offered higher deposit interest rates or bonuses to entice customers. Accordingly, credit institutions that were found to have violated the regulation would also be temporarily stopped from opening more branches and transaction offices and establishing subsidiaries for six months.

Tuesday, October 04, 2011

Source: GARP

 

 Four more New Jersey community banks added millions of dollars to their capital reserves last month by selling preferred shares to the government through the Obama administration's Small Business Lending Fund so they can make more small-business loans. Freedom Bank in Oradell received $4 million, and Highlands Bancorp in Vernon, which has a branch in Totowa, received $6.9 million. Highlands used most of its capital infusion to pay off Troubled Asset Relief Program (TARP) funds, said George Irwin, chief executive officer of Highlands Bancorp, which has increased its loan portfolio by more than 8 percent this year. The small-business lending program allows banks to pay the government less in dividends than they did with TARP if they meet lending goals. "We're cutting our carrying costs from 5 percent to 1 percent," Irwin said. "We'll have an additional $1.2 million to $1.3 million to hopefully make more loans to small businesses." Freedom Bank -- which did not receive TARP money -- did not respond to a request for comment.

 

Center Bancorp in Union received $11.3 million and Harmony Bank, in Ocean County's Jackson Township, received $3.5 million, according to the Treasury's seventh and final fund disbursement notice. Nine New Jersey banks received funds through the program, which is intended to encourage community banks to increase lending to small businesses and, thereby, spur job growth. The fund was established as part of the Small Business Jobs Act that President Obama signed into law last year. The price a bank pays for the funding is reduced as the firm's small-business lending increases. Some industry observers and bankers have been skeptical about the program's prospects of boosting job growth, because demand for loans remains weak amid uncertainty about the economy and the potential impact of regulatory reform. Nicholas Ketcha Jr., managing partner at FinPro in Liberty Corner, said the small-business fund could help boost lending because many community banks need more capital if they are going to take more risk. Regulators have restricted some banks' ability to lend because of capital-strength concerns, and it's difficult lately for small banks to raise capital by selling common stock, so new capital from the government will ease some of the pressure, he said. "Right now, banks have to be very selective with the loans they make, so maybe they will be able to loosen their standards a bit, but not go back to the underwriting that got everybody into trouble," Ketcha said. Since June, more than $4 billion has been spread among 332 banks with less than $10 billion in assets, the Treasury said. The lenders had to be financially sound to qualify. Those on the FDIC's problem bank list were disqualified, as were banks that had taken Troubled Asset Relief Program money and missed dividend payments. The Treasury said that 952 applications were received and more than 40 percent were unable to meet minimum requirements. The Treasury based its decisions on reviews of earnings, asset quality and other factors.

 

Tuesday, October 04, 2011

Source: GARP

 

 CHANCELLOR George Osborne has said taxes will only be cut when the Government can afford to do so in a speech to the Conservative conference. He said solving the eurozone crisis remains the most important factor in kick-starting growth in the UK. The Chancellor has been under pressure from Labour to cut VAT to inject money into the economy -- and from senior figures in his own party to scrap the 50p top rate of income tax. He said it would be wrong to borrow money to fund temporary tax cuts or increase public spending. Mr Osborne did reveal the Government will bypass Britain's foot- dragging banks by injecting tens of billions into struggling small firms in an attempt to head off a "double-dip recession". After finally losing patience with the banks over their reluctance to lend to businesses, Mr Osborne has announced that the Treasury would underwrite loans for small and medium-sized firms by buying corporate bonds or "business IOUs". The loans will be cheaper than those offered by the banks. Aides said the aim was to prevent another credit crunch, but the move also reflects growing fears among ministers that the global economic slowdown could push the UK back into recession. The Chancellor's aides denied that his "credit easing" proposal amounted to a Plan B on the economy and that his Plan A was not working. They also insisted that it would not increase Britain's deficit.

 

Mr Osborne refused to change his cuts strategy, rejecting Tory demands for tax reductions to boost growth and Labour and Liberal Democrat calls for higher spending. Ten minutes into his address, the rating agency Standard & Poor's confirmed the UK's AAA credit rating, but it warned that the cuts could inhibit growth and was gloomy about growth and jobs. The Chancellor said: "I don't pretend to you that... there are not difficult days ahead. But together we will ride out the storm and together we will move into the calmer, brighter seas." His most significant measure was the move to help small firms. Although full details will not be set out until his autumn statement next month, the "credit easing" plan could be implemented by the Bank of England on an emergency basis if the eurozone crisis deepens. The new scheme may be run by the Bank or an arm's-length body. The Treasury will create a US-style market but will not "pick winners", as the private sector will vet firms applying for the new loans. Although the Treasury would be liable if a company defaulted on a loan, officials said any losses would be covered by interest received on other loans.

 

The move means the Treasury will avoid a difficult annual negotiation over lending targets for the banks, before waiting anxiously to see if they have been met. Critics said it was a sign that the present agreement, called Project Merlin, had failed. The Institute for Fiscal Studies warned that the full programme would not boost growth in the short term. John Walker, national chairman of the Federation of Small Businesses, said: "The credit-easing measure announced today could be a significant development that would open up a new finance stream to viable businesses." Mr Osborne also risked further damaging David Cameron's green credentials by announcing that Britain would not set a higher target to cut its carbon emissions than the rest of Europe. The Chancellor said environmental laws and rules were adding to the energy bills of households and companies. "Britain makes up less than 2% of the world's carbon emissions to China and America's 40%. We are not going to save the planet by putting our country out of business," he said. He provoked more controversy by announcing that people claiming unfair dismissal will have to pay up to Pounds 250 to make a claim and a fee of Pounds 1,000 or more if there is a full employment tribunal hearing. The charges, which would be refunded if the employee wins, will also apply to sex-discrimination actions.

Tuesday, October 04, 2011

Source: GARP

 

 EURO ZONE finance ministers started two days of talks on the debt crisis last night amid open divisions over contentious moves to expand the remit of their bailout fund. Although Greece was top of the agenda, the ministers were also discussing proposals to "leverage" the assets of the European Financial Stability Facility (EFSF) to strengthen its power to intervene in bond markets. Germany played for time, however, as officials said the immediate priority was ensure an earlier set of EFSF reforms were endorsed by all 17 euro zone countries. All single currency countries except Slovakia, Malta and the Netherlands have now approved these measures, which will expand the fund's lending capacity and give it the right to buy up sovereign bonds from market investors. EU leaders are concerned that the Slovak government, which faces deep internal resistance to the changes, might not be able to secure parliamentary support for the overhaul. At a time when the expanding debt crisis threatens to engulf Italy and Spain, this would place yet another political roadblock in the way of the long battle to bring the debacle under control. Official and diplomatic sources say EU heads of state and government will discuss plans for a new batch of EFSF reforms at a summit in a fortnight's time.

 

This means ministers would have to deliver significant advance preparatory work by then. However, German minister Wolfgang Schauble stressed the need yesterday to deliver the first overhaul before debating new powers for the fund. "Speculating makes no sense," Mr Schauble told reporters as he arrived in Luxembourg. "We will wait until the other countries that haven't ratified it also do so." Although markets are sceptical that any "leveraging" initiative would be big enough on its own to finally settle the tumult, such measures are seen as a viable means of intensifying the fight against the debt emergency. A number of proposals are on the table, among them a system under which the EFSF would provide cross-guarantees to the European Central Bank to compensate it for losses it incurs as it proceeds with its bond-buying campaign to prop up Italy and Spain. In part at least, this flows from concern to minimise divisions in the top echelon of the ECB over these interventions. A "leveraging" measure of that kind - similar to policies adopted in the US at the height of the 2008 financial crash -- would have the benefit of protecting the ECB's position while not requiring any increase in the top-line lending capacity of the EFSF.

 

 

As a result, euro zone countries would not have to increase the guarantees they provide to the fund when it raises money on markets for bailouts. While that would reduce the political risk in the process, the proposal is but one of several on the table. "We are reviewing options on optimising the use of the EFSF in order to get more out of it and make it more effective as a financial firewall to contain contagion. Leveraging is one of the options," said EU economics commissioner Olli Rehn. "We will discuss this with the ministers. . . There are options including the ECB and options not including the ECB. This is something we will discuss today." ECB governing council member Christian Noyer, chief of the French central bank, said it was unrealistic to expect an increase in the EFSF's size. He was open, however, to measures to enhance its power to intervene in markets. "Whether amounts are big enough is a matter of opinion," Mr Noyer said in a speech in Tokyo. "It would be unrealistic to expect an increase in the EFSF itself but I am personally open to any scheme that would allow existing commitments to be leveraged to provide greater intervention capacity." At the annual meeting of the International Monetary Fund last month, it was suggested that the fund's lending capacity might rise to [euro]2 trillion from [euro]440 billion. EU leaders are resisting pressure on that front, mindful that it would require another round of parliamentary approval in euro zone countries. They are also trying to damp down pressure to deliver a big recapitalisation for vulnerable euro zone banks. The IMF estimates that the banks' exposure to the debt crisis now stands at [euro] 300 billion.

Tuesday, October 04, 2011

Source: GARP

 

 

In the battle for stock investors' minds, if not their hearts, the bears are winning. Another dive in share prices worldwide pushed the broad Standard & Poor's 500 stock index close to a 20% drop from its spring peak, raising fears of a fresh cascade of selling by investors who don't want to risk deeper losses. "There's a void of confidence right now" in global markets, said Bill Larkin, a bond manager at Cabot Money Management in Salem, Mass. That was the story of the third quarter, and it dominated market action on the first trading day of the fourth quarter: Nervous investors kicked off the final three months of the year by dumping stocks and fleeing once again for the classic haven of U.S. Treasury bonds, as fears over the global economy resurged. The Dow Jones industrials Monday slumped 258.08 points, or 2.4%, to 10,655.30, the lowest close since September 2010, after falling 12% in the third quarter.

 

Despite data Monday showing an uptick in U.S. manufacturing activity in September and strong car sales for the month, those reports were good only for a modest rally at the beginning of trading, before sellers took control. "Everything has a negative bias now," said Andy Brooks, a veteran stock trader at T. Rowe Price in Baltimore. "Where's the glass-half-full crowd?" The optimists' ranks have shrunk for the last two months as Europe's government-debt crisis threatened to fuel a new global financial meltdown, just three years after the U.S. banking system nearly collapsed from mortgage losses. Stocks had fallen in most Asian markets Monday, and the trend continued in Europe after Greece said it wouldn't meet targets for reducing its budget deficit in 2011 or 2012, despite a vicious austerity campaign to cut spending. That raised once again the prospect of a Greek bond default, even though many analysts believe the rest of the Eurozone will pony up money Greece needs this month to avoid default. Battered European stock markets were mostly down 1% to 2.3% for the day, after rebounding last week. The euro fell 1.6% to an eight-month low of $1.318. Although Europe's woes have held the spotlight all year, investors lately have become fearful that China's economy could slow more than expected, dealing another hit to global growth. A gauge of Chinese manufacturing activity improved slightly in September, but the Shanghai composite stock index fell to a 2 1/2 -year low Monday.

On Wall Street, worries about the U.S. economy were fanned by a plunge in airline stocks on talk that American Airlines parent AMR Corp. may seek bankruptcy protection. AMR sank 33% to $1.98. The turn of the calendar to October also has contributed to investors' dismal mood, analysts say.

 

October has a reputation as a calamitous month for stocks, mainly because two of the biggest crashes in history occurred this month, in 1929 and 1987. But October also is known as the "bear killer" because it marked the bottom for 11 bear markets since World War II, including those of 1973-74 and 2000-02, according to the Stock Trader's Almanac. Market bulls say history may repeat again, with stocks already down sharply. Even if investors believe that the current market decline will end this month, the question is how much deeper the losses will get before the selling wave exhausts itself. With Monday's 2.8% drop in the S&P 500, to 1,099.23, the index closed below the 1,120 mark, which is where it had bounced three times since early August. What's more, the S&P now is down 19.4% from its spring high. A drop of 20% is the usual threshold for declaring a new bear market. Indexes of U.S. small and mid-size stocks already are well into bear markets. But if the blue-chip S&P 500 enters bear territory it could be a bigger blow to investor psychology because the S&P is a benchmark for many 401(k) retirement accounts. Sam Stovall, chief investment strategist at S&P in New York, said he worries that small investors could flood the exits, fearing that a 20% drop in the S&P 500 could soon turn into a 50% drop, as occurred in 2008-09. "Because people remember 2008, they may take the attitude of 'sell now and ask questions later,' " Stovall said.

Monday, October 03, 2011

Source: GARP

 

 The euro plunged against other major currencies Monday as signals that Greece might default caused traders to dump European investments. The dollar soared against other currencies as traders sold stocks and piled into safer investments. Greece's government said Sunday that it missed deficit-cutting targets set by its international lenders. Those lenders are considering whether to give Greece its next installment of bailout cash. Without it, Greece will run out of money this month. A default by Greece would shock the world's financial system, and might even tip the global economy back into recession. Europe's economy is barely growing, and economists have been lowering their forecasts for economic growth in the U.S.  Financial companies are of greatest concern to investors. Banks in France and Germany hold billions in debt issued by Greece and other countries that are struggling. A default by Greece would cause those holdings to lose value quickly, threatening the banks and scaring off potential business partners. If banks stop lending to each other, the global credit system might freeze up. The euro fell to $1.3198 at 3:24 p.m. Eastern time Monday, from $1.3424 late Friday. That was its lowest point of the day, and the lowest value against the dollar since Jan. 13.

 

Europe's shared currency also plunged to 101.11 Japanese yen, a 10-year low. The dollar rose against most other currencies as rapid selling by global stock traders increased demand for investments that are seen as less risky. The dollar is considered a safe bet mainly because it gives holders access to the market for U.S. Treasury securities. Treasurys are still seen as the safest bet around, despite a credit rating downgrade by Standard & Poor's this summer. Analysts said much of the demand for dollars came from traders selling investments in emerging markets such as Brazil and China. Those nations' economies depend on consumer demand in Europe and the U.S. If developed economies shrink, emerging markets would likely plunge. A sell-off in U.S. stock markets also helped the dollar. The Dow Jones industrial average fell 258 points as fears about Europe continued to intensify. The British pound fell to $1.5458 British pound from $1.5626 late Friday. The New Zealand dollar fell to 75.61 cents from 76.39 late Friday. The dollar rose to .9190 Swiss franc from .9051 late Friday. It rose to 1.0499 Canadian dollar from 1.0438. The dollar fell to 76.52 yen from 77.08 late Friday.

Monday, October 03, 2011

Source: GARP

 

 Long-term Treasury prices rose Monday as bond-buying by the Federal Reserve and fears about Europe drew traders to the relative safety of government debt. The yield on the 10-year Treasury note fell to 1.79 percent from 1.91 percent late Friday. The yield hit a record low of 1.71 percent last month after the Fed's plan was announced. The 10-year note rose $1.25 for every $100 invested. The Fed was buying about $2.5 billion of 30-year bonds Monday, according to the Federal Reserve Bank of New York. The purchases are the first step in a plan to buy $44 billion of mostly 10- and 30-year Treasurys, and sell the same amount of shorter-dated investments. By buying longer-dated Treasurys, the Fed hopes to bring down long-term interest rates. The yield on the 10-year Treasury is the basis for rates on many kinds of loans including mortgages. Lower interest rates might encourage people to borrow and banks to lend. They also might make Treasurys less attractive, encouraging investors to move money into higher-risk investments such as stocks. The yield on the 30-year Treasury bond fell to 2.75 percent at 3:44 p.m. Eastern time Monday, from 2.90 percent late Friday. It was the lowest yield since the beginning of January 2009, when the global financial system was in the thick of its worst crisis in generations. The 30-year bond gained $3.53 for every $100 invested. Bond yields fall as their prices rise. Yield is the income traders would receive from holding a bond until its expiration date. Worrying signals from Europe caused investors to dump higher-risk investments that might suffer in a recession, such as stocks and energy commodities. Their money flowed into lower-risk bets such as dollars and Treasurys.

 

Greece admitted on Sunday that its deficit will be higher than it had promised its international lenders. That might make them reluctant to release its next round of bailout cash. Without that money, Greece will be unable to pay its bills sometime this month. Yet finance ministers from other European nations did not ready with a detailed bailout plan. Germany and others want banks to take bigger losses on their holdings of Greek debt, effectively shifting some of the cost from taxpayers to private companies. That might threaten banks in France and Germany, prompting another wave of bailouts. At worst, the shock might freeze global lending and cause a deep recession. The yield on the two-year Treasury note fell to 0.24 percent from 0.25 percent late Friday. The three-month T-bill paid a yield of 0.01 percent, unchanged from Friday. Its discount wasn't available.

Monday, October 03, 2011

Source: GARP

 

 Economists say it is not a matter of if, but when. The Bank of England's Monetary Policy Committee is expected to vote on Thursday to pump another pounds sterling 50bn into the ailing UK economy, expanding the stock of the quantitative easing programme to pounds sterling 250bn since it began buying assets in March 2009. Minutes of the September MPC meeting made it clear that if conditions did not improve then the Bank could launch a second round of QE. The speed at which the economic outlook is deteriorating -- expected to be highlighted in a raft of Purchasing Managers' Index data showing a further round of contraction in activity in key sectors in the UK and the eurozone -- will make the case for printing more money even stronger. Howard Archer, chief economist at IHS Global Insight, said: 'While we currently favour a move in November, it is very possible the Bank could act at the conclusion of this week's meeting if UK data shows further weakness and the global economic environment fails to show any signs of improvement. 'The odds of the Bank of England expanding its QE programme are quite high in the light of increasing recession risks for the UK economy.'

 

And last night Neil Mackinnon, chief economist at VTB Capital, added: 'The UK and the rest of the global economy face sizeable downside risks from the worsening eurozone debt and banking crisis.' Speculation suggests the European Central Bank will also cut interest rates to 1pc, from 1.5pc, on Thursday to ease the strains on the financial sector. Further liquidity is required to prop up Europe's banks as the eurozone debt crisis rumbles on. Fragile stockmarket confidence could be spooked even further if, as reported Dexia -- one of Belgium's biggest lenders -- needs to be rescued. The Footsie recorded its worst quarterly performance for nearly a decade in the third quarter. It fell 13.74pc -- or pounds sterling 212bn -- and continues to live on its nerves ahead of further news over Greece's expected EU bailout. A recently-published report by the Institute of Directors also calls for a further round of quantitative easing to boost the UK economic outlook in the short and long term. Entitled The Route Back to Growth, the report also suggests the Government cuts the rate of corporation tax to 15pc by 2020 to help improve investment flows and encourage job creation in the private sector. The IoD also believes the Treasury should restore the top rate of income tax to 40p (from 50p) to show the outside world that the UK welcomes talented entrepreneurs and highly-skilled professionals.

Monday, October 03, 2011

Source: GARP

 

 A fortnight has passed since the Reserve Bank of India (RBI) raised its policy rate, but only two private sector banks have so far raised their loan rates since and not many banks are eager to follow suit. After the first quarter policy rate hike in July, 32 banks hiked their rates in the first week and another 14 a week after that. Most banks have refrained from raising their loan rates as there aren't too many takers for bank credit. While most corporations are opting to wait and watch as they expect the policy rate to start going down sooner rather than later, those who are willing to borrow money at a high cost may not be able to pay back on time. This means banks are running the risk of piling up bad debts. While year-on-year (October 2010 till September 2011) loan growth is 20.4%, the growth so far this fiscal year is only 3.4%. In the April-June quarter, the industry's gross non-performing assets, or NPAs, rose by 7.64%--from '60,685 crore in the January-March quarter to '65,318 crore. It was the highest increase in bad loans in a quarter since July-September 2006.

 

The central bank had on 16 September hiked its policy rate by 25 basis points to 8.25%, its 12th hike since March 2010, to fight a persistently high inflation in the world's second-fastest growing major economy after China. One basis point is one-hundredth of a percentage point. Since then, only ING Vysya Bank Ltd and Dhanlaxmi Bank Ltd have raised their loan rates. According to Amandeep Goraya, analyst at GEPL Capital Pvt. Ltd, both loan as well as deposit rates have not been increased by most banks because they are expecting interest rates to be near their peak. "Also, hiking rates could have a negative impact on loan demand." "Banks have probably not hiked rates because credit growth has shown no signs of improving... Deposit rates are flat for the last six months except in some select baskets because banks have to match their assets," said an analyst with a Mumbai-based brokerage, who did not want to be named. "Banks have not hiked rates maybe because they are reviewing or even absorbing the hikes... RBI governor has been clearly hawkish, which means that there could be more hikes and banks will have to pass it on. They do not have the holding power now because they have to maintain their margins," said Chaitra Bhat, analyst at LKP Securities Ltd. "These decisions (to hike loan and deposit rates) do not work in isolation. There are too many forces working in the market and we will have to wait and watch how the market dynamics react and then take a call," said K.R. Kamath, chairman and managing director of Punjab National Bank. S. Raman, chairman and managing director of Canara Bank, also said it's not that monetary transmission is not happening, "only that it could be delayed". Raman said the government's decision to increase its borrowing programme by '58,500 crore will put pressure on loan rates and deposit rates too may go up.

"The extra borrowing programme might add a new element in the equation," he said.

 

Bankers are also hopeful that with the end of the first half of the financial year, the so-called busy season will kick in and the industry will start borrowing. Yields on government bonds have risen after the announcement of the increase in the government's borrowing programme. A week after the central bank hiked its policy rate in May, only three banks raised their loan rates in the first week and one in the second week. However, within a month, 38 banks hiked their deposit and lending rates. Analysts say banks are not raising rates because people are keeping money with banks for safety with the stock market in a bear phase and the price of gold staying volatile. Once the demand for credit picks up, banks will be compelled to raise their deposit rates to mop up money, they say.

 

Sunday, October 02, 2011

Source: GARP

 

Federal regulators bowed to pressure from big banks seeking a quick exit from the financial bailout program and did not uniformly apply the government's own conditions set for repaying the taxpayer funds, a new watchdog report says. The report was issued Friday by the office of Christy Romero, the acting special inspector general for the $400 billion taxpayer bailout of the financial industry and automakers. It found that regulators, to varying degrees, "bent" to pressure from the banks in late 2009 and relaxed the requirements put in only weeks earlier. The regulators also were motivated by a desire to cut the government's stake in the banks it had bailed out in September 2008 when the financial crisis struck, the report says. Meanwhile, the banks wanted to get out quickly from the so- called Troubled Asset Relief Program, or TARP, because they wanted to avoid its limits on executive compensation and the stigma associated with receiving rescue money, according to the report.

 

The report focused on the sales of stock to raise capital and bailout repayments by four major banks: Bank of America Corp. and Citigroup Inc., which each received $45 billion from the government; Wells Fargo & Co., which received $25 billion; and PNC Financial Services Group Inc., which got $7.6 billion. Because the regulators failed to enforce the policy for repayments set by the Federal Reserve, the new report says, "the process to review a TARP bank's exit proposal was ... inconsistent." That policy required banks to issue at least $1 in new common stock for every $2 in bailout money they repaid. But the banks doggedly resisted the regulators' demands to issue common stock, seeking instead to use cheaper and "less sturdy" alternatives such as selling assets or issuing preferred stock, the report found. Issuing common stock is a better way to shore up a bank's capital base, it said. When Bank of America, Citigroup and Wells Fargo repaid the government in December 2009, only Citigroup fully met the 1-for-2 requirement, the report said. The regulatory agencies overseeing the banks, which negotiated the repayment terms with them, were the Federal Reserve, the Federal Deposit Insurance Corp. and the Treasury Department's Office of the Comptroller of the Currency. Treasury itself ran the bailout program, and the report said its involvement in individual banks' repayment proposals was greater than was previously known publicly.

 

It said Treasury encouraged the banks to speed repayment, raising the criticism that Treasury officials put that goal ahead of ensuring that the banks were strong enough to exit TARP safely. "The result was nearly simultaneous repayments by Bank of America, Wells Fargo and Citigroup in an already fragile market," the report said. The three banks issued a combined $49.1 billion in new common stock as part of their repayments. Tim Massad, Treasury's acting assistant secretary for financial stability, said "We're pleased that the report acknowledges that the nation's large banks are much stronger today as a result of the actions taken by Treasury." Taxpayers will recoup the full amount invested in banks, around $245 billion, and will make an additional $20 billion or so in profit, Massad said in a telephone interview Thursday. He said the quickened share sales were the best approach to follow. Delaying the banks' stock offerings and repayments "carried a lot of risk with it," said Massad, because it's hard to know what the market for bank shares is going to be like later on, and holding back could dampen investor confidence. "We pushed them to raise as much private capital as they could," he said. Robert Stickler, a spokesman for Charlotte, N.C.-based Bank of America, said the bank's wanting to issue stock "all at once rather than in stages was because of market conditions." He rejected the idea that his bank might have pressured the regulators for a quicker exit. The bank's primary motivation was to remove the stigma of being a TARP recipient, Stickler said, and there also was concern that the restraints on executive pay were making it hard for them to keep executives. The Federal Reserve said in written comments on the new report that, while it led the process of reviewing banks' repayment proposals, it consulted with all the agencies. "All agreed with the final decision to allow each" bank to repay, the Fed said. The Office of the Comptroller of the Currency disagreed with the report's finding that the bank review process was inconsistent. The flexibility to "deviate somewhat" from the requirements was necessary and produced positive results, the agency said. PNC, Wells Fargo and Citigroup said the TARP repayments allowed them to focus on their businesses and were in the best interests of taxpayers and shareholders.

Friday, September 30, 2011

Source: GARP

 

 LORD Adair Turner, the head of the Financial Services Authority, last night launched an outspoken broadside at the banks, claiming their ability to create credit and money is "potentially dangerous" and calling for unprecedented new powers for regulators to intervene in their lending. Turner, who is a member of the interim Financial Policy Committee, which oversees the stability of the banking system, said we cannot rely on free markets to ensure bank lending goes to "socially optimal" borrowers such as small firms. He said that only a fifth of the vast expansion in bank balance sheets in the run up to the credit crunch had been funnelled into the real economy, and that excessive lending to sectors such as commercial property may be "at the expense of more socially valuable projects which languish unfinanced." Measures might include risk-weightings for loans to small firms being set by regulators instead of being decided by the banks.

 

The FSA supremo said regulators need to break with the "orthodoxy" that free markets will automatically ensure lenders allocate capital to the most productive parts of the economy. He added that we "cannot avoid" considering options that would have been thought "unacceptably interventionist" before the credit crunch. Turner rejected the previous free market orthodoxy as "wrong and dangerous," saying it "appeared to justify the enormous rewards enjoyed by many financiers." Regulators should challenge the idea financial innovation is a good thing, he said, because much of it focused on tax avoidance, or created profits that turned out to be illusory because people did not understand the risks involved. He said that while investment banking activities, or so-called "casino" operations, had taken much of the blame for creating the financial crisis, traditional lending had also been a big contributor. The British Bankers' Association said: "Our own figures show a current lack of demand for credit and we urge governments and other international bodies to consider carefully how they act so we do not hinder growth, made it unattractive to borrow or for businesses to remain in the UK." Separately, Santander boss Ana Botin set out ambitious plans for growth in the UK with hopes to expand lending to small firms and to personal current account customers, although she warned of "strong headwinds" in the next two years.

 

Friday, September 30, 2011

Source: GARP

 

 FRESH fears about the health of the world's major banks emerged today, with City analysts predicting that there will soon need to be another round of fund-raising to shore up balance sheets. With credit markets closing and talk now commonplace that another credit crunch has begun, investors were today warily eyeing credit default swaps, the insurance policies that are bought against the risk of a company defaulting. Morgan Stanley, the Wall Street giant that has a major operation in London, today saw its CDS price indicating that it is as risky as Italian banks. Bloomberg reports that the cost of buying protection against a default of Morgan Stanley's debt for five years has surged to 456 basis points, or $456,000, for every $10 million of debt insured. That is up from 305 basis points on September 15. Brad Hintz, an analyst at Sanford C Bernstein, told Bloomberg: "The CDS spreads are making investors and creditors nervous."

 

Another bank analyst said: "It is a sign of extreme stress and a sign of the times. There will need to be a further recapitalisation."

Moody's Analytics said in a report yesterday that Morgan Stanley's CDS prices imply that investors see the bank's credit rating as having declined to Ba2 from Ba1 in the last month. The company is actually rated six grades higher at A2 by Moody's Investors Service. By comparison, Bank of America and France's Societe Generale, which have CDS trading at 403 basis points and 320 basis points respectively. Morgan Stanley declined to comment. The bank was the biggest recipient of emergency loans from the Federal Reserve during the financial crisis and also benefited from capital provided by Tokyo-based Mitsubishi UFJ Financial Group and the US Treasury. The bank analyst added: "There is no direct correlation between CDS's and bank funding, but those prices tell you there is concern out there." Morgan's CDS price is the highest it has been since March 2009. As Bloomberg points out, it is nowhere near the peak hit in October 2008 as Lehman Brothers went under and the financial crisis began in earnest. Banks have lately been slashing thousands of jobs as they seek to cut costs in line with falling revenues. Analysts think that the UK banks may need less extra capitalisation than some of the Wall Street players will require.

Friday, September 30, 2011

Source: GARP

 

 It was a stomach-churning summer that most investors would like to forget. The United States lost its top-of-the-line credit rating for the first time. The financial system of Europe seemed ready to collapse. Money managers sifted through data for signs that the economy was about to slide into a new recession. In the financial markets, the result was the most volatile three months since the depths of the credit crisis in 2008 and 2009. Investors had a hair trigger: On four straight days in early August, the Dow Jones industrial average swung more than 400 points. As much as investors might like to put the summer of swings behind them, analysts say they should brace for more. Even if the next corporate earnings season, in October, shows that companies are still making money, it may not be enough to calm the markets until the bigger questions about Europe are answered. Europe's debt problems are "going to continue to overshadow everything else in the market until we have a resolution," said Stephen Auth, chief investment officer at Federated Investors.

 

The European Union is wrestling with crippling debt in a handful of nations. If those nations can't make payments, banks that hold their national bonds will suffer deep losses, and lending could tighten worldwide around the world - possibly leading to a widespread recession. For now, investors can expect ugly quarterly statements. The Standard and Poor's 500 index, the basis for most mutual funds that invest in U.S. stocks, fell 14 percent over the three months that ended in September. Riskier stocks fared even worse. The Russell 2000 index of smaller companies plunged 22 percent - enough to meet the technical definition of a bear market for the first time since March 2009. Investors overlooked fundamentals of individual companies and made bets on the whole market. On more than half the trading days since Aug. 1, more than 400 of the stocks in the S&P 500 rose or fell as a group, according to Bespoke Investment Group. There have been 42 of these "all or nothing" days this year, a pace that would break the full-year record of 52, set in 2008. Perhaps the best investment over the quarter was the very thing everyone fretted about - U.S. government debt. Treasury prices soared even after the S&P ratings service knocked American debt down one notch from the highest level on Aug. 5. On Sept. 22, the yield on the benchmark 10-year Treasury note hit a record low, 1.71 percent. Bond yields fall when prices rise. The message: Investors valued safety over profits. With all the uncertainty, the best bet seemed to be that the U.S. government would repay its debts, even if it meant lousy returns for investors. Fears about the U.S. economy were heightened in September after the Federal Reserve said it believed that the economy has "significant downside risks" that will hamper a quick recovery, including high unemployment, a depressed housing market and slow growth in consumer spending.

 

The Fed announced Sept. 21 that it would shuffle its holdings of Treasury bonds to help push down interest rates on mortgages and other long-term loans. It is hoping that cheaper money will make consumers and businesses spend more. But its bleak economic outlook sent the Dow down 675 points, or nearly 6 percent, over a two-day span. Raw materials like oil, copper and corn plunged on fears that demand would dry up. Gold shed nearly 10 percent between Sept. 19 and 23 as investors sold their holdings for cash to cover losses in other financial markets. Few analysts think the stock market will be any smoother during the last three months of the year. Europe's problems are unsettled, unemployment remains high at 9.1 percent, and there's no sign Washington will agree on fixing the economy. Typically, September is the worst month of the year for the stock market. Since 1950, the S&P 500 has fallen by an average of 0.6 percent during the month, according to the Stock Trader's Almanac. But September's losses tend to be made up quickly in October, with its average gain of 0.6 percent. Few think that will happen again this year. Sam Stovall, chief equity strategist at S&P, points to a fact that could encourage bullish investors, however: Since World War II, a sharp decline of 10 percent in more in the S&P 500 over one quarter has been followed by an average gain of 7.2 percent the next, he said. "Investors are no better than hyperactive first-graders playing musical chairs and trying to out-anticipate the other," he said. "This is no different. They start to think the market is oversold, and they should buy it when it's cheap." Corporate earnings, typically the main focus of the market, are becoming harder to forecast because of all the clashing signs of the global economy. Analysts are predicting that companies in the S&P 500 make 13 percent more over the three months ending in September than at the same time last year, according to data provider FactSet. Investors aren't as convinced and are sending stock prices lower. The S&P 500 now trades at 10.7 times what analysts think the companies will make over the next year, which suggests that stocks are cheap. When the economy looked like it was picking up in February, the index traded at a multiple of 13.6 times earnings. Its 10-year average is 15.

 

Even so, some companies are proving bearish investors wrong. Nike beat Wall Street's expectations when it reported its corporate results Sept. 22 and said that demand for athletic apparel and sneakers grew in nearly every market worldwide. Its stock jumped more than 5 percent. Some experts say investors should hold their noses and buy stocks anyway. "We remain positive regarding stocks relative to bonds and cash and view the current pullback as an opportunity," Bill Stone, chief investment strategist at PNC, wrote in a note to clients. "Stock valuations are attractive at the moment." Assuming, he added, that corporate earnings don't collapse - another sign that uncertainty rules right now on Wall Street.

Friday, September 16, 2011

Source: GARP

 

Worried that a mounting debt crisis in Europe could trip up the global economy, the Federal Reserve opened its vault Thursday to the central banks of other countries in an effort to head off a crippling shortage of dollars. The main recipient of the Fed's money is the European Central Bank, which will in turn extend dollar loans to banks in the nations that use the euro currency. Those banks do significant business in dollars, for instance making loans to customers operating around the world, and have been finding it harder to raise dollars from anxious investors. The initiative, which entails temporarily swapping dollars for foreign currencies, also involves the central banks of Britain, Switzerland and Japan, underlining the extent of international concern about Europe's deteriorating financial system. By tapping the Fed for dollars, the other central banks are taking advantage of long-standing arrangements, first put in place four years ago at the outset of the global financial crisis to prevent bank lending from freezing up. Global stock markets surged on the news of this coordinated response by some of the world's leading central banks. The Standard & Poor's 500-stock index in the United States rose 1.7 percent Thursday, and the German stock market closed up 3.2 percent. Asian markets rose in early Friday trading, with Japan's Nikkei 225 index up 1.7 percent at midday. The value of the euro currency rose on greater optimism that the European debt crisis can be resolved.

 

At the heart of Europe's financial problems are the hundreds of billions of dollars in risky government bonds held by the banks. Those bonds were issued by cash-strapped governments, like those of Greece and Portugal, and if they default, the banks could face massive losses. As concerns turn to the health of the banks themselves, investors are becoming wary of lending them money, at least at the previously low rates. The Fed will make short-term dollar loans to the ECB and other central banks through "swap lines," swapping dollars for an equivalent amount of euros, British pounds, Swiss francs and Japanese yen. The ECB will, in turn, make those dollars available to euro-zone banks, the Bank of England to British banks, and so on, in the form of three-month loans at a fixed interest rate. While these loans will not ease any losses the banks could suffer from a default, say, by Greece, the initiative lubricates the European financial system, preventing temporary shortages of cash from further weakening the banks and choking off growth. This step comes at an especially delicate moment for the banks as they prepare for the end of the year. Traditionally, as they get ready to publicly report their financial positions, banks have shifted into cash and away from riskier assets as a way of buffing their appearance. This year, however, cheap dollars are increasingly hard to come by. European banks have traditionally raised dollars by borrowing from U.S. money market funds. But those funds have cut back, responding in part to the anxiety of their own investors. U.S. officials view the action as a way to support Europe's efforts to contain its crisis while incurring no real risks of their own, because the ECB is guaranteeing that the Fed will not lose money. It is the other central banks that are extending loans to ailing European banks. "The major European banks are having trouble funding themselves in dollars," said Brian Bethune, an economist at Amherst College. "This puts that fire out, but doesn't solve the underlying problem of the financial institutions having large and unknown exposure to Greece and the other problematic countries like Portugal and Spain." The Fed previously provided dollars to European banks via swap lines on several occasions in 2008 during some of the worst periods of the financial crisis. This action received little public attention in the U.S. amid the Fed's controversial bailout of American International Group and its other extraordinary steps to salvage the financial system. But ECB President Jean-Claude Trichet has described the swap lines as critical to avoiding a much deeper crisis in the world banking system. The swap lines have remained open since then, but this is the first time the ECB has used them to any great extent in the current crisis. The new lending program comes as European leaders are struggling to reach agreement on steps to address the debt crisis. In Athens, the Greek cabinet held a tense meeting Thursday about budget cuts and further austerity measures that the European Union is requiring in return for providing further bailout money. German Chancellor Angela Merkel and French President Nicolas Sarkozy told Greek Prime Minister George Papandreou on Wednesday that they would support his country so long as it met the tough spending goals.

 

On Thursday, Merkel again out one tool that could help resolve the crisis: eurobonds that individual European governments could use to borrow money at a relatively low interest rate because the entire euro zone would stand behind them. Such eurobonds, which would rely heavily on Germany's financial backing, are "absolutely wrong," Merkel said, according to wire services. Speaking at the Frankfurt Auto Show, she said that no "onetime thunderbolt" would do the trick and added that stabilizing the euro area would take time. But she stressed that her country had a "duty and responsibility" to secure the future of the euro. European finance ministers are scheduled to meet Friday in Poland on Friday, and U.S. Treasury Secretary Timothy F. Geithner will attend as an invited guest. He has been pushing senior European officials to take faster and more dramatic action to stem the chill spreading across the continent's financial system. European heads of state decided in July on new measures to address the threat of a government default. But those have yet to be put in place. The session will give Geithner a chance to speak to the group and lobby individual ministers.

Friday, September 16, 2011

Source: GARP

 

The head of the International Monetary Fund has called for bold and collective action to combat a slowing global economy and a worsening European debt crisis. IMF managing director Christine Lagarde also said she welcomed President Barack Obama's US job-creation plan. Mrs Lagarde will preside at her first annual meeting of the 187- nation lending institution next week. A former French finance minister, she took over at the IMF in June, succeeding Dominique Strauss-Kahn, who resigned in May to fight attempted rape charges. The charges were later dismissed. "We are certainly living through times of great economic anxiety," she said in an address at the Woodrow Wilson Centre. Her speech was billed as a preview of the issues the IMF will address at meetings in Washington next week. "Exactly three years after the collapse of Lehman Brothers, the economic skies look troubled and turbulent as global activity slows and downside risks increase," Mrs Lagarde said. "Without collective, bold action, there is a real risk that the major economies slip back instead of moving forward." Heavy debt loads were "knocking the wind out of the recovery". "Weak growth and weak balance sheets -- of governments, financial institutions and households -- are feeding negatively on each other, fuelling a crisis of confidence and holding back demand, investment and job creation," she said. She called this a vicious cycle that is gaining momentum, hastened by "policy indecisions and political dysfunction". Mrs Lagarde said Mr Obama's job-creation programme must coincide with a credible plan to shrink the federal budget deficits in coming years. For Europe, Mrs Lagarde said nations with huge debt burdens must get control of government spending. And she said banks need to boost their capital. Her comments followed critical remarks on Wednesday by World Bank President Robert Zoellick. He faulted the 17 nations that share the euro currency for failing to take tough actions to prevent the debt crisis in Europe. Mr Zoellick said the euro-currency nations created a shared currency without ensuring that it would work. Fears that Greece is headed for a default on its debt have troubled global financial markets. A Greek bankruptcy could destabilise other financially troubled European countries, such as Portugal, Ireland, Spain and Italy. It would also be a blow to many European banks, which are large holders of Greek government bonds.

Friday, September 16, 2011

Source: GARP

 

The launch of the Gulf single currency, which had been delayed following the withdrawal of the UAE and Oman, is on track, Saudi Arabia's Central Bank Governor Muhammad Al Jasser said. Al Jasser said on the sidelines of a meeting of Arab central bank governors in Doha that the economic conditions in the Gulf are "excellent" for forming a monetary union and that a plan to launch a Gulf single currency was on track. "There was no postponement, and I have said from the beginning that there will not be a specific date [for the single currency launch]... the economic situation in our countries is excellent and nothing is delaying the currency," he was quoted as saying. The UAE and Oman have withdrawn from the Gulf single currency plan. The UAE abandoned the plan in May 2009 withdrawing in protest against placing the forerunner of the future joint central bank in Riyadh. The Institute of International Finance, or IIF, has pointed out that a monetary union between the other four countries of the GCC would be delayed due to a lack of progress in putting institutional arrangements in place, the IIF said. Although most of the technical and policy convergence criteria have been achieved, a monetary policy framework and a common system of payments and settlements are yet to be put in place, said the Washington-based institute. According to economists, it is unlikely that a GCC currency will be active within the next few years. Economists argue that the Gulf monetary union needs to establish monetary independence for member countries, all of which are pegged to the US dollar, except Kuwait. Al Jasser said the kingdom had no plans to revalue the riyal at this time. The UAE and Saudi Arabian central bank governors said on Thursday that they were happy with current interest rate levels in their countries. Sultan bin Nasser Al Suweidi, the UAE Central Bank Governor, said on the sidelines of the meeting that the current interest rates were good and there was no need to change them.Al Jasser also said he was happy about the rates. The Saudi central bank has been keeping its repo rate at two per cent since January 2009 and the reverse repo rate at 0.25 per cent since June 2009. Saudi Arabia's currency is pegged to the US dollar, which limits the central bank's scope to combat inflation because it needs to keep interest rates closely aligned with US benchmarks to avoid excessive pressures on the riyal. Al Jasser said that "everyone" was concerned over the fragile state of the US economy and Europe's ongoing sovereign debt crisis. His comments did not provide a vote of confidence for the United States, nor for the eurozone, as he also said Saudi Arabia would not consider purchasing eurozone debt. With the US dollar under pressure since Standard & Poor's unprecedented US debt downgrade, speculation has also grown over whether GCC countries might consider revaluing their currencies. While Al Jasser drew attention to the fact that Saudi Arabia is not interested in incurring risk by buying eurozone debt, he didn't address any Middle East exposure to the eurozone debt crisis via other ties. Outside market watchers, however, can point to possible risks for the area. Arab countries hit by unrest may need to turn to financial support from international institutions such as the World Bank and the International Monetary Fund as growth slows in the region, central bank governors said. "They [Arab central bank governors] expressed their fears from an expected drop in growth rates this year," they said after the meeting. The central bank governors also said they would offer support to each other. "The governors expressed their support to all central banks in Arab countries that are witnessing political developments and transformations," they said.

Thursday, September 15, 2011

Source: GARP

 

Saudi Arabia is not concerned about US debt and the world's No. 1 oil exporter is also not looking into buying euro zone debt, Saudi Arabian Monetary Agency Gov. Muhammad Al-Jasser said Wednesday. Gulf crude exporters, which mostly peg their currencies to the dollar, are major holders of Treasuries and other US assets, with oil -- priced in dollars -- their main source of government income. Asked if the OPEC member was worried about the US debt and was considering purchasing euro zone sovereign debt, Al-Jasser said: "No", Reuters reported. Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: "Al-Jasser's remark makes every sense, both from a structural perspective and in view of the prevailing economic realities and risks. The Kingdom's heavy reliance on dollar-denominated oil revenues and a long and successful history of maintaining a credible peg to the US dollar create a different backdrop for policy than is the case for instance in China. With a steady influx of US dollars, the Kingdom will naturally seek to place a significant portion in highly rated US dollar-denominated securities." Even following Standard & Poor's downgrade, he said there are few, indeed effectively no, credible contenders to US Treasuries in this regard. Moreover, recent indications suggest that further downgrades are unlikely in the near term while efforts toward fiscal consolidation are under way, albeit in a politically charged atmosphere. The dollar peg itself is not in question. If anything, its role as an anchor of stability and predictability has been enhanced in an environment of intense global economic uncertainty. "Significant diversification into European bonds would also represent a risky choice at a time when fiscal pressures in a number of euro zone countries are intense and a credible, sustainable solution to the crisis is yet to be formulated. Even in an optimistic scenario, the European bond markets are likely to experience significant volatility and hence do not represent an obviously more attractive alternative to US Treasuries," Kotilaine said. Paul Gamble, head of research at Riyadh-based Jadwa Investment, said: "It is understandable that the Kingdom will say it is not concerned about the US rating downgrade as Saudi Arabia is a large holder of US government debt. The US is still top-rated by the two other leading credit rating agencies and no other country provides the same size, breadth of liquidity of capital market instruments as the US does. Given problems in the euro zone, a cautious stance toward sovereign debt from the region is appropriate." Ratings agency S&P last month cut the US long-term credit rating by one notch in an unprecedented blow due to concerns about the nation's budget deficits and climbing debt burden.

Fears of debt contagion in the euro zone have been shaking the global markets over the past months. On Wednesday, the euro and European stocks were lifted by an announcement by the head of the European Commission that it would soon present options for issuing a common euro zone bond. Al-Jasser also told reporters after meeting central bank governors of Qatar, Kuwait and Bahrain in Doha that the economic situation in the four countries aiming to form a monetary union was "excellent" and that a plan to launch a Gulf single currency was on track. "There is no postponement, and I have said from the beginning that there will not be a specific date (for the single currency launch) ... the economic situation in our countries is excellent and nothing is delaying the currency," Al-Jasser was quoted by Reuters as saying.

Thursday, September 15, 2011

Source: GARP

 

European banks are facing a reckoning over hundreds of billions of dollars in loans extended to the continent's cash-strapped governments with potential losses so large, if countries default, that some financial firms could be put out of business. The tumbling value of government bonds issued by some European governments is already undermining the health of major banks. On Wednesday, Moody's Investors Service cut the credit rating of two large French banks, due to their holdings of Greek government bonds and to wider concerns about whether investors will continue to trust European banks with their money. If a major bank were to fail, that could send shock waves across the Atlantic, buffeting U.S. financial companies with close ties to their European counterparts or major investments in Europe. The downgrades by Moody's added fuel to a debate among European and U.S. policymakers over whether the continent's banks are mostly healthy or instead need billions of dollars in additional capital to withstand likely losses on loans made to countries such as Greece, Portugal and Italy. Greek bonds are already being resold at half their face value because of the high risk of default. If these losses mount, they could eat away at the capital buffer of banks across Europe, raising the prospect of an outright bank failure - which some financial analysts fear could cause the global financial system to seize up as it did after the Wall Street investment bank Lehman Brothers collapsed in 2008.

 

Capital point of contention

The question of whether European banks are dangerously short of capital will be a point of contention as European finance ministers gather in Poland on Friday and the International Monetary Fund holds its annual meetings next week. IMF Managing Director Christine Lagarde has argued that European banks need a quick and large capital infusion, and U.S. Treasury Secretary Timothy F. Geithner in a CNBC interview on Wednesday said that European leaders are "behind the curve" in addressing the region's banking and other problems. In cutting the rating of Credit Agricole, Moody's cited the French firm's "sizeable exposure to the Greek economy." The rating company downgraded Societe Generale because of broader concerns about the outlook for French banks. This action may make it more difficult or more expensive for the banks to raise the money they need to operate - bad news in an environment where financial firms already mistrust each other and are charging more to lend to each other. French bank officials have said they regard their capital buffers as adequate, and French central bank governor Christian Noyer on Wednesday said Moody's action was "relatively good news." With some investors predicting that Moody's would slash the banks' rating even more, Noyer told French radio, "It's a very limited downgrade," according to wire service reports. Some banks have been turning to the European Central Bank for help. On Wednesday, the ECB reported that two European banks had tapped it for dollar-based loans, a sign the firms were struggling to find the money they need on the open market. The banks were not named.

 

In an interview Tuesday, Lagarde said that possible losses on government bonds, combined with the slowdown in the European economy, may make banks overly cautious, restricting lending at a time when more credit is needed to boost economic activity. "Banks have to be in a position to make loans," she said. "The risk is that they take the view that deleveraging is the way to go. . . . We see that as a major threat to growth." European regulators examined the strength of European banks in July, and these "stress tests" yielded new information about which firms have lent the most money and made the biggest investments in the region's weakest economies. The sums involved are substantial, potentially dwarfing the amounts of capital banks have set aside as a buffer against possible losses. According to data from the Bank for International Settlements, European banks as of April 1 had more than $2.1 trillion at risk in Greece, Ireland, Portugal, Spain and Italy, nations that are struggling with high public debt, low growth and waning investor confidence. Greece, Ireland and Portugal have already received international bailouts. Spain and Italy are battling to avoid the need for help. French and German banks alone hold about $260 billion in government bonds from those five countries, the BIS data show. Financial analysts and the banks themselves increasingly recognize that these holdings may be worth less than their face value. But estimating the possible losses - and deciding whether banks should account for them now - could prove controversial. These steps could force Europe to declare that nations such as Italy or Spain are poor credit risks. Since the advent of the 17-nation currency union a decade ago, European banks have been encouraged to buy government bonds under rules that have treated them as risk-free investments that would almost certainly be repaid. That approach has proved faulty. In their most recent financial statements, some European banks have admitted as much by "writing down" the Greek bonds on their books - in other words, acknowledging they are worth less than previously stated. The question remains open of whether the bonds of other countries should receive similar treatment. The answer depends in part on what happens in Greece. If a Greek default is avoided or limited in scope, with losses to bondholders kept to a minimum, then bonds issued by large nations like Italy and Spain won't have to be written down. But if Greece were to default altogether, it would raise the risk of the same happening elsewhere and force banks to prepare for potentially devastating losses on bonds of other governments. In its analysis, Moody's assumed banks might have to write off as much as 60 percent of the value of their Greek bonds, 50 percent of their Irish and Portuguese bonds, 10 percent of their Spanish bonds, and 7 percent of their Italian bonds. Hung Tran, deputy director of the Institute of International Finance, said the likely losses on government bonds were "manageable" for banks in Europe. But he also said Europe must acknowledge that different countries pose different credit risks.

Wednesday, September 14, 2011

Source: GARP

 

The largest U.S. banks will be required to show regulators how they would break up and sell off their assets if they are in danger of failing. The Federal Deposit Insurance Corp. voted 3-0 Tuesday to approve the rules, which were mandated under the financial overhaul passed by Congress last year. They are designed to reduce the chances of another government bailout of Wall Street banks in the event of another financial crisis. The rules require banks with $50 billion or more in assets to submit so-called living wills to the FDIC, the Federal Reserve and the Financial Stability Oversight Council and send revised plans annually. Among the banks affected are Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and JP-Morgan Chase & Co. The biggest banks of the group would have to start filing their plans next July. The others wouldn't be due until 2013. The FDIC says that 124 financial firms plus 37 federally insured banks and thrifts will be subject to the requirements. Twenty-six of the institutions are U.S. banks or financial firms. The rest are U.S. subsidiaries of banks based in foreign countries. Regulators would have the power to seize and dismantle those banks that threaten the broader financial system. They also have the power to designate other firms as potentially threatening the financial system and require them to submit plans. The plans must include detailed information on a bank's businesses and operations, structure, assets and liabilities, capital cushion held against risk, and how much they owe other big financial institutions. If their operations change, the banks would have to submit revised plans within 45 days. Based on their review of the plans, the regulators are empowered to order banks to make changes to their operations, such as selling assets or divisions. They also can reject the plans and order banks back to the drawing board.

 

Wednesday, September 14, 2011

Source: GARP

 

The head of the World Bank is criticizing the 17 countries that share the euro currency for not taking tough actions to prevent the debt crisis in Europe. Robert Zoellick said Wednesday that the nations did not act responsibly because they created a shared currency without ensuring that it would work. He said they should have first considered those nations that couldn't compete in global trading markets and those that are burdened by debt. "The global economy has entered a new danger zone with little running room as European countries resist difficult truths about the common responsibilities of a common currency," Zoellick said. Fears that Greece is headed for a default on its debt have roiled markets for days. A Greek bankruptcy could destabilize other financially troubled European countries, such as Portugal, Ireland, Spain and Italy. It would also be a severe blow to many European banks, which are large holders of Greek government bonds. Moody's on Wednesday downgraded the credit ratings of two French banks, Societe Generale and Credit Agricole. Treasury Secretary Timothy Geithner said Wednesday that European leaders know that they have been "behind the curve" in dealing with the debt crisis. But Geithner said in an appearance on CNBC that European governments now understand the severity of the situation and have the financial resources "to do what it takes to hold this thing together." In his speech, Zoellick also criticized the United States for failing to deal with soaring budget deficits and not moving forward with free trade agreements. "It is not responsible for the United States to falter in facing fundamental issues such as unsustainable growth in entitlement spending, the need for a pro-growth tax system and a stalled trade policy," Zoellick said in a speech at George Washington University. Japan also shared blame for the latest risks to the global economy, Zoellick said. Japan had resisted making the structural reforms to its economy that would allow the world's third largest economy to achieve stronger growth. Zoellick said that the United States, Europe and Japan had "procrastinated for too long on taking the difficult decisions" to fix problems in their economies. "Unless Europe, Japan and the United States can ... face up to responsibilities, they will drag down not only themselves but the global economy," Zoellick said. He made his comments in advance of the annual meetings next week in Washington of the 187-nation World Bank and its sister lending institution, the International Monetary Fund.

Tuesday, September 13, 2011

Source: GARP

 

UK BANKS will be forced to boost their capital and separate their core operations from riskier trading and investment banking at an annual cost of up to pound(s)7 billion, under sweeping reforms announced yesterday. The final recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, call for a bank's ringfenced operation to have its own board of directors and equity capital equivalent to 10 per cent of risk-weighted assets. But in concessions, the banks will be able to chose which non- core businesses to place inside the ringfence, with a deadline of 2019 to implement some of the toughest measures in the world. The recommendations come after a year-long investigation into the near-collapse of the UK banking system in 2008. They punctuate a remarkable turnround for a financial centre that once boasted of its "light touch" approach to regulation. The Vickers report also said that banks must maintain additional loss-absorbing capital, such as so-called bail-in bonds or contingent convertible bonds known as "cocos" over and above their equity, equal to a further 7 per cent to 10 per cent of assets adjusted for risk. That rule puts the UK on a par with Switzerland, which also has an outsized banking sector. Both countries are seeking to avoid the problems of -Iceland and Ireland, where financial industry woes devastated the broader economy. Sir John said the reforms would be "fundamental and far- reaching" and that they would have helped prevent the high-profile failure of banks such as Northern Rock and Royal Bank of Scotland. "Measures of this kind will do a lot to contain the damage, as well as to reduce the risks in the first place,'' he said, adding that the reforms would bring UK banking "back to where it used to be". The CBI employers' organisation warned that the proposals risked leaving UK banks at a "disadvantage to their overseas competitors". "The proposals on capital requirements are out of step with internationally agreed measures under way so will increase the cost of lending for UK businesses," it said. Bank stocks trimmed early heavy losses in London and outperformed rivals in Europe as investors reacted to the report. The additional costs - which the commission estimated at pound(s)4 billion-pound(s)7 billion - will result from wholesale lenders charging banks more to fund operations outside the ringfence, which will lose a government guarantee and the perceived safety of diversification.

 

UK commission goes where other regulators fear to tread

ANALYSIS: THE INDEPENDENT Commission on Banking's plan to boost minimum equity and overall capital requirements for British banks would put the UK among the world's toughest regimes, and the proposal to ringfence retail banking is unmatched in large financial centres. However, banks in other countries may eventually find themselves having to make similar, although less drastic changes in their legal structures, as part of the global plan to force financial institutions to write recovery and resolution plans, also known as living wills, lawyers said. The commission, led by Sir John Vickers, wants banks to put their core businesses - including retail banking and small business lending - into a separate entity with its own board of directors and its own equity capital equal to 10 per cent of assets, adjusted for risk. That capital level is well above the global minimum of 7 per cent set by the Basel Committee on Banking Supervision and puts the UK up with Switzerland and some Asian countries for overall capital requirements. Most other EU regulators plan to stick with the Basel minimums. There is even less support for formal ringfencing. Asian and US regulators dismissed the idea. "In the emerging world . . . there will still be a desire to grow their financial sectors ... Hence erecting barriers to asset transformation or increasing the costs of intermediation . . . is unlikely to be seen as an attractive option," said Richard Reid, research director of the International Centre for Financial Regulation. Many continental European regulators point to the relative resilience of some universal banks during the 2008 banking crisis as evidence that the commission has fundamentally misdiagnosed the problem. They worry that higher capital levels could hit the real economy, single-country solutions could harm the common market and that free flowing liquidity and capital are critical to keeping the banking sector healthy. "We should do everything to avoid what is detrimental to the single financial market. Not only would this cause higher costs for consumers, but it would also reduce the stability and resilience of the European banking sector," Josef Ackermann, Deutsche Bank's chief executive, has said. The draft of the EU law that will set minimum capital requirements for the 27-nation bloc has been seen by some as preventing the UK from enacting Vickers's 10 per cent minimum rule. "The UK has gone out on a limb . . . Other countries are likely to fear the damage such a move could cause their banks, the economy and, ultimately, the taxpayers who funded the bailouts," said Peter Green, partner at global law firm Morrison Foerster.

But Michel Barnier, the EU internal market commissioner, has pledged to give the UK enough "flexibility" to implement the Vickers recommendations.

Tuesday, September 13, 2011

Source: GARP

 

The dreaded D-word for those struggling with Europe's economic crisis is no longer just "debt."

 

Try "default."

European politicians, who denied for months that bankruptcy was an option as Greece struggled to bring down an enormous budget deficit, are now beginning to acknowledge the possibility. Nervous investors appear to increasingly believe default is just around the corner. They have withdrawn billions of dollars from Europe's stock markets over the last few weeks. Beyond cold-shouldering Greece, investors are punishing European banks that hold huge piles of government debt and pulling back on lending money to traditionally safe countries such as Italy. On Monday, fears that Athens is heading inexorably toward default and deepening doubts over whether Europe's leaders have the political will or skill to keep the debt crisis from spiraling out of control sent the region's stocks tumbling. Banks in France and Germany scrambled to assure investors that they could survive their exposure to sovereign debt, but were hammered all the same. In a separate move, Britain unveiled a radical plan to overhaul its banking system to protect ordinary consumers if the institutions' riskier activities go disastrously wrong, as they did during the global financial meltdown three years ago. The sharp sell-off in the markets reflected the growing sense that Greece, with one bailout behind it and another one promised, is nearly out of time. Athens is caught in a dispute over the pace of its spending cuts with the European Union and the International Monetary Fund, which have threatened to withhold the next installment of emergency loans, worth about $11 billion, if it doesn't speed up its reforms. Without the cash infusion, Greece will probably go bust by the end of October and the default could trigger a worldwide credit crunch. The drop in the markets also followed official statements and media reports out of Germany suggesting that Berlin, Europe's paymaster, was beginning to prepare for a Greek default. The head of the junior party in Germany's ruling coalition wrote in an article published Monday that there should "no longer be any taboos" when it comes to solving the debt crisis. A well-managed default should no longer be ruled out, Philipp Roesler of the Free Democrats said in the newspaper Die Welt. Other German officials have raised the prospect of Greece leaving the 17-nation Eurozone.

 

For months, German Chancellor Angela Merkel has flatly dismissed talk of restructuring Athens' debt. Her refusal to entertain the idea and the conflicting signals now emerging from her government have heightened unease among investors. Athens proposed a property-tax hike over the weekend to help slash its massive budget deficit. But skepticism prevails over its ability to follow through. EU and IMF inspectors are due back in Greece this week, and there are signs that the property-tax proposal will mollify them. But speculation remains rife among investors that even if not imminent, bankruptcy is still inevitable. "We're moving closer and closer to the deadline here," said Julian Callow, chief European economist for Barclays Capital in London. "There's real concern here that Europe doesn't have an obvious route map to resolve the situation." Worse, the debt crisis has widened to engulf Italy, which suffers from a stagnant economy and a staggering debt load of $2.5 trillion. Borrowing costs have hit painful levels for Rome, which has hastened to come up with an austerity plan to satisfy investors. Any default by Greece would be completely dwarfed by a similar fate for Italy, whose size would overwhelm attempts by other members of the Eurozone to save it. After being accused of equivocating over spending cuts, Italian Prime Minister Silvio Berlusconi vowed Monday to shepherd the austerity package through the lower house of Parliament as soon as possible. Berlusconi, badly weakened by a series of financial and sex scandals, is due in Brussels on Tuesday to assure European officials of his commitment to putting Italy's budget in order. Heavy exposure to Italian and Greek public debt made France's three largest banks the biggest losers in the French stock market Monday, which dropped by 4% overall. The three banks -- BNP Paribas, Credit Agricole and Societe Generale -- could all suffer a humiliating credit downgrade by ratings agencies this week, which would only aggravate their troubles. Francois Baroin, France's minister for the economy, denied that there was any threat to the solvency or liquidity of French banks. "There's no urgency for the banks, because those that are actually being massacred on the bourse have all the means to respond to this," Baroin told reporters. "Whatever the Greek scenario and whatever provisions have to be made, French banks have the means to deal with it," said Christian Noyer, the governor of France's central bank. Germany's big banks also led the market plunge in that country Monday. The main German index has lost a third of its value in the last two months. And in Britain, banks were hit on the London Stock Exchange by the government's announcement that it would try to implement the most drastic shake-up of the country's financial system in decades. Changes proposed by a blue-ribbon commission advocate separating financial institutions' retail operations from their wholesale and investment activities. That way, Britain's finance minister said, ordinary depositors will not be hurt if banks suffer major losses through risky investments like subprime mortgages. Although some banks are wary of the costs and complications involved, Chancellor of the Exchequer George Osborne said such a change would solve "the British dilemma" -- namely, "how Britain can be the home of successful international banks that lend to families and businesses without exposing British taxpayers to the massive costs of those banks fail- ing." Under the plan, the banks would have until 2019 to complete the switch. "This may seem a long time. It is," said John Vickers, the head of the commission that proposed the overhaul. "But short-termism got us into this mess, and we need long-termism to build a more stable system for the future."

Tuesday, September 13, 2011

Source: GARP

 

Investors fretted about a chaotic Greek debt default Tuesday even though German Chancellor Angela Merkel indicated the debt-ridden country was making progress in meeting the demands of international creditors. Confirmation that Italy's finance minister had discussions with China's sovereign wealth fund last week amid speculation that Rome is looking to persuade Beijing to buy its bonds helped support U.S. stocks late Monday. That positive momentum held for much of the Asian session, but faded in European trading. Fear that Greece will soon run out of cash remains the driver in the markets, weighing on stocks in Europe and driving down the yield on German ten-year bonds to record lows. The fall in the German yield to 1.69 percent is another indication that investors are reluctant to pile in to supposedly risky assets. "Markets are tired of talk and rumour on how to get Europe back on its feet and are still waiting for concrete results," said Ben Critchley, a sales trader at IG Index. In Europe, the FTSE 100 index of leading British shares was down 1 percent at 5,078 while Germany's DAX fell 0.7 percent to 5,035. France's CAC-40 bore the brunt of the selling as investors continued to fret about the financial health of its banks - it was down 2.2 percent at 2,791. BNP Paribas was in the spotlight of investor concerns trading 7 percent lower. Wall Street was poised for a retreat at the open - Dow futures were down 1 percent at 10,882 while the broader Standard & Poor's futures fell 1.2 percent to 1,144. Investors are particularly nervous that financial aid will be pulled from Greece, which is trying to get a grip on its debts, now standing at over 150 percent of national income. Merkel sounded a note of optimism regarding Greece's chances of getting the next batch of bailout cash from the so-called troika - the European Commission, the European Central Bank and the International Monetary Fund. Representatives from the three organizations are due back in Athens this week. "Everything that I hear from Greece is that the Greek government has hopefully understood the signs of the time and is now doing the things that are on the daily agenda," Merkel said on rbb-Inforadio. "The fact that the troika is returning means that Greece has started doing some things that need to be done." Merkel also warned of the perils of an "uncontrolled" Greek bankruptcy. Even if Greece gets its next installment of euro8 billion ($11 billion), the markets think that the country will have to concede defeat some time over the next year. "Should Athens meet all its payment obligations over the coming six months, markets once again price in an almost 70 percent likelihood of the country defaulting over the following six months," said Lutz Karpowitz, an analyst at Commerzbank. "The possibility of Greece not defaulting over the coming 12 months is therefore as low as 10 percent," he added. Those fears are starting to impact on the euro, which has been resilient over the last few months on signs the European Central Bank was raising rates. Last week's indication from the bank that rate hikes are off the agenda has prompted a reassessment, and allowed the Greek default fears to start driving the currency lower. On Monday, it struck a seven-month low below $1.35. It was trading steadily Tuesday, down only 0.1 percent at $1.3637. Earlier in Asia, stocks remained relatively buoyant following the late flourish on Wall Street the day before. Japan's benchmark Nikkei 225 index gained nearly 1 percent to close at 8,616.55 while Australia's S&P/ASX200 index rose 0.9 percent to 4,072.70. Mainland Chinese investors were preoccupied Tuesday with domestic concerns, fretting over further credit tightening to counter inflation, which is hovering near three-year highs. The benchmark Shanghai Composite Index lost 1.1 percent to 2,471.31. The smaller Shenzhen Component Index dropped 1.6 percent to 1,077.13. Meanwhile, oil prices recovered some ground. Benchmark oil for October delivery was up 44 cents to $88.63 in electronic trading on the New York Mercantile Exchange.

 

Tuesday, September 13, 2011

Source: GARP

 

 UK BANKS will be forced to boost their capital and separate their core operations from riskier trading and investment banking at an annual cost of up to pound(s)7 billion, under sweeping reforms announced yesterday. The final recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, call for a bank's ringfenced operation to have its own board of directors and equity capital equivalent to 10 per cent of risk-weighted assets. But in concessions, the banks will be able to chose which non- core businesses to place inside the ringfence, with a deadline of 2019 to implement some of the toughest measures in the world. The recommendations come after a year-long investigation into the near-collapse of the UK banking system in 2008. They punctuate a remarkable turnround for a financial centre that once boasted of its "light touch" approach to regulation. The Vickers report also said that banks must maintain additional loss-absorbing capital, such as so-called bail-in bonds or contingent convertible bonds known as "cocos" over and above their equity, equal to a further 7 per cent to 10 per cent of assets adjusted for risk.

 

That rule puts the UK on a par with Switzerland, which also has an outsized banking sector. Both countries are seeking to avoid the problems of -Iceland and Ireland, where financial industry woes devastated the broader economy. Sir John said the reforms would be "fundamental and far- reaching" and that they would have helped prevent the high-profile failure of banks such as Northern Rock and Royal Bank of Scotland. "Measures of this kind will do a lot to contain the damage, as well as to reduce the risks in the first place,'' he said, adding that the reforms would bring UK banking "back to where it used to be". The CBI employers' organisation warned that the proposals risked leaving UK banks at a "disadvantage to their overseas competitors". "The proposals on capital requirements are out of step with internationally agreed measures under way so will increase the cost of lending for UK businesses," it said. Bank stocks trimmed early heavy losses in London and outperformed rivals in Europe as investors reacted to the report. The additional costs - which the commission estimated at pound(s)4 billion-pound(s)7 billion - will result from wholesale lenders charging banks more to fund operations outside the ringfence, which will lose a government guarantee and the perceived safety of diversification.

UK commission goes where other regulators fear to tread

ANALYSIS: THE INDEPENDENT Commission on Banking's plan to boost minimum equity and overall capital requirements for British banks would put the UK among the world's toughest regimes, and the proposal to ringfence retail banking is unmatched in large financial centres. However, banks in other countries may eventually find themselves having to make similar, although less drastic changes in their legal structures, as part of the global plan to force financial institutions to write recovery and resolution plans, also known as living wills, lawyers said. The commission, led by Sir John Vickers, wants banks to put their core businesses - including retail banking and small business lending - into a separate entity with its own board of directors and its own equity capital equal to 10 per cent of assets, adjusted for risk. That capital level is well above the global minimum of 7 per cent set by the Basel Committee on Banking Supervision and puts the UK up with Switzerland and some Asian countries for overall capital requirements. Most other EU regulators plan to stick with the Basel minimums. There is even less support for formal ringfencing. Asian and US regulators dismissed the idea. "In the emerging world . . . there will still be a desire to grow their financial sectors ... Hence erecting barriers to asset transformation or increasing the costs of intermediation . . . is unlikely to be seen as an attractive option," said Richard Reid, research director of the International Centre for Financial Regulation. Many continental European regulators point to the relative resilience of some universal banks during the 2008 banking crisis as evidence that the commission has fundamentally misdiagnosed the problem. They worry that higher capital levels could hit the real economy, single-country solutions could harm the common market and that free flowing liquidity and capital are critical to keeping the banking sector healthy. "We should do everything to avoid what is detrimental to the single financial market. Not only would this cause higher costs for consumers, but it would also reduce the stability and resilience of the European banking sector," Josef Ackermann, Deutsche Bank's chief executive, has said. The draft of the EU law that will set minimum capital requirements for the 27-nation bloc has been seen by some as preventing the UK from enacting Vickers's 10 per cent minimum rule. "The UK has gone out on a limb . . . Other countries are likely to fear the damage such a move could cause their banks, the economy and, ultimately, the taxpayers who funded the bailouts," said Peter Green, partner at global law firm Morrison Foerster. But Michel Barnier, the EU internal market commissioner, has pledged to give the UK enough "flexibility" to implement the Vickers recommendations.

 

Tuesday, September 13, 2011

Source: GARP

 

Bank of Ireland has fined Goldman Sachs [euro]160,000 following an investigation into regulatory breaches at the investment bank. The Central Bank found that the bank failed to manage, monitor and report accurately its regulatory counterparty risk capital requirement during an 18-month period between July 2008 and December 2010. In addition, the firm's internal control mechanism failed to identify that its regulatory counterparty risk capital requirement was incorrectly calculated, the investigation found. Goldman Sachs disclosed errors in calculations of the firm's counterparty risk requirement to the Central Bank in December 2010. In a statement yesterday, the Central Bank said that in deciding the appropriate penalty to impose, it had taken account of the fact that the regulatory capital maintained by the firm during the period was at all times in excess of its capital requirements, and that the bank had co-operated with the investigation from an early stage. Director of enforcement Peter Oakes said the existence of proper systems and controls to ensure continuous and proper calculation of risk and regulatory capital requirements was essential to the maintenance of stable and properly financed financial service providers. The reliance on automated systems should be tempered by adequate oversight to ensure that systems and controls are comprehensive and proportionate. "Firms are reminded to monitor and test their internal control systems on a regular basis and should take great care to ensure that any changes to systems are properly and fully tested so that regulatory requirements are adhered to and all regulatory reports provided to the Central Bank are accurate," he said.

Tuesday, September 13, 2011

Source: GARP

 

 The rupee fell to its 13-month low on Monday as traders rushed to buy dollars with global markets increasingly turning risk-averse. A drop in India's factory output in July, announced on Monday, also increased fears that domestic growth will be affected in fiscal 2012, impacting the rupee. A falling rupee will make the fight against inflation by Reserve Bank of India (RBI) difficult as the rupee value of imports, particularly oil import, will rise. The fall in the local currency in the past one month is more than the fall in crude prices, making it costlier for India. The local currency ended at 47.22 per $1, down from 46.56 on Friday, the lowest close since 20 July 2010. It has lost 1.42% on Monday and 3% in the past six trading days. The drop in industrial production has rekindled fears of a pullout of funds by foreign institutional investors (FIIs) from the equity markets, said N.S. Venkatesh, treasurer at IDBI Bank Ltd. FIIs bought Indian equities worth a net $520 million (around '2,444 crore) till 9 September. "That will increase dollar demand in India. Also, dollar strength internationally, particularly against the euro, has weighed against the rupee domestically," he said.

 

Euro has weakened against the dollar over concerns that Europe sovereign debt crisis was taking the turn for the worse. The euro fell 0.4% to $1.3611 on Monday, on speculation that Germany is preparing for a default by Greece, Bloomberg news agency reported. The Dollar Index, which tracks the US currency against its trading partners, was 0.2% higher. The fall in the rupee could be potentially inflationary because crude oil prices have not fallen in line with the Indian currency, said Mohan Shenoi, treasurer at Kotak Mahindra Bank Ltd. "It is inflationary because Brent crude, which makes an important component in the Indian basket, has not fallen as much," Shenoi said. Brent crude for October delivery is trading at $110.76 per barrel, though lower than $120 per barrel in April but higher than the $83 per barrel about a year ago. Because of the rupee's fall, India will have to spend more to buy each barrel of crude. Shenoi said the rupee is now "in new territory". "It has fallen significantly, mirroring the dollar's rise globally. If it falls below 47.50, then it will be difficult to gauge as to how much it will weaken further," he said. A slower than expected growth in industrial production added to the gloom in the currency market. Industrial production grew at 3.3% in July versus 8.8% in June because of a 15.2% drop in capital goods versus a 38.2% growth in June. Market expected industrial production to expand 6.2%. A disappointing industrial growth data added to the rupee's woes, said Samiran Chakraborty, head of research at Standard Chartered Bank. "But global risk-aversion in favour of the dollar has to be the primary reason for the rupee's fall. And with the uncertainties particularly in the European region continuing it is very difficult to predict currency movements," he said. Meanwhile, economists expect RBI to hike interest rates by another 25 basis points (bps) in its mid-quarter monetary policy review later this week. One basis point is one hundredth of a percentage point. "Industrial production grew slower than expected mostly due to the volatile capital goods segment and on the back of last year's high base. Abstracting from the volatility, growth is moderating and not collapsing. With inflation pressures not abating, this should keep the RBI in tightening mode and we expect a 25 bps rate hike this Friday," said Leif Eskesen chief economist, India and Asean, at HSBC.

Monday, September 12, 2011

Source: GARP

 

The yield on the 10-year Treasury note hit another record low on Monday as fears intensified that Greece will default on its debt. The Treasury Department auctioned three-year notes at a record-low yield as traders rushed to buy investments seen as lower-risk. The yield on the 10-year note was 1.95 percent at 4:40 p.m. compared with 1.92 percent late Friday. It fell earlier to 1.87 percent, the lowest since the Federal Reserve Bank of St. Louis began keeping daily records in 1962. During the financial crisis in late 2008, the 10-year yield hit a low of 2.05 percent. Greece is struggling to show its neighbors that its debts are under control. Some are threatening to withhold its next round of bailout money. A default by Greece would cause the value of its government bonds to plunge. That could destabilize European banks that hold Greek debt. Those fears caused the stocks of major French and German banks to sink by as much as 10 percent Monday. There are few safe places remaining for traders to stash the billions of dollars flowing out of global stock markets, banks and European debt markets, analysts say. The dollar hit a seven-month high against the euro as concerns about Europe's economic stability added to demand for lower-risk investments. The euro also hit a 10-year low against the Japanese yen. That demand was apparent in an afternoon auction of three-year Treasury notes that were priced to yield 0.334 percent, the lowest auction yield on record. Yet demand was roughly the same as at recent auctions, analysts said. More auctions are planned in the coming days. The Treasury Department will auction 10-year notes Tuesday and 30-year bonds Wednesday. The price of the 10-year note fell 25 cents for every $100 invested. Bond yields rise as their prices fall. The 30-year bond's yield was nearly flat at 3.25 percent. Its price fell 6 cents per $100 invested. The three-month T-bill's yield was flat at 0.01 percent. Its discount wasn't available.

Monday, September 12, 2011

Source: GARP

 

Mounting fears over the possibility of a Greek debt default and signs of division within Europe's policymaking circles over how to deal with the crippling crisis combined Monday to send bank stocks sharply lower. Senior German politicians have suggested publicly in recent days that an orderly bankruptcy of Greece may be part of a solution to the country's problems. The notion, which has been a taboo so far in Europe's handling of the crisis, has spawned uncertainty in financial markets. The Stoxx 50 index of blue chip European shares tumbled 3 percent with many of the continent's leading financial groups, such as Deutsche Bank and BNP Paribas, down some 10 percent as investors worried over their exposure to potentially bad European debt.  France's Societe Generale, which dropped 10 percent, tried to calm investors with a statement saying its exposure to the euro's more imperiled economies is diminishing - at euro3 billion - and that it was accelerating plans to raise over euro4 billion ($5.4 billion). "The intensifying sell-off ... reflects heightened investor fear that Greece is on the verge of defaulting, which could plunge the weak global economy back into another Lehman-esque recession," said Lee Hardman, an analyst at the Bank of Tokyo-Mitsubishi UFJ. The euro also got hammered, falling at one stage Monday to $1.3495 - its lowest level since the middle of February. Since then, it has stabilized, trading flat at $1.3606. The euro has slumped since the European Central Bank indicated last Thursday that it won't be raising interest rates again anytime soon - the prospect of higher rates had helped prop up the currency despite the debt woes afflicting many of its members. The tensions in financial markets were fueled by a suggestion Monday from the general secretary of German Chancellor Angela Merkel's junior coalition partner that Greece could leave the eurozone. "In the final analysis, one also cannot rule out that Greece either must, or would want to, leave the eurozone," Christian Lindner said in an interview on ZDF television. Lindner's comments echo those made by his leader Philipp Roesler that Greece may have to default and reports that the country is looking at how it can protect its banks. "In case of emergency, the orderly bankruptcy of Greece must be part of that, if the necessary tools are available," Roesler wrote in a guest commentary in Monday's edition of Die Welt newspaper. In Berlin, an official in Chancellor Angela Merkel's office sought to downplay the talk of a Greek default or euro exit on Monday. Merkel's spokesman, Steffen Seibert, said Germany is "confident that Greece will be in a position to continue consistently along the road on which it has embarked" and that the current treaties don't foresee either a voluntary exit or expulsion of any country from the eurozone.

 

"Our clear aim is to stabilize the eurozone as a whole, in its entirety," Seibert said. Greece is struggling to convince international creditors that it's doing enough to get a handle on its mountain of debts in order to receive the next batch of money due from a multibillion bailout fund. At the weekend, the government announced it was imposing a two-year property tax to raise euro2 billion ($2.8 billion) and plug a budget gap identified by the European Union and the International Monetary Fund. Markets seem unconvinced that Greece will be able to avoid bankruptcy, especially in light of the latest musings from Germany. "With German officials seemingly in destructive overdrive, as per all the public talk of preparing for a Greek default and even a Greek euro exit, markets can hardly be blamed for the latest charge for the bunker and tin hats," said Marc Ostwald, market strategist at Monument Securities. The shock resignation Friday of the ECB's chief economist Juergen Stark helped fuel the turmoil in markets. Though the ECB said his departure was due to "personal reasons," investors think there's more to it than that. Stark has been a consistent skeptic over the bank's purchases of government bonds in the markets. Though the program is designed to prevent the debt crisis from enveloping Italy and Spain in particular, it potentially exposes the ECB to the risk of huge losses on shaky bonds. Disagreement over how to handle the debt crisis, which has already led to the bailout of three of the euro's 17 members, has been cited as one of the main reasons why it continues to flare up time and time again. Though Stark's resignation has been viewed negatively in the markets, some analysts think it may actually act as a catalyst for the ECB to take an even more central role in dealing with the debt crisis, especially with regard to the banking system. "The immediate fear over the erosion of the ECB's policy integrity hurt the euro, but investors may choose to take a different view if the ECB does take a material turn to the dovish side in the immediate future, which is considered rather essential right now to guarantee financial stability," said Chris Walker, a UBS analyst.

 

Monday, September 12, 2011

Source: GARP

 

Major British banks should ringfence investment banking operations from mainstream activities by 2019 to reduce the risks of taxpayers having to bear the cost of any future bailouts, a government-appointed commission recommended on Monday. The long-awaited reported from the Independent Commission on Banking said its proposals would cost the banks up to 7 billion pounds ($11 billion) a year. Shares in the major banks opened lower, with Barclays down 4.3 percent, Royal Bank of Scotland down 3.8 percent, Lloyds Banking Group 3.3 percent and HSBC 0.8 percent. The report, which broadly echoed the proposals in an interim assessment in April, also endorsed the sale of 632 branches by Lloyds Banking Group, but did not, as some expected, call for the divestiture of even more branches. Treasury chief George Osborne planned a statement in parliament Monday afternoon to respond to the report. The recommendations are intended to avoid a repetition of the credit crisis in 2008 when the British government bought up large chunks of the country's banking system after it ran into major financial difficulties. The British taxpayer now owns mortgage lenders Northern Rock and Bradford & Bingley, 83 percent of Royal Bank of Scotland and 41 percent of Lloyd's Banking Group. "The risks inevitably associated with banking have to sit somewhere, and it should not be with taxpayers," said the commission, chaired by Sir John Vickers, a former chief economist of the Bank of England. Vickers added in future, banks need much more equity capital, and that their debt "must be capable of absorbing losses on failure, while ordinary depositors are protected." The British Bankers' Association, the industry's main lobby group, said the planned reforms "need to be carefully analyzed and compared with those agreed internationally." In particular, it said an assessment of the reforms on the economy, the recovery and banks' ability to support their customers needs to be made. The report recommended that U.K.-based "systemically important banks" should be required to have a loss-absorbing cushion of at least 17 percent of risk-weighted assets in their retail operations - the ordinary banking functions of current accounts and lending. Lower capital requirements would be set for smaller banks. The Basel III agreement calls for banks to hold equity capital equal to at least 7 percent of risk-weighted assets. The commission ruled out a total separation of retail banking from wholesale and investment banking, in part because of the greater expense, and the potential difficulties of enforcing the changes under European law. Though the report conceded that the complete separation "would remove a channel of contagion risk from investment banking to retail banking (and vice versa)," it said it "would preclude support for troubled retail banks from elsewhere in banking groups."

Saturday, September 10, 2011

Source: GARP

 

Bank of America Corp. is preparing to slash 40,000 or more jobs nationwide, a dramatic retrenchment that reflects the deepening woes of the country's largest bank and the magnitude of the U.S. economic slowdown. The layoffs will come mainly from the BofA's sprawling consumer-banking operations, which will take a heavy toll on branches, loan centers and other offices throughout California. Bank of America has 45,000 employees in the state, about 1 in 6 of its nearly 300,000-person workforce, and is expected to roll out the job cuts over the next several years. The company, which for years was based in San Francisco and maintains its huge mortgage unit in Calabasas, also is in the process of closing 10% of its branches nationwide. California has the highest concentration of BofA branches in the U.S. with 956 throughout the state, though it has been losing ground in recent years to rivals like Wells Fargo & Co. and JPMorgan Chase & Co. The layoffs are another blow to California, with its battered economy and nearly 12% unemployment rate. From tellers to middle managers, laid-off Bank of America employees are likely to have a tough time finding new jobs. "We don't need to lose any jobs in this environment, whether in financial services or anywhere else," said Esmael Adibi, a Chapman University economist. The details of the cutbacks were not officially announced, but the information was disclosed by three Bank of America executives who have been briefed on the plan but were not authorized to speak publicly. Brian Moynihan, Bank of America's beleaguered chief executive, is expected to unveil details at an investor conference Monday in New York. Investors sent shares of the BofA down 3.1% to $6.98 on Friday on a day banks led the overall market sharply lower on more worries about global economies falling into a recession. The Dow Jones industrial average fell 303.68, or 2.7%, to 10,992.13. Executives met at the bank's Charlotte, N.C., headquarters Thursday and Friday to finalize the plan, which has been under discussion for months. Moynihan is grappling with how to wring more profit from the bank's core customer base, which includes about 58 million consumer and small-business accounts. At least one analyst said the cutbacks could weigh heavily on BofA's millions of Southern California customers, who would have to deal with fewer branches and longer lines for tellers.

 

"You're definitely going to see decreased service levels for consumers," said Christopher Whalen, a bank analyst at Institutional Risk Analytics. "They're talking about either closing branches or reducing the head count in the branches." Moynihan hopes to fashion a smaller but more focused company that can withstand the fallout from its disastrous 2008 takeover of mortgage lender Countrywide Financial Corp. in Calabasas. The home-lending unit has run up $30 billion in losses, and faces billions more in potential liability from a barrage of mortgage-related lawsuits. Federal regulators and private investors allege that Countrywide misled them about the quality of loans and bonds tied to high-risk mortgages bought during the housing boom. Earlier this month, federal regulators sued Bank of America and 16 rivals, contending that the banks sold loans to housing goliaths Fannie Mae and Freddie Mac under false pretenses. Bank of America's retrenchment is also being driven by the slack U.S. economy and darkening outlook for the banking industry. Intensifying worries about its prospects have cut Bank of America's stock price by more than half since mid-January, a far larger hit than its peers have suffered. "The financial-services industry as a whole is going to shrink," said Nancy Bush, a banking analyst and contributing editor at research firm SNL Financial. "We don't need as many loans, as many credit cards, as many mortgages as we did in the past two decades." The flailing economy has struck particularly hard at Bank of America, which critics say has been beset by poor management and a flawed growth strategy of rapid-fire acquisitions of other companies. To overcome its woes, BofA executives have worked for much of the past year on the ambitious restructuring known as Project New BAC, a reference to the ticker symbol for the company's stock. Moynihan has made a number of bold steps in recent weeks, including signing on billionaire Warren Buffett as a major shareholder. This week he ousted two senior executives, including Sallie Krawcheck, one of the highest-ranking women on Wall Street. The first phase of New BAC is designed to streamline the consumer businesses, including home loans, credit cards and wealth management. It also will make cuts in the corporate support staff, such as legal, marketing, human relations and finance employees. The bank previously had announced another 6,000 job cuts this year and has closed, sold or put on the auction block former Countrywide divisions that made loans through independent brokers, bought loans from smaller lenders and sold specialty insurance. Critics have urged Moynihan to go even further as he launches a second phase of the BAC project, which will analyze potential cost cuts and restructurings at some of the business lines focused on corporate and institutional clients. Some critics suggest Moynihan should put Countrywide, which still has a separate identity, into bankruptcy to stem lawsuits. There has also been talk of BofA selling all or part of its Merrill Lynch operation, which it bought during the financial crisis. The company has in the past denied that either of these options is under consideration. A spokesman for the company declined to comment. Shareholders said they would be watching the developments carefully, noting that Moynihan has been battling a credibility problem since he pledged to raise the dividend and then failed to follow through when regulators objected. "It's been painful," said Jonathan Finger, who runs a Houston financial firm with a major investment in BofA. "He's got to make the public and investors comfortable that the company is going to be strong and is going to be around." Finger and others believe that the cutbacks stem from Moynihan's desire to show Wall Street he is aggressively addressing the bank's problems. BofA is the nation's largest bank as measured by loans and other assets. But in a measure of its financial afflictions, its stock market value, at about $71 billion on Friday was less than Wells Fargo's $124 billion and Chase's $125 billion. "Their competition is not standing still -- they've got to have a plan to continue to grow and build the business," Finger said.

Friday, September 09, 2011

Source: GARP

 

Top European Central Bank official Juergen Stark is resigning well before the end of his term, removing a key voice for higher interest rates and raising questions about the bank's course during Europe's debt crisis. Stark's departure comes amid controversy over the central bank's program to purchase government bonds in the open market, a risky practice that has provoked strong criticism in Stark's home country Germany. The ECB said in a statement only that Stark, 63, was leaving "for personal reasons." His term was to end in just under three years, on May 31, 2014. But analysts suggested his departure was linked to policy disagreements. "Ongoing controversies on the ECB's bond purchasing program seem to have triggered Stark's resignation," said ING economist Carsten Brzeski. European stock markets and the euro fell sharply on the news as investors worried about the leadership at the eurozone's top monetary authority. The ECB is playing a key and controversial role in fighting the market turmoil in Europe, which is generated by fears over too much government debt in some countries. Last month the bank resumed its emergency program to buy the government bonds of troubled states. That has pushed down the market borrowing rates in Spain and Italy, helping to keep them from financial disaster, but has also stirred opposition among some conservative German members of parliament and academic economists.

 

Critics say the practice means the bank is using its monetary powers to support, if only indirectly, financially shaky government budgets. Stark, who sits on the six-member executive board of the ECB, was quoted earlier Friday as saying that the bond purchases had to be temporary. A group of German professors and a conservative lawmaker challenged the purchases in Germany's constitutional court but their arguments were rejected in a ruling Wednesday. Brzeski noted Stark was the ECB's "most hawkish" member - an advocate of higher interest rates to keep prices from rising - and that his departure could trigger speculation about interest rate cuts. The bank indicated Thursday that its benchmark refinancing rate was likely on hold at 1.5 percent for some time after two increases in April and July, but some economists think a turn for the worse in the debt crisis could force a cut by the end of the year or early next year. Responsible for economics and statistics, Stark is often described as the bank's chief economist and has considerable influence over the forecasts that support ECB policy decisions. He was also formerly an official with Germany's anti-inflation Bundesbank. Stark's departure is the second unexpected personnel change at the ECB this year, after governing council member and Bundesbank head Axel Weber, regarded as front runner to succeed bank President Jean-Claude Trichet, dropped out of the running and did not seek another term. Instead, Bank of Italy head Mario Draghi was chosen by eurozone leaders to replace Trichet Nov. 1. It's not clear what Stark's departure would mean for the bank's course until his replacement is clear. As the biggest country in the eurozone, Germany would be in a strong position to demand a German replace him so as to keep at least one seat on the influential body. Der Spiegel said on its website that a possible replacement was deputy finance minister Joerg Asmussen, who has played a key role in crafting agreement on bailouts for heavily indebted Greece, Ireland and Portugal. The ECB said Stark would remain in his job until a successor is appointed by the end of the year.

Friday, September 09, 2011

Source: GARP

 

A new analysis of the world's top industrialised nations underscores the impressive nature of Australia's economic recovery, having recorded its strongest growth in four years during the June quarter. In contrast, the Organisation for Economic Cooperation and Development (OECD) says the recovery in many OECD countries almost came to a halt in the same period. Growth in both the US and the euro area turned out weaker in the first six months of year than it had expected. "The risk of more negative growth going forward has become higher in some major OECD economies, but a downturn of the magnitude of 2008/09 is not foreseen," OECD chief economist Pier Carlo Padoan told reporters in Paris from prepared notes. In its interim economic outlook assessment released on Thursday, the OECD said world trade stagnated in the June quarter, and that was only partly due to disruptions in supply chains after Japan's earthquake and tsunami in March.

 

Consumer and business confidence fell in major OECD economies on the back of weak economic data, gridlock over fiscal policy in the US, the euro sovereign debt crisis and growing concerns that there is "less policy ammunition" to offset further weakness. The Paris-based institution in its latest projections expects quarterly gross domestic product (GDP) growth among the Group of Seven (G7) economies, excluding Japan, will remain at less than one per cent on average over final six months of 2011 on an annualised basis. The G7 comprises Canada, the United States, Japan, Germany, Britain, France and Italy. For the June quarter, the annualised growth rate of the G7 was 0.4 per cent including Japan and 0.7 per cent excluding Japan. "The impact of the sovereign debt woes in Europe and the United States and the associated turbulence in stock markets over the (northern hemisphere) summer have not fully fed through into the indicators underpinning the projections," the chief economist said. As such, uncertainty surrounding these projections is "high". He did not provide new projections for the Australian economy. Australia's national accounts released on Wednesday showed the economy rebounded 1.2 per cent in the June quarter, after posting a 0.9 per cent contraction in the previous quarter in the wake of the Queensland floods and cyclone. Annualising Australia's quarterly growth rate would make it a whopping 4.8 per cent. The OECD sees multiple risks to the outlook, not least that the sovereign debt crisis in the euro area could intensify again. There are also renewed concerns over banks' balance sheets, a further tightening of financial conditions, and "if money markets freeze up, growth may be adversely affected".  The institution says interest rates in most OECD economies should be kept on hold. Mr Padoan said there could be scope for rates could be lowered if economies risk relapsing into recession.

Friday, September 09, 2011

Source: GARP

 

Thomas Hoenig, Kansas City Federal Reserve Bank president, will step down this month after reaching mandatory retirement age of 65. But after 20 years in the post, he isn't leaving with a whimper. Hoenig, in an interview Thursday with The Oklahoman, criticized current Fed monetary policy, the concept of "too big to fail," and economic strategy designed to spur consumption rather than production. The Fed recently promised to hold interest rates at historic lows until mid-2013. Hoenig, who regularly dissented from the consensus of the Fed's rate-setting panel when he was a voting member, said that policy reflects short-term thinking. "Economics is about the long term and recognizing what you have and then allowing a path for the future," Hoenig said. "When you only try and take care of the short run, you create the next path full of problems, as we learned over and over in Oklahoma." Hoenig oversees Fed activity in a seven-state region that includes Oklahoma. In his long career with the Fed, he has dealt with this state's economic turmoil. On the July 4 weekend of 1982, Hoenig, then a midlevel Fed executive, determined that Oklahoma City's Penn Square Bank was insolvent. He recommended that his bosses at the Federal Reserve reject the bank's pleas for cash. They let Penn Square Bank fail. The Oklahoma City bank's sketchy energy loans eventually led to the collapse of Chicago-based Continental Illinois, the largest bank failure in U.S. history until 2008.

 

Break up mega-banks

His experience with the successful wind-down of that big bank influences his stance that financial institutions should be allowed to fail. He also sees danger in the recent explosive growth of the nation's very largest banks. "I think it's unfortunate that we have these institutions that by themselves -- individual institutions -- can take down the entire economy," Hoenig said. "It goes to the point that if you have the largest institution in the country that's well over $2 trillion, nearly $3 trillion, that you are not going to let it fail." The mega-banks should be broken up, Hoenig said. Traditional commercial banking pursuits and riskier investment practices should be separated, with only the former covered by a government-backed safety net, he said. Hoenig concedes there is little chance those institutions will be split. "These are also extremely powerful institutions," he said. "They have tremendous contributions to the political lobby. They pay people very well to tell their story. It's a very influential group." Hoenig believes current monetary policy has been reactive to current conditions, rather than in response to more fundamental economic problems. While policymakers claim lower interest rates will spur the economy and create more jobs, Hoenig said that doesn't address the more basic issue of the nation's increasing deficit between what it makes and what it consumes. "You're continuing to push the idea of consuming more than you produce on into the future in the name of jobs," he said. "But what have we done by consuming more than we produce? We've destroyed jobs. So how is that going to work differently this next time through? Asking questions -- we need to spend more time doing that before we start assigning solutions that are inappropriate." Keeping benchmark interest rates near zero distorts the credit market, Hoenig said, and has created greater uncertainty and confusion. "I am concerned," he said. "Monetary policy is a very important tool for any economy, but it has its limits. It is important to keep that in mind. When you try to do more than you're meant to do, you can do harm. I think that is what we run the risk of right now."

 

More dissent needed

Hoenig isn't ready to disclose what he will do after leaving his longtime Fed post. Public service still interests him, but not enough to make him seek a political office, he said. He is encouraged that three dissenting votes were registered during the most recent Open Market Committee meeting, and hopes whomever succeeds him will champion some of his unpopular stances. Although his views rarely carried the day, Hoenig believes he fought the good fight. "I want to get along with everyone like everyone else does, but sometimes you can't," he said. Dissent "is something we need more of. All you have to do is look at the economy and you'd know we need more of it. The economy today -- remember this -- the economy today is consensus driven. I'm not sure that consensus driven is always the right way."

 

Thursday, September 08, 2011

Source: GARP

 

The U.S. and rich nations in Europe need to take action to shore up confidence in their economies as their recoveries are set to stagnate or go into reverse, the Organization for Economic Cooperation and Development said Thursday. The Paris-based watchdog for the world's most developed economies slashed its forecast for growth in the U.S. and the eurozone this year due to government belt-tightening and falling consumer and business confidence. The agency's head economist said governments need to take urgent steps to restore confidence and break the vicious circle in which they are trapped. "We are seeing a huge drop in confidence both in business and households, which for us reflects perceptions that markets have about how policymakers are responding, both in long and short term," OECD Chief Economist Pier Carlo Padoan told the Associated Press.

The U.S. will grow by only 1.4 percent this year, the agency said, down sharply from a forecast of 2.6 percent only three months ago. The combined economies of Germany, France and Italy, the three largest members of the eurozone, will grow by under 1 percent this year, less than half the OECD's May forecast of 2 percent growth. "This is quite a downward revision," Padoan said. "I would say the risk of having some negative growth figures as we go forward is much higher today (than in May)." As a result, he said there was space for looser monetary policy - either by cutting interest rates or using tools such as the Federal Reserve's program to buy bonds to stimulate the economy. If needed, he suggested governments with credible debt reduction plans could temporarily boost spending.

 

The starkly downbeat report comes the same day that President Barack Obama is scheduled to address Congress to pitch a $300 billion economic plan aimed at urgently creating jobs. The European Central Bank, meanwhile, is expected to signal a halt to its rate hike campaign later in the day. The debate over whether - and how - to support growth is also expected to dominate the agenda of talks Friday among the financial leaders from seven of the world's most developed economies in Marseille. In its update to the twice-yearly economic outlook report, the OECD forecast the U.S. economy will grow at only a 0.4 percent annualized rate in the fourth quarter, while in Europe, the three largest economies in the eurozone will contract by 0.4 percent in that period. The OECD nevertheless said that "a downturn of the magnitude of 2008/2009 is not foreseen." Padoan said that the steep cut to the U.S. outlook was caused by stagnating employment and a more severe pull back by over-indebted consumers than the OECD had forecast. "The two things are not conducive to stronger confidence," Padoan said. "It's an interaction of factors which we think has kicked in because there was no visible progress." "You have to break a viscious circle in a way," Padoan said. The OECD economist said it was "extremely urgent" for Europe to implement changes agreed to in July to increase its bailout fund's flexibility, giving it the right to buy the bonds of financially weak governments, help recapitalize banks, and quickly loan money to countries before they get into a full-blown debt crisis. "Governments and markets need to be reassured that Europe is serious on producing more progress in strengthening the European architecture," Padoan said.

Thursday, September 08, 2011

Source: GARP                

 

The dollar rose against most major currencies on Thursday on comments from top central bankers in Europe and the U.S. European Central Bank President Jean-Claude Trichet said early Thursday that the region's economy is "subject to particularly high uncertainty and intensified downside risk." He said the bank's governors had left its benchmark refinancing rate unchanged. Trichet's comments suggested that the bank will stop increasing interest rates for now. That pushed the euro to a two-month low against the dollar. Low rates can make a currency less attractive to investors. In the afternoon, Federal Reserve Chairman Ben Bernanke said he's surprised by the weakness of consumer spending since the recession ended. He offered no new details about possible steps by the Fed to reinvigorate the struggling U.S. economy. Bernanke's cautious tone and lack of specifics helped lift the dollar against the Japanese yen, Canadian dollar and Norwegian Krone. The Fed is considering steps that would make the dollar less attractive by increasing the money supply. If Bernanke had hinted at actions such as a fresh round of bond-buying, the dollar likely would have lost value. Instead, the dollar rose against a basket of six major currencies, reaching the highest point since mid-March. By that measure, the dollar has risen 4.5 percent since the beginning of May. Investors sought the dollar's relative safety during a broad stock market sell-off triggered by worries about a slowdown in global growth and a deepening European debt crisis. In late trading, the euro fell to $1.3876 from $1.4093 late Wednesday. It fell as low as $1.3836 on July 12.

 

The ECB has raised its benchmark interest rate twice since April to stave off inflation. The euro's value decreased this summer because of the possibility that an indebted European nation might default on its debt. Higher interest rates can also stymie economic growth by increasing borrowing costs and slowing the flow of credit to consumers and companies. The European Union economy grew at a sluggish 0.2 percent rate in the second quarter. Further rate increases might risk tipping it back into recession. Investors often are attracted to currencies from nations with higher interest rates because the higher rates increase their income from currency bets. However, when the economic outlook darkens, they rush into currencies that are seen as safe, such as the dollar and Swiss franc. In other trading, the British pound fell to $1.5960 from $1.5980. The Swiss franc soared to 87.51 cents from 85.8 cents. The dollar rose to 77.54 Japanese yen from 77.25 late Wednesday.

 

Thursday, September 08, 2011

Source: GARP                

 

Cautious consumers and persistent headwinds threaten the U.S. economic recovery and are leading to a "slower pace of recovery over coming quarters," Federal Reserve Chairman Ben S. Bernanke said Thursday. In a speech to the Economic Club of Minnesota, Bernanke didn't try to sugarcoat the challenges facing the slowing U.S. economy, which is increasingly at risk of sliding back into a recession like the one that ended in June 2009. "From recent comprehensive revisions of government economic data, we have learned that the recession was even deeper and the recovery weaker than we had previously thought; indeed, aggregate output in the United States still has not returned to the level that it had attained before the crisis," the Fed chief said. "Importantly, economic growth over the past two years has, for the most part, been at rates insufficient to achieve sustained reductions in the unemployment rate, which has recently been fluctuating a bit above 9 percent." There'd been hopes on Wall Street that Bernanke on Thursday might outline next steps, but he didn't; he said options will be debated at the Sept. 20-21 meeting of Fed policymakers. One surprise for the nation's central bank chief is the deep caution shown by U.S. consumers, who during boom times accounted for about 70 percent of U.S. economic activity. "After contracting very sharply during the recession, consumer spending expanded moderately through 2010, only to decelerate in the first half of 2011," Bernanke said. He cited temporary factors such as Japan's nuclear disaster and a spike in oil prices that weighed on consumers, and added other factors, too.

 

"Households are struggling with other important headwinds as well, including the persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less." In addition, ongoing debt problems in Europe have troubled U.S. banks and financial markets. On Thursday, the head of the European Central Bank offered a grim view of his regional economy. Jean-Claude Trichet said during a news conference in Germany that there was "particularly high uncertainty and intensified downside risks" in greater Europe, lowering his regional growth forecast for the rest of 2011. Bernanke's legal mandate is to keep inflation in check while promoting full employment. Like President Barack Obama, he's under pressure to find some spark for an economy that had an annual growth rate of 0.4 percent in the first quarter of the year and 1 percent from April to June. The Fed has held its benchmark lending rate at near zero since December 2008. It also has purchased trillions of dollars worth of mortgage bonds and government securities in an attempt to keep rates low and encourage investment and risk-taking. Asked from the audience about recent dissent in votes among Fed policymakers, Bernanke downplayed the significance of the rare public splits. "One thing that is certainly evident is that we are currently in a situation which, in many ways, is unprecedented," the Fed chief said, adding, "It's natural that we have some disagreement." He cited the worst recession since the Great Depression, ongoing stress in global financial markets and other challenges that forced the Fed to seek "alternative ways" to stimulate the economy. Bernanke was silent on steps that Obama and Congress can take to spark hiring and growth. He also was cautious when responding to questions about the bitter partisan divide as a special congressional deficit-reduction panel began its work on Thursday. The Fed chief warned against steep near-term spending cuts that could hurt an economy at risk of stalling. Supporting steps to address long-term debt challenges, he cautioned that "fiscal policymakers should not, as a consequence, disregard the fragility of the economic recovery." Bernanke is under political fire in the emerging 2012 campaign season. During Wednesday night's debate among GOP presidential candidates, front-runner Rick Perry, the governor of Texas, stuck to his accusation that Bernanke's rescue efforts were disastrous. His closest rival, Mitt Romney, said he wouldn't reappoint the Fed chief when his term ends in 2014. Bernanke avoided those slights during his speech.

Thursday, September 08, 2011

Source: GARP

 

European Central Bank head Jean-Claude Trichet warned there are increasing risks for the eurozone's waning economic recovery and less chance of inflation - clear signals the bank is done raising interest rates for some time. At a news conference Thursday, Trichet offered new, gloomier economic projections after the bank's 23-member governing council left the benchmark refinancing rate unchanged at 1.5 percent. Pressure had risen on the bank to freeze its rate hike campaign after a turbulent summer in which worries grew that the 17-nation currency bloc's debt crisis was hurting consumers and businesses and global growth was stalling. Trichet said the eurozone economy was expected "to grow moderately" but that that assessment was "subject to particularly high uncertainty and intensified downside risk." Meanwhile, the risk of excessive inflation, which he had previously described as leaning to the upside, was now "broadly balanced." Trichet turned aside questions about whether rates will stay on hold, saying "we are never pre-committed," but economists say the darker outlook is a sign the bank will not raise rates soon. It controversially raised rates a quarter point in April and July, based on earlier expectations for more inflation and stronger growth. Shadows over Europe's recovery have gathered quickly since the bank last made a rate decision on Aug. 4. Indicators of business and consumer optimism have sagged and second quarter growth came in at just 0.2 percent. The debt crisis has led to dizzying ups and downs on stock and bond markets, weighing on consumption and production. The uncertainty also pushed Britain's Bank of England to leave rates unchanged on Thursday, at a record low of 0.5 percent, although in Britain's case inflation remains stubbornly high at 4.4 percent.

 

Eurozone officials are trying to contain a crisis triggered by market concerns that governments cannot handle their high debt loads. Those fears have raised borrowing rates for financially troubled countries, to the point where Greece, Ireland and Portugal have needed bailouts from other eurozone countries and the International Monetary Fund. With prospects for the economy worsening, some experts even think the ECB may have to cut rates if Europe's debt crisis takes a turn for the worse. Economists at the Royal Bank of Scotland see a 40 percent chance that the bank will have to slash rates by a half percent by the end of this year. Commerzbank economist Michael Schubert noted Trichet had called current rates "accommodative," or still low enough to support growth. That "means that the ECB must see a further significant deterioration of the situation before it starts to consider rate cuts," Schubert said in a research note. The ECB staff cut its growth projection for next year to 1.3 percent from 1.7 percent. It still sees inflation falling to 1.7 percent; last month eurozone prices grew 2.5 percent on an annual basis. Trichet's usually smooth demeanor grew more animated when he was asked about widespread criticism in Germany of eurozone rescue efforts and the opinion held by some there that it would be better to abandon the euro and return to the deutsche mark.

 

Trichet, due to retire at the end of October, gave a seven-minute-long defense of the ECB's record since the euro's 1999 introduction, in which he said the bank had preserved the value of the currency and kept inflation in Germany low at an average 1.55 percent. He noted that was better than Germany had done for 50 years with the mark, and underlined that the ECB had done so by maintaining its independence and ignoring French and German politicians who at times pressed it for lower interest rates - which stimulate growth but can undermine a currency's value. "To those people, I will say the following, we were called to deliver price stability," said Trichet. "We have delivered price stability over the first 12 years and 13 years of the euro - impeccably, impeccably." "I would very much like to hear the congratulations for an institution which has delivered price stability in Germany," he said, raising his voice for "in Germany." "Thank you for your excellent question, which was very stimulating," he said with a smile at the end of his monologue, drawing laughter. Trichet and the bank have played a key role in warding off the debt crisis, buying Italian and Spanish bonds to drive down bond market borrowing rates and prevent those countries from finding themselves unable to borrow affordably, as did Ireland, Greece and Portugal. Italy's fate is of concern because it's too big for the eurozone's euro440 billion ($618 billion) rescue fund to bail out. Trichet had restrained praise for the spending cuts and tax increases passed by the Italian Senate on Wednesday night, saying the package was "in line with the first commitment" made by Premier Silvio Berlusconi to move more quickly to balance the budget. He wouldn't comment on the bond buying program. However, Trichet and his incoming successor, Bank of Italy head Mario Draghi, have indicated they expect the purchases to be taken over by the eurozone rescue fund as soon as national parliaments approve giving it that power this fall. In Greece, the government is in the process of carrying out a debt swap that should modestly cut its huge debt load, and is struggling to meet conditions for another installment of its bailout loan. Financial market prices indicate there are widespread expectations among investors the country may default, an event that could mean serious losses for banks that hold the government bonds. That, in turn, risks undermining the economy by choking off credit to businesses.

Wednesday, September 07, 2011

Source: GARP

 

BEIRUT -- UNCTAD said Tuesday that the economies of the developing countries have outperformed those of the developed countries in the first few months of this year. "Growth performance is strong in developing economies, which have resumed their pre-crisis growth trend and are expanding at above 6 percent this year, compared to only between 1.5 and 2 percent for developed countries and 3 percent for the world economy, said the Trade and Development Report 2011 released by UNCTAD in Beirut. The report attributed the strong growth path of developing economies to the improvement in domestic demand. However, it predicted that these economies will still face financial instability and speculative capital flows generated in developed economies. "Although growth in developing countries has become more and more dependent on the expansion of domestic markets, these countries still face significant external risks because of economic weakness in the developed economies and a lack of significant reforms in international financial markets," it said. "As a result, these countries remain vulnerable to trade and financial shocks that would strongly affect the volume of their exports and the prices of primary commodities, as in 2008." Meanwhile, TDR 2011 stated that trade recovery has been faster in developing than in developed economies.

 

It added that price increases have followed demand recovery and supply shocks, as well as a boost in financial investment in commodities. More recently, drops in commodity prices have largely reflected negative changes in the sentiment of financial investors. Hence, the implementation of measures to reduce domestic demand in response to high commodity prices has proven to be inappropriate, harming growth without lowering inflation. The report has advised to adopt a better policy in which wages would progress in line with productivity which would be a more rational way to control inflationary pressures and to support domestic demand growth at the same time. Moreover, the report argues that a shift from fiscal stimulus toward fiscal tightening is unsuccessful, especially in the most developed economies which were severely hit by the financial crisis. "In such a situation, a restrictive fiscal policy may reduce GDP growth and fiscal revenues, and is therefore counterproductive in terms of fiscal consolidation," it said. The report added that the crisis caused a significant deterioration in public sector accounts, as fiscal stimulus packages were put in place. "In several developed countries, public bailouts of financial institutions accounted for a large portion of the deficit, reflecting a conversion from private into public debt," it said. As a result, it continued, the median public debt-to-GDP ratio in developed countries almost doubled, to more than 60 percent of GDP, between 2007 and the end of 2010. "Economic growth in developing countries, as a group, suffered less impact from the financial crisis, partly thanks to active countercyclical fiscal policies; as a result, fiscal balances improved in 2010 and debt-to-GDP ratios remained in check," it argued.

UNCTAD suggested a number of policy responses to improve commodity market functioning, increasing transparency in physical and derivatives markets, as well as internationally coordinated tighter regulation of financial investors -- for instance, by imposing position limits or a transaction tax. The study argues that financial deregulation has been one of the main factors leading to the global financial and economic crisis of 2008. It stressed the need for tighter regulation in the financial sector. However, it admitted that even if the financial sector were to be better regulated, it would not automatically drive growth and employment or make credit accessible to small and medium-sized firms or the population at large.

Wednesday, September 07, 2011

Source: GARP

 

The global currency war escalated dramatically yesterday after Switzerland stepped in to weaken the franc in a bid to rid itself of "safe haven" status. The Swiss National Bank placed a minimum exchange rate of SwFr1.20 against the euro in the largest intervention in foreign exchange markets in recent times. It said it will enforce the rate "with the utmost determination and is prepared to buy foreign currency in unlimited quantities". Analysts warned it could trigger tit-for-tat action by other central banks around the world as they fight to weaken their currencies to bolster exports. "The Swiss National Bank went to war over its currency," said James Hughes, senior market analyst at foreign exchange broker Alpari. The move stunned traders and the franc dropped by almost 10pc against the euro to a rate of SwFr1.22 as gold raced to a day high of $1,920 an ounce before easing. "That was the single largest foreign exchange move I have ever seen," said Jeremy Cook, chief economist at currency brokers World First. Investors have piled into the "Swissie" in favour of more risky assets such as the euro and shares as turmoil ripped through the financial markets. But it pushed up the cost of Swiss exports, from chocolate and cheese to pharmaceuticals, making them uncompetitive. More than half of Swiss products are sold abroad, and almost 60pc of its exports go to countries in the European Union. In a strongly worded statement the SNB, whose chairman is Philipp Hildebrand, said it would "no longer tolerate" such a strong franc. "The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy," it added. The move triggered speculation that Japan would now step in to weaken the yen as the currency wars entered a dangerous new phase. Japan's new finance minister Jun Azumi said he will tell the G7 summit this week that the yen's strength is bad for the world economy, and that he is ready to step in. The race to the bottom can force countries into potentially destabilising measures to keep exports cheap. It is feared that skirmishes in the currency markets will lead to a disastrous new wave of protectionist trade policies like those that exacerbated the Great Depression. The US Federal Reserve is mulling the prospects of another round of quantitative easing, which would suppress the dollar. The Bank of England is also under mounting pressure to start printing money again to stimulate economic growth. Such a move would help weaken the pound -- essential to enable goods in British factories to be sold overseas.

Wednesday, September 07, 2011

Source: GARP

 

A broad rally broke a three-day losing streak in the stock market Wednesday as fears about Europe's debt crisis ebbed. Stocks rose sharply after a German court backed the country's role in bailing out other European nations. The Dow Jones industrial average jumped 200 points in the first hour of trading and continued to climb throughout the day, ending up 275 points. The afternoon gains came after Italy's Senate approved a deficit-cutting package and the Federal Reserve reported that U.S. business conditions are improving. Traders were also speculating that President Barack Obama would announce a $300 billion jobs package made up of tax cuts, state aid and infrastructure spending in an address to Congress on Thursday night. The Dow and other U.S. indexes fell over the previous three days on worries over weakness in the U.S. job market and concerns that Europe's debt woes could lead to a global economic recession.

 

"The market has been pricing in an out-and-out recession, so any hints that policy issues might be solved is a plus," said Brian Gendreau, market strategist at Cetera Financial Group. The Dow surged 275.56 points, or 2.5 percent, to close at 11,414.86. All 30 stocks in the Dow average rose. The Standard and Poor's 500 index jumped 33.38, or 2.9 percent, to 1,198.62. All 10 company groups that make up the S&P index rose. The Nasdaq composite shot up 75.11, or 3 percent, to 2,548.94. The German court ruling also pushed the prices of Treasury securities lower as investors were more willing to hold risky assets like stocks. Treasury prices have been rising over the past week, sending their yields lower, as demand for lower-risk investments increased. The yield on the 10-year Treasury note rose to 2.05 percent. Its price fell 50 cents per $100 invested. The yield traded at 1.97 percent late Tuesday. On Monday it fell to 1.91 percent, the lowest since the Federal Reserve Bank of St. Louis began keeping daily records in 1962. Gold, another traditional safe haven, fell $56, or 3 percent, to $1,817 an ounce. It closed at $1,891 on Aug. 22. Historically low Treasury rates are prompting some institutional investors to see stocks as a better value. The yield on the benchmark 10-year Treasury note began plunging from just over 3 percent on July 27 to 2.2 percent by the end of August. Investors were piling into lower-risk assets as the stock market swung wildly. The yield has hovered around 2 percent this week. An investor who buys the S&P 500 index, meanwhile, earns a 2.38 percent yield in the form of dividends. "Market sentiment has actually been worse than economic data lately, and now you are seeing institutional investors saying, `I can get a better yield from the S&P 500 than I can from a 10-year Treasury'," said Howard Ward, portfolio manager of the GAMCO Growth Fund.

 

Yahoo and Bank of America rose sharply after announcing the departures of key executives after the market closed Tuesday. Yahoo gained 5 percent, to $13.61, after announcing that CEO Carol Bartz had been fired. Some analysts said the move made the company a takeover target. Bartz spent nearly three years steering the company. Bank of America jumped 7 percent, to $7.48, after the bank announced a management reorganization that will result in two top officers leaving. The changes were seen as one of chief executive Brian Moynihan's most dramatic moves to reshape the embattled bank. Bank of America shares have fallen 48 percent this year through Tuesday, compared with a 7 percent drop in the S&P 500 index. Financial companies were the top performing group in the S&P 500 index. JP Morgan Chase & Co., Goldman Sachs and Wells Fargo each rose more than 3 percent. Urban Outfitters fell 2 percent, to $25.26, after the retailer said its sales were slipping in the current quarter. Computer graphics company Nvidia Corp. jumped 8 percent, to $14.25, after the company said it expects its revenues to be higher than Wall Street analysts forecast. A Federal Reserve survey found that that the economy grew modestly in its 12 bank regions in July and August as consumers spent more. Nine stocks rose for every one that fell on the New York Stock Exchange. Volume was below average at 3.9 billion shares.

Wednesday, September 07, 2011           

Source: GARP

 

South Korea needs to take measures to minimize the possible side effects of homegrown hedge funds in order to help them take root in the local capital market, an expert said Wednesday. In June, the financial watchdog finalized qualifications for domestic hedge funds with the aim of introducing the first of their kind within this year. Currently, South Koreans are only allowed to invest in hedge funds established in foreign countries. "Regulations on hedge funds should be fleshed out to minimize their risks that may cause market turbulence," Hwang Kun-ho, chairman of the Korea Financial Investment Association, told a forum here. A hedge fund is privately pooled money by investors who seek high returns on risky bets using a wide range of derivatives or investment techniques such as short-selling or leveraged buyouts. Hwang said that hedge funds have come under fire somewhat due to their excessive or speculative bets on short-term returns, but noted that they will also help lubricate the capital markets by bringing more large-scale financing and creating a buffer against irregular external shock, if introduced. "For this end, preemptive and prudent supervision is necessary and measures to protect investors should also be crafted out," Hwang said. "So securing financially ethical experts and enough capital to a sound level is another must for Korean firms." The South Korean market for hedge funds would reach US$2.4 billion if they were set up, according to the Korea Capital Market Institute.

Tuesday, September 06, 2011

Source: GARP

 

EUROPE'S SOVEREIGN debt crisis will stunt bank profit for years and could kill off the weakest, Deutsche Bank chief executive Josef Ackermann told industry bosses, amid intense scrutiny of the sector's finances. "Prospects for the financial sector overall ... are rather limited," the chief executive of Germany's top bank said yesterday. "The outlook for the future growth of revenues is limited by both the current situation and structurally," he added. Mr Ackermann was speaking at Frankfurt's annual Banks in Transition conference against a backdrop of gloom in the capital markets, where fears some euro zone countries could default on their debts have made investors fearful. Many European banks could go under if they had to accept a "haircut" at current market valuations on their entire sovereign debt holdings, instead of the 21 per cent writedown that has been proposed on Greek sovereign debt, Mr Ackermann warned. "It's stating the obvious that many European banks would not survive having to revalue sovereign debt held on the banking book at market levels," he said. Fears about how the crisis will play out have struck the inter- bank lending market and made it difficult for banks to raise even long-term financing, said Ulrich Schroder, head of German government- backed KFW .

 

"The situation for banks is more dramatic than it was in 2008," he said in a panel discussion at the conference. "In 2008, governments were still able to support their banks. Now this is simply no longer possible," Mr Schroder said, adding that he knows of no bank that is able to issue a seven- or eight-year bond in the current environment. Bank shares tumbled further on yesterday with the STOXX Europe 600 banking index closing down 6 per cent to its lowest level in 29 months, after tumbling by a third in value since the beginning of the year. "The chances of a near-term recovery remain slim as euro zone debt concerns, structural reform and a [US] lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector," Manoj Ladwa, a senior trader at ETX Capital, said. Deutsche stock fell almost 9 per cent, with shares in Swiss rival Credit Suisse down 8 per cent and Royal Bank of Scotland shares slumping 12 per cent. A US regulator sued 17 large banks and financial institutions on Friday over losses on about $200 billion of subprime bonds, adding to the sector's woes. Credit Suisse chairman Urs Rohner said the new regulatory environment had curtailed the risky activities for banks, but would also result in lower profits. - (Reuters)

Monday, September 05, 2011

Source: GARP

 

The eurozone needs a "quantum" leap toward economic integration, the incoming chief of the European Central Bank said Monday, as the bond yields of countries with shaky finances, like Greece and Italy, jumped amid increased investor tensions. Mario Draghi warned that measures like the bank's buying of bonds to stabilize markets were only temporary fixes and that only substantially more integration would address the fundamental problem of a lack of coordination of the eurozone's fiscal policies. The movement in bond yields on Monday showed just how varied investors' confidence was in different eurozone countries. Borrowing rates jumped in countries considered high-risk, such as Greece, Italy and Spain and fell in Germany, widely considered a safe haven in times of financial turmoil. Speaking at a conference in Paris, Draghi dismissed the idea of eurobonds - debt issued jointly by the eurozone countries. Some have argued this would help weaker countries borrow more easily because they wouldn't have to pay such high interest rates, which in turn make their debts bigger. But stable countries like Germany would likely see their rates rise. Instead, Draghi suggested the eurozone should adopt rules that would require more budget discipline. There is already a proposal that would require all eurozone countries to balance their budgets. Profligate spending during boom times funded by cheap debt is one of the root causes of the current crisis. Market tensions were high on Monday, both due to worries about some countries' debt problems and a global financial sell-off triggered by concerns that the U.S. economy may slip back into recession.

 

The difference in interest rates between the Greek and benchmark German 10-year bonds, known as the spread, spiraled to new records on Monday, topping 17.3 percentage points. Yields on the Greek bonds were above 18 percent. High yields mean borrowing is more expensive for Greece, making it even harder to reduce its debt load. In fact, its yields are so high that Greece has been relying since last year on funds from a euro110 billion ($157 billion) package of bailout loans from other European Union countries and the International Monetary Fund. On July 21, European leaders agreed on a second bailout, worth an additional euro109 billion. Italy's own 10-year bond yields jumped to 5.45 percent amid signs that the government in Rome is wavering in its commitment to enforce its austerity program. ECB chief Jean-Claude Trichet in recent days has called on Silvio Berlusconi's government to push through with the deficit-cutting measures promised in August. Italy's stability is of particular concern because it would be too expensive to rescue for the eurozone. In an effort to steady the yields, the ECB has been buying Italian and Spanish bonds in recent weeks, driving down the interest rates. On Monday, the bank announced that it had increased its purchases last week to euro13.3 billion ($18.8 billion). That's double the euro6.65 billion spent the previous week. Draghi indicated that such makeshift measures would continue, including making sure the European Financial Stability Facility - the eurozone's bailout fund - takes over the bond purchases and has enough cash in it.

Monday, September 05, 2011

Source: GARP

 

Washington should abandon fiscal austerity policies and switch to fiscal stimulus to avoid a double-dip recession, the International Monetary Fund head says. The United States has "enough room in the short term to put in place measures that will actually stimulate growth and help create employment," Managing Director Christine Lagarde told the German magazine Der Spiegel. But she said she did not propose fighting the debt-crisis effects with more debt and said Washington would need to supplement stimulus measures with a credible medium-term debt strategy. In finance, "short term" usually refers to less than a year and "medium term" usually refers to one to three years. "We are in a situation of slowed growth and we have a confidence issue that culminated this summer with the downgrading of the U.S. from its AAA status," she said. "Measures need to be taken to ensure that this vicious circle is broken." The Standard & Poor's credit-rating agency took the unprecedented step Aug. 5 of removing the U.S. government from its AAA list of risk-free borrowers, a downgrade that had symbolic significance but few clear financial implications, economists said. Europe similarly needs to shift to stimulus from austerity, said Lagarde, a former French finance minister who took over as IMF head July 5.

 

The intergovernmental IMF oversees the global financial system and provides low-cost loans to countries in financial crisis. Its loans generally come with tough conditions requiring borrowers to clean up their balance sheets with deep spending cuts or currency devaluations. Lagarde said at a central bankers conference in Jackson Hole, Wyo., Aug. 27 the global economy's "downside risks" were increasing -- and the risks were "aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed" to turn their economies around. "Developments this summer have indicated that we are in a dangerous new phase," she said at the conference. "The stakes are clear -- we risk seeing the fragile recovery derailed." But she told Der Spiegel in an interview published Sunday the fragile recovery could avoid being derailed "if governments, institutions and central banks work together." "The spectrum of policies available" has narrowed "because a lot of ammunition was used in 2009," often viewed as the economic crisis's turning point, but the U.S. and world economies can avoid a "threatening downward spiral" into a double-dip recession, she said.

Monday, September 05, 2011

Source: GARP

 

The catastrophe bond market appears set to rebound during the second half of the year despite a slower pace during the first half caused by several factors. A soft traditional market, the March 11 earthquake and tsunami in Japan, and changes to Risk Management Solutions Inc.'s U.S. hurricane model all contributed to the slow pace of first-half cat bond issuance, market experts say. However, investor demand for insurance-linked securities remains high and the market has largely worked through the issues that confronted it earlier this year. "Broadly speaking, we see what we would call probably a very active second half of the year. We've had a couple of transactions already," said Paul Schultz, president of Aon Benfield Securities Inc. in Chicago. Mr. Schultz said he sees a good pipeline of transactions likely to come to market, which should carry over into 2012. According to New York-based GC Securities, an affiliate of Guy Carpenter & Co. L.L.C., nearly $1.61 billion in new catastrophe bonds were during the first six months of 2011, with nearly $10.64 billion in outstanding risk capital in the market at the end of the second quarter. That's down from last year, when there was $2.35 billion in new issuance during the first half with total risk capital in the market standing at $11.82 billion. There was more than $12.18 billion in risk capital in the market at the close of 2010, according to GC Securities. "We definitely have seen an active year this year; particularly we have seen another active third quarter," said Cory Anger, managing director and global head of insurance-linked securities at GC Securities. "If you kind of look back to the first half of the year, what you've probably seen is that issuance is a little bit slower than for the same period the year before," said Markus Schmutz, head of insurance-linked securities structuring and origination at Swiss Re Capital Markets Corp. in New York.

 

Mr. Schmutz noted the RMS model change as one factor slowing first-half cat bond issuance. "A lot of people who were thinking about doing issues had some questions about how would the market react to the model change," he said. "They also had some questions about reinsurance renewals at July 1." "Even today I think investors and issuers are working through some of the changes" to the RMS model, said Aon Benfield's Mr. Schultz. "It still continues to be an issue for the market." While the earthquake in Japan appeared to slow cat bond issuance, the market's response seems appropriate, the experts say. It's possible the Japan loss caused a "lag" in new issuance while the market digested the event and how it played out. But, said Mr. Schultz, "I don't think it changed any of the issuance that was going to come to market." "What's happened in terms of catastrophic events around the world hasn't really had that much of an impact," he said. "The market does expect to pay losses from time to time." "Of the outstanding cat bond limit, about $1.5 billion was exposed to Japanese earthquake risk," said GC Securities' Ms. Anger. One issue, Muteki Ltd., paid its full limit of approximately $300 million. That issue provided earthquake coverage to Zenkyoren Ltd., the Japanese National Mutual Insurance Federation of Agricultural Cooperatives, under a deal in which Munich Reinsurance Co. provided reinsurance to the Japanese mutual, then securitized the exposure through the Muteki bonds. Swiss Re's Mr. Schmutz noted that the Muteki transaction functioned as designed. "(Investors) took the loss and moved on. We haven't really heard of anyone panicking and leaving the market," he said. "Really it serves as a very nice proof of the product and the concept." Roger G. Beckwith, vp and secretary of Lane Financial L.L.C. in Chicago, had a similar view of the market's response to the catastrophe in Japan. "Things recovered in a pretty reasonable period of time," he said. The third factor slowing first-half issuance was the fact that prior to the quake and tsunami in Japan, traditional markets were very aggressive, Mr. Schultz said. "We actually had a couple of bonds that were scheduled to come to market that just went back to the traditional market because it was just more efficient for the clients," he said.

"We still are working through the RMS issue. We think the other ones have been resolved," Mr. Schultz said. "We think we will work through the RMS issue by the end of the year." "We started the year with an estimate of $5 billion to $6 billion that was going to come to market. We've sort of revised that to $4 billion to $5 billion," he said. Investor interest in insurance-linked securities remains strong. "We've seen investor support continue to be robust," Ms. Anger said. With market proponents regularly citing the uncorrelated nature of cat bonds to other investment instruments, the market might be in a position to benefit from stock market volatility. "We really have accelerated bringing new investors into the space and it really started after the global financial crisis in 2008," said Mr. Schultz. While most asset classes producing negative returns after the financial crisis, insurance linked-securities produced positive returns, he said. "The fact that (cat bonds) have shown very little correlation (with other investment risks) makes them an attractive option for many investors," Mr. Schmutz said. WIth U.S. windstorm risks the most common exposure in the ILS market, there is interest from investors in increasing the diversity of ILS exposures, according to Lane Financial's Mr. Beckwith. "I think we've seen with recent deals that there's a lot of interest in diversifying ILS," he said. "So things that are non-U.S. wind or non-U.S. are sought after. You've had a pretty good reaction in the market to non-U.S. wind deals." Recent events could drive the shape of some cat bonds going forward. For example, the frequency and severity of U.S. windstorms and the number of catastrophic events and total losses this year might lead some issuers to look to the cat bond market to cover accumulations of losses. "(An) area that we're seeing a lot of focus on now from a U.S. perspective is around aggregate structures, which isn't surprising, given that 2011 has been a historically severe year," Ms. Anger said. Tornado frequency and severity coupled with the Japanese earthquake led to insurance and reinsurance losses, "which aren't negligible," said Mr. Schmutz. That has led some to consider aggregate covers to address the "extraordinary frequency of smaller events," he said. Ms. Anger noted that supply chain disruptions resulting from the disaster in Japan also have prompted discussions about corporations using the ILS market to address supply chain risks. She cited this year's e150 million ($215.9 million) Pylon II Capital Ltd. European windstorm issue by Paris-based Electricite de France S.A. as a possible model. "For them, the original catalyst for putting it in place was the loss of income and business interruption from European windstorms," as it could provide property protection, she said. "When we see very significant events that have had an impact on corporations, we do see increased focus on alternative solutions."

Monday, September 05, 2011

Source: GARP

 

Weather derivatives, originated in the late 1990s by recently deregulated U.S. energy companies looking to mitigate revenue lost to adverse temperatures, have evolved to become a multibillion-dollar worldwide business. Today, observers and proponents say, the weather derivative market serves numerous business sectors and regions, as well as a host of risks. Those advances, they note, are the primary reason the number of weather derivative contracts written globally last year reached more than 1.4 million through March, a record for the market, according to the Washington-based Weather Risk Management Assn. The total value of those contracts rose as high as $45.24 billion in 2006, the year after Hurricane Katrina, and totaled $11.82 billion last year, according to the association. "It was essentially a U.S. business focused on retail energy companies," said Juerg Trueb, a Zurich-based managing director at Swiss Reinsurance Co. "Now, it's a market that's become worldwide and grown to include a lot of varying solutions in a number of different sectors. There's a much broader range of underlying risk that's being contracted, and all kinds of indexes being used to quantify the impact of the weather." There are two main types of weather derivative contracts.

 

Standardized, exchange-based contracts are placed by a broker and bought and sold by traders, largely through the Chicago Mercantile Exchange. The buyer's account with the broker is debited or credited based on the fluctuating price of the weather risk covered in the contract. The second type, over-the-counter contracts, are placed directly with capital providers such as hedge funds or reinsurers and are either warehoused or traded against other nonstandardized products. OTC contracts offer greater flexibility in specific weather triggers and payment plans, but experts say they carry greater liability to the end user in that they do not mitigate the risk of default of a capital provider. Where a weather derivative contract differs from a traditional insurance policy -- and where it can provide buyers with additional protection -- is its coverage of low-severity, high-frequency events like rain, snow and temperature fluctuations, as opposed to one-time catastrophes and natural disasters. At the market's genesis, energy companies purchased contracts based solely on temperatures, collecting payouts for the number of days the average winter or summer temperature registered above or below a preset threshold. Proponents attribute the market's growth largely to the addition of bespoke weather risk contracts on rain, snow, wind and other adverse conditions, as well as a cross-commodity products structure basing the payout on the frequency of a weather occurrence combined with the underlying market price or volume of a commodity produced. "Over the last decade or so, a lot of companies have looked more closely at their risks and found that an off-the-rack solution like heating and cooling degree day products didn't really fit that well," said Martin Malinow, CEO of the New York-based Galileo Weather Risk Management Advisors L.L.C. and a former WRMA president. "They needed a much more tailored solution that really fit not only the location but also the true nature of the underlying exposure," he said. The broader range of risks covered has fueled the expanded demographic and geographic diversity of customers using weather derivative products, said Bill Windle, president of WRMA's board of directors and a Woodlands, Texas-based managing director at Renaissance Reinsurance Energy Advisors Ltd. Energy remains the market's dominant participant, but surveys have shown increased interest from the agriculture, construction, transportation and hospitality industries.

 

"Especially in the last two or three years, the market has shown a much greater diversity in its customer base," Mr. Windle said. In 2004, 69% of all inquiries about weather derivatives were attributed to the energy sector. Last year, that fell to 46%, while 23% of the interest came from construction companies and 12% from the agriculture industry. Companies in the outdoor entertainment industry -- such as amusement parks, concert venues and open-air sports stadiums -- also have entered the market in recent years, Mr. Windle said. Weather derivatives also have enjoyed significant market growth outside the United States, particularly in Europe and Asia. Some 63% of last year's 998,000 OTC contracts were written in Europe compared with just 13% in 2005, according to WRMA. When the CME entered the weather derivatives market in 1999, it had only two product forms for futures and options based on heating and cooling degree days, said Paul Peterson, director of commodity research and product development for CME. Those contracts were solely for energy companies and available in just 10 U.S. cities, he said. "Today, we're up to 67 different products," Mr. Peterson said. "We're also up to 24 U.S. cities and we have contracts available in 11 other countries, including several European countries, Japan, Canada and Australia." Looking forward, proponents said there is ample opportunity for growth in the market, primarily in the green energy sector. Contracts for wind, solar and hydroelectric energy producers are in development, but have yet to be brought to market. Mr. Peterson said the CME is only in the beginning stages of crafting a contract tailored to the green energy sector. "It's a very complex process, but we're going to keep chipping away at it," Mr. Peterson said. "They're all viable topics, and all very good areas for future work."

Monday, September 05, 2011

Source: GARP

 

The investment management industry proved resilient in the 10 years since the terrorist attacks of Sept. 11, 2001, even though things can never be the same. Even some of the money management firms hardest hit have survived and thrived. Among them, Fiduciary Trust Co. International and Fred Alger Management Inc., decimated by the loss of 97 and 35 employees, respectively, when their World Trade Center offices were destroyed, will commemorate their lost colleagues for the 10th anniversary of the 9/11 attacks. Still, the money management industry didn't emerge unscathed from the tragedy: The attacks left a sense of vulnerability as a permanent and ugly scar, and forever changed the way the world thinks about investments. "9/11 fundamentally changed the world's confidence that we're always on firm footing and that we will get through any crisis," said J. Tomilson Hill, president and CEO of Blackstone Alternative Asset Management, New York. "Before the attacks in 2001, there was a sense that governments, including the central banks, would always be able to figure out a solution to any problem. But we came very close to having the whole global banking system -- the lifeblood of the global economy -- close down. 9/11 contributed to the sense that the institutions we rely on are not always in control and that sense of vulnerability affects everything -- markets, financial institutions, personal decisions," Mr. Hill said. That sense of vulnerability dramatically changed the perspective of market participants, sources said.

 

"There's no doubt that (9/11) had an indelible impact in terms of changing the way that we look at the world" and think about the connections that a more global environment has created in the 10 years since the terrorist attack, said Andrew W. Lo, a finance professor at the Massachusetts Institute of Technology and chairman and chief investment strategist of hedge fund manager AlphaSimplex Group, Boston. While 9/11 wasn't the first incident that sparked a far-reaching flight to quality, it did mark "a coming of age of the kind of global integration that we now take for granted," said Mr. Lo. Since 9/11 there have been a number of instances in which "multiple asset classes became locked in correlation," and that has "changed the way we think about risk management and investments," he said.

 

More risk

Said BlackRock Inc.'s Robert C. Doll Jr.: "The world, especially the U.S., became a much riskier place after 9/11. There has been a semipermanent increase in the risk premiums investors now pay because 9/11 introduced risk we didn't have before." Mr. Doll said he has "no clue about the magnitude of this cost. It's impossible to quantify." But he noted the new world order that emerged after Sept. 11, 2001, convinced him to factor geopolitical risk into his investment process. "What are the wild cards? Everyone is more wary and aware that these risky events could pop up unexpectedly, but no one can anticipate what they will be or where or when they will happen," said Mr. Doll, vice chairman, a director and CIO of global equities at New York-based BlackRock. The 9/11 "wild card" did hammer home to money managers and institutional investors alike just how unprotected their operations were from a wide variety of threats beyond terrorism, including natural disasters and man-made problems such as strikes and power outages. "The most tangible realization after Sept. 11 was just how unprepared Wall Street trading houses and the money management industry were for an event of this kind. 9/11 didn't end up moving markets on a permanent basis, but it changed how we all do business," said Stephen N. Potter, president of Northern Trust Global Investors, Chicago. Mr. Potter and others said the events of Sept. 11, 2001, unveiled dangerous new investment and operational risks and an industrywide realization that risk systems, business continuity plans, disaster recovery processes and system backups required massive upgrades. "The events of September 2001 heightened awareness of the possibility of black swan events and definitely accelerated the industry's focus on risk management and better scenario analysis. Back then, very few managers were factoring terrorism or geopolitical events into their risk management systems," said John S. Griswold, executive director, Commonfund, Wilton, Conn. At Commonfund, risk managers now "sit at the main table" and are an important part of the firm's entire investment process. Risk managers also pushed for "a much longer investment horizon" to match the mandate of its endowment fund clients, he said. Like many companies, Prudential Financial Inc., Newark, N.J., greatly expanded its business continuity planning after 9/11's "wake-up call," said Charles Lowrey, chief operating officer for the U.S. businesses. Prior to 2001, such plans were likely to focus on limited disruptions, such as how to respond if power lines to a company office were cut by a construction crew. After 9/11, suddenly people realized the need for "detailed, specific operating procedures" for an array of contingencies, Mr. Lowrey said.

 

Remote backup sites

The disaster planning of money managers of all sizes now includes multiple, remote, fully functional backup sites -- either owned by the company or by a third-party provider -- that can fully replicate the company's systems within a short time frame, said Sameer Shalaby, CEO of Paladyne Systems Inc., New York, which provides integrated technology to the money management industry. Site locations are confidential and the buildings are unmarked and completely nondescript. "Security of the data centers of these companies is extremely important and of huge interest to managers because the common belief is that the next big terrorist attack will be cyber. Investment managers are as concerned about cyber attacks as they are about physical attacks because both will disrupt their business," Mr. Shalaby said. He said institutional investors now conduct far more due diligence on their money managers' business contingency and disaster plans and are increasingly demanding documentation and evidence that those plans are functional. The $30 billion Public School & Education Retirement System of Missouri, Jefferson City, is one such investor, said M. Steve Yoakum, executive director: "9/11 absolutely was the impetus that reminded everyone, very strongly, of our vulnerabilities." He said Missouri's teachers are completely dependent on the retirement system for their benefits because they are not covered by Social Security. All but a handful of those benefit payments are made electronically, so the fund's systems and all of its vendors have to be absolutely disaster-proof. "We conduct very rigorous due diligence on the systems and backup plans of all of our vendors, including money managers and custodians, as well as anyone else we do business with, right down to the local bank that accepts our beneficiary's electronic payment," Mr. Yoakum said. Since 9/11, the fund moved its backup facility to a secure data center underneath a mountain in Branson, Mo., where its entire operation can be brought up within hours. "Beyond the threat of terrorism, we've had floods in this state and a devastating tornado in Joplin. We have to be prepared for any kind of disaster, natural or man-made."

 

Economic impact

Just how much impact 9/11 has had on the economic environment investors and money managers are facing now is a matter of contention. Many observers argue the attacks shouldn't be seen as a decisive economic factor. For example, the spending that can be directly tied to Sept. 11 -- the more than $1 trillion spent in Iraq and Afghanistan -- is dwarfed by the outlays deployed to respond to the recession the U.S. economy fell into at the end of 2007, noted Gary Shilling, president of economic consulting firm A. Gary Shilling & Co., Springfield, N.J. Some, however, believe the continuing ripple effects ultimately will prove considerable. The 9/11 attacks effectively siphoned trillions of dollars from the productive private sector and into government spending -- including homeland security outlays -- with an accompanying step-up in intrusive regulations, noted Robert D. Arnott, chairman and CEO of Research Affiliates LLC, Newport Beach, Calif. If the indirect effects of 9/11 -- as a pronounced inflection point that focused attention on geopolitical risks at the expense of grappling with a range of severe economic problems at home -- are added to the considerable direct costs of Iraq and Afghanistan, it's reasonable to see that attack as a "serious contributing factor," if not a primary factor behind today's difficult economic outlook, added Christopher J. Brightman, a director and head of investment management at Research Affiliates.

Saturday, September 03, 2011

Source: GARP

 

In the latest government effort to recoup mortgage meltdown losses, the federal regulator for Fannie Mae and Freddie Mac sued 17 banks over mortgage bonds that were sold to the giant home-finance companies during the housing boom and proved to be toxic. The lawsuits, filed late Friday in New York federal and state courts and Connecticut federal court, for the most part accused the banks of negligence in misrepresenting the risks embedded in securities backed by subprime mortgages and other risky loans. Some of the lawsuits, filed by the Federal Housing Finance Agency, also alleged fraud against some of the banks. The damage demands, which were not disclosed, could run well into the billions of dollars against the banking giants named in the lawsuits. A similar suit filed by the agency in July sought to recoup losses of more than $900 million from dealings with Swiss banking giant UBS. Shares of major U.S. banks named as defendants in the litigation tumbled Friday. Bank of America Corp. dropped 8%, Citigroup Inc. and Goldman Sachs Group Inc. fell more than 5%, and JPMorgan Chase & Co. declined more than 4%. Several defendants couldn't be reached or declined to comment. Others said they would aggressively defend themselves and characterized Fannie Mae and Freddie Mac as sophisticated investors that knowingly took on risk. They said the losses stemmed from market forces, not their errors and omissions. Fannie and Freddie "have in their past public statements acknowledged that their losses in the mortgage-backed securities market were due to the unprecedented downturn in housing prices and other economic factors, including sustained high unemployment," BofA said in a statement. The lawsuits illustrate how federal authorities, largely stymied in attempts to mount criminal prosecutions related to the mortgage crisis, are targeting Wall Street in civil lawsuits. The National Credit Union Administration has said it plans to sue as many as 10 banks that sold money-losing mortgage bonds to credit unions, with JPMorgan, the Royal Bank of Scotland and Goldman Sachs named defendants so far. The banks have denied wrongdoing.

The Federal Deposit Insurance Corp. also has filed dozens of lawsuits accusing bankers and various others of causing the collapse of federally insured institutions, including IndyMac Bank in Pasadena and Washington Mutual Bank in Seattle. The Federal Housing Finance Agency took control of Fannie Mae and Freddie Mac nearly three years ago as they skidded toward bankruptcy. Propping them up to keep the housing markets from collapse has cost taxpayers about $169 billion so far. Fannie and Freddie, which own or guarantee 65% of all U.S. mortgages and issue mortgage-backed bonds sold around the world, were barred from making significant direct investments in subprime loans. But they backed large numbers of loans made to borrowers with decent credit scores who didn't document their incomes. The bonds at issue in the lawsuits are so-called private-label securities, issued by lenders and Wall Street firms instead of Fannie and Freddie. While backed by risky loans, they were supposed to have been the safest of the bonds carved out of privately pooled mortgages. Fannie and Freddie were allowed to buy many of them to help satisfy requirements that they support lending to low- and moderate-income borrowers. But when huge numbers of loans went into default and the housing markets began falling apart in 2007, the supposed safeguards built into the structures of the securities proved inadequate and they suffered huge losses.

Friday, September 02, 2011

Source: GARP

 

Regulators on Friday closed two small banks in Georgia, boosting to 70 the number of U.S. bank failures this year. The pace of closures has eased in 2011 as the economy has slowly improved and banks work their way through the bad debt accumulated in the recession. By this time last year, regulators had shuttered 118 banks. The Federal Deposit Insurance Corp. seized Patriot Bank of Georgia in Cumming, Ga., with $150.8 million in assets and $111.2 million in deposits, and CreekSide Bank in Woodstock, Ga., with $102.3 million in assets and $96.6 million in deposits. Atlanta-based Georgia Commerce Bank agreed to assume the assets and deposits of the two failed banks. In addition, the FDIC and Georgia Commerce Bank agreed to share losses on $136.2 million of Patriot Bank of Georgia's loans and other assets, and on $69.2 million of CreekSide Bank's assets.

The failure of Patriot Bank of Georgia is expected to cost the deposit insurance fund $44.4 million. CreekSide Bank is expected to cost the fund $27.3 million. Georgia has been one of the hardest-hit states for bank failures. Regulators closed 16 lenders in Georgia last year. The closures of Patriot Bank of Georgia and CreekSide Bank brought to 19 the number of banks shut down in the state this year. California, Florida and Illinois also have seen large numbers of bank failures.

 

In all of 2010, regulators seized 157 banks, the most in any year since the savings-and-loan crisis two decades ago. Those failures cost around $21 billion. The FDIC has said 2010 likely marked the peak for bank failures from the Great Recession. In 2009, there were 140 bank failures that cost the insurance fund about $36 billion, a higher price tag than in 2010 because the banks involved were bigger on average. Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three were closed in 2007. From 2008 through 2010, bank failures cost the fund $76.8 billion. The deposit insurance fund fell into the red in 2009. With failures slowing, the FDIC's fund balance turned positive in the second quarter of this year; it stood at $3.9 billion as of June 30. Depositors' money - insured up to $250,000 per account - is not at risk, with the FDIC backed by the government. That insurance cap was made permanent in the financial overhaul law enacted in July 2010.

Wednesday, September 07, 2011

Source: GARP

 

Workers marched in Italy and Spain on Tuesday to protest planned spending cuts as new data confirmed fears of an economic slowdown across Europe. Regional stock markets dropped for a third day, and some had lost about 10 percent of their value since Friday. After a sharp sell-off Monday to start the week, the Stoxx 50 index of euro-zone companies shed an additional 1.8 percent Tuesday. U.S. stocks also slid for the third straight day Tuesday, although they rose above the day's lows in a late-afternoon rally. At the close, the Dow Jones industrial average was down 0.9 percent; the Standard & Poor's 500-stock index, 0.7 percent; and the Nasdaq composite index, 0.3 percent. The White House said Tuesday that it was confident Europe would be able to manage its growing debt crisis. "The Europeans face a difficult challenge, but we believe they have both the ability and the will to meet those obligations," White House spokesman Jay Carney said, adding that President Obama and senior aides had been in regular consultations with European leaders. Asian markets rebounded in Wednesday trading. Japan's blue-chip Nikkei 225 index ended its morning session up 1.4 percent. The market declines in Europe and the United States reflect widening concerns about the euro-area economy as governments battle a complicated and interconnected set of problems that have confounded them for nearly two years. Leading analysts have compared the situation to the months leading up to the 2008 collapse of Lehman Bros. and have warned that a fragile global economy could not stand another financial crisis of that magnitude.

 

But the sense of instability is clear, from the streets of capitals clogged with striking workers to the offices of central banks. Officials at the Swiss National Bank surprised markets Tuesday by imposing a minimum exchange rate of 1.20 francs to the euro. The Swiss have been struggling to curb their soaring currency, which has become a haven amid jitters over the euro and which threatened the Swiss economy by driving up the price of the country's exports. Some analysts said they feared a disruption in currency markets if other nations take similar measures to keep their currencies from rising as the dollar and the euro slump. The Swiss bank said it was prepared to buy "unlimited" amounts of foreign currency to support the minimum exchange rate. The Swiss franc fell nearly 8 percent against the euro for the day. Also Tuesday, Greece's finance minister sought to calm fears that his country was at serious risk of a second default, the Associated Press reported. Evangelos Venizelos pledged to speed up delayed reforms meant to trim the country's bloated public sector, open tightly regulated professions to competition and kick-start an ambitious privatization plan. "Greece is not the pariah of the European Union. It is not a permanent sore and problem," Venizelos told reporters. "It is an equal, competitive country that has a very serious problem regarding its public debt and fiscal deficit. We can and shall overcome this, but not without carrying out the structural reforms in full."

 

Euro-area leaders were continuing talks in Berlin on Tuesday over an expanded rescue program for the debt-burdened nation. In Washington, the trade group representing major financial companies said it had become increasingly worried that new rules meant to strengthen the banking system were undercutting economic growth. According to a study by the Institute of International Finance, the new banking rules, set by a committee of world central bankers convened in Basel, Switzerland,, are forcing banks to boost capital and cash levels when the economy needs stronger credit growth. Because of growing mistrust, particularly in the European banking system, capital is becoming more expensive to raise, another drag on bank profits, performance and lending. Even as the Federal Reserve Bank loosens the U.S. money supply to try to boost the nation's economy, the bank capital rules are pushing institutions to be more conservative, said the IIF's managing director, Charles Dallara. "It is essential to find the right balance in this process, especially at a time of pronounced economic weakness," Dallara said. Updated statistics showed that growth in the 17-nation euro area slowed sharply, to 0.2 percent, in the second quarter, compared with 0.8 percent for the first three months of the year. German factory orders fell in July, confirming a slowdown in the area's largest economy.

 

Analysts also said the measures that make up the gross domestic product warn of contractions on the way. Household spending is expected to continue falling as governments cut budgets, slash public-sector payrolls and take other steps to trim deficits, and exports, the one bright spot for countries such as Spain and Ireland, are beginning to dip as the world economy slackens. The data cast "further doubt on the region's ability to grow its way out of the debt crisis," Ben May, European economist for research consultancy Capital Economics, wrote in an analysis of the latest figures. The strikes in Italy and Spain were aimed at government efforts to control public debt and to maintain confidence that the two countries will be able to pay their bills without international bailouts of the sort that Greece, Portugal and Ireland required this year. Italy, in particular, would strain the available euro-area resources if it needed to be rescued. The Italian Parliament is debating how to trim its budget by $60 billion, and union members said they want to protect the social programs and benefits built up for Italian workers. In Athens, Venizelos's announcement came as Greece's borrowing costs hit a record high amid fears related to the government's faltering austerity program and the deeper-than-expected recession. Euro-area leaders accepted an expanded debt-relief program in principle at a July 21 meeting, but talks stalled after Finland demanded that Greece post collateral for Finland's share of an emergency loan. Failure of the 17 parliaments to approve the new program for Greece could put the country at risk of default again. That would threaten the many European banks that have lent money to the Greek government.

Wednesday, September 07, 2011

Source: GARP

 

Bank of America Corp. Chief Executive Brian Moynihan shuffled his management team, ousting two top executives as the embattled banking giant faces a plummeting stock price and mounting legal woes. Moynihan on Tuesday announced the departure of Sallie Krawcheck, the bank's head of global wealth and investment management, and Joe Price, president of consumer and small-business banking. Both were top lieutenants to former CEO Kenneth Lewis, who resigned in October 2009. Krawcheck, one of the most powerful women on Wall Street and a former top executive at Sanford C. Bernstein & Co. and Citigroup Inc., was hired by Lewis in 2009. Price had been the bank's chief financial officer under Lewis and became head of the consumer bank, Moynihan's former job, in early 2010. The Charlotte, N.C.-based bank named two other executives as co-chief operating officers: David Darnell to oversee businesses focused on individual customers, including credit cards, home loans, wealth management and small businesses; and Tom Montag as head of the businesses that serve larger companies and institutional investors.

 

Since the second quarter of 2010, Bank of America's global banking and markets business under Montag and the global commercial banking business under Darnell have reported combined net income of $11.5 billion, the bank said. Moynihan described the departure of Krawcheck and Price as "de-layering and simplifying" to remove a management layer. Price said his departure stemmed from Moynihan's New BAC initiative, which is studying how to make the bank operate more efficiently and reportedly is considering eliminating as many as 30,000 positions. "It became evident that streamlining could be done at the top as well," Price said. The management shake-up comes as Moynihan strives to sell non-core assets such as foreign credit cards and certain specialty mortgage businesses in a drive to raise capital and reduce risks at his company, the biggest U.S. bank as measured by assets. Investors have been worried by heavy losses in Bank of America's mortgage business and fear Moynihan may have to sell more company stock to raise capital, diluting the holdings of current shareholders. Bank of America shares Tuesday fell 26 cents, or 3.6%, to $6.99, and are down 48% this year.

Wednesday, September 07, 2011

Source: GARP

 

The Federal Reserve is moving toward new steps aimed at lowering interest rates on mortgages and other kinds of long-term loans, without making another massive infusion of money into the economy. When Fed officials hold a pivotal meeting in two weeks, they will strongly consider buying more long-term Treasury bonds, which should lead to lower interest rates for those bonds and other long-term investments. This would ultimately make it cheaper for businesses to borrow money for investments and push more dollars into the stock market, in addition to reducing rates on mortgages and other consumer loans. To pay for the bond purchases, the Fed would sell off some of the shorter-term bonds it already owns rather than printing new money. At their last meeting, Fed officials discussed whether to revive their earlier program of massive bond purchases, using newly printed money to buy hundreds of billions of dollars in securities as a way of pumping money into the economy. This discussion prompted wide speculation that the Fed might do it again. But now the consensus among Fed policymakers is jelling around the new strategy. While it might avoid some of the controversy that surrounded the bond purchases, including sharp criticism by some lawmakers and Republican presidential candidates, Fed officials expect the new approach to have a similar benefit for economic growth. The Fed's policy committee will consider this and other strategies at its meeting on Sept. 20 and 21.

 

The willingness of Fed officials to embark on this effort to lower interest rates reflects their serious concern about an economy that is on a knife's edge. Economic growth has been so weak in recent months that there is risk of a vicious cycle of falling incomes and employment - unless the Fed gives the economy a nudge. The idea of shifting the composition of bonds the Fed already owns - sometimes known as a "twist" operation - is not without downsides, however. Interest rates already are very low, and pushing them down further may not have much effect. One major aim would be to encourage people to refinance their mortgages, freeing up money to spend on other things and foster economic activity. But with so many people owing more on their homes than the homes are worth, relatively few are in a position to take advantage of lower rates to refinance. At the same time, by shifting from short-term bonds to longer-term ones, the Fed would face a greater risk of losing money when it is time to sell them. Just as for an individual investor, a 30-year bond is a riskier investment for the Fed than a two-year bond. "It's not going to change this into a smoking recovery, but at least it will be pushing things in the right direction," Michael Feroli, chief North American economist for J.P. Morgan Chase, said when asked about a possible shift in the Fed's bond portfolio. He estimated that the move would lower mortgage rates by 0.1 to 0.2 percent. The move to change the makeup of the portfolio would probably attract internal disagreement. Already, three Fed officials dissented from a decision at the last meeting by the policymaking board meant to lift the economy by extending how long the central bank envisions keeping interest rates low. At the upcoming meeting, which was expanded to two days to allow more discussion, Fed officials are likely to take up other possible measures. These could include pledging to keep the overall size of the bond holdings intact for a long period and detailing the specific conditions - such as an unemployment or inflation rate target - under which the Fed would begin scaling back its support for economic growth.

 

One official, Chicago Fed President Charles Evans, has publicly called for keeping low rates in place until the unemployment rate falls to 7 percent or inflation rises above 3 percent. Many of his Fed colleagues would probably chafe at his inflation target but might accept the general approach. Some Fed leaders have been advocating massive new purchases of bonds, akin to the $600 billion program announced last fall, according to minutes of the last policy meeting. But many Fed officials are resisting steps that would entail even larger bond holdings, which could be difficult to sell when the economy strengthens. The Labor Department's weak jobs report on Friday added momentum to the Fed's consideration of new steps. Not only did job creation come to a halt in August, but the previous two months' results were revised downward. The result: Job creation for four months now has been well below levels that would eventually bring the unemployment rate down. The Fed has a mandate to maintain maximum employment, and the past few months' job numbers show that ground is being lost on that front. "If they feel like we're no longer converging in the direction of full employment, even if previously it was a very slow convergence, then they have to be much more impatient," said Jan Hatzius, the chief economist at Goldman Sachs. "There is such a thing as stall speed, and the Fed wants to avoid getting to that point." Fed leaders might be more willing to take even more dramatic steps, such as a new round of bond purchases, if they saw that the Obama administration and Congress were fixing the dysfunctional mortgage market, which could in turn make those measures more effective. With so many people unable to take advantage of low rates to refinance, for instance, one of the major channels through which the Fed can help the economy isn't working normally. Fed Chairman Ben S. Bernanke has repeatedly said that the Fed compares the cost of policy steps, in terms of risk of inflation or trouble unwinding the measures, with the benefits for economic growth. A better-functioning mortgage market, according to a growing consensus within the Fed, could increase the benefits of new action without increasing the costs.

Wednesday, September 07, 2011

Source: GARP

 

A dramatic move by the Swiss Central Bank to weaken its currency has sent shockwaves through currency markets as worries over the health of the world's economy intensify. The Swiss National Bank (SNB) said it would buy "unlimited quantities" of foreign currency in an effort to drive down the value of the Swiss Franc, a currency that has surged 20% since the start of the year. The announcement did just that, immediately devaluing the region's currency and driving up the value of the euro, a move that should aid exporters from Northern Ireland if it lasts. Behind the bank's move -- described as unprecedented by currency traders -- is the fact investors have been rushing to buy the Swiss currency over the last few months to protect against the second wave of financial turmoil that has gripped some of the world's largest economies.

 

Its safe haven status meant the value of the Swiss currency climbed from around 1.30 francs/euro earlier in the year to near parity at one stage over the last few weeks. While revelling in its relatively resilient economy, the move put the country's exporters at a disadvantage and could have endangered its longer-term recovery. A strong Swiss franc means buyers using other currencies have to pay more for Swiss products. "The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development," the Swiss National Bank said in a statement. "The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of 1.20 francs." While the bank's move helped boost the Swiss stock market, jitters over the state of sovereign debt in Europe and the US economy sent bank shares around the world lower despite a more positive performance by some of the main indexes. US shares were particularly hard-hit as investors feared lenders face a growing list of lawsuits due to problem mortgages. But it is the fragility of the European sovereign debt that is at the forefront of investors' minds with contagion from Greece's precarious situation weighing heavy. "There's a sense that there's no lifeboat out there," said Paul Atkinson from Aberdeen Asset Management.

Monday, March 07, 2011

Source: GARP

 

Despite controversy over a proposal to reign in the bonuses of Wall Street executives, the Securities and Exchange Commission voted 3-2 to issue for comment a plan to reduce incentives and prohibit institutions from maintaining compensation arrangements that encourage "inappropriate risks." The plan is similar to one proposed by the Federal Deposit Insurance Corp. last month and stems from the Dodd-Frank Wall Street Reform and Consumer Protection Act. At financial institutions, as well as hedge funds, with total assets of $1 billion or more these firms are required to disclose the structure of their incentive-based compensation arrangements so the regulator can decide whether the bonus is excessive or could lead losses to the firm, the SEC said in meeting notes on Wednesday. Executives at firms with $50 billion in assets or more would be required to defer at least half of their bonuses for three years. There was concern about how the proposal would impact large firms, especially when it comes to recruiting and retaining top employees. Some think the limit to bonuses will keep large brokerage firms and financial advisory companies from being competitive. SEC Chairman Mary Schapiro said she wanted "to be very attuned to unintended consequences" and would be interested in hearing views about how the proposal would impact private fund advisors as well as other brokers' and advisors'. Meanwhile, the SEC also laid out three other proposals: new governance rules for clearinghouses, the removal of credit-ratings impacting money market mutual funds, and reopening the public comment period on a proposal to limit the control big banks have in governing clearinghouses. The proposal to remove credit ratings caused a stir because regulators have had a hard time finding a substitution for the ratings. The SEC voted unanimously Wednesday to do away with the requirement that money-market funds invest 97% of their assets in "highly liquid short-term investments of the highest quality." Instead, the SEC will replace that with a new standard: a money market fund's board of directors (or its delegate) must determine that the security presents minimal credit risks. All the proposals will be followed by a public comment period that will be open through April 25. A second vote by the commission is required before the proposal will be made final.

Monday, September 05, 2011

Source: GARP

 

In Aug. 3 testimony before the Senate Banking Committee, Thomas Hamilton, speaking on behalf of the Securities Industry and Financial Markets Association, stated that possible steps to take to solve the issues currently affecting our mortgage finance system could include the government limiting the amount of borrowing that banks can do from the Federal Home Loan Banks, and developing a market for covered bonds in the United States. Certainly, given the dire economic situation we find ourselves in, any additional sources of funding should be explored, but not at the cost of limiting the effectiveness of the Federal Home Loan Banks. Indeed, the Home Loan Banks came through the mortgage crisis in stellar fashion, providing advances to their members-more than 7,000 local lenders across the country-that reached $1 trillion at the height of the crisis. This vital liquidity was provided without a single loss on these advances, and therefore, not a penny of loss to taxpayers. Why cripple a winner to give a competitive advantage to an untested competitor-a potentially riskier one at that? Covered bonds are a common source of mortgage funding in Europe and are similar to our country's mortgage-backed securities, with the exception that the loans in these pools remain on the balance sheet of the issuing bank and the pool is actively managed. Obviously, this structure is only workable for very large banks, which explains its appeal in Europe, where large, state-sponsored banks dominate. Today, large U.S. banks can structure and bring to market issues of covered bonds. But the transactional costs and the absence of a government guarantee produces a relatively unattractive yield for investors, which leaves the covered bond proponent looking for some level of government support, or the option to expand the categories of assets in the pool-in addition to mortgages-to increase the yield potential. And we know what happened in the MBS market when the mortgage packagers and investors started chasing yield.

 

While the European covered bonds typically consist of high-quality loans, the proposed U.S. model would allow risky assets such as home equity loans, student loans, auto loans and credit card debt to be pooled into the securities. As Christopher Whalen, publisher of the Institutional Risks Analyst, was quoted in a March newspaper article as stating, "This proposal is about starting the Wall Street assembly line for selling toxic waste to investors." Another detriment to impairing the advances capacity of the FHLBs in order to encourage the growth of covered bonds is the adverse impact such a move would have on small banks. As Stephen Andrews, a community banker with the Bank of Alameda, a member of the FHLB of San Francisco, stated in March 11 testimony before the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises: "Smaller community banks would be at a competitive disadvantage in a covered bond market because they do not have the volume of mortgages necessary to support covered bond financing." So small banks would be shut out of the covered bond market and likely face higher advances fees from diminished and smaller-scale FHLBs. Community bankers are not the only ones concerned with the prospects of a covered bond market. In March, the FDIC issued a statement on the legislative proposal to create a covered bond market in the U.S. "The creation of this new government program will primarily benefit large complex financial institutions which already enjoy funding advantages over smaller financial institutions and nonfinancial commercial entities of all sizes. To provide these firms with additional government backed funding advantages over smaller banks and nonfinancial firms would be at odds with everything we learned coming out of the crisis and work in contravention to current efforts to end too big to fail." The FDIC, referring to the expanded asset types to be included in the pools, added that the proposed structure of a U.S. covered bond market "will thwart the nascent efforts to enhance market discipline in the wake of the financial crisis." Given the magnitude of the housing and mortgage crisis we recently experienced, it is important that we continue to debate and explore new initiatives that might enhance market opportunities and reduce future crisis. But we shouldn't jump into proposed solutions without fully vetting the pros and cons, given the significance of the issue to our economy and the consumer's well being.

Monday, September 05, 2011

Source: GARP

 

The biggest shake-up of British banking in a generation will damage the already flagging UK economy, a leading forecaster warns today. Strict "firewalls" between traditional High Street banking and more risky "casino" investment arms will cut GDP by 0.3pc, according to the Ernst & Young Item Club. The Independent Commission on Banking, set up to improve stability, is expected to recommend the ring-fencing when it publishes its findings next week. But the Item Club warns that the proposals by ICB chairman Sir John Vickers will drive up funding costs for banks and "curtail' lending to households and businesses. Neil Blake, an economic advisor to the Item Club, said: "The greater the restrictions on cross-funding between the retail and investment arms of banks, the more severe we expected the reactions of the financial markets to be and the greater the effect on large corporates and as a result UK GDP." Reform of the banking sector is set to stoke tensions in the Coalition in the coming weeks. Liberal Democrats want the banks to be broken up but senior Tories worry that performing major surgery now could result in a fall in lending to business and damage the economic recovery. "Early optimism for the financial services sector in 2011 has vanished," said Blake. "This significant change of fortunes has potentially serious implications for the recovery prospects of the wider economy."

 

World Bank president Robert Zoellick said the global economy "is entering a new danger zone' as weak growth and towering debts take their toll. "The financial crisis in Europe has become a sovereign debt crisis, with serious implications for the monetary union, banks, and competitiveness of some countries," he said. "The United States must address the issues of debt, spending, tax reform to boost private sector growth and a stalled trade policy. The world economy is entering a new danger zone this autumn." Analysts warned that some of the biggest names in British retail will add to the economic gloom. Home Retail Group is expected to report a 9pc drop in sales at Argos and a 3pc fall at Homebase. Currys and PC World owner Dixons looks set for a 13pc decline. The High Street recorded its worst sales for two years, with takings down 2.2pc last month. Manufacturers were more upbeat. The EEF said the sector was still growing at a "healthy" rate. The Bank of England is expected to take no action to stimulate the economy this week, leaving interest rates at 0.5pc. However, it is under mounting pressure to print more money.

Monday, September 05, 2011

Source: GARP

 

The recent parliamentary passage of a bill awarding the Bank of Korea (BOK), South Korea's central bank, a role in coping with financial instability has set the stage for the central bank to tackle problems in a flexible manner, the top central banker said Monday. The National Assembly on Wednesday approved a bill governing the BOK, allowing the central bank to keep financial stability as its policy priority, together with price stability. The passage paved the way for the BOK to play a role in preventing another financial crisis. "The passage of the bill means that an environment has been made (for the BOK) to flexibly respond to changing (economic) situations. This is not an issue where one institution takes authority away from another institution," BOK Gov. Kim Choong-soo told reporters. The amendment has been drifting for nearly two years in the National Assembly amid sharply divided opinions among stakeholders. The Financial Supervisory Service, the country's financial regulator, and local banks have been opposing the revision, claiming that the move will decentralize the watchdog's regulatory rights, thereby increasing burdens on financial firms due to potential frequent inspections. The passage of the bill will empower the central bank to cope with financial instability and conduct policies to stem financial systemic risks, thus allowing the BOK to play a role in tackling potential financial turmoil. Meanwhile, the BOK governor said that actions taken by the central bank cannot always be in line with market expectations. "The central bank needs to have good communication with market players, but it should not always act in tandem with market expectations," Kim said. Kim said as there are many economic agents like households and companies, it is natural that the BOK's policy decision cannot satisfy all players. His remarks came as the BOK will hold a monthly rate-setting meeting on Thursday. South Korea's consumer prices jumped a jaw-dropping 5.3 per cent in August from a year earlier, which analysts say warrants a rate hike to tame inflation. But dimmer global economic outlooks and heightened economic uncertainty are making more analysts bet on a rate freeze this month. The BOK froze the key rate at 3.25 per cent for the second straight month in August as the first-ever U.S. credit downgrade and the euro zone sovereign strains increased economic uncertainty.

 

Monday, September 05, 2011

Source: GARP

 

Taiwan's banks will soon be given a freer hand to operate in China once revised regulations governing cross-strait monetary exchanges are implemented, the Financial Supervisory Commission (FSC) said Friday. Under the revised regulations that were approved by the Executive Yuan on Wednesday, the existing "one out of two" rule -- only a parent bank or its sub-bank in a third region other than China can open either a branch or sub-bank in China or have stakes in a bank there -- will be lifted. Also to be nullified is another rule that stipulates that a bank can only have two choices from among the three available options -- setting up a branch or a sub-bank, or investing in a local bank. To minimize the possible investment risk, the new regulations set the ceiling of a bank's mainland China investment at no more than 15 per cent of its net value, while a financial holding company's total China investment should not exceed 10 per cent of its net value. Meanwhile, Chinese banks operating Taiwanese branches or sub-banks can receive single-sum deposits of no less than NT$3 million, in an effort to avoid possible risk for ordinary clients, the FSC said. The new measures are expected to go into force in one month, it added.

 

Thursday, September 01, 2011

Source: GARP

 

As part of its ongoing efforts to better align the interests of participants in the RMBS market and address the issue of risk retention, the Asset Securitization Forum (ASF) has come out with some guidelines relating to the repurchase of RMBS. The trade group is recommending that pooling and servicing agreements should include a provision for an independent reviewer as an enforcement mechanism for the representations and warranties related to loans. This reviewer should have adequate power to review the loans, including being given access to the loan files, upon the occurrence of a "review event," such as delinquency levels above a certain threshold. The ASF repurchase proposals also recommended that if the parties involved - such as issuers, investors and originators - are not satisfied with the outcome of the third-party review, they could go in for a dispute resolution process that will be binding. Tom Deutsch, ASF's executive director, said that these RMBS repurchase proposals are part of its ongoing Project RESTART effort and make up the enforcement mechanism for the model representations and warranties that the ASF had come up with in 2009. He expects that the use of this enforcement mechanism will mean that "enforcement happens quicker, faster, stronger than previous types of transactions and reduce litigation costs on deals going forward." The ASF believes that its RMBS repurchase principles will serve better at aligning the interests of market participants than the Dodd-Frank Act's proposals for risk retention, aimed at creating "skin in the game" for RMBS issuers.

 

"We think that the risk retention can be best served by better reps and warranties, and better repurchase provisions for those reps and warranties, rather than items like the premium capture cash reserve account that seem to go well beyond the mandate of Dodd-Frank," Deutsch noted. Jordan Schwartz, a partner with Cadwalader, Wickersham & Taft, also believes that the Dodd-Frank proposals are an excessive approach to risk retention in terms of, for instance, the provision calling for issuers to retain risk in the form of a vertical slice of the issuance, as well as the provision for the premium capture cash reserve account. "The premium capture reserve account was a creation of the regulators that implemented the Dodd-Frank provision, and not of the statute itself," according to Schwartz. "The statute itself simply requires a credit risk retention in an amount of not less than 5%." Schwartz believes that strong reps and warranties, backed by good governance making for effective remedies to enforce them, are sufficient to ensure that the interests of various parties to a securitization are aligned without the need for credit risk retention. "However, it seems that ship has sailed and some form of credit risk retention is inevitable, with certain exceptions set forth in the regulations for qualified residential mortgages ," he acknowledged. "In that way, strong reps and warranties and enforcement mechanisms can be considered a complementary feature of securitization to risk retention."

 

The current industry practice is that the parties to a transaction themselves determine if there is any breach of reps and warranties. While this worked well in the early days of securitization, when participants could rely on an honor system and the industry did not have many fly-by-night participants, there is a need for a more rigid enforcement mechanism now given the happenings during the market meltdown. As for the question of who will serve as an independent third-party reviewer of transactions, it could be any third-party that does not have any kind of interest in the deal to be reviewed. Firms already undertaking collateral risk management, or due diligence firms, could be a good fit to take on this role. There is also scope for new firms to be set up to satisfy this newly created role of third-party reviewer, which calls for an understanding of the residential mortgage origination process and transaction documentation, along with the application of good judgment. The ASF RMBS repurchase proposal also calls for recourse to a binding dispute resolution mechanism, as specified in the pooling and servicing agreement, in case the parties involved don't agree with the findings of the third-party reviewer. One area where there is scope for disagreement between investors and issuers is as to what triggers a review event. While issuers believe that the trigger for the independent review should be completely objective and performance-based, investors also want the ability to trigger a review themselves if they feel that it is warranted. Mani Sabapathi, a principal engaged in RMBS credit research with Prudential's fixed-income investment group, expects that it will be a continuing challenge to define what constitutes a review event for this purpose. According to him, the ASF has provided a high-level outline as to what constitutes a review event. Sabapathi believes that this ASF proposal addresses the most pressing concerns of investors. "This is a good starting point," he said. "Clearly a lot of details are yet to be resolved, but it lays out a pretty high-level framework that will improve the health of the securitization industry."

Thursday, September 01, 2011

Source: GARP

 

A national infrastructure bank that would entice private investors into road and rail projects could be a major part of the jobs package that President Barack Obama hopes will finally bring relief to the unemployed. The White House hasn't divulged the contents of the package that Obama is to unveil in an address to a joint session of Congress next week. But the president has pushed the idea of an infrastructure bank in recent speeches and has praised Senate and House bills that create such a government-sponsored lending institution. Whether the bank, which would need time to organize, could have any real impact on the jobs situation in the coming year - and particularly before the November 2012 elections - is in dispute. Obama seems to think it would. "We've got the potential to create an infrastructure bank that could put construction workers to work right now, rebuilding our roads and our bridges and our vital infrastructure all across the country," he said at a news conference in July. But Janet Kavinoky, director of infrastructure issues at the U.S. Chamber of Commerce, cautioned that "even in the next two years I don't believe the bank is going to be that kind of job creator." The best way to spur job growth in the short term is for Congress to pass long-stalled bills to fund aviation and highway programs, she said.

The Chamber of Commerce strongly supports the infrastructure bank. Kavinoky said the United States is one of the few large countries that lack a central source of low-cost financing for construction projects. But she said it's going to take time to get it running and come up with a pipeline of projects where funds can be invested. Sen. John Kerry, D-Mass., who's sponsoring an infrastructure bank bill, argued that "we have projects all across America that are ready to go tomorrow." He said the bank "could have money flowing in the next year easily." Michael Likosky, senior fellow at the NYU Institute for Public Knowledge and author of "Obama's Bank: Financing a Durable New Deal," says he is working with transportation agencies in California and New York that "are waiting for the federal government to say they are going to support these projects." A commitment to a national infrastructure bank could also provide a positive spark to financial markets and encourage investment, he said. The bank would supplement federal spending on infrastructure by promoting private-sector investment in projects of national or regional significance. The private sector currently provides only about 6 percent of infrastructure spending. Supporters, which range from the Chamber of Commerce to the AFL-CIO, say pension funds, private equity funds and sovereign wealth funds have hundreds of billions of dollars ready to be invested in low-risk infrastructure projects.

 

It's better than having pension fund money go to Treasury bonds, Likosky said. "It's really about changing our approach; we're in tough economic times and we will be for a while. We have to make sure the money we have goes further." The Kerry bill would require $10 billion in start-up money from the government to get the first loans going and cover administrative costs. The bank would be government owned, run by a board of directors, independent of any federal agency and self-sustaining after the initial expense. Public-private partnerships, corporations and state and local governments would be eligible for the loans. The bank's directors would pick which projects to finance based on an analysis of costs, benefits and revenue streams, such as from tolls or fees, for repaying the loan. Once the terms of the loan, including interest rates and fees to cover risk, are set, the Treasury Department would disburse the loan. Urban projects would have to be at least $100 million in size, rural ones $25 million. The infrastructure bank's loan could cover no more than 50 percent of a project's costs. "There is going to be a revenue stream for payback and therefore the project is going to stand on its own because it will be a good enough project to attract private-sector funding," said Sen. Kay Bailey Hutchison of Texas, one of several Republican co-sponsors of the Kerry plan. Supporters estimate the bank could set up as much as $160 billion in government loans over a decade and anchor as much as $650 billion in projects.

 

In the House, Rep. Rosa DeLauro, D-Conn., has a similar bill that relies on $25 billion in start-up money and makes use of bonds as well as loans to stimulate construction projects. Both Kerry and DeLauro would cover transportation, water and energy projects. DeLauro would also include communications projects. She says her bill is modeled after the European Investment Bank, which has been financing infrastructure projects for 50 years and last year invested more than $100 billion. Obama, in his 2012 budget proposal, envisioned spending $30 billion to start an infrastructure bank within the Transportation Department that would provide grants as well as loans to transportation projects. That idea drew opposition from the House Transportation Committee chairman, Rep. John Mica, R-Fla. He said in a recent article in the congressional newspaper Roll Call that it would be better to increase help for existing state infrastructure banks "rather than increasing the size of the bloated federal bureaucracy, as some advocate, by creating a national infrastructure bank." Kerry pointed to a 2009 American Society of Civil Engineers report that said $2.2 trillion needs to be spent over five years to bring the nation's roads, bridges and water systems up to an adequate level. He said Congress needs to both pass a new highway bill and agree on alternatives like the bank. "If we can leverage $650 billion and get money going in the transportation bill, we can begin to nibble away at the problem," Kerry said.

Thursday, September 01, 2011

Source: GARP

 

Liberal Democrat Cabinet minister Vince Cable has played down reports of a rift with Conservative coalition colleagues over banking reform. The Business Secretary said he did not "think there is a difference" within the Government over the likely proposed ring- fencing of banks' retail and investment arms. The Independent Commission on Banking is widely expected to propose the reform later this month, but reports have suggested that Chancellor George Osborne and Prime Minister David Cameron are sympathetic to lenders' claims that they will need several years to make the change. Senior figures in the business and banking community have warned against imposing the reform, particularly given the fragile state of European economies. CBI director general John Cridland said pushing ahead with the measure at the current time would be "barking mad". British Bankers' Association chief executive Angela Knight warned imposing the measures on lenders risked denting confidence and cutting the supply of credit to the economy. Mr Cable dismissed their concerns about the state of the economy as "disingenuous in the extreme" and said continuing anxieties about the health of banks showed the need for reform. The Prime Minister said no decisions would be made until the publication of Sir John Vickers' commission's report on September 12. He added: "I think the key thing we want from banks is lending into the economy so we can support growth and jobs, and we need to make sure we are not taking risks that put jobs at risk."

 

Mr Cable, who was visiting Edinburgh University yesterday, said he had worked closely with the Chancellor on the issue. He said: "I don't think there is a difference within the UK Government. "I've worked very closely with the Chancellor to set up the Independent Banking Commission and set up its terms of reference. "We both agreed publicly that there needs to be reform of the banking system." But Labour seized on newspaper suggestions the Business Secretary and Chancellor were at loggerheads over the reform. Shadow Treasury minister Chris Leslie said: "The Government needs to get a grip. The choked-off recovery we've seen since George Osborne's spending review and Vat rise should not be an excuse for ducking the necessary reforms. "Nor should rows between senior Cabinet ministers, and coalition politics, nor lobbying by the banking industry, stand in the way of delivering banking reforms that are in the national interest. "That's why in its final report next month the Vickers Commission should advise bickering ministers on the timing for implementing these reforms. "In the short term we need the banks to support the jobs and growth that are essential to get the deficit down. "That means tougher action to get the banks lending to small businesses and a fair tax on bank bonuses to fund 100,000 jobs for young people. "And in the medium term we need banking reforms that pass Labour's three tests of protecting customers and taxpayers, securing international agreement to protect jobs in Britain, and delivering a banking system that supports the long-term interests of the wider economy."

 

Wednesday, August 31, 2011

Source: GARP

 

Confidence in the United States and Europe crumbled this month as debt woes and weak growth took their toll. The mood in America and in the eurozone darkened as economic storm clouds gathered on both sides of the Atlantic. 'What we are going through is a crisis of confidence,' said Tom Porcelli, an economist at RBC Capital Markets. But the gloom was not enough to stop shares in London soaring yesterday as the FTSE 100 index played catch-up having been closed during the global rally on Bank Holiday Monday. The Footsie jumped 2.7pc or 138.74 points to 5268.66 despite a loss of momentum in New York, Frankfurt and Paris. Figures in the US yesterday showed consumer confidence sank to its lowest level in more than two years in August. The report by the Conference Board blamed the fallout from political wrangling over America's debts and the loss of the country's prized AAA credit rating. Turmoil in the financial markets also hit confidence as did mounting fears that the US could drag the Western world back into recession. Charles Evans, head of the Chicago Federal Reserve Bank, said the US economy is 'going sideways' and said the jobs market was 'consistent with being in a recession'. A monthly survey by the European Commission showed things are no better in the eurozone.

 

Economic sentiment in the 17-nation single currency bloc suffered the sharpest decline since the height of the financial crisis three years ago. It came as European leaders battled to prevent the crisis that has crippled Greece, Ireland and Portugal spreading to Spain, Italy and France. Chris Williamson, chief economist at Markit, said the two reports gave recovery hopes 'another hammering'. He said: 'This is bad news for the global economic recovery as a whole. Expect to see growth forecasts revised down in the light of these new numbers.' Ratings agency Standard & Poor's cut growth forecasts for the eurozone to 1.7pc in 2011 and 1.5pc in 2012 from 1.9pc and 1.8pc. It downgraded Britain to 1.3pc and 1.8pc from 1.5pc and 2pc. 'We continue to believe that a genuine double dip will be avoided because we see several sources of continuing growth over the next 18 months, including still buoyant demand from emerging markets,' said Jean-Michel Six, S&P's chief economist for Europe. 'Nevertheless, we recognize that downside risks are significant.'

Wednesday, August 31, 2011

Source: GARP

 

Treasury yields rose Wednesday after encouraging economic news drew money into higher-risk investments. Orders for U.S. manufactured goods rose sharply in July, lifted by a surge in demand for autos and strong orders for commercial aircraft. Overall factory orders climbed 2.4 percent, the largest increase since March. The rebound by automakers sowed hope among investors that manufacturers are recovering after a soft patch this spring and summer. Many factories slowed production because of supply chain interruptions related to the earthquake and tsunami that hit Japan in March. When they failed to bounce back quickly, many feared that the economic recovery was losing momentum. Stocks rose on the brighter economic outlook Wednesday, drawing money away from lower-risk, low-return Treasurys. The yield on the benchmark 10-year Treasury note rose to 2.23 percent from 2.18 percent late Tuesday. Its price fell 50 cents for every $100 invested. Bond yields rise as their prices fall. Treasury yields declined sharply this month as demand for U.S. government debt increased. The yield on the 10-year note fell below 2 percent for the first time Aug. 18. It fell more than half a percentage point this month. The rally came despite a downgrade of U.S. debt by Standard & Poor's. S&P blamed political wrangling over raising the nation's borrowing limit.

 

Analysts said the move by S&P failed to deter traders because there are no comparable low-risk investments that are easy to buy and sell. "Treasurys are the only game in town, the only alternative" for traders seeking to protect their money against a downturn, said Kim Rupert, managing director at Action Economics LLC. Traders took the S&P downgrade with "more than a grain of salt," she said, in part because the other two major rating agencies still have a top rating on U.S. debt. Treasury prices fell on Wednesday in part because some investment funds were rebalancing their portfolios to match indexes of U.S. sovereign debt. Certain funds promise investors the same returns as bond indexes that track a basket of Treasurys. The funds often wait until the end of the month to adjust to any changes in the market. The buying spree can boost demand for Treasurys at month's end, Rupert said. Traders snapped up Treasurys this spring to protect their assets as uncertainty spread about the outlook for the global economy. Higher-risk investments such as stocks declined for much of the month, at times swinging wildly between gains and losses. The volatile trading was driven in part by fears about Europe's debt crisis. Banks there hold unknown amounts of debt issued by cash-strapped nations such as Greece, Ireland and Portugal. All three have needed financial lifelines from their neighbors. A default by one nation that uses the euro could also hurt other the economies of other nations that use the currency.

In the U.S., the Federal Reserve acknowledged this month that the economic recovery is weaker than it had expected. It announced a plan to keep short-term rates near zero for the next two years. That effectively capped yields for shorter-term Treasurys. Traders seeking higher returns were forced to buy longer-dated securities. Hope is growing among traders that the Fed will launch another round of bond purchases after its September meeting. By boosting demand for Treasurys, the Fed can push yields even lower. One aim is to maintain ultra-low rates on consumer loans. Another is to give investors an incentive to move money into higher-risk investments such as stocks. Traders have bought up Treasurys in anticipation of a possible move by the Fed, said Ian Lyngen, senior government bond strategist with CRT Capital Group LLC. "The market thinks that's increasingly likely," he said. The price of the 30-year bond fell $1.81 for every $100 invested. Its yield rose to 3.61 percent from 3.52 percent late Tuesday. The yield of the 2-year note was flat at 0.20.  The yield on the three-month T-bill was 0.01 percent. Its discount wasn't available.

Wednesday, August 31, 2011

Source: GARP

 

The Chinese regulator may consider relaxing banks' capital requirements, said a Shanghai Securities News report on Wednesday. The report quoted a source from the China Citic Bank as saying that the second draft of the Administration Rules on Commercial Banks' Capital has relaxed the requirements on the measurement of banks' capital and risk assets. The impact of the second draft is much less strong as the banks expected, said the source. The report also quoted a senior management from a joint-stock bank as saying that the banking regulator is considering reducing the risk weight of the assets. China Banking Regulatory Commission (CBRC) in the middle of August issued the Administration Rules on Commercial Banks' Capital for public opinion. The rules stated higher requirements on banks' capital adequacy ratio, which led to market concern that banks may initiate a round of refinancing boom to boost their capital.

Wednesday, August 31, 2011

Source: GARP

 

South Korea's parliament on Wednesday approved a bill aimed at beefing up the role of the Bank of Korea (BOK) in coping with financial instability, paving the way for the central bank to play a role in preventing another financial crisis. On the last day of the extra session, the National Assembly passed a revised bill governing the central bank in a 147 to 55 vote, allowing the central bank to keep financial stability as its policy priority, together with price stability. The amendment has been drifting for nearly two years in the National Assembly amid sharply divided opinions among stakeholders. The Financial Supervisory Service, the country's financial regulator, and local banks have been opposing the revision, claiming that the move will decentralize the watchdog's regulatory rights, thereby increasing burdens on financial firms due to potential frequent inspections. The passage of the bill will empower the central bank to cope with financial instability and conduct policies to stem financial systemic risks, thus allowing the BOK to play a role in tackling potential financial turmoil. "The passage of the act will help the BOK play a role in conducting macro-prudential policies," BOK Gov. Kim Choong-soo said at a press conference. "It is meaningful that the stage has been set for the central bank to cooperate with related institutions to brace for potential global crises." The law regulating the BOK's activities was last revised in 1998, making price stability the central bank's top priority while its authority to supervise local banks was transferred to the financial regulator. But the global financial crisis and recent scandals over ailing savings banks, following the financial watchdog's regulatory mishap, have lent support to revising the BOK law so as to strengthen its role in stabilizing the financial system. "Even if the BOK failed to secure the right to probe into financial firms on its own, the bill will help the BOK expand its authority," said Jun Sung-in, an economics professor at Hongik University.

 

The bill will legally guarantee the BOK's right to request the FSS to jointly inspect financial firms. If the BOK requests a joint probe, the FSS is required to launch the investigation within one month, which will be listed by presidential decree. The central bank could also demand the financial watchdog share information on non-bank institutions like savings banks. But the bill did not reflect the BOK's wish to investigate local financial firms' business practices on its own when lenders face an acute shortage of liquidity. Some experts have been arguing that a failure to secure authority to probe financial firms will limit the BOK's push to promote financial stability. Under the revised bill, local banks will also be required to put aside cash reserves for their bank bonds, a move that the lenders oppose because it will likely hurt their profitability. Currently, Korean banks are required to set aside a certain amount of customer deposits in cash at the central bank. South Korean banks had sold a huge volume of bonds over the past few years ahead of the 2008 global financial crisis in a bid to secure cash to finance excessive lending. But heavy sales of bank bonds contributed to bringing about a funding squeeze when the financial crisis cropped up. The specific reserve ratio for bank bonds will be decided later. But it is widely expected that in times of normalcy, the required reserve ratio will be zero for bank bonds. But when signs of financial problems appear, lenders will be required to put aside reserves for bank bonds.

Wednesday, August 31, 2011

Source: GARP

 

Some Federal Reserve officials were inclined to move more aggressively than the central bank did at its meeting three weeks ago to try to address the weakening economy, according to new minutes of the meeting that show a committee deeply worried about the outlook. The Fed leaders who gathered on Aug. 9 to shape the nation's monetary policy thought the information since their previous meeting indicated "that economic growth so far this year was considerably slower than they had expected." They noted that the labor market was worsening, household spending growth slowing, and consumer and business confidence weakening. Against that backdrop, the Fed decided to announce that it envisions keeping interest rates very low through the middle of 2013, viewing this as "a measured response to the deterioration in the outlook" and "a possible way to reduce interest rates and provide greater support to the economic expansion," the minutes said. Some wanted to go further: "A few members" of the Fed policy committee argued that the deterioration in the economy "justified a more substantial move at this meeting," though they were willing to go along because the policy shift was in the direction they preferred.

The meeting minutes do not identify those officials wanting more aggressive action, but the Federal Reserve Bank of Chicago president, Charles Evans, essentially identified himself as one in a CNBC interview Tuesday, saying, "I think we need to do more." The minutes added clarity on what doing more might consist of. "Some" participants at the meeting said the Fed could buy more Treasury bonds to try to push money into the economy, essentially launching a third round of "quantitative easing," the strategy undertaken late last year when the economy was dipping. Others suggested shifting the Fed's portfolio into longer-term bonds, which might help the economy by pushing down mortgage and other interest rates. And still others suggested cutting the 0.25 percent rate that the Fed currently pays banks for money they park at the central bank. As was previously announced, three members of the Fed committee had the opposite impulse - dissenting from the decision because they preferred not to include language about keeping rates low for the next two years. Thus, the Fed again finds itself in a period of wide disagreement, with people arguing diametrically opposite positions. In some ways, the current situation, with the economy again at risk of slipping into a recession, presents the Fed with more difficult decisions than did a similar moment last year. Then, inflation was clearly coming in well below the level of 2 percent or so that the Fed aims for, allowing plenty of latitude to act. Now, inflation is around that target, meaning that any further monetary easing risks pushing inflation too high. Fed Chairman Ben S. Bernanke said in a speech Friday that the central bank "is prepared to employ its tools as appropriate" to support the economy and keep prices stable. However, he declined to give specific hints that the Fed will take action at its Sept. 20-21 meeting.

Wednesday, August 31, 2011

Source: GARP

 

SILVIO BERLUSCONI'S decision to backtrack on his emergency austerity budget and scrap a proposed tax on the wealthy has triggered a popular outcry while risking market confusion and fresh confrontation with the European Central Bank. The move was made by his centre-right government as Italy saw weaker than expected demand for its first auction of treasury debt since the ECB stepped in earlier this month to buy Italian bonds. In return for bond purchases, Rome agreed to undertake sweeping cuts and impose structural reforms amid sovereign debt concerns. Mr Berlusconi said in a television interview yesterday that revisions, which include scrapping a widely criticised tax on high earners and scaling back cuts to local authorities, made the budget "more equal". But labour unions and the opposition reacted with anger to the discovery that the changes would also delay retirement for many Italians by excluding from pension calculations years spent at university and in military service. It was also unclear how the government would make up a budget shortfall of an estimated [euro]4 billion as a result of the revision, analysts said. The Bank of Italy warned yesterday that the country faced low growth because of the cuts. Giada Giani, a senior economist at Citi, said the revisions "are definitely not a positive". She told the Financial Times: "What is clearly negative is the number of times the government has changed the package, sending the wrong signal to the market - of confusion, of not knowing which decision to take." A senior Italian banker who declined to be named said: "It is a clear step from bad to vague." It is unclear how the ECB will react. The central bank will want to ensure the size of the overall austerity package remains unchanged and that the budget is balanced in 2013. It also sees structural reforms as potentially more important than fiscal reforms.

 

Mario Baldassarri, chairman of the senate's finance commission, said scrapping the wealth tax and cuts to local authorities would take away [euro]5 billion in total from the austerity budget, offset by only about [euro]500 million raised from other small reforms. "There is the possibility that a balanced budget will not be reached by 2013," Mr Baldassarri said. He added that the revised package did not contain the structural reforms required by the ECB. Adding to mounting threats of civil action against the cuts, Italy's doctors threatened to strike. They will be among the worst hit by the change to pensionable age, having spent longest at university. Popular anger was also directed at the country's top-earning footballers, who were exempted from the wealth tax, having threatened to strike over it. The tax will still be levied on members of parliament. In the bond auction, Italy sold nearly [euro]8 billion of government debt but met relatively weak demand, which threatened to reignite market pressure on the highly indebted country. Bid-to-cover ratios for 10-year debt remained stubbornly low at 1.269, sending yield spreads over the equivalent German debt to 300 basis points, the highest level since the repurchasing programme resumed. The rise in yields, which nonetheless stayed well below levels hit before the European Central Bank began buying Italian debt three weeks ago, raised questions about the sustainability of Rome's funding efforts and threw the focus on to a Spanish bond auction tomorrow. Analysts said the sale showed Italy was not facing an immediate funding crisis.

Tuesday, August 30, 2011

Source: GARP

 

The latest storms in Europe's sovereign debt crisis and stock-market chaos have triggered the deepest collapse in economic confidence in the eurozone since 2008's financial meltdown, gloomy new figures revealed today. The European Commission's latest snapshot of sentiment across the 17 euro countries revealed plunging confidence among businesses of all types and adds to the welter of dire economic news from the region in recent days. The closely watched monthly survey showed sentiment falling at the fastest pace since December 2008 in the wake of the Lehman Brothers collapse and will fuel fears of a double-dip recession. It comes after a month of turbulence which saw the US stripped of its gold-plated AAA credit rating and speculative attacks on Spain and Italy, which forced the European Central Bank to intervene to buy up the bonds of the debt-laden nations. The eurozone managed growth of just 0.2 percent in the second quarter of 2011 as powerhouse economies like France and Germany stagnated. The commission expects growth to slow down further due to high oil prices in the first half of the year and the recent turmoil in markets. Commerzbank economist Christoph Weil said: "Concerns about euro-area fiscal deficits and the global slowdown are aggravating economic confidence." The commission's survey is seen as a robust indicator of future activity, but the indicator fell to 98.3 in August from a revised 103 in July with optimism declining in all sectors. Financial information firm Markit added to Europe's worries after its latest survey found the region's crisis closing consumer wallets. Sales fell for the fourth month in a row as retailers "continued to endure challenging conditions", Markit said. The euro dropped more than a cent against the dollar and also fell against the pound as markets reacted to the poor data. The worries over confidence and growth will increase the pressure on ECB president Jean-Claude Trichet to reverse its previous hard line on inflation after two interest rate hikes earlier this year. Bank of England Governor Sir Mervyn King has also flagged up the eurozone's woes as the biggest risk to the UK's fragile recovery, as the region accounts for almost half of the nation's exports. The latest business barometer from Lloyds Bank Corporate Markets showed confidence among UK firms slumping at the fastest rate since March 2009.

 

Tuesday, August 30, 2011

Source: GARP

 

South Korea's top financial regulator called on local credit card companies Tuesday to strengthen their risk management as banks' recent moves to halt household loans could raise demand for card loans. "Due to local banks' efforts to stem rising household debt, credit card loans could sharply increase, which is feared to hurt their financial asset quality," Financial Supervisory Service (FSS) Gov. Kwon Hyouk-se said in a meeting with nine heads from card companies and consumer financing firms. He said credit card companies need to beef up the risk management in order not to see a sharp rise in card loans as more people could scurry to non-bank financial institutions to borrow money. His remarks came as the financial watchdog is stepping up efforts to curb growing household debt, which reached 876.3 trillion won (US$815.6 billion) as of end-June. Several local banks plan to halt the extension of fresh household loans until Wednesday in a bid to join the regulator's efforts to curb household debt. Market watchers said banks' move to control loan growth is feared to prompt borrowers to rely on other financial institutions like card firms and non-bank institutions. The South Korean economy was hard-hit in 2003 when the credit card bubble burst following excessive issuance of plastic money. Mindful of the risks of a credit card boom, the financial regulator is seeking to limit credit card companies' total assets and new card issuance, as well as marketing costs. Kwon also emphasized that local card players should make efforts to prevent possible leaks of customer information. Concerns about online security breaches have heightened due to a series of hacking attacks on local financial firms and a popular Internet portal. Hackers struck the consumer finance firm Hyundai Capital Services Inc. and the National Agricultural Cooperative Federation, or Nonghyup, early this year, stealing customers' personal data and crippling online transactions.

Tuesday, August 30, 2011

Source: GARP

 

Top European officials defended the health of the continent's financial system Monday, trying to stem concerns that Europe's slowing economy and high levels of government debt may cause some of its banks to fail. In separate statements European Central Bank President Jean-Claude Trichet and European Economic and Monetary Affairs Commissioner Olli Rehn said banks within the 17-nation euro currency zone have been steadily raising the amount of capital set aside as a cushion against losses and will not face the sort of cash crunch that helped trigger the recession in 2008. Their comments come amid gathering evidence of an economic slowdown that threatens to knock Europe's crisis response further off course and spark a new round of global economic turbulence. With growth stalling, there is mounting fear that struggling countries like Greece, Spain and Italy could miss their targets for reducing their public debt and further undermine the confidence of international investors, who are already demanding higher interest rates in return for lending to them. The remarks were also a rebuff to Christine Lagarde, head of the International Monetary Fund, who warned during the weekend that weakness in European banks posed a key risk to the economy. Speaking at a conference of central bankers and economists in Jackson Hole, Wyo., Lagarde, a former French finance minister, said the banks needed "urgent recapitalization." She said the euro zone's financial system had to prove it could withstand the impact of an economic slowdown and possible losses arising from investments in the government bonds of heavily indebted nations.

 

The dispute among prominent European officials reflects a divide over solutions to Europe's problems. Despite calls, including those from the Obama administration, for more dramatic action, Europe's unwieldy and often cautious politics have led to a stepwise approach that has yet to allay concerns that the monetary union may crack apart. At a meeting Monday of the European parliament's Economic and Monetary Affairs Committee, Trichet and Rehn offered reassurance about the health of the banks. Trichet explained that the ECB has guaranteed open-ended lending to any European bank that needs cash, removing any liquidity threat to the firms or the wider economy. "There cannot be a liquidity problem for the European banking system," Trichet said, noting there are about $700 billion in loans outstanding from the ECB and a further willingness to lend whatever banks need. The ECB in recent weeks also has been buying large sums of government bonds issued by Italy and Spain to help keep down their borrowing costs. (The interest rate on bonds tends to decline as demand increases.) Last week, the central bank increased its holdings of government bonds by another $7 billion. As in the United States, banks in Europe were hard hit by the financial crisis, which began in 2007, and subsequent recession. While Europe's financial industry has gone through a major reorganization, the process is not as far along as in the United States. The consolidation of Europe's banking sector is incomplete, with more closures and mergers considered likely, particularly in troubled economies like that of Greece. On Monday, Greek officials announced that two of the country's largest banks were merging, with the hope that the combined firm could withstand the hazards in the economic climate.

 

Although Rehn acknowledged "deterioration" in Europe's growth prospects - and the possibility that problems in the financial industry could drag down the broader economy - he also said the region's banks were getting stronger. European banks "are significantly better capitalized now than they were one year ago," and weaker ones are being required to raise more capital, Rehn said. In her weekend remarks, Lagarde said public funds should be used, if necessary, to shore up the continent's banks. Otherwise, she warned, even strong economies like Germany and France could suffer bank failures or face a "liquidity crisis" if financial firms stop lending to each other out of fear. Her comments underscored the growing concern about how Europe's challenges may affect its banks and their ability to support economic activity through loans. The root of the problem is government bonds issued in struggling countries. Large investments in these bonds, which were considered secure when they were made, are now in doubt. As the European economy slows, this could lead to an increase in defaults and reduced profits for the banks. As concerns grow about the health of banks, their ability to raise new cash, either through issuing their own long-term bonds or taking out short-term loans, is becoming more constrained and more expensive, according to IMF and other reports.

Lagarde's call for a quick and broad recapitalization plan is aimed at breaking that dynamic. The aim would be to restore investor confidence in the banks - and the confidence of banks in each other - by injecting enough new money to make clear they could weather both an economic slowdown and losses on their government bonds.

 

But this approach would face stiff political resistance in much of Europe for several reasons. After using tens of billions of dollars in taxpayer funds to prop up banks in recent years, European leaders are reluctant to pump in more. The proposal would be especially controversial in stronger countries like Germany, which could be obliged to provide money to help banks elsewhere, for instance in Spain. Moreover, European leaders over the past year have agreed to ante up for emergency loans to Greece, Ireland and Portugal. Expanding this program by making bailout funds available to banks across the euro zone could prove difficult for national leaders to justify. Addressing the danger posed by holdings of government bonds would also require leaders to jettison the assumption that these bonds would never default. Current regulations do not force banks to set aside capital against possible losses on their holdings of government bonds, unlike other types of investments.

 

Tuesday, August 30, 2011

Source: GARP

 

In 2005, thriving Bank of America Corp. had a spare $3 billion to invest in one of China's biggest banks, with an eye on making a return but also exploring the business landscape of a fast-growing country. Six years later, the capital-thirsty Charlotte bank is selling half its current stake in China Construction Bank for a $3.3 billion gain as it continues a turbulent recovery from the financial crisis. Investors welcomed the sale, boosting Bank of America's shares by 8 percent to $8.39 on Monday. The shares are down 37 percent this year, but have climbed in four straight trading days. The widely expected sale of the CCB shares is the latest step by chief executive Brian Moynihan to build capital to absorb mortgage losses and meet new international standards. In the process, he is dismantling many of the deals engineered by his predecessor, Ken Lewis. While Bank of America has struggled with mortgage losses tied to Lewis' acquisition of Countrywide Financial in 2008, the CCB investment has produced positive results. Bank of America sold CCB shares in 2009 for pretax gains of $2.8 billion and $7.3 billion. In the first six months of this year, Bank of America also reaped dividend payments of $837 million from CCB, up from $535 million in the same period a year ago. "This was a good acquisition that Lewis made," said Gary Townsend, chief executive of Hill-Townsend Capital, which invests in banks.

 

Bank of America may have preferred to keep some of the assets it's selling, but necessity and a strategy to focus on core businesses are spurring the sales, Townsend said. After first investing in CCB in 2005, Bank of America added to its stake in 2008, ultimately amassing 44.7 billion shares, equal to about 19 percent of CCB's stock. On Monday, the bank confirmed it's selling 13.1 billion shares for about $8.3 billion in cash proceeds. The bank will continue to hold about 5 percent of CCB's shares, less than the 9 percent stake it originally took. The sale to an unidentified group of private investors is expected to close in the third quarter. The bank bought the batch of CCB shares that it's selling at a price of 2.79 a share in Hong Kong Dollars. Now it's selling them for 4.94 -- a 77 percent return. The sale price, however, is below the 5.29 they traded for on Friday. In late 2010, the shares traded above 8.00. Bank of America was prohibited from selling the shares until Monday. Shedding the shares has a number of positive results for the bank. It generates about $3.5 billion in so-called Tier I common capital, and it also reduces the amount of riskier assets on the bank's balance sheet by $7.3 billion. Simply reducing the CCB stake below 10 percent is also a plus as the bank works to meet new capital standards that are being phased in starting in 2013. That's because investments in financial institutions above 10 percent will require a deduction in the capital levels reported by a bank. The sale of the CCB shares is an "incremental positive" for the bank, Baird analyst David George wrote in a report Monday. Baird remains confident the bank will meet Tier I common capital ratio requirements in 2015 or 2016, before the 2019 deadline, through earnings and by shedding assets, George wrote.

 

Bank of America expects to exceed all minimum requirements through the six-year phase-in period, bank spokesman Jerry Dubrowski said. Although Moynihan has insisted the bank doesn't need to issue new stock to raise capital, investors have remained wary of that pledge. Issuing new stock dilutes the holdings of existing shareholders. Last week, Moynihan reached an agreement to allow Warren Buffett to inject $5 billion in the bank. The CEO said the bank didn't need the capital but recognized the positive effect of a Buffett investment. That $5 billion stake will be in preferred stock but it comes with a provision that would allow Buffett to buy common stock, which would dilute common shareholders if triggered. Buffett's warrants to buy common stock help the bank's capital ratios under current rules, but don't aid the bank under future rules unless they are exercised. Since taking over in 2010, Moynihan has reached agreements to sell the bank's stake in a Brazilian bank, a mortgage insurance unit, shares in asset manager BlackRock, overseas credit operations and other assets. The bank has also signaled its interest in selling the rights to service certain mortgages, which are a negative in capital ratio calculations. "They own so many things you can almost see another (sale) anytime," said Townsend, of Hill-Townsend Capital.

In addition to taking a stake in CCB, Bank of America forged a strategic partnership with its Chinese counterpart, giving it insight into one of the world's fastest-growing economies. The two banks' customers, for example, have free access to both banks' ATMs. Bank of America has also advised CCB on governance, risk management, credit cards and other areas. Beijing-based CCB, one of China's biggest banks, has about 13,400 branches and about 39,874 ATMs. That compares to Bank of America's 5,700 branches and 17,800 ATMs. The two banks are discussing a potential extension and expansion of their current partnership, Bank of America said. "Our partnership with China Construction Bank has been mutually beneficial," Moynihan said in a statement.

Tuesday, August 30, 2011

Source: GARP

 

THE British Bankers' Association has called for the Independent Commission on Banking's proposed reforms to be delayed until the economy has recovered and taxpayers have been repaid for bailing out the banks. Angela Knight, the BBA's chief executive, said markets and economies were now more fragile than when the ICB published its preliminary report in April, and imposing costly reforms on lenders risked denting confidence and cutting the supply of credit to the economy. Ms Knight said: "We have a high degree of uncertainty, market turbulence and lack of confidence that governments in other countries have got a sufficient grip on their economies. We are in for a very difficult autumn. "This is therefore the time to concentrate on economic recovery and paying back ... the Government and taxpayers. "By all means think about new regulation, but now is not the time to add that as an overlay with respect to costs, uncertainty or whether it is going to do anything beneficial anyway," she said. The BBA's intervention comes two weeks before the ICB publishes final plans for increasing stability and competition in UK banking. It will then be up to the Chancellor, George Osborne, to decide whether and at what pace to implement any reforms. The commission's main proposal was to "ring-fence" retail and investment banking operations to separate essential functions from trading. The ICB did not say how it would make the separation and the banks are anxiously awaiting details.

Monday, August 29, 2011

Source: GARP

 

A government official said on Monday [29 August] that debts incurred by local governments are different from those found in the debt-laden United States and the European Union (EU), adding that the likelihood that local governments will default on their debts is low. Xu Lin, director of the Monetary and Financial Department of the National Development and Reform Commission (NDRC), the country's top economic planning agency, made the remarks in a statement posted on the commission's website. Xu said China has learned a valuable lesson from the current debt crises in the United States and the EU, adding that it is imperative to adopt new measures that will help local governments manage their debt and guard against risks. He said China's local government debts, particularly those raised through local government financing vehicles (LGFVs), are largely used to build infrastructure, which indirectly generate revenue and boost local economies. Xu noted that China has strong solvency, given the rapid growth of its economy and fiscal revenues. In addition, the amount of realizable assets held by local governments is "quite large," he said.

 

According to the National Bureau of Statistics, China's gross domestic product (GDP) rose 9.6 percent year-on-year to reach 20.446 trillion yuan (3.2 trillion U.S. dollars) in the first half of this year. The country's national fiscal revenue jumped 30.5 percent from a year earlier to 6.67 trillion yuan in the first seven months of this year. Local government debts totaled 10.72 trillion yuan as of the end of 2010, or roughly 26.9 percent of the country's GDP, according to data released by the National Audit Office in June. If debts owed by the central government are included, the total debt is still less than 50 percent of China's GDP. Xu said that governments and supervisory departments at multiple levels have introduced risk-reducing measures against local government debts since the second half of 2009. "It would be very unlikely for our local governments to default on their debts," he said, adding that local governments' investments and debts must be kept within a reasonable scope to avoid systematic debt risks.

China's banks have been ordered by the China Banking Regulatory Commission to stop providing loans to local governments for unapproved projects and to tighten credit management in order to prevent debt increases. Concerning the weak subscription of bonds sold by LGFVs, also known as quasi-municipal bonds, Xu said that rising yields for such bonds show that investors are more experienced in handling risks.

 

"It is unnecessary to panic or even go short on those bonds based on unreasonable judgments," Xu said, citing normal repayment of capital and interest on such bonds, as well as strict and transparent requirements for bond issuance. Chinese cities usually use capital raised through selling quasi- municipal bonds to fund infrastructure construction. Xu said the increased difficulty in selling corporate bonds via the LGFVs is the result of monetary policy changes and investors' worries about local government debt risks. He said that investors' worries have reminded the NDRC to pay more attention to the potential risks of such bonds and to take measures to protect bond investors' interests.

Monday, August 29, 2011

Source: GARP

 

The Japanese Financial Services Agency's 2011 business year guidelines for its oversight of financial institutions will focus on how banks and others are supporting reconstruction in areas affected by the March earthquake disaster. The FSA will use the guidelines for the year that runs from July 2011 to June 2012, when it inspects financial institutions. Many people in areas that bore the brunt of the March 11 earthquake and tsunami were left jobless and homeless. With such circumstances in mind, the FSA will examine whether institutions are working with borrowers saddled with pre-existing debt who have been forced to take out fresh loans to rebuild. The guidelines call for appropriate loan modifications as well as the smooth provision of loans to disaster-hit areas. The FSA will also check to make sure banks are thoroughly managing credit risks at major borrowers. To enable lenders in quake-hit zones to focus on supporting reconstruction, the FSA plans to freeze on-site inspections of these institutions for the time being. It will also encourage regional financial institutions in such areas to tap public funds to strengthen their operations under a law designed to buttress sound lenders. The FSA will also ramp up oversight of price decline risks in institutions' stock and bond holdings and liquidity risks, in light of recent financial market turmoil stemming from European and U.S. debt woes. The inspections are also set to strengthen oversight of systems at financial institutions, especially in the wake of Mizuho Bank's massive breakdown in March. By doing so, the FSA aims to curtail the risk of systems malfunctions beforehand. The FSA will also scrutinize credit ratings agencies to ensure fairness and prevent conflicts of interest.

Monday, August 29, 2011

Source: GARP

 

Reserve Bank of India Deputy Governor Subir Gokarn has said banks would have to balance risks when lending to small and medium enterprises (SMEs). "If banks are looking at SMEs as a significant part of their lending activity for expanding their portfolio, they will have to balance the credit to the sector with the consideration of increased riskiness that comes with the increase in portfolio," Gokarn told an SME summit here. He said fair amount of attention has been given to the finance and credit problems of the SME sector as many banks have taken initiatives in providing funds to them. "Banks need to realise that as they move down the scale of hierarchy, risks will increase...that is the nature of business and commercial environment. Therefore, there is a need to balance out risk with lending activity," Gokarn said. He further said there is a need for developing a mechanism for risk management or risk mitigation. "Both lenders and borrowers need to develop a mechanism to mitigate or manage risk". Gokarn also pointed out that government policy intervention can make this sector more viable and competitive. Besides, he said SMEs need to adopt a collaborative approach for their overall development. "If they collaborate, they will be able to leverage larger challenges such as technology availability, brand building and marketing among others," he said.

 

Sunday, August 28, 2011

Source: GARP

 

The world economic recovery is in new peril of derailing, the head of the International Monetary Fund said Saturday as she called on leaders in the United States and Europe to take aggressive and immediate action to address new cracks appearing in the global economy. The global economy is in a "dangerous new phase," said Christine Lagarde, the IMF managing director, speaking at a conference of top central bankers and economists. The world is endangered by "a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed." Unlike in the first wave of global crisis in 2008, governments have fewer tools to address the simmering problems, Lagarde acknowledged. But there remain solutions, including addressing long-term debt problems in the United States and Europe while moving cautiously in the near term; addressing problems in the U.S. housing market that are making it hard for Americans to get out from under their debts; and recapitalizing European banks. The comments came near the close of an annual gathering of central bankers and leading economists from around the world, which occurs each year in the Grand Teton mountains and is organized by the Federal Reserve Bank of Kansas City. At the same event on Friday, Federal Reserve Chairman Ben S. Bernanke said the U.S. economy will ultimately return to its pre-crisis prosperity, but that it will take good policy decisions to get there. Lagarde issued more of a call to arms to the central bankers. "We must act now, act boldly and act together," said Lagarde, calling for a coordinated plan of attack on the simmering new crisis by officials on both sides of the Atlantic. The U.S. and European governments must simultaneously move to reduce long-term budget deficits and provide more support for job creation today, she said.

 

"It does not necessarily mean more upfront drastic belt-tightening," Lagarde said. "If countries address long-term fiscal risks like rising pension costs or health-care spending, they will have more space in the short run to support growth and jobs." And she said the U.S. government should intervene more in the housing market to help reduce the burden of mortgage debt. She argued for more aggressive programs to help homeowners who owe more on their mortgages than their homes are worth, stronger intervention by housing finance firms Fannie Mae and Freddie Mac, and policies to help more homeowners refinance to take advantage of low mortgage rates. European officials also need to rein in their longer-term finances in ways that do not cut spending so rapidly as to undermine growth, Lagarde said. And European nations need to strengthen the finances of their banks by helping them add more capital - perhaps using a financial stability fund established by European governments last year as a mechanism to bail out Greece and other nations. More fundamentally, she said, Europe's governments need to deepen their political connections. "The current economic turmoil has exposed some serious flaws in the architecture of the euro zone, flaws that threaten the sustainability of the entire project."

 

Lagarde also said that central banks should continue pumping money into the world economy to try to boost growth. "Monetary policy also should remain highly accommodative," she said, "as the risks of recession outweighs the risk of inflation . . . policymakers should stand ready, as needed, to dive back into unconventional waters." Jean-Claude Trichet, president of the European Central Bank, who leads the setting of monetary policy for the 17 nations that use the euro currency, was speaking on the same panel but avoided such specific endorsements of new policy action. He did, however, urge vigilance amid an uneven economic situation. "All advanced economies are put into stress," Trichet said. "The business model of the U.S., Japan, the U.K. are all under question." Europe as a whole, he noted, has a lower budget deficit than the United States and Japan. But, "the problem is that we are challenged in our governance."

 

Saturday, August 27, 2011

Source: GARP

 

Federal Reserve Chairman Ben S. Bernanke, insisting that the long-term U.S. economic prospects remain good, took aim at Washington policymakers for causing upheaval in financial markets and failing to do their part in bolstering the flagging recovery. Bernanke did not rule out new action by the central bank to stimulate growth, but he emphasized in a much-anticipated speech Friday that the Fed could do only so much by regulating interest rates and other monetary policy. He practically goaded the White House and Congress to do more to create jobs and strengthen the economy using fiscal policy, which would include both tax cuts and federal spending. Although it is important to reduce the nation's deficits over time, he said in unusually blunt language for a central bank leader, it would be a mistake to "disregard the fragility of the current economic recovery" and create "fiscal head winds," a reference to short-term spending cuts at a time of immediate economic needs. Some analysts took Bernanke's speech as a sign that the Fed was prepared to provide new monetary stimulus, possibly as early as its next policymaking meeting in late September. "He basically punted until then," said Cornelius Hurley, a Boston University professor and a former assistant general counsel at the Fed. Rep. Brad Sherman (D-Sherman Oaks) said Bernanke would probably have to take some action because no major fiscal stimulus was likely to come out of the deeply divided Congress and a "political system that is mostly broken." Bernanke spoke at an annual Fed conference in Jackson Hole, Wyo., shortly after the government released a report that revised downward the second-quarter economic growth to a meager annual rate of 1%, from 1.3%. The revision was largely a result of weaker exports. On the other hand, private spending and investment in the April-through-June period were slightly higher than initially estimated. Growth in the second half of this year is expected to be a bit stronger, but consumer spending -- a major driver of the economy -- remains weak amid sluggish hiring and stagnant income gains. And economists said the risks of a double-dip recession have risen sharply as the debt crisis in Europe and the political firestorm over the debt ceiling in Washington and the subsequent downgrade of U.S. debt have jolted Wall Street and taken a toll on public confidence.

 

Bernanke blamed the nasty debt-limit battle for disrupting the markets and "probably the economy as well." "The country would be well-served by a better process for making fiscal decisions," he told central bankers, economists and others gathered at Grand Teton National Park. "Fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals." And he warned that continuing partisan warfare over economic policy could inflict long-term damage, no matter what policy decisions were ultimately made. "Similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses," he said. Stock markets, which have been on a roller-coaster ride since the downgrade of U.S. debt earlier this month, initially fell after Bernanke's remarks. But they quickly bounced up, with the Dow Jones industrial average finishing 134.72 points higher, or 1.2%, at 11,284.54. Some investors had hoped Bernanke would signal a new round of major Treasury bond purchases, as he did a year ago at the same conference, in a bid to drive long-term interest rates even lower and stimulate more lending. But having already flooded the financial system with hundreds of billions of dollars and pledging earlier this month to keep short-term interest rates near zero for two more years, Bernanke echoed many outside economists in questioning how much bang the Fed could get with another fat dose of bond purchases. "The Fed has done everything possible -- and then some," said Alice Rivlin, a former Fed vice chairman and a senior fellow at the Brookings Institution. "I don't think anybody is convinced that [additional] monetary policy could affect the recovery greatly," Rivlin said. "If there is action, it has to come from fiscal authorities." President Obama is preparing to deliver a speech after Labor Day outlining a new job-creation plan that could include an extension of the Social Security payroll tax cuts and long-term unemployment benefits, as well as a boost for infrastructure work and job training. But many doubt that Obama could push most of his proposals through a House controlled by Republicans who have insisted on reducing spending and cutting back the government's role in the economy. In his speech, Bernanke acknowledged that the recovery has been slower than expected -- and not just because of temporary factors, such as high oil prices and the earthquake and tsunami in Japan. He attributed some of the persistent weakness to the deep slump in the housing market and a financial crisis of historic proportions. Bernanke sought to reassure people that the U.S. economy, despite all its problems, had not lost competitive advantages that could lead to long-term growth and prosperity. He mentioned America's diverse economy, technological superiority, entrepreneurial culture and research capabilities. "Although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years," he said. At the same time, Bernanke noted that some of the short-term problems -- and the policies taken or not taken to address them -- could present long-term troubles. Specifically, he cited the large numbers of unemployed people who have been without work for more than six months, a group that now constitutes nearly half of the 14 million people who are officially jobless. "Under these unusual circumstances," he said, "policies that promote a stronger recovery in the near term may serve long-term objectives as well."

Friday, August 26, 2011

Source: GARP

 

Stocks rose in afternoon trading Friday after Federal Reserve Chairman Ben Bernanke said the U.S. is on track for long-term economic growth. Trading volume was light, a sign that many traders were leaving the New York area ahead of Hurricane Irene. The storm is expected to reach the region late Saturday night. A spokesman for the New York Stock Exchange said trading is expected to open as usual on Monday. Bernanke announced no new economic stimulus measures during his speech at a conference in Jackson Hole, Wyo. He left open the possibility of more action by the Fed if another recession looks likely. Indexes fell sharply as the speech was released and it became clear that Bernanke was not promising additional support of the economy. The Dow Jones industrial average was down about 78 points shortly before the speech started and slumped as many as 220 points shortly after Bernanke started speaking. It recovered those losses within an hour and stayed higher the rest of the day. Optimism had been building on Wall Street this week that Bernanke might announce some kind of action Friday. Bernanke laid out plans for a bond-buying program at the same conference a year ago. Half an hour before the closing bell, the Dow was up 92 points, or 0.8 percent, to 11,240. The Standard & Poor's 500 index rose 13, or 1.1 percent, to 1,172. The Nasdaq composite index rose 52, or 2.1 percent, to 2,471.

 

The S&P 500 is up 5 percent this week, putting the widely used index on track for its first weekly gain after a four-week losing streak. It would also be the biggest gain since the week that ended July 1. Microsoft Corp led the 30 stocks that make up the Dow with a 3 percent gain. Tiffany & Co. rose 8 percent, the most of any of the 500 stocks in the S&P index, after the luxury retailer raised its profit forecast for the year. In his speech, Bernanke focused on the long-term strengths of the U.S. economy, saying that they "do not appear to have been permanently altered by the shocks of the past four years." That shot of optimism helped lift markets. "In the American economy, the only thing that's really lacking right now is confidence," said David Kelly, chief market strategist at JPMorgan funds. Kelly said the Fed has few remaining options to help the economy, but action by the central bank might not be necessary. "People who understand the limits of monetary policy also understand that the economy has what it takes to grow," Kelly said. Other analysts said that Bernanke's speech also helped lift investor sentiment. Liz Ann Sonders, chief investment strategist at Charles Schwab, said Bernanke's speech was an "acknowledgement that the Fed is not out of tools and that they stand ready" to act if needed. Underscoring how fragile the U.S. economic recovery is, early Friday the government said the nation's economy grew at an annual rate of just 1 percent in the April-June quarter, weaker than previously estimated. The report renewed concerns that the U.S. might be headed for another recession. Nine of the past 11 recessions since World War II have been preceded by a period of growth of 1 percent or less. The Fed has already pledged to keep short-term interest rates low until mid-2013. Low rates make higher-risk bets such as stocks more attractive. At last year's conference in Jackson Hole Bernanke signaled that the central bank would buy more government bonds to lower long-term interest rates. Stocks rose steadily during the period when the Fed bought up $600 billion of Treasurys. The government lowered its estimate for economic growth in the April-June quarter because of fewer exports and weaker growth in business stockpiles. That means the economy expanded only 0.7 percent in the first six months of the year, its worst pace since the recession ended in June 2009. The yield on the 10-year Treasury note spiked in the hour after Bernanke's speech. It was 2.13 percent just before the speech and rose to 2.22 percent in the hour after the text was released. In afternoon trading the yield was 2.20 percent. Demand for Treasurys has been strong in part because of instability in Europe. Germany has balked at proposals to bulk up bailout efforts for Greece, Portugal and Ireland. A group led by Finland is demanding collateral on the bailout loans to Greece, highlighting growing policy divisions among countries that use the euro. Greece can't afford to set aside collateral for every nation participating in the bailout. Finland's move could scuttle the plan. The last time the New York Stock Exchange was closed due to weather was in 1996, when the opening was delaying until 11:00 am due to a snowstorm. It was last closed for a hurricane on September 27, 1985.

Friday, August 26, 2011

Source: GARP

 

Commodities rose broadly Friday after Federal Reserve Chairman Ben Bernanke said the economy should improve over time, even though it still needs near-term help. In an address at Jackson Hole, Wyo., Bernanke said the Fed is prepared to use other measures, as needed, to promote economic growth and would meet for two days next month to hold a "fuller discussion." He also suggested that Congress needs to do more to promote hiring and growth, or risk delaying the economy's return to full health. Bernanke's comments seemed to encourage investors. Most commodity prices were lower before Bernanke's speech but finished higher. Analysts had expected Bernanke to make few, if any, changes from the position outlined earlier this month in which Fed policymakers said they would leave interest rates near zero at least through mid-2013. They also said it was possible they would take other steps, such as another round of bond purchases, to stimulate growth. Earlier Friday the government lowered its estimate of second-quarter U.S. economic growth to an annual pace of just 1 percent, below its earlier estimate of 1.3 percent. Kingsview Financial analyst Matt Zeman said he believes the market already accounted for the slowing economy and the possibility that Bernanke would not unveil any new measures to help growth. That left investors most of the day to reposition their holdings ahead of the weekend as Hurricane Irene began delivering rain to the East Coast. MF Global senior market strategist Rich Ilczyszyn said he believes investors have to look at each individual commodity market to get an idea of future demand and supplies. He said the market should remain robust because consumers will still need to buy gasoline and food, and industrial metals will be needed for rebuilding infrastructure. It was a volatile week for gold trading. Gold for December delivery rose $34.10 to finish at $1,797.30 an ounce after nearly hitting $1,900 an ounce as Monday's trading ended. In other metals trading, September silver rose 20.7 cents to $40.952 an ounce, September copper increased 2 cents to $4.099 per pound, October platinum rose $4.50 to $1,826.90 an ounce and September palladium increased $5.20 to $756.35 an ounce. Benchmark crude rose 7 cents to end at $85.37 per barrel on the New York Mercantile Exchange. In other Nymex trading, heating oil rose 2.26 cents to $3.0158 per gallon, gasoline fell 1.57 cents to finish at $2.786 per gallon and natural gas increased 0.6 cent to $3.912 per 1,000 cubic feet. December wheat rose 9.25 cents to finish at $7.97 a bushel, December corn increased 23.5 cents to $7.67 a bushel and November soybeans rose 30.75 cents to $14.235 a bushel.

Friday, August 26, 2011

Source: GARP

 

Jim Senary has invested for long-term, home-run stock growth plenty throughout his lifetime. But today, the 57-year-old former Delphi Corp. financial analyst is opting for a safer, more conservative approach with his investment dollars. Even with the stock market as volatile as it's ever been -- and many analysts said it's simply because of fear-stricken media consumers -- investors feel as if the stock market is too risky a play. But Senary, like many other investors, puts his money in companies that offer high-yield dividends, whether they come in monthly, semi-annual or annual dividend payments. "I came to the realization that I'm at the age where I'm going to have to rely on a steady cash flow," Senary said. "A sure dividend is more important than the growth of the stock." In the past 80 years, dividends have accounted for approximately 40 percent of the S&P 500's total returns, according to Thornburg Investment Management. That's a statistic that Robert Gardner, CPA and financial adviser with Stifel, Nicolaus & Co. Inc., Butler Wick Division in Canfield, Senary's adviser, says is often overlooked during bull markets. "Dividends have a greater appeal in slow-growth environments," he said. "We basically look to grow our wealth in stocks by appreciation of shares and dividends. As significant appreciation from here is being debated, especially lately, dividends have been gaining attention." Dividend yields are calculated by dividing the annual dividend per share by the current share price. Gardner said that as the baby-boomer generation begins to retire, those individuals seek, but have trouble finding, a sufficient source of income from less volatile, lower-return investments such as CDs, corporate bonds and U.S. treasuries.

 

"Dividend-payers tend to be the more mature, established companies that have weathered various economic storms and have maintained their payouts," he said. But that hasn't deterred conservative-style investors, most of them older, who choose a "growth and income" style of investing, Gardner said, even if they have no immediate income need. "A lot of people are looking to retire," said Brian Laraway, financial adviser at Bury Financial Group in Poland. "They're using dividends to help bridge their gap from their pension and Social Security. It's some spending money." The dividend-seeking approach is also more popular today, including among younger investors, because of lower tax rates. The government used to tax dividends as ordinary income; dividends are now taxed at the capital-gain rate. Congress recently extended the lower capital gains and dividend tax rates through the end of next year. The long-term maximum capital gain rate is 15 percent for assets owned for more than one year. Investors in the 10 percent or 15 percent marginal income-tax brackets will pay no tax on gains or qualified dividends. Though dividends themselves may seem like a fiscally conservative approach to investing, not every company pays out dividends, and not every company pays out worthwhile dividends. Gardner said dividend yields are commonly in the 2.5 percent to 3.5 percent range, but some can reach as high as 6 percent. "You can't deny there are certain sectors that pay dividends," said Laraway, who cited the utilities, financial, energy and health-care sectors as some that do. "You don't see a lot of tech companies that pay dividends."

 

Reynolds American Inc., one of America's largest tobacco companies (with products such as Camel, Pall Mall, Kool and Kodiak), has a divided yield of 5.93 percent -- and that's in addition to the near-13 percent market gain since the beginning of 2011. Verizon Communications is another company with a better-than-average dividend yield. Even with a less than 1-percent market return so far this year, it still has a dividend yield of 5.6 percent. Laraway said that dividend-seeking isn't all about high-yield returns, either; it's also about the consistency and longevity of dividend payments. Senary said the same thing and cited Countrywide as an instance of high-yield dividends that eventually disappeared. "When you're looking at the dividend aspect, you have to look at the overall company," he said. Global pharmaceutical company Eli Lilly and Co. has given out 10 dividends over the last decade. Coke has a modest 2.8 percent dividend but has shelled it out for nearly a half-century and increased it multiple times. If it's not for the consistent returns, it's also for the peace of mind, and investors aren't giving up too much. "Considering the role that dividends have played in total return of the market, I don't feel such investors are sacrificing the potential for attractive long-term market gains when compared with pure-growth investors," Gardner said. "And it may be a smoother ride."

Thursday, August 25, 2011

Source: GARP

 

Bad debts, already a concern for the banking industry, may grow in the wake of rising interest rates, Reserve Bank of India's (RBI) deputy governor Anand Sinha said. "The stock of NPAs (non-performing assets, or bad debts) is rising since 2006-07. Although gross NPAs have declined sharply from 15.7% in 1997 to 2.24% now, the trend is a matter of concern," Sinha said in Mumbai on Wednesday. "But we don't see it as a systemic risk." RBI has raised its policy rate 11 times since March 2010 to control inflation. The rate is now 8.25% and analysts expect one more round of hike next month. Bankers say they are getting more debt restructuring proposals from small and medium-sized enterprises that are unable to service their debts. Sinha said Indian banks will need a large amount of capital to maintain proper capital adequacy under the Basel-III norm, an international accounting standard, which requires lenders to set aside higher capital. Banks are prepared for now as they don't have a large trading book. Except for two or three banks, Sinha said, all other Indian banks are adequately capitalised for moving to the new capital norms. But lenders and their majority owners should brace up for higher capital requirement. Sinha did not say how much capital will be needed. Basel-III, a standard set of norms in the making since the financial crisis of 2008, will be implemented in India over a number of phases, beginning in 2013. Crisil Ratings director Ramaraj Pai said the 26 public sector banks will need a whopping '8 trillion in core capital by 2019, when the Basel-III norms will be fully implemented. As of fiiscal 2010, these banks had a core capital of only '70,000 crore, which is well above the Basel-II requirement. Sinha said banks' mandatory investment in bonds, known as statutory liquidity ratio (SLR), will not be considered eligible as liquid assets when the new norm sets in. Currently, 24% of an Indian bank's deposit base has to be invested in government securities. The committee preparing the Basel-III norms has rejected RBI's suggestion to include SLR as liquid asset as the investment is mandatory. Telling banks to invest in bonds over and above this limit will be cost-negative for banks. This is a dilemma for the RBI, Sinha said without elaborating.

 

Thursday, August 25, 2011

Source: GARP

 

A gauge of the risk of lending to top Japanese firms climbed to a roughly 15-month high Wednesday as a downgrade of Japan's government debt added to worries about stock prices and corporate earnings. The Markit iTraxx Japan index of credit default swaps rose 15.48 points to 160.06, higher even than immediately after the March 11 earthquake. Corporate credit-default swaps settled down through the end of July, in part on expectations of improved earnings, but have turned upward this month. With U.S. and European financial markets unsettled, "the trend toward risk aversion has grown even stronger in Japan as well," says Koji Shimamoto at BNP Paribas Securities (Japan) Ltd. Wednesday's cut to Japan's sovereign credit rating by Moody's Investors Service stoked this sentiment. Moody's dropped Japanese banks' ratings accordingly, and that has an indirect impact on the creditworthiness of nonfinancial firms that rely heavily on bank loans. Swaps on some major companies have exceeded post-quake highs. The cost of insuring against default on five-year Toyota Motor Corp. (TSE:7203) bonds rose to a roughly 15-month high of 84 basis points. Five-year swaps on Softbank Corp. (TSE:9984) climbed to 144 basis points, the most in about six months. Both are below the warning level of 200. Anxiety over credit risk remains confined for now. Yields on major corporate bonds were largely flat in the secondary market. But given the difficulty in predicting how U.S. and European market turmoil will affect Japan, "the situation will continue to be unstable," predicts a bond trader at a domestic bank.

Wednesday, August 24, 2011

Source: GARP

 

Stocks in Europe and the U.S. rose Wednesday after data showing a surge in demand for cars and planes in July offered an unexpectedly upbeat sign of life in the U.S. economy. Investors on both sides of the Atlantic shrugged off a cut in Japan's credit rating that had weighed on Asian markets earlier in the day.  But stocks are likely to fluctuate ahead of Friday's speech by Federal Reserve Chairman Ben Bernanke at an economics conference in Jackson Hole, Wyo. Investors hope Bernanke will signal a third round of massive bond-buying to boost the faltering U.S. recovery.  Britain's FTSE 100 rose 1.9 percent to 5,227 points. Germany's DAX jumped 3.4 percent to 5,723 and France's CAC-40 added 2.4 percent to 3,158.

 

After initially opening lower, Wall Street also turned higher after the Commerce Department reported an unexpected 4 percent surge in demand for long-lasting manufactured goods in July. Demand for autos and auto parts jumped 11.5 percent, the most in eight years. Aircraft orders, a volatile category, soared 43.4 percent, after falling 24 percent in June. The data is encouraging because it shows resilient demand for goods that require big, long-term investments. In morning trading, the Dow Jones Industrial Average rose 0.5 percent to 11,236, while the broader S&P 500 gained 0.6 percent to 1,169. The report from the Commerce department "reinforces other data that the economy wasn't at serious risk of recession through July," said David Resler, chief U.S. economist at Nomura Securities. Retail sales and industrial production also held up well last month, he said. The positive report also boosted oil prices, as a growing economy has more demand for energy. But analysts have warned that any long-term stabilization in global stock markets will likely only come once there is a better plan to get the U.S. economy to grow faster and create more jobs as well as a lasting solution to the eurozone's debt crisis. "If Bernanke does not pull a rabbit out of the hat at Jackson Hole on Friday risk trades could look vulnerable once again," analysts at Credit Agricole cautioned. Fresh data out of the eurozone indicated that some businesses are already preparing for potential troubles.

 

Germany's closely watched Ifo index of business optimism fell more than expected in another negative signal about Europe's largest economy. The index fell to 108.7 for August from 112.9 in July. Market analysts had expected a smaller drop to 111.0. "August's drop in Ifo business confidence adds to the growing evidence that the German economic recovery has faltered," analysts at Capital Economics wrote in a note, adding that a slowdown for the eurozone's growth engine is set to hurt other members of the currency union that are still fighting to pull themselves out of crisis. The European Union's statistics office, meanwhile, said that industrial new orders in the currency union dropped 0.7 percent in June from the previous month. In May, industrial orders had grown 3.6 percent. Earlier in Asia, Japan's Nikkei 225 index fell 1.1 percent to close at 8,639.61 after opening higher early Wednesday. Sentiment was dented after Moody's Investors Service downgraded Japan's credit rating to Aa3 from Aa2, citing weak growth prospects for the world's No. 3 economy, massive government debt and constant political uncertainty. The new rating is three notches below Moody's top Aaa rating. The downgrade, which puts Moody's rating in line with other major credit rating agencies, is the latest blow for Japan after its economy remained mired in recession in the second quarter due to tumbling factory production and exports following the March 11 earthquake and tsunami. South Korea's Kospi dropped 1.2 percent, Hong Kong's Hang Seng tumbled 2.1 percent and Australia's S&P/ASX 200 fell 0.1 percent. Markets in Singapore, Taiwan and Indonesia also fell. Mainland Chinese shares were mixed with the benchmark Shanghai Composite Index falling 0.5 percent to 2,541.09 while the Shenzhen Composite Index edged 0.1 percent higher to 1,144.74. In commodities markets, benchmark oil for October delivery rose 27 cents to $85.68 a barrel on the New York Mercantile Exchange. In London, Brent crude for October delivery jumped 85 cents to $110.16 on the ICE Futures exchange. The euro slipped 0.1 percent to $1.442, while the dollar remained stable at 76.69 yen.

Tuesday, August 23, 2011

Source: GARP

 

One of the Federal Reserve's primary roles is to be the lender of last resort to banks. It played that role to the tune of $1.2 trillion in the financial crisis that began in 2007, according to data compiled for the first time by Bloomberg News. The Bloomberg probe of the Fed's lending showed that Morgan Stanley, Citigroup and Bank of America were the single largest borrowers from the central bank from August 2007 to April 2010. The Fed also lent heavily to struggling foreign banks: Almost half of the Fed's top 30 borrowers, measured by peak balances, were European firms, Bloomberg said. They included Royal Bank of Scotland, Switzerland's UBS and Belgium's Dexia. The Fed initially refused to disclose which banks had sought help, asserting that publishing the information could trigger a run on the institutions by branding them as troubled. But the Fed lost that argument in the courts after Bloomberg sued for disclosure. Bloomberg notes that the Fed has said it had "no credit losses" on any of the emergency lending programs and that an internal Fed report in February showed the central bank netted $13 billion in interest and fee income from the programs from August 2007 to December 2009.

 

"We designed our broad-based emergency programs to both effectively stem the crisis and minimize the financial risks to the U.S. taxpayer," James Clouse, deputy director of the Fed's division of monetary affairs in Washington, told Bloomberg. "Nearly all of our emergency-lending programs have been closed. We have incurred no losses and expect no losses." Still, the Fed's ability to lend in secret meant that bank shareholders weren't privy to the full story about their companies' funding troubles, Bloomberg notes. There also are some interesting details about the kind of collateral banks put up for their Fed loans, according to Bloomberg: "As the crisis deepened, the Fed relaxed its standards for acceptable collateral. Typically, the central bank accepts only bonds with the highest credit grades, such as U.S. Treasurys. By late 2008, it was accepting 'junk' bonds, those rated below investment grade. It even took stocks, which are first to get wiped out in a liquidation. "Morgan Stanley borrowed $61.3 billion from one Fed program in September 2008, pledging a total of $66.5 billion of collateral, according to Fed documents. Securities pledged included $21.5 billion of stocks, $6.68 billion of bonds with a junk credit rating and $19.5 billion of assets with an 'unknown rating,' according to the documents. About 25 percent of the collateral was foreign-denominated."

Monday, August 22, 2011

Source: GARP

 

Hedge fund managers are rummaging through the world's vast debt opportunities, looking for undiscovered sources of alpha in an overheated market plagued by high volatility and correlations that are much too close for comfort. Managers are meticulously combing through odd, obscure, complicated, often tainted securities. Also, those hedge fund firms with the sophisticated skills needed to exploit these opportunities are taking their ideas to institutional hedge funds-of-funds managers. Hedge fund performance has been challenged so far this year, with the July 31 year-to-date return of the HFRI Fund Weighted Composite index return at just 1.55% and the HFRI Fund of Funds Composite index flat at 0.37%. "The bad news is that it's very dangerous to be invested in traditional asset classes in a market like this that's drowning in liquidity. The good news is that because there's so much funky debt around, skilled hedge fund managers can find deals that will yield hundreds of basis points of return in excess of traditional securities," said David Ben-Ur, co-chief investment officer, Corbin Capital Partners LLC, New York. Corbin Capital managed $2.7 billion in hedge funds of funds mostly for institutional investors as of July 31. Most of the creative alpha sources that hedge funds managers seek are in the debt arena, observers said. They range from troubled asset-backed securities to ways to short European sovereign debt to potential deals between hedge fund managers and European banks that are looking to trim their balance sheets by offloading structured credit portfolios. The common characteristics of these vastly different kinds of debt deals include extreme complexity, opacity, illiquidity and fairly small investment outlays. These deals frequently involve a stressed seller who has to get rid of debt securities quickly at bargain prices. "These forced sales tend to create a pawn-shop dynamic," said a hedge funds-of-funds CEO who asked not to be identified. "The buyer gets to set the price, because there usually aren't a lot of buyers looking for these kinds of very complex securities. And the price usually is well below what these assets are worth," the CEO added.

 

Structure is important

The illiquidity of many of these investments means that "the vehicle structure is very important. It can't be the typical evergreen hedge fund structure," said Mary Bates, senior consultant and credit specialist in Hewitt EnnisKnupp's hedge fund group, Chicago. Ms. Bates noted that most hedge fund managers create a hybrid vehicle for their credit and debt investments with a lockup period of between two and five years -- less than a private equity fund, but longer than most hedge fund lockups. But accepting the longer lockup period should bring rewards, said Robert Kaplan, CIO of Permal Group, New York. "Hedge fund managers need time to work through these illiquid assets, but that's the price of the opportunity. Many institutional investors have been very focused on maintaining ready liquidity since the 2008 and that means they are missing a lot of opportunities," Permal managed $23 billion in hedge funds of funds as of July 31. Veteran credit hedge fund manager Peter L. Briger Jr. stressed that for his team of 350 credit specialists at Fortress Investment Group LLC, the best pickings are in "the busted structured finance servicers and capital structures in the world that have yet to be worked through. We are looking at all of the illiquid areas now. If you have the capital to put to work, the best opportunities right now are there. But you have to make sure you get paid for the liquidity risk." Mr. Briger is co-chairman and principal of New York-based Fortress, which managed $43.8 billion in hedge funds and private equity as of June 30. He also is co-chief investment officer of Fortress' Drawbridge Special Opportunities hedge fund strategy, one of the industry's longest-running credit opportunity funds, having launched in 2002. The onshore and offshore versions of the fund totaled $5.3 billion as of June 30. The onshore fund returned a net 7.2% year-to-date June 30 and a net 25.5% in the year ended Dec. 31. The funds offer annual redemptions. Executives at BlueMountain Capital Management LLC, New York, are looking at a wide range of debt opportunities, including both subprime auto loans and the non-agency option arms of residential mortgage-backed securities and relative value trades in dividend swaps that are performing well because of volatility on the dividend curve.

 

Bank prospects

Stephen Siderow, founder and president, also is looking "prospectively" to acquire structured credit portfolios from banks in the U.S. and Europe that likely will have to trim their holdings in order to meet regulatory requirements. "We believe we can buy these relatively inexpensively and manage down the risk over time. These are ... complex portfolios and there are few hedge fund managers with sufficient experience and size to handle these kinds of investments. The European banks are looking very carefully at potential buyers because they have to remain a counterparty to these portfolios," Mr. Siderow said. BlueMountain managed $6.7 billion in hedge funds and other alternative investments as of July 31. Institutionally oriented hedge funds-of-funds managers are capitalizing on their close relationships with hedge fund managers, who are coming to them more and more frequently with good ideas for debt and credit investments. For example, Blackstone Alternative Asset Management, Corbin, Permal and Benchmark Plus Management LLC all have struck co-investment deals with some of their managers in diverse areas such as auto loans and residential mortgages, event-driven and activist situations, microcap equity and long/short structured credit. "The key to finding these opportunities is through strong relationships with hedge fund management and then being able to quickly act and set up the investment," said Permal's Mr. Kaplan. Blackstone Alternative Asset Management has set up a partnership with Bayview Asset Management LLC to invest in whole mortgage loans and mortgage-backed securities. To date, Bayview manages $2 billion in the strategy for BAAM's hedge funds of funds as well as in separate accounts for some of BAAM's larger institutional investors. BAAM managed $40 billion in hedge funds of funds and customized hedge fund portfolios as of July 31 for institutional investors.

 

Support for new strategies

Investcorp International Inc., New York, uses its hedge fund seeding business to support creative new hedge fund strategies.

Deepak B. Gurnani, CIO and head of hedge funds, said Investcorp seeded Prosiris Capital Management LLC in July because of founder Reza Ali's long/short approach to monetizing structured credit investments. "Institutional investors love the asset-backed securities space because it's so big and deep â?" about $17 trillion in the U.S. â?" but it's very opaque and complicated. It takes the kind of skill that Prosiris' investment teams have," Mr. Gurnani said. Investcorp also is readying a strategy to debut this fall that will short European sovereign debt. "Every institution that we talk to is very worried about the impact on the markets and on their portfolio of the European sovereign debt crisis. They are interested in shorting their exposure. We think this is going to be a really good play for hedge funds," Mr. Gurnani said. Investcorp managed $5 billion in hedge funds of funds as of July 31. As of the same date, $1.6 billion was invested in single-manager funds on the firm's investment platform.

Monday, August 22, 2011

Source: GARP

 

Institutional investors are starting to look to benchmarks and "better beta" indexes for something they used to get from government bonds: peace of mind. As many of the largest sovereign bond markets have also become the most indebted, the use of cap-weighted investment approaches has made less and less sense, experts say, as cap weighting increases investments to a country as it becomes more and more in debt. Alternatives to cap weighting boost diversification -- especially to emerging markets -- and deliver better returns, money managers say. Fundamentally weighted indexes use factors such as debt-to-GDP ratios as indicators of a country's creditworthiness. Long used in equities, such alternatives to market-capitalization-weighted indexes and benchmarks are fairly new to bonds. Using cap-weighted bond strategies puts most of the assets in the hands of the most-indebted issuers. For global government bond indexes, that means concentration in the bonds of debt-laden and growth-strained countries such as the U.S., Japan and Italy. "It's hardly the best place to invest your pension money," said Stephane Monier, Geneva-based chief investment officer for fixed income and currencies at boutique Lombard Odier Investment Managers. He added that when downgraded issuers fall off a cap-weighted index, "you have a lot of selling pressure, which ... detracts from your performance." Lombard Odier runs about e10 billion ($14.4 billion) in fixed income -- about e2 billion of which is in its new fundamentally weighted strategies -- for institutional clients, primarily in Switzerland and the Netherlands. BlackRock Inc., Pacific Investment Management Co. LLC and State Street Global Advisors have developed or are working on alternatives to non-cap-weighted approaches, while Barclays Capital, Research Affiliates LLC and TOBAM have developed or are working on non-cap-weighted indexes. While the arguments against cap weighting in bonds are well known, an obvious replacement hasn't emerged, experts said. "It's something we are looking at," but the search is "a work in progress," said Martyn Simpson, senior associate in Mercer LLC's bond manager research boutique in London. "We haven't come up with a one-size-fits-all solution for our clients." Non-cap-weighted approaches introduced so far are fine in theory, but "there are quite significant practical limitations to a lot of them," said Roz Amos, senior investment consultant at Towers Watson & Co. in London. Felix Goltz, head of applied research at the EDHEC-Risk Institute, Nice, France, said non-cap-weighted bond indexes do reduce the problem of investing in the most-indebted countries (or companies, in the case of a corporate bond strategy), but "in terms of controlling risk exposures, they don't achieve much." One of the biggest complaints about non-cap-weighted approaches is liquidity. For example, the sovereign debt of countries such as Norway and Sweden are considered very high quality, but the number of bonds available for investment "simply do not exist," said Benjamin Brodsky, London-based managing director and global head of fixed-income asset allocation and emerging markets in BlackRock's quantitative bond group.

 

Rules-based approach

BlackRock is developing a rules-based enhanced indexing approach for global government bonds that will overlay some fundamental selection criteria on existing cap-weighted indexes. The firm runs more than $10 billion in a similar corporate bond strategy. "The scalability (of the sovereign strategy) would be very high, and the transaction costs also should be very low," Mr. Brodsky said. SSgA is working to expand its enhanced index alternative offerings, currently limited to a rules-based exchange-traded fund that screens corporate bonds using fundamental factors. "Certainly now what we're seeing with sovereign credit risk, we're looking to apply the same technology to other markets," said Brian Kinney, managing director and global head of fixed-income beta solutions at SSgA, Boston. In July, Barclays Capital launched its Fiscal Strength Weighted bond index family, also a rules-based fundamental approach, which adjusts market-cap country weights within existing Barclays Capital indexes based on public macroeconomic and governance data for each country. "If you depend only on fundamental factor weights, you might not have an index that's (investible)," said Brian Upbin, director and head of benchmark index research at Barclays Capital in New York. The firm also offers other index alternatives, such as GDP-weighted and ones that cap exposures to single countries. Research Affiliates plans an autumn launch for its new sovereign debt index. To ensure liquidity, the firm's process uses a "rescaling process" that shifts weights for smaller countries from those determined by fundamental factors closer to what they might be in an equally weighted portfolio, said Shane Shepherd, vice president and head of fixed-income research at the firm's Newport Beach, Calif., headquarters.

 

Outperformance

Company officials expect the sovereign debt index will top cap-weighted index performance by as much as 80 basis points annually. In the eight months ended Aug. 4, Lombard Odier's strategy outperformed the J.P. Morgan Government Bond index-World by 1.47 percentage points, and at a lower volatility, according to data from the company. PIMCO's Global Advantage Bond index, or GLADI, strategy, which invests in government and corporate bonds plus mortgage-backed securities and other instruments, has returned an annualized 12.55% since inception vs. 9.17% annualized for the Barclays Capital Global Aggregate bond index, PIMCO data showed. Institutional assets in GLADI grew to about $5 billion since it was introduced in January 2009. Ramin Toloui, executive vice president and co-head of emerging markets portfolio management at PIMCO, Newport Beach, Calif., recognizes the GLADI strategy is capacity constrained, but said it can handle hundreds of billions of dollars. "It's not something the whole world can adopt overnight," he said. "But the reality is, the whole world isn't switching overnight." Another major benefit to non-cap-weighted approaches is that they tend to incorporate more emerging markets debt into government bond portfolios, thereby increasing diversification and offering exposure to foreign currencies. It is a way of "hard-wiring" emerging markets exposure into a portfolio, Mr. Toloui said, pointing out that emerging markets are responsible for one-third of global GDP, more than half of global growth and that they are the world's creditors. For example, as of Sept. 30, China owned 9.5% of the U.S.'s total debt of $13.6 trillion, according to the blog Political Calculations. "These factors are not being reflected in the current allocations of capital most investors have."

Monday, August 22, 2011

Source: GARP

 

Institutional investors, by and large, will be returning to the basics over the next 10 years, according to a new report from McKinsey & Co. Investors will be moving away from a focus on outperforming benchmarks and maximizing alpha regardless of market conditions, to one that emphasizes meeting their fundamental investment objective. McKinsey's report, "The Best of Times and the Worst of Times for Institutional Investors," details major shifts that are expected in the investment landscape and a dichotomy developing among how institutional investors are adapting. Only time will tell which strategy will prove the right one, according to the report. Rapid GDP growth in developing countries, more government involvement to reduce debt and changes in risk management also will play a large role in shaping the financial markets in this decade, according to the report. "Institutions are getting back to the basics," said Jonathan Tetrault, Toronto-based principal at McKinsey and one of three authors of the report. "They realize it helps them to simplify a little of what they are doing and meet return objectives. Many are going back to fundamentals and moving away from indices." Through discussions with more than 50 industry experts and investment professionals at institutions that collectively manage more than $3 trillion in assets, McKinsey researchers found that institutions agree they need to adapt to the new environment, but are using vastly different strategies to do so. Some are tweaking their existing approaches while others are completely rethinking their investment and operating models. Mr. Tetrault said institutional investors are gradually moving from relative return to absolute return and focusing on longer-term targets. Portfolios will be built that are less aligned with benchmarking. Among the major shifts investors need to make in order to adapt to the new market landscape, Mr. Tetrault said, is to adopt a more forward-looking investment approach involving more communication with managers on their objectives and strategies. Institutional investors "came to the conclusion it (maximizing diversification) is not necessarily providing the best approach to meet investment objectives," Mr. Tetrault said. "Organizations are not trying to maximize returns, but maximize the chances to meet investment objectives with the smallest envelope of risk." The market crisis of 2008 showed capital-market interconnectedness is both a boon and a threat. According to the report: "While market liquidity and efficiency has increased, this increasing interconnectedness could also lead to larger and more frequent asset bubbles, exposing institutional investors to increased variability in performance." Although many of the outperforming investments in the next decade will be the result of growth in emerging markets, institutional investors will have to avoid the asset class' "free-lunch mirage" as equity returns show very little correlation with economic growth in the near and medium term, according to the Mr. Tetrault.

 

Right approach

Institutional investors will have to find the right approach -- whether it is using external managers that have offices and a global footprint in developing countries, or creating a network of local partners -- for emerging markets investing. How to be able to pick the best external manager for emerging markets was one of the top three priorities for 90% of the investors participating in the study, Mr. Tetrault said. "What became pretty clear is exposure to (emerging) markets doesn't correlate to performance," Mr. Tetrault said. A simple passive index investing approach could well yield disappointing results, the report states. "We see the bar is rising ... for performance in these markets," Mr. Tetrault said. In terms of government, Mr. Tetrault said the "big unknowns" for the next decade are how the U.S. and Europe handle their debt situations and how robust China's growth will be. "It is the first time in 20 years there have been three major question marks," Mr. Tetrault said. The pressure on government balance sheets will cause a rapid deleveraging process that will last six to seven years, to reduce the ratio of debt to gross domestic product by 25% in developed countries. "We believe that institutional investors can expect, over the next decade, a continuation of greater government involvement in the capital markets," the report states. "This will be driven by a variety of forces, which include a desire to address national economic challenges (e.g., competitiveness or income inequality) and an increased skepticism around the market's ability to police itself. We expect these government interventions to take a series of forms, including larger and more frequent open-market operations, more significant monetary policy actions, and enhanced financial regulation." An increase in regulation and oversight may well increase costs for investment institutions and drive returns down, the report states. Looking ahead to equity strategies in the next decade, Mr. Tetrault said institutions will typically limit the number of companies they invest in to 30 or 40, with larger investments, longer holdings and less volatility. Three such strategies stand out in McKinsey's report: long-term relationship investing, thematic investing, and "all-weather" strategies. "Institutional investors have become much more focused on absolute risk and less sensitive to relative risk," Mr. Tetrault said. "Institutional investors have more and more absolute thinking in their strategies."

Monday, August 22, 2011

Source: GARP

 

The U.S. debt ceiling crisis, S&P's unprecedented downgrade of America's AAA credit rating and eurozone debt woes have delivered a triple-whammy to money market strategies, but this time, the sector is proving resilient. "For money market strategies, it's the biggest test since Lehman Brothers" in 2008, said Martyn Simpson, London-based senior associate within Mercer LLC's bond manager research boutique. "So far, they're holding up well" under redemption pressure. Investors withdrew $148 billion, or about 5% of total net assets, from money market funds during the three weeks ended Aug. 2, the deadline for debt-ceiling negotiations, according to data provided by iMoneyNet, a money market research company based in Westborough, Mass. In comparison, about $16 billion was redeemed during the same period last year. In the two weeks following Aug. 2, investors sought safety from turbulent global markets and returned to money markets -- with inflows of about $88 billion. However, money market fund managers still face several major challenges, said Viktoria Baklanova, New York-based senior director in the fund and asset manager rating group at Fitch Ratings Ltd. The low interest-rate environment already has made it very challenging for fund managers to operate profitably. In addition, the continuing regulatory debate over the structure of the money market sector is causing a lot of uncertainty. On top of that, there are far fewer investment options, particularly as recent market volatility has forced cash fund managers to shorten the duration of portfolios, which already are under more restrictive investment guidelines. "Until these issues are resolved, it's difficult (for managers) to build a sustainable strategy," Ms. Baklanova said. Yields on money market funds have suffered. According to iMoneyNet, the simple seven-day average performance on all taxable money market funds was 4.77% on April 3, 2007, compared with 0.76% at the end of December 2008 and 0.03% at year-end 2010. The average seven-day yield as of Aug. 16 was 0.02%. Pressure on short-term liquidity strategies was exacerbated by the congressional stalemate over negotiations to raise the debt ceiling in the U.S. and the subsequent downgrade by Standard & Poor's of the country's credit rating amid worsening eurozone economic weakness, sources said. Christopher Redmond, London-based senior investment consultant in Towers Watson & Co.'s cash manager research division, added: "If cash funds struggle, and by implication short-term funding markets are challenged, the outcome would likely be horrific." At J.P. Morgan Asset Management, for example, managers in July stopped investing in assets that matured beyond Aug. 2. "We were building liquidity" and had anywhere between 40% and 75% of the money market fund assets invested in overnight positions, said John T. Donohue, managing director and chief investment officer of global liquidity at J.P. Morgan Asset Management in New York. JPMAM had about $450 billion in money market assets under management as of June 30.

 

Protected by maturity

"The difference is that managers have learned that you're really protected by your (portfolio) maturity," said Joe Sarbinowski, managing director and head of institutional liquidity management at DB Advisors in New York, which manages about $120 billion in money market strategies. "For example, it's not uncommon for us to have between 40% and 50%" invested in securities with a maturity period of seven days or less, he said. Money market funds domiciled in the U.S. accounted for about $2.5 trillion, or about 55% of the total worldwide, as of June 30. Following the collapse of Lehman Brothers Holdings Inc., investors fled cash funds, many of which held illiquid assets and could not meet redemptions. The Federal Reserve had to step in with a temporary funding facility, and managers spent billions propping up money market funds. In 2010, new regulations required money market funds to hold at least 10% of their net assets in overnight securities and 30% in debt that matured within seven days. Eurozone problems also have made cash managers more nervous. Most have scaled down allocations to short-term debt issued by European banks, which typically have higher exposures to regional sovereign debt in troubled nations including Italy and Spain. French banks -- chiefly BNP Paribas SA, Societe Generale SA and Credit Agricole SA -- were hit the hardest, making it more difficult for them to borrow U.S. dollars through money market funds, said Peter G. Crane, president and CEO of Crane Data LLC, Westboro, Mass., a research firm that focuses on short-term liquidity strategies. Still, French banks are still among the top 10 holdings of prime money market funds accounting for about 7.3% of the total assets, according to Crane data. "U.S. money market funds and French banks couldn't leave each other even if they wanted to," Mr. Crane said. "French banks continue to be among some of the most highly ranked financial institutions in the world, and (cash fund managers) need to diversify exposure." While investors remain confident in French banks from a fundamental standpoint, there's a matter of headline risk, managers said. At Legg Mason Inc., the money market team "has significantly diminished its exposure to eurozone banks recently because of headline risk, not because of credit issues," according to a statement from the firm. Legg Mason has about $110 billion in liquid assets under management, including money market funds.

 

Reducing in 2010

At Vanguard Group Inc., cash fund managers began reducing exposure to European banks in 2010, said David R. Glocke, Malvern, Pa.-based principal and head of taxable money markets. Vanguard's cash fund managers not only stopped investing in troubled nations such as Italy and Spain, but also France and Germany because of uncertainty surrounding the cost of bailing out indebted countries in the eurozone. "We redeployed (assets) to other sectors, including Treasuries and (U.S.) agency securities, as well as Canadian and Australian banks," Mr. Glocke said. Vanguard's money market strategies -- including its $114 billion Prime Money Market Fund -- also increased their holdings in commercial paper issued by household names such as Nestle SA, The Coca-Cola Co. and PepsiCo Inc., Mr. Glocke added. As of July 31, Vanguard had $152 billion in money market strategies. Earlier this year as concerns over the stability of the European banking system heightened, U.S. prime cash funds cut exposure to eurozone banks by $58 billion in June and $38 billion in July, according to a research paper published Aug. 9 by J.P. Morgan Chase & Co. However, eurozone banks still account for about 32% of the total assets invested in prime money market funds. "By nature, (cash managers) need to select bonds that are highly rated, and there are just not many traditional companies that are as highly rated as banks," Mercer's Mr. Simpson of Mercer said, "so there's a massive slant toward banks." Cash funds' exposures to European banks had been moving higher following the Lehman Brothers collapse, partly "as a function of the deterioration of U.S. bank credit," but recently have started to come down because of fragility in the eurozone, J.P. Morgan's Mr. Donohue said. David Rothon, senior vice president and fixed-income product specialist at Northern Trust Global Investments in London, said investments in short-term debt issued by European banks now account for between 10% and 20% of money market portfolios compared with between 30% and 40% a year ago. Mr. Rothon, whose firm manages about $100 billion, added: "The biggest threat to money market funds is still old-fashioned liquidity."

Monday, August 22, 2011

Source: GARP

 

Shortly before the turn of the millennium, when Bank of America assembled the first nationwide banking franchise, it unveiled a red, white and blue logo designed to evoke the American flag and amber waves of grain. Today, the logo emphasizes only the coast-to-coast mess the country's largest bank finds itself in. "You can boil down Bank of America's difficulties to this: It is the bank to America," said Nancy Bush, a banking analyst at NAB Research. "The nation's problems are its problems." With the domestic economy seemingly grinding to a halt and housing still resolutely in the dumps, investors have all but written off BofA. Its stock has fallen nearly 50% this year -- the worst decline for any big bank in the U.S. or Europe. Even though BofA has relatively little exposure to Italy, Spain or the other European nations that provided the fuel for last week's market panic, its problems stateside are considered so serious that there's now a $130 billion gap between the bank's market valuation and the price it would fetch if its stock merely traded at the industry average. Put another way, the discount that investors assign BofA shares is nearly as large as the market value of JPMorgan Chase and larger than that of Oracle, PepsiCo or Verizon. No wonder BofA Chief Executive Brian Moynihan is furiously trying to reconfigure his struggling institution. He's selling noncore assets, closing branches, pulling back on lending and exiting lines of business such as proprietary trading. Last week, the bank said it would cut 3,500 jobs, with more to come. But tinkering around the edges and trying to ride out the storm won't cut it, according to analysts. They believe it's time for North Carolina-based BofA to give up its dreams of being a major Wall Street and global institution and return to its roots as a traditional deposit-taker and lender. "The goal is to be like Wells Fargo -- not a money-center bank, but a huge regional one," Ms. Bush said.

 

Largest quarterly loss ever

BofA would not comment on Ms. Bush's remarks. But earlier this month, during an unusual midquarter conference call organized by a hedge fund investor, Mr. Moynihan insisted that he is not interested in leading a major strategic retreat or breaking up his bank, which has assets of $2.3 trillion. "Customers want us to provide all the services we provide -- the corporation to be able to provide corporate investment banking advice to them, an individual to be able to provide both banking and brokerage and investing advice to them," Mr. Moynihan said. Still, events may force his hand. BofA's $9 billion loss in the second quarter was its largest ever, and its stock trades at a paltry 0.35% of its book value -- far below the median 0.94% ratio that the top 50 banks fetched as of June 30, according to RBC Capital Markets. The depressed figure means investors believe that BofA is either overvaluing the loans it holds or facing a massive loss. That's not a bad assumption, considering the plague of toxic mortgages that infests the bank. BofA took nearly $21 billion in pretax mortgage-related losses last quarter, overwhelming the $4 billion profit generated by its other activities. Such ugly numbers will likely continue, considering that BofA's legacy asset-servicing unit had $1 trillion in delinquent mortgages and other loans at the end of 2010, according to a company presentation. The most immediate issue is figuring out how much BofA will have to repay institutional investors who sued because they were sold defective mortgages. It could be on the hook for more than $44 billion in refunds, and in a worst-case scenario, the tab could reach $62 billion, according to a Compass Point Research & Trading report earlier this month. Yet, BofA has set aside only $18 billion in reserves. In the meantime, Mr. Moynihan is raising cash by essentially selling the furniture stored in the attic. Last week, he parted with BofA's Canadian credit card business, his 34th divestiture since becoming CEO at the start of last year, according to Bloomberg data. He's also gotten rid of private equity investments, a minority stake in money-management firm BlackRock and, for good measure, the bank's Korean wealth management business. But he may have to hock the jewels if mortgage losses reach the high end of estimates. First to go would most likely be BofA's 10% stake in China Construction Bank, which the bank says is worth $21 billion.

 

Parting with Merrill Lynch

If it were to need still more cash, BofA could be forced to part with some or all of Merrill Lynch, its best-performing business at the moment. Merrill in its entirety would probably fetch about $30 billion, based on Morgan Stanley's current value. Mr. Moynihan insisted in this month's conference call that he wouldn't sell Merrill, whose retail brokerage force is a key sales channel. But Ms. Bush suggests he might dispose of most of Merrill's investment banking operations, which are woven into BofA's global banking and markets division. That division generated $3.7 billion in earnings over the first half, about the same as Goldman Sachs. But such earnings are inherently volatile and entail taking large risks -- something regulators want to see large banks doing less. Some investors speculate that Mr. Moynihan may deal with his bank's mortgage problems by putting into bankruptcy the Countrywide mortgage division, the source of much woe since BofA bought it in 2008. But that may be wishful thinking. Experts believe there's no way BofA can fence off Countrywide, since the bank disclosed four months after the deal that it had taken control of the mortgage originator's assets and liabilities. "We see no plausible way for Bank of America to disclaim Countrywide," Adam Cohen, an analyst at debt-research firm Covenant Review, wrote in a recent report.

Monday, February 21, 2011

Source: GARP

 

The NCUA Board last week issued for comment a rule that would bar certain incentive-based bonuses that would encourage risky management behavior or expose credit unions to large losses and require all credit unions over $1 billion to disclose incentive packages on an annual basis. The rule, required of bank and credit union regulators under last year's Dodd-Frank Financial Reform Act, goes a step further than the banking regulators by requiring all credit unions over $10 billion in assets (the FDIC set the bar at $50 billion) to defer 50% of all cash bonuses for three years or more, then adjust those bonuses for any losses their credit unions report during that period. NCUA Chairman Debbie Matz emphasized that the proposed rule and its certain enactment later this year is required by the new financial reform bill and was not dreamed up by NCUA. She also noted the disclosures cover the structure of the bonuses, and not the dollar amount. "I think that's an important distinction," said Matz. The Dodd-Frank requirement was in response to findings that some of the biggest financial failures over the past few years were related to cases where managers were rewarded for risky policies that provided rich returns to their institutions. NCUA claims that the failure of WesCorp FCU was driven by lucrative incentive packages awarded top executives for earnings and other goals.

 

The disclosures will cover all bonuses to be paid to presidents, chief executive officers, chief financial officers, chief operating officers, chief investment officers, chief legal officers, chief lending officers, chief risk officers or heads of major business lines for credit unions over $1 billion in assets. That amounts to 184 credit unions, including 169 natural person credit unions and 15 corporates. There are six credit unions over $50 billion in assets, three natural person credit unions (Navy FCU, Pentagon FCU and North Carolina State Employees' CU) and three corporates. The rule is expected to take effect in 2012. The NCUA Board also renewed the interest rate ceiling for all federally chartered credit unions at 18%, the same as last year. The interest rate ceiling is the maximum allowable rate that can be charged on any loan by a federally chartered credit union. The Board also issued for comment a proposed rule, also mandated under Dodd-Frank, which will replace the requirement in all investment regulations that credit unions obtain credit ratings from the Wall Street agencies and instead do an internal credit analysis of the counterparty in the transaction under an internal standard created by the credit union's own board of directors. "The proposed rule replaces the standard credit rating-which came under attack during the financial crisis as many Triple A-rated securities failed-with a case-by-case analysis to decide whether a certain investment has the capacity to meet its financial commitments." The NCUA Board also approved new chartering standards for corporate credit unions for the first time in 30 years.

Monday, August 22, 2011

Source: GARP

 

South Korean banks should beef up their risk management as the level of their loan delinquency remains high and could pose potential risks amid economic uncertainties, a report said Sunday. Local lenders' rate of non-performing loans on small and medium enterprises (SMEs) and property market-related project financing have been trending lower but are still at a high level, according to the report by the Korea Institute of Finance. Non-performing loans at 18 local banks stood at 1.73 per cent of their total lending as of the end of June, down from 2 per cent in the previous quarter. Their non-performing loan rate on household debts reached 0.56 per cent at the end of the second quarter, according to data by the Financial Supervisory Service (FSS).

 

The report, however, said the bad loan rates on SME and project financing debts are still high and could lead to a rise in fresh bad loans amid a prolonged slump in the local property market and a slowing global economy. he report also said banks should continue to step up efforts to enhance their asset quality and capacity to cushion losses. "The environment for local banks is not all positive as regulations on banks are being tightened and uncertainties on the global economy are rising," the report said. "Local banks should focus on a stable management strategy by enhancing risk management." Earlier this month, the FSS said the second-quarter results are favorable but warned of a possible pile-up of fresh bad debts down the road. As part of efforts to curb insolvency, the FSS said it plans to encourage local banks to set annual targets for bad debt reduction.

 

Monday, August 22, 2011

Source: GARP

 

China is not likely to introduce economic stimulus measures despite growing concerns that the global economy might slip back into a recession, an expert said Monday. Fresh concerns over a global recession have been setting off alarm bells, after the first-ever U.S. credit rating downgrade and the persistent debt crisis in Europe gave the global financial markets a beating. Vincent Chan, China strategist at Credit Suisse, said that the Chinese government is still in the process of estimating the chance and impact of a global economic slowdown. "(China) is still far from having a stimulus package ready," he said.

 

"(Even) if a stimulus package really takes place, it will be very different from the one in 2008-2009, with a much smaller scale." At the end of 2008, the Chinese government pumped 4 trillion yuan (US$590.2 billion) into the market to counter the worldwide financial crisis. Beijing, which had maintained expansionary fiscal and loose monetary policies for about two years, started to roll back such measures in late 2010 as it faced record-high inflation resulting from excess liquidity and an overheated economy. The country's central bank has raised the benchmark interest rate for the third time so far this year. Chan said concerns on inflation and inflation expectation are still very strong among Chinese policymaking circles, which has become a constraint on the relaxation of monetary policy. "Stability will override most other concerns. Stability in the current context basically means inflation and property prices being kept under control, and no major unemployment problems arising from the economic slowdown," he said.

"More than one government economist told us that if there is no major risk of unemployment, the Chinese government could tolerate a lower economic growth rate -- even below 8 per cent could be acceptable." The expert added that after the aggressive investments in the last few years, there are fewer investment projects that are financially viable in the short to medium term. Most of the infrastructure sectors being highlighted, such as social housing, irrigation and roads or bridges at county levels, are likely to be low-yield assets, he said.

Tuesday, August 23, 2011

Source: GARP

 

Europe faces the threat of economic stagnation after an alarming collapse in business confidence during August, a gloomy industry survey warned today. Financial information firm Markit's latest worrying snapshot of flagging growth in the eurozone showed activity stuck at 22-month lows during the month and the manufacturing sector shrinking for the first time since 2009. It also revealed confidence among the region's services firms falling at the fastest pace since the height of the financial crisis in October 2008 as sentiment was rocked by Europe's sovereign debt crisis and biting austerity measures. The figures raise the prospect of even weaker growth among the 17 nations using the eurozone after last week's sluggish 0.2 percent advance between April and June. The two largest economies, France and Germany, slowed to a virtual standstill and the rest of Europe saw falling output for the third month in a row, Markit added.

 

Chief economist Chris Williamson said: "Growth in the third quarter could be even slower than the disappointing 0.2 percent rise seen in the three months to June. Most worrying is the near-stagnation of Germany, which suggests that the region's main engine of growth has stalled." There was slightly better news at home as the CBI's latest industrial survey showed manufacturing orders holding up, but the British Bankers' Association warned lending conditions were "very subdued" in July with businesses reluctant to invest and looking to pay down debt. Markit's figures also showed new orders among manufacturers and services firms in the eurozone falling for the first time in a year, as well as flagging job creation. ING Bank economist Martin van Vliet said: "With little prospect of a near-term pick-up in external demand and the impact of the recent financial market turbulence yet to fully feed through into activity, we cannot be too complacent about the risk of a new eurozone recession."

 

The mounting evidence of stagnation will put more pressure on the European Central Bank to reverse its two interest rate rises this year to tackle high inflation. A leading German trade association cut its growth forecasts to 2 percent in 2011 and just 1 percent in 2012, and the ZEW institute added today that confidence among German investors also fell sharply in August. In Spain, which came under attack from bond markets this month, politicians were recalled to debate a ?5 billion (UKpound4.4 billion) round of spending cuts to tackle the deficit. But it borrowed almost ?3 billion at much lower rates than last month, helped by the ECB's move into troubled markets to buy up debt.

Tuesday, August 23, 2011

Source: GARP

 

The number of troubled banks tracked by the Federal Deposit Insurance Corp. fell in the April-June quarter, the first quarterly drop in five years. But growth in bank earnings slowed, a sign that the financial industry is feeling the effects of a weak economy. The FDIC said Tuesday that there were 865 banks on its confidential "problem" list in the second quarter, or roughly 11.5 percent of all federally insured banks. That was down from 888 in the January-March quarter and the first decline since mid-2006. Those are banks considered to have low capital cushions against risk. The FDIC also said the banking industry earned $28.8 billion in the second quarter, up from $20.9 billion in the same period last year. That marked the eighth straight quarter that earnings rose from the previous year. But it was the smallest gain in the past seven quarters. Banks with assets exceeding $10 billion drove the bulk of the earnings growth. They made up 1.4 percent of all banks but accounted for about $23.4 billion of the industry's earnings in the second quarter.

 

Those are the largest banks, such as Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Most of these banks have recovered with help from federal bailout money and record-low borrowing rates. "Banks have continued to make gradual but steady progress," FDIC Acting Chairman Martin Gruenberg said at a news conference. But he noted that the industry revenues haven't been growing. "In the last two quarters, revenues were lower than a year earlier," he said. Gruenberg and other FDIC officials said the industry continues to struggle with flat growth in loans. Banks' loan balances increased $64 billion in the second quarter. That was a modest gain, but it marked the first time in three years that there has been growth in balances, the FDIC said. So far this year, 68 banks have failed. That's down from the 157 banks that shuttered last year, which was the most for one year since 1992.

 

Most of the banks that have struggled or failed have been small or regional institutions. They depend heavily on loans for commercial property and development - sectors that have suffered huge losses. As companies shut down during the recession, they vacated shopping malls and office buildings financed by those loans. Still, large banks are less profitable than they were before the 2008 financial crisis. As a result, many are shrinking their staffs. Swiss bank UBS AG said Tuesday that it is cutting 3,500 jobs worldwide as part of an effort to save 2 billion Swiss francs ($2.5 billion) annually by the end of 2013. Bank of America said last week that it is cutting 3,500 jobs. Goldman Sachs Group Inc., Bank of New York Mellon Corp., State Street Corp. and other financial institutions have also announced layoffs this summer.

 

Many of the banks are posting profits right now. Their layoffs indicate permanent structural changes rather than temporary cuts in response to a weak economy. U.S. banks employ about 2.09 million people, down from 2.21 million in early 2008, according to data compiled by the FDIC. The average salary in the finance and insurance industry was $84,516 last year, according to the Bureau of Labor Statistics. Though that's far higher than the overall private-sector average of $46,451, the finance salaries are shrinking while other salaries are growing. The average salary in finance and insurance fell $436 from 2007 to 2010, not adjusted for inflation. The average salary in all private-sector jobs rose $2,089. In recent weeks, stocks of big U.S. banks have been rocked by fears that the impact of the government-debt crisis in Europe could spread to the U.S. financial system. U.S. banks are sturdier, however, holding more capital now than they did before the financial crisis that struck in 2008. And they have limited direct exposure to the riskiest European countries, Portugal, Ireland, Italy, Greece and Spain. Last year's bank failures cost the FDIC's deposit insurance fund an estimated $21 billion. But in the April-June quarter, fewer failures allowed the insurance fund to strengthen. The fund turned positive in the second quarter, showing a $3.9 billion balance as of June 30. That compared with a $1 billion deficit in the first quarter. The FDIC is backed by the government, and its deposits are guaranteed up to $250,000 per account. Apart from its deposit insurance fund, the agency also has tens of billions in loss reserves.

 

Thursday, August 18, 2011

Source: GARP

 

With the euro facing a threat to its existence, politics are keeping German Chancellor Angela Merkel from putting the full weight of Europe's largest economy behind a solution to the continent's debt crisis, and that could leave markets unsettled for years. Merkel, head of a conservative-led coalition whose grip on power has grown tenuous, has made a steady set of compromises - many of them unpopular in Germany - over the past 18 months in an effort to preserve the euro currency zone and prevent its weakest member countries from becoming insolvent. So far, those steps have fallen short, and concerns have mounted among investors that large countries such as Italy and Spain could fall victim to the crisis, unnerving world stock markets and contributing to fears of a renewed recession.

 

Analysts see the outcome of Merkel's meeting Tuesday with French President Nicolas Sarkozy as a sign that no new grand solutions are in the offing. What she called "magic wand" ideas - such as the introduction of a common "eurobond" backed by all 17 nations in the currency zone - are being set aside. Instead, Merkel is essentially waiting for budget cuts and economic reforms promised in Greece, Italy and elsewhere to take hold, and for new initiatives approved by European leaders in recent months to get up and running. That could take months, if not longer, given the pending legal challenges and required parliamentary action in the 17 member countries - not to mention the time needed for economic reforms to bear fruit.

 

After nearly two years of summit meetings, press pronouncements and ambitious steps to contain the crisis, "the hope was always that the next decision would calm things," said Christoph Schmidt, a professor at the Rheinisch-Westfalisches Institut in Essen and a member of the German Council of Economic Experts. "The political elite has understood there cannot be a once-and-for-all solution. It will be a years-long process." This strategy carries risks. A renewed recession or slower-than-expected growth could cause countries to go further into debt and miss benchmarks set for them by the International Monetary Fund, touching off new turbulence in the markets.

 

For the strategy to succeed, there must be steady progress by national parliaments in overhauling economic and budget policies despite at-times violent local opposition. And it will require a reluctant European Central Bank to continue buying government bonds as needed to hold down borrowing costs for euro-zone countries. But even as the crisis has proved more durable than many expected, the political constraints on Merkel have increased.

 

Germany, Europe's largest and strongest economy, accounts for about one-third of the euro-zone economic output and is funding a similar share of the $600 billion program already approved to help rescue struggling neighbors such as Greece. Germany would also be on the line to help finance any increase in those emergency loans or any new initiatives. But its economy has also slowed, and recent surveys show a sharp decline in business and consumer sentiment. In some public opinion polls, upwards of two-thirds of Germans feel Merkel's government has done a bad job handling the euro-zone crisis. She is under fire from many sides. Members of her conservative coalition are demanding that she act to cut taxes as promised during her campaign - though the dominant sentiment in Europe is for measures to balance budgets and reduce deficits.

 

After campaign promises for tax cuts and further economic reform, "nothing happened, and now she is starting a discussion of entering into a transfer union. . . . It is a sour piece of politics," said Ralf Welt, managing partner of Dimap Communications, a political consulting and polling firm. "Transfer union" refers to what many Germans feared the euro area might become: a way to transfer wealth from more successful nations to others. Unions, meanwhile, are demanding the establishment of a minimum wage and changes in labor laws amid concerns that the German government is doing too little to protect the growing share of workers in low-wage jobs, now estimated at about a fifth of the workforce.

 

Ulrike Guerot, a senior fellow at the European Council on Foreign Relations, said Merkel cannot commit more money to the euro crisis without risking an open fracture between haves and have-nots in Germany. In recent years, Guerot said, "there have been extensive gains but they have been unevenly distributed." 'Not what we signed up for' Germans joined the currency union a decade ago with some trepidation. They feared they could be stuck with the bill for other, less-productive economies in Europe and insisted on a "no bailouts" clause in the treaty establishing the union.

 

That clause was circumvented when European leaders created the recent emergency loan program. They said it was allowed under the section authorizing countries to aid each other in the case of natural disaster. The program is being challenged in the German courts. "You can say it is better to share," Guerot said, but "people will argue this is not what we signed up for: 'We have options. We can go global alone. Those resentments are a reason some of the proposed "once and for all" solutions to Europe's problems could be out of reach.

 

Consider the eurobond. It is elegant in theory - a form of debt issued in the name of all 17 countries and backed by the economic resources of a major industrial region. Advocates say a eurobond would rival U.S. Treasury bonds, in the size of their potential market and their perceived safety as an investment, and - in a stroke - wipe away concerns about the riskiness of government debt in Europe. But this would also represent an all-in bet by Germany, with its fortunes rising and falling with those of Greece, Ireland, Italy and other troubled economies. That is seen here as a recipe for higher interest rates. Local business publications have estimated that Germany, which pays record-low interest rates to borrow money, might have to ante up $45 billion a year more for its share of the debt service on eurobonds. And there is an array of thorny questions: How much to issue each year? Who gets the proceeds? How to make sure the money is properly spent?

 

In a recent interview in Der Spiegel magazine, finance minister Wolfgang Schauble said that if such a bond were created, it could come at the end of a long process during which, in effect, Europe's nations would submit their sovereign spending power to a common financial authority. At their meeting in Paris, Merkel and Sarkozy suggested the start of this process. They reached agreement that the two countries would confer more closely on tax policy and encourage the other euro countries to meet more regularly on economic policy. A new euro-zone council would be established, with still-undefined powers for its president.

 

Without deep coordination, said Deutsche Bank economist Thomas Mayer, eurobonds and other expansive changes are unlikely, for a familiar reason. "Germany taxpayers would be responsible for spending decisions in other country's parliaments. You cannot do that without consequence," he said. "You'd see a movement in the northern European countries that would be a true successor of the American tea party."

 

Wednesday, Aug 17, 2011

Source: Bloomberg

 

Speculative demand from investors has pushed the gold market into a “bubble that is poised to burst” after prices surged to a record this year, Wells Fargo & Co. said. “We have seen the economic damage” of past bubbles and “feel compelled to ring the warning bells,” Wells Fargo analysts led by Dean Junkans said in a report dated yesterday and e-mailed today. Gold futures have advanced 26 percent this year, following 10 straight annual gains. The price reached a record $1,817.60 an ounce on Aug. 11 on demand for an investment haven as European and U.S. sovereign-debt woes escalated. “There could be substantial risk to gold once the fear that the world is coming to an end subsides,” Junkans said in a telephone interview from Minneapolis. “We are worried about the downward risk.”

 

Holdings in exchange-traded products backed by gold rose to a record 2,217 tons on Aug. 8, Bloomberg data show. CME Group Inc. said volume in Comex gold futures and options rose on Aug. 9 to a record 504,368 contracts. That topped the previous all- time high of 469,689 contracts on July 28, 2010. Gold futures for December delivery rose $27, or 1.5 percent, to close at $1,785, the highest settlement ever, on the Comex in New York. Last week, the metal jumped 5.5 percent, the most since February 2009 and the sixth straight gain.

 

Soros, Paulson

George Soros and Eric Mindich cut their holdings in the SPDR Gold Trust, an exchange-traded fund, in the second quarter as prices rallied, while billionaire John Paulson maintained the largest stake, a filing with the U.S. Securities and Exchange Commission showed yesterday. Thailand, South Korea and Kazakhstan added gold valued at about $2.56 billion to their reserves in July, joining Mexico and Russia in increasing holdings this year as central bankers hedge against depreciating foreign-currency reserves. About 60 percent of clients surveyed by UBS AG expect gold to be trading above $1,800 by the end of this year. The survey was conducted in the first two weeks of August, the bank said.

Wednesday, August 17, 2011

Source: GARP

 

Barclays was left red faced today after a star trader and his team who were poached from a rival just two years ago decided to leave to set up their own hedge fund. Todd Edgar, 39, and almost a dozen fellow commodities traders were poached from JPMorgan in August 2009 when Barclays' new chief executive Bob Diamond was in charge of the investment bank BarCap. Edgar was reported single handedly to have made JPMorgan a $100 million (UKpound61 million) profit in 2008.

 

He moved across to Barclays almost at the top of the commodities trading boom. JPMorgan complained to the Financial Services Authority over the Edgar poaching, which was reported to have seen him and his team given a $50 million cash and shares package to move.

 

They could take all of that with them under a so-called "good leaver" clause in their Barclays contract. Edgar's departure, which BarCap declined to comment on, comes as trading profits for banks have dropped sharply and new US legislation which bars banks from trading on their own behalf takes effect. City experts today said many more traders could choose to leave large banks and set up their own businesses as regulation tightens.

 

There is still huge uncertainty over what Sir John Vickers' Independent Commission on Banking will recommend when it reports next month. Bankers are bracing themselves for tough new rules which ring-fence a bank's retail activities from its more risky investment-banking activities. Top traders are also facing an increasing glare of publicity as UK banks are forced to reveal details of employees who earn over UKpound1 million a year. Banks are slashing costs with Barclays likely to shed 3000 jobs this year, some half of which could come at BarCap.

 

Tony Anderson, head of financial products at law firm Pinsent Masons, said: "There are several factors influencing moves among key banking personnel in the City. "Current trading conditions and remuneration levels relative to profitability of business units are obviously key."

Wednesday, August 17, 2011

Source: GARP

 

Sir Mervyn King has warned the Chancellor that the eurozone crisis is a major risk to Britain and that he is prepared to ease monetary policy further despite the latest rise in inflation. The Bank of England governor's comments are contained in a letter to George Osborne which was published after the government released the latest inflation figures showing that consumer prices rose to 4.4pc in July after falling back slightly in June. In the letter, the governor acknowledges that the Bank expects inflation to rise to 5pc later this year before falling back in 2012. King's letter contains the strongest words to date on the danger to Britain's economic recovery from the problems in the 17-country eurozone.

 

"There is a risk that this could lead to further severe stress and dislocation in financial markets and, were this risk to crystalise, it would have a significant impact on the British economy," the governor says. The caution of the Bank of England suggests that the official bank rate, currently pegged at 0.5pc, could remain at that low level for the foreseeable future. King also makes it clear that if necessary the Monetary Policy Committee, which sets interest rates, would be ready to engage in further asset purchases -- quantitative easing -- to try and boost output. But he admits that there is a "limit to what monetary policy can do when large real adjustments are required." The low interest rate message will come as a relief to households with mortgages who have been able to use lower repayments to offset the higher prices cascading through the economy.

 

But it will be another blow to savers, particularly those in retirement, who must watch inflation denude their nest eggs. They will find it almost impossible to obtain real returns -- those above inflation -- on their deposits with banks and building societies. The Office for National Statistics reported that the higher prices in July were the result of prices being restored to normal in the shops after heavy discounting and sales in June. The public will be enraged to learn that another factor was higher charges imposed by the banking sector. Inflation can be expected to surge ahead next month when the latest round of gas and electricity prices -- ranging from 11pc to 19pc -- start to feed through to domestic utility bills. The Bank of England is, however, hopeful that inflation will ease later in the year as lower oil and commodity prices, which are falling because of a softening world economy, cool the upward pressure.

Wednesday, August 17, 2011

Source: GARP

 

A New York bankruptcy judge has chosen a company to help sell off billions of dollars' worth of commercial loans held by the estate of failed investment bank Lehman Brothers. WCAS Sullivan International Investment Management said Wednesday that it plans to create and sell exotic bonds - similar to the ones that toppled the storied Wall Street firm - that will be backed by the loans, and it will give the proceeds to Lehman's creditors. Lehman's was the biggest bankruptcy filing in U.S. history; the firm had more than $600 billion in assets on its books before it filed for bankruptcy court protection.

 

WCAS said it will take over the $5.3 billion commercial loan portfolio under a deal with the court overseeing Lehman's bankruptcy. The portfolio includes $3.8 billion in commercial loans and $1.5 billion in promised loans that were not funded, WCAS said. The agreement is part of the court's campaign to sell off Lehman's assets and return the proceeds to those who were owed money when the bank failed.

 

Seeking to maximize those proceeds, WCAS plans to pool the loans into complex bonds known as collateralized loan obligations. It will sell investors slices of those bonds and give the proceeds to Lehman's estate and its creditors. Over time, income from loan payments will be distributed among buyers of the bonds. WCAS said it plans to bundle loans worth at least $1 billion during the next year and eventually generate income from $2 billion of the loans in the portfolio.

 

The returns to Lehman's creditors will likely be smaller. That's because some of the loans will not be repaid, and the investors who buy them will offer less than the loans' face value because they are assuming that risk. WCAS is a global asset manager specializing in high-risk, high-return bonds, also called junk bonds. The company has $7.8 billion in assets under management. The 2008 financial crisis started in the market for investments such as CLOs and other loan-backed bonds. Banks held trillions of the investments on their books, mainly backed by shoddy home mortgage loans. The mortgage bonds became toxic in 2008 after home prices declined and homeowners started to default. As the bonds lost value, banks and traders realized that many of them would never pay off and many abandoned Lehman, fearing its losses would be too great. In contrast, the bonds created by WCAS will contain business loans that are seen as a safer bet. WCAS also will manage parts of the portfolio that can't be bundled, such as the unfunded promises and commercial loans that might already have soured.

 

Lehman's bankruptcy caused the global credit markets to freeze up almost overnight. Banks refused to lend to each other because they feared more failures and greater losses. Companies and consumers were unable to get loans. The restructuring firm overseeing Lehman's liquidation hailed the deal with WCAS as "a great outcome for the estate and for our creditors." Doug Lambert, managing director of Alvarez & Marsal, said it will maximize income from the loans over the long term. He noted that WCAS will hire ten people who already manage the loans, "ensuring continuity of management" by people focused on maximizing returns for Lehman's creditors.

Wednesday, August 17, 2011

Source: GARP

 

Banking regulation might have been too lax before the housing bust, but federal lawmakers at a hearing in Newnan questioned Tuesday whether the crackdown since then has unfairly punished community banks and slowed the industry's recovery. "Banks that are too big to fail survived. Banks that are too small have been cut loose," said Rep. Lynn Westmoreland, a Republican from Coweta County who is also a former home builder. More than 100 people -- mostly bankers, homebuilders or regulators -- attended the hearing. Westmoreland was joined by three other members of the panel, including David Scott, a Democrat who represents areas of south and west metro Atlanta. They said regulators from the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency may have become overzealous in their enforcement of community banks.

 

Bankers, they said, complain of "mixed messages" from regulators, especially when it comes to helping distressed borrowers. Georgia leads the nation in bank failures with 67 since mid-2008, and the state remains stuck in a fickle recovery. Most of Georgia's failed banks are small community institutions that lent to developers in a white hot real estate market. Critics have alleged uneven treatment of troubled banks and said methods the government uses to dispose of failed banks harm borrowers and could be hindering the economic recovery by restricting credit. Regulators, however, said their practices are designed to return the industry to health so that banks can help fund an economic rebound.

 

"We want banks to deploy capital and liquidity, but in a responsible way that avoids past mistakes and does not create new ones," said Kevin Bertsch, associate director of bank supervision and regulation for the Federal Reserve. Regulators also said they've instituted guidance to help banks work with distressed borrowers. Chuck Copeland, chief executive of First National Bank of Griffin, complained of "regulatory paralysis," and of bankers being criticized in hindsight after previously receiving top marks for management.

 

Michael Rossetti, a home builder and bank director, said banks and businesses "are being regulated to death," and that orders to reduce concentrations in risky loans have curtailed sensible lending. Gary Fox, former chief executive of Bartow County Bank, which failed in April, said Georgia was overbanked during the housing bubble, with too many new institutions allowed to form in 1990s and 2000s when banking laws were relaxed.

 

That led to riskier lending practices as banks competed for business, he said. Westmoreland and Scott -- often at opposite ends of the ideological spectrum -- are co-sponsoring a bill to require the inspector general of the FDIC and the nonpartisan Government Accountability Office to examine enforcement practices and sales of failed banks to healthy rivals.

 

So-called loss-share deals are often offered to attract buyers of failed banks, with the FDIC absorbing a large percentage of the losses on bad loans. Regulators say loss-share deals have saved the FDIC's deposit insurance fund, which backstops deposits, $40 billion. Critics charge the deals result in fire sales of assets and injure borrowers. Regulators also say the deals help maintain real estate values better than earlier failed bank liquidations, which involved bulk auctions of assets.

 

The bill also would examine certain accounting practices that critics say force banks to write down the value of certain performing loans, often involving real estate. "Most of the banks that failed [in Georgia] have been appraised out of business," said Fox.

 

The bill has passed the U.S. House of Representatives and is pending in the Senate. Rep. Spencer Bachus, R-Ala., another member of the subcommittee and chairman of the House Financial Services Committee, criticized some regulators' actions, but added it can be "human nature" to blame someone else for problems. Bachus said regulators might have made mistakes but added he doesn't think they forced bank failures. The subcommittee members present, who also included Chairwoman Shelley Moore Capito, R-W. Va., all have received contributions from financial institutions over the years.

 

Brian Olasov, an expert in distressed real estate and a non-attorney managing director at Atlanta law firm McKenna Long & Aldridge, said regulation has skewed too strict in the wake of the recession. "Nobody saw the depth and severity of the problem," he said. Kevin Jacques, finance professor at Baldwin-Wallace College in Ohio and a former U.S. Treasury Department economist, said the banking crisis exposed serious problems hidden inside many once-profitable banks, leaving regulators to walk a tightrope between oversight that is too harsh or soft. "Regulators make a very nice target for politicians for being too stringent [during a bad economy]," Jacques said.

Wednesday, August 17, 2011

Source: GARP

 

CHINA IS looking to see what impact the current financial crisis is going to have on its economy, just as the rest of the world is beginning to wonder if China can step in again, as it did three years ago, with measures to give a shot in the arm to the world economy. As euro zone policymakers work furiously to contain the debt crisis, China, the world's second biggest economy, has acknowledged that Europe has problems. Crucially, it has stopped short of officially chastising the euro zone leaders for allowing things to get to this sorry stage, and even given valuable expressions of confidence that European leaders can stop the crisis from deteriorating.

 

Going easy on Europe is not a given - there have been critical, if veiled, voices slamming the United States for allowing it to happen over there. China holds $3.2 trillion in foreign reserves, 70 per cent of them in dollars. But there is a sense of growing anxiety in Beijing about what exactly is going on in the euro zone. European Central Bank Governing Council member Yves Mersch seemed to be trying to soothe precisely these Chinese anxieties when he said in an interview with the China Business News this week that no euro zone member states would be allowed to quit the currency bloc. "Leaving the euro area is not an option for any member country," was how his remarks translate into English from Chinese. He said it was tantamount to suicide because there were no other working currencies to fall back on.

 

No one knows what China's holdings of eurobonds are, though they are said to be focused on Germany and France, and much smaller than its holdings of US debt. The Luxembourg central bank governor also said it was up to governments to work harder to keep public finances healthy, which will also help the Chinese. "It is the responsibility of governments to bring public finances back onto sustainable tracks," said Mersch.

 

Professor Huang Weiping of the school of economics at Renmin University said France and Germany continued to do well and the fact that China was still buying debt from Spain and Greece showed a certain level of confidence. Also China's holdings of euro zone debt are relatively small. "Even if France got into trouble, the debt burden is much smaller than the US. And the way to manage risk from holding a larger amount of US debt is to put your eggs in different baskets," he said. However, he matched this guardedly upbeat assessment with a warning. "China is not positive on the development of the debt crisis in Europe, it is highly concerned," said Huang. Beijing has regularly expressed its support for debt-laden European countries, because it does not want the problems to get any worse as these countries are major buyers of Chinese exports.

 

A weaker euro zone economy and slowing US growth would hit Chinese exports because of lower consumer spending in these areas. So what can China do to help and offset this scenario? Three years ago, it launched a multi-trillion yuan stimulus package. This time it has two or three options open to it.

 

"China has room to stimulate demand in the event of a slump in growth and could also play a role in stabilising global markets. But there is less space for a major stimulus today than in 2008. As then, the immediate beneficiaries of any new spending would be commodity producers rather than the G7," said Mark Williams, senior China economist, and Qinwei Wang, China economist, in a research note from Capital Economics in London. "There has been no attempt to soothe markets by reaffirming China's commitment to continue buying US debt, as has happened periodically with European debt over the past year. That said, we suspect China would be more supportive if US Treasury yields rose significantly or the dollar slumped," they wrote.

Wednesday, August 17, 2011

Source: GARP

 

Global stocks fell Wednesday in a downbeat appraisal of a Franco-German summit that failed to persuade investors that a convincing fix to the eurozone's spiraling debt crisis was imminent. French President Nicolas Sarkozy and Germany Chancellor Angela Merkel called for greater economic and political unity among the 17 nations that share the euro. But they failed to take the decisive actions the markets had hoped for, including committing to common eurobonds that would spread the risk for the sovereign debt or strengthening a new bailout fund. The market reaction showed little confidence in the announcements, which came on the heels of weak growth in Germany, Europe's largest economy. "There was no talk about boosting the EFSF (European Financial Stability Facility) and not talk about eurobonds, all rather disappointing but not altogether surprising, given the political obstacles against them," said Michael Hewson of CMC Markets. "The biggest worry remains the lack of economic growth in Europe."

 

In Europe, Germany's DAX was 1 percent lower at 5,931 while the CAC-40 in France rose a slight 0.05 percent to 3,232. Britain's FTSE 100 of leading British shares was down 0.72 percent at 5,318. Wall Street was poised for a fairly subdued opening later - Dow futures were down 0.1 percent at 11,380 while the broader Standard & Poor's 500 futures fell an equivalent rate to 1,192.

 

Compared to last week, when turmoil gripped financial markets in the aftermath of Standard & Poor's downgrade of the U.S.'s credit rating and as Europe's debt crisis threatened Italy and Spain, trading this week has been fairly subdued. Often, trading in the second half of August runs dry up until the U.S. return from the Labor Day weekend in early September. In the currency markets, the most activity centered on the Swiss franc. The Swiss franc was back in demand after the Swiss National Bank failed to peg the currency with the euro, as had been widely speculated upon in recent days. Instead, the bank decided to inject more of the Swiss currency into the money markets in its latest attempt to stem the export-sapping appreciation of the currency.

 

"The market was heavily anticipating something along the lines of a target or a foreign exchange floor, but ultimately the SNB simply expanded their current measures," said Geoffrey Yu, an analyst at UBS. By late morning London time, the euro was trading around 0.7 percent lower on the day at 1.1361 Swiss franc, while the dollar was 1.1 percent lower at 0.7873 franc.

 

Elsewhere, the euro was 0.3 percent firmer at $1.4427 while the dollar fell 0.3 percent to 76.55 yen. Earlier in Asia, Japan's benchmark Nikkei 225 index sank 0.6 percent to close at 9,057.26 as a strengthening yen dragged down the country's vital export sector. South Korea's Kospi, which tumbled last week amid massive foreign selling, rose 0.7 percent to 1,892.67.

 

Mainland Chinese shares edged lower as investors fretted over possible monetary tightening measures and the debt problems among European countries using the euro common currency. The Shanghai Composite Index fell 0.3 percent to 2,601.26 while the Shenzhen Composite Index likewise slipped 0.3 percent to 1,163.87. Hong Kong's Hang Seng index rose 0.4 percent to 20,289.03, buoyed by Chinese Vice Premier Li Keqiang's pledge to expand the role of Hong Kong as an offshore trading center for China's yuan currency. Oil prices rose further with the benchmark New York rate up $1.04 at $87.69 a barrel.

Wednesday, August 17, 2011

Source: GARP

 

Chinese commentators are marking a visit by Vice President Joseph Biden by offering a struggling United States advice: Stop flooding your economy with cheap credit. The prescriptions awaiting Biden, who arrives in Beijing later Wednesday, range from cutting government budget deficits to fighting poverty. While similar to the advice of Western analysts, the comments are unusually pointed for China where communist leaders say governments should stay out of each others' affairs, and show the shifting fortunes of the two powers. "The United States has entered a long period of decline," wrote economist Xia Bin, who advises China's Cabinet and central bank, on his blog.

 

The main purpose of Biden's mission is get a better bead on Vice President Xi Jinping, who is expected to take over as Communist Party chief next year and will visit Washington later this year. Biden is also expected to get an earful on Tibet and Taiwan, the democratic island Beijing claims and which Washington provides arms to. But Chinese worries about the U.S. economy are the subtext for the five-day visit. Beijing's biggest fear is a possible third round of bond-buying by the Federal Reserve, known as quantitative easing or QE. It is supposed to push down interest rates and boost investment by injecting money into the economy, but Beijing worries that it will boost prices of commodities traded in dollars, fuel inflation and erode the value of its $1.2 trillion in Treasury debt. "The U.S. should refrain from launching QE3 and tighten its monetary policy to raise the world's confidence in the dollar," the chairman of state-owned Bank of China, Xiao Gang, wrote Wednesday in China Daily, an English-language newspaper aimed at foreign readers.

 

Beijing has repeatedly appealed to Washington to protect foreign investors and the dollar. It has avoided publicly making specific demands but this week's commentaries in the entirely state-controlled press make clear what it wants to see. "China has much at stake over U.S. economic policy changes and a stable U.S. dollar," the official Xinhua News Agency said. Resolving economic problems in a "responsible manner" would improve U.S.-Chinese relations, it said. Other governments complain earlier Federal Reserve efforts to reduce interest rates prompted investors to move money to developing economies in search of higher returns, pushing up the value of their currencies and prices of their exports. China's own government debt is low compared with those of the United States, Japan and European countries, even after a huge stimulus that helped it rebound quickly from the 2008 global crisis.

 

The press campaign also might help Beijing diffuse criticism it faces from some Chinese in comments posted on Internet sites questioning its decision to invest so much of its $3.2 trillion in foreign reserves in Treasury debt. Treasurys are seen as one of the lowest-risk assets but the recent debate in Washington over raising the government debt limit and downgrade of the U.S. credit rating caused alarm in China. "By focusing concern on the failures of U.S. policymaking, as China sees it, Chinese officials are able to deflect attention from their own part in creating some of the global imbalances and the decision that lay entirely in their hands to invest so much in U.S. Treasurys," said Capital Economics analyst Mark Williams. Beijing faces its own debt problem after it disclosed that local governments owe $1.6 trillion in bank loans that paid for public works and other expenses. But analysts say high economic growth means it should be easily manageable. Bank of China's Xiao and other commentators said Washington should focus on longer-term reforms to cut its budget and trade deficits, raise savings and create jobs.

 

"They should set out to solve the poverty issue," a researcher at Peking University's Development Research Institute, Xu Jianguo, wrote in the Global Times, published by the Communist Party flagship newspaper People's Daily.

Wednesday, August 17, 2011

Source: GARP

 

The economy of Germany, Europe's headline performer, slowed to a virtual standstill over the past three months, according to new figures released Tuesday, a further blow to international efforts to contain the financial crisis on the continent. The discouraging news came just hours before German Chancellor Angela Merkel and French President Nicolas Sarkozy called for closer European coordination in setting economic policy and new steps to discipline governments whose lax budget practices prompted the debt crisis. Meeting in Paris, Merkel and Sarkozy sought to address the challenge that has long bedeviled the 17 countries that share the euro. Although they use the same currency, they have lacked common oversight of tax and spending policies, leaving much of the continent vulnerable to the fiscal failures of individual nations.

 

The pair proposed that countries harmonize their tax policies, adopt a new tax on financial transactions and commit to balancing their budgets, as well as set up an economic council of national leaders that would meet at least twice a year. But the post-meeting news conference did little to cheer U.S. and euro-zone stock markets, which were down after the poor German growth report. The abrupt slowdown in Europe's largest economy comes at a time when Germany is expected to fund a major portion of the emergency loans extended to struggling neighbors such as Greece, Ireland and Portugal. Germany's contribution is unpopular at home, and the new economic troubles could make it hard for politicians to sell any additional bailouts if Europe's debt crisis worsens. The new figures call into question whether Germany can remain the economic engine that officials in the United States and elsewhere have been counting on to power Europe's recovery. Amid recent signs that the U.S. recovery is flagging, the news that Germany grew only 0.1 percent during the second quarter is an especially grim development for the world's economy.

 

The German economy had bounced back from the recent global recession, looking - in the words of one analyst in Berlin - "like a swimmer in a neoprene suit." But that strong growth, about 3.5 percent last year, was largely the result of a post-recession export boom that economists did not consider sustainable. The reality is more sobering: weak domestic consumption, stagnant wages, an aging population and underlying growth - estimated at barely more than 1 percent annually - that looks little different from that of anemic neighbors such as Italy and Spain. "Trend growth is not that high," said Thomas Mayer, chief economist for Deutsche Bank. "It would have been false to think that Germany would turn into a locomotive for Europe. That is not a viable proposition."

 

According to a release from the Federal Statistical Office of Germany, flagging investment and household consumption were behind the slowdown - particularly disappointing for those, including U.S. officials, who have urged Germany to stoke local demand. The figures for June 2010 to this past June were more encouraging, showing that Germany grew 2.8 percent. But even that represented a decline. Also discouraging were new figures released Tuesday for the entire region that uses the euro. Growth for the second quarter was only 0.2 percent, reflecting government austerity programs and slowing global economic activity. The poor German showing is the latest in a spate of downbeat news for Europe. France, the euro zone's second-largest economy, reported last week that it had essentially stagnated. And recent moves by European leaders to craft an expanded bailout for Greece, along with other steps to show they would defend the currency, were quickly discounted by the markets.

 

Although the crisis in Europe is ostensibly driven by high levels of government debt and annual deficits, it is also rooted in slow growth, with nations such as Italy and Spain struggling to expand fast enough that their tax base keeps up with their commitments to citizens and bondholders. Germany's growth in the past few years offered an example to weaker economies. A decade ago, the nation was one of Europe's laggards, with exorbitant wages, expensive social commitments and the challenge of absorbing the former East Germany. In the euro's early years, Germany violated the euro-zone requirement that countries keep their annual deficits below 3 percent of annual economic output.

 

But Germany revised its labor and tax rules to become globally competitive. Its stable of large multinationals benefited as China and other fast-growing developing nations snapped up German capital goods and high-end products. Figures released last week, however, showed that German exports in June were down significantly from the month before and manufacturing dropped to its lowest level since October 2009. In a country that has been spared the riots and demonstrations of Greece and Spain, the slowdown may reinforce a public sentiment - reflected in some opinion polls - that Germany should go no further in risking its own financial health to help its weaker neighbors.

 

At their meeting, Merkel and Sarkozy, whose countries account for about half the euro zone's economic output, spoke of a unified response. In a joint statement, they called for what Sarkozy termed "a true economic government for the euro zone," including a council of leaders from the 17 member countries that would meet at least twice a year. Compared with some of the more dramatic steps that European officials have taken to address the debt crisis, such as establishing a trillion-dollar bailout fund last year, the proposals offered Tuesday were more evolutionary, Merkel said. By bringing the economic and social policies of the euro nations into sync, the region could "regain confidence step by step," she said.

 

The proposals were short on details, and some analysts said they had heard similar ideas before. Over the years, European leaders, particularly from Germany, have offered various ways to control euro-zone spending, but to little effect. National parliaments would still have to approve the proposed measures, such as constitutional amendments to require a balanced budget, and governments would still have to live up to them. "They have not given any details on what they feel economic governance should look like," said Daniela Schwarzer, an expert on European integration at the German Institute for International and Security Affairs. And if the new economic council meetings amounted to no more than the latest in a long series of summits, she said, "that is nothing substantially new."

Wednesday, August 10, 2011                                                                                                                                                                
Source: GARP

Thegovernment has questioned public sector banks on delays in disbursing largeloans to the fund-starved infrastructure sector. The governmentlast week sought details of such delays on loans of '100 crore or more forpower and road projects. Loan flow to these projects is slowing, data from theReserve Bank of India (RBI) shows. "They (finance ministry) have asked forthe details of loans sanctioned," said Arun Kaul, chairman and managingdirector of UCO Bank. "It is a concern for banks that companies are notgetting clearances for projects. In some cases, banks have released part of theloan and projects are stuck (due to clearance hurdles), thus risking theexposure."

Two other bankers, including thechairman of a leading state-run bank, said they too received the financeministry's communication on this. Both declined to be named. Analysts saidpublic banks are reluctant to lend to power and road projects fearing defaultsand uncertainty on their completion. "Banks are not keen to lend due torepayment issues," said Abhishek Kothari, analyst with Way2Wealth BrokersPvt. Ltd. "Government probably wants to nudge them a bit to lend to thesector, especially to power." Many projects, particularly in the powersector, are not being completed on time because of a host of issues. Commercialbanks cite delays in land and environmental clearances as the main hurdlesforcing infrastructure companies to lag behind schedules. Typically, banksrelease the loan amount in phases depending on the completion of each phase ofa project.

"Infrastructure companiesare unable to perform the way they have promised due to (problems in)acquisition of land, leaving banks unsure about the recovery," said AnandGupta, honorary treasurer, Builders Association of India, an association ofdevelopers and infrastructure firms. "They are holding back even thesanctioned loans." Typically, commercial banks lend at 200-300 basispoints (bps) over their base rate, or minium lending rate, to infrastructurecompanies. One basis point is one-hundredth of a percentage point. Base rate ofmost public sector banks is 10-11%. More than half of the infrastructure loansgoes to the power sector.

RBI's latest data shows loans toinfrastructure projects grew at 39% year-on-year in the 12 months to 20 May,slower than the 44.3% increase in the corresponding year-ago period. Inabsolute terms, however, banks' total lending to the infrastructure sectorincreased to '5.5 trillion as on 20 May from '3.9 trillion a year ago. SinceMarch, growth in bank lending to the infrastructure sector has been almoststagnant, with lending to power and telecom projects declining. The chairman ofanother state-run lender said his bank is in the process of responding to theministry's note. "Most of the issues for not disbursing loans to power androad projects are due to lack of clearances in time. What should the bank dowhen the company is not lifting the sanctioned amount," the officialasked.

India needs an investment of atleast $1 trillion to develop its infrastructure in the 12th Plan period(2013-2017), by government estimates. The 11th Plan estimates the privatesector will contribute nearly one-third of the total planned investment.Commercial banks are not too forthcoming in supporting infrastructure growth asthey fear a growing mismatch between their loans and deposit portfolio.Besides, banks are constrained in extending more loans to the sector as many ofthem have hit their internal ceilings on lending to infrastructure projects.Banks are finding it difficult to finance projects that have repaymentschedules of up to 15 years as a bulk of their deposits mature in one-threeyears. Officials of several state-run banks said they have either reached orare fast running out of available headroom due to shortage of resources and sectoralexposure limits set by RBI.

Under current norms, a bank canlend only up to 15% of its capital to a single borrower and 40% of capitalfunds in the case of a borrower group. This makes lending to infrastructurefirms difficult for smaller banks. Industry officials said group exposurelimits create roadblocks for fund availability. "Banks have set their owngroup exposure limits. Suppose one group firm has not drawn the money evenafter the bank sanctioned it, other companies in the group will not get fundsas the group limit is already met," said Amitabh Das Mundhra, director atSimplex Infrastructures Ltd, a Kolkata-based infrastructure company.

 Tuesday, August 09,2011                                                                                                                                                                      Source: GARP 

Thefear that has gripped Europe's sovereign debt market for months took root inits stock markets as investors increasingly worried on Tuesday about uncertaingrowth prospects for some of the continent's biggest companies. Spain and Italywatched their borrowing costs drop further in signs of success for a massivecentral bank move to quell Europe debt's crisis, but stock markets were inturmoil as stronger economies showed worrying signs of slowing.

Germany'sstock market was down for the 10th consecutive day and new data from Europe'sgrowth engine showed that export growth - a closely watched economic indicator- is slowing down. The Federal Statistical Office said exports in June were upby 3.1 percent to euro88.3 billion ($126 billion) on the year, the smallestincrease in 16 months. "In June we got to feel the first indications ofthe decreasing global economic dynamism," said Anton Boerner, the head ofGermany's exporters' association. The impact of the slowing U.S. economy"will be felt in the coming months," he added.

Germanyhas sailed through the debt crisis relatively unscathed. Despite much grumblingover the big contributions to the rescue packages to Greece, Ireland andPortugal, the eurozone's largest economy enjoyed stellar growth last year andearly this year, big companies like BMW and Volkswagen reported bumper profitsand unemployment is lower than in has been in years. But if the current stockmarket sell-off continues, this may soon change. Since July 22, the day aftereurozone leaders decided to give their bailout fund new powers but refused toexpand its size, Germany's main stock index, the DAX has lost more than 20percent. That's more than the 15 percent drop seen on the FTSE 100 in the U.K.,or the 17 percent dive on the French CAC-40. Closely watched German indicatorsof consumer confidence and business confidence also declined more than expectedlast month. German output grew by 3.6 percent last year, and the government inEurope's biggest economy hopes growth this year will again top 3 percent.

But inFrance - Germany's biggest trading partner - growth is likely to only be 0.2percent in the third quarter, the central bank said this week. The Bank ofFrance' s monthly industrial survey showed both corporate order books andfactory utilization rates falling for the second month in a row in July. Thebenchmark in France recovered from earlier losses and was slightly up in earlyafternoon trading, but the DAX was 1.4 percent lower, echoing Monday's plungeon Wall Street, where the Dow Jones fell a dizzying 634 points, one of theworst days since 2008.

"Investorsare worried about rising global recession risks, the threat of a major bankbust and a loss of confidence in G20 policymakers ability to resolve currenteconomic and financial problems especially in the eurozone," said analystNeil MacKinnon of VTB Global Securities. The negative sentiment on stockmarkets contrasted with somewhat declining tensions in Spanish and Italian bondmarkets, where intervention from the European Central Bank was starting to takeits effect. The yield, or interest rate, on Spanish 10-year bonds was at 5.03percent, after approaching 6.5 percent just a week ago. The yield on Italianequivalents was at 5.14 percent, also about 1 percentage point below where itwas Monday morning before the ECB intervention.

"Itis the worst crisis since World War II and it could have been the worst crisissince World War I if leaders hadn't taken the important decisions," ECBPresident Jean-Claude Trichet said with French radio station Europe 1,defending the bank's decision to further intervene on bond markets. Trichetdidn't directly confirm that the ECB has been buying up the bonds of Italy andSpain, saying only that his banks "is in the secondary market" foreurozone bonds and that it would release the amounts invested on Monday, as itdoes every week. The ECB head also indicated that his bank still sees the mainresponsibility for fighting the debt crisis with eurozone governments and notthe central bank.

"Iwon't say" how long the ECB will buy bonds on the secondary market,Trichet said. "What we expect is that the governments do what we considerto be their job." He said eurozone countries needed to implement recentlytaken decisions to allow their bailout fund to buy government bonds on the openmarket "as rapidly as possible." Italy and Spain, meanwhile, have todeliver on their promises to cut their budgets as the central bank hasdemanded, Trichet said. Despite the ECB's reluctance to take a central role infighting the debt crisis, analysts have warned that it may not be easy for thebank to halt its bond-buying program once the eurozone bailout fund has beenequipped with its new powers.

Theycaution that the euro440 billion European Financial Stability Facility does nothave enough money to intervene effectively on secondary markets to help largecountries like Italy and Spain, and that divisions among countries, which allhave to sign off on intervention, could delay any necessary action. The head ofGermany's Free Democrats, the junior partner in Chancellor Angela Merkel'scoalition criticized the ECB action, warning that it is not the bank's positionto get involved. "The central bank must remain impartial," saidChristian Lindner, 32.

Hecalled for European leaders to avoid knee-jerk reactions that make governmentslook helpless.

"Themarkets smell fear and react with speculation," Lindner said.

 

 

 

 

Wednesday,August 10, 2011

Source:GARP

TheBank of England has downgraded its growth forecast for 2011, blaming adeteriorating global economy. The Bank said Wednesday in its quarterlyinflation report that it now predicted growth of 1.4 percent this year, downfrom previous forecasts of 1.8 percent. It said it would rise to an annual rateof around 2.7 percent in two years time.

"Themost significant risks to demand stem from abroad," said Bank said.2Indicators of global growth have weakened, and it is possible that some ofthis slowdown will persist."  Inaddition, the Bank said inflation in Britain has a "good chance" ofhitting 5 percent this year as higher utility bills feed through but that itwill likely fall back sharply next year. Though inflation is well above theBank's 2 percent target, rate-setters have kept the main interest rateunchanged at the record low of 0.5 percent as economic growth remains subdued,especially at a time when the government is enacting big austerity measures.

TheBank warned in its report that "the squeeze in households real incomes islikely to continue to weigh on domestic demand." Governor Mervyn King saidthe biggest risks for the world economy are coming from the eurozone, which isgrappling with a severe debt crisis that has already seen three countriesbailed out and has recently threatened Italy and Spain. King dismissedsuggestions by reporters at a press conference that the riots that have spreadacross Britain in the last week were triggered by youth unemployment and publicsector job cuts, saying that the private sector has created four times morejobs in the past year than have been shed by the public sector.

Kingsaid the Bank has room to ease monetary policy further, including expanding itsasset purchase program. On Tuesday, the Federal Reserve said it would alsoconsider a further monetary stimulus if the economy continued to be weak.

Sunday,August 07, 2011

Source:GARP

Fearsare growing that the downgrade of America's debt coupled with the mountingeurozone debt crisis will spill over into the banking system, sparking a secondcredit crunch at least as bad as the one that followed the collapse of LehmanBrothers. A fresh credit crunch would cripple the flagging economic recoveryand could heap yet more pain on companies in need of lending and on homebuyersstruggling to get a mortgage.

RayBoulger at mortgage broker John Charcol said: 'In the short term, interestrates will have to stay low for even longer. But what would be worrying wouldbe a banking crisis on even half the scale we saw after Lehman Brothers. Inthat case we'll see the banks find it hard to get funding and the lenders willpull in their horns.' The crisis that has gripped world markets is expected toworsen after the decision of ratings agency Standard & Poor's to downgradeAmerica's credit rating from triple-A to AA+.

Pricesplunged last week after European Commission president Jose Manuel Barrosoadmitted the euro crisis may spread, and the markets continued to squeeze Italyand Spain, driving down the price of their bonds. This means the effectiveinterest rate on those bonds -- the yield -- rises and this indicates thelikely cost to that country of any future borrowing. The impact of the USdowngrade will become apparent tonight as markets in Asia open. There will bepressure on all dollar assets, including bonds and equities, as well as thedollar itself. The downgrade was widely expected, but with internationalmarkets in febrile mood, knee-jerk sell-offs are likely.

JustinUrquhart-Stewart, a director at fund manager Seven Investment Management, said:'We are dealing with a European debt problem, a US debt problem and a lack ofpolitical leadership. These are all known factors and a downgrade was a knownknown. It was inevitable. So there's no real reason why it would have any impacton the markets. But we're not in a normal market. We are in a fret and themarket will react irrationally. Will the market fall? It shouldn't, but yes itwill.' US authorities are expected to allow banks to continue using Treasuriesas if they were top-notch assets for solvency purposes. Europe's regulators arelikely to follow suit.

But itis now seen as inevitable that Greece and possibly other states will have torestructure their debts, in practice meaning banks that hold their bonds willtake losses. Royal Bank of Scotland set aside UKpound733 million for losses onits UKpound1.4 billion holdings of Greek bonds last week. There was talk thatFrance's second-biggest bank, Societe Generale, was in trouble due to exposureto Greek debt. It owns 88 per cent of the Greek bank Geniki, whose value hascollapsed. There are also fears about Italy's biggest bank, UniCredit. Lossesby banks would put further pressure on their capital and raise fears for theirsolvency. Capital markets have already been moribund for the past two months,making it extremely hard for banks to raise capital needed for lending.

Thecrisis is seen as the first big test for former French finance ministerChristine Lagarde as head of the International Monetary Fund (IMF). Shereplaced Dominique Strauss-Kahn last month. Analysts at investment bank MorganStanley warned last week that it was 'critical for funding markets to reopen inSeptember', adding that they took a negative view of the whole banking sector,with a handful of international exceptions such as HSBC. One London sharetrader said: 'It does not matter that the direct exposure to Europe is small,it's the possible indirect effects that are hurting the banks.'

LloydsBanking Group -- mostly UK-focused -- said last week its total exposure togovernment debt in the troubled eurozone was just UKpound189 million, but itwas one of the worst-hit shares in the market meltdown, down 24 per cent forthe week. Traders said the main causes were the risk of a general economicslowdown in Britain sparked by a eurozone crisis, and Lloyds' need for morefinancing from wholesale markets. Lloyds raised UKpound25 billion in the firsthalf of 2011, a valuable step in cutting its dependence on credit from theGovernment and the Bank of England. But analysts say this figure shows howcrucial it was to Lloyds that wholesale capital markets were not hit by theeurozone implosion.

BritishBankers' Association chief executive Angela Knight insisted her members canweather the euro crisis. 'What Britain has done very publicly is require itsbanks to recapitalise,' she said. 'It made banks hold more liquid cash in a waysome other countries have not.' Knight rounded on Europe's politicians, whoagreed a plan to stem the euro crisis in July that has yet to be put intoaction. 'It's almost as if there is an assumption that they can make anannouncement, then go away on holiday and everyone will wait for them to comeback. That is not how markets work,' she said.

Thesell-off of Spanish and Italian government bonds is an unsettling echo of thepressures that have forced Ireland, Greece and Portugal to seek a rescue fromeurozone partners and the IMF and raised the prospect that these countriescould actually default on their debts. But some argue that the pressure onSpain and Italy is misplaced. One banker said: 'The market attacks on Greece,Ireland and Portugal were fair. But ltaly has quite a strong economy and Spain,while it has its problems, is doing something about them. It has stepped up tothe plate.

'Spainis not just about a property bubble on the costas and there's more to Italythan Berlusconi and bunga bunga parties.'

 

Tuesday,August 09, 2011

Source:GARP

America's economic conditionshave worsened to the extent that a key lending rate in the economy probablywill stay near zero at least until mid-2013, a divided Federal Reserveannounced Tuesday in a statement that promised action to keep the economymoving forward. Citing "considerably slower" economic growth than hadbeen projected, the rate-setting Federal Open Market Committee, with threedissenting votes, said it anticipated keeping the benchmark federal funds ratenear zero until well after the next presidential election. That rate, whichbanks charge each other, is the basis on which banks set the prime rate theycharge their best customers. The rate has been near zero since December 2008,and the first-ever target date offered for this record low rate signals thatlending interest rates will remain low for quite some time as an impairedeconomy struggles to regain footing. "This is an exceptionally dovish Fedstatement that downplays the inflation risks and significantly downgrades theFed's assessment of economic growth," forecaster RDQ Economics said in aresearch note.

Stocks had been trading up mostof the day until the Fed's announcement, but they turned sharply south afterthe statement was released. As markets digested what the Fed had done, however,stocks stampeded upward at the close of trading, recovering much of Monday'ssteep losses. The Dow Jones industrial average rallied 429.92 points, or 3.98percent, to close at 11,239.77. The S&P 500 fared even better, gaining53.07 points, or 4.74 percent, to finish at 1172.53. The tech-heavy NASDAQsoared 124.83 points, or 5.29 percent, to end at 2482.52. The rally came toolate for crude oil. Prices for next-month delivery settled down $2.01 to $79.30on the New York Mercantile Exchange, falling 17 percent so far this month.That's bad for investors but good news for weary motorists and energy-intensivebusinesses such as truckers and airlines.

In practical terms, the Fed'sstatement Tuesday drove down the interest rate the Treasury Department paysinvestors who purchase two-year government bonds. That low return encouragesinvestors to seek better returns in the market for stocks, bonds or commoditiesand promotes risk taking and economic activity. It amounted to a creative wayfor the Fed to boost the economy. While earlier Fed statements spoke to headwinds slowing growth, Tuesday's suggested that these weak underlyingfundamentals might have been masked. "Temporary factors, including thedamping effect of higher food and energy prices on consumer purchasing powerand spending as well as supply chain disruptions associated with the tragicevents in Japan, appear to account for only some of the recent weakness ineconomic activity," the Fed statement said.

It painstakingly listed theweaknesses:

"Indicators suggest adeterioration in overall labor market conditions in recent months, and theunemployment rate has moved up. Household spending has flattened out,investment in nonresidential structures is still weak and the housing sectorremains depressed." Given the turmoil in financial markets over the pastweek, the markets were expecting that the Fed at minimum would change itslanguage of past statements to pledge the exceptionally low rates for a definedperiod.

Few analysts, however, expected apledge to keep rates so low for so long. The announcement came with an almostunheard-of three dissents among the 10 committee votes. The presidents of theFederal Reserve Banks of Philadelphia, Dallas and Minnesota preferred moreambiguous language promising an "extended period" for near-zerorates, rather than a hard date. Despite market turmoil tied to last Friday'sembarrassing downgrade of U.S. government bond ratings, the Treasury Departmentsold $32 billion in three-year Treasury notes Tuesday at record-low interestrates. It was the first Treasury auction since Standard & Poor's took awaythe gold-plated AAA rating, and it suggested that investors still see U.S.bonds as the safest in the world. The Fed pledged to keep reinvesting theearnings from the vast securities it had purchased earlier to stimulateeconomic activity. It also restated that it'll review the size and compositionof its holdings as needed.

"The committee discussed therange of policy tools available to promote a stronger economic recovery in acontext of price stability. It will continue to assess the economic outlook inlight of incoming information and is prepared to employ these tools asappropriate," the Fed said, keeping its options close to the vest. Amongthe tools the Fed is thought to be considering is lowering the interest rate itpays on the cash that private banks keep in the Fed system. Like Tuesday'saction, this would create a disincentive to sit on cash, encouraging banks toinvest and lend in support of the economy.

Another option is to lengthen thematurity of securities the Fed holds, driving down long-term lending rates inthe economy. That, in turn, would drive down mortgage rates to the benefit ofcommercial real estate, homebuyers and refinancing of mortgages. Faced with aslide back into recession, analysts expect that Fed Chairman Ben Bernanke wouldpurchase even more assets to spark investment and lending. The chairman mayshed more light on his options at a speech Aug. 26 at the Wyoming resort cityof Jackson Hole.

Tuesday,August 09, 2011

Source:GARP

The U.S. regulator of creditunions on Tuesday sued Goldman Sachs & Co. for more than $491 million indamages over losses incurred by two failed credit unions that purchasedmortgage-backed securities underwritten by the investment bank. The complaintfiled by the National Credit Union Administration in U.S. District Court in LosAngeles is the latest lawsuit brought by the federal regulatory agency againsta major bank as it seeks to recover billions in losses related to riskymortgage-backed securities that brought down credit unions in recent years.

Buyers of mortgage-backedsecurities, mostly banks, pension funds and other big investors, made moneyfrom the investments if the underlying debt was paid off. But as U.S.homeowners started falling behind on their mortgages and defaulted in droves in2007, the securities failed and their buyers lost billions. In the complaint,which also names as defendants several issuers of mortgage-backed securities,regulators claim that the documents used in offering the securities containeduntrue statements or omissions as to how risky the investments were. As aresult, U.S. Central Federal Credit Union in Lenexa, Kan., and WesternCorporate Federal Credit Union in San Dimas, Calif., acquired themortgage-backed securities, believing the risk of loss was minimal, accordingto the complaint.

However, even though virtuallyall of the securities had a triple-A rating, they represented a substantialrisk of losses, the NCUA claims. And when the investments' market valueplummeted, the credit unions - two of the nation's largest - failed. The NCUAplaced the two credit unions into conservatorship in March 2009. In October of2010, it placed them into involuntary liquidation. Goldman Sachs declined tocomment Tuesday. The NCUA says it may sue five to 10 other banks in comingweeks. In June, regulators sued JPMorgan Chase & Co. and Royal Bank ofScotland PLC. Factoring in the latest lawsuit, regulators are seeking torecover nearly $2 billion in damages. Any recoveries from the lawsuits wouldreduce the total losses resulting from the failure of Western Corporate, U.S.Central and three other failed corporate credit unions: Southwest Corporate,Members United Corporate and Constitution Corporate, the NCUA said. Corporatecredit unions provide financing and investment services to the much largerpopulation of retail credit unions. Shares of The Goldman Sachs Group Inc.added 50 cents to $123.30 in aftermarket trading. The shares ended the regulartrading session up $5.07, or 4.3 percent, to $122.73.

Asian currencies had their biggest weekly advance since April, led by South Korea’s won and the Malaysian ringgit, as regional central banks raised interest rates and concern eased that Greece will default. Taiwan raised borrowing costs on June 30 following increases last month in India and Korea, boosting the yield advantage for the region’s debt. Overseas investors were net buyers of more than $1.6 billion of stocks in India, Indonesia, Korea, Thailand, Taiwan and the Philippines this week. Lawmakers in Greece backed a bill to authorize an austerity plan required to keep rescue aid flowing. The vote in Greece “has allowed investors to think beyond the euro-region and realize that growth prospects in Asia are stronger than rest of the world,” said Mirza Baig, a Singapore- based currency strategist at Deutsche Bank AG. “The regional central banks are raising interest rates and that shows the confidence of policy makers in their economies. We have seen inflows into equities.” The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-traded currencies excluding the yen, rose 0.56 percent, the most since the week ended April 1. The won rose 1.2 percent this week to 1,069 per dollar, according to data compiled by Bloomberg. The ringgit strengthened 1.2 percent to 3.01 and India’s rupee added 0.9 percent to 44.59. Greek Prime Minister George Papandreou’s drive to stave off the euro area’s first sovereign default was boosted when lawmakers approved a budget-cutting package.

Rate Increases

Taiwan’s central bank raised the discount rate on 10-day loans to banks to 1.875 percent from 1.75 percent. All 18 economists in a Bloomberg News survey predicted the decision, after increases of the same amount in each of the previous four quarters. The won advanced for a second week after a government report yesterday showed inflation accelerated. Consumer prices rose 4.4 percent, after a 4.1 percent gain in May, exceeding the central bank’s target for a sixth straight month. Exports increased 14.5 percent in June from a year earlier, resulting in a trade surplus of $3.3 billion. “The rise in consumer prices is reinforcing market sentiment that authorities may allow the won to appreciate, in order to alleviate price pressure,” said Byeon Ji Young, currency analyst at Woori Futures Co. in Seoul.
 

Exports Rise

The ringgit completed the first weekly gain in a month after global funds added to holdings of the nation’s assets. Foreign investors raised ownership of ringgit-denominated debt by 93 percent in May from a year earlier to 181.5 billion ringgit ($60.3 billion), according to data published Bank Negara Malaysia late yesterday. Exports rose 11 percent in May from a year earlier after having increased 11.1 percent the previous month, according the median forecast of economists in a Bloomberg survey before government data due on July 5. “The market is reacting to the positive headlines even though Greece by no means is out of the woods yet,” said Suresh Kumar Ramanathan, a currency strategist at CIMB Investment Bank Bhd. in Kuala Lumpur. Elsewhere, Indonesia’s rupiah gained 0.7 percent to 8,538 against the dollar, Singapore’s dollar appreciated 0.8 percent to S$1.2268, the Philippine peso appreciated 0.8 percent to 43.125 and Taiwan’s dollar advanced 0.4 percent to NT$28.788. Thailand’s baht weakened 0.4 percent to 30.80 before July 3 elections that may trigger political unrest. Source: Bloomberg News Date: 3 July 2011

China’s non-manufacturing industries expanded at the slowest pace in four months in June, adding to concerns that efforts to tame inflation are curbing growth in the world’s second-biggest economy. A purchasing managers’ index dropped to 57 from 61.9 in May, the China Federation of Logistics and Purchasing said on its website today. A reading above 50 indicates an expansion. A manufacturing index fell in June to the lowest level in 28 months as export orders and output grew at a slower pace, according to a July 1 report also released by the federation. The slowdown in manufacturing “caused a reaction in producer services,” Cai Jin, the organization’s president, said in today’s statement. “Although from April it has kept dropping, the index level still shows China’s non-manufacturing industries are maintaining quite quick growth. Affordable housing construction has accelerated.” The government’s drive to build 10 million low-income housing units this year has increased demand for housing and building industries, Cai said. The Communist Party is boosting investment in affordable housing to counter a slump in manufacturing growth. Premier Wen Jiabao set a target to build 36 million social housing units during the next five years, according to a Feb. 27 online interview. The non-manufacturing PMI is based on data from industries including transport, real estate, retailing, catering and software.

Tightening Outlook

Pressure for additional monetary tightening may be easing, after manufacturers’ input prices rose in June at the slowest pace since July 2010, according to logistics federation data. Morgan Stanley says inflation may have peaked last month at an estimated 6.2 percent, the highest rate since July 2008. The central bank has raised reserve requirements 12 times and interest rates four times since the start of last year. “The risk of a hard landing for China’s economy is small,” Peng Wensheng, an economist with China International Capital Corp., said in Beijing on July 1. Peng sees one or two more interest-rate increases this year.

Employers in the U.S. probably expanded payrolls at a pace that failed to reduce the unemployment rate in June as companies sought to contain costs amid slower growth, economists said a report may show this week. Payrolls climbed by 100,000 workers after a 54,000 increase in May that was the smallest in eight months, according to the median forecast of economists surveyed by Bloomberg News ahead of Labor Department data due July 8. The jobless rate held at 9.1 percent. Another report may show growth in services cooled. A recovery that Federal Reserve Chairman Ben S. Bernanke said is “frustratingly slow” explains why employers such as Lockheed Martin Corp. and Gannett Co. are cutting positions or becoming reluctant to add as many workers. Faster payroll growth is needed to spur consumer spending that accounts for 70 percent of the economy. “We’re going through a slow patch in hiring,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “June payrolls will be better than May but still far short of what is needed to bring down unemployment. That’s not good for demand.” The projected gain would be less than the 166,000 monthly average in the first quarter of the year. Payroll increases of around 200,000 a month are needed for a sustained decline in the unemployment rate, Brown said. While the economic recovery started in June 2009, the labor market has been slow to improve, taking a toll on President Barack Obama’s approval ratings. Since he took office in January 2009, unemployment has increased by about a percentage point and the economy has lost 2.5 million jobs. By a 44 percent to 34 percent margin, Americans say they believe they are worse off than when Obama took office, according to a Bloomberg National Poll conducted June 17-20.

Private Payrolls

 The Labor Department employment report will also show private payrolls, which exclude government agencies, increased by 125,000 after rising 83,000 in May, according to the survey median. “Recent labor market indicators have been weaker than anticipated,” Fed policy makers said in a statement after their June 21-22 meeting. “The economic recovery is continuing at a moderate pace, though somewhat more slowly” than anticipated, partly reflecting “temporary” factors, they said. Bernanke said at a news conference after the meeting that policy makers “expect the unemployment rate to continue to decline but the pace of progress remains frustrating slow.”

Cuts at Newspapers

Lockheed Martin, the world’s largest defense contractor, on June 30 said it plans to cut about 1,500 employees from its Aeronautics business unit that makes F-35 jet fighters. The reductions will be spread across several states including Texas, Georgia and California, the Bethesda, Maryland-based company said. McLean, Virginia-based Gannett, the publisher of 82 newspapers including USA Today, said in June it is eliminating about 700 jobs at its community-newspaper unit amid weakness in local and national advertising. The economic recovery is not happening “as quickly or favorably as we had hoped,” Bob Dickey, president of Gannett’s U.S. community publishing division, said in a memo. “While we are seeing improved circulation results and audience growth, weakness in the real estate sector, slow job creation and now softer auto ad demand continue to challenge revenue growth.” The economy may be starting to rebound from a first-half slowdown, according to reports last week. Manufacturing picked up in June as components supply disruptions related to the earthquake in Japan eased. The Institute for Supply Management’s factory index rose to 55.3 from 53.5 in May, the Tempe, Arizona- based group said July 1.

Factory Orders

A Commerce Department report on July 5 is projected to show orders placed with factories rebounded 1 percent in May after falling in April by the most in almost a year. Investors are counting on manufacturing, which has led the recovery, to keep bolstering growth. The Standard & Poor’s Super-composite Machinery Index has climbed 5.6 percent from the beginning of June through July 1, outpacing the broader S&P 500, which gained 1.9 percent. Services industries, which cover about 90 percent of the economy, expanded at a slower pace in June, a report may show on July 6. The Institute for Supply Management’s index of non- manufacturing businesses eased to 53.6 from 54.6 in May, according to the Bloomberg News survey. Source: Bloomberg News Date: 3 July 2011

The Bank of England is set to keep interest rates on hold on Thursday amid further signs that the UK's economic recovery is faltering. When the Bank's Monetary Policy Committee (MPC) last met, a month ago, it left interest rates at their record low of 0.5% because they were worried about the fragile nature of the economy. Since then, there have been further signs of a slowdown in growth, after surveys revealed that activity in the manufacturing sector in June slumped to a 21-month low and consumer confidence showed its biggest fall since January. Many economists now do not expect a rise in rates until 2012. This is despite inflation having remained at 4.5% in May - more than double the Bank's 2% target - after increases in the cost of food and alcohol. One of the main worries for the MPC is the decline in consumer spending, as nervous households delay all but essential purchases because they fear for their jobs, while their wages are failing to keep pace with rising prices. There has been increasing evidence of this over the past month, following the recent collapse into administration of retailers Jane Norman and Habitat, while other store chains such as Carpetright and Thorntons have announced store closures.


At the last meeting of the nine-strong committee, the number of members voting for a hike in interest rates dropped to two from three after Andrew Sentance, who had consistently voted for a rise, was replaced by Ben Broadbent, who sided with the no-change camp. But even the members who voted for a hike admitted that recent economic data had been weak and there was renewed talk about the economy needing to be boosted by a second round of quantitative easing. Howard Archer, chief economist at IHS Global Insight, said: "We now expect the Bank to hold off from raising interest rates until the second quarter of 2012.”We suspect that most MPC members will maintain the view for many more months to come that higher rates are an extra handicap that the fragile economy could well do without." Source: Bloomberg & Press Association UK Date: 3 July 2011

The euro area approved its share of a 12 billion-euro ($17.4 billion) aid payment for Greece and pledged to complete work in the coming weeks on a second rescue package for the cash-strapped nation to prevent a default. Finance ministers agreed to disburse 8.7 billion euros of loans under last year’s 110 billion-euro bailout by July 15, rewarding Greek Premier George Papandreou for pushing an extra austerity plan through parliament. The International Monetary Fund is due to provide the rest of the July aid installment, the fifth under the 2010 package. The spotlight now turns to a second bailout to which banks and insurers plan to contribute following German demands for taxpayer relief. Euro-area governments and investors will provide 70 percent of new aid that may total as much as 85 billion euros, with the IMF offering the rest, Thomas Wieser, an Austrian Finance Ministry official, said on June 30. “The Greek authorities provided a strong commitment to adhere to the agreed fiscal adjustment path,” the 17 euro-area finance chiefs said in an e-mailed statement yesterday after a conference call that was joined by the IMF’s acting chief, John Lipsky, and European Central Bank President Jean- Claude Trichet. “The precise modalities and scale of private- sector involvement and additional funding from official sources will be determined in the coming weeks.” Source: Bloomberg Date: 2 July 2011