Posts Tagged ‘Federal Reserve’
Wednesday, February 1st, 2012
The federal Commodity Futures Trading Commission (CFTC) proposed limiting banks’ proprietary trading and hedge fund investments under the Dodd-Frank Act’s Volcker rule. The CFTC 3-2 vote makes it the last of five regulators to seek public comment on the proposal. This vote opens the measure to 60 days of public comment. The rule, named for former Federal Reserve Chairman Paul Volcker, was included in Dodd-Frank to rein in risky trading at banks that benefit from federal deposit insurance and Fed discount window borrowing privileges.
The CFTC stayed mum when the Fed, Federal Deposit Insurance Corporation, Securities and Exchange Commission and Office of Comptroller of the Currency released their joint proposal last year. The four agencies extended the comment period on their proposal until February 13 after financial-industry groups and lawmakers cited the complexity of the rule and the lack of coordination with the CFTC in requesting an extension.
The CFTC may soften Dodd-Frank a bit, granting Wall Street banks exceptions to rules requiring dealers to sensibly believe their derivatives are suitable for clients and in the best interests of endowments and other so-called special entities. The rules “implement requirements for swap dealers and major swap participants to deal fairly with customers, provide balanced communications, and disclose material risks, conflicts of interest and material incentives before entering into a swap,” CFTC Chairman Gary Gensler said.
Opponents say the CFTC proposal would cause “severe market disruption” by transforming the relationship between swap dealers and clients such as pensions and municipalities, according to Sifma and the International Swaps and Derivatives Association, Inc.. Under the final rule, dealers must disclose material risks and daily mid-market values of contracts to their clients. The CFTC may also complete rules designed to protect swap traders’ collateral that is used to reduce risk in trades. The rule insulates the collateral if the broker defaults, while allowing the customer funds to be pooled before a bankruptcy, according to a CFTC summary of the regulation.
Commissioner Scott O’Malia voted in favor or the rule, but said he did not want to give market participants “a misleading sense of comfort” that it would have prevented the loss of customer money at the brokerage giant. “This rulemaking does not address MF Global,” O’Malia said. “This rulemaking would not have prevented a shortfall in the customer funds of the ranchers and farmers that transact daily in the futures market. Nor would it have expedited the transfer of positions and collateral belonging to such customers in the event of a collapse similar to that of MF Global.”
Commissioner Jill Sommers, who voted against the rule, criticized the rule for doing nothing to protect a futures commission merchant’s futures customers. “Given recent events, we need to re-think this approach so we can provide adequate protections, in a comprehensive and coherent way, to swaps customers and to futures customers,” Sommers said. “I do not favor a piecemeal approach to customer protection.”
Tags: bankruptcy, Commodity Futures Trading Commission, Dodd-Frank Act, Federal Deposit Insurance Corporation, Federal Reserve, Hedge fund investment, Inc., International Swaps and Derivatives Association, MF Global, Office of Comptroller of the Currency, proprietary trading, Securities and Exchange Commission, Sifma, Volcker Rule, Wall Street
Posted in Economics, Financing, General | No Comments »
Tuesday, January 24th, 2012
The Obama administration plans to work closely with federal regulators, Fannie Mae and Freddie Mac to start a pilot program to sell government-owned foreclosures in bulk to investors as rentals, according to administration officials.
There currently are approximately 250,000 foreclosed properties on the books of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), and millions more are expected. Last year’s foreclosure processing delays created an enormous backlog of properties yet to be processed and are just now being restarted. One of the program’s initiatives is for the federal government to mitigate and manage new foreclosures. Late-stage delinquencies still number close to two million, according to a report from Lending Processing Services (LPS). Foreclosure starts are double foreclosure sales and “the trend toward fewer loans becoming delinquent, which dominated 2010 and the 1st quarter of 2011, appears to have halted,” according to LPS.
“I think there is a fair amount of money in the wings waiting to buy, investors doing cash raises to buy properties on a large scale,” said Laurie Goodman of Amherst Securities. “But that means they have to build out a rental organization; it means they build out a management company, because if you’re accumulating a hundred homes in Dallas that’s very different than running a multifamily building.”
This is good advice. The recession began with housing, and is one of the main things holding back the recovery. The most recent unemployment numbers — which showed that non-farm payrolls grew by 200,000 in December, and the jobless rate declined to 8.5 percent from 8.7 percent — join other cautious signs of an improving economy, although the housing situation is worsening. There’s still a serious risk it might put a halt to and not just delay expansion.
“Foreclosed homes are a complex problem. We need some creative thinking and new processes to solve the problem of so many distressed homeowners. I would love to see the market handle it on its own but what makes sense for a single home is likely to destroy confidence in the housing market in aggregate,” said Jafer Hasnain, Partner at Lifeline Assets. “Housing distress needs a Michael Dell to think about streamlining process details, and a Steve Jobs to make it elegant and human.”
House prices fell again in October, according to the S&P/Case-Shiller index. The pipeline of delinquencies and future foreclosures is full, which continues to dim the prospects of a quick recovery. Efforts so far, such as the Home Affordable Modification Program (HAMP), have helped, but less than hoped.
According to the Federal Reserve, there are no simple answers, but it makes several suggestions that Congress should examine. One is to encourage conversions from owner-occupied to rental because that market has strengthened in recent months: Rents have risen and vacancies have declined. A faster conversion rate would hold down rents and ease the pressure of unsold homes on house prices. Fannie, Freddie and the Federal Housing Administration account for about 50 percent of the inventory of foreclosed properties. Many of these are viable as rentals. A government-sponsored foreclosure-to-rental program to clear away regulatory hurdles would make a big difference.
A second suggestion is to encourage refinancings. The administration tweaked the existing HAMP program in October, easing some of the earlier restrictions on eligibility. Even more could be done, according to the Fed. One possibility involves the fees that lenders pay to Fannie and Freddie for assuming new risks when loans to distressed borrowers are refinanced. These charges could be cut or eliminated, even though Congress just voted to increase them to help pay for the payroll-tax extension.
Some institutional investors have shown interest in bulk REO deals, but the plan has to incorporate ways to help facilitate financing. That has been one of the biggest barriers to deals already in the works between hedge funds and the major banks. There is plenty of cash to buy properties, but creating a management structure for the rentals is costly, and some investors are finding the math doesn’t add up to make it worth their while.
Larger investors want to get real scale in any government program, in the range of 50, 100, 500 properties per deal, or $1 billion-plus in assets. That’s why the government is looking to test several different approaches. Fannie Mae did a $50 million sale in June, although that was on the small side. Officials are evaluating what larger asset sales would look like.
“We expect several pilots that will involve both local investors and institutional investors. The goal here is to reduce supply by converting foreclosed homes into rental units,” says Jaret Seiberg of Guggenheim Securities. “Less supply – even less fear about a flood of foreclosed homes hitting the market – could stabilize (home) prices.”
Tags: congress, Fannie Mae, Federal Housing Administration, federal regulators, Federal Reserve, foreclosures, Freddie Mac, hedge funds, Home Affordable Modification Program, institutional investors, Obama administration, Payroll-tax extension, refinancing, Rental market, REO deals, S&P/Case-Shiller index
Posted in Economics, Financing, General, Residential | No Comments »
Wednesday, December 7th, 2011
In a stunning revelation, Bloomberg has obtained 29,000 pages of Federal Reserve documents detailing the largest bailout in American history. According to an article that will appear in the January issue of Bloomberg Markets magazine, the “Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on December 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.”
The $7.77 trillion that the central bank made available stunned even Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009. According to Stern, he “wasn’t aware of the magnitude.” It overshadows the Treasury Department’s better-known $700 billion Troubled Asset Relief Program (TARP) program. When you add up guarantees and lending limits, it becomes clear that the Fed had committed $7.77 trillion as of March, 2009 to rescuing the financial system. That is more than half the value of the U.S. GDP that year. “TARP at least had some strings attached,” said Representative Brad Miller (D-NC), a member of the House Financial Services Committee. “With the Fed programs, there was nothing.”
According to Bloomberg’s editors, “Even as they were tapping the Fed for emergency loans at rates as low as 0.01 percent, the banks that were the biggest beneficiaries of the program were assuring investors that their firms were healthy. Moreover, these banks used money they had received in the bailout to lobby Congress against reforms aimed at preventing the next collapse. By keeping the details of its activities under wraps, the Fed deprived lawmakers of the essential information they needed to draft those rules. The Dodd-Frank Wall Street Reform and Consumer Protection Act, for example, was debated and passed by Congress in 2010 without a full understanding of how deeply the banks had depended on the Fed for survival. Similarly, lawmakers approved the Treasury Department’s $700 billion Troubled Asset Relief Program to rescue the banks without knowing the details of the far larger bailout being run by the Fed.
“The central bank justified its approach by saying that disclosing the information would have signaled to the markets that the financial institutions that received help were in trouble. That, in turn, would make needy institutions reluctant to use the Fed as a lender of last resort in the next crisis. Fed officials argue, with some justification, that the program helped avert a much bigger economic cataclysm and that all the loans have now been repaid.”
Derek Thompson, a senior editor at The Atlantic, argues that the Fed’s secret bailout is a sign that it was doing its job. According to Thompson, “First, you can be furious that the Federal Reserve ‘committed’ $7.7 trillion — a sum of money equal to half of the U.S. economy — to save the financial system. I understand the shock, but we were at the precipice of catastrophe and that money wasn’t ‘spent’ so much as it was put at risk and subsequently recouped. The economy has struggled in the three years since, but we avoided meltdown. The trillions worked.
“Second, you can be furious that the banks made a profit off of their own mistakes — but $13 billion is a small price to pay for staving off Armageddon. Third, you can be furious that the Federal Reserve went to court to keep this information out of the hands of journalists. There, I’d agree. It’s Congress’s job (not the Federal Reserve’s job) to pass laws that govern the banking sector, but Congress needs information to make good decisions about regulating banks and it’s disappointing that the Federal Reserve withheld details about its bailouts while the commission and the Dodd-Frank debate were ongoing. Fourth, you can be furious that our central bank basically did the right thing when it had to, and its counterpart in Europe won’t — at the risk of a continental meltdown.”
Times’ Massimo Calabresi agrees. According to Calabresi, “But the Fed saved the world economy through all this lending without losing a penny in the process. And after its initial heavy breathing, the article does give the Fed an opportunity to explain itself. ‘Supporting financial-market stability in times of extreme stress is a core function of central banks,’ said William B. English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.’ In other words, lending money to banks in a crisis is the whole point of the Fed: saving the world economy by flooding the system with money when it is about to freeze up is exactly what the central bank was created to do.”
The Fed has been lending money to banks since just after it was established in 1913. By the end of 2008, the Fed had created or expanded 11 lending facilities catering to financial firms that were unable to obtain short-term loans from their usual sources. “Supporting financial-market stability in times of extreme market stress is a core function of central banks,” said William English, director of the Fed’s Division of Monetary Affairs. “Our lending programs served to prevent a collapse of the financial system and to keep credit flowing to American families and businesses.”
Tags: bailout, Ben Bernanke, Bloomberg, Committee, congress, Division of Monetary Affairs, Dodd-Frank Wall Street Reform and Consumer Protection Act, Federal Reserve, Freedom of Information Act, GDP, House Financial Services, Occupy Wall Street movement, Treasury Department, Troubled Asset Relief Program, Wall Street
Posted in Economics, Financing, General | No Comments »
Wednesday, November 30th, 2011
American companies ordered more heavy machinery, computers and other long-lasting manufactured goods in September, an encouraging sign for the shaky economy. The increase in demand for these durable goods suggests businesses are staying with investment plans, despite slow growth and a lack of consumer confidence.
Durable goods are products expected to last a minimum of three years. Core capital goods are products that have nothing to do with defense or aircraft. The gains are driven by tax breaks given to businesses for investments made this year, an incentive Congress approved last December to boost the lethargic economy.
“Demand for big ticket items seems to be alive and well,” said John Ryding, an analyst at RDQ Economics. “Outside of the volatile transportation sector, the gains in durable orders were broad based in September, and point to a manufacturing sector that continues to expand at a solid rate.”
“Despite the understandable concern about economic growth, businesses are still investing,” said Jennifer Lee, senior economist at BMO Capital Markets.
Robust demand for core capital goods is a strategic reason why economists expect an annual growth rate of 2.4 percent in the 3rd quarter. That would be a major improvement from the first six months of the year, when the economy expanded at just 0.9 percent, the worst growth since the recession ended more than two years ago. A 2.4 percent growth rate could ease fears that the economy is on the verge of sliding back into a recession. Even so, the growth rate needs to nearly double to make a substantial dent in the unemployment rate, which remained stuck at 9.1 percent in September for the third consecutive month.
“Manufacturing is in pretty decent shape, and this ends the quarter on a high note,” said Brian Jones, a senior U.S. economist at Societe Generale, who accurately forecast demand for non-transportation equipment. “We’ve got decent momentum going into the 4th quarter.” Orders for computers and related products jumped as much as six percent. A Commerce Department report is projected to show the world’s largest economy grew at a 2.5 percent annual pace in the 3rd quarter, an increase of the 1.3 percent rate in the previous three months. Societe Generale’s Jones said the gain in durable goods demand has the potential to bring GDP growth for last quarter closer to three percent.
Boeing, the largest American aircraft maker, received 59 airplane orders in September, compared with 127 the preceding month. September’s decline came on the heels of a 25 percent gain in August. Orders for non-defense capital goods excluding aircraft jumped 17 percent at an annualized rate compared with an 11 percent increase in the previous three months, an indication that business investment is picking up.
Additional indicators show that manufacturing, which accounts for approximately 12 percent of the economy, continues to grow. The Institute for Supply Management’s factory index rose a full point to 51.6 in September, compared with 50.6 in August. A level greater than 50 indicates that expansion is taking place. Industrial production advanced in September on demand for items such as cars and computers, according to the Federal Reserve.
According to Mike Shea, Managing Partner and Trader at Direct Access Partners LLC, “The number wasn’t bad, and having a decent number in durables is far better than having a bad number, since with the overhang of Europe, if we were getting lousy data here, then we wouldn’t have anything to hang our hats on. If not for what was going on in Europe, this market would be running on all cylinders. The summit in Europe is the tradable event. We could have one hundred percent earnings positive surprises today, we could have great economic data come out, all of that could come in rosy domestically, but if the news out of Europe is judged to be bad, none of what happens in the U.S. will matter. This market will not shrug off a lousy plan coming out of Europe. It will not shrug off any plan that is not fundamentally based in reality.”
Tags: Auto parts, Autos, BMO Capital Markets, Boeing, Commercial aircraft, computers, congress, Core capital goods, Department of Commerce, Durable goods, Durable goods orders, Europe, Federal Reserve, GDP, Heavy machinery, Institute for Supply Management, RDQ Economics, recession, Societe Generale, unemployment rate
Posted in Development, Economics, General | No Comments »
Thursday, November 10th, 2011
Is a 20 percent downpayment on a house or condominium on the horizon? If some federal regulators get their way, buyers may have to put down $60,000 on a $300,000 house to get the best possible mortgage interest rate. Although this sets the bar high, regulators believe it will prevent the risky lending practices that ended in a rash of foreclosures.
Numerous groups immediately announced their opposition to the proposal, contending that a 20 percent downpayment is too burdensome for many working class would-be homebuyers. If the proposal goes into effect in summer, it is not likely to have a major impact on the housing market for a while because the majority of mortgages are insured by federal agencies and are exempt from the rule. John Taylor, chief executive of the National Community Reinvestment Coalition, said “If we require 20 percent downpayments to get a loan, we will ensure broad swaths of working- and middle-class people will not be able to get a loan.” According to Tom Deutsch, executive director of the American Securitization Forum, believes the 20 percent requirement will do little to encourage banks to make loans without federal backing. “The extremely rigid proposals…will further prolong the U.S. government’s 95 percent market share of the credit risk of newly originated mortgages,” he said.
Sheila C. Bair, chairman of the Federal Deposit Insurance Corporation, disagrees. “Properly aligned economic incentives are the best check against lax underwriting,” she said. The Federal Reserve and Treasury Department also support the move, and other federal regulators are expected to get behind the new requirement. The move comes as the Obama administration is working to end Fannie Mae and Freddie Mac, the government-backed mortgage companies, by reducing the competitive advantage they have over banks. One proposal is to require the agencies to charge higher fees to draw private firms back into the mortgage market.
Mortgage Bankers Association CEO John Courson warns that the 20 percent downpayment requirement would further damage already sluggish housing demand. “We believe that such a narrow construct of the risk retention exemption would limit mortgage opportunities for qualified borrowers more than it would reduce the number of problem loans,” Courson said. Ron Phipps, president of the National Association of Realtors, said the new rules will further restrict mortgage credit and housing recovery overall. “Adding unnecessarily high minimum downpayment requirements will only exclude hundreds of thousands of buyers from home ownership, despite their creditworthiness and proven ability to afford the monthly payment, because of the dramatic increase in the wealth required to purchase a home,” Phipps said.
Treasury Secretary Timothy Geithner, who is leading the regulatory effort, said “Risk retention will help promote better standards for underwriting and securitizing mortgages, which is good for the long-term health of the housing market and for our nation’s economy.” An element of the Dodd-Frank Act that impacts the residential market, known as “risk retention”, is a rule that requires that mortgage lenders and securitizers to invest a minimum of five percent of the risk on qualified residential mortgages. The rule will play a crucial role in determining how much risk banks have to retain from mortgages they originate or package into bonds known as mortgage backed securities (MBS) and then subsequently sell into the market. “If this proposal goes through, the way it’s written, I think the housing market will not recover for years to come,” says Joe Murin, chairman of consulting firm The Collingwood Group.
Tags: 20 percent downpayments, American Securitization Forum, Dodd-Frank Act, Fannie Mae, Federal Deposit Insurance Corporation, federal regulators, Federal Reserve, foreclosures, Freddie Mac, Mortgage Bankers Association, Mortgage interest rate, mortgage-backed securities, National Association of Realtors, National Community Reinvestment Coalition, Obama administration, Qualified residential mortgages, residential market, Risk retention, Risky lending practices, Timothy Geithner, Treasury Department
Posted in Financing, General, Residential | No Comments »
Monday, November 7th, 2011
Are Americans shopping until they drop again? It could be, judging by the latest government report showing that consumer spending rose by a surprisingly vigorous 0.6 percent in September, even as personal incomes barely grew. Adjusting for inflation, after-tax income declined slightly by 0.1 percent, according to the Department of Commerce. The bottom line is a sharp drop in the saving rate in September, to just 3.6 percent. That’s the lowest level since 2007 and a drop from a healthy five to six percent during most of the last two years.
Scott Hoyt, who studies consumer spending for Moody’s Analytics, says it’s possible that the September numbers may have been inflated by spending for repairs and other things after Hurricane Irene. At the same time, other data suggest that people are spending more because lenders are suddenly more willing to give credit and as households — which had deferred buying new cars and other goods — feel more optimistic about the direction of the economy. Consumer spending is perceived as a critical economic component, and is often cited as representing 70 percent of the nation’s GDP.
The improvement in consumer spending helped boost the economy through the 3rd quarter while policymakers ranging from President Barack Obama to the Federal Reserve took additional action to stimulate growth and hiring. Unless paychecks grow, Americans may not be able to continue their spending sprees. “Given the state of consumer sentiment and the savings rate, we should see moderate spending, at best, going forward,” said Sean Incremona, a senior economist at 4Cast Inc., who accurately predicted the consumer spending boom. “The savings rate is just one of those warning signs that says we’re not pulling ourselves out vigorously, so the economy still has a lot of vulnerability.”
Fed policymakers are considering options for additional monetary easing even as the economy improves. Vice Chairman Janet Yellen said that a 3rd round of significant asset purchases “might become appropriate if evolving economic conditions called for significantly greater monetary accommodation.”
“Consumers today are still facing inflationary pressures on food, high unemployment, minimal job and income growth and waning consumer confidence,” BJ’s Restaurants, Inc., Chief Financial Officer Gregory Levin said after the chain reported a 6.5 percent increase in sales for the 3rd quarter. “It is difficult to ascertain if the current trends represent the trend we will end up seeing throughout the remainder of this year, or how strong the holiday retail selling season will be.”
“Income growth will have to be watched closely in coming months as the recent trend of spending at the expense of savings is not sustainable,” economists at Nomura Securities wrote. Inflation rose 0.2 percent in September, based on the latest analysis of the personal consumption expenditure price index. The PCE (Personal Consumption Expenditures) grew by 2.9 percent over the past year.
“Sluggish growth in U.S. consumer income in September led households to cut back on saving to increase their spending, casting doubts over the durability of the economy’s third-quarter growth spurt,” Reuters wrote.
According to The Hill, “Purchases of new and used cars drove spending. Clothing sales rose 1.1 percent. Purchases such as utility payments were up 0.2 percent, as consumers paid to cool their homes during a brutally hot summer.
Tags: 4Cast Inc., After-tax income, BJ’s Restaurants, consumer spending, Department of Commerce, Federal Reserve, GDP, Holiday retail selling season, Hurricane Irene, Inc., inflation, Janet Yellen, Moody’s Analytics, PCE Index, President Barack Obama, Saving rate
Posted in Economics, Financing, General | No Comments »
Wednesday, November 2nd, 2011
American companies ordered more heavy machinery, computers and other long-lasting manufactured goods in September, an encouraging sign for the shaky economy. The increase in demand for these durable goods suggests businesses are staying with investment plans, despite slow growth and a lack of consumer confidence.
Durable goods are products expected to last a minimum of three years. Core capital goods are products that have nothing to do with defense or aircraft. The gains are driven by tax breaks given to businesses for investments made this year, an incentive Congress approved last December to boost the lethargic economy.
“Demand for big ticket items seems to be alive and well,” said John Ryding, an analyst at RDQ Economics. “Outside of the volatile transportation sector, the gains in durable orders were broad based in September, and point to a manufacturing sector that continues to expand at a solid rate.”
“Despite the understandable concern about economic growth, businesses are still investing,” said Jennifer Lee, senior economist at BMO Capital Markets.
Robust demand for core capital goods is a strategic reason why economists expect an annual growth rate of 2.4 percent in the 3rd quarter. That would be a major improvement from the first six months of the year, when the economy expanded at just 0.9 percent, the worst growth since the recession ended more than two years ago. A 2.4 percent growth rate could ease fears that the economy is on the verge of sliding back into a recession. Even so, the growth rate needs to nearly double to make a substantial dent in the unemployment rate, which remained stuck at 9.1 percent in September for the third consecutive month.
“Manufacturing is in pretty decent shape, and this ends the quarter on a high note,” said Brian Jones, a senior U.S. economist at Societe Generale, who accurately forecast demand for non-transportation equipment. “We’ve got decent momentum going into the 4th quarter.” Orders for computers and related products jumped as much as six percent. A Commerce Department report is projected to show the world’s largest economy grew at a 2.5 percent annual pace in the 3rd quarter, an increase of the 1.3 percent rate in the previous three months. Societe Generale’s Jones said the gain in durable goods demand has the potential to bring GDP growth for last quarter closer to three percent.
Boeing, the largest American aircraft maker, received 59 airplane orders in September, compared with 127 the preceding month. September’s decline came on the heels of a 25 percent gain in August. Orders for non-defense capital goods excluding aircraft jumped 17 percent at an annualized rate compared with an 11 percent increase in the previous three months, an indication that business investment is picking up.
Additional indicators show that manufacturing, which accounts for approximately 12 percent of the economy, continues to grow. The Institute for Supply Management’s factory index rose a full point to 51.6 in September, compared with 50.6 in August. A level greater than 50 indicates that expansion is taking place. Industrial production advanced in September on demand for items such as cars and computers, according to the Federal Reserve.
According to Mike Shea, Managing Partner and Trader at Direct Access Partners LLC, “The number wasn’t bad, and having a decent number in durables is far better than having a bad number, since with the overhang of Europe, if we were getting lousy data here, then we wouldn’t have anything to hang our hats on. If not for what was going on in Europe, this market would be running on all cylinders. The summit in Europe is the tradable event. We could have one hundred percent earnings positive surprises today, we could have great economic data come out, all of that could come in rosy domestically, but if the news out of Europe is judged to be bad, none of what happens in the U.S. will matter. This market will not shrug off a lousy plan coming out of Europe. It will not shrug off any plan that is not fundamentally based in reality.”
Tags: Auto parts, Autos, BMO Capital Markets, Boeing, Commercial aircraft, computers, congress, Core capital goods, Department of Commerce, Durable goods, Durable goods orders, Europe, Federal Reserve, GDP, Heavy machinery, Institute for Supply Management, RDQ Economics, recession, Societe Generale, unemployment rate
Posted in Development, Economics, General | No Comments »
Monday, October 24th, 2011
Federal regulators have requested public comment on the Volcker Rule – the Dodd-Frank Act restrictions that would ban American banks from making short-term trades of financial instruments for their own accounts and prevent them from owning or sponsoring hedge funds and private-equity funds. The Volcker rule, released by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency, is intended to head off the risk-taking that caused the 2008 financial crisis. The rule, which is little changed from drafts that have been leaked recently, would ban banks from taking positions held for 60 days or less, exempt certain market-making activities, change the way traders involved in market-making are compensated and assure that senior bank executives are responsible for compliance.
Analysts say the proposed rule could slash revenue and cut market liquidity in the name of limiting risk. Banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., have already been winding down their proprietary trading desks in anticipation of the Volcker Rule kicking in. Banks’ fixed-income desks could see their revenues decline as much as 25 percent under provisions included in a draft, brokerage analyst Brad Hintz said. Moody’s Investors Service said the rule would be “credit negative” for bondholders of Bank of America Corporation, Citigroup, Inc., Goldman Sachs, JPMorgan and Morgan Stanley, “all of which have substantial market-making operations.” The rule, named for former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act with the intention of reining in risky trading by firms whose customer deposits are insured by the federal government.
John Walsh, a FDIC board member and head of the Office of the Comptroller of the Currency, said that he was “delighted” that regulators had reached an agreement on the proposed rule, “given the controversy that has surrounded this provision — how it addressed root causes of the financial crisis.” “I expect the agencies will move in a careful and deliberative manner in the development of this important rule, and I look forward to the extensive public comments that I’m sure will follow,” Martin J. Gruenberg, the FDIC’s acting chairman, said. The rule will be open for public comment until January.
Not surprisingly, Wall Street opposes the rule, saying it will cut profits and limit liquidity at a difficult time for the banking industry. Moody’s echoed those concerns, saying the current version of the Volcker rule would “diminish the flexibility and profitability of banks’ valuable market-making operations and place them at a competitive disadvantage to firms not constrained by the rule.” Some Democratic lawmakers and consumer advocates are pushing to close loopholes in the rules, especially the broad exemption for hedging. Supporters of the Volcker rule take issue with a plan to excuse hedging tied to “anticipatory” risk, rather than clear-and-present problems. “Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute,” said Marcus Stanley, policy director of Americans for Financial Reform, an advocacy group. Additionally, the Securities Industry and Financial Markets Association raised concerns about whether the exemption for trades intended to make markets for customers is too narrow.
According to Moody’s, the large financial firms all have “substantial market-making operations,” which the Volcker Rule will target. The regulations also will recreate compensation guidelines so pay doesn’t encourage big risk-taking. Derivatives lawyer Sherri Venokur said restrictions on compensation are “intended to create a sea change in the mindsets of those who create the culture of our banking institutions — to value ‘safety and soundness’ as well as profitability.”
Equity analysts at Bernstein say that the Volcker Rule — if implemented in its current form – will slash Wall Street brokers’ revenues by 25 percent, and cut pre-tax margin of their fixed income trading businesses by 33 percent. According to Bernstein, the Volcker Rule’s potential limitations are a surprise because it appears to prohibit flow trading in “nonexempt portions” of the bond-trading business. Bernstein says inventory levels – and, in all probability, risk taking – must be based on client demands and not on “expectation of future price appreciation.”
A Bloomberg.com editorial offers support to the Volcker Rule, while admitting it won’t be perfect. According to the editorial, “This week, the first of several regulatory agencies will consider a measure aimed at ending the practice. Known as the Volcker rule, after Paul Volcker, the former Federal Reserve chairman, the measure would curb federally insured banks’ ability to make speculative bets on securities, derivatives or other financial instruments for their own profit — the kind of ‘proprietary’ trading that can lead to catastrophic losses. Whatever form it takes will be far from perfect. It will also be better than the status quo. The bank bailouts of 2008, and the public outrage over traders’ and executives’ bonuses, laid bare a fundamental problem in big institutions such as Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co.
“They attempt to combine two very different kinds of financial professionals: those who process payments, collect peoples’ deposits and make loans, and those who specialize in making big, risky bets with other peoples’ money. When these big banks run into trouble, government officials face a dilemma. They want — and in some ways are obligated — to save the part of the bank that does the processing and lending, because those elements are crucial to the normal functioning of the economy. But in doing so, they also end up bailing out the gamblers, a necessity that erodes public support for bailouts and stirs enmity for banks. Separating the bankers from the gamblers is no easy task. Commercial banks’ explicit federal backing — including deposit insurance and access to emergency funds from the Federal Reserve — is attractive to proprietary traders, who can use a commercial bank’s access to cheap money to boost profits. Bank executives like to employ traders because they generate juicy returns in good times that drive up the share price and justify large bonuses. In effect, both traders and managers are reaping the benefits of a government subsidy on financial speculation. The Volcker rule will not — and probably cannot — fully dissolve the union of bankers and gamblers.”
Tags: Americans for Financial Reform, Bank of America Corporation, Bloomberg, Citigroup, derivatives, Dodd-Frank Act, Federal Deposit Insurance Corporation, federal regulators, Federal Reserve, financial crisis, financial regulation, Goldman Sachs, hedge funds, Inc., JP Morgan Chase & Company, Moody’s Investor Services, Morgan Stanley, Office of the Comptroller of the Currency, Paul Volcker, President Barack Obama, Private-equity funds, securities, Securities Industry and Financial Markets Association, Short-term trades, Volcker Rule, Wall Street
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Tuesday, October 18th, 2011
The strange saga of how a rogue UBS trader lost $2 billion and who has since been fired and charged with fraud and false accounting in a London court has raised questions about the bank’s stability and whether it will retain its clients. Ghana-born trader Kweku Adoboli was perceived as a polite and snappily dressed young man who mixed grueling hours in London’s financial district with a lavish social life in the capital’s nightspots. But even the 31-year-old Adoboli appeared to foresee his work-hard, play-hard lifestyle coming undone. “Need a miracle,” he posted on his Facebook page, just hours before his arrest.
Analysts and regulators questioned why the Swiss banking giant UBS and its monitoring systems had failed to spot Adoboli’s alleged fraud. “Nobody blames the tiger for stalking its prey, but you do blame the zookeeper for leaving the tiger’s cage open,” said Stephen Brown, professor of finance at New York University’s Stern School of Business. “These top banks hire the best and brightest ambitious young people and when they outperform everyone else the bankers want to believe in their brilliance so they look the other way. That’s exactly what happened at UBS.”
Said a London based private banker at a rival global institution, “We don’t want to gloat because there but for the grace of God. But it’s likely to be the kind of thing that if we were in competition with them for a pitch it would help us because it would be another question mark in people’s minds,” he said.
Peter Thorne, an analyst at Helvea said this crisis is less serious than UBS’ previous woes and is unlikely to result in a similar stampede. “I can’t believe they’re not going to do their utmost to maintain their clients. Also, if you’ve been through the financial crisis and you stuck with UBS you must love them, so I’m not sure you’re going to jump ship,” he said.
The Wall Street Journal’s David Weidner compares this case to that of Nick Leeson. “Consider the story of Nick Leeson, the first trader to bring down a bank. He racked up $1 billion in losses and was sentenced to six years in jail. Barings Bank collapsed under the weight of the exposure. Leeson said exceptional risk-taking was common. He actually used an account that his team had set up to cover losses of a junior trader. And as many accused rogues have argued, Leeson said the bank tacitly approved. The number of rogue traders — there have been at least 11 since 1995 who have lost roughly $10 billion combined – suggests that Leeson may be right. So, why is trading beyond internal limits allowed? Because of the winners. Enter Philipp Meyer, a former UBS derivatives trader who left the business a few years ago and wrote about the excess of the business. To be clear, Meyer never said he made unauthorized trades, but he did offer this observation about trading. ‘It was pretty clear what The Market didn’t like. It didn’t like being closely watched. It didn’t like rules that governed its behavior.’”
Writing for Business Week, William D. Cohan says that “Whether UBS is shown to have been aware of Adoboli’s trading is almost beside the point. If the bank was aware of it and did not stop it, then its failure to do so is unconscionable. If it was not aware of the trades, then its compliance and risk management departments’ failure to prevent them from happening in the first place is equally appalling. In the post-Lehman, Dodd-Frank, Basel-III era, it is nearly unfathomable that a global bank of UBS’s heft, wealth and importance could allow this kind of loss to occur. Where were the adults? There will almost certainly be regulatory consequences for the rest of Wall Street as a result of this ill-timed debacle. The banks will howl, but tighter rules could actually help protect the rest of us from their bad behavior.”
Happily for the United States and the Dodd-Frank laws, it’s less likely that a rogue trader could topple a major U.S. financial institution. One section of the Dodd-Frank legislation is the Volcker Rule, named after former Federal Reserve chairman Paul Volcker, which limits American banks’ ability to trade their own funds. That wasn’t true in 2008, when losses from bad bets that banks made on mortgages led to the meltdown of Bear Stearns and Lehman Brothers. Full implementation of the Volcker Rule is expected to be delayed from its original July 21, 2012 deadline. A majority of the largest American banks have already sold or closed the desks that make these trades – known as “prop” or proprietary trading desks. “Banks can put themselves under with dangerous trading and take the commercial side with them as they go down,” said Robert Prentice, a professor of business law at the University of Texas’ McCoombs School of Business. “A big part of what the Volcker Rule will do is separate out the risky trading from the deposits.”
A majority of the banking system depends on computers to spot abnormal trading activity that could signal unauthorized trades. Industry watchers still question whether the Volcker Rule in its final form will mandate the spin-off of prop trading from banks or whether it will be watered down. “You can’t underestimate the lobbying ability of the banking industry in the U.S. and the U.K.” said Stewart Hamilton, a finance and accounting professor at the University of Edinburgh. “It’s huge.”
Tags: Barings Bank, Basel III, Bear Sterns, Credit Suisse, Dodd-Frank Act, Federal Reserve, Helvea, Kweku Adoboli, Lehman Brothers, London Capital Markets Division, Nick Leeson, Paul Volcker, Proprietary trading desks, Rogue trader, UBS, Volcker Rule, Wall Street
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Wednesday, October 5th, 2011
Federal Reserve Chairman Ben Bernanke, in a long-awaited speech in Jackson Hole, WY, announced no new steps the Fed will take to prop up the shaky U.S. economy. Rather, he expressed optimism that the economy will continue to recover, based on its inherent strength and from assistance provided by the central bank. Bernanke restated the Fed’s determination to keep the federal funds rate “exceptionally low” for a minimum of two years. He did not say what many had been hoping to hear: that the Fed would begin another round of quantitative easing – usually referred to as QE3.
Bernanke said that he expected inflation to remain at or below two percent. Additionally, he acknowledged that the recent downgrade of the nation’s AAA credit rating had undermined both “household and business confidence.” He implied that there was only so much more the Fed can do to stimulate the economy, and that the time has come for Congress and the Obama administration to create “policies that support robust economic growth in the long term,” to reform the nation’s tax structure and to control spending.
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including, of course, economic and financial developments, at our meeting in September,” Bernanke said. He went on to clarify the Fed’s guidance about how long interest rates will remain exceptionally low. “In what the committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years.”
As Bernanke delivered his remarks, the government cut its estimated 2nd quarter GDP growth to a paltry rate of one percent, a revision from the 1.3 percent previously reported. The revision was expected and primarily due to weaker exports. In more positive news, private spending and investment in April through June were slightly higher than initially estimated. The GDP grew by an annual rate of just 0.4 percent in the 1st quarter. The 2nd half of 2011 is expected to be somewhat stronger, but a major driver of the economy — consumer spending — remains weak amid slow hiring and sluggish income gains.
“This economic healing will take a while, and there may be setbacks along the way,” Bernanke said. “Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not, as a consequence, disregard the fragility of the current economic recovery. 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,” Bernanke said. “It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.”
“Economic performance is clearly subpar, and from that standpoint the case for some sort of further economic-policy assistance is just being made by the poor performance,” said Keith Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management. Although Bernanke said the Fed has stimulus tools left, “the threshold to utilizing them is going to require fairly different conditions than what we have today,” such as lower inflation or a return of financial instability, Hembre said.
Bernanke also used the occasion to scold Congress for its tardiness in resolving the deficit debate. “The country would be well served by a better process for making fiscal decisions,” Bernanke said at the Federal Reserve Bank of Kansas City’s annual economic symposium. “The negotiations that took place over the summer disrupted financial markets and probably the economy, as well, and 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.” Bernanke implied that a return to economic prosperity is at stake. “I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if — and I stress if — our country takes the necessary steps to secure that outcome,” he said. The budget process, according to Bernanke, would be more effective if negotiators set “clear and transparent budget goals” and established “the credibility of those goals.”
Bernanke reassured investors that United States prospects for growth are sound over the long term and that the Fed has tools to aid the recovery if needed, even though he is not planning another stimulus at this time. “What no action will do is give confidence to investors that things are not as bad as many people perceive, otherwise he would’ve acted,” Keith Springer, president of Springer Financial Advisors in Sacramento, CA, said. “Investors will eventually see the positives.”
Tags: Ben Bernanke, congress, consumer spending, Debt-ceiling battle, economic stimulus, exports, Federal Reserve, Federal Reserve Bank of Kansas City, GDP, interest rates, Jackson Hole, Nuveen Asset Management, Obama administration, QE3, Springer Financial Advisors, WY
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