Posts Tagged ‘financial crisis’
Monday, August 22nd, 2011
Standard & Poor’s may have downgraded the United States credit rating from AAA to AA+ and the bears may have taken over Wall Street, but the Berkshire Hathaway chairman and billionaire Warren Buffett believes that the nation deserves a AAAA rating.
In a recent appearance on CNBC, Buffett said that he still believes that the United States’ debt is AAA and that he’s not changing his mind about Treasuries based on Standard & Poor’s downgrade. “If anything, it may change my opinion on S&P,” according to the Oracle of Omaha. “I wouldn’t dream of putting it anywhere else,” Buffett said, noting that at Berkshire, the only reason he’s sold Treasuries in the past is to purchase stocks or make acquisitions. Berkshire is still buying T-bills, even though yields have declined. “If I have to buy (Treasuries) at a zero percent yield, I will,” he said. “I don’t like it, but we’ll do it.”
Buffett has something of a vested interest in criticizing Standard & Poor’s. Berkshire Hathaway is one of the biggest shareholders in Standard & Poor’s main competitor Moody’s with about 28 million shares. But the billionaire has long urged people to make their own decisions about an investment’s prospects without relying on credit rating agencies. Buffett said the action doesn’t change his view on the soundness of U.S. Treasury bills. At least $40 billion of Berkshire Hathaway’s approximately $48 billion cash and equivalents is in U.S. Treasury bills, and Buffett won’t consider investing it elsewhere.
According to Buffett, America’s leaders may have a difficult time agreeing on the country’s financial future and the value of the dollar may slide, but that won’t keep the world’s richest nation from paying its debts. The United States has a GDP of about $48,000 per person, and the Federal Reserve can always print more money. “Our currency is not AAA, and in recent months the performance of our government has not been AAA, but our debt is AAA,” Buffett said.
Writing on the InvestorPlace.com website, Jeff Reeves says that “Before you scoff that Buffett is just a bygone relic of an era during which stocks like General Electric truly did have bulletproof dividends and it would have been unfathomable for stocks like General Motors to go bankrupt, consider this: In September 2008, the depths of the financial crisis when nobody knew which bank would fail next, Buffett and Berkshire dumped $5 billion into preferred stock of Goldman Sachs. Thanks to the 10 percent interest on those shares, Berkshire Hathaway earned a cool $500 million per year in dividends before Goldman bought back the stock several months ago. What’s more, the investment bank paid a hefty 10 percent premium to buy back those preferred shares. Maybe it was crazy to jump into banks headfirst when the market was going haywire in 2008. But it was awfully profitable for Buffett. You might think it’s crazy to stick to your buy-and-hold strategy now, or to continue to rely on U.S. Treasury Bonds. But take a deep breath and remember that not everyone is screaming and running for the hills. Yes, persistent problems with unemployment, the political bickering in Congress and the flatlining of our American economy are serious issues. But they are hardly new.”
Not everyone agrees with Buffett. According to the Equity Master website, “We must say that we do not agree with Mr. Buffett. We are not arguing with the credibility of S&P, whose reputation admittedly became tainted when it gave the highest rating to many mortgaged backed securities in the months leading up to the demise of Lehman. But that does not mean that the U.S. is without some serious problems. Indeed, the U.S.’ mounting debt is a huge cause for concern and the government’s latest move to raise the debt ceiling is only likely to postpone an eventual default and not entirely extinguish it. Moreover, the claim that the U.S. can pay its debt because it can print more money is a dangerous one to make. Printing money never really solved America’s problems. The two big quantitative easing programs and their failure to revive the sagging U.S. economy is testimonial to the fact. One thing that it will certainly do is bring down the value of the dollar and cause inflation to accelerate posing a fresh set of problems for the U.S. So, while criticisms can be piled on S&P, downgrading of the U.S.’ credit rating is something that the world’s largest economy had a long time coming.”
Firstpost agrees that Buffett is wrong. “Among other things, he said that the U.S. deserved a AAA credit rating when the S&P decided to bring it down to AA+. He also believes the U.S. will avert a double-dip recession. Well, Mr. Buffett, you are already half-wrong. A slow-growing nation with a 100 percent debt-to-GDP ratio cannot be AAA by any stretch of economic logic. It makes India’s 70-72 percent debt-GDP ratio look like the epitome of prudence. As for the other half of your prediction – that the U.S. will avoid a double-dip recession – the jury is out on that one, but the recession wasn’t the reason for the S&P downgrade anyway. There are two reasons, or maybe three, why the U.S. is in a mess. One is that it is overleveraged – in deep debt – both at the level of government and the common people. Two, the law that the U.S. can indefinitely live beyond its means has a flaw. It was built on the assumption that dollar debts can be paid off by printing more of the green stuff forever.”
Tags: AAA credit rating, Bear market, Berkshire Hathaway, Buy-and-hold strategy, CNBC, congress, Double-dip recession, Federal Reserve, financial crisis, GDP, General Electric, General Motors, Goldman Sachs, Lehman Brothers, Moody’s, Political bickering, Quantitative easing, Standard & Poor’s, T-bills, The Oracle of Omaha, Treasuries, unemployment, Wall Street, Warren Buffett
Posted in Economics, General | 1 Comment »
Wednesday, July 20th, 2011
American home prices may start rising as soon as the 3rd quarter as a foreclosure decline makes more homes available for sale, according to Housing and Urban Development Secretary Shaun Donovan. “It’s very unlikely that we will see a significant further decline,” Donovan said. “The real question is when will we start to see sustainable increases. Some think it will be as early as the end of this summer or this fall.” Home sales have increased in six of the past nine months; the number of homeowners in default is declining, Donovan said on CNN’s “State of the Union” program.
“In the long run, it’s a good time to buy,” Donovan said. “It’s so affordable today compared to where it’s been for generations.” Contracts to purchase previously owned homes rose 8.2 percent in May, following a revised 11 percent drop in April, according to the National Association of Realtors (NAR). Another NAR report showed sales of existing houses, which make up about 96 percent of the market, fell in May to a six-month low. Home prices fell four percent in April over 2010, the biggest decline in 17 months according to the S&P/Case-Shiller index of values in 20 cities. An estimated 1.7 million U.S. homes were in the foreclosure process and expected to be put on the market in April, representing an 18 percent decline from the peak, as fewer loans entered delinquency and more distressed homes were sold, CoreLogic Inc. said.
Additionally, Donovan said that foreclosures are down approximately 40 percent when compared with last year. Although 1.3 million homes are still in the foreclosure process, Donovan said that housing prices are stabilizing in the aftermath of the worst financial crisis since the Great Depression. According to Donovan, “So, we are making progress, but rightly, the American people recognize we’re not where we need to be. We still have a ways to go.”
On the subject of requiring 20 percent downpayments to buy homes, Donovan said there should be a way for qualified people to buy a home with less money upfront. “We can’t go so far in the other direction that we cut off home ownership for people who really can be successful homeowners. We can get back to the place where it’s a good investment and we will be able to make money over time,” Donovan said, noting that Americans should no longer view their homes as ATMs.
Financial analyst A. Gary Shilling, writing in The Christian Science Monitor, isn’t as optimistic. In fact, he thinks that housing prices are likely to fall another 20 percent before bottoming out. According to Shilling, “Many housing optimists a year ago believed not only that the housing collapse was over, but also that a robust rebound was under way. Low mortgage rates and collapsed housing prices, not to mention the $8,000 federal tax credit for new home buyers and other initiatives, seemingly were going to kick-start housing activity nationwide. Then a funny thing happened on the way to the housing recovery. The tax credits expired, home sales dried up, and prices resumed their declines from their 2006 peak. Excess inventories piled up due to overbuilding and mounting foreclosures. In the meantime, buying those lower-priced houses became more difficult as lenders, burned by the housing crash, tightened lending standards and increased downpayment requirements. As a result, the housing sector not only has failed to bolster the weak economic recovery but is also likely to continue to struggle for years. And that’s bad news for the economy, which has softened in recent months. Excess inventories are the mortal enemy of housing prices. Lower prices are needed to unload surplus inventory, but in turn, lower prices bring forth more inventory from anxious sellers. The anxiety of house sellers and the reluctance of buyers are enhanced by the realization that house prices can fall – and are falling for the first time in 70 years.”
The idea of owning a home is becoming less attractive as many people realize that it may be many years before prices stop falling and stabilize, let alone revive. As proof, the national homeownership rate has fallen from its late 2009 peak of 69.2 percent to 66.4 percent in the 1st quarter of 2011 – the exact same level as in late 1998. As homeownership loses its luster, rental apartments are gaining. The homeownership rate is likely to continue to decline to its earlier long-term trend of around 64 percent as people continue to separate their abodes from their investments and as the baby boomers age, retire, and downsize. That means approximately 4.5 million new renters in coming years. Apartment construction, which normally totals 300,000 units annually, will be vigorous once surplus vacancies disappear.
Tags: ATMs, CNN “State of the Union” program, CoreLogic, Department of Housing and Urban Development, Distressed homes, Downpayment, Federal tax credits, financial crisis, foreclosures, Great Depression, Housing prices, Inc., National Association of Realtors, S&P/Case-Shiller index, Shaun Donovan
Posted in Economics, General, Residential | No Comments »
Wednesday, May 18th, 2011
The Federal Reserve is identifying risks in the financial system that could someday erupt into a new financial crisis, but regulators must be careful not to unintentionally hamper lending as they set up new oversight, according to Chairman Ben Bernanke. “We want the system to be as strong and resilient as possible,” and more intense oversight and changes such as requiring banks to hold more capital will help, said Bernanke at the Federal Reserve Bank of Chicago’s Bank Structure & Competition conference. “If we can’t arrest risks, we want to make sure the financial system is defending itself,” he said. The Dodd Frank Act establishes governmental structures to analyze risk aimed at preventing another financial failure as harsh as the one that almost brought down the world’s economy in the fall of 2008.
Through the Financial Stability Oversight Council and within the Fed, regulators are still analyzing what can cause “systemic risk,” – identified as risk that can cause widespread financial failure, Bernanke said. Similar actions are underway in other nations; Bernanke said that regulators worldwide are communicating with each other while implementing their own systems. If the new structures had been in place previously, Bernanke said, the 2008 financial crisis likely would not have happened. The old system of regulation spread authority across too many entities, was poorly coordinated, and problems “fell through the cracks.” As the Federal Reserve develops a structure for analyzing risk, Bernanke said the focus must go beyond “fighting the last war.” Future financial threats may differ from those of the past, which is why the banking industry currently is facing new oversight. When some banks announced plans to pay shareholders dividends, regulators applied “stress tests” to their finances to determine if the institutions would be sound even if the economy weakened. According to Bernanke, the government’s new stress testing system has provided accurate assessments of bank finances.
Even so, the regulations – the first new ones in 70 years — will be written to encourage bank compliance. “No one’s interests are served by the imposition of ineffective or burdensome rules that lead to excessive increases in costs or unnecessary restrictions in the supply of credit,” Bernanke said. “Regulators must aim to avoid stifling reasonable risk-taking and innovation in financial markets, as these factors play an important role in fostering broader productivity gains, economic growth, and job creation.”
Bernanke and Fed officials are trying to balance the need to diminish the risk of another financial crisis with the aim of stimulating the economy after the worst recession since the Great Depression. The Dodd-Frank Act gives the Fed the job of overseeing the biggest financial companies. “While a great deal has been accomplished since the act was passed less than a year ago, much work remains to better understand sources of systemic risk, to develop improved monitoring tools, and to evaluate and implement policy instruments to reduce macro-prudential risks,” Bernanke said.
Lawmakers who solidly opposed the financial overhaul legislation, say Dodd-Frank goes too far and might make it more difficult for American banks to compete globally. Some are working to cut funding for agencies established by the law and limit the scope of new rules. According to the General Accounting Office, the law will cost nearly $1 billion to implement in 2011.
Additionally, Bernanke cited the sovereign-debt concerns in Europe as an example where the analysis led to the May 2010 decision by the Federal Open Market Committee to authorize “dollar liquidity swap lines with other central banks in a pre-emptive move to avert a further deterioration in liquidity conditions.”
To listen to our podcast on financial reform with Anthony Downs of The Brookings Institution, click here.
Tags: bank regulators, Bank stress tests, Ben Bernanke, Dividends, Dodd-Frank Act, Federal Open Market Committee, Federal Reserve, Federal Reserve Bank of Chicago’s Bank Structure & Competition, financial crisis, Financial Stability Oversight Council, General Accounting Office, Great Depression, job creation, Shareholders, Sovereign-debt concerns, systemic risk
Posted in Economics, Financing, General | No Comments »
Monday, April 18th, 2011
The Treasury Department is planning to sell $142 billion worth of toxic assets that it acquired during the financial crisis. According to Treasury, it wants to sell approximately $10 million worth of assets every month, depending on market conditions and hopes to end the program next year. Treasury acquired the securities — primarily 30-year, fixed-rate mortgage-backed securities guaranteed by Fannie Mae or Freddie Mac –between October, 2008 and December, 2009 to stabilize the home loan market.
The Treasury has decided to sell the securities now because the market has “notably improved.” According to Treasury officials, the sale could net $15 billion to $20 billion in profits for taxpayers. The sale will have a negligible impact on the U.S. debt limit but could delay the ceiling’s arrival by a few days. In early March, Treasury estimated the U.S. would hit the $14.294 trillion ceiling between April 15 and May 31. The Treasury in 2008 retained State Street Global Advisors, a leading institutional asset manager, to acquire, manage and dispose of the mortgage-backed securities portfolio.
“We will exit this investment at a gradual and orderly pace to maximize the recovery of taxpayer dollars and help protect the process of repair of the housing finance market,“ Mary Miller, assistant secretary for financial markets, said. “We’re continuing to wind down the emergency programs that were put in place in 2008 and 2009 to help restore market stability, and the sale of these securities is consistent with that effort.”
Congress gave Treasury the authority to buy securities guaranteed by Fannie Mae and Freddie Mac. The value of these mortgage-backed securities declined significantly after the housing bubble burst, prompting fears that write-downs could drag down individual banks and further plunge the financial system into panic. The Treasury said that three years after the worst point of the crisis, the market for asset-backed derivatives is now much more robust.
The government bought $221 billion of these bonds, as part of the Housing and Economic Recovery Act of 2008. Treasury announced that it would buy the bonds on the day the government took over Fannie and Freddie. “The primary objectives of this portfolio will be to promote market stability, ensure mortgage availability, and protect the taxpayer,” Treasury said at the time. The portfolio is now just $142 billion. The Congressional Oversight Panel, which supervised the Troubled Asset Relief Program, said that as of February of 2011, Treasury had received $84 billion in principal repayments and $16.7 billion in interest on the securities it holds.
“It was a bit of a surprise, though will likely be easy to digest,” said Tom Tucci, head of government bond trading at Capital Markets in New York. “We spent a year and a half at levels that were unsustainable because they weren’t based on economic fundamentals, they were based on fear. “Now some of the fundamentals are starting to come back into place.”
Republicans are asking for deeper cuts in government spending before they will agree to raise the debt limit. Treasury Secretary Timothy Geithner has cautioned that failure to raise the borrowing limit would cause an unparalleled default by the government on the national debt. Without question, this would drive up the government’s cost of borrowing money.
Tags: 30-year fixed-rate mortgage securities, congress, Congressional Oversight Panel, Debt ceiling, default, Fannie Mae, financial crisis, Freddie Mac, Housing and Economic Recovery Act of 2008, Housing bubble, mortgage market, national debt, Republicans, State Street Global Advisors, Timothy Geithner, Toxic assets, Treasury Department, Troubled Asset Relief Program
Posted in Economics, Financing, General | No Comments »
Tuesday, April 5th, 2011
The Federal Reserve made some serious money in 2010. The central bank’s profit soared to $81.7 billion, a record high, primarily from growing interest earnings on federal agency and government-sponsored enterprise mortgage-backed securities. The Fed’s balance sheet — which also can be monitored monthly — ballooned to $2.43 trillion, up $193 billion from 2009, as holdings of the Treasury Department and mortgage-backed securities increased. The Fed gave back $79 billion to Treasury in last year, an 68 percent increase over $47 billion the Fed returned in 2009. The Fed’s previous record high earnings was $53.4 billion.
In reaction to the financial crisis, the Fed acquired securities whose value had collapsed due to fear and uncertainty in markets. Additionally, the Fed created emergency lending programs for banks and firms, which further boosted its balance sheet. The central bank came under attack for taking too many risks with taxpayer money and putting itself in a position to endure losses. So far the Fed’s crisis-lending programs have earned handsome profits. The 2010 income rise primarily resulted from $24 billion in interest earnings from the $1.0 trillion mortgage-backed securities and agency bonds it bought to stabilize the housing market. As of last week, the Fed held a virtually identical quantity of such securities.
The Treasury Department plans to slowly sell its $142 billion portfolio of mortgage-backed securities. Although there’s no direct implication for Fed policy, the market reaction to the Treasury sale provides valuable input into how the central bank may go about selling its own significantly larger holdings, which analyst expect to take place early in 2012. That’s a significant increase over the $907 billion it held in August 2008, just before the financial crisis. To help the nation’s economy recover, the Fed has created massive amounts of credit to support the banking system and buy bonds.
Writing in the Christian Science Monitor, Doug French notes that “Amongst the assets Mr. Bernanke and Co. are shepherding include sub-prime mortgage bonds that once belonged to American International Group (AIG). The Wall Street Journal reports that AIG would like to repurchase these bonds as a part of its attempt to break free from government control through a public stock offering. ‘Ahead of that, AIG wants to be able to show investors it is putting its cash to work and boosting investment income in its insurance units,’ reports the WSJ’s Serena Ng. The rub is that AIG is offering 53 cents on the dollar for the mortgage bonds. Maybe the Fed can do better in the marketplace.”
Tags: AIG, Ben Bernanke, central bank, Federal Reserve, financial crisis, mortgage-backed securities, Profits, securities, Sub-prime mortgage bonds, Treasury Department, Wall Street Journal
Posted in Economics, Financing, General, Industrial, Office, Residential | 1 Comment »
Wednesday, March 30th, 2011
The Federal Reserve‘s second round of stress tests requires the 19 largest U.S. banks to examine their capital levels against a worst-possible-case scenario of another recession with the unemployment rate hovering above 8.9 percent. The banks were instructed to test how their loans, securities, earnings, and capital performed when compared with at least three possible economic outcomes as part of a broad capital-planning exercise. The banks, including some seeking to increase dividends cut during the financial crisis, submitted their plans in January. The Fed will complete its review in March.
“They’re essentially saying, ‘Before you start returning capital to shareholders, let’s make sure banks’ capital bases are strong enough to withstand a double-dip scenario,’” said Jonathan Hatcher, a credit strategist at New York-based Jefferies Group Inc. Regulators don’t want to see banks “come crawling back for help later,” he said.
The review “allows our supervisors to compare the progress made by each firm in developing a rigorous internal analysis of its capital needs, with its own idiosyncratic characteristics and risks, as well as to see how the firms would fare under a standardized adverse scenario developed by our economists,” Fed Governor Daniel Tarullo said. Although Fed policymakers aren’t predicting another slump any time soon, they want banks to be prepared for one. In January, the Federal Open Market Committee forecast a growth rate of 3.4 percent or more annually over the next three years, with the jobless rate falling to between 6.8 percent and 7.2 percent by the 4th quarter of 2013. Unemployment averaged 9.6 percent in the 4th quarter of 2010.
The new round of stress tests are being overseen by a financial-risk unit known as the Large Institution Supervision Coordinating Committee (LISCC). The unit relies on the Fed’s economists, quantitative researchers, regulatory experts and forecasters and examines risks across the financial system. Last year, the LISCC helped Ben Bernanke respond to an emerging liquidity crisis faced by European banks. “The current review of firms’ capital plans is another step forward in our approach to supervision of the largest banking organizations,” Tarullo said. “It has also served as an occasion for discussion in the LISCC of the overall state of the industry and key issues faced by banking organizations.”
At the same time, Bernanke expressed his support for the Dodd-Frank Act, which will add new layers of regulation to the financial services industry, as well as the Consumer Protection Act. “Dodd-Frank is a major step forward for financial regulation in the United States,” Bernanke said, noting that the Fed is moving swiftly to implement its provisions. Additionally, the Fed wants banks to think about how the Dodd-Frank Act might affect earnings, and how they will meet stricter international capital guidelines. Banks will have to determine how many faulty mortgages investors may ask them to take back into their portfolios. Standard & Poor’s estimates that mortgage buybacks could carry a $60 billion bill to be paid by the banking industry.
In the meantime, the big banks are feeling adequately cash rich to pay dividends to their stockholders. Bank of America’s CEO Brian T. Moynihan said that he expects to “modestly increase” dividends in the 2nd half of 2011. “We’d love to raise the dividend,” James Rohr, CEO of PNC, said. “We’re hopeful of hearing back in March from the regulators.” JPMorgan CFO Douglas Braunstein told investors that the bank asked regulators for permission to increase the dividend to 30 percent of normalized earnings over time. Braunstein said that JPMorgan’s own stress scenario was more severe than the Fed’s, and assumed that the GDP fell more than four percent through the 3rd quarter of this year with unemployment peaking at 11.7 percent.
Clive Crook, a senior editor of The Atlantic, a columnist for National Journal, and a commentator for the Financial Times, believes that United States fiscal policy itself merits examination. Writing in The Atlantic, Crook says that “Fiscal policy needs a hypothetical stress test, just like bank capital. Let’s be optimistic and suppose that the deficit projections do hold, and that a debt ratio of 80 percent can be comfortably supported at full employment. What happens when we enter the next recession with debt at that level? Assume another really serious downturn, and another 30-odd percentage points of debt. Worried yet? That’s why the problem won’t wait another ten years, and why sort-of-stabilizing at 80 percent won’t do.”
Tags: Bank of America, Bank stress tests, Ben Bernanke, capital, Capital levels, Consumer Protection Act, Daniel Tarullo, Dividends, Dodd-Frank Act, Earnings, Federal Open Market Committee, Federal Reserve, financial crisis, financial reform, financial services, GDP, Inc., industry, Jeffries Group, JPMorgan Chase PNC Financial Services Group, Large Institution Supervision Coordinating Committee, loans, Mortgage buybacks, recession, Regulators, securities, Standard & Poor’s, Stockholders, unemployment, Wall Street reform
Posted in Economics, General | No Comments »
Thursday, January 27th, 2011
At the instruction of Congress, the Federal Reserve has released the names of the approximately 21,000 recipients of $3.3 trillion in aid provided during the financial meltdown –without doubt the nation’s worst economic crisis since the Great Depression. Not surprisingly, two of the top beneficiaries were Bank of America and Wells Fargo, who received approximately $45 billion each from the Term Auction Facility. American units of the Swiss bank UBS, the French bank Societe Generale and German bank Dresdner Bank AG also received financial assistance. The Fed posted the information on its website in compliance with a provision of the Dodd-Frank bill that imposed strict new financial regulations on Wall Street.
One of the biggest surprises on the list is the fact that General Electric accessed a Fed program no fewer than 12 times for a total of $16 billion. Although the Fed originally objected, Congress demanded accountability because there was evidence that the central bank had gone beyond their usual role of supporting banks. In addition, the Fed purchased short-term IOUs from corporations, risky assets from Bear Stearns and more than $1 trillion in housing debt.
Reactions to the revelations are both positive and negative. On the positive side, Richmond Fed President Jeffrey Lacker said “We owe an accounting to the American people of who we have lent money to. It is a good step toward broader transparency.” Sarah Binder, a senior fellow with the Brookings Institution, disagrees, noting that “These disclosures come at a politically opportune time for the Fed. Just when Chairman Bernanke is trying to defend the Fed from Republican critics of its asset purchases, the Fed’s wounds from the financial crisis are reopened.”
Senator Bernard Sanders (I-VT) said “We see this (list) not as the end of a process but really a significant step forward in opening the veil of secrecy that exists in one of the most powerful agencies in government. Given the size of these commitments, it is incomprehensible that the American people have not received specific details about them.”
Tags: AIG, Bank of America, Bear Stearns, Ben Bernanke, Bloomberg News, Brookings Institution, congress, Dodd-Frank bill, Dresdner Bank AG, Federal Reserve, Federal Reserve Bank of Richmond, financial crisis, General Electric, Goldman Sachs, Great Depression, Lehman Brothers, Senator Bernard Sanders, Societe Generale, Term Asset-Backed Securities Loan Facility, Term Auction Facility, UBS, Wall Street, Wells Fargo
Posted in Economics, Financing, General | No Comments »
Wednesday, January 26th, 2011
The Federal Reserve has obser
ved that Wall Street’s big banks eased credit terms for hedge funds and private equity firms in the 4th quarter of 2010. More banks believe that credit terms have “eased somewhat” than those that think it has “tightened somewhat” in the last three months of 2010, according to the Fed’s year-end financing survey. Hedge funds and other investors worked harder to negotiate favorable terms for transactions; 55 percent of dealers responded that clients “increased somewhat” or “increased considerably” their requests for concessions.
According to the Fed, increased competition and general improvement in the market are the primary reasons that explain why the terms eased. Fully 90 percent of survey respondents cited each factor as “very important” or “somewhat important” in easing their terms. The Fed, which started the survey in response to the financial crisis, found that the results “highlighted that a significant volume of credit intermediation has moved outside of the traditional banking sector.”
“More-aggressive competition from other institutions and an improvement in the current or expected financial strength of counterparties were frequently cited reasons for the easing of terms,” the Fed report said. In addition, the banks surveyed said borrowers have increased efforts to negotiate better terms. “Dealers also noted that demand for funding of all categories of securities covered in the survey had increased over the past three months, including demand for funding of equities,” the report said.
Tags: corporate bonds, credit, Federal Reserve, financial crisis, foreclosure, hedge funds, Private derivatives, private-equity firms, securities, Wall Street
Posted in Economics, Financing, General | No Comments »
Thursday, January 20th, 2011
President Barack Obama’s crackdown on Wall Street excesses could be hampered if the incoming Republican-controlled Congress refuses to fund two crucial regulatory agencies. The Dodd-Frank financial reform law – passed with heavy Democratic support – promised a generous budget to regulate the $600 trillion over-the-counter derivatives market. Now, the law’s implementation may be derailed by the incoming 112th Congress. Randy Neugebauer (R-TX), who will chair the House Financial Services oversight subcommittee, wants to review the regulators’ expansion plans. “Once you turn the money loose, it’s a little harder to stop that train,” he said.
The two regulatory agencies in question are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The SEC, for example, had expected to receive an 18 percent increase to its 2011 budget, which would have allowed it to hire 800 new regulators to enforce Dodd-Frank. Roadblocks are on the horizon, however, in the form of Representative Spencer Bachus (R-AL), who will chair the House Financial Services Committee, and Frank Lucas (R-OK), who will chair the agricultural committee that oversees the CFTC. The two Congressmen wrote to regulators, saying “An overarching concern…is the need to get it done right, not necessarily get it done quickly.” The Republicans’ attitude to enforcing Dodd-Frank could be a boon to Wall Street firms, whose lobbyists are advocating a go-slow approach.
Mary Schapiro, SEC Chairman, said “We will have to take some more steps to cut back. At this stage, it will impact our work.” The chronically underfunded and understaffed CFTC, which had expected a 50 percent budget increase, had planned to hire 240 new regulators this year to enforce its new oversight of the swaps market. According to CFTC Chairman Gary Gensler, “I do think without sufficient funding next summer (2011) you’d see a significant number of registrants – swap dealers, swap execution facilities and so forth – whose legitimate applications would have to be slowed down. Michael Greenberger, a University of Maryland law professor and previously the CTFC’s director of trading and markets, says.
Tags: 112th Congress, Barney Frank, Christopher Dodd, Commodity Futures Trading Commission, democrats, Dodd-Frank financial reform law, Federal Deposit Insurance Company, financial crisis, Gary Gensler, Mary Schapiro, Over-the-counter derivatives market, President Barack Obama, Randy Neugebauer, Regulators, Republicans, Securities and Trade Commission, Spencer Bachus, Swaps market, Wall Street
Posted in Economics, General, Green, Office | No Comments »
Wednesday, November 24th, 2010
The Federal Reserve – in a highly unusual action – is defending its recent purchase of Treasury bonds in an effort to get the U.S. economy moving. Critics of the decision to purchase additional assets, led by former Fed chairman Alan Greenspan, conservative economists and writers, representatives of foreign governments – not to mention Sarah Palin — say that the Fed is deliberately weakening the dollar to make American exports more competitive. Other arguments are that the Treasury bond purchases could eventually cause inflation and that the action won’t stimulate economic growth.
William Dudley, President of the Federal Reserve Bank of New York, countered that the objective is not to weaken the dollar or cause inflation. In fact, he believes that the Fed’s moves are already having a positive impact. “You’ve seen a significant easing of financial conditions,” according to Dudley. “I have to believe that the expectation of a second large-scale asset purchase program was the primary driver of those changes.” Fed Vice Chairman, Janet Yellen, agrees, telling the Wall Street Journal that action was necessary to spur the economy. If there is no monetary stimulus, Yellen says “I’m having a hard time seeing where really robust growth can come from.”
Dudley’s and Yellen’s comments seem to confirm that the Fed is no longer staying out of public debate over its policies. Although the Fed has typically remained above the fray to maintain its appearance of political independence, that stance has proved untenable in the face of the turmoil that resulted from the financial crisis. As a result, the Fed is now open to criticism from small-government conservatives and liberals who don’t trust Wall Street. Unfortunately for the Fed, Congressman Ron Paul (R-TX) — who based his 2008 presidential bid on his opposition to monetary policy – will soon chair the committee that oversees the Fed and plans to use the post as a “mini bully pulpit,” he said.
Tags: Alan Greenspan, Ben Bernanke, Federal Reserve, financial crisis, US treasury bonds, Wall Street
Posted in Economics, Financing, General | No Comments »