Archive for the ‘Economics’ Category
Wednesday, September 1st, 2010
Goldman Sachs and Citigroup are in the process of trying to sell their fourth CMBS package in 2010 with $788 million of debt from 48 properties as investor interest in these vehicles rekindles. Although the Federal Reserve noted that commercial real estate is still slowing economic growth, bond investors believe that growth is strong enough for borrowers to meet debt payments. According to Dan Castro, chief of structured finance analytics and strategy at BTIG LLC, “CMBS is an avenue that’s going to provide better returns. There’s a lot of guys clamoring for these returns.”
Consider that corporate bond yields are only 177 basis points over Treasury, while CMBS yields are 100 bps higher. According to Business Week, “The difference between the rate to exchange floating for fixed-interest payments and Treasury yields for two years, known as the swap spread, is a measure of investor perception of credit risk. It serves as a benchmark for investors in many types of debt, including mortgage-backed and auto-loan securities. The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20,” indicating increased confidence. So while CMBS still has a ways to go to get back to previous levels, the market is in recovery which is great news for the rest of the industry which relies on CMBS for refinancing.
Tags: auto-loan securities, cititgroup, CMBS, Dan Castro, Federal Reserve, Ford, Goldman Sachs, leveraged loans, mortgage-backed securities, quality of credit, treasury yields
Posted in Economics, Financing | No Comments »
Tuesday, August 31st, 2010
The nation’s financial system needs significantly more regulation than exists now. The lack of tough regulatory powers strongly impacted the recent financial crash and the Great Recession that ensued. The good news is that the Obama administration is moving firmly in this direction with financial reform legislation a critical item on its agenda. This is the opinion of Anthony Downs, a senior fellow with the Brookings Institution and former President of the Real Estate Research Corporation. In a recent interview for the Alter NOW Podcasts, Downs said that between 1980 and 2007, the value of international capital markets - including bank deposits, assets, equities, public and private debt - quadrupled relative to the world’s GDP, lifting millions of people out of poverty. Although unprecedented, this growth relied heavily on borrowed money to finance higher living standards and highly leveraged loans with limited reserves backing them. In the end, the growth was unable to be sustained.
The financial reform legislation currently undergoing reconciliation by a Senate-House conference committee is not a reinstatement of the 1933 Glass-Steagall Act - which separated investment and commercial banking — because banks will still be allowed to deal with securities. Under the new law, banks will have to register derivatives with some type of formal exchange and maintain records on who is borrowing money and under what terms. This marks a significant change from before the Great Recession, when derivatives were traded with virtually no oversight.
Downs believes that former Federal Reserve Chairman Alan Greenspan contributed to the financial crisis in two ways. In 2001, when Greenspan was informed that there was fraud in the subprime housing market and that he should do something about it, he refused to take action because he didn’t believe in regulation. According to Downs, “that was a terrible mistake and meant that all the horrible loans made in the subprime market could continue unchecked.” Greenspan’s second error was to maintain low interest rates for as long as he did at a time when an enormous amount of capital was coming into the United States economy from overseas. Because investors were avoiding the stock market, they put their money into real estate. That drove the price of properties sky high and destroyed the concept of intelligent underwriting and evaluating the risk before approving the loan.
Anthony Downs On Financial Reform:
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Tags: Alan Greenspan, Anthony Downs, Ben Bernanke, Brookings Institution, derivatives, Federal Reserve, financial crash, financial reform, financial regulation, GDP, Glass-Steagall Act, Great Recession, Obama administration, reconciliation, securities, subprime
Posted in Development, Economics, Financing, Industrial, Office | 1 Comment »
Thursday, August 26th, 2010
Sales of luxury goods are doing quite well, according to a recent report from LVMH, the manufacturer of Louis Vuitton bags and accessories and Dom Perignon champagne. The world’s largest luxury goods purveyor, LVMH reported a 53 percent increase in net profits to €1.1 billion ($1.4 billion) on sales of €6.9 billion in the 1st half of 2010. According to Bernard Arnault, LVMH chairman, the increase is due to his company’s status as “pioneer, and its early implantation in regions with strong growth.” Similarly, apparel notables Burberry and Hermes experienced a 27 percent increase in sales during the 1st quarter. Luxury cars like BMW and Porsche once again are in strong demand. However, Pam Danziger, president of Unity Marketing, urged caution. “We expect the pace of growth in luxury consumer spending to remain modest over the next two quarters,” Danziger said.
Tags: Asia, Bernard Arnault, BMW, Burberry, Dom Perignon, Hermes, Louis Vuitton, luxury goods, Pam Danziger, Porsche, Tag Heuer
Posted in Economics | No Comments »
Wednesday, August 25th, 2010
Curiosity is growing about which Wall Street banks will be the first to get out of proprietary trading or the private equity business as they restructure to come into compliance with new financial regulatory reform legislation. The Volcker Rule - named for former Federal Reserve chairman Paul Volcker - limits banks from these practices and sets new levels on the size of private equity or hedge fund investments. In other words, the banks are not allowed to hold more than three percent of their Tier 1 capital - a measure of their financial strength — in private equity or hedge fund investments.
Bank of America is almost in compliance, though Goldman Sachs must act more aggressively and is reported to be weighing several options to comply with the increased regulation. The good news for the Wall Street banks is that they have several years in which they can reduce their holdings. “They have time to adjust,” said Mark Nuccio, partner at Boston-based Ropes & Gray. “I don’t think there’s any intention on behalf of the regulators to create economic dislocation at financial institutions.”
The new rules are driving certain banks to rethink their business, while others see the new law as a welcome excuse to distance themselves from unwanted hedge or private-equity funds. “If you were leaning toward a strategic change anyway then now is a good time to re-evaluate the business because you have a regulator saying you shouldn’t be in this business anyway,” said Thomas Whelan, chief executive of Greenwich Alternative Investments. This is particularly true for banks that quickly acquired hedge fund operations during the boom years. At that time, having a hedge fund was essential to the strategic mix. Since 2008, however, when hedge funds posted their worst-ever returns and clients tried to cash in assets, the math changed for many banks.
Tags: Bank of America, banking, derivatives, Federal Reserve, Goldman Sachs, hedge funds, Morgan Stanley, Paul Volcker, President Barack Obama, private-equity firms, Volcker Rule, Wall Street
Posted in Economics, Financing | No Comments »
Thursday, August 19th, 2010
A leading candidate to head the new Bureau of Consumer Financial Protection is Elizabeth Warren, although her potential nomination is not without controversy. Writing on CNN Money.com, Katie Benner says “Detractors say that Warren lacks experience, that she’s not impartial, and that she could make it so expensive to extend credit that only the richest Americans and biggest businesses could get a mortgage, a credit card or a loan. But these knocks against Warren obscure the likely impact that she would have on the bureau. And mostly, they are straw men.”
Warren is a Beltway outsider and a Harvard law professor. She did take leave in 2008 to head the Congressional Oversight Panel (COP), which evaluates TARP and oversees the Treasury Department. Since its inception, the COP has published 22 detailed reports with little dissent, despite multiple differences of opinion regarding economics and politics among the staff members. Ken Trotske, an economist who serves on the panel, describes Warren as a consensus builder. “I’m in awe of the work they turn in to meet that schedule, because it’s a demanding schedule.”
In its two years of existence, COP has become an intellectual hub in Washington, D.C.’s efforts to understand the relationship between the federal government and Wall Street. According to Benner, “The outcry over Warren’s impartiality is a through-the-looking-glass twist on the current state of our regulatory affairs. It bears repeating that it’s a good thing for the head of an agency designed to protect consumers to actually put the interests of consumers first. For the last few years, as was made imminently clear by the implosion of 2008, Wall Street regulators were doing anything but regulating.”
In Benner’s words, “Someone like Warren is a shock to that system. She unabashedly sides with consumers. She hates fine print and contracts with ‘gotcha’ clauses. She wants to eliminate predatory loans. And she thinks that it’s okay for bank profits to be crimped in service of a level playing field between borrowers and their lenders.
Tags: Brooksley Born, Bureau of Consumer Financial Protection, Elizabeth Warren, Harvard, Katie Benner, TARP, Treasury Department, Wall Street
Posted in Economics, General | No Comments »
Monday, August 16th, 2010
One company that is holding its own despite the shaky economy is Peoria, IL-based Caterpillar, Inc., which reported an enviable quarterly profit thanks to growth in emerging markets. The world’s largest manufacturer of construction and mining equipment is benefiting from growing mining and energy operations with orders outpacing shipments to dealers. Additionally, Caterpillar plans to increase production during the second half of 2010 and has hired 3,650 new employees this year — 1,250 in the United States and 2,400 overseas.
Caterpillar, which laid off 30,000 employees globally from late 2008 through 2009, is being cautious, saying it still has “significant economic concerns.” Eli Lustgarten, an economist with Longbow Research, notes that “Construction in developed countries is not doing well, particularly in the United States.” Caterpillar is well aware that its second-quarter profit of $707 million was derived from sales which rose 116 percent in Latin America and 62 percent in the Asia/Pacific region.
Another company that is prospering is Boeing, which has delivered 191 Next Generation 737s so far this year, including 95 in the second quarter. Chicago-based Boeing has delivered 222 airplanes in 2010. Demand for single aisle planes comes not only from growth markets, but also for replacing older aircraft such as the 737 Classics, A320s, and McDonnell Douglas MD-80/90s. The demand for single-aisle airplanes remained strong even during 2009, according to Boeing. The growth of low-cost carriers, emerging intra-China demand, and a large need for replacement airplanes will keep the demand for single-aisle airplanes strong into the future.
“The world market is doing much better than last year, but there are still challenges,” said Randy Tinseth, vice president of marketing, Boeing Commercial Airplanes. “Looking at 2010, we see a world economy that continues to recover. We expect the world economy to grow above the long-term trend this year. As a result, both passenger and cargo travel will grow this year.”
Tags: Asia Pacific, Boeing, Caterpillar, China, emerging markets, energy, JP Morgan Chase, Latin America, Longbow Research, mining
Posted in Economics, Industrial | No Comments »
Wednesday, August 11th, 2010
There’s good news and bad news about the health of European banks. Of the 91 financial institutions that recently underwent stress tests, only seven outright failed. Those seven who did not perform well were ordered to raise their capital by €3.5 billion (approximately $4.5 billion). The number of failures were far less than what was expected, though the results confirmed fears that the stress test was too easy.
The results indicate that 91 banks in 21 European nations would be able to cope with a second recession, even though investor confidence has been shaken by the Greek debt crisis. “I see nothing stressful about this test. It’s like sending the banks away for a weekend of R&R,” said Stephen Pope, chief global equity strategist at Cantor Fitzgerald. “There is little evidence that the tests have been applied consistently and there is a distinct lack of credibility, making it a wasted opportunity,” said Richard Cranfield of the international law firm Allen & Overy. Even though the modest findings cast doubt on how credible the bank tests were, it may not matter because the European economy is recovering quickly.
Five small regional Spanish lenders who failed the test will require recapitalization that will accomplish a state-funded drive to unite the nation’s network of unlisted savings banks. They included the Banca Civica, Diada, Espiga, Unnim and Cajasur. All told, these small banks need €1.8 billion, according to the Bank of Spain. Several German and Greek banks also were perceived as weak and in need of restructuring, although the state-owned Hypo Real Estate was the only German lender to flunk, as was the Greek owned ATEbank. Banks that nearly failed with a Tier 1 ratio of less than seven percent under the most stressed scenario included Germany’s Deutsche Postbank, Greece’s Piraeus, Allied Irish Banks, Italy’s Banca and Spain’s Bankinter. According to Cranfield, “The banks that have scraped through may have more of a challenge on their hands and they may be the ones the market focuses on,” Cranfield concluded.
Tags: Allied Irish Banks, ATEBank, Banca Civica, Bank of Spain, bankinter, Cajasur, Deutsche Postbank, Diada, Espiga, european banks, European Union, Greek debt crisis, Hypo Real Estate, Piraeus, Richard Cranfield, stress tests, UBI Banca, Unnim
Posted in Economics, Financing | No Comments »
Monday, August 9th, 2010
With the passage of historic financial reform legislation, Treasury Secretary Timothy Geithner is being given the authority to reshape bank regulations, oversee financial markets and create a consumer protection agency. Few Treasury secretaries will wield this much influence once President Obama signs the new financial overhaul legislation passed by Congress.
Geithner’s fingerprints are all over the effort to expand financial regulation. The bill is extremely close to the initial draft he released last summer but also names him — as long as he remains Treasury secretary — as the head of a council of senior regulators. The legislation also puts him at the head of the new consumer bureau until the Senate confirms a permanent director. In other words, Geithner will mold the regulator over the next several months. It also will be his responsibility to work out several issues left unresolved by the bill — for instance, which financial derivatives will be subject to the strict new trading rules and which risky activities big banks will have to spin off.
The legislation “will help restore the great strength of the American financial system, which — at its best — develops innovative ways to provide credit and capital, not just for our great global companies, but for the individual with an idea and a plan,” according to Geithner. Efforts to win passage of the financial regulatory bill were driven primarily by the Treasury, proof that Geithner has significant autonomy within the administration.
Sen. Christopher J. Dodd (D-CT), who moved the financial overhaul package through the Senate, said it wasn’t his preference to put the Treasury secretary in charge of the new council. He would prefer that a member of the Federal Reserve board fill that role. At the same time, he said, having a member of the president’s Cabinet in charge could make the council “more politically responsive. It gives you some accountability,” Dodd said.
Tags: Christopher Dodd, congress, consumer protection agency, Federal Reserve, financial reform legislation, Larry Summers, National Economic Council, President Barack Obama, Secretary of the Treasury, Timothy Geithner
Posted in Economics | No Comments »
Thursday, August 5th, 2010
The next item on President Barack Obama’s ambitious agenda is likely to be overhauling Fannie Mae and Freddie Mac, the government-backed mortgage firms that so far have cost American taxpayers $145 billion to keep afloat. The two firms, which own more than half of the nation’s $11 trillion in home mortgages, collapsed along with the housing market and were taken over by the federal government in September of 2008.
Many Congressional Republicans believe that scrapping Fannie and Freddie is mandatory; Democrats disagree and President Obama is expected to support reforms backed by consumer, real estate and banking groups. The core of the emerging consensus is to preserve the 30-year, fixed-rate mortgage. Susan Woodward, former chief economist at the Department of Housing and Urban Development (HUD) and a founder of Sand Hill Econometrics, said “People regard it as a right as Americans to get a 30-year, fixed-rate loan.”
Banks and builders agree with consumer advocates representing homebuyers that it’s good for the government to promote residential lending by supporting what Fannie and Freddie have done for years - purchasing mortgages and bundle them into securities that they sell to investors. When the system works as intended, the MBS market creates additional money that is funneled back into the market to make new affordable loans. The task is to determine how to accomplish this without the lax practices that the taxpayers had to pay for when catastrophic losses occurred in 2008.
The Obama Administration and leading Democrats strongly believe that the federal government should have a role in promoting homeownership. Shaun Donovan, HUD Secretary, said “We should not compromise any of our core policy goals in the decisions we make in structuring our house financing system.”
Tags: Barack Obama, Barney Frank, CMBS, congress, Consumer Federation of America, Department of Housing and Urband Development, Fannie Mae, Federal Deposit Inusrance Corporation, Federal Housing Finance Agency, Freddie Mac, George W. Bush, lobbyists, Mortgage Bankers Association, Sand Hill Econometrics, Shaun Donovan, taxpayer money, Treasury Department, Wall Street
Posted in Economics, Financing, Residential | No Comments »
Wednesday, August 4th, 2010
As the nation gradually recovers from the Great Recession, several years are likely to pass before lending returns to pre-crisis levels, according to Federal Reserve Governor Elizabeth Duke. The return of credit growth is far slower than during any business cycle of the last four decades with the sole exception of the 1990 - 1991 recession. At that time, consumer credit required three years and commercial real estate nearly nine years to recover, Duke said in a recent speech.
Since December of 2008, the Fed has kept its target interest rate at zero to 0.25 percent in an effort to reduce the cost of borrowing and help the economy recover from the Great Recession. Even so, loans held by commercial banks slid by approximately five percent in 2009. “Just as the causes for the decline in lending are multifaceted and complex and took time to evolve, the solutions will likely be equally difficult and will take time to fully work,” Duke said. She is the sole former commercial banker to serve on the Fed’s Board of Governors. “We at the Federal Reserve, meanwhile, will continue to do everything we can to encourage a return to a healthy credit environment.”
According to data released by the Federal Reserve, consumer borrowing increased in April for the first time in three months. The Fed’s Open Market Committee notes that household spending is restrained by “high unemployment, modest income growth, lower housing wealth and tight credit.” Duke said that “Just looking at the statistics, it is not hard to construct a scenario in which consumer demand for credit remains sluggish for quite a while. Household net worth dropped about 25 percent during the crisis, about 20 percent of mortgage borrowers lack equity in their homes and consumers are quite burdened by debt payments.”
Tags: Ben Bernanke, Conference Board, Department of Commerce, Elizabeth Duke, Fed, Federal Reserve, George W. Bush, Great Recession, Gulf of Mexico, household spending, interest rates, lending, National Fedearaton of Independent Business, oil spill, unemployment
Posted in Economics, Financing | No Comments »