Category: Financial Crisis
Fed aid in financial crisis went beyond U.S. banks to industry, foreign firms
Washington post | Thursday, December 2, 2010 | 12:15 AM
The financial crisis stretched even farther across the economy than many had realized, as new disclosures show the Federal Reserve rushed trillions of dollars in emergency aid not just to Wall Street but also to motorcycle makers, telecom firms and foreign-owned banks in 2008 and 2009.
The Fed’s efforts to prop up the financial sector reached across a broad spectrum of the economy, benefiting stalwarts of American industry including General Electric and Caterpillar and household name companies such as Verizon, Harley-Davidson and Toyota. The central bank’s aid programs also supported U.S. subsidiaries of banks based in East Asia, Europe and Canada while rescuing money-market mutual funds held by millions of Americans.
The biggest users of the Fed lending programs were some of the world’s largest banks, including Citigroup, Bank of America, Goldman Sachs, Swiss-based UBS and Britain’s Barclays, according to more than 21,000 loan records released Wednesday under new financial regulatory legislation. The data reveal banks turning to the Fed for help almost daily in the fall of 2008 as the central bank lowered lending standards and extended relief to all kinds of institutions it had never assisted before.
Fed officials emphasize that their actions were meant to stabilize a financial system that was on the verge of collapse in late 2008. They note that the actions worked to prevent a complete financial meltdown and that none of the special lending programs has lost money. (Some have recorded healthy profits for taxpayers.) But the extent of the lending to major banks – and the generous terms of some of those deals – heighten the political peril for a central bank that is already under the gun for a wide range of actions, including a recent decision to try to stimulate the economy by buying $600 billion in U.S. bonds.
The Fall and Rise of Major Economies’ Interest Rates
Article first published as The Fall and Rise of Major Economies’ Interest Rates on Blogcritics.
The world financial crisis, the worst since the great depression of 1930s, forced major economies of the world reduce their central banks’ interest rates to their least level possible. This was done to overcome “the credit crunch” that erupted as a byproduct of the financial crisis. Credit crunch was also a result of the bankers ceasing their lending to one another, due to mistrust developed out of lack of transparency over the exposure of each bank to the toxic sub-prime mortgage loans.
As the banks, investment as well as commercial, stopped releasing their funds for lending, the central banks stepped in to see that the required funds are available to market. This prompts people believing that the banks are in dearth of funds, which is not true. If market players stall their activities, the theories of free market economy would become useless. Ironically the people (or consumers in market language), on whose purchasing capacity and spending activity the markets depend upon, had no role in this entire fiasco except paying taxes and losing jobs.
Interest Rates
The central banks exercise their control mainly on four rates. They are Bank Rate (or discount rate), repo rate (repurchasing rate), reverse repo rate and CRR (cash reserve ratio). A bank rate is the interest rate that is charged by a country’s central bank (federal bank in some countries) on loans and advances
Big Firm Bonuses Back to pre-Crisis Level
Article first published as Big Firm Bonuses Back to pre-Crisis Level on Technorati.
Bonuses to executive directors are back to pre-crisis level in the U.K. Though pace of increases is slowed, the levels of payment have reached almost pre-crisis level. A business advisory firm Deloitte conducted a survey to find the developments occurred in pays and bonuses after the crisis. The survey revealed that pay increases for the executives might be history for now. The BBC News quoted Stephen Cahill of Deloitte as saying, “Last year we saw a very large number of companies freezing executive salaries, but at the time it was difficult to predict whether this was a one-off. Now it appears that the years of executive salaries increasing at rates far in excess of inflation and the increase in average earnings are, at least for the moment, well and truly over.”
Toppers at Top
The survey found that the average bonuses for executive directors of FTSE 100 companies were equal to 100% of their basic salary for the year. It said the top 30 companies increased the bonuses to their executives by 140%. Coming to mid-sized FTSE 250 companies, one in Seven paid no bonus to their bosses. For the present year also the difference between the trends of bonuses in FTSE 100 and FTSE 250 companies are expected to continue. While for the bosses of FTSE 100 companies, the bonuses are expected to be greater than the last year in the present year; they would be lower for FTSE 250 companies.
Bonus vs. Austerity
While European Countries are burdened with high levels of debts and deficits and their governments are already on the path of aggressive austerity measures and spending cuts, trade unions or giving warning signals that the workers’ pay
Goldman Faces ‘Near Record’ U.K. Fine
Market Watch | 08/09/2010 | 04:50 PM ED
Goldman Sachs faces a large fine from the U.K.’s financial regulator related to its business practices in London, according to a Financial Times report published late Wednesday. Citing unidentified sources, the report says the fine from the Financial Services Authority (FSA) will be "near-record." The FSA’s largest-ever fine came three months ago, when JPMorgan Chase paid £33.3 for failing to hold its clients’ money in separate accounts.
The fine, which the report states could be announced as early as Thursday morning, is the result of a five month investigation announced four days after the Securities and Exchange Commission charged Goldman with civil fraud related to Abacus, a complex debt instrument it sold. Goldman settled that case for $550 million.
Housing group gives four-year negative equity warning
BBC News | 31 August 2010 | 13:19 GMT
Homeowners who bought at the peak of the market face four more years of negative equity, a housing group said. The National Housing Federation (NHF) said the average buyer in England paid £216,800 for a home in 2007. They may now have to wait until 2014 before prices recover enough to make their homes worth more than their loan. Meanwhile, figures from the Bank of England show that the number of mortgages approved for UK home buyers was barely changed in July at 48,722. The figures reinforce data from lenders and surveys which suggest that prices have reached a plateau after the revival that started in the spring of 2009. The Bank’s figures show that in July, the number of mortgage approvals was just 160 higher than in June and only slightly higher than the average recorded in the previous six months. The net mortgage lending rose by only £86m in July, one of the lowest monthly increases on record.
Forecasts
According to the NHF, house prices in England will dip again next year by 3%, before steadily climbing thereafter. The federation expects prices to be 22% higher by 2015 than they were in 2009, bringing the average price of a house to £226,900. The NHF, which represents housing associations in England, said in its report that prices are still too high for many buyers. Unless homeowners wish to sell their property, being in negative equity – when your home has become worth less than the mortgage secured against it – does not necessarily pose a problem. But it is when people are looking to move that they can face a struggle, as lenders are entitled to insist that borrowers redeem their loans. In theory, if the mortgage is worth more than the house and the borrowers cannot find the money elsewhere, they will be prevented from moving.
Job Crisis: Machines Over Manpower
Bloomberg Businessweek | July 29, 2010 | 5:00PM EST
The recession, economists say, technically ended in mid-2009. A year later the unemployment rate is still stuck above 9 percent, and it may take until 2012 for it to reach 8 percent, according to a survey of economists by Bloomberg News. The general explanation for this stubbornly high rate is that companies face an unprecedented era of uncertainty, with questions on the impact of health-care reform, the strength of the real estate market, and the cost of financial regulations all remaining unanswered. Until companies get clarity, they will be reluctant to hire new full-time employees.The job crisis could be seen another way: as a continuation of a trend that started 20 years ago. Before 1990, recessions in the U.S. followed a similar pattern. The downturn would end, and companies would start adding jobs in a little more than two months, according to the National Bureau of Economic Research. In 1990-91 hiring began outpacing firing three months after the end of the recession. It took seven months after the 2001 recession’s technical end before hiring trends turned positive, and 27 months before companies hired in large enough numbers to cut seriously into unemployment. This time the lag is even longer.Economist Allen Sinai, who runs the consulting firm Decision Economics, has an explanation for this emerging pattern. He sees the capital-labor ratio—total capital invested as a percentage of hours worked—as the key to the puzzle. Capital spending boosts productivity and, in the short run at least, often eliminates the need for extra workers on the factory floor or in the office. Continue reading
Goldman Sachs Lost Money on 10 Days in Second Quarter
Bloomberg News | Aug 9, 2010 | 4:02 PM GMT+0530 document.write(dateFormat(new Date(1281349941000),”mmm d, yyyy h:MM TT Z”));
Goldman Sachs Group Inc., the bank that makes the most revenue trading stocks and bonds, lost money in that business on 10 days in the second quarter, ending a three-month streak of loss-free days at the start of the year. Losses on Goldman Sachs’s trading desks exceeded $100 million on three days during the period that ended on June 30, according to a filing today by the New York-based company with the U.S. Securities and Exchange Commission. The firm also disclosed that trading losses surpassed its value-at-risk estimate, a measure of potential losses, on two days.
Trading results across Wall Street firms declined after Goldman Sachs and its biggest rivals posted perfect results, with no losing days, in the first quarter. Goldman Sachs’s $5.61 billion in second-quarter trading revenue exceeded all of its Wall Street competitors. The bank, overseen by Chairman and Chief Executive Officer Lloyd Blankfein, relied on trading for 71 percent of its revenue in the first half of the year, down from 80 percent a year earlier. Today’s filing also shows that the firm’s traders generated more than $100 million on 17 days during the quarter. Of the 65 days in the quarter, Goldman Sachs traders made money on 55 days, or 85 percent of the time. Continue reading
Time to Buy Dollars as Euro Economies Reach Limits of Austerity
Time to Buy Dollars as Euro Economies Reach Limits of Austerity – Bloomberg 02/08/2010
FX Concepts LLC, the hedge fund that bought the euro in June just as it began a 9.7 percent surge against the dollar, now says it’s almost time to get out of the currency. The firm, which manages $8 billion in assets, expects the euro’s advance from a four-year low on June 7 to come undone by September, partly because European austerity programs will start to weigh on growth. Reports last week that showed Spanish consumer confidence falling to the lowest level this year and banks tightening credit standards in the region suggest the budget measures may already be undermining the recovery. The same fiscal measures that helped restore confidence in the euro may soon weaken the region’s economies and torpedo the rally. A July 30 survey of 21 money managers overseeing $1.29 trillion by Jersey City, New Jersey-based research firm Ried Thunberg ICAP Inc. found 75 percent don’t expect Europe’s common currency to strengthen over the next three months. “Austerity is really bad for growth,” said Jonathan Clark, vice chairman at New York-based FX Concepts, the world’s biggest currency hedge fund. “In the U.S., austerity is mainly on the state level, but in Europe they are whole-hog into cutting spending to reduce deficits. Under a pessimistic scenario, the European currencies are in a lot of trouble.”
Spending Cuts
Spain, Portugal and Greece will reduce spending by an average 4.3 percent of gross domestic product from 2009 to 2011, said Gilles Moec, an economist in London at Deutsche Bank AG, Germany’s largest lender. The euro area will expand 1.5 percent this year, less than a previous estimate of 2 percent, UBS AG, the biggest Swiss bank by assets, said in a July 16 report. The cuts contrast with the U.S., where President Barack Obama signed into law a $34 billion extension of unemployment benefits last month. The Congressional Budget Office projects a record $1.47 trillion deficit this fiscal year ending Sept. 30, and $1.42 trillion in 2011. While U.S. growth is slowing, it beats the European Union, where a 750 billion-euro ($981 billion) backstop for the region’s most indebted nations stabilized the currency after it slid from $1.5144 on Nov. 25 to the June 7 low. U.S. GDP grew at a 2.4 percent pace in the second quarter, compared with 3.7 percent in the prior period, the Commerce Department in Washington said July 30. Corporate spending on equipment and software jumped at a 22 percent annual rate, the biggest increase since 1997. The median second-quarter estimate for the euro region is 1.30 percent, and 1.10 percent for the year, based on a survey of 20 economists by Bloomberg. Continue reading
Top German banker found guilty of market manipulation
Deutsche Welle | 14.07.2010
The former chief of German bank IKB has been found guilty of market manipulation and given a 10-month suspended sentence. He was also given a hefty fine for misstating investment risks. The former head of German lender IKB Deutsche Industriebank, Stefan Ortseifen, was found guilty on Wednesday of manipulating the bank’s share price at the start of subprime crisis. He was given a 10-month suspended sentence. Ortseifen, who took up a position on the IKB board of directors in 1994, was also fined 100,000 euros ($127,000), which must be paid to charities.
"Ortseifen wanted to manipulate IKB’s share price, that was his goal," said prosecutor Nils Bussee. "He wanted to make the impression that, when it comes to subprime risks, everything was fine." The prosecution had argued that Ortseifen intentionally tried to raise the share price of his company by misstating the effect the US subprime mortgage crisis had had on IKB. The bank deals mainly with small and medium-sized businesses. Prosecutors had sought a 10-month sentence during the case brought before Duesseldorf District Court.
Fed May `Ease’ Policy at Next Meeting Aug. 10, Primary Dealer Nomura Says
Bloomberg | Jul 31, 2010 | 2:29 AM GMT+0530
Nomura Holdings Inc., one of the 18 primary dealers that trade with the Federal Reserve, said policy makers will “ease” at their Aug. 10 meeting, though what form it takes is debatable. Central bankers may change the language of their policy statement to signal that the Fed’s balance sheet will remain expanded and change policy on the mortgage program to start reinvesting paydowns, the firm said in a note to clients today. There is also a chance of other actions, such as a cut in the rate on excess reserves, Nomura’s global economics team said. Nomura changed its viewpoint because of a softening of the comments from policy makers such as Philadelphia Fed President Charles Plosser and St. Louis Fed President James Bullard. The firm also cited the Fed’s downward revision for growth and the slack in the economy that threatens to push inflation to an unacceptably low level for Fed Chairman Ben S. Bernanke.
“Easing is going to be very seriously considered given several months of disappointing data and the very dovish tone of public commentary across the spectrum,” said Zach Pandl, an economist at Nomura Securities International in New York. “If the Fed is averse to buying more assets, then cutting the rates of interest on reserves could be the next option.” Bullard said yesterday that the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep rates near zero.
Recession in U.S. Was Even Worse Than Estimated, Revisions Show
Bloomberg | Jul 30, 2010 | 10:07 PM GMT+0530
The worst U.S. recession since the 1930s was even deeper than previously estimated, reflecting bigger slumps in consumer spending and housing, according to revised figures. The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the 3.7 percent drop previously on the books, the Commerce Department said today in Washington. Household spending fell 1.2 percent in 2009, twice as much as previously projected and the biggest decline since 1942. “We do tend to get bigger revisions at turning points in the economy,” Steven Landefeld, director of the Commerce Department’s Bureau of Economic Analysis, said in a press conference this week. On the more positive side, “in the past, we’ve tended to undershoot the recovery” as well, he said.
The data better explain why the jobless rate doubled, reaching a 26-year high of 10.1 percent in October, and has been slow to subside. The government also boosted personal income levels for each of the past three years, propelling the savings rate higher and signaling households are further along the process of repairing finances. The rebound from the recession has been more subdued in the last six months of 2009, as the economy grew at an average 3.3 annual pace from July 2009 through December, instead of the 3.9 percent previously projected. By comparison, growth averaged 7.2 percent in the two quarters following the 1981-82 recession, during which the economy contracted just 2.9 percent.
Lehman Collapse
The worst quarter of the current economic slump is now the final three months of 2008, in the immediate aftermath of the collapse of Lehman Brothers Holdings Inc., rather than the first quarter of 2009. GDP shrank at a 6.8 percent pace from October to December 2008, exceeding the prior estimate of 5.4 percent, making it the deepest quarterly drop since 1980. The new data showed the peak of the last expansion occurred in the fourth quarter of 2007 rather than the second quarter of 2008. The figures are more in sync with the recession chronology prescribed by the National Bureau of Economic Research, the accepted arbiter of U.S. business cycles. The Cambridge, Massachusetts-based private group determined the slump began in December 2007, and has yet to announce when it ended. Consumer purchases, which account for 70 percent of the economy, were cut for each of the past three years, with the biggest reduction taking place last year. Less spending on services than previously estimated, including financial services and auto repair, was responsible for the change.
UK interest rates to stay at record low ‘until 2014’
BBC News | 25 July 2010 | 15:47 GMT
The Bank of England will have to keep interest rates at their record low of 0.5% until 2014, a leading economic forecaster has said. The Ernst & Young Item Club said rates would need to be kept low to counter-balance the government’s spending cuts. "A base rate of 0.5% will begin to look like the new normal," Professor Peter Spencer from the Item Club said.
The Office for Budget Responsibility (OBR) has said that it expects rates to start to rise next year. Interest rates have stood at 0.5% since March 2009. "The new coalition’s plans to cut the deficit are certainly ambitious," said Prof Spencer. "On the assumption that the government is able to implement the overall reduction of £40bn set out in the Budget, we expect that UK growth will struggle to reach 1% this year but will gradually speed up in the following years to give the UK a high-quality recovery based on trade and investment."
Hungary Credit Rating May Be Cut to Junk After IMF Talks Fail
Bloomberg | Jul 23, 2010
Standard & Poor’s said it may cut Hungary’s credit rating to junk after the collapse of talks with the International Monetary Fund and European Union. Moody’s Investors Service said it may also lower the country’s grade. The IMF and EU on July 17 suspended talks with the government without endorsing Prime Minister Viktor Orban’s plans to control the budget deficit. The creditors provided Hungary with a 20 billion-euro ($25.9 billion) rescue package in 2008, which had served to reassure investors. “We believe that without an EU/IMF program to anchor policy, Hungary is likely to face higher and more volatile funding costs, which in our view could weigh on financial sector balance sheets, the public finances, and economic growth,” S&P said today in a statement. A rating downgrade would raise the cost of borrowing for Hungary at a time when the country is struggling to repair investor confidence after ruling party officials in June compared the country’s economy with Greece. S&P rates Hungary BBB-, its lowest investment grade. The Moody’s rating is two steps higher at Baa1. S&P will lower Hungary’s rating if in the coming year it concludes “government policies are unlikely to result in a meaningful decline in public debt,” it said in the statement.
Forint Falls
Hungary’s currency fell 1.1 percent to 286.83 per euro as of 3:15 p.m. in Budapest. The forint has dropped 8.1 percent in the past three months, making it the worst performer among more than 170 currencies tracked by Bloomberg. The cost of insuring Hungary’s government debt against default rose 14.5 basis points to 343, according to data provider CMA. “Running a higher budget deficit while losing your biggest potential supplier of capital isn’t a good mix,” said Kieran Curtis, who manages $2 billion in emerging market debt at Aviva Investors in London. “The market isn’t going to finance a higher budget deficit without an IMF agreement.” Hungary’s government said credit rating companies “don’t understand” that fiscal responsibility needn’t come at the expense of independent economic policy. “We’re going to continue a disciplined fiscal policy, which doesn’t equal the usual austerity policy that affects families and businesses,” the Economy Ministry said in an e- mailed response to questions from Bloomberg News.
Obama signs sweeping Wall Street overhaul into law
Reuters | Thu Jul 22, 2010 | 2:29am IST
President Barack Obama signed into law on Wednesday the most comprehensive financial regulatory overhaul since the Great Depression, vowing to stop risky behavior on Wall Street that imperiled the U.S. economy. Influential business groups lined up to criticize the new law, underscoring Obama’s uneasy relationship with America’s business community. Some on Wall Street, however, welcomed the clarity offered by the law after months of wrangling in Congress over what should be in the legislation. The law, which got final approval from the Senate last week, targets the kind of Wall Street risk-taking that helped trigger a global financial meltdown in 2007-2009 and also aims to strengthen consumer protections. Obama, facing voter unrest over Wall Street bailouts that have failed to spark a strong Main Street job recovery, pledged taxpayers would never again have to pump billions of dollars into failing firms to protect the economy. "There will be no more taxpayer-funded bailouts. Period" said Obama.
With Republicans poised to make gains in the November congressional elections, Obama’s Democrats are eager to show voters that they have taken steps to tame an industry that dragged the economy into its deepest recession in 70 years. Obama and Democrats have yet to gain political traction from the legislative victory, with Americans still anxious about a 9.5 percent jobless rate and ballooning deficits. The financial regulatory reforms were a major achievement for Obama and his ambitious domestic agenda. Earlier this year he signed into law sweeping reforms of the United States’ $2.5 trillion healthcare system. The financial reforms won Democrats few friends on Wall Street. Wealthy donors have started to steer more campaign contributions to Republicans, who voted overwhelmingly against the reforms.
"UNSCRUPULOUS LENDERS"
Obama had harsh words for "unscrupulous" lenders and others he said had taken risks that endangered the economy. He said the new law was aimed at curbing abuses and excesses on Wall Street and stopping taxpayer bailouts of failing companies. The law would provide certainty "to everybody from bankers to farmers to business owners. And unless your business model depends on cutting corners or bilking your customers, you have nothing to fear from this reform," Obama said. The U.S. Chamber of Commerce, an influential business group that often
Goldman Sachs Profit Drops 82%, Missing Analysts’ Estimates
Bloomberg | Jul 20, 2010
Goldman Sachs Group Inc. said second-quarter profit dropped 82 percent, missing analysts’ estimates on a slide in trading revenue, five days after settling U.S. regulators’ fraud allegations. Revenue and profit were the lowest since the fourth quarter of 2008. Net income fell to $613 million or 78 cents a share, from $3.44 billion, or $4.93 a share, a year earlier, New York-based Goldman Sachs said in a statement today. The average estimate of 21 analysts surveyed by Bloomberg was for earnings of $1.99 per share, with estimates ranging from 77 cents to $4.34. Some of the analysts didn’t include costs of the settlement. Lloyd Blankfein, Goldman Sachs’s chairman and chief executive officer, is working to restore the firm’s reputation after agreeing to pay $550 million to settle the Securities and Exchange Commission’s fraud accusations. The bank’s bigger competitors, including JPMorgan Chase & Co., last week also reported lower trading revenue as market gyrations reduced clients’ willingness to take on risk. Concern that the U.S. economic rebound will stall and reform legislation will crimp profits at finance companies have weighed on their stocks. “The clouds over the financial industry remain thick,” said Michael Farr, president and founder of Washington-based Farr, Miller & Washington LLC, who manages more than $650 million. Farr, who sold his Goldman Sachs stock when the SEC suit was filed on April 16, said he’s considering buying again.
‘Leading the Category’
“You’ve got probably the greatest, most innovative investment bank in the world, leading the category, which looks cheap,” Farr said before earnings were released. “I have not put my money back in yet but I am taking a close look at doing just that.” Goldman Sachs fell to $141.48 in New York trading at 8:31 a.m. from $145.68 yesterday. The stock is down 14 percent this year through yesterday, while the S&P 500 Financials Index, which tracks the performance of 80 financial company shares, is down 2 percent this year. “The market environment became more difficult during the second quarter and, as a result, client activity across our businesses declined,” Blankfein said in the statement. Costs during the quarter included a $600 million charge for a tax levied by the U.K. government on bonuses paid to bank employees last year as well as a $550 million cost from the SEC settlement. Excluding those two costs, earnings per share would have been $2.75 per share. That’s still the lowest since the fourth quarter of 2008.
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