Last week, Congress. This week, the world.
At the Group of 20 meeting on Thursday, President Obama is expected to push the new regulations that he and Treasury Secretary Tim Geithner pitched to Congress last week as a way to prevent another financial market collapse. He heads to London on Tuesday and will meet the next day with the leaders of Great Britain, Russia and China.
The president will emphasize the need to regulate hedge funds and derivatives markets, encourage better capitalization of financial companies and "forge coordination among regulators," said Michael Froman, a deputy Obama adviser on international economic affairs. The need to crack down on offshore tax havens is also on the agenda, Froman added.
A lot is at stake beyond the call for tougher regulations, experts say.
Last week, billionaire investor George Soros, while addressing a Senate panel on foreign relations, called it a "make or break event" for the global markets.
0:00 /3:39Global glimpses of recovery
The United States has faced criticism for emphasizing the need for economic stimulus rather than strengthening its own regulatory system, which many blame for triggering the global crisis.
Global economists say they expect the proposed regulatory platform to blunt that criticism and help the United States push for broader global stimulus efforts and other shorter-term economic crisis reforms.
"The U.S. is on better grounds going into the summit now," said Morris Goldstein of the Peterson Institute for International Economics. "It's hard for other countries to say the U.S. is dragging its feet on regulatory reforms."
Many countries are, in particular, expected to applaud increased regulation on hedge funds and investment firms, experts say. In fact, some may consider the U.S. efforts in that area too weak and push for even more of a crack down.
"The Europeans believe the reason we got into this was shadow banks," said Nariman Behravesh, chief economist for IHS Global Insight, a global research firm. "Geithner's proposals don't go very far in that direction."
Brad Setser of the Council on Foreign Relations said he expects all countries to "rally behind" a push to move derivatives trading to clearinghouses or exchanges. He said that would reduce risk associated with hedge funds even more than direct regulation.
Some European countries may also push for the establishment of a risk regulator to oversee banks and investment firms globally -- an idea that will not sit well with the United States and emerging nations, said Eswar Prasad, a global economics expert at the Brookings Institution.
Generally, the proposed new regulations should help "dissipate tensions" between the United States and other countries who had been wanting to see a discussion of tighter rules, Prasad said.
However, some leaders, including those in India and Eastern Europe, are worried about how tougher rules would be implemented. Requiring more capital to back up financial deals could dampen lending and ability for some emerging markets to grow.
Prasad said he also expects some tension from countries that don't want to talk about new regulations while they're struggling with a crisis and trying to get their economies back on firm ground.
But that's exactly why they need to work on a global regulatory agenda, said Homi Kharas, another Brookings Institution economist.
"The danger is if you don't move on putting in place some processes, you're going to end up with a substantially different regulatory framework, as recovery starts to pick up," Kharas said.
Monday, March 30, 2009
Thursday, March 26, 2009
Wall Street in rally mode
Stocks gained Thursday morning, extending the recent rally, thanks to better-than-expected earnings from Best Buy and ongoing bets that the economy is closer to stabilizing.
The Dow Jones industrial average (INDU) rose 72 points, or 0.9% almost two hours into the session. The S&P 500 (SPX) index rose 9 points, or 1.2%. The Nasdaq composite (COMP) rose 31 points, or 2%.
A better-than-expected new home sales report helped investors push stocks higher Tuesday at the end of a choppy session. It was the latest in a string of slightly better-than-anticipated news that has bolstered hopes that the economy could be closer to stabilizing.
Such signs - along with the latest initiatives from Treasury and the Fed - have propelled the S&P 500 by 20% in 2-1/2 weeks. Market pros are cautiously optimistic that the bear market saw a bottom on March 9, when the S&P 500 and Dow industrials both ended at more than 112-year lows.
Yet stocks supposedly hit bottom twice before in the current bear market, in both November and October. As such, investors are likely to remain wary of calling a floor until more time has passed.
Washington: Treasury Secretary Tim Geithner outlined a massive overhaul of the regulatory system in the wake of the financial meltdown of the last 18 months. Speaking before the House Financial Services Committee, he said the changes are needed to repair a system that has "proved too unstable and fragile."
Changes include having a single regulator oversee the biggest financial firms and requiring large hedge funds to register with the Securities and Exchange Commission. Any such changes need Congressional approval. (Full story)
Earlier in the week Geithner and Federal Reserve Chairman Ben Bernanke made the case for broader powers to regulate non-bank financial institutions like insurer AIG (AIG, Fortune 500).
On Monday, Treasury introduced its plan to purge bank balance sheets of up to $1 trillion in bad assets that are limiting lending and prolonging the recession.
Economy: The number of Americans filing new claims for unemployment rose to 652,000 from a revised 644,000 the prior week. Economists surveyed by Briefing.com thought sales would have risen to 650,000.
Continuing claims, a measure of people who have been receiving unemployment for a week or more, rose to an all-time high of 5.56 million.
Fourth-quarter GDP shrank at an annual rate of 6.3% in the fourth quarter of last year, versus an earlier reading of 6.2%. The decline was a 26-year low. Economists thought GDP would shrink by a 6.6% annual rate.
In other news, Best Buy (BBY, Fortune 500) reported a 23% drop in fiscal fourth-quarter earnings versus a year ago. Excluding charges, the retailer earned $1.61 per share, versus economists' forecasts for $1.40 per share. The company also forecast full-year earnings in a range of $2.50 to $2.90 per share versus estimates for a gain of $2.45 per share. Shares rallied 15% in the morning.
0:00 /02:39Life in the pits
Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 2.22% from 2.79% Wednesday. Treasury prices and yields move in opposite directions.
Lending rates were unchanged. The 3-month Libor rate held steady at 1.23%, where it stood Wednesday, while the overnight Libor rate held steady at 0.29%, according to Bloomberg.com. Libor is a bank-to-bank lending rate.
Other markets: In global trading, Asian markets ended higher and European markets weakened in afternoon trading.
In currency trading, the dollar gained against the euro and the yen.
U.S. light crude oil for May delivery rose 78 cents to $53.55 a barrel.
COMEX gold for May delivery rose $3.40 to $940.10 an ounce.
The Dow Jones industrial average (INDU) rose 72 points, or 0.9% almost two hours into the session. The S&P 500 (SPX) index rose 9 points, or 1.2%. The Nasdaq composite (COMP) rose 31 points, or 2%.
A better-than-expected new home sales report helped investors push stocks higher Tuesday at the end of a choppy session. It was the latest in a string of slightly better-than-anticipated news that has bolstered hopes that the economy could be closer to stabilizing.
Such signs - along with the latest initiatives from Treasury and the Fed - have propelled the S&P 500 by 20% in 2-1/2 weeks. Market pros are cautiously optimistic that the bear market saw a bottom on March 9, when the S&P 500 and Dow industrials both ended at more than 112-year lows.
Yet stocks supposedly hit bottom twice before in the current bear market, in both November and October. As such, investors are likely to remain wary of calling a floor until more time has passed.
Washington: Treasury Secretary Tim Geithner outlined a massive overhaul of the regulatory system in the wake of the financial meltdown of the last 18 months. Speaking before the House Financial Services Committee, he said the changes are needed to repair a system that has "proved too unstable and fragile."
Changes include having a single regulator oversee the biggest financial firms and requiring large hedge funds to register with the Securities and Exchange Commission. Any such changes need Congressional approval. (Full story)
Earlier in the week Geithner and Federal Reserve Chairman Ben Bernanke made the case for broader powers to regulate non-bank financial institutions like insurer AIG (AIG, Fortune 500).
On Monday, Treasury introduced its plan to purge bank balance sheets of up to $1 trillion in bad assets that are limiting lending and prolonging the recession.
Economy: The number of Americans filing new claims for unemployment rose to 652,000 from a revised 644,000 the prior week. Economists surveyed by Briefing.com thought sales would have risen to 650,000.
Continuing claims, a measure of people who have been receiving unemployment for a week or more, rose to an all-time high of 5.56 million.
Fourth-quarter GDP shrank at an annual rate of 6.3% in the fourth quarter of last year, versus an earlier reading of 6.2%. The decline was a 26-year low. Economists thought GDP would shrink by a 6.6% annual rate.
In other news, Best Buy (BBY, Fortune 500) reported a 23% drop in fiscal fourth-quarter earnings versus a year ago. Excluding charges, the retailer earned $1.61 per share, versus economists' forecasts for $1.40 per share. The company also forecast full-year earnings in a range of $2.50 to $2.90 per share versus estimates for a gain of $2.45 per share. Shares rallied 15% in the morning.
0:00 /02:39Life in the pits
Bonds: Treasury prices rose, lowering the yield on the benchmark 10-year note to 2.22% from 2.79% Wednesday. Treasury prices and yields move in opposite directions.
Lending rates were unchanged. The 3-month Libor rate held steady at 1.23%, where it stood Wednesday, while the overnight Libor rate held steady at 0.29%, according to Bloomberg.com. Libor is a bank-to-bank lending rate.
Other markets: In global trading, Asian markets ended higher and European markets weakened in afternoon trading.
In currency trading, the dollar gained against the euro and the yen.
U.S. light crude oil for May delivery rose 78 cents to $53.55 a barrel.
COMEX gold for May delivery rose $3.40 to $940.10 an ounce.
Thursday, March 19, 2009
Health tax break: Sacrosanct no more
Get ready. Washington is again debating how to fix the health care system. And the outcome might affect your wallet.
The discussions are just beginning and much remains undecided. But expect at least one thing: To help pay for changes and reduce overall costs, lawmakers will consider curbing the tax benefits that employees enjoy when they get their health insurance plans through work.
Here's the crux of the issue: President Obama wants to create a $634 billion fund to pay for health care reforms. Leading lawmakers appear willing to go along, but they're not keen on how he has proposed to pay for a big part of it. Obama wants to cap how much of a deduction high-income taxpayers may take. The administration estimates doing so could raise $318 billion over 10 years.
The Senate's top tax writer, Max Baucus, D-Mont., who is also leading the push for health care reform, has asked White House budget chief Peter Orszag to consider instead changing the tax break that employees receive when their employers foot part of the bill for their health insurance.
Right now the portion of premiums paid by employers is treated as tax-free compensation to employees. And there is no limit on how much employers may contribute.
Some lawmakers have proposed eliminating the exclusion entirely and replacing it with a tax credit or deduction.
But Baucus isn't in that camp. "I do not favor eliminating it ... and I don't think that's where the vast majority of Congress is either. But I do think it needs to be trimmed, limited, looked at," he said at a presentation at the Kaiser Family Foundation earlier this month.
While the president doesn't support the idea of taxing employees on employer-provided health benefits -- and in fact, promised during his campaign that if elected nothing would change for employees who get their insurance through their jobs -- administration officials have indicated in different forums that no idea is off the table when it comes to health reform.
What a cap may ... or may not ... do
The health care exclusion is the federal government's single biggest tax expenditure. In other words, Uncle Sam forgoes more potential tax revenue from this tax break than any other. The exclusion was worth $246 billion in potential revenue in 2007, according to the Joint Committee on Taxation. That number is expected to increase every year as health care costs rise.
But imposing a cap isn't likely to raise anywhere near that kind of money although it may lower costs in the long run because of that old show stopper: human behavior.
"The goal of the cap is to get people to buy less comprehensive plans," said Paul Fronstin, the director of health research at the Employee Benefit Research Institute.
Translation: Workers who have to start paying tax on a portion of their health care compensation may opt for lower-cost, less comprehensive plans to escape having to pay any tax. And that would curb how much revenue the federal government could raise overall.
"When they get down to the numbers, it won't raise as much money [as they might need]," Fronstin said.
Figuring out what's fair
Questions of fairness will play a role in the debate over whether and where to cap the exclusion and on whom.
One of the criticisms of the work-based tax break is that it disproportionately benefits high-income employees, because they pay the highest tax rates and the value of the exclusion is based on an employee's top tax rate.
One idea under consideration is to impose a cap that "wouldn't affect the majority of Americans," a Baucus aide told CNNMoney.com. The aide didn't specify whether that meant only high-income taxpayers, only those in the very highest-priced plans or some other group.
Another criticism is that the work-based tax break disproportionately benefits those who buy very expensive and comprehensive plans. The thinking is that Americans aren't aware of the true cost of health care plans because they only pay for a portion of their plans, so they're not likely to be cost-conscious when it comes to deciding on their insurance, treatments or drugs.
"The goal of capping the tax exclusion is to tax Cadillac plans, but it won't just tax Cadillac plans," Fronstin said.
By that he means Cadillac plans aren't the only ones that are expensive.
The cost of employer-based insurance plans is dependent on a number of factors, including the average age of the participants. So, a younger worker at a company where the average age is 55 will pay more for the same plan as she would if she worked at a company with a younger employee base. The same applies if she lives in the Northeast, where health insurance is more expensive, or if she works for a small business.
"Those disparities exist now, but you're not being taxed on them," Fronstin said.
The discussions are just beginning and much remains undecided. But expect at least one thing: To help pay for changes and reduce overall costs, lawmakers will consider curbing the tax benefits that employees enjoy when they get their health insurance plans through work.
Here's the crux of the issue: President Obama wants to create a $634 billion fund to pay for health care reforms. Leading lawmakers appear willing to go along, but they're not keen on how he has proposed to pay for a big part of it. Obama wants to cap how much of a deduction high-income taxpayers may take. The administration estimates doing so could raise $318 billion over 10 years.
The Senate's top tax writer, Max Baucus, D-Mont., who is also leading the push for health care reform, has asked White House budget chief Peter Orszag to consider instead changing the tax break that employees receive when their employers foot part of the bill for their health insurance.
Right now the portion of premiums paid by employers is treated as tax-free compensation to employees. And there is no limit on how much employers may contribute.
Some lawmakers have proposed eliminating the exclusion entirely and replacing it with a tax credit or deduction.
But Baucus isn't in that camp. "I do not favor eliminating it ... and I don't think that's where the vast majority of Congress is either. But I do think it needs to be trimmed, limited, looked at," he said at a presentation at the Kaiser Family Foundation earlier this month.
While the president doesn't support the idea of taxing employees on employer-provided health benefits -- and in fact, promised during his campaign that if elected nothing would change for employees who get their insurance through their jobs -- administration officials have indicated in different forums that no idea is off the table when it comes to health reform.
What a cap may ... or may not ... do
The health care exclusion is the federal government's single biggest tax expenditure. In other words, Uncle Sam forgoes more potential tax revenue from this tax break than any other. The exclusion was worth $246 billion in potential revenue in 2007, according to the Joint Committee on Taxation. That number is expected to increase every year as health care costs rise.
But imposing a cap isn't likely to raise anywhere near that kind of money although it may lower costs in the long run because of that old show stopper: human behavior.
"The goal of the cap is to get people to buy less comprehensive plans," said Paul Fronstin, the director of health research at the Employee Benefit Research Institute.
Translation: Workers who have to start paying tax on a portion of their health care compensation may opt for lower-cost, less comprehensive plans to escape having to pay any tax. And that would curb how much revenue the federal government could raise overall.
"When they get down to the numbers, it won't raise as much money [as they might need]," Fronstin said.
Figuring out what's fair
Questions of fairness will play a role in the debate over whether and where to cap the exclusion and on whom.
One of the criticisms of the work-based tax break is that it disproportionately benefits high-income employees, because they pay the highest tax rates and the value of the exclusion is based on an employee's top tax rate.
One idea under consideration is to impose a cap that "wouldn't affect the majority of Americans," a Baucus aide told CNNMoney.com. The aide didn't specify whether that meant only high-income taxpayers, only those in the very highest-priced plans or some other group.
Another criticism is that the work-based tax break disproportionately benefits those who buy very expensive and comprehensive plans. The thinking is that Americans aren't aware of the true cost of health care plans because they only pay for a portion of their plans, so they're not likely to be cost-conscious when it comes to deciding on their insurance, treatments or drugs.
"The goal of capping the tax exclusion is to tax Cadillac plans, but it won't just tax Cadillac plans," Fronstin said.
By that he means Cadillac plans aren't the only ones that are expensive.
The cost of employer-based insurance plans is dependent on a number of factors, including the average age of the participants. So, a younger worker at a company where the average age is 55 will pay more for the same plan as she would if she worked at a company with a younger employee base. The same applies if she lives in the Northeast, where health insurance is more expensive, or if she works for a small business.
"Those disparities exist now, but you're not being taxed on them," Fronstin said.
Wednesday, March 18, 2009
GE's credibility gap with investors
General Electric stock has fallen 72% over the past year amid concerns about rising losses at its finance arm, GE Capital. In an attempt to reassure investors, the company will deliver a detailed, five-hour presentation on GE Capital to investors in New York this Thursday.
In an interview on CNBC that aired March 5, GE's chief financial officer Keith Sherin acknowledged that GE (GE, Fortune 500) has a credibility problem with investors. "We've got to earn that trust back." he said.
"We recognize that we've made statements about both not raising equity and about not cutting the dividend and we've had to backtrack on those," Sherin said. He blamed these reversals not on on the uncertain economy.
He said that the best way to regain trust is to be as transparent as possible, and that Thursday's presentation about GE Capital should help provide that clarity.
0:00 /2:11A financial solution for GE
"This meeting is clearly an attempt to lessen investor worries about rising credit losses, asset write-downs and dilutive equity raises," wrote Sanford Bernstein analyst Steve Winoker in a research note. "GE Capital has always been a 'black box' in terms of disclosure relative to its banking peers. CFO Keith Sherin has promised more detailed disclosure of GE Capital's assets and loss estimates at this meeting, and we applaud the move, but our opinion is that GE must disclose nearly everything investors demand or else risk exacerbating investor doubts about credibility and transparency."
The big questions
Some analysts believe credit losses at GE Capital will be greater than the company says it expects, specifically in commercial real estate, U.S. credit cards, and U.K. residential real estate. In his CNBC interview, Sherin said that these segments would all be discussed during the presentation.
Analysts also have questions about GE Capital's earnings. Citigroup analyst Jeffrey Sprague believes that it is unlikely that GE Capital (referred to in his note as GECC) will meet the company's previous guidance. He writes: "S&P noted that management's GECC earnings guidance of $5 billion is unlikely and even has the potential to be negative in '09. We are currently modeling GECC net income at [about] $3 billion."
Deutsche Bank sees GE Capital earning $2.9 billion for 2009. Citi's Sprague adds that large tax credits could offset losses at GE Capital, but that "the reliance on big tax credits underscores the erosion of GECC's earnings power. That said, it is clear management's outlook remains substantially too optimistic."
Sanford Bernstein's Winoker says he wants more clarity around GE exposure to what he calls "at-risk geographies," including Eastern European banking and real estate exposure in Florida, California, and Nevada.
He also wants to know whether the industrial side has the capacity to inject more money into GE Capital and, if so, how much more. He also wants to know under what circumstances the company would raise common equity or consider using TARP, or even spin off GE Capital.
The company has on several occasions said that it has no plans to separate GE Capital from GE. In his CNBC interview, Sherin said that an "incredibly disastrous economic situation" would have to unfold before GE would use TARP funding, and it would only do so if all other backup plans would not work.
Sherin also said that the speculation about GE Capital is overdone, that the company is in an "incredibly strong liquidity position" that includes $45 billion in cash, and that GE Capital will be profitable in the first quarter.
Much is riding on Sherin's ability to back up these statements. As Winoker said in his note, "After numerous quarters and years of disappointments, with GE, investors have adopted a 'show me' attitude to the company and are now punishing the stock with the same pressures faced by financial institutions over the last year."
In an interview on CNBC that aired March 5, GE's chief financial officer Keith Sherin acknowledged that GE (GE, Fortune 500) has a credibility problem with investors. "We've got to earn that trust back." he said.
"We recognize that we've made statements about both not raising equity and about not cutting the dividend and we've had to backtrack on those," Sherin said. He blamed these reversals not on on the uncertain economy.
He said that the best way to regain trust is to be as transparent as possible, and that Thursday's presentation about GE Capital should help provide that clarity.
0:00 /2:11A financial solution for GE
"This meeting is clearly an attempt to lessen investor worries about rising credit losses, asset write-downs and dilutive equity raises," wrote Sanford Bernstein analyst Steve Winoker in a research note. "GE Capital has always been a 'black box' in terms of disclosure relative to its banking peers. CFO Keith Sherin has promised more detailed disclosure of GE Capital's assets and loss estimates at this meeting, and we applaud the move, but our opinion is that GE must disclose nearly everything investors demand or else risk exacerbating investor doubts about credibility and transparency."
The big questions
Some analysts believe credit losses at GE Capital will be greater than the company says it expects, specifically in commercial real estate, U.S. credit cards, and U.K. residential real estate. In his CNBC interview, Sherin said that these segments would all be discussed during the presentation.
Analysts also have questions about GE Capital's earnings. Citigroup analyst Jeffrey Sprague believes that it is unlikely that GE Capital (referred to in his note as GECC) will meet the company's previous guidance. He writes: "S&P noted that management's GECC earnings guidance of $5 billion is unlikely and even has the potential to be negative in '09. We are currently modeling GECC net income at [about] $3 billion."
Deutsche Bank sees GE Capital earning $2.9 billion for 2009. Citi's Sprague adds that large tax credits could offset losses at GE Capital, but that "the reliance on big tax credits underscores the erosion of GECC's earnings power. That said, it is clear management's outlook remains substantially too optimistic."
Sanford Bernstein's Winoker says he wants more clarity around GE exposure to what he calls "at-risk geographies," including Eastern European banking and real estate exposure in Florida, California, and Nevada.
He also wants to know whether the industrial side has the capacity to inject more money into GE Capital and, if so, how much more. He also wants to know under what circumstances the company would raise common equity or consider using TARP, or even spin off GE Capital.
The company has on several occasions said that it has no plans to separate GE Capital from GE. In his CNBC interview, Sherin said that an "incredibly disastrous economic situation" would have to unfold before GE would use TARP funding, and it would only do so if all other backup plans would not work.
Sherin also said that the speculation about GE Capital is overdone, that the company is in an "incredibly strong liquidity position" that includes $45 billion in cash, and that GE Capital will be profitable in the first quarter.
Much is riding on Sherin's ability to back up these statements. As Winoker said in his note, "After numerous quarters and years of disappointments, with GE, investors have adopted a 'show me' attitude to the company and are now punishing the stock with the same pressures faced by financial institutions over the last year."
Tuesday, March 17, 2009
Housing starts unexpectedly surge
Initial construction of U.S. homes unexpectedly surged in February, according to a government report released Tuesday.
Housing starts rose to a seasonally adjusted annual rate of 583,000 last month, up 22% from a revised 477,000 in January, according to the Commerce Department.
Economists were expecting housing starts to decline to 450,000, according to consensus estimates compiled by Briefing.com.
Applications for building permits, considered a reliable sign of future construction activity, rose 3% to a seasonally adjusted annual rate of 547,000 last month. Economists were expecting permits to fall to 500,000.
Housing starts rose to a seasonally adjusted annual rate of 583,000 last month, up 22% from a revised 477,000 in January, according to the Commerce Department.
Economists were expecting housing starts to decline to 450,000, according to consensus estimates compiled by Briefing.com.
Applications for building permits, considered a reliable sign of future construction activity, rose 3% to a seasonally adjusted annual rate of 547,000 last month. Economists were expecting permits to fall to 500,000.
Monday, March 16, 2009
Dow extends rally on bank gains
Blue chips extended gains Monday, with the Dow and S&P 500 bouncing for a fifth straight session, but the tech-fueled Nasdaq struggled to extend its advance.
The Dow Jones industrial average (INDU) added 86 points, or 1.2% over an hour into the session. The S&P 500 (SPX) index added 10 points, or 1.4%. The Nasdaq composite (COMP) lost 4 points, or 0.3%.
Stocks rallied last week, bouncing back after the Dow and S&P 500 hit 12-year lows. The week was Wall Street's best since last November with the Dow gaining 9%, the S&P 500 gaining 10.7% and the Nasdaq adding 10.6%.
Talk about reinstating the "uptick rule" that limits short selling - and changing mark-to-market accounting - helped spark the gains. Also, Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500) all said that they were profitable in the first two months of the year. On Monday, British bank Barclays (BCS) continued the trend, saying that it had a good start to the year.
The banking sector faces more writedowns and turmoil in the months ahead, but the announcements from the companies were nonetheless reassuring to investors.
Technology stocks retreated after the recent rally, with Intel (INTC, Fortune 500), Dell (DELL, Fortune 500) and Oracle (ORCL, Fortune 500) all lower.
G-20: Finance ministers of the Group of 20 industrialized nations meeting over the weekend promised to do whatever is necessary to fix the global economy and repair the shaky banking system. The group also backed increased support for emerging markets.
But the group remained wary of a U.S. proposal for a broader coordinated government spending plan to stimulate global economies. A summit of the group's national leaders is scheduled in London on April 2.
Bernanke: Speaking on CBS's "60 Minutes" this weekend, Federal Reserve Chairman Ben Bernanke said that the recession will "probably" end this year if the government is successful in stabilizing the flailing banking system.
The Fed is meeting Tuesday and Wednesday to discuss interest rates, with an announcement expected Wednesday afternoon. The central bank is expected to hold the fed funds rate, its key short-term interest rate, essentially at zero.
However, the Fed could announce that it's going to start buying long-term U.S. Treasurys after saying it was prepared to do so at its last few meetings.
Economy: February industrial production continued to decline last month, as the recession wore on. The government said production fell by a seasonally adjusted 1.4% in the month versus forecasts for a fall of 1.3%. Production fell 1.9% in the previous month.
Capacity utilization, a measure of factory output, fell to 70.9% from 71.9% in January. Economists surveyed by Briefing.com thought it would fall to 71%.
The NY Empire State index, a key regional manufacturing report, fell to a record low of negative 38.2 in March from negative 34.7 in February.
Bonds: Treasury prices inched lower, raising the yield on the benchmark 10-year note to 2.97% from 2.90% Friday. Treasury prices and yields move in opposite directions.
Lending rates were little changed. The 3-month Libor rate fell to 1.31% from 1.32% Friday, while the overnight Libor rate held at 0.33%, according to Bloomberg.com. Libor is a bank-to-bank lending rate.
Other markets: In global trading, Asian markets ended higher and European markets gained in afternoon trading.
In currency trading, the dollar fell versus the euro and gained against the yen.
U.S. light crude oil for April delivery fell $1.88 to $44.37 a barrel on the New York Mercantile Exchange.
COMEX gold for April delivery fell $13.60 to $916.50 an ounce.
The Dow Jones industrial average (INDU) added 86 points, or 1.2% over an hour into the session. The S&P 500 (SPX) index added 10 points, or 1.4%. The Nasdaq composite (COMP) lost 4 points, or 0.3%.
Stocks rallied last week, bouncing back after the Dow and S&P 500 hit 12-year lows. The week was Wall Street's best since last November with the Dow gaining 9%, the S&P 500 gaining 10.7% and the Nasdaq adding 10.6%.
Talk about reinstating the "uptick rule" that limits short selling - and changing mark-to-market accounting - helped spark the gains. Also, Citigroup (C, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500) all said that they were profitable in the first two months of the year. On Monday, British bank Barclays (BCS) continued the trend, saying that it had a good start to the year.
The banking sector faces more writedowns and turmoil in the months ahead, but the announcements from the companies were nonetheless reassuring to investors.
Technology stocks retreated after the recent rally, with Intel (INTC, Fortune 500), Dell (DELL, Fortune 500) and Oracle (ORCL, Fortune 500) all lower.
G-20: Finance ministers of the Group of 20 industrialized nations meeting over the weekend promised to do whatever is necessary to fix the global economy and repair the shaky banking system. The group also backed increased support for emerging markets.
But the group remained wary of a U.S. proposal for a broader coordinated government spending plan to stimulate global economies. A summit of the group's national leaders is scheduled in London on April 2.
Bernanke: Speaking on CBS's "60 Minutes" this weekend, Federal Reserve Chairman Ben Bernanke said that the recession will "probably" end this year if the government is successful in stabilizing the flailing banking system.
The Fed is meeting Tuesday and Wednesday to discuss interest rates, with an announcement expected Wednesday afternoon. The central bank is expected to hold the fed funds rate, its key short-term interest rate, essentially at zero.
However, the Fed could announce that it's going to start buying long-term U.S. Treasurys after saying it was prepared to do so at its last few meetings.
Economy: February industrial production continued to decline last month, as the recession wore on. The government said production fell by a seasonally adjusted 1.4% in the month versus forecasts for a fall of 1.3%. Production fell 1.9% in the previous month.
Capacity utilization, a measure of factory output, fell to 70.9% from 71.9% in January. Economists surveyed by Briefing.com thought it would fall to 71%.
The NY Empire State index, a key regional manufacturing report, fell to a record low of negative 38.2 in March from negative 34.7 in February.
Bonds: Treasury prices inched lower, raising the yield on the benchmark 10-year note to 2.97% from 2.90% Friday. Treasury prices and yields move in opposite directions.
Lending rates were little changed. The 3-month Libor rate fell to 1.31% from 1.32% Friday, while the overnight Libor rate held at 0.33%, according to Bloomberg.com. Libor is a bank-to-bank lending rate.
Other markets: In global trading, Asian markets ended higher and European markets gained in afternoon trading.
In currency trading, the dollar fell versus the euro and gained against the yen.
U.S. light crude oil for April delivery fell $1.88 to $44.37 a barrel on the New York Mercantile Exchange.
COMEX gold for April delivery fell $13.60 to $916.50 an ounce.
Thursday, March 12, 2009
Stocks recharge rally
After a brief sputter at the open, stocks recharged the two-day rally Thursday, with a smaller-than-expected drop in retail sales and strength in bank and drugmaker shares fueling the run.
Investors also sent GE higher, despite news that it lost its top credit rating in a S&P downgrade.
The Dow Jones industrial average (INDU) gained 103 points, added 12 points, or 1.6%. The Nasdaq composite (COMP) gained 14 points, or 1%
The Nasdaq rallied Wednesday and the Dow eked out a gain, managing a two-day win streak for the first time in five weeks. Stocks initially slipped Thursday morning, before making a move higher in the late morning.
Also in the mix: Bernard Madoff, one of Wall Street's biggest swindlers, entered a guilty plea on 11 charges. (Full story)
Economy: February retail sales fell 0.1% after falling a revised 1.8% in the previous month, the Commerce Department reported Thursday. Sales were expected to have fallen 0.5%, according to a consensus of economists surveyed by Briefing.com.
Sales excluding volatile autos rose 0.7% versus a revised 1.6% in January. Economists thought sales would fall 0.1%.
Another government report showed that the number of Americans filing new claims for unemployment last week rose to 654,000 from a revised 645,000 the previous week. The number of Americans continuing to receive benefits rose to a record 5.3 million.
General Electric: Standard & Poor's downgraded GE and GE Capital's long-term credit ratings to AA+ from AAA, with a "stable" outlook. But Wall Street had been speculating that one of the major ratings agencies might issue a downgrade, and the stock had already slumped in anticipation of an announcement. GE shares rallied 8% Thursday.
0:00 /5:32Turn banks into utilities
Financials: Bank stocks were mostly higher, with Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500) and Morgan Stanley (MS, Fortune 500) all rising. The KBW Bank (BKW) sector index rose 3%.
The bank sector drove a bigger stock market advance Tuesday after regulators said they may reinstate the "uptick rule" that stops short sellers from driving a floundering stock lower. Critics say the absence of the rule has played a role in the steep selloff of bank stocks this year.
Stocks also got a boost Tuesday after Citigroup (C, Fortune 500) cooled some worries about its future by saying it was profitable in the first two months of the year.
Also in focus: Thursday's congressional hearing on mark-to-market accounting. Critics say the accounting rule has hurt the bank sector by forcing companies to write down bad assets at fire sale prices. Supporters say it provides a clear picture of the assets banks are holding.
In other financial news, mortgage lender Freddie Mac, now under federal conservatorship, reported its sixth straight quarterly loss late Wednesday and asked the government for another $30.8 billion.
Drugmakers: Swiss company Roche Holding said it's buying the remaining 44% of U.S. biotech Genentech it doesn't already own. The $46.8 billion deal ends an almost 8-month battle in which Genentech (DNA) repeatedly spurned Roche's offer.
Biotech Gilead Sciences (GILD) said it will buy drugmaker CV Therapeutics (CVTX) for $1.4 billion. CV shares jumped 28%, while Gilead shares fell 2%.
Pfizer (PFE, Fortune 500) said that a late-stage clinical trial of its cancer drug Sutent has been stopped early after the drug produced a significant benefit in patients with a rare form of cancer. Shares of the Dow component jumped 4.5%.
Bonds: Treasury prices inched higher, lowering the yield on the benchmark 10-year note to 3.01% from 3.02% Wednesday. Treasury prices and yields move in opposite directions.
Lending rates were little changed. The 3-month Libor rate eased to 1.32% from 1.33%, while the overnight Libor rate held at 0.33%, according to Bloomberg.com. Libor is a bank-to-bank lending rate.
Other markets: In global trading, most Asian markets ended higher, with the exception of the Japanese Nikkei. European markets were mixed in afternoon trading.
In currency trading, the dollar gained versus the euro and fell against the yen.
U.S. light crude oil for April delivery gained $1.73 to $44.06 a barrel on the New York Mercantile Exchange.
COMEX gold for April delivery rose $14.30 to $925 an ounce.
Investors also sent GE higher, despite news that it lost its top credit rating in a S&P downgrade.
The Dow Jones industrial average (INDU) gained 103 points, added 12 points, or 1.6%. The Nasdaq composite (COMP) gained 14 points, or 1%
The Nasdaq rallied Wednesday and the Dow eked out a gain, managing a two-day win streak for the first time in five weeks. Stocks initially slipped Thursday morning, before making a move higher in the late morning.
Also in the mix: Bernard Madoff, one of Wall Street's biggest swindlers, entered a guilty plea on 11 charges. (Full story)
Economy: February retail sales fell 0.1% after falling a revised 1.8% in the previous month, the Commerce Department reported Thursday. Sales were expected to have fallen 0.5%, according to a consensus of economists surveyed by Briefing.com.
Sales excluding volatile autos rose 0.7% versus a revised 1.6% in January. Economists thought sales would fall 0.1%.
Another government report showed that the number of Americans filing new claims for unemployment last week rose to 654,000 from a revised 645,000 the previous week. The number of Americans continuing to receive benefits rose to a record 5.3 million.
General Electric: Standard & Poor's downgraded GE and GE Capital's long-term credit ratings to AA+ from AAA, with a "stable" outlook. But Wall Street had been speculating that one of the major ratings agencies might issue a downgrade, and the stock had already slumped in anticipation of an announcement. GE shares rallied 8% Thursday.
0:00 /5:32Turn banks into utilities
Financials: Bank stocks were mostly higher, with Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500) and Morgan Stanley (MS, Fortune 500) all rising. The KBW Bank (BKW) sector index rose 3%.
The bank sector drove a bigger stock market advance Tuesday after regulators said they may reinstate the "uptick rule" that stops short sellers from driving a floundering stock lower. Critics say the absence of the rule has played a role in the steep selloff of bank stocks this year.
Stocks also got a boost Tuesday after Citigroup (C, Fortune 500) cooled some worries about its future by saying it was profitable in the first two months of the year.
Also in focus: Thursday's congressional hearing on mark-to-market accounting. Critics say the accounting rule has hurt the bank sector by forcing companies to write down bad assets at fire sale prices. Supporters say it provides a clear picture of the assets banks are holding.
In other financial news, mortgage lender Freddie Mac, now under federal conservatorship, reported its sixth straight quarterly loss late Wednesday and asked the government for another $30.8 billion.
Drugmakers: Swiss company Roche Holding said it's buying the remaining 44% of U.S. biotech Genentech it doesn't already own. The $46.8 billion deal ends an almost 8-month battle in which Genentech (DNA) repeatedly spurned Roche's offer.
Biotech Gilead Sciences (GILD) said it will buy drugmaker CV Therapeutics (CVTX) for $1.4 billion. CV shares jumped 28%, while Gilead shares fell 2%.
Pfizer (PFE, Fortune 500) said that a late-stage clinical trial of its cancer drug Sutent has been stopped early after the drug produced a significant benefit in patients with a rare form of cancer. Shares of the Dow component jumped 4.5%.
Bonds: Treasury prices inched higher, lowering the yield on the benchmark 10-year note to 3.01% from 3.02% Wednesday. Treasury prices and yields move in opposite directions.
Lending rates were little changed. The 3-month Libor rate eased to 1.32% from 1.33%, while the overnight Libor rate held at 0.33%, according to Bloomberg.com. Libor is a bank-to-bank lending rate.
Other markets: In global trading, most Asian markets ended higher, with the exception of the Japanese Nikkei. European markets were mixed in afternoon trading.
In currency trading, the dollar gained versus the euro and fell against the yen.
U.S. light crude oil for April delivery gained $1.73 to $44.06 a barrel on the New York Mercantile Exchange.
COMEX gold for April delivery rose $14.30 to $925 an ounce.
Tuesday, March 10, 2009
Bernanke: Fix banks to get a recovery
Federal Reserve chairman Ben Bernanke said Tuesday that economic recovery hinges on stabilizing the financial system, and proposed new policies aimed at absorbing financial shocks in the future.
"Until we stabilize the financial system, a sustainable economic recovery will remain out of reach," Bernanke said in prepared remarks.
If the financial system is put back in order, the U.S. economy could work its way out of recession "later this year" and experience "a period of growth" next year, Bernanke said.
"In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit," he said.
The Fed chairman said steps should be taken to address problems tied to financial institutions deemed too big to fail. These large, interconnected financial firms pose a "systemic risk" to economic stability, he said.
"In the present crisis, the too-big-to-fail issue has emerged as an enormous problem," he said.
Bernanke said allowing firms to become too big to fail reduces market discipline and encourages excessive risk-taking. Moreover, government rescues of firms that are too big to fail can be costly to the taxpayer, he said.
Speaking in Washington to the Council on Foreign Relations, Bernanke said regulators need new tools to respond to the failure of a "systemically important nonbank financial firm." Federal bankruptcy laws are not sufficient to protect the public's interest when a major nonbank financial firm fails, he said.
The comments came one week after the Treasury Department restructured its bailout of insurance giant American International Group (AIG, Fortune 500) and gave the company another $30 billion infusion.
Bernanke also said regulators should strengthen the nation's "financial infrastructure" to make it more secure in the event of another crisis.
Among other things, the Fed and other regulators will continue to work toward establishing "stringent targets" and "performance standards" for market participants, he said.
To that end, the government should work with the private sector to improve the way certain exotic derivatives, such as credit default swaps, are cleared from the market.
0:00 /5:10Bernanke: banks need more funds
Bernanke also said that more steps should be taken to support the credit and mutual fund markets. The Fed has emergency programs in place to increase liquidity in these markets.
Additionally, certain accounting rules and other regulations have made the financial sector excessively "procyclical" or sensitive to economic booms and busts.
To assess threats to the broader economy, Bernanke proposed that Congress create a "systemic risk authority." The authority could oversee, among other things, standards for capital, liquidity, and risk-management practices for the financial sector, he said.
"Until we stabilize the financial system, a sustainable economic recovery will remain out of reach," Bernanke said in prepared remarks.
If the financial system is put back in order, the U.S. economy could work its way out of recession "later this year" and experience "a period of growth" next year, Bernanke said.
"In the near term, governments around the world must continue to take forceful and, when appropriate, coordinated actions to restore financial market functioning and the flow of credit," he said.
The Fed chairman said steps should be taken to address problems tied to financial institutions deemed too big to fail. These large, interconnected financial firms pose a "systemic risk" to economic stability, he said.
"In the present crisis, the too-big-to-fail issue has emerged as an enormous problem," he said.
Bernanke said allowing firms to become too big to fail reduces market discipline and encourages excessive risk-taking. Moreover, government rescues of firms that are too big to fail can be costly to the taxpayer, he said.
Speaking in Washington to the Council on Foreign Relations, Bernanke said regulators need new tools to respond to the failure of a "systemically important nonbank financial firm." Federal bankruptcy laws are not sufficient to protect the public's interest when a major nonbank financial firm fails, he said.
The comments came one week after the Treasury Department restructured its bailout of insurance giant American International Group (AIG, Fortune 500) and gave the company another $30 billion infusion.
Bernanke also said regulators should strengthen the nation's "financial infrastructure" to make it more secure in the event of another crisis.
Among other things, the Fed and other regulators will continue to work toward establishing "stringent targets" and "performance standards" for market participants, he said.
To that end, the government should work with the private sector to improve the way certain exotic derivatives, such as credit default swaps, are cleared from the market.
0:00 /5:10Bernanke: banks need more funds
Bernanke also said that more steps should be taken to support the credit and mutual fund markets. The Fed has emergency programs in place to increase liquidity in these markets.
Additionally, certain accounting rules and other regulations have made the financial sector excessively "procyclical" or sensitive to economic booms and busts.
To assess threats to the broader economy, Bernanke proposed that Congress create a "systemic risk authority." The authority could oversee, among other things, standards for capital, liquidity, and risk-management practices for the financial sector, he said.
Sunday, March 8, 2009
Consumer credit: Surprise $1.8 billion jump
Consumer borrowing showed a surprise rise in January, snapping a three-month decline and signaling that households may have started to loosen their purse strings.
However, one month of upbeat news does not make a trend, said Wachovia economist Adam York.
"The combination of consumers wanting to rein in their spending - especially for big ticket durables, things that get financed - coupled with banks looking to lower the risk of their balance sheets means that we will look for weak growth in consumer credit at best or potentially further declines," said York.
Credit card borrowing, or revolving debt, increased at an annual rate of 1.2% in January, following a revised 9.5% drop in the prior month, according to the Federal Reserve. Non-revolving credit, including student and auto loans, increased by an annual rate of 0.6%, versus a revised uptick of 0.1% in December.
Total consumer borrowing rose by $1.8 billion to $2.564 trillion in January, according to the Fed. That's an increase from a revised $2.563 trillion in December.
Economists were expecting consumer credit to fall by $5 billion in January, according to a consensus of economists polled by Briefing.com.
The annual rate of consumer borrowing rose by an annual rate of 0.75% in January, following a revised 3.5% drop in the prior month.
York said that he will be looking closely at next week's government report on monthly retail sales for a better read on consumer sentiment going forward, especially following the surprise 1% jump reported in December. Economists polled by Briefing.com anticipate sales will show a 0.4% slide for January.
Last August, consumer credit contracted for the first time since January 1998. After a rebound in September, credit started contracting and the amount of consumer debt fell for the remainder of 2008.
Consumers have been skittish to spend and lenders have been skittish to lend in an environment where the economy is shedding jobs by the droves and foreclosures keep rising.
Friday, the government reported that the unemployment rate surged to its highest level in 25 years. Employers slashed 651,000 jobs in February, down from a revised loss of 655,000 jobs in January, according to the report from the Labor Department. The unemployment rate rose to 8.1% from 7.6% in January.
However, one month of upbeat news does not make a trend, said Wachovia economist Adam York.
"The combination of consumers wanting to rein in their spending - especially for big ticket durables, things that get financed - coupled with banks looking to lower the risk of their balance sheets means that we will look for weak growth in consumer credit at best or potentially further declines," said York.
Credit card borrowing, or revolving debt, increased at an annual rate of 1.2% in January, following a revised 9.5% drop in the prior month, according to the Federal Reserve. Non-revolving credit, including student and auto loans, increased by an annual rate of 0.6%, versus a revised uptick of 0.1% in December.
Total consumer borrowing rose by $1.8 billion to $2.564 trillion in January, according to the Fed. That's an increase from a revised $2.563 trillion in December.
Economists were expecting consumer credit to fall by $5 billion in January, according to a consensus of economists polled by Briefing.com.
The annual rate of consumer borrowing rose by an annual rate of 0.75% in January, following a revised 3.5% drop in the prior month.
York said that he will be looking closely at next week's government report on monthly retail sales for a better read on consumer sentiment going forward, especially following the surprise 1% jump reported in December. Economists polled by Briefing.com anticipate sales will show a 0.4% slide for January.
Last August, consumer credit contracted for the first time since January 1998. After a rebound in September, credit started contracting and the amount of consumer debt fell for the remainder of 2008.
Consumers have been skittish to spend and lenders have been skittish to lend in an environment where the economy is shedding jobs by the droves and foreclosures keep rising.
Friday, the government reported that the unemployment rate surged to its highest level in 25 years. Employers slashed 651,000 jobs in February, down from a revised loss of 655,000 jobs in January, according to the report from the Labor Department. The unemployment rate rose to 8.1% from 7.6% in January.
Tuesday, March 3, 2009
Reality check on Obama's deficit plan
President Obama won't submit a formal 2010 budget request to Congress until next month. But the head-knocking on the Hill over fiscal priorities begins in earnest this week.
Starting on Tuesday, White House budget director Peter Orszag, Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke will all be testifying before Congressional committees about the budget.
A main question will be whether Obama's proposals can reduce the deficit as much as the administration estimates they will: $2 trillion over 10 years.
Orszag bases that deficit-reduction estimate on four main factors: economic recovery, collecting more revenue from high-income taxpayers, curbing corporate tax breaks and winding down the war in Iraq.
Given how unprecedented the downturn has been and the uncertainties in the geopolitical situation, several of the factors the administration is relying on to deliver its deficit-reduction promises are far from guaranteed.
Banking on economic recovery
The assumptions: The economy will start its recovery in 2010, with 3.2% growth in gross domestic product (vs. a 1.2% drop this year). GDP will grow 4.0% in 2011 and 4.6% in 2012.
Reality check: The White House's GDP estimates, while roughly in line with those projected by the Federal Reserve, are higher than average. Some say the administration is being too optimistic.
But Orszag says larger-than-average increases isn't unusual.
"As you emerge [from a very deep recession] the economy temporarily grows faster than normal just because your starting point is so low," he told CNN.
Economic recovery can help reduce the deficit by reducing the government's need to borrow money to fund its efforts. That's because tax revenue starts to rise as more employers start hiring and boost production, while demand for government services and benefits such as unemployment insurance falls as more people find work.
Should the economy take longer to recover than forecast by the White House, however, the deficit will be reduced by something less than promised.
Last week, the government reported that the nation's economic slide during the last three months of 2008 was even sharper than expected. Gross domestic product fell at an annual rate of 6.2%, its worst decline in 26 years.
Some economic news, though, has surprised to the upside. Consumer spending rose more than expected in January after declining for six consecutive months.
Raising taxes on high-income filers
The assumptions: Reduce the deficit by $637 billion over 10 years by letting the Bush tax cuts expire in 2011 for singles making more than $200,000 and couples making more than $250,000.
Reality check: Letting the tax cuts expire has a good chance of happening. But the savings that achieves could be undercut if two other revenue raising efforts don't pan out.
Already, some leading Democrats -- including Senate Budget Chairman Kent Conrad, D-N.D., and Senate Finance Chairman Max Baucus, D-Mont. -- have questioned Obama's plan to limit itemized deductions on high-income filers.
Obama hopes to raise $318 billion over 10 years with this provision and use it to help pay for his new health reform fund.
Separately, he wants to make permanent his signature credit for low- and middle-income families and fund it by requiring companies to pay for the amount of carbon emissions they produce. He estimates a cap and trade program, which is the subject of much debate, would raise $646 billion.
If either or both of these revenue raisers don't pan out, the administration will have to propose other ways to help pay for his new initiatives or risk further increasing the deficit.
"The key to the budget is whether they stick to that pledge [to pay for their new proposals] because they have the potential to add enormously to the deficit if they're not paid for," said Bob Bixby, director of the Concord Coalition, a deficit watchdog group.
Curbing corporate tax breaks
Assumptions: Raise $354 billion by changing a variety of corporate tax provisions, including repealing some tax benefits for oil and gas companies.
Reality check: The biggest piece of it -- estimated to raise $210 billion -- is a vaguely worded item called "international enforcement, reform deferral and other tax reform policies."
Analysts expect that a significant chunk of that $210 billion will come from a change to current policy that lets U.S.-based companies defer tax payments on their foreign subsidiaries' profits until they bring the money back to the United States.
How the rule is changed will affect how much revenue may be raised. And corporate resistance to it will be stiff.
"We don't know where members [of Congress] will fall after a very powerful lobbying effort," said Dan Clifton, the head of policy research at Strategas Research PartnersClifton.
Lawmakers' positions will be driven in part by the the economic interests of their states. Sen. Barbara Boxer, D-Calif., has sponsored bipartisan amendments to make it less costly for companies to repatriate earnings. A number of California-based technology companies have large portions of their business based abroad, Clifton said.
Winding down the war in Iraq
Assumptions: Obama is planning to pull a large number of combat troops out of Iraq by the end of August 2010.
The White House estimates the troop withdrawal, even as operations in Afghanistan continue, will preserve $1.5 trillion over 10 years that would otherwise be spent.
Reality check: The real savings, some say, is actually going to be less since the administration was measuring its proposals against a baseline that assumes the country would spend what it currently spends in Iraq for each of the next 10 years.
That's the way budget baselines are normally constructed, said Josh Gordon, policy director at the Concord Coalition. But, he added, no one was expecting U.S. involvement in Iraq to continue at current levels for the next 10 years.
It's also not clear how much more money will be needed to fund military efforts in Afghanistan. Currently the budget request has assumed $50 billion a year as a place holder. Any more than that would negate the savings realized from the Iraq withdrawal.
Starting on Tuesday, White House budget director Peter Orszag, Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke will all be testifying before Congressional committees about the budget.
A main question will be whether Obama's proposals can reduce the deficit as much as the administration estimates they will: $2 trillion over 10 years.
Orszag bases that deficit-reduction estimate on four main factors: economic recovery, collecting more revenue from high-income taxpayers, curbing corporate tax breaks and winding down the war in Iraq.
Given how unprecedented the downturn has been and the uncertainties in the geopolitical situation, several of the factors the administration is relying on to deliver its deficit-reduction promises are far from guaranteed.
Banking on economic recovery
The assumptions: The economy will start its recovery in 2010, with 3.2% growth in gross domestic product (vs. a 1.2% drop this year). GDP will grow 4.0% in 2011 and 4.6% in 2012.
Reality check: The White House's GDP estimates, while roughly in line with those projected by the Federal Reserve, are higher than average. Some say the administration is being too optimistic.
But Orszag says larger-than-average increases isn't unusual.
"As you emerge [from a very deep recession] the economy temporarily grows faster than normal just because your starting point is so low," he told CNN.
Economic recovery can help reduce the deficit by reducing the government's need to borrow money to fund its efforts. That's because tax revenue starts to rise as more employers start hiring and boost production, while demand for government services and benefits such as unemployment insurance falls as more people find work.
Should the economy take longer to recover than forecast by the White House, however, the deficit will be reduced by something less than promised.
Last week, the government reported that the nation's economic slide during the last three months of 2008 was even sharper than expected. Gross domestic product fell at an annual rate of 6.2%, its worst decline in 26 years.
Some economic news, though, has surprised to the upside. Consumer spending rose more than expected in January after declining for six consecutive months.
Raising taxes on high-income filers
The assumptions: Reduce the deficit by $637 billion over 10 years by letting the Bush tax cuts expire in 2011 for singles making more than $200,000 and couples making more than $250,000.
Reality check: Letting the tax cuts expire has a good chance of happening. But the savings that achieves could be undercut if two other revenue raising efforts don't pan out.
Already, some leading Democrats -- including Senate Budget Chairman Kent Conrad, D-N.D., and Senate Finance Chairman Max Baucus, D-Mont. -- have questioned Obama's plan to limit itemized deductions on high-income filers.
Obama hopes to raise $318 billion over 10 years with this provision and use it to help pay for his new health reform fund.
Separately, he wants to make permanent his signature credit for low- and middle-income families and fund it by requiring companies to pay for the amount of carbon emissions they produce. He estimates a cap and trade program, which is the subject of much debate, would raise $646 billion.
If either or both of these revenue raisers don't pan out, the administration will have to propose other ways to help pay for his new initiatives or risk further increasing the deficit.
"The key to the budget is whether they stick to that pledge [to pay for their new proposals] because they have the potential to add enormously to the deficit if they're not paid for," said Bob Bixby, director of the Concord Coalition, a deficit watchdog group.
Curbing corporate tax breaks
Assumptions: Raise $354 billion by changing a variety of corporate tax provisions, including repealing some tax benefits for oil and gas companies.
Reality check: The biggest piece of it -- estimated to raise $210 billion -- is a vaguely worded item called "international enforcement, reform deferral and other tax reform policies."
Analysts expect that a significant chunk of that $210 billion will come from a change to current policy that lets U.S.-based companies defer tax payments on their foreign subsidiaries' profits until they bring the money back to the United States.
How the rule is changed will affect how much revenue may be raised. And corporate resistance to it will be stiff.
"We don't know where members [of Congress] will fall after a very powerful lobbying effort," said Dan Clifton, the head of policy research at Strategas Research PartnersClifton.
Lawmakers' positions will be driven in part by the the economic interests of their states. Sen. Barbara Boxer, D-Calif., has sponsored bipartisan amendments to make it less costly for companies to repatriate earnings. A number of California-based technology companies have large portions of their business based abroad, Clifton said.
Winding down the war in Iraq
Assumptions: Obama is planning to pull a large number of combat troops out of Iraq by the end of August 2010.
The White House estimates the troop withdrawal, even as operations in Afghanistan continue, will preserve $1.5 trillion over 10 years that would otherwise be spent.
Reality check: The real savings, some say, is actually going to be less since the administration was measuring its proposals against a baseline that assumes the country would spend what it currently spends in Iraq for each of the next 10 years.
That's the way budget baselines are normally constructed, said Josh Gordon, policy director at the Concord Coalition. But, he added, no one was expecting U.S. involvement in Iraq to continue at current levels for the next 10 years.
It's also not clear how much more money will be needed to fund military efforts in Afghanistan. Currently the budget request has assumed $50 billion a year as a place holder. Any more than that would negate the savings realized from the Iraq withdrawal.
Monday, March 2, 2009
HSBC cuts 6,100 jobs
HSBC is cutting 6,100 jobs and closing most of its U.S. consumer lending business amid slumping profits, the bank said Monday.
HSBC (HBC), Europe's biggest bank, launched Britain's biggest rights issue on Monday, to raise 12.85 billion pounds ($18.3 billion) to help it overcome big losses in the United States and exploit the woes of weaker rivals.
The company said that while it is shutting most of its U.S. consumer lending business and cutting 6,100 jobs, it was ready for acquisitions in its traditional stronghold of Asia where many banks are pulling out to focus on their core markets.
HSBC said it would sell 5.1 billion shares at $3.61 each, which is a 48% discount to Friday's close.
Shares in the bank were down 5.1% to $34.80. HSBC's Hong Kong-listed shares were suspended.
"It's always difficult for a market that's feeling jittery to absorb 12.5 billion of new stock," said Jane Coffey, head of equities at Royal London Asset Management which is HSBC's 24th largest shareholder according to Thomson Reuters data.
"I am not surprised the stock is down but they are doing the right thing and we are going to support the issue."
The stock has halved in value since Lehman Brothers collapsed in September but HSBC's relative resilience to the global financial crisis means it has outperformed European peers which have lost almost two-thirds of their value.
Its share price fall ranked it as the world's fourth-biggest bank, just behindJP Morgan Chase (JPM, Fortune 500), with a market value of just over $70 billion.
Several investors had told Reuters last week they would support a rights issue, and wanted management to act quickly to remove uncertainty hanging over its share price.
"The move seems to be timely and gives them greater flexibility and it certainly puts the bank in a better position but the success will be determined by the manner in which the market moves on from here," said one top ten shareholder in HSBC who asked not to be named.
U.S. job losses
Unlike many global players HSBC reported a profit for 2008 but it still took a hit with a pretax profit of $9.3 billion some 62% below the $24.2 billion reported for 2007.
The slide in profits was largely the result of a goodwill impairment charge of $10.6 billion in the United States.
Excluding the charge, pretax profit fell to $19.9 billion which was ahead of the $19 billion expected by analysts.
The bank also cut its dividend for the full year by 29% to 64 cents per share and said it would close its troubled U.S. consumer loans business, HFC.
HSBC's losses in North America last year amounted to $15.5 billion, including the $10.6 billion goodwill charge which follows its troubled acquisition of Household, the U.S. consumer lending business bought six years ago for $14.8 billion.
"With the benefit of hindsight, this is an acquisition we wish we had not undertaken," chairman Stephen Green said in a statement.
Group-wide the bank said that losses on bad loans jumped 44% versus 2007 to $24.9 billion.
Acquisitions
HSBC has traditionally been among the best-capitalized banks in the world and had resisted raising capital or turning to governments for help while rivals absorbed billions of dollars in losses and scrambled for cash as the credit crisis deepened.
But finance director Douglas Flint said the bank may want to finance acquisitions as weaker rivals retreat from international markets, especially those that have had to take state help.
"We want to position ourselves both defensively for turbulent times and opportunistically for the options that will appear," Flint told reporters. "There's nothing on the go but we believe the opportunities will come to banks that have the ability to take such options."
HSBC said the rights issue would add 150 basis points to its capital ratios, strengthening the core equity tier 1 ratio to 8.5% and the tier 1 ratio to 9.8%, restoring its capital advantage over rivals.
Alex Potter, analyst at Collins Stewart, said the improved capital strength was not enough to form an "obvious war chest" for acquisitions but that it meant HSBC still remained a "very conservative bank."
"With stronger capital, greater diversity and better funding -- these are rare qualities for a bank and we remain long-term buyers of the stock but see short-term weakness," Potter said.
Others felt that even HSBC would struggle, however, as the global economy deteriorates.
"In HSBC we see vulnerability to the collapse in world trade and rising balance sheet risks," said Sandy Chen, analyst at Panmure Gordon.
The company itself said it was "extremely hard to predict" its 2009 performance but added that business in January had been "strong and ahead of our expectations."
The rights issue is being underwritten by Goldman Sachs (GS, Fortune 500), JPMorgan Cazenove, HSBC and three other co-bookrunners. It overtakes a 12 billion pound rights issue by Royal Bank of Scotland last year although exchange rate fluctuations mean the RBS one was bigger in dollar terms.
Responding to growing public anger of the scale of bonuses paid to many senior bankers, HSBC said no performance share awards would be made for 2008 and that no executive director would receive a cash bonus.
HSBC (HBC), Europe's biggest bank, launched Britain's biggest rights issue on Monday, to raise 12.85 billion pounds ($18.3 billion) to help it overcome big losses in the United States and exploit the woes of weaker rivals.
The company said that while it is shutting most of its U.S. consumer lending business and cutting 6,100 jobs, it was ready for acquisitions in its traditional stronghold of Asia where many banks are pulling out to focus on their core markets.
HSBC said it would sell 5.1 billion shares at $3.61 each, which is a 48% discount to Friday's close.
Shares in the bank were down 5.1% to $34.80. HSBC's Hong Kong-listed shares were suspended.
"It's always difficult for a market that's feeling jittery to absorb 12.5 billion of new stock," said Jane Coffey, head of equities at Royal London Asset Management which is HSBC's 24th largest shareholder according to Thomson Reuters data.
"I am not surprised the stock is down but they are doing the right thing and we are going to support the issue."
The stock has halved in value since Lehman Brothers collapsed in September but HSBC's relative resilience to the global financial crisis means it has outperformed European peers which have lost almost two-thirds of their value.
Its share price fall ranked it as the world's fourth-biggest bank, just behindJP Morgan Chase (JPM, Fortune 500), with a market value of just over $70 billion.
Several investors had told Reuters last week they would support a rights issue, and wanted management to act quickly to remove uncertainty hanging over its share price.
"The move seems to be timely and gives them greater flexibility and it certainly puts the bank in a better position but the success will be determined by the manner in which the market moves on from here," said one top ten shareholder in HSBC who asked not to be named.
U.S. job losses
Unlike many global players HSBC reported a profit for 2008 but it still took a hit with a pretax profit of $9.3 billion some 62% below the $24.2 billion reported for 2007.
The slide in profits was largely the result of a goodwill impairment charge of $10.6 billion in the United States.
Excluding the charge, pretax profit fell to $19.9 billion which was ahead of the $19 billion expected by analysts.
The bank also cut its dividend for the full year by 29% to 64 cents per share and said it would close its troubled U.S. consumer loans business, HFC.
HSBC's losses in North America last year amounted to $15.5 billion, including the $10.6 billion goodwill charge which follows its troubled acquisition of Household, the U.S. consumer lending business bought six years ago for $14.8 billion.
"With the benefit of hindsight, this is an acquisition we wish we had not undertaken," chairman Stephen Green said in a statement.
Group-wide the bank said that losses on bad loans jumped 44% versus 2007 to $24.9 billion.
Acquisitions
HSBC has traditionally been among the best-capitalized banks in the world and had resisted raising capital or turning to governments for help while rivals absorbed billions of dollars in losses and scrambled for cash as the credit crisis deepened.
But finance director Douglas Flint said the bank may want to finance acquisitions as weaker rivals retreat from international markets, especially those that have had to take state help.
"We want to position ourselves both defensively for turbulent times and opportunistically for the options that will appear," Flint told reporters. "There's nothing on the go but we believe the opportunities will come to banks that have the ability to take such options."
HSBC said the rights issue would add 150 basis points to its capital ratios, strengthening the core equity tier 1 ratio to 8.5% and the tier 1 ratio to 9.8%, restoring its capital advantage over rivals.
Alex Potter, analyst at Collins Stewart, said the improved capital strength was not enough to form an "obvious war chest" for acquisitions but that it meant HSBC still remained a "very conservative bank."
"With stronger capital, greater diversity and better funding -- these are rare qualities for a bank and we remain long-term buyers of the stock but see short-term weakness," Potter said.
Others felt that even HSBC would struggle, however, as the global economy deteriorates.
"In HSBC we see vulnerability to the collapse in world trade and rising balance sheet risks," said Sandy Chen, analyst at Panmure Gordon.
The company itself said it was "extremely hard to predict" its 2009 performance but added that business in January had been "strong and ahead of our expectations."
The rights issue is being underwritten by Goldman Sachs (GS, Fortune 500), JPMorgan Cazenove, HSBC and three other co-bookrunners. It overtakes a 12 billion pound rights issue by Royal Bank of Scotland last year although exchange rate fluctuations mean the RBS one was bigger in dollar terms.
Responding to growing public anger of the scale of bonuses paid to many senior bankers, HSBC said no performance share awards would be made for 2008 and that no executive director would receive a cash bonus.
Subscribe to:
Posts (Atom)