Wednesday, May 20, 2009

Fed Reluctant to Guarantee Muni Borrowings as Hearings Begin

(Bloomberg) -- The Federal Reserve will tell a congressional committee today that it is reluctant to extend guarantees to California and other municipal market borrowers struggling to sell bonds.

The House Financial Services Committee, chaired by Massachusetts Democrat Barney Frank, is conducting hearings on four municipal finance bills, including one that would give the Fed authority to guarantee the repayment of variable-rate bonds and short-term notes. Another measure would create a public finance office in the Treasury Department to reinsure $50 billion of municipal bonds through 2015. Insurers, including MBIA Inc. and Ambac Financial Group Inc., have lost top ratings, limiting the value of that coverage.

The Fed has “important misgivings” about guaranteeing municipal bonds, David Wilcox, the deputy director of the Fed’s research and statistics division, said in prepared remarks for the hearing that the committee released late yesterday. He urged Congress to “narrowly” tailor any program if it does proceed, ensuring a quick exit for the government.

“The Federal Reserve believes that such a role is better suited to elected officials and the administration than to the central bank,” Wilcox said in his remarks regarding the proposed legislation.

State and federal lawmakers have pressed the Fed and Treasury to extend support to municipal securities since the Troubled Asset Relief Program, or TARP, was introduced last year. Municipal bond sales tumbled after the bankruptcy of Lehman Brothers Holdings Inc. in September, according to data compiled by Bloomberg.

California Plea

California Treasurer Bill Lockyer wrote to Treasury Secretary Timothy Geithner on May 13 asking him to extend the TARP to states and local governments facing “a severe cash flow crunch in the near term due to eroding tax revenues resulting from the current economic downturn.”

California, which is rated A by Standard & Poor’s, the lowest for a U.S. state, may need as much as $23 billion in short-term borrowing, according to state’s Legislative Analyst’s Office. Voters rejected a package of budget-balancing measures this week, increasing the need for such financing.

A federal backstop may lower the cost of issuing the securities by about $1 billion, said James Reynolds, chief executive officer at Loop Capital Markets LLC. California sold two short-term note issues totaling $5.8 billion last year, according to Thomson Reuters.

“That’s real money,” said Reynolds, whose Chicago-based company led the sale of $2.5 billion of municipal bonds last year, according to Thomson Reuters. “That’s real jobs,” he said, referring to the threat of more state worker terminations in California, where the state plans to fire 5,000 of its 200,000 workforce.

Variable-Rate Notes

Municipal borrowers selling short-term notes or variable- rate demand notes, or VRDNs, often seek a bank guarantee to buy the securities if there is no demand from investors when rates periodically reset. Variable-rate bonds mature in as many as 30 years with rates resetting weekly or monthly. The notes mature within 13 months.

Illinois sold two series of 4 percent notes totaling $1 billion on May 14, the largest deal this year -- a $500 million series maturing on April 26, 2010, and the other maturing May 20, 2010.

“Things have improved a lot, but this California situation is highlighting the vulnerability of the market right now,” said Chris Mier, a municipal market strategist at Loop Capital.

Bernanke Letter

Fed Chairman Ben S. Bernanke said in a March 31 letter to members of the House that a $1 trillion program under the TARP for reviving the asset-backed securities market wasn’t appropriate for variable-rate demand notes. Bernanke also said that much of the municipal market had improved this year, permitting states to resume conventional fixed-rate sales.

Frank, the chairman of the House committee, has pressed for changes in the municipal market since last year when demand for state and local government securities plummeted amid the global credit crisis. One of the four bills being heard today is the revival of his legislation prohibiting credit rating companies from evaluating municipal debt with standards differing from those used for corporate bonds.

The committee will also consider legislation requiring state and local government financial advisers to register with the U.S. Securities and Exchange Commission. The measure would aim to curb so-called pay for play in which advisers sell services to public agencies by currying favor among public officials.

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Tuesday, May 19, 2009

AIG investors to get $843 million: SEC

(Reuters) - A federal court has approved the distribution of more than $843 million to harmed investors at insurer American International Group, the U.S. Securities and Exchange Commission said on Tuesday.

The court estimates that checks will soon be mailed to more than 257,000 AIG investors that were affected by an alleged accounting fraud at the company, the SEC said.

AIG, which has been propped up by billions of dollars in taxpayer funds, was charged with accounting fraud in 2006. The SEC alleged that the insurer falsified its financial statements from at least 2000 until 2005 and reported misleading information about its financial condition.

The company, which did not admit or deny the allegations, had repaid its ill-gotten gains, as well as penalties to the government. In 2007, a federal court authorized the SEC to establish a 'fair fund' to distribute the money to harmed AIG investors.

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Sunday, May 17, 2009

Asian consumers go back to basics in downturn

(Reuters) - Forget about bells and whistles. Asians have gone back to basics in the economic slowdown and are opting for no-frills, lower-priced products rather than brand names and items with fancy features that rarely get used.

Manufacturers across the region, the world's largest producer of electronics and white goods, are more than happy to oblige as they scramble for orders that will keep their heads above water until the economic tide changes.

"People are hesitant to buy top-notch, expensive models, but they still want to buy decent ones with some useful functions," said Kohei Ueda, a general manager at Bic Camera, a major consumer electronics chain in Japan.

From laptops without standard accessories such as CD-roms, to rice cookers and microwave ovens with minimal functions, brands such as Samsung and LG Electronics are quickly introducing basic items that can be sold at lower price points.

It's all about surviving the slowdown which has dealt a severe blow to Asia's export-dependent economies such as South Korea which saw exports drop 25 percent in the first quarter of the year alone.

"In an economic downturn, liquidity problems outweigh the factor of profits. Therefore, it would be important to keep their factories running and pay back debt," said Choe Soon-kyoo, a professor of Yonsei University's business school in Seoul.

"They are adopting that (low-price) strategy to maintain liquidity rather than to make profits," he added.

Buoyant sales from these products are providing relief, and much needed cash flow, to companies that posted heavy profit falls or swung to quarterly losses early this year such as Samsung Electronics whose earnings plummeted to 619 billion won in the March quarter from 2.2 trillion won a year ago.

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Central banks may need more power for financial stability

(Reuters) - Central banks might need more power to oversee banks if they are to play a larger role in maintaining financial stability in the post-crisis world, a Bank for International Settlements (BIS) report said on Sunday.

The report also said central banks should examine issues such as the make-up of policymaking bodies, their independence, voting habits and finances as their role evolves.

"The current global financial crisis could well have ... important implications for central banks, particularly with respect to their role in fostering financial stability," said the report, by the Central Bank Governance group.

"If central banks are to play a key role in dealing with systemic risk when applying a more macroprudential approach, they may also need to have closer oversight of systemically significant institutions."

But the report said there was no magic bullet for arranging central bank governance to deal with the new challenges, as their roles as well as political and economic conditions differ from each other.

"What is suitable for one country will not be for another. Hence, setting down a single set of best practices is not feasible."

Financial stability, for its part, would be difficult to codify in central bank objectives, as it is not as simple as naming a range for consumer price growth as an inflation target.

"Financial stability is ... somewhat incomplete as a guiding light for policy actions and as a basis for accountability," it said.

"Financial stability is not an absolute objective -- most economists would agree that financial variables should be flexible, and should change, and sometimes sharply. The question is by how much and in what circumstances."

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Thursday, May 14, 2009

U.S. financial reform to be unveiled despite clashes

(Reuters) - The Obama administration's plan to reshape the opaque world of derivatives trading, unveiled on Wednesday, is only a preview of sweeping financial reform proposals that may be announced as soon as next week.

The White House and Treasury, responding to the global financial crisis, have firm ideas about tightening oversight of hedge funds, streamlining bank regulation, shaking up executive pay standards and protecting consumers.

But two key components of the administration's approach -- policing "systemic risk" and winding down troubled financial firms -- are dividing senior officials and lawmakers, which will likely cause delays in getting broad reforms enacted.

Treasury Secretary Timothy Geithner, a chief architect, acknowledged on Wednesday the proposals might not sit well with everyone. "It's not going to be comfortable for everybody but it's important to do," he told a group of bankers.

The regulatory reform drive comes as economies around the globe continue to reel from a credit market paralysis triggered by a sudden plunge in the value of exotic securities created during the U.S. real estate boom. U.S. President Barack Obama has vowed to pursue changes to prevent another such crisis.

His administration's approach centers on a powerful, new "systemic risk" regulator, likely to be the U.S. Federal Reserve, backed by a council of regulators, including the Federal Deposit Insurance Corp, which will also get new powers, according to sources briefed on the plan.

That compromise has emerged after a debate between advocates of centralized financial supervision and skeptics who fear making the Fed too powerful, especially in view of its shaky record in handling troubled insurer AIG (AIG.N).

The administration looks poised to put the FDIC at the center of newly streamlined bank regulations. Other agencies' rulebooks will be rewritten to conform with an FDIC standard, preventing banks from shopping around for a lax regulator.

But other bank overseers, such as the Comptroller of the Currency and the Office of Thrift Supervision, for now, will not be slated for shutdown, the sources said.

As part of its effort, the Treasury will emphasize the need for global cooperation, wary of the risk that financial firms might flee to jurisdictions with looser regulations.


Geithner said on May 8 that Congress would get "the broad comprehensive framework within the next couple weeks, and we hope to move forward quickly with legislation."

Democratic lawmakers and the White House want to enact reforms by the year-end, but the deadline looks less realistic as the proposal expands.

"The problem is that as you start adding more new issues, the consensus starts breaking down," said Wayne Abernathy, an executive at the American Bankers Association.

Many of the proposals involve sensitive structural changes that threaten existing bureaucracies and cross jurisdictional lines among congressional committees.

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GM near deal with UAW

(Reuters) - Under the direction of the U.S. Treasury, General Motors Corp is close to a deal with the United Auto Workers that would cut its hourly labor costs by more than $1 billion a year, the Wall Street Journal said, citing people familiar with the matter.

GM expects to halve its remaining cash outlays for retiree health costs to about $10 billion, and supplement that contribution with a 39 percent equity stake in the reorganized company, the people told the paper.

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