Global Articles on what is going on...posted daily

[sandi66]

Reset with Russia Continues
By Newsroom America Feeds at 24 Jun 18:08

It may be that no relationship has seen greater progress and been more productive over the past two years than that between the U.S. and Russia. As one of his earliest foreign policy priorities, the President sought to “reset” relations with Russia and reverse what he called a “dangerous drift.”

Every meeting of the two presidents has been preceded by countless hours of preparation and negotiations, helping to ensure that tangible steps forward could be taken on issues ranging from the New START Treaty and nuclear proliferation, to North Korea, to Kyrgyzstan, to energy and the environment.

Read the White House fact sheet.


www.newsroomamerica.com/story/27168.html

[sandi66]

•Derivatives Compromise May Break House Impasse Over U.S. Financial Reform

noir.bloomberg.com/apps/news?pid=20601087&sid=aTuXHdK4yqTw&pos=2


U.S. House Offers Compromise on Lincoln Swaps-Desk Provision


By Phil Mattingly

June 25 (Bloomberg) -- U.S. House lawmakers negotiating a financial-regulation bill offered a compromise on derivatives oversight aimed at breaking an impasse over a Senate measure that would force banks to push swaps-trading into subsidiaries.

Representative Collin Peterson today proposed letting banks such as JPMorgan Chase & Co. and Citigroup Inc. trade interest-rate swaps, foreign exchange swaps and instruments deemed as "hedging for the bank’s own risk" as an alternative to a sweeping ban proposed by Senator Blanche Lincoln.

The plan outlined by Peterson, the Minnesota Democrat who leads the House Agriculture Committee, would still require banks to use subsidiaries for trading of non-investment grade entities, commodities and credit-default swaps not cleared through an exchange.

Lincoln, the Arkansas Democrat who leads the Senate Agriculture Committee, hasn’t agreed to accept Peterson’s modifications. She and her Senate colleagues may counter the House offer with their own proposed compromise.

White House and Treasury Department officials have been working with House-Senate conferees to craft a compromise on the Lincoln proposal for much of the past two days. The measure is part of a broader financial bill aimed at overhauling Wall Street’s regulations after the worst financial crisis since the Great Depression.

Representative Barney Frank, the Massachusetts Democrat leading the congressional negotiations, said he thought the language would go "a little further than I would go, but it’s the best compromise we can get."


To contact the reporter on this story: Phil Mattingly in Washington at [e-mail].

Last Updated: June 25, 2010 01:10 EDT


ty joye

[sandi66]

Banks to get an easier ride at G20 than they feared

25.06.10

G20 leaders meeting to discuss reform of the world banking system in Toronto tomorrow are likely to be presented with draft proposals which may be less hard-line than originally feared by banks.

The Basel Committee of central bankers and regulators is reported to be softening its stance on the levels of liquidity banks must set aside to protect against future financial crises, giving them more breathing space.

The Bank of England today also called for an “extended transition” to the new rules, while US legislators backed off forcing banks to split off some of their more risky activities.

The Basel Committee may ease its planned capital and liquidity rules, dubbed Basel III, in the latest draft to be set out at the G20 summit.

But senior sources reinforced the fact that even if there is a lightening of liquidity rules, those for capital adequacy won't be altered and will still be far more onerous than the current Basel II regulations.

The news came as the Bank of England warned UK banks that they need to ensure they raise up to £800 billion to refinance their balance sheets by the end of 2012.

Global policymakers are aiming to agree new capital and liquidity rules this year to help prevent another financial meltdown.

The Bank wants to see a minimum limit of capital and liquidity, with banks building up extra reserves when times are good, which they can then use to weather more difficult periods.

It also wants to give banks a bit of breathing space before the new global rules are enforced.

In the US, legislators reached a compromise which mean banks do not have to spin off most of their lucrative swaps dealing desks.

As a result, President Obama can attend Toronto with his financial reforms set to become law by July 4.

Under the deal, banks can trade in-house foreign exchange and interest rate swaps, gold and silver swaps, and derivatives designed to hedge their own risk.

But they will need to spin off dealing desks to affiliates to handle agricultural, energy and metals swaps, equity swaps, and uncleared credit default swaps.

www.thisislondon.co.uk/standard-business/article-23849029-g20-to-give-banks-breathing-space-in-new-rules.do

[sandi66]

JUNE 25, 2010, 9:08 A.M. ET

Bair Says Bill Will End 'Too Big to Fail'

Federal Deposit Insurance Corp. Chairman Sheila Bair said bank regulators would have the tools they need to banish "too big to fail" institutions from the financial landscape once a Wall Street overhaul bill becomes law.

In the first installment of The Big Interview, a WSJ.com video interview that will be posted at 10 a.m. EDT Friday, Ms. Bair said that new powers allowing regulators to seize and liquidate failing institutions would act like a threat hovering over the financial industry, deterring firms from growing oo large or reckless.

"This is a kind of a nuclear bomb that you hope you never have to use," Ms. Bair said. "The fact that it's there, I think, is going to be important. And if we have to use it, we will."

The bill pending in Congress would empower the heads of the FDIC, the Federal Reserve and the Treasury to wind down a financial firm other than a bank, a provision intended to give the government a choice other than the messy bankruptcy of Lehman Brothers and the controversial rescue of American International Group. The FDIC, with its long history of resolving failed banks, would act as receiver, selling off the assets.

Ms. Bair said the existence of this new authority would prompt investors to shift capital away from the biggest financial firms toward smaller ones, strengthening them after a wave of consolidation in the financial industry created some competitive disparities. She predicted that investors would favor smaller firms whose risks are more transparent, raising capital costs for bigger ones.

Ms. Bair, who often clashed with other key officials over how to keep the financial system afloat during the crisis, said uninsured bank depositors got a raw deal compared with the bondholders and derivatives counterparties of bailed-out firms who came out whole.

"I think that was a terrible inequity," Ms. Bair said. A provision of the financial-overhaul bill would retroactively apply the now higher limits on federally insured deposits at six banks that failed before Congress raised the limits in 2008.

Bair said the FDIC doesn't regret participating in decisions to rescue large firms. "We felt we did what we needed to do, but we felt they were quite unpleasant and inequitable," she said.

In the interview, Bair said Congress should now turn its attention to deciding the future of Fannie Mae and Freddie Mac, the mortgage giants seized by the government in September 2008. She said Congress should end the firms' hybrid public-private structure, widely blamed for fueling the perception that the government would bail them out.

The structure "didn't work" and is a "prime example of the dangers of too big to fail," she said.

The government, Ms. Bair said, should either provide explicit subsidies for mortgages, placing the costs on the federal books, or abandon its role, leaving private firms to fund mortgages entirely. "We think you should go in one direction or the other," she said.

Pressed about which model she favored, Ms. Bair said the government was most justified in providing government backing for mortgages for low-income people, citing the model of the Federal Housing Administration. But she questioned whether the government needed to subsidize mortgage credit broadly.

"I think a properly regulated and functioning private securitization market perhaps could provide liquidity sources that we need to fund mortgages," she said.

Ms. Bair said the traditional notions of mortgage-lending and homeownership acted for years to stabilize communities, but got turned upside-down in the last decade. She has questioned, in recent speeches, government subsidies for homeowners that are triple those for renters.

"We need to understand why we want to promote homeownership, which is homeownership and responsible mortgages that build wealth, don't strip wealth," she said.

Ms. Bair, the only woman involved in the highest-level discussions as officials sought to rescue the financial system, acknowledged that at times she felt excluded from key decisions. She said the fact that she's a woman could have been a factor.

"There's really nothing I can do about it. If gender's a factor, it's a factor. The best I can do is state my case, and do my job as best I can," she said.

Ms. Bair, a Republican who narrowly lost a bid for a Kansas congressional seat in the 1990s, insisted she has no plans to run for office. After wrapping up her term at the FDIC in the middle of next year, she'll return to academia and said she intends to write a memoir of her role in bringing the U.S. financial system back from the brink.

online.wsj.com/article/SB10001424052748703615104575328513929369040.html

[sandi66]

China sets strong yuan rate ahead of G20

ALLISON JACKSON

June 25, 2010 - 11:59PM

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China's central bank set the strongest yuan exchange rate in years on Friday, as international pressure builds for a stronger currency ahead of the weekend Group of 20 summit in Canada.

The People's Bank of China said it set the central parity rate -- the centre point of the currency's allowed trading band -- at 6.7896 to the dollar, 0.3 percent stronger than Thursday's 6.8100.

The figure marks the strongest level since China freed the currency from an 11-year-old peg in July 2005 and moved to a tightly managed floating exchange rate.

During trading on Friday, the yuan strengthened to 6.7856 on the China's main foreign exchange market before closing slightly weaker at 6.7900, Dow Jones Newswires said.

The currency has appreciated 0.53 percent against the greenback over the week.

"Today's trading is quite balanced -- there were no especially large buys and sales were not very heavy either," a Beijing-based forex trader told AFP.

China has tweaked the rate up and down this week ahead of the G20 summit and has a history of letting the yuan strengthen slightly before sensitive events, apparently to defuse criticism that it keeps the currency too low.

Policymakers pledged last weekend to let the yuan trade more freely against the dollar but ruled out dramatic moves in the currency or a one-off appreciation.

In a vaguely worded statement, the central bank said the yuan would remain "basically stable" -- official code for keeping the currency on a tight leash. The action was widely seen as a bid to head off rancour at the G20 meeting following intense pressure on Beijing to embrace currency reform as part of efforts to enhance a global economic recovery.

US President Barack Obama said Thursday it was too early to determine the impact of China's limited currency reform although he viewed the move as "positive."

Speaking ahead of his meeting Saturday with Chinese leader Hu Jintao on the sidelines of the G20 summit in Toronto, Obama maintained that the "undervalued" yuan provided China "with an unfair trade advantage."

Some experts say the yuan is undervalued against the dollar by up to 40 percent.

Traders have reported this week that Chinese state-owned banks were buying the dollar, thereby weakening the yuan.

They said it was an apparent attempt by authorities to show its critics that currency flexibility could cut both ways.

Unmoved by Beijing's action, US lawmakers have threatened to press ahead with legislation they said would treat "currency manipulation" as an illegal subsidy and enable US authorities to impose tariffs on Chinese goods.

On Thursday, China again warned against "protectionist" retaliation over its currency policy, saying an appreciation in the yuan would not solve the Chinese trade surplus with the United States, a source of tension between the two.

Analysts say China's yuan pledge does not presage the sort of significant revaluation that many are calling for, and they expect only a limited appreciation over the next 12 months, if any.

However, the currency's limited moves this week might be enough to deflect criticism at the G20, said Brian Jackson, a senior analyst at Royal Bank of Canada in Hong Kong.

"This is not a big move, but it is significant. President Hu can point to it as evidence that China is serious about making its currency more flexible when he meets other G20 leaders in Toronto," he said.

China had effectively pegged the yuan at about 6.8 to the dollar for the past two years to prop up exporters during the global financial crisis. Critics say the policy gives Chinese producers an unfair advantage.



news.smh.com.au/breaking-news-world/china-sets-strong-yuan-rate-ahead-of-g20-20100625-za17.html

[sandi66]

Gold Seen "Stable in Summer Lull" as Yuan's "Dead-Cert" Rise Questioned

Commodities / Gold and Silver 2010

Jun 25, 2010 - 07:31 AM

By: Adrian_Ash

THE PRICE OF WHOLESALE GOLD held onto Thursday's gains early in London on Friday, trading 0.8% below last week's record weekly finish as world stock markets slipped for the fourth day running.

Commodities also held flat, as did silver prices, trading 2.6% down for the week at $18.71 per ounce.

The US Dollar rose against the Pound, Yen and Euro – helping push the gold price in Euros back above €32,550 per kilo.

But the Dollar was outpaced by the Chinese Yuan, meantime, which rose to a new record as the People's Bank set its daily fix 0.3% higher from Thursday.

The PBoC announced its new "flexible" policy on Monday, a move widely seen as trying to deflect accusations of export-stealing at tomorrow's G20 summit of leading economies in Toronto.

"Now that revaluation of the CNY has begun," says French bank and London bullion dealer Natixis, "more productive commodities such as energy and base metals should outperform store-of-value commodities such as gold.

"The CNY will presumably be allowed to appreciate very gradually [and so] productive commodities should outperform gold for a variety of reasons," the research team says, citing stronger domestic Chinese demand, and higher oil prices as China's refining capacity becomes able to bear higher Dollar-equivalent costs.

But when the Yuan "appreciated smartly" after its previous de-pegging of five years ago, says Steven Barrow at Standard Bank, "we have to remember that, for the period from July 2005 through to the summer of 2008, the Dollar was a weak currency.

Now the Dollar is strong vs. the Euro, it may still be "worth looking for more Dollar/Yuan weakness. But perhaps an even better idea is to look for a much lower Euro/Yuan rate going forward."

Back in the gold market Friday, "Monday's outside day bearish reversal warning off 1265 remains a concern," says the latest technical analysis from Scotia Mocatta.

In silver, the bullion bank says, "$18.88 remains a resistance ahead of [last] Monday's high of $19.45."

"Despite repeated setbacks, it is not looking all that bad for investors and speculators who are betting on rising gold prices," says Wolfgang Wrzesniok-Rossbach at German refining group Heraeus in Hanau in his weekly report.

"However, fresh investor demand has, at times, eased off," he says, pointing to "much normalised delivery periods" for retail gold investment units between one-ounce and one-kilo.

"For the coming weeks we expect a general slowing down [in demand], not least due to the summer recess period. [But] the price of gold should, to begin with, stay reasonably stable."
By Adrian Ash
BullionVault.com

www.marketoracle.co.uk/Article20607.html

[sandi66]

June 25, 2010, 10:17AM ET

Obama's remarks on the financial overhaul deal

By The Associated Press

Text of President Barack Obama's remarks Friday on a compromise that members of Congress reached on overhauling Wall Street rules, as transcribed by the White House.

OBAMA: Good morning, everybody. In a few moments I'll depart for Canada to take part in a summit with the G8 and the G20 nations. This is the third G20 summit we've held since I was sworn in as president.

At our first meeting, in London, with the world in the grips of the worst financial crisis of our time, we acted boldly and swiftly to bring our economy back from the brink. At our second meeting, in Pittsburgh, with our recovery beginning to take hold, we agreed to work to pursue a balanced pattern of global growth, and repair our financial systems.

This weekend in Toronto, I hope we can build on this progress by coordinating our efforts to promote economic growth, to pursue financial reform, and to strengthen the global economy.

We need to act in concert for a simple reason: This crisis proved, and events continue to affirm that our national economies are inextricably linked. And just as economic turmoil in one place can quickly spread to another, safeguards in each of our nations can help protect all nations.

I'm gratified we've made great progress toward enacting these safeguards here at home. Because of the incredibly hard work of Chairman Dodd and Chairman Frank, and the strong leadership of Chairwoman Lincoln and Chairman Peterson, and the great efforts of the conferees and members of both parties -- who were up very late last night -- we are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression. Early this morning, the House and Senate reached an agreement on a set of Wall Street reforms that represents 90 percent of what I proposed when I took up this fight.

Now, let me be clear. Our economic growth and prosperity depend on a strong, robust financial sector, and I will continue to do what I can to foster and support a dynamic private sector. But we've all seen what happens when there's inadequate oversight and insufficient transparency on Wall Street.

The reforms making their way through Congress will hold Wall Street accountable so we can help prevent another financial crisis like the one that we're still recovering from.

We'll put in place the toughest consumer financial protections in our history, while creating an independent agency to enforce them. Through this agency, we'll combine under one roof the consumer protection functions that currently are divided among half a dozen different agencies. Now there will be one agency whose sole job will be to look out for you.

Credit card companies will no longer be able to mislead you with pages and pages of fine print. You will no longer be subject to all kinds of hidden fees and penalties, or the predatory practices of unscrupulous lenders.

Instead, we'll make sure that credit card companies and mortgage companies play by the rules. You'll be empowered with easy-to-understand forms so you know what you're agreeing to. And you'll have the clear and concise information you need to make financial decisions that are best for you and your family.

Wall Street reform will also strengthen our economy in a number of other ways. We'll make our financial system more transparent by bringing the kinds of complex deals that help trigger this crisis, like trades in a $600 trillion derivatives market, into the light of day. We'll enact the Volcker Rule to make sure that banks protected by the safety net of the FDIC can't engage in risky trades for their own profit. And we'll create what's called a resolution authority to help wind down firms whose collapse would threaten our entire financial system. No longer will be have companies that are "too big to fail."

Over the last 17 months, we passed an economic recovery act, health insurance reform, education reform, and we are now on the brink of passing Wall Street reform. And at the G20 summit this weekend, I'll work with other nations not only to coordinate our financial reform efforts, but to promote global economic growth while ensuring that each nation can pursue a path that is sustainable for its own public finances.

As the main forum for international economic cooperation, the G20 is the right place to discuss such issues. And over the last few days, I hope we can build on our past progress and strengthen the global economy for a long time to come.

Thank you very much, everybody.

Q: Can you get the bill through the Senate?

OBAMA: You bet.

www.businessweek.com/ap/financialnews/D9GIBKVO0.htm

[sandi66]

Senate unanimously confirms TSA nominee
By Jordan Fabian - 06/25/10 11:03 AM ET

The Senate on Friday unanimously confirmed President Barack Obama's nominee to head the Transportation Security Administration, John Pistole.

The former FBI deputy director was cleared by the Homeland Security Committee on Friday. He becomes the first permanent chief at the airport security agency since Obama took office in 2009.

Two previous nominees, former FBI agent Erroll Southers and retired Gen. Robert Harding, were forced to withdraw their nominations due to controversies involving their past jobs.

But Pistole garnered widespread support from senators leading up to his confirmation. In his FBI post, he played a pivotal role in the arrest of Faisal Shahzad, who was arrested for the attempted Times Square bombing in New York City last month.

Shahzad was taken off an airplane bound for Dubai at New York's John F. Kennedy Airport two days after the bomb attempt was foiled.

thehill.com/blogs/blog-briefing-room/news/105551-senate-unanimously-confirms-tsa-nominee

Background:

FBI Executives Home Page

John S. Pistole – Deputy Director

John S. Pistole began his career as a Special Agent with the FBI in 1983. He served in the Minneapolis and New York Divisions before being promoted to a Supervisor in the Organized Crime (OC) Section at FBIHQ. He assisted the Italian National Police in their investigations into the 1992 assassinations of two prominent Magistrates. He also served as an Instructor in OC matters at the FBI Academy for nearly 30 New Agents Classes.

Mr. Pistole later served as a field supervisor of a White-Collar Crime (WCC) and Civil Rights Squad in Indianapolis, Indiana, where he created a Health Care Fraud Task Force and a Public Corruption Task Force. During this time, he also developed curricula and provided instruction at the International Law Enforcement Academy in Budapest, Hungary.

Mr. Pistole next served as Assistant Special Agent in Charge, Boston, Massachusetts, where he had oversight for WCC, Computer Intrusion Programs, and all FBI matters in the States of Maine and New Hampshire and WCC, especially Public Corruption, in Rhode Island. In 1999, he helped lead the investigative and recovery efforts for the Egypt Air Flight 990 crash off the coast of Rhode Island. Following the espionage arrest of Robert Hanssen, he was detailed to FBIHQ and helped lead the Information Security Working Group, addressing security and vulnerability issues. In 2001, he was named an Inspector in the Inspection Division in Washington, D.C., where he led teams conducting evaluations and audits of FBI field offices and Headquarters divisions.

Following the events of 9/11, Director Mueller appointed Mr. Pistole to the Counterterrorism Division, first as Deputy Assistant Director for Operations, then as Assistant Director. Mr. Pistole was then appointed as the Executive Assistant Director for Counterterrorism and Counterintelligence. In October, 2004, Mr. Pistole was promoted to Deputy Director, the number two position in the FBI. He is a recipient of the 2005 Presidential Rank Award for Distinguished Executive. In 2007, Mr. Pistole received the Edward H. Levy Award for Outstanding Professionalism and Exemplary Integrity.

Mr. Pistole practiced law for two years prior to joining the FBI. He is a graduate of Anderson University (Indiana) and the Indiana University School of Law - Indianapolis. He is married and has two daughters.

www.fbi.gov/libref/executives/pistole.htm

[sandi66]

Investors applaud China's currency move

By Ellen Kelleher

Published: June 25 2010 18:59 | Last updated: June 25 2010 18:59

China’s move to stop pegging its currency to the US dollar is being applauded by investors across the globe, who hope that a rise in the currency’s value will boost the competitiveness of western companies.

In an apparent concession to the US ahead of this weekend’s Group of 20 (G20) meeting, officials in Beijing said they would allow the renminbi (rmb) to resume its appreciation against a basket of currencies. It had been pegged to the US dollar since 2008.

If the value of the rmb rises steadily from this point on, economists forecast that the cost of Chinese goods will jump, making goods from European, US, Japanese and Korean companies easier to sell.

At the same time, the purchasing power of Chinese wage earners would also increase – benefiting both exporters to China and Chinese companies focused on domestic consumption.

Chinese companies stand to benefit from the change as the price of their exports would rise and their purchasing power would increase.

“The strengthening exchange rate could also turn the Chinese into major global corporate acquisition merchants,” says Mike Lenhoff, chief strategist with the brokers Brewin Dolphin.

“This is a massive positive for US, European and UK equities – and other places in Asia will become more competitive as well,” adds Ben Yearsley, an investment manager with independent advisers Hargreaves Lansdown.

The sudden timing of Beijing’s decision surprised some fund managers, but they agreed it was shrewd.

“This is a smart move by China ahead of the G20 conference in Toronto at the weekend where it would have undoubtedly come under more concerted pressure to revalue the renminbi,” said Ted Scott, director of strategy with F&C Asset Management, in his latest note to investors.

“By pre-empting the summit, China has spiked the guns of its economic rivals while at the same time conceding very little.”

But while Beijing’s decision offers some benefits to European and US companies, financial advisers are still eager to recommend pan-Asian and China-only funds.

Mainland Chinese stock markets were trading slightly higher this week on the news. The Shanghai stock exchange is up 2.16 per cent (in US dollar terms) in the past week and the Hang Seng gained more than 2 per cent.

“The economic growth in the world is clearly moving ever more toward the east,” says Tim Cockerill, head of research with the UK advisory firm Ashcourt Rowan Asset Management.

Philip Ehrmann, manager of Jupiter’s China fund, is so impressed by China’s economic growth projections that he predicts the country will eclipse Japan as the world’s second- largest economy before the year ends. “Multi-nationals are making good money in China and it still looks fair value,” says Ehrmann. “The stock market in China has gone sideways since last July. Stocks’ price-to-earnings ratios have come down considerably.”

In the past five years, however, the average UK-registered Asia Pacific (excluding Japan) fund gained 101 per cent, according to Morningstar, while the average performance of China and greater China funds was even higher at 164 per cent.

Two funds Cockerill recommends are First State Asia Pacific Leaders, which takes a long-term view on stock selection, and Fidelity’s South East Asia fund, which has a more active mandate and more than 30 per cent in China. The First State fund rose 139 per cent in the past five years, while Fidelity’s South East Asia fund is up 168 per cent over the same period.

Some advisers have suggested that private investors could also consider betting on the rmb’s performance in currency markets.

Just this week, ETF Securities, the exchange-traded fund (ETF) provider, introduced two new emerging markets currency ETFs offering long and short exposure to the rmb.

There are drawbacks to the revaluation, however. First, Chinese exports are set to become more expensive, which is a concern for investors in US and European retailers selling Chinese goods. Second, currency speculators might be attracted to buy the currency for short-term gains. In response to such a stampede of interest, inflation might increase and Beijing could face difficulty controlling the country’s money supply, forecasts Scott.

www.ft.com/cms/s/2/f51fa076-8081-11df-be5a-00144feabdc0.html

[sandi66]

Suiting Up for a Post-Dollar World

June 25th, 2010 2:51 pm | by Mike Miller |

by John Browne, Senior Market Strategist, Euro Pacific Capital

The global financial crisis is playing out like a slow-moving, highly predicable stage play. In the current scene, Western governments are caught between the demands of entitled welfare beneficiaries and the anxiety of bondholders who fear they will be stuck with the bill. As the crisis reaches an apex, prime ministers and presidents are forced into a Sophie’s choice between social unrest and bankruptcy. But with the “Club Med” economies set to fall like dominoes, the US Treasury market is not yet acting the role we would have anticipated.

Our argument has always been that the US benefits from its reserve-currency status, allowing it to accumulate unsustainable debts for an unusually long period without the immediate repercussions of inflation or higher borrowing costs. But this false sense of security may be setting us up for a truly monumental crash.

There is fresh evidence that time is running out for the dollar-centric global monetary order. In fact, central banks outside the US are already making swift and discrete preparation for a post-dollar era.

To begin, the People’s Bank of China has just this week decided to permit a wider trading range between the yuan and the dollar. This is the first step toward ending the infernal yuan-dollar peg. While the impetus behind this abrupt change remains a mystery, I have a sneaking suspicion that, as my colleague Neeraj Chaudhary explained in his commentary last week, the nationwide labor strikes were a prime motivator.

In response to the 2008 credit crunch, the Fed printed so many dollars that the People’s Bank of China was forced to drive Chinese inflation into double digits to maintain the peg. The pain has fallen on China’s workers, who have seen their wages stagnate while prices for everything from milk to apartments have skyrocketed. This week’s move indicates that, regardless of its own policy motives, the Communist Party can no longer afford to keep pace with the dollar’s devaluation. The result will be a shift in wealth from America to China, which may trigger a long-anticipated run on the dollar, while creating investment opportunities in China.

Just days before China’s announcement, Russian President Dmitry Medvedev rattled his monetary sabre by telling the press of his intention to lead the world toward a new monetary order based on a broad basket of currencies. Giving strength to his claim, the Central Bank of Russia announced that it would be adding Canadian and Australian dollars to its reserves for the first time. Analysts suggest that the IMF may follow suit. While Russia floats in the limbo between hopeless kleptocracy and emerging economy, it does possess vast natural resources and a toe-hold in both Europe and Asia. In other words, it will be a strategically important partner for China as it tries to cast off dollar hegemony.

Speaking of Europe, the major powers there are moving toward a post-dollar world by rejecting President Obama’s calls to jump on America’s debt grenade. The prescriptions coming from Washington translate loosely to: our airship is on fire, so why don’t you light a candle under yours so that we may crash and burn together. Given that dollar strength is largely seen as a function of euro weakness (as Andrew Schiff discussed in our most recent newsletter, debt troubles in the eurozone’s fringe economies have created a distorted confidence in the greenback. However, as you might imagine, Europe has higher priorities than being America’s fall guy. Led by an ever-bolder Germany, the European states are wisely choosing not to throw themselves on our funeral pyre, but to wisely clean house in anticipation of China’s rise.

In another ominous sign for the dollar, the Financial Times reported Wednesday that after two decades as net sellers of gold, foreign central banks have now become net buyers. What’s more, more than half of central bank officials surveyed by UBS didn’t think the dollar would be the world’s reserve in 2035. Among the predicted replacements were Asian currencies and the euro, but – by far – the favorite was gold. This is supported by Monday’s revelation by the Saudi central bank that it had covertly doubled its gold reserves, just about a year after China made a similar admission. There is no reason to assume these are isolated incidents, or that the covert trade of dollars for gold doesn’t continue. To the contrary, this is compelling evidence that foreign governments are outwardly supporting the status quo while quietly preparing for the dollar’s almost-inevitable devaluation. What people like Paul Krugman believe to be a return to medieval economics may, in fact, be the wave of the future.

In peacetime, hardened troops will likely tolerate a blowhard general for an extended period; but when the artillery opens up with live ordnance, an ineffectual leader risks rapid demotion. The newspapers are now riddled with hints that foreign governments have lost faith in Washington and the dollar reserve system. It seems to me only natural that after a century of war, inflation, and socialism, the next hundred years would belong to those people who hold the timeless values of hard money and fiscal prudence. Unfortunately, our policymakers are not those people.

libertymaven.com/2010/06/25/suiting-up-for-a-post-dollar-world/10067/

[sandi66]

Banks `Dodged a Bullet' as U.S. Congress Dilutes Trading Rules

By Christine Harper - Jun 25, 2010

Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said.

A deal reached by members of a House and Senate conference early this morning diluted provisions from the tougher Senate bill, limiting rather than prohibiting the ability of federally insured banks to trade derivatives and invest in hedge funds or private equity funds.

Banks “dodged a bullet,” said Raj Date, executive director for Cambridge Winter Inc.’s center for financial institutions policy and a former Deutsche Bank AG executive. “This has to be a net positive.”

Hashed out almost two years after the worst financial crisis since the Great Depression, the legislation shepherded by Senate Banking Committee Chairman Christopher Dodd and House Financial Services Chairman Barney Frank places limits on potentially risky activities such as proprietary trading or over-the-counter derivatives and gives regulators new powers to seize and wind down large, complex institutions if needed.

The overhaul, which still requires approval from the full Congress, won’t shrink banks deemed “too big to fail,” leaving largely intact a U.S. financial industry dominated by six companies with a combined $9.4 trillion of assets. The changes also do little to solve the danger posed by leveraged companies reliant on fickle markets for funding, which can evaporate in a panic like the one that spread in late 2008.

‘Fig Leaf’

The Standard & Poor’s 500 Financials Index, whose 79 companies include JPMorgan Chase & Co. and Goldman Sachs Group Inc., rose 1.4 percent at 1:02 p.m. in New York.

The legislation is “largely a fig leaf,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “Given where we were when this got started, I’d have to imagine the Wall Street firms are pretty happy.”

Banks avoided drastic curbs on their highly profitable derivatives businesses. Lenders including JPMorgan and Citigroup Inc. will be required to move less than 10 percent of the derivatives in their deposit-taking banks to a broker-dealer division during the next two years, which may require additional capital.

Goldman Sachs and Morgan Stanley, which were the two biggest U.S. securities firms before converting to banks in September 2008, won’t be as affected because they kept most of their derivatives in their broker-dealer units.

‘Pennies’ of Dilution

“There’s going to be some adaptation, but I don’t think there’s going to be any colossal impact,” said Benjamin Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $900 million and holds stakes in Bank of America Corp., JPMorgan and Wells Fargo & Co. Derivatives rules mean “there’s going to be a capital raise, but the analysis we’ve seen suggests we’re talking in the pennies in terms of dilution” of earnings per share.

Senator Blanche Lincoln, a Democrat from Arkansas, had originally advocated forbidding banks that receive federal support such as deposit insurance from trading swaps, a rule that could have required banks to spin off those businesses.

The final agreement provides a number of exemptions: Banks can continue trading derivatives used to hedge their risks and can keep trading interest-rate and foreign-exchange contracts. Banks will have up to two years to move other types of derivatives, such as credit default swaps that aren’t standard enough to be cleared through a central counterparty, into a separately capitalized subsidiary.

97% of Market

U.S. commercial banks held derivatives with a notional value of $216.5 trillion in the first quarter, of which 92 percent were interest-rate or foreign-exchange derivatives, according to the Office of the Comptroller of the Currency. The five U.S. banks with the biggest holdings of derivatives -- JPMorgan, Goldman Sachs, Bank of America, Citigroup and Wells Fargo -- hold $209 trillion, or 97 percent of the total, the OCC said.

The rules are “nowhere as bad as what the banks might have feared as recently as a week ago,” Bill Winters, the London- based former co-chief executive officer of JPMorgan’s investment bank, told Bloomberg Television today. “Banks have pretty much factored in already the idea that most derivatives will have to be cleared through a central clearing counterparty. Not a huge surprise and probably not a huge cost either.”

Volcker Rule

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. They include credit-default swaps, which act like insurance for investors in case a debt issuer can’t repay.

Swaps sold by American International Group Inc. that later went sour helped push the insurer to the brink of bankruptcy and triggered a $182 billion federal bailout of the New York-based company during the near collapse of the financial system in 2008.

Another portion of the legislation that was amended in the final conference was the so-called Volcker rule, named after Paul Volcker, the former Federal Reserve chairman who championed it. Originally the rule would have prevented any systemically important bank holding company from engaging in proprietary trading, or bets with its own money, as well as investing its own capital in hedge funds or private-equity funds. Goldman Sachs executives have estimated that about 10 percent of the firm’s annual revenue comes from proprietary trading.

3% Rule

In the final version, the banks will be allowed to provide no more than 3 percent of a fund’s equity, and will be limited to investing up to 3 percent of the bank’s Tier 1 capital in hedge funds or private equity funds. That represents a ceiling of about $3.9 billion for JPMorgan, $3.6 billion for Citigroup and $2.1 billion for Goldman Sachs, according to the companies’ latest quarterly reports.

“I don’t think it will have any impact at all on most banks,” Winters said of the amended Volcker rule. “It’s a pragmatic solution that will result in the banks having no big issues.”

While the rule has been watered down, it still represents an important change in direction for a financial industry that had been allocating a larger and larger portion of capital over the last decade to making bets and investments with their own money, said James Ellman, president of San Francisco-based hedge fund Seacliff Capital LLC, which specializes in financial industry stocks.

‘Casino’ Must Go

“You’re going to be taking out of the banks areas of investing that every 10 years or so, at certain points in the cycle, tend to have dramatic losses,” Ellman said. “Effectively you’re telling the system: We have to take the casino out of the utility.”

While Ellman said the legislation will help to make the financial system safer, he added that “it won’t satisfy anybody who wanted really strict additional regulation of banks.”

The new version of the Volcker rule also incorporates changes proposed by Democratic Senators Jeff Merkley of Oregon and Carl Levin of Michigan that aim to curb conflicts of interest by preventing firms that underwrite an asset-backed security from placing bets against the investment. In April, Levin presided over a hearing in which Goldman Sachs executives were accused of betting against some of the same collateralized debt obligations that they underwrote; the executives responded by saying they were acting as market-makers.

Market-Based Funding

While requirements for an increase in capital will provide banks with a bigger cushion to absorb losses, the legislation does little to reduce banks’ dependence on the markets to finance their balance sheets. It was that market-based funding that made firms like Goldman Sachs and Morgan Stanley vulnerable to the panic that spread in 2008.

“Something has to be put in place to cause banks to have deposit-based liabilities and not market-based liabilities,” Grimes & Co.’s Wallace said.

The effects of the legislation won’t be seen for several years as new regulations are drafted and implemented, analysts said. New international capital requirements under consideration by the Basel Committee on Banking Supervision, which could be implemented by the end of 2011, will also be important.

Investors and analysts including Optique Capital Management’s William Fitzpatrick said bank stock prices have already factored in any likely reduction in revenue from the changes.

“Profitability is indeed going to take a hit and we’re going to see more stringent capital requirements,” said Fitzpatrick at Milwaukee-based Optique, which oversees about $800 million including stock in Bank of America, Goldman Sachs and JPMorgan. “The changes are most certainly necessary. They can certainly lead to a more stable and predictable earnings stream.”

Still, he added, “this doesn’t remove all of the elements of financial distress that could lead to some of the challenges we had in 2008.”

www.bloomberg.com/news/2010-06-25/banks-dodged-a-bullet-as-congress-dilutes-u-s-trading-rules-in-overhaul.html

[sandi66]

Build America Bonds Have Biggest Week in 6 Months as $3B Sold

By Allison Bennett and Justin Doom - Jun 25, 2010


Build America weekly issuance more than doubled to $3.34 billion, the most since December, as investor demand pushed yields on such debt to the lowest in almost two weeks.

The average yield of Build America Bonds fell almost 2 basis points to 5.89 percent on June 23, the lowest since June 11, according to a Wells Fargo index. Higher issuance also helped boost overall debt sales by states and municipalities to a six-week high of $8.9 billion, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.

In the week ended Dec. 11, $3.98 billion of the taxable securities were sold, according to Bloomberg data. This week’s total is the fourth-highest since the program’s inception. The record week ended Aug. 21 with $4.22 billion of such obligations issued.

“Municipalities need the money, they need to borrow and Build America is an easy funding mechanism,” said Tom Boylen, a managing director and municipal-bond trader in Chicago for BMO Capital Markets. “The funding needs of this country are still extremely high. For investors, staying outside of cash is the only way you’re going to pick up any income.”

Yields on top-rated tax-exempts maturing in 2020 fell 1 basis point yesterday to 3.16 percent, the lowest in two weeks, according to Municipal Market Advisors, as buyers were more particular with their investments, Boylen said.

Ten-year government yields headed for a weekly decline of 8 basis points to 3.14 percent.

Yield Spread

The yield-spread between the average Build America Bond and the 30-year U.S. Treasury has widened 37 basis points to 178 basis points since May 6, according to Bloomberg data.

“There’s still an advantage to using BABs even though spreads have widened,” said Alan Schankel, head of fixed-income research at Janney Montgomery Scott LLC in Philadelphia.

The Bay Area Toll Authority, which is financing the new San Francisco-Oakland Bay Bridge, sold $1.5 billion of Build Americas yesterday, the biggest sale since March.

The $250 million in debt maturing in 2030 priced to yield 6.79 percent, 275 basis points above the benchmark 30-year Treasury for the deal. The $400 million due in 2040 was 287.5 basis points more than the benchmark, and the $850 million maturing in 2050 yielded 7.04 percent, 300 basis points above.

After the 35 percent interest rebate from the U.S. government, the bonds maturing in 2040 will cost the authority 4.5 percent, according to Bloomberg data. Top-rated 30-year debt yielded 4.55 percent yesterday, according to Concord- Massachusetts-based MMA.

A two-year extension of the Build America program is included in a Senate bill awaiting action. Passed by the House of Representatives May 28, the provision would cut federal subsidies to borrowers to 32 percent in 2011 and 30 percent in 2012.

Following are descriptions of pending sales of municipal debt in the U.S.:

MASSACHUSETTS WATER POLLUTION ABATEMENT TRUST, a state agency that provides low-cost loans for local water projects, will sell about $498 million of top-rated municipal bonds as soon as next week to refinance existing debt and fund water- treatment and drinking-water projects. The bulk of the sale will be $330 million of federally subsidized taxable Build Americas, with the remainder coming as tax-exempts. Underwriters led by Goldman Sachs Group Inc. will market the issue to investors. (Added June 24)

ILLINOIS, which is dealing with a deficit equal to half of its $25.9 billion budget, plans to sell $900 million in Build America Bonds as soon as next week. The state is rated fifth- highest at A1 by Moody’s and A+ by S&P. Citigroup Inc. will lead the marketing of the securities, which will be used for state transportation projects. (Added June 24)

JEFFERSON HEALTH SYSTEM, a nonprofit entity formed by three health-care service companies in Pennsylvania and New Jersey, plans to offer $355 million in tax-free municipal bonds as early as next week. The securities, rated by Moody’s at Aa3, fourth- highest, and AA by Fitch Ratings and S&P, third-highest, will be used to refinance current debt. The notes will be marketed by a group led by JPMorgan Chase & Co. and Citigroup. (Added June 24)

NEW YORK LIBERTY DEVELOPMENT CORP., a state arm created to finance loans for lower Manhattan construction, will sell $650 million in tax-exempt municipal bonds as soon as next week to refinance existing debt from the Bank of America Tower project at One Bryant Park. Bank of America Merrill Lynch and JPMorgan will underwrite the securities, which are top-rated by Fitch and Moody’s. (Added June 22)

www.bloomberg.com/news/2010-06-25/build-america-bond-sales-have-biggest-week-in-6-months-as-3-billion-sold.html

[sandi66]

States of Crisis for 46 Governments Facing Greek-Style Deficits

By Edward Robinson - Jun 25, 2010

Californians don’t see much evidence that the worst economic contraction since the Great Depression is coming to an end.

Unemployment was 12.4 percent in May, 2.7 percentage points higher than the national rate. Lawmakers gridlocked over how to close a $19 billion budget gap are weighing the termination of the main welfare program for 1.3 million poor families or borrowing more than $9 billion in the bond market. California, tied with Illinois for the lowest credit rating of any state, is diverting a rising portion of tax revenue to service debt, Bloomberg Markets magazine reports in its August issue.

Far from rebounding, the Golden State, with a $1.8 trillion economy that’s larger than Russia’s, is sinking deeper into its financial funk. And it’s not alone.

Even as the U.S. appears to be on the mend -- gross domestic product has climbed three straight quarters -- finances in Arizona, Illinois, New Jersey, New York and other states show few signs of improvement. Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of U.S. GDP.

“States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co- director of the Center for Economic and Policy Research in Washington. “That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”

Stimulus Dries Up

State budget woes are a worsening drag on growth as the federal government tries to wean the economy from two years of extraordinary support. By Jan. 1, funds from the $787 billion federal stimulus bill will dry up. That money from Washington has helped cushion state budgets as tax revenue has plunged.

State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters, through December 2009, according to the Nelson A. Rockefeller Institute of Government at the State University of New York at Albany.

Lawmakers need to overhaul tax policy, underfunded public pensions and entitlement spending programs such as Medicaid if they want to establish long-term plans that will foster growth, says former New Jersey Governor Christine Todd Whitman.

If they fail to act, state fiscal positions will steadily erode and hurt the U.S. economy through 2060, according to a March 2010 report prepared for Congress by the U.S. Government Accountability Office.

‘Major Surgery’

“States don’t have a choice anymore,” Whitman says. “These problems are going to require major surgery.”

Reform may get short shrift as Republicans and Democrats intensify their age-old fight over taxes and spending in this election year. On May 20, New Jersey Governor Chris Christie vetoed a Democratic bill that would have raised income taxes for residents earning at least $1 million a year to help close an $11 billion deficit. Christie, a Republican, wants to cut spending for school districts and cap property tax increases.

“At some point, the people’s ability to pay runs out,” Christie said in a speech in New York on May 25.

The widening deficits have led to some unorthodox moves. In California, the state grabbed $1.7 billion in redevelopment money from local governments in May. Riverside County, a Los Angeles suburb where the housing bust has left unemployment at more than 15 percent, lost $28 million that had been set aside to build fire stations, senior centers and other public works.

Jobs or Education

The projects would have created 3,000 jobs, says Tom Freeman, spokesman for the county’s Economic Development Agency. The government needed the county cash for schools, says Aaron McLear, spokesman for Governor Arnold Schwarzenegger.

The episode demonstrates how the fiscal mess pits job creation against education in a zero-sum game, says Robert Hertzberg, the Democratic speaker of the State Assembly from 2000 to 2002. California is locked in a rigid system in which legislators need a two-thirds majority to raise taxes and yet must comply with voter-approved initiatives that mandate prison construction and other spending.

There’s little chance of any sweeping changes this year ahead of a gubernatorial race between Republican Meg Whitman, former chief executive officer of EBay Inc., and Attorney General Jerry Brown, a Democrat who was governor from 1975 to 1983.

‘So Dysfunctional’

The winner will have to muster the political courage to take on core constituencies, whether anti-tax conservatives who support Whitman or labor unions that back Brown, says Steve Westly, California’s Democratic treasurer from 2003 to 2007.

The risk is that California ends up like Greece, with no one trusting that it can get its financial house in order, says Westly, now a venture capitalist in Menlo Park. “It has to be a combination of cuts and revenue increases,” he says.

Still, California isn’t Greece. It’s home to Silicon Valley, Hollywood and a $27 billion agriculture industry. “It’s unbelievable,” says Bob Nichols, CEO of Windward Capital Management Co. in Los Angeles. “How do you screw up a place with the growth capability of California? It’s so dysfunctional.”

www.bloomberg.com/news/2010-06-25/states-of-crisis-widen-as-46-governments-in-u-s-face-greek-style-deficits.html

[sandi66]

Note to Dodd, Frank and Dimon: Make It Much, Much Simpler

by LINDA LOWELL

Friday, June 25th, 2010, 12:58 pm

Although horse trading over the House and Senate versions of regulatory reform is limping to an end, I thought I’d bring up some fundamental observations the Bank of England’s Andrew Haldane made earlier this year on systemic risk and cost, bank size and diversification. Andy, as some Internet sources refer to him, is Executive Director, Financial Stability, at the BOE.

These are points culled from empirical research, the sort of fundamentals one would always wish policy makers would take as their starting point, instead of the kind of sloganeering that seems to pass for legislative activity these days. I also thought they would be fitting contemplations for the titans of finance running the Godzilla banks (including one, whom I know personally to be an exemplary centurion of banking, name checked above). Or, if not for the CEOs, then certainly food for thought for the past, present and future bank shareholders whose investments they shepherd.

Count the Cost of Systemic Crisis

Speaking last March on “The $100 Billion Question,” Haldane introduced his topic of how big a bank should be by offering some estimates of the damage wreaked by the recent disasters. The media was all over this piece of Haldane’s exegesis, like as they say white on rice. But it’s worth recapping, if only because lots of reporters tend to leave the best thinking behind, eviscerated and shredded, when they grab that money shot.

Haldane defined systemic risk as a pollutant, a noxious by-product of the banking industry. Just like other industries, banking can be seen as producing private benefits for investors, customers and bank employees and social costs via banking crises (which have been occurring with distressing regularity over the recorded history of banking). Once the situation is drawn in this way, reckoning the cost of the latest crisis “helps calibrate the intervention necessary to tack system risk, whether through regulation of restrictions.”

He then works through some hefty academic work in banking, finance theory, operations research, even the behavioral and physical sciences to conclude that the optimal size for banking enterprises might be under US$100bn. (His bibliography cites more than 40 works!) Grounding his argument in the actual historical progression, in US law, from the Depression to the present, he does so with considerable wit and irony and mostly without too heavily taxing non-financial types’ intellectual resources.

In terms of fiscal transfer from the government to the banks, the cost of the crisis to US taxpayers is estimated around $100bn. Not too big a bill to present to the banks. Haldane estimated that taxing the banks $5bn a year could recoup it, assuming a systemic crisis occurs every 20 years.

The true social cost is better captured by foregone output — estimated at about $4trn worldwide. Moreover, some of the GDP losses may persist, in which case the present value cost of the crisis would significantly exceed the immediate cost. This is a bill too big to put to the banks. Making that same assumption of a systemic banking crisis every twenty years, the estimated annual levy on banks would exceed the current market capitalization of the largest global banks by several hundred billion dollars.

Banks of course do not bear the full blame. That is, “For every reckless lender there is likely to be a feckless borrower.” Haldane tries another measure, the implicit fiscal subsidy provided by government support, which can be estimated by the difference between banks’ stand-alone ratings and their supported ratings (worth 1.5 to 4 rating notches in Haldane’s data, rising from an average 1 notch in 2007 to 3 in 2009). Worth about $250bn in 2009 lower interest payments on bank liabilities (ex deposits) to a sample of global banks.

More to the point, the bigger the banks, the greater the implicit subsidy provided by being too big to fail. Looking at UK banks and building societies, Haldane found the large institutions sopped up 90% of the implicit subsidy. Another study found that the annual subsidy in funding costs for the 18 US banks with over $100bn in assets was $34bn per year.

The Al'Qaeda Metaphor

Aside from putting pricing out the social pain, Haldane’s speech got a lot of attention — if not much profound consideration by policy makers — because he used the structure of Al'Qaeda to promote the idea that smaller could be better. His point was that "modularity" dissipates some systemic risk. In a nutshell, because Al'Qaeda’s exists as a bunch of decentralized cells, it is difficult to infiltrate and destroy.

Haldane cites other kinds of systems and networks where structural modularity translates into systemic resilience, but the most intriguing – and much more persuasive than Al'Qaeda – comes via attempts on the world domino-toppling record. For what is our global financial system, if not a long line of dominos!

In the 1980s, an attempt involving 8000 dominos failed when a member of the TV film crew dropped his pen, spilling the majority of the dominos. Twenty years later, a sparrow topped 23,000 dominos, but "750 built-in gaps averted a systemic disaster" and allowed a new record of over 4m dominos was set.

Haldane’s point? If all these big, full service conglomerate banks are fully diversified, in effect they hold the same portfolio. The system as a whole lacks diversity and is more prone to generalized systemic collapse. "Homogeneity breeds fragility."

That’s not all. Despite the "intuition" of conglomerating banks that big is more cost-efficient, Haldane can demonstrate empirically that the size or diversity of 24 global banks does not translate into more stable income. In fact, Haldane’s data indicate that size and diversity may increase income variability. Worse, he can show that during the crisis the larger, more diversified banks suffered proportionally greater losses.

Academic research — "the literature" — indicates that economies of scale are exhausted at much lower levels than might be presumed — perhaps at $5bn – $10bn in assets. Studies indicate that economies of scope are similarly limited. Analysis of US bank holding companies suggest that gains achieved by diversifying business lines may well be offset by exposures to businesses such as trading with more volatile income streams. (UBS shareholders, who revolted in 2008 over the firms US mortgage trading losses, might agree.)

"KISS"

So why isn’t cost efficiency a linear function of size? Here’s where the breadth of Haldane’s scholarship kicks in. The answer — like the scrapped prescribed modularity of Glass-Steagall — has been around since the Thirties. In a 1934 paper, "The Problem of Management and the Size of Firms," Austin Robinson asserted the human mind and memory are the limiting factor. Quotes Haldane, "…Every increase in size beyond a point must involve a lengthening of the chain of authority…at some point the increasing costs of co-ordination must exceed the declining economies." (Those are Haldane’s ellipses.)

For a concrete example, Haldane looks outside banking and finance to military history. "“In Roman times, the optimal size of a military unit was 100 — hence the Roman centurion. This was the maximum number of men a general felt able to know well enough to lead and control." Two millennia and massive advances in telecommunications later, the optimal unit size in the US army is still held to be just under 100.

In fact, there is a law — Dunbar’s Law — that says the number of relationships humans appear able to control is less than 150 (this finding is drawn from neurological behavioral science). For most people, suggests Haldane, the number is probably single digits, despite LinkedIn or Facebook, iPhones or Blackberries. (Facebook contacts, Haldane quotes another saying, are not really friends.) By contrast, a Godzilla bank can be comprised of several thousand legal entities.

The recent crisis held many examples of failures rooted in what Haldane calls "an exaggerated sense of knowledge and control….When Lehman Brothers failed, it had almost one million open derivatives contracts — the financial equivalent of Facebook friends. Whatever the technology budget, it is questionable whether any man’s mind or memory could cope with such complexity." (Those are my ellipses.)

Not Even Jamie Dimon

I cannot read this wonderful passage of Haldane’s without thinking of Jamie Dimon, CEO and Chairman of JP Morgan Chase. Dimon is the most impressive manager I’ve ever seen in the flesh. (Disclosure: He is the reason I bought some shares of JPM in the dark days of the financial crisis and continue, sentimentally, to hold them.)

Here’s how. I was briefly at Smith Barney after Drexel Burnham, where I got my introduction to mortgage research, failed. Sandy Weill, in the person of Primerica, had recently acquired Smith Barney and one of Dimon's jobs was to oversee the trading businesses. The thing that impressed me so was that Dimon was regularly out on the trading floors, in his shirt sleeves, asking questions. He knew our names and what we knew. I could have been six reports below him, but more than once he stopped me to ask what I thought about IO strips because elsewhere in that conglomerate someone was building a portfolio of these leveraged prepayment bets on the premise they were cheap. Were they cheap, and what were the risks they wouldn’t pay off? Alas, I was too green an analyst to frame a response that could put me on the wrong side of my traders.

I’ve heard the same kind of stories from people who worked in the trenches at Bank One when JP Morgan bought it and Dimon in 2004. And Bank One was a big bank — $290bn in assets. Today, JP Morgan is over $2trn in assets. Dimon must have a number of able centurions below him, because the Wikipedia notes that President Obama cited JPM as one of "a lot of banks that are actually pretty well managed." The President conceded, "Jamie Dimon, the CEO there, I don't think should be punished for doing a pretty good job managing an enormous portfolio."

Still, I wonder how many of Dimon’s centurions walk among the troops and know who on the line does what? And recent headlines say JPM is looking to expand in Europe. As great a general as Dimon is, I wonder if he might be spreading my contribution to his capital too thin.

A Recipe for Catastrophe

If Haldane’s remarks are relevant for the big bank managers charged with protecting their shareholders’ interests, they are doubly so for the policy and lawmakers who will presume to repair the financial system.

The financial system operated by mega universal banks is like other complex dynamic systems: "the distribution of risk may be lumpy and non-linear, subject to tipping points and discontinuities." Unlike the tidy world of finance theory, the distribution of outcomes in this system is unknown. This is a wholly different order of uncertainty than the kind of uncertainty (garden variety investment risk) that is traded for return. The technical term for this minefield uncertainty is “Knightian” uncertainty.

Haldane is conversant with the literature on how systems should be regulated in the face of Knightian uncertainty. Rule one, keep it simple. “Complex control of a complex system is a recipe for confusion at best, catastrophe at worst.” Complex control adds rather than subtracts uncertainty.

His example is the US constitution, four pages long. By contrast, the first draft of Christopher Dodd’s Senate financial reform bill was 1,336 pages long. (And the conference committee is not editing it!) Which, wonders Haldane, “will have a more lasting impact on behavior”?

Second, minimize the likelihood of the worst outcomes. Often the simplest way to do this is what non-economists call “structural reform”. That is, regulate structure, not behavior. Case in point: Glass-Steagall, simple “red-line regulation” and only 17 pages long, it separated commercial and securities brokerage banking businesses. (I guess the Volcker rule, by comparison, would be a pink line.)

Haldane’s counter example is yet more egregious than the US reform bill. Basel II “was anything but simple”. It comprises thousands of pages, took fifteen years to deliver, and was calibrated in the main “from data drawn from the Great Moderation, a period characterized by an absence of tail events”. Rigged with a complex menu of capital risk weights, it epitomizes “fine-line, not red-line, regulation”.

Amen.

www.housingwire.com/2010/06/25/note-to-dodd-frank-and-dimon-make-it-much-much-simpler

[sandi66]

Basel Committee: no decision yet to scrap Basel III liquidity rules

Author: Joel Clark
Source: Risk magazine | 25 Jun 2010

Regulators accept reform package will need to be reshaped but claim no decisions will be taken until July's committee meeting

The Basel Committee on Banking Supervision has not yet made a formal decision to shelve any parts of its proposed reforms to the Basel II framework, despite reports this morning claiming bank lobbyists have won their battle to limit the new rules.

Senior committee members have told Risk they were shocked to see reports suggesting the proposal for a net stable funding ratio (NSFR) would be shelved, as they don't intend to make any firm plans until the next Basel Committee meeting on July 15 at the earliest - although notes and suggestions are being circulated between committee members in advance.

"Leading up to the July meeting, there are a lot of efforts to see if we have an agreement among committee members on the direction forward, but we haven't got there yet. The committee has not agreed to the elimination of any parts of the proposal, I can say that definitively," says one US-based regulator and committee member.

"People should be very cautious about reaching conclusions prematurely, we haven't even discussed the issue yet. The committee is still in the process of going through the comments and impact assessments, and decisions haven't been reached on these issues," says a European committee member.

Regulators have admitted in recent weeks that aspects of the current proposals - including the NSFR and a proposed capital charge for the credit valuation adjustment - might need to be reworked before the measures are finalised later this year, but no firm decision has been reached on how that should be done.

The July 15 meeting in Basel is expected to be a watershed, at which decisions could be taken to postpone parts of the package, but those decisions would then need approval from the group of central bank governors and heads of supervision that oversee the Basel Committee's work.

"It is possible the committee could decide that certain parts of the agreement have to be finalised sooner than other parts of the agreement. Could the NSFR fall into that category? Yes it could, but I would challenge anybody to say there is agreement to that effect yet," says the US regulator.

If the NSFR is to be scrapped, the move would be welcomed by the many banks that have been lobbying against the proposals. Some reports this morning claimed gains by UK bank stocks reflected relief that concessions may be in the pipeline.

Although the FTSE 100 was down 0.44% shortly after 14:00 BST, some banking stocks were up - HSBC gaining 1.6% and Standard Chartered 2.2%. RBS had at one point been the biggest riser on the index, but by early afternoon had given up gains of more than 2%.

Press reports have also suggested a draft of the Basel Committee's current thinking will be presented at this weekend's meeting of the Group of 20 (G-20) leading economies in Toronto. But committee members don't expect significant Basel-related decisions to be made at the meeting.

"I'm sure it will be discussed this weekend, but my understanding is the outcome of that discussion is going to be continued support for raising the standards in support of the resilience of financial institutions, and commitment to the timetable of completion by the G-20 meeting in November," says the US regulator.

www.risk.net/risk-magazine/news/1719321/basel-committee-decision-scrap-basel-iii-liquidity-rules

[sandi66]

With Financial Regulation Agreement in Place, Is it Time to Privatize the SEC?

By Justin Rohrlich Jun 25, 2010 12:10 pm

It would be a tricky process, according to one expert. But there's no question that something needs to be done.

After a 20-hour overnight session, conferees from the House and Senate came to an agreement on details for the most comprehensive financial regulation package seen in four generations.

Assuming it passes the House and Senate next week, it will be presented to President Obama for his signature by July 4.

“This is going to be a very strong bill, and stronger than almost everybody predicted that it could be and that I, frankly, thought it would be,” House Financial Services Committee Chairman Barney Frank told reporters on Wednesday.

William Isaac, former chairman of the FDIC and current chairman of Fifth Third Bancorp (FITB), begs to differ.

“It doesn’t reform anything, not anything that needs to be reformed,” he said. “We haven’t done anything to repair this 100-year-old regulatory structure.”

The most controversial part of the bill seems to be the establishment of regulations pertaining to the over-the-counter derivatives market. JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), and Morgan Stanley (MS) held 97% of the market, which, according to the Office of the Comptroller of the Currency, had a notional value of $212.8 trillion in the fourth quarter.

This morning, Anthony Randazzo, director of economic research at the Reason Foundation and a specialist in financial regulatory policy, wrote:


We had a golden opportunity to rewrite the regulatory structure for finances in this country, ending too big to fail policies, ending perverse incentives in the market place, ending government distortions that caused so many of the problems we faced. Sadly, this is not what we've got.

Instead, conferees have agreed on a 2,000-page bill that not only fails to address many of the most severe problems in the system, but creates additional pains as well. The process was driven by politics, not a proper understanding of the causes of the crisis or problems in the system.



Client number nine, known in certain circles as former New York State Governor Eliot Spitzer, had this to say on Slate.com:


At a political level, big business over the past 30 years superficially won by limiting liability and neutering the effectiveness of regulatory supervision. And the public has ended up absorbing the enormous costs of two disasters -- one financial, one ecological. We will reclaim the proper balance and protection for the public only when we remedy these errors. Eliminate false caps on liability that distort incentives and behavior, or reestablish the effectiveness of the oversight agencies -- from the SEC to the MMS. If we don't, the tragedies of the past several years will be premonitions of the crises to come.



California Representative Darrell Issa, the top Republican on the House Government Reform and Oversight Committee, pointed out in a May 18 report titled “SEC: Designed for Failure” that the SEC’s “systemic failures” weren't addressed in the legislation.

“To put our economy back on track, Congress and the administration must work together to fix broken government agencies like the SEC, instead of enacting measures against businesses that hurt job growth and institutionalize bailouts,” he said.

But many don’t believe the SEC can be fixed and there have been calls by some to privatize the agency.

In an email to Minyanville, the Reason Foundation’s Randazzo says that, in practice, privatization of the SEC could present a number of complications:


Privatizing the SEC would be a tricky process. The regulation side could be done by shifting to more private organizations that make recommendations widely followed by the market, modeled on something like the FASB. The enforcement side would be more complex. If there is a singular, most important role for government it is to provide a sound justice system. To the extent that the SEC looks into and prosecutes fraud and other illegal activities, I’m not sure we’d want to privatize them. In theory, those functions could be kicked over to a division within the Justice Department. I’ve also seen some rough ideas on a bounty system, though that would need to be really well thought-through.

At the end of the day, financial markets need to have a regulator to enforce the law and ensure fair competition. Even from a libertarian standpoint that is a good role of government. That said, the SEC has proven sorely incompetent, partially because of the inability to attract good talent. While there certainly are parts of the SEC that could be kicked out to the private sector, and there certainly are powers to set standards that should be left up to individual companies, I think the best reform for the SEC would be to, one, be way more selective about who they hire, and, two, match that higher level of talent with more competitive compensation packages.

One organization that would have principles to follow here could be Teach for America -- is teaching a high paying job? No. Is it a glamorous job? ‘O! captain! My captain!’ moments are rare. But TFA attracts high talent because they are seen as elite. And if you are TFA alum you have that status. If the SEC were highly selective with its hiring, and made it a place for which people wanted to work (and had to work up to), then perhaps there could be significant culture shift and more effective enforcement there.



Is the SEC just filling seats to maintain mandated staffing levels?

Randazzo says:


I wouldn’t say the SEC is just filling seats. They hire smart people. But the best talent overwhelmingly goes to the Wall Street firms themselves, and the second best goes to the regulators. So if you’re constantly hiring people who didn’t get hired by Goldman to regulate the people who did get hired by Goldman, eventually the regulator is going to miss something. Or a lot of things.



As for the SEC being a less-than-prestigious entry on one’s resume, Randazzo says:


I don’t hear about a lot of people going to law school because they want to be SEC lawyers. But plenty want to be prosecutors. Nor do I hear about individuals pursuing justice degrees because they want to work on SEC strike forces. But plenty want to work for the FBI. The question the SEC needs to ask is not only how can we pay people better, but how can we create a culture of incentives and prestige such that people want to work for us like they would the Justice Department or FBI.


There’s solution out there, somewhere. The question is: Does an agency known of late more for its inability to catch wrongdoing hiding in plain sight and using government computers to view pornography on the job while swindlers construct Ponzi schemes to bilk investors out of billions have the ability to recognize it?

www.minyanville.com/businessmarkets/articles/financial-regulation-fifth-third-bancorp-jpmorgan/6/25/2010/id/28932

[sandi66]

Chico's Butte Community Bank gets orders from FDIC
Staff Reports
Posted: 06/25/2010 01:48:46 PM PDT


CHICO — The Federal Deposit Insurance Corp. has notified Butte Community Bank that it needs to take corrective action.
The FDIC announced today that the bank must take one or both of the following actions: The bank must sell enough stock to adequately capitalize itself, or can accept an offer to be acquired by another institution.

The FDIC ordered Butte to take these actions in May, noting the bank was "significantly undercapitalized."

The Chico-based bank is a subsidiary of Community Valley Bancorp, and has 15 branches.

No one from the bank could be reached immediately for comment.


www.orovillemr.com/news/ci_15378293

[sandi66]

Jun. 25, 2010
Copyright © Las Vegas Review-Journal

Federal regulators say SouthwestUSA Bank's financial condition deteriorating

By JOHN G. EDWARDS
LAS VEGAS REVIEW-JOURNAL Federal regulators today disclosed a serious enforcement action taken against SouthwestUSA Bank of Las Vegas, noting that the bank's financial condition is deteriorating.

The Federal Deposit Insurance Corp. directive to take "prompt corrective action" explained that the $214 million bank was notified in November that it was undercapitalized. SouthwestUSA submitted a capital restoration plan, but the FDIC directive said the plan was unacceptable.

"The bank's unacceptable capital plan and deteriorating condition and management's inability to return the bank to a safe and sound condition require that prompt corrective action be taken immediately," the FDIC stated in the directive signed by J. George Doerr, deputy regional director, on May 7.

Attempts to reach executives at the bank were unsuccessful.

The FDIC ordered the bank to sell enough shares to be adequately capitalized or to accept a buyout offer from another bank.

SouthwestUSA lost $866,000 in the first quarter, down from $3.4 million in the fourth quarter of last year, according to data compiled by SNL Financial. Nonperforming assets, which include past-due loans and foreclosed assets, increased to 28 percent of total assets from 24 percent at year-end 2009.

Contact reporter John G. Edwards at [e-mail] or 702-383-0420.

www.lvrj.com/business/federal-regulators-say-southwestusa-bank-s-financial-condition-deteriorating-97175014.html

[sandi66]

Cameron vows to deal with 'imbalances' between

Saturday, 26th June 2010

Date: 26 June 2010

By ANDREW WOODCOCK

DAVID Cameron tried to smooth over a growing transatlantic spat over the economy as world leaders began the G8 summit in Canada.

Fresh from unveiling a £40 billion package of tax rises and spending cuts in Tuesday's austerity Budget, the Prime Minister is at the forefront of calls for countries which have got deep into debt during the financial crisis to start paying down their deficits

But the United States – which also borrowed heavily to counter the recession – is more cautious, with president Barack Obama last week warning fellow members of the G20 group of major economies not to risk stalling global recovery by cutting too soon.

The US wants to keep spending to stimulate growth, amid fears of mounting unemployment and a possible double-dip recession.

In a round of TV interviews as the G8 Muskoka summit kicked off, Mr Cameron insisted that there was "no difference" between him and Mr Obama on the need for action to deal with imbalances threatening the world economy. And he stressed that the US president recognised that each country must take steps which were appropriate to its national circumstances.

Countries with healthy budget surpluses, like China, can stimulate growth by boosting domestic demand, but those which have run up debts need to restore confidence by "living within their means", he said.

"What I want to achieve above all is to get the right outcome for the world economy and that means those countries, like our own, with big budget deficits have to move faster. Other countries with surpluses can afford to do different things. Dealing with those imbalances – that is what this is really about."

He added: "Do we need to deal with the imbalances between the big surplus countries, like China and the big deficit countries like America and us? Yes, we do need to deal with these imbalances and that is what President Obama is speaking about."

This year's G8 gathering is focusing on development, with Canada pushing initiatives on child and maternal health in the poor world. The eight members – Britain, the US, France, Germany, Italy, Canada, Japan and Russia – will be joined by leaders of the Caribbean countries Haiti and Jamaica.

But Mr Cameron is putting on pressure for members to fulfil promises to double development aid made at the 2005 summit in Gleneagles. An accountability report showed they will fall $18bn short of pledges, with aid from countries like Japan and Italy actually falling over the past five years.

In a pointed article for Canada's Globe and Mail newspaper, Mr Cameron warned that the summits must be "more than just grand talking shops" and called for "fresh thinking and renewed political leadership" on issues like aid. And he later acknowledged it was "frustrating" when pledges made with great fanfare were not fulfilled.

"We made promises back in Gleneagles. We should stick to those promises," he said.

news.scotsman.com/uk/Cameron-vows-to-deal-with.6385633.jp

[sandi66]

Regulators close banks in Fla., Ga., NM
(AP) – 15 minutes ago

WASHINGTON — Regulators have shut down banks in Florida, Georgia and New Mexico, lifting to 86 the number of U.S. bank failures this year.

The Federal Deposit Insurance Corp. on Friday took over Peninsula Bank, based in Englewood, Fla., with $644.3 million in assets and $580.1 million in deposits. The agency also seized First National Bank in Savannah, Ga., with $252.5 million in assets and $231.9 million in deposits, and High Desert State Bank, based in Albuquerque, N.M., with $80.3 million in assets and $81 million in deposits.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP) — Regulators on Friday shut down banks in Florida and Georgia, lifting to 85 the number of U.S. bank failures this year.

The Federal Deposit Insurance Corp. took over Peninsula Bank, based in Englewood, Fla., with $644.3 million in assets and $580.1 million in deposits. The agency also seized First National Bank in Savannah, Ga., with $252.5 million in assets and $231.9 million in deposits.

Miami-based Premier American Bank agreed to assume the assets and deposits of Peninsula Bank. The Savannah Bank is assuming all the deposits and some of the assets of First National Bank; the FDIC will retain most of the assets for eventual sale.

In addition, the FDIC and Premier American Bank agreed to share losses on $437.6 million of Peninsula Bank's assets.

The failure of Peninsula Bank is expected to cost the deposit insurance fund $194.8 million; that of First National Bank is expected to cost $68.9 million.

With 85 closures nationwide so far this year, the pace of bank failures far outstrips that of 2009, which was already a brisk year for shutdowns. By this time last year, regulators had closed 45 banks. The pace has accelerated as banks' losses mount on loans made for commercial property and development.

The number of bank failures is expected to peak this year and be slightly higher than the 140 that fell in 2009. That was the highest annual tally since 1992, at the height of the savings and loan crisis. The 2009 failures cost the insurance fund more than $30 billion. Twenty-five banks failed in 2008, the year the financial crisis struck with force, and only three succumbed in 2007.

As losses have mounted on loans made for commercial property and development, the growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $20.7 billion as of March 31.

The number of banks on the FDIC's confidential "problem" list jumped to 775 in the first quarter from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

A majority of institutions posted profit gains in the January-March quarter. But many small and midsized banks are likely to continue to suffer distress in the coming months and years, especially from soured loans for office buildings and development projects.

The FDIC expects the cost of resolving failed banks to total around $60 billion from 2010 through 2014.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government.

www.google.com/hostednews/ap/article/ALeqM5gg9RS-ZvzlfzrcnujKaEDMXrYyYgD9GIJJJ04

[sandi66]

Republican Politician and Former VP, Cheney, Hospitalized

June 26 2010 07:57:32

Prominent GOP leader and former U.S. Vice President Dick Cheney was hospitalized earlier today after experiencing discomfort. According to Fox News, he has endured a great deal of health-related problems over the years, including a quadruple bypass surgery, two artery-clearing angioplasties and four heart attacks.

Cheney was admitted to George Washington University Hospital on Friday and it has been reported that he is expected to remain hospitalized through the end of the weekend, according to his spokesman Peter Long. It is unknown at this time as to whether the discomfort that he experienced was related to the laundry list of heart problems that he has suffered from in the past.

The former Vice President’s first heart took place in 1978 when he was 37 years old, and he suffered his second heart attack just six years later in 1984. Four years later in 1988, Cheney sustained his third heart attack and he was forced to undergo quadruple bypass surgery in an attempt to have his arteries unclogged.

The Republican politician suffered his fourth in November 2000, two months before he took office as the U.S.’ 46th Vice President. Cheney’s most recent heart attack occurred four months ago, which forced doctors to issue a heart catheterization as well as a stress test.

tothecenter.com/news.php?readmore=12945

[sandi66]

Is $1 billion G-20 summit worth it?From Xuan Thai, CNN White House producer

June 26, 2010 -- Updated 1055 GMT (1855 HKT)

Washington (CNN) -- As Dr. Evil learned in the Austin Powers movies, $1 billion isn't quite what it used to be.

The upcoming G8 and G-20 summits in Toronto are expected to top $1 billion in costs. At such a large price tag, it's reasonable to ask if the meetings are worth it. But former top White House aides say that even with the hefty price, the meetings more than pay for themselves in both tangible and intangible ways.

According to David Gergen, who worked for five former presidents and has participated in several such summits, the world has already seen a return on the current $1 billion investment.

"The G-20 meeting is expensive, but it has already paid for itself because China announced a strengthening of its currency, which is good for the United States and for many other countries," Gergen said. "China only announced it was going to revalue its currency upward because the G-20 was going to occur."

The summits also offer an opportunity for leaders to meet face to face, giving them a chance to build relationships and sometimes change first impressions.

"President [Ronald] Reagan's first G8 was in Canada, and at that time he was sort of seen as a cowboy by much of the world," Gergen recounted.

France, Germany, Italy, Japan, the United Kingdom, the United States, Canada and Russia make up the industrialized countries of the G8. The G-20 is made up of the 20 top economies in the world -- 19 countries and the European Union.

After that first summit, Gergen said, Reagan's image changed, "President Reagan had gained much more respect from other heads of state but as well as from the public around the world." Gergen said Reagan even changed the perception of the international media who covered the meeting.

Giving a behind-the-scenes peek, Gergen described past G8s as an opportunity to build coalitions and relationships. Reagan initially didn't like the idea of big international meetings, but he eventually found the G8 to be "enormously constructive," said Gergen.

The one on one sessions with world leaders were helpful in getting "across the United States' point of view and bringing along allies," Gergan said.

Former George W. Bush adviser Dan Price had similar sentiments, pointing out that discussions at these summits aren't limited to the larger and more formal group settings. There are opportunities for informal talks too, he said.

"Discussions continue in the corridors. There are bilaterals. Discussions continue over meals. You achieve a sense of understanding," said Price.

And in times of crisis like in the autumn of 2008, when the world economies were faltering, Price said a global meeting of this magnitude can help build confidence. It was one of the reasons why former President George W. Bush wanted to elevate the G-20 from a meeting that historically included only financial heads to meeting with heads of state.

"It's a very significant gathering. The G-20 nations control more than 85 percent of the world GDP, so what they discuss and what they decide has an important impact on the global economy, and they're not meeting for a photo op," said Price.

With the G-20 focusing more on macro-economic needs, the G8 has shifted its focus to development needs. Price pointed out that over the last five to seven years, the G8 has done enormous work in areas such as HIV/AIDS, malaria, tuberculosis, clean drinking water and neglected tropical diseases.

But Price saids there's another reason for the meeting, and that's simply to foster a cooperative spirit.

"You also get a very palpable sense that it is a global community, and that one must act together rather than relapsing into unilateralism."

With a billion-dollar price tag, getting to know your neighbors has become a very expensive endeavor.

edition.cnn.com/2010/POLITICS/06/25/g20.g8.summits/?hpt=C2&fbid=E9HI7E1-l6L

[sandi66]

Merkel concedes defeat on bank levy at G-8

26.06.2010

Großansicht des Bildes mit der Bildunterschrift: Merkel has failed to get non-Europeans on boardGerman Chancellor Angela Merkel admitted that she had failed to convince other leaders at the G-8 summit to adopt a global bank tax. But she dismissed talk of a rift with the US over European austerity measures.

Before heading to Canada to meet with leaders of the world's top economies, German Chancellor Angela Merkel had hoped to get an agreement on a worldwide tax on bank risk-taking and a tax on financial transactions, but she has conceded that neither G-8 nor G-20 countries were likely to endorse the plan.



"I think that we Europeans have a more positive approach (to the tax issue) ... but other countries will not join in," Merkel said on Friday after the first day of talks at the G-8.



Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift: EU leaders want banks to pay for their share of the crisis
Leaders of the European Union agreed on June 17 to call on the G-20 group of advanced and emerging economies to enact both measures to discourage risk-taking by banks and force banks to pay for bank failures. Sweden has already imposed a levy on its banks and Britain, France and Germany have all agreed to do the same.



But summit host Canada came out against the plans, partly because Canadian banks have emerged relatively unscathed from the economic crisis. Other participants see the taxes as a poorly timed intervention as banks and economies focus on recovering from the economic meltdown.



"In most states, the problem is that the banking sector has not reached pre-crisis levels of lending to the real economy. The introduction of such taxes and levies would hardly be a factor to stimulate such lending," said Andrei Bokarev, an economic advisor to Russian President Dmitry Medvedev.



More disagreement?



Despite conceding defeat on the bank taxes, Merkel played down concerns about a greater rift in economic policy between Europe and the United States.



A disagreement appeared to be developing between Washington and Berlin in the run-up to the event in Huntsville, near Toronto. US officials had voiced concerns that too much zeal in making cuts to tackle the budget deficits of European nations could hamper growth in the future.



Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift: US President Obama is against harsh spending cuts
Speaking after early discussions, Merkel said she believed it was possible for countries to gain a tighter grip on public spending without derailing growth.



"I have made it clear that we need sustainable growth and that growth and intelligent austerity measures don't have to be contradictions," Merkel told journalists. "The discussion was not controversial, there was a lot of mutual understanding," she said.



US President Barack Obama earlier insisted that national economic policies must focus on bolstering the recovery, rather than immediately tackling deficits.



"This weekend in Toronto I hope we can build on this progress by coordinating our efforts to promote economic growth, to pursue financial reform, and to strengthen the global economy," Obama said at the White House on Friday.



Germany defends austerity measures



Merkel had said that G-8 members should start to cut their deficits immediately, despite fears that this could kill the global recovery.



Bildunterschrift: Großansicht des Bildes mit der Bildunterschrift: Germany's Angela Merkel arrived in Canada amid trans-Atlantic tensions over economic policy
"It is time to reduce the deficits. Europe has experienced what it means to have too big deficits," she told journalists on arrival at the summit.



Merkel, as head of Europe's largest economy, has led moves to slash spending in the wake of the eurozone debt crisis. Critics have said that the more than 80 billion euros ($98 billion) in savings announced by Merkel over the next four years will hit growth.



"We need growth that doesn't rely on debt," Merkel insisted. "The world needs a new architecture for financial markets and the EU and I will push for that very intensively."



Berlin has support in Europe



Other EU countries, like Britain, are following the German approach. British Prime Minister David Cameron arrived at his first major international summit days after laying out a budget aimed at tackling Britain's own record deficit. Cameron argued that a failure to reduce the deficit would pose an even bigger threat to the recovery.




"There must be the flexibility for countries to act, taking account of their own national circumstances. But I believe we must each start by setting out plans for getting our national finances under control," Cameron wrote in an article for Canada's Globe and Mail newspaper.



However some, including France and the US, object to Britain and Germany's cuts. According to critics, measures such as pay freezes will thwart demand for products from other struggling European economies.



Bildunterschrift: Britain's Prime Minister David Cameron is making his global debut at the summit


Hosts Canada back the US



Canadian Prime Minister Stephen Harper said in a letter last week to G-20 leaders that major Western countries must "send a clear message" about their long-term plans to sharply reduce deficits.



But he also warned of lurking danger. "The fiscal stimulus we have implemented was necessary to protect our economies from a much worse crisis," he wrote.



Merkel arrived in Canada on Friday, and flew to Huntsville, the resort where the summit opened at midday local time. The topics up for discussion aside from economic policy include the Middle East and the conflict surrounding Iran's nuclear program as well as Afghanistan.



The economic debate is likely to come to a head on Saturday and Sunday, when an additional 11 countries will join the talks, plus the European Union, as the G-8 turns into the G-20 summit. Together, the G-20 nations make up two-thirds of the world population and represent about 85 percent of global economic power.


www.dw-world.de/dw/article/0,,5732220,00.html

[sandi66]

Your messages for the Queen

June 25, 2010 10:50 AM

The Queen graces the cover of HELLO! Canada's Special Collector's Edition. (HELLO! Canada)

Canada will be welcoming royalty next week when the Queen and Prince Philip arrive for an official visit.

Queen Elizabeth II will travel through the country from June 28 to July 26, stopping in Nova Scotia, Ontario and Manitoba.

The trip, which was announced last summer, will be the Queen's 24th official visit to Canada. Her last visit was in 2005.

www.cbc.ca/news/yourcommunity/2010/06/your-messages-for-the-queen.html

[sandi66]

Iraq’s Kirkuk gets $65 million as part of share in oil royalties



By Fatima Kamal



Azzaman, June 26, 2010



The oil-rich city of Kirkuk has received more than $65 million (approx. 80 billion dinars) as part of its share from oil exports.



Under new Iraqi legislation, oil-producing provinces have the right to $1 from each barrel their oil fields export.



The sum was Kirkuk’s share for the past four months. The money should be used specifically for reconstruction and development purposes.



The central government has directly transferred the money to a commission implementing reconstruction projects in the province.



“We have formed a committee to identify the projects on which the money will be spent,” said Qassem Hamza, a senior provincial official.



It is the first time oil-producing provinces are given their share of royalties under the new regulations. Hamza said the sum represented Kirkuk’s share for the first four months of this year.



An Iraqi economist, refusing to be named, said the allocations were bound to reinvigorate the province’s economy “if spent wisely.”



More money is in the pipeline for Kirkuk. Last month, its prolific fields exported 13.347 million barrels. On average, Hamza said he expected about $15 million a month, barring negative price fluctuations on international markets.



The southern Province of Basra is by far the largest exporter in the country but the least developed.



Basra is expected to reap $50 million on average every month. The Finance Ministry is yet to issue Basra’s share for the first four months of this year.



Last month, Basra oil fields exported more than 45 million barrels a day, according to statistics issued by the Oil Ministry.


www.azzaman.com/english/index.asp?fname=news%5C2010-06-26%5Ckurd.htm

[sandi66]

Wall Street bill boosts Obama reform legacy
--------------------------------------------------------------------------------
| DATE: 2010-06-26

WASHINGTON, June 26, 2010 (AFP) - Barack Obama is about to affix the tightest handcuffs on Wall Street in decades, adding a finance reform bill to his historic health overhaul, and boosting his claims for a transformative presidency.

Yet Obama's triumph, to be cemented by Congress next week, comes at a moment of deep political peril, with the president again mired in multiple crises, from America's worst environmental disaster to a slowed Afghan war plan.

Hopes that economic growth would power cuts in the high unemployment rate and revive Democrats' approval ratings before mid-term elections in November have also taken a hit, and Obama's personal popularity is plumbing new lows.

The final outline of the finance bill, touted by the president as an insurance policy against new economic meltdowns that will hold greed-soaked corporate titans accountable, was agreed early Friday by lawmakers.

Obama said Friday the package, expected to face final votes in Congress next week, contained 90 percent of his wish list, with its consumer protection agency, new curbs on bank trading and credit card rules.

"We are poised to pass the toughest financial reform since the ones we created in the aftermath of the Great Depression," he said.

On Saturday, Obama renewed his call for final approval of Wall Street reform.

"I don't have to tell you why these reforms are so important," Obama said in his weekly radio address.

"We'll put in place the strongest consumer financial protections in American history, and create an independent agency with an independent director and an independent budget to enforce them."

Whatever charges Obama's critics throw at him, they can hardly dispute he has lived up to his vow to have triggered massive political change.

But has he driven change further than the current volatile political climate can bear? -- a question crucial to the president's own prospects and one that will help shape the battleground for November's elections.

Obama's biggest previous legislative achievements, like his massive 787 billion dollar economic stimulus plan or the sweeping health care reform, are at worse unpopular, or at best yet to be evaluated.

Yet the White House will hope that the strong wave of political anger roiling US politics will turn the law cracking down on corporate excess into an electoral trump card that Republicans will pay a price for opposing.

Future prospects for Obama's still ambitious legislative agenda appear uncertain meanwhile.

His efforts to inject new stimulus into the economy, to alleviate the plight of the unemployed masses, and to tackle other big ticket items like immigration reform and climate change have fallen prey to election year political gridlock.

And the Obama bandwagon could come to a sudden halt, if Republicans realize hopes to wrest control of the House from Democrats and make things tighter in the Senate in November.

While all US administrations profess to ignore polling data, this White House may have been chastened by the findings of the latest Wall Street Journal/NBC News poll this week.

Obama's approval rating hit his lowest point yet: 48 percent disapproved of his job performance, while only 45 percent approved.

Two in three people said the country was headed in the wrong direction and only one third said it was improving under Obama's leadership.

The numbers may partly be a response to the latest crisis to rock the White House -- the oil disaster in the Gulf of Mexico, which has dragged on for weeks with massive amounts of crude and gas spewing into the ocean.

Faced with BP's inability to plug the leak, delays with compensation payments from the oil giant, entire Gulf coast industries mothballed by the crisis and an environmental disaster, Obama has had trouble projecting command.

Critics dismissed an Oval Office address last week on the disaster as lackluster and the spill will likely dog the president until the mid-terms, in which voters traditionally give a first-term leader's party a bloody nose.

Obama's authority was again challenged this week, when an article surfaced in which Afghan war General Stanley McChrystal mocked members of the president's war cabinet.

Obama won plaudits from the pundits this time, by swiftly recalling the general from the war zone and sacking him, then pulling off a political masterstroke by appointing talismanic General David Petraeus in his place.

But the episode invited unwelcome scrutiny on the progress of Obama's critical troop surge strategy, delays in implementing the plan, and provoked questions about whether the Taliban and not US forces had momentum.

An oft cited truism in American politics is that it is the economy which dictates election results.

If so, there will be consternation among Obama supporters.

The Commerce Department lowered its estimate on GDP growth downward for the second time to 2.7 percent on Friday, prompting fears the recovery is slowing.

And a weaker than expected job report for May left unemployment at a crushing 9.7 percent.

www.haveeru.com.mv/english/details/31196/Wall_Street_bill_boosts_Obama_reform_legacy

[sandi66]

Weekly Scenario: Equity Diversified Funds Gains More than Index Funds

Published on 26th June, 2010 17:10:00

Most of the equity fund categories witnessed gains during the week end period 25 June 2010. Among the major equity fund categories, Equity Diversified funds category gained 0.80%, Tax Savings funds rose 0.68% and Index funds climbed 0.14% during the week end period 25 June 2010. Moreover equity diversified funds gained more than index funds. Among the sector fund categories, FMCG Funds category was the biggest gainer by 2.53%, followed by Telecom Fund (2.51%), Pharma Funds (1.62%), Auto Fund (1.12%) and Media Funds (0.75%). While Banking Funds fell 0.42% and Infotech Fund lost 0.63%. Heavy profit booking in banking and IT sectors lead to the fall of these sector funds.
Among the sub categories in the debt funds, Short Term Income Funds gained 0.11%, Floating Rate Income Funds - Long Term surged 0.10%, Floating Rate Income Funds - Short Term, Ultra Short Term Funds and Liquid Funds climbed 0.09% each, Income Funds rose 0.08%, and Gilt - Short Term gained 0.02% over one week period ended 25 June 2010. On the other hand Gilt - Medium & Long Term category declined by 0.03%.

Sensex rose 3.71 points or 0.02% to 17,574.53 in the week ended 25 June 2010. While Nifty rose 6.45 points or 0.12% to 5,269.05.

Small-cap and mid-cap indices outperformed the Sensex. The BSE Mid-cap index jumped 1.53% to 7,082.51 and the BSE Mid-cap index gained 1.62% to 8,989.20.

Buying was seen in Consumer Durables, which gained 3.03%, followed by Oil & Gas (3.02%), Healthcare (2.97%), FMCG (2.79%) and Realty (2.21%). The major sectoral losers were IT and Bankex.

Equity Diversified Funds

NAV of the Equity Diversified Funds category gained 0.80% in the week ended 25 June 2010, however the gains were lower than the previous week's gain of 1.69%. Among the schemes in the equity diversified category, DSP BR Natural Resources & New Energy Fund gained the maximum of 3.34%, followed by JM HI FI Fund which climbed 3.09%, SBI Magnum Comma Fund rose 2.82%, Tata Growing Economies Infrastructure - Plan A jumped 2.77% among others. Religare AGILE Fund and Principal Services Industries Fund were the worst performers in this category, losing 1.66% and 1.43% respectively.

Tax Savings Funds

Tax savings Funds category gained 0.68% over one week period as on 25 June 2010. Sahara Tax Gain Fund and Quantum Tax Savings Fund were the top performers with a return of 1.84% and 1.71% respectively during one week period. Among the other schemes in the category, Fortis Tax Advantage Plan (ELSS) rose 1.42%, ING Tax Savings Fund climbed 1.36% and HDFC Tax Saver Fund surged 1.31%. Bharti AXA Tax Advantage Fund - Eco and Bharti AXA Tax Advantage Fund ended at the bottom of the table losing 0.14% and 0.09% respectively.

Index Funds

The Index Fund category gained 0.14%, over one week period ended 25 June 2010. However the category gains were lower than gains in the previous week end period. Benchmark S&P CNX 500 Fund was the highest gainers in this category as its NAV appreciated by 0.84%. Among the other schemes in the category, LICMF Index Fund - Sensex Advantage Plan rose 0.55%, ING Nifty Plus climbed 0.26% and Birla Sun Life Index Fund surged 0.18%. HDFC Index Fund-Sensex Plus Plan and HDFC Index-Sensex Plus Plan ended at the bottom of the table losing 0.06% and 0.05% respectively.

Sector Funds

Pharma Funds category gained 1.62% over one week period ended 25 June 2010. All the schemes in this category gained, while UTI-Pharma & Healthcare Fund ended the week as the top performer with a return of 2.36%.

Bank Funds category lost 0.42% over one week period ended 25 June 2010. Only 2 out of 7 schemes in this category registered gains, while the rest ended up as losers for the week end period. JM Financial Services Sector Fund rose 0.08% and Sundaram BNP Paribas Financial Services Opportunities Fund climbed 0.06%. Religare Banking Fund and ICICI Pru Banking & Financial Services Fund were the major losers in this category. Their NAV fell 0.91% and 0.81% respectively.

FMCG Funds category rose 2.53% over one week period ended 25 June 2010. However the gains were lower than the previous week end gain of 3.60%. All the schemes in this category were able to deliver gains. ICICI Pru FMCG Fund was the top performer in this category. In terms of NAV performance, the fund's NAV gained 3.61% over the one week period.

Infotech Funds category lost 0.63% over one week period ended 25 June 2010. Birla Sun Life New Millennium Fund was the only gainer in this category. Its NAV gained 0.11%. Franklin Infotech Fund was the biggest loser in this category as their NAV fell 1.10%.

Hybrid Funds

Among the sub categories in the hybrid funds, Equity Oriented Balanced Funds surged 0.59%, followed by Debt Oriented Balanced Funds (0.22%), Monthly Income Plans (0.18%), Asset Allocation Funds (0.15%) and Arbitrage Funds (0.01%) during the one week period ended 25 June 2010.

SBI Magnum NRI Investment Fund-Flexi Asset and UTI-Variable Investment Scheme gained 0.29% and 0.01% respectively under asset allocation balanced fund category.

JM Balanced Fund and HDFC Balanced Fund were the highest gainer in equity oriented balanced fund category as its NAV appreciated by 1.24% and 1.19% respectively. HDFC Children's Gift Fund-Investment Plan was the next highest gainer by 1.14%. Among the other schemes in the category, ING Balanced Fund climbed 1.08%, ICICI Pru Child Care Plan-Gift Plan surged 1.04% and DSP BR Balanced Fund added 0.98%. Benchmark Equity & Derivatives Opportunities Fund was loser in this category as their NAV eroded by 0.02%.

LICMF was the highest gainer in debt oriented balanced fund category as its NAV appreciated by 0.61%. UTI-Retirement Benefit Pension Plan was the next highest gainer by 0.39%. Among the other schemes in the category, HDFC Children's Gift Fund-Savings Plan climbed 0.38%, UTI-CRTS surged 0.32% and UTI-Mahila Unit Plan added 0.29%. DWS Money Plus Advantage Fund was the worst performer in this category delivering just 0.03%.

Exchange Traded Funds (ETFs)

Gold ETF category gained 0.71% during the week end period. All the schemes in this category ended as gainers as at the end of the week.

The other ETF category declines 0.01% during the week ended 25 June 2010. Hang Seng BeES and Junior BeES were the top performers by 2.33% and 1.58% respectively. The only debt ETF i.e. Liquid BeES witnessed gain of 0.08%. Bank BeES and Reliance Banking Exchange Traded Fund were the biggest losers in this category. Their NAV declined by 1.19% and 1.18% respectively.

Debt Funds

Among the sub categories in debt fund, Short Term Income Funds category gained the maximum of 0.11%. ICICI Pru Long Term Plan was the highest gainer in the entire debt fund category by 0.31%, followed by LICMF Bond Fund which surged 0.28%, IDFC G-Sec Fund - STP climbed 0.24% and SBI Magnum Income Fund added 0.23% among others.

www.bloombergutv.com/stock-market/mutual-fund/commentary/404765/weekly-scenario--equity-diversified-funds-gains-more-than-index-funds.html

[sandi66]

Taking it to the 'Street' - Pols OK finance industry overhaul

By GEOFF EARLE Post Correspondent

With Post Wire Services

Last Updated: 8:03 AM, June 26, 2010

Posted: 3:39 AM, June 26, 2010


WASHINGTON -- Lawmakers yesterday reached a deal on a massive overhaul of Wall Street, giving President Obama a big win, but allowing city banks to dodge the most drastic regulatory proposals.

Obama lauded the agreement -- the toughest crackdown on financial institutions since the Depression -- as including "90 percent of what I proposed when I took up this fight."

The president said it would "help prevent another financial crisis like the one that we're still recovering from."

The final compromise -- reached after an all-night, 21-hour negotiating session between the House and Senate -- heads to a final vote in both chambers next week.

It regulates everything from credit and debit cards, to mortgages, to complex trades by the world's largest financial institutions.

The legislation creates a federal agency to police consumer lending, sets up a warning system for financial risks, forces failing firms to liquidate, and maps new rules for instruments that have been largely uncontrolled.

Although the votes are expected to be close, Democratic leaders hope to have the bill sent to Obama for his signature by July Fourth to hand him the second big victory of his administration after health-care reform.

Obama campaigned on reining in Wall Street, and congressional Democrats intend to hold up the legislation as a major accomplishment ahead of the November mid-term elections.

A recent poll found 79 percent of Americans blame banks for the nation's economic problems.

"The American people overwhelmingly want an end to the risky behavior on Wall Street that brought our economy to the brink of collapse," said Democratic Campaign Committee spokesman Ryan Rudominer.

"This November, voters will have a clear choice between House Democrats standing with middle-class families on Main Street, and a Republican Party that puts their political interests first in order to defend big corporate special interests."

Lawmakers trying to strike a deal were buffeted by competing arguments from industry officials, who said the new oversight would be ruinous and consumer advocates who called for strict regulation.

In a key late development, members of the New York House delegation were able to water down provisions authored by Sen. Blanche Lincoln (D-Ark.) that would have kept big city banks from investing in complex derivatives -- which Wall Street considers a vital tool to hedge risk.

Fourteen New York lawmakers and an even larger group of centrist "New Democrats" had threatened to oppose the bill if the provision wasn't changed.

"What we were fighting against was sort of some out-of-control pitchfork populism against Wall Street," said Rep. Michael McMahon (D-SI).

"I think we were able to come up with a very reasonable package, one that makes sense and helps New York."

House Speaker Nancy Pelosi cleared New York House members to negotiate with Lincoln on the final deal in congressional hallways.

New York lawmakers asked Sen. Charles Schumer to get involved in the final talks, according sources familiar with the endgame.

But Schumer stayed on the sidelines, the sources said.

Schumer, himself a conferee, voted for the final conference agreement, which passed 7-5.

"One of the most important and enduring reforms in this bill is the brand new agency that will focus on helping consumers and prevent them from being ripped off," Schumer said.

Mayor Bloomberg said, "I want to thank New York's congressional delegation and groups like the centrist House Democrats for making the final product better for our national economy, better for consumers and shareholders, and better for New York City."

Bank stock soared as investors saw regulations wouldn't be as stringent as they feared.

The final deal:

* Prohibits banks from making risky bets with their own cash, but lets them invest 3 percent of their capital in hedge and private-equity funds.

* Limits the ability of banks to trade derivatives, forcing them to spin investments off into subsidiaries, but lets them use interest-rate swaps to hedge their risks.

* Creates a consumer-protection bureau and contains other provisions to protect consumers from shady lenders and aggressive credit-card companies.

* Slaps banks with up to $19 billion in fees and seeks to prevent future bailouts.

Democrats "obviously are going to market this as a short-term win because -- whoo-hoo! -- they cracked down on Wall Street," a senior GOP strategist scoffed. "My guess is there's plenty in there that will end up being owned by the Democrats long-term that they will come to regret."

Booms and busts


WINNERS

President Obama: The president — here with France’s Nicolas Sarkozy at the G-8 summit in Huntsville, Ontario, yesterday — gets his second big legislative win after health care. Changes subject from the Gulf spill.

Car dealers and pawn shops: Special-interest politics at its worst. Both managed to get exemptions from oversight of new consumer protection board.

Mayor Bloomberg, New York lawmakers: Won last-minute concessions for the city’s most important industry.

New York City banks, hedge funds: They would have rather seen no new legislation, but dodged the most devastating proposals.

Congressional Democrats: Beleaguered party finally gets something to campaign on — taming Wall Street — for the November mid-term elections.

LOSERS

Left-wingers: Didn’t get anything like the most stringent anti-Wall Street proposals they were pushing.

Republicans: Politically, they’re on the wrong side of the issue, and could be portrayed as tools of Wall Street in the November elections.

Credit-card companies: Already facing new regulations outlawing their most egregious practices, they won’t be able to squeeze small shops as much on “swipe” fees.

Sen. Blanche Lincoln (D-Ark.): Fighting for her political life, she pushed a plan that would have killed city banks by outlawing derivatives trading, but the proposal was significantly watered down.

Rating agencies: Moody’s and others subject to new, stringent oversight after botching calls on risky firms.

What’s in the financial-reform agreement for consumers:

Financial-protection bureau
* Creates an independent Consumer Financial Protection Bureau to set rules for banks, mortgage lenders and credit-card companies.

Credit scores
* Consumers get to see their credit score if a landlord or bank uses it to deny a lease or loan.

Brokers
* Study of the brokerage industry to determine whether stockbrokers should have a fiduciary duty to clients.

Plastic
* Requires the minimum purchase amount for credit-card transactions to be no more than $10, while giving the Fed the power to limit the fees that card issuers can collect on debit-card transactions.

Mortgage reforms
* No prepayment penalties for people with adjustable-rate mortgages. Brokers can’t get bonuses for pushing bad loans instead of their best offer.

State laws
* Often tougher state consumer-protection laws would apply to banks and other financial institutions, including national banks.

www.nypost.com/p/news/national/taking_it_nUPfV2H5PxHfw8bcORL3rO/1

[sandi66]

Banks ‘dodged a bullet’ on derivatives

Financial reform bill watered down during congressional negotiations

By Christine Harper
BLOOMBERG NEWS
Updated: June 27, 2010, 6:52 am / 0 comments
Published: June 27, 2010, 12:30 am

Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said.

A deal reached by members of a House and Senate conference diluted provisions from the tougher Senate bill, limiting rather than prohibiting the ability of federally insured banks to trade derivatives and invest in hedge funds or private equity funds.

Banks “dodged a bullet,” said Raj Date, executive director for Cambridge Winter’s Center for Financial Institutions Policy and a former Deutsche Bank AG executive. “This has to be a net positive.”

Hashed out almost two years after the worst financial crisis since the Great Depression, the legislation shepherded by Senate Banking Committee Chairman Christopher Dodd and House Financial Services Chairman Barney Frank places limits on potentially risky activities such as proprietary trading or over-the-counter derivatives and gives regulators new powers to seize and wind down large, complex institutions if needed.

The overhaul, which still requires approval from the full Congress, won’t shrink banks deemed “too big to fail,” leaving largely intact a U.S. financial industry dominated by six companies with a combined $9.4 trillion of assets.

The changes also do little to solve the danger posed by leveraged com-

panies reliant on fickle markets for funding, which can evaporate in a panic like the one that spread in late 2008.

The legislation is “largely a fig leaf,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D. C. “Given where we were when this got started, I’d have to imagine the Wall Street firms are pretty happy.”

Banks avoided drastic curbs on their highly profitable derivatives businesses. Lenders including JPMorgan and Citigroup Inc. will be required to move less than 10 percent of the derivatives in their deposit-taking banks to a broker-dealer division during the next two years, which may require additional capital.

Goldman Sachs and Morgan Stanley, which were the two biggest U. S. securities firms before converting to banks in September 2008, won’t be as affected because they kept most of their derivatives in their broker-dealer units.

“There’s going to be some adaptation, but I don’t think there’s going to be any colossal impact,” said Benjamin Wallace, an analyst at Grimes&Co. in Westborough, Mass., which manages $900 million and holds stakes in Bank of America Corp., JPMorgan and Wells Fargo & Co.

Derivatives rules mean “there’s going to be a capital raise, but the analysis we’ve seen suggests we’re talking in the pennies in terms of dilution” of earnings per share, he said.

Senator Blanche Lincoln, a Democrat from Arkansas, had originally advocated forbidding banks that receive federal support such as deposit insurance from trading swaps, a rule that could have required banks to spin off those businesses.

The final agreement provides a number of exemptions: Banks can continue trading derivatives used to hedge their risks and can keep trading interest- rate and foreign-exchange contracts. Banks will have up to two years to move other types of derivatives, such as credit default swaps that aren’t standard enough to be cleared through a central counterparty, into a separately capitalized subsidiary.

The rules are “nowhere as bad as what the banks might have feared as recently as a week ago,” Bill Winters, the London-based former co-chief executive officer of JPMorgan’s investment bank, told Bloomberg Television. “Banks have pretty much factored in already the idea that most derivatives will have to be cleared through a central clearing counterparty. Not a huge surprise and probably not a huge cost either.”

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. They include credit-default swaps, which act like insurance for investors in case a debt issuer can’t repay.

Swaps sold by American International Group Inc. that later went sour helped push the insurer to the brink of bankruptcy and triggered a $182 billion federal bailout of the New York-based company during the near collapse of the financial system in 2008.

www.buffalonews.com/2010/06/27/1096175/banks-dodged-a-bullet-on-derivatives.html

[sandi66]

Sunday, Jun. 27, 2010
Changing the Rules
Overhaul affects Main Street, Wall Street
By Spencer Gaffney

WASHINGTON -- The Senate and House will take up much-anticipated financial reform legislation this week when the lawmakers vote on the Dodd-Frank bill, the most sweeping financial reform since the Great Depression.

The bill goes to both chambers after a House-Senate conference committee thrashed out a compromise version during two weeks of meetings that ended Friday.

All 27 Democrats on the conference committee voted for the bill and all 16 Republicans voted against.


The bill is named for Sen. Chris Dodd, D-Conn., who has announced he will retire when his current term expires, and Rep. Barney Frank, D-Mass.

Congressional leaders say they want to get the Dodd-Frank bill through Congress and to President Obama's desk before the July 4 recess.

Obama had pushed for financial regulatory reform and is expected to sign off on the bill.

"The reforms making their way through Congress will hold Wall Street accountable so we can help prevent another financial crisis like the one that we're still recovering from," said Obama in a statement Friday.

Here are some of the ways the nearly 2,000-page Dodd-Frank bill will change the way Main Street and Wall Street do business.


MAIN STREET

DEBIT CARDS

Old System: Unlike credit cards, where the user borrows money from the creditor and pays it back at the end of the month, debit cards are directly tied to money in the cardholder's bank account. When a customer uses a debit card, banks charge retailers a fee, called an interchange fee.

New System: Dodd-Frank will empower the Consumer Financial Protection Bureau, a new government agency under the Federal Reserve that will police lending, to cap interchange fees charged by banks with assets worth more than $10 billion. Retailers will be allowed to set maximum and minimum purchases for debit card users.

Why Change?: Sen. Dick Durbin, D-Ill., says that the fees banks charge for debit cards, about 1 percent or 2 percent of the purchase, are too high. These fees are a huge business for big banks, which collected almost $20 billion dollars in fees last year. Small business owners say they lose money when people purchase small items.

NEW MORTGAGE RULES

Old System: A key cause of the financial meltdown stemmed from subprime mortgages, which are home loans with high interest rates made to people with bad credit scores. Lenders were allowed to engage in so-called NINJA (No Income/No Job or Assets) loans, in which the borrower didn't have to prove he could pay back the loan.

New System: Mortgage lenders now must obtain proof of a borrower's ability to pay back the loan and borrowers will have to provide proof of income. Mortgage lenders must disclose how high the interest rate can go in an adjustable-rate mortgage.

Why Change?: During the housing bubble, mortgage lenders made loans to increasingly less creditworthy people. The policy was fine as long as house prices kept going up. Home owners could use their now more valuable home as collateral to take out a new, bigger line of credit and pay off their old mortgage. But when home prices started to stall, people who probably couldn't afford a home in the first place started to default on their mortgages. The housing bubble popped and brought down the economy with it.

PAYDAY LOANS

Old System: Payday loans are high-interest loans marketed primarily to low-income customers who otherwise don't qualify for credit. Payday loans are available from stores like Advance America or online at sites including nationalpayday.com. Payday loans typically charge from 15 percent to 30 percent interest for a two-week lending period. They are regulated on a state-by-state basis by state usury laws.


New System: Dodd-Frank would impose federal regulation on payday lenders through the Consumer Financial Protection Bureau. If it chose to cap the annual percentage rate of payday loans, banks would not be able to circumvent the law by registering in Delaware or South Dakota, two states that don't have usury laws.

Why Change?: Because those two states don't have usury laws, payday lenders register their banks there and then set up storefronts around the country and charge interest rates that exceed a state's usury ceiling. The legislation would empower federal regulators to set uniform national rules. Payday loans' high rates can put their users in severe debt; citing this concern Congress capped the interest rates at 36 percent for members of the military in 2007.

FDIC DEPOSITS

Old System: The Federal Deposit Insurance Corporation is the government agency that insures bank deposits. Until 2008, the maximum deposit the FDIC would insure was $100,000. After the financial crisis of 2008, the limit was temporarily raised to $250,000. The higher coverage is set to expire in 2013.

New System: Dodd-Frank makes permanent the increase to $250,000.

Why Change?: Supporters of the higher ceiling contend that it helps protect against bank runs. If more of peoples' money is insured, they are less likely to panic and demand their money from the bank.

One of the big beneficiaries of the higher ceiling would be small businesses. Even small businesses often have relatively high cash flows and need to access their money quickly. Companies that might have needed to spread their money between several banks to have their deposits federally insured now can consolidate their accounts.

AUTO LOANS

Old System: Buying a car is the biggest purchase many Americans make after buying a home, and car loans are designed to help pay for the car over time. Recent reports of predatory lending practices, largely targeting low-income car buyers, include "yo-yo" deals. In such a deal a dealer will have a buyer sign a "conditional contract," then call him back in a few days later and demand more money. Other issues include falsification of loan documents and dealers not paying off liens on trade-in vehicles. Car loans are regulated by the Federal Trade Commission.

New System: Unlike almost all other types of loans made to consumers, car loans will not be regulated by the Consumer Financial Protection Bureau. Lawmakers voted to "carve-out" the auto dealers from the new regulations, arguing that car loans had nothing to do with the 2008 financial crisis.

Why Change?: The military has said that curbing predatory auto loans is an issue of national security because shady used-car dealers often set up shop outside bases and trap soldiers in loan scams.

END OF FREE CHECKING?

Old System: Banks offered free checking accounts to attract customers. Banks believed that they could make more by lending the money or making investments than they would make from charging a checking account fee and potentially losing a few deposits.

New System: The death of free checking isn't part of Dodd-Frank, but it is a likely reaction of the banks. Wells Fargo has already announced that it will no longer offer free checking accounts for new customers, and Bank of America is considering following suit.

Why Change?: Banks are hungry for more revenue. For example, the new restriction on fees that big banks can charge for debit cards is expected to cost the banks billions. They will try to recoup those fees somehow.


WALL STREET

EXECUTIVE PAY

Old System: Directors of a publicly traded company set the pay for the chief executive officer and other executives. These salaries are often tied to performance, but some incentives might encourage excess risk-taking and provide massive payouts even if the firm falters and the executives are fired.

New System: Dodd-Frank allows shareholders to cast nonbinding votes on executive pay. Additionally, the Fed will be allowed to set standards for any executive pay policies it decides are "unsafe and unsound."

Why Change?: Public outrage over high executive salaries during the 2008 financial crisis prompted President Obama to cap the executive salaries at $500,000 for firms receiving government support.

HEDGE FUNDS/PRIVATE EQUITY

Old System: Hedge funds and private equity funds invest money from groups such as banks, pension funds or university endowments. Hedge funds usually buy common stock, bonds, currency or other assets, and private equity funds buy whole companies. Anyone can buy into public investments, such as mutual funds, that are regulated by the Securities and Exchange Commission. But hedge funds are not regulated by the SEC, and only accredited investors, defined as either a financial organization or an individual with an annual income of at least $200,000 or a net worth of $1.5 million, can invest in hedge funds.

New System: Hedge funds and private equity funds above $150 million will be regulated by the SEC. Additionally, the minimum net worth for an accredited investor in a hedge fund will be raised to reflect inflation. Using the Consumer Price Index, the new levels for accredited investors would be about $460,000 in annual salary or roughly $2.3 million in net worth.

Why Change?: Hedge funds represent large pools of money and are often highly leveraged. Lawmakers have argued that the potential for these funds to default means that they present a systemic risk to the marketplace and should be required to register with the SEC.

DERIVATIVES

Old System: A derivative is a bet on the future price of an underlying asset, like a mortgage or a currency. Derivatives are used as a way to protect against future price changes, a practice known as hedging.

Banks write and sell derivatives, also known as "swaps." The only way to buy a derivative is to call a bank's trading desk.

New System: Banks can still trade in interest rate swaps, foreign exchange swaps, and gold and silver swaps, but must spin off riskier derivatives such as energy swaps and equity swaps.

The bill would require banks that write derivatives to retain a 5 percent stake in the risk of the derivative, a rule known as "skin in the game." Regulators will have one year to implement the changes.

Why Change?: Derivatives are complex financial instruments that contributed to the 2008 financial crisis. Often, banks would sell derivatives to customers and then bet against those same derivatives.

PROPRIETARY TRADING

Old System: Traditionally, banks were allowed to invest only money on behalf of their clients. However, starting in 1998, banks were allowed to engage in proprietary trading, speculative investments made with their own money.

New System: Dodd-Frank prohibits banks from most forms of proprietary trading and puts strict limits on how much banks can invest in certain investment funds. Banks can invest only 3 percent of their money in hedge funds and private equity, and own a maximum of 3 percent of any given funds.



Why Change?: In order to encourage lending, the Federal Reserve allows FDIC-insured banks to borrow money cheaply from the government. However, banks could use these funds for proprietary trading, rather than lending to customers. When those investments go bad, if the government believes that the bank's failure would represent a systemic risk, it will step in and "bail out" the bank. The Volcker rule, named for former Fed chairman and Obama's current economic adviser Paul Volcker, would limit how banks can make these investments. The rule represents a partial reinstatement of the Glass-Steagall Act from 1933, which was enacted in response to the Great Depression. It was the repeal of this act in the late '90s that let banks start investing with their own money again.

CREDIT RATING AGENCIES

Old System: Credit rating agencies grade the risk of debt obligations. For instance, if a state government releases a bond, a credit rating of AAA would mean that the credit rating agency believes that the bond was virtually risk-free. The big three credit rating agencies in the United States are Standard & Poor's, Moody's Investor Services, and Fitch Ratings.

New System: The Dodd-Frank bill would commission an SEC study of the rating agencies, which means most changes will come further down the road. The bill empowers the SEC to deregister a firm that has given too many inaccurate ratings. Ratings agencies were protected under the First Amendment since their ratings were considered "forward-looking statements," but the bill attempts to get around that protection and would empower investors to sue credit rating agencies for "knowing or reckless" behavior.

Why Change?: In 2008, credit rating agencies gave soaring ratings to some subprime mortgage-backed securities that turned out to be worthless. The rating agencies have been criticized for having cozy relationships with the companies they are rating. Debt-issuers like banks were allowed to "shop around" and hire the agency that would give the best rating, which gave the agencies an incentive to rate securities highly. The rating agencies also have been criticized for being too slow to downgrade securities when the investments became riskier.

www.modbee.com/2010/06/27/1228465/changing-the-rules.html