More Power For The Cabal Crowd

Move over SEC a big old dog is moving in

By Robert Schmidt and Jesse Westbrook

May 19 (Bloomberg) — The Obama administration may call for stripping the Securities and Exchange Commission of some of its duties under a regulatory reorganization that could be unveiled as soon as next week, people familiar with the matter said.

The proposal, still being drafted, is likely to give the Federal Reserve more power to supervise financial firms deemed too big to fail. The Fed may inherit some SEC functions, with others going to other agencies, the people said. On the table: giving oversight of mutual funds to a bank regulator or a new agency to police consumer-finance products, two people said.

The 75-year-old SEC, chartered to oversee Wall Street and safeguard investors, has seen its reputation tarnished as some lawmakers blamed it for missing the incipient financial crisis and failing to detect Bernard Madoff’s $65 billion Ponzi scheme. Any move to rein in the agency is likely to provoke a battle in Congress, which would need to approve the changes, and draw the ire of union pension funds and other advocates for shareholders.

“It would be a terrible mistake,” said Stanley Sporkin, a former federal judge and enforcement chief at the SEC. “Whatever the SEC has done or didn’t do, it is still the premier investor protection agency around.”

SEC Chairman Mary Schapiro’s agency has been mostly absent from negotiations within the administration on the regulatory overhaul, and she has expressed frustration about not being consulted, according to people who have spoken with her. She has pledged to fight any attempt to diminish the SEC, they said.

Geithner, Summers

Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers are leading the administration’s effort to redraw the lines of authority for policing the financial system.

“We’re going to have to bring about a lot of changes to the basic framework of oversight, so there’s better enforcement,” Geithner, said May 18 at the National Press Club in Washington. “That’s going to require simplifying, consolidating this enormously complicated, segmented structure.”

Geithner may be asked about his plans for a regulatory revamp at a Senate Banking Committee hearing on financial-rescue efforts in Washington May 20.

Treasury spokeswoman Stephanie Cutter didn’t respond to requests for comment. The SEC also didn’t immediately respond.

Dinner Meeting

Geithner was set to discuss the regulatory revamp at a May 19 dinner with Summers, former Fed Chairman Paul Volcker, ex-SEC Chairman Arthur Levitt and Elizabeth Warren, the Harvard University law professor who heads the congressional watchdog group for the $700 billion Troubled Asset Relief Program.

President Barack Obama has said he wants to sign legislation on regulatory changes by year-end. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, is planning hearings with the aim of drafting a bill by the end of June.

The SEC’s job is to regulate stock markets, police securities sales and make sure public companies make adequate disclosures to investors about their finances. The commission has five members, with the chairman and two commissioners typically from the president’s political party and the other two from the party not in the White House.

Schapiro was appointed by Obama to replace Christopher Cox, who was named by President George W. Bush.

Cox Record

Under Cox, the SEC ceded some of its authority to the Fed after the central bank responded to Bear Stearns Cos.’ near collapse last year by inserting its own examiners into Wall Street securities firms.

Former Treasury Secretary Henry Paulson, Geithner’s predecessor, urged Congress in a March 2008 “blueprint” for overhauling financial rules to give the Fed broader powers to oversee risk in the system.

Opponents of giving the Fed more authority, such as former SEC chief Levitt, have said the central bank’s focus on keeping the financial system solvent may trump efforts to punish companies for violating securities laws. Levitt is a board member of Bloomberg LP, the parent company of Bloomberg News.

Economy will guide the FED

By Krishna Guha in Washington

The Federal Reserve is turning its attention to the impact of the economic crisis on the productive capacity of the US economy – an issue central to any assessment of when it might start tightening monetary policy again.

Most officials think the crisis will have some impact on supply because of structural changes that make it difficult to reallocate workers to different sectors of the economy and restricted financing for new business projects.

Wall Street has given hope that the US economy is stabilising

Looking up: the rebound on Wall Street has given hope that the US economy is stabilising
EDITOR’S CHOICE
Fed offers spur to buy bubble-era securities – May-20
Analysis: Let battle commence – May-19
Editorial: Taming derivatives – May-18
Companies face higher hedging costs – May-18
In depth: US downturn – Apr-15

But the mainstream Fed view is that this impact will not be very large, possibly reducing trend growth from about 2.5 per cent to 2 per cent or fractionally higher for a few years.

This relatively modest mark-down of the economy’s future supply potential suggests the Fed thinks that excess capacity will continue to put downward pressure on prices for an extended period even if a gradual recovery takes hold.

This means the central bank may not be in any hurry to raise interest rates next year unless growth is stronger than it expects or inflation expectations independently move higher.

However, the debate inside the Fed is still at an early stage and there is a range of views among policymakers about the supply-side impact of the crisis, which may be hinted at in forecasts released on Wednesday.

Minutes from the April policy meeting due along with the forecasts are likely to show that the Fed – which feared an intensifying downward spiral in the economy and markets in the run-up to its March meeting – was much less concerned about those risks by last month.

For the Fed, the rebound in financial asset prices is not just an indicator of improving expectations: it is a mechanism through which policy is gaining ­traction.

Officials are fairly confident the economy is stabilising and will start growing again late this year, in spite of some discouraging news on consumer spending since the April meeting, which was offset by further easing of credit market strains.

Nonetheless, the Fed base case forecast is that the recovery will be initially weak. Combining its thinking on demand with its thinking on supply suggests the “output gap” – the difference between supply and demand – will peak at a very large 8-9 percentage points of gross domestic product next year.

If the base case forecast plays out, the Fed may not see a need to raise interest rates before the end of 2010 or even into 2011, particularly if the government sticks with declared plans to withdraw fiscal stimulus in 2011.

However, there is a risk that the Fed could be overly optimistic on supply potential, as it was with disastrous effect in the 1970s.

The Bank of Canada has marked down its estimate of potential supply in Canada more aggressively than the Fed is minded to in the US, and it is not obvious that Canada faces more wrenching structural changes than the US.

Fed officials know that the output gap is notoriously difficult to estimate in real time, with the unemployment rate consistent with stable inflation now anywhere between 4.5 per cent and 5.5 per cent, and might err slightly on the side of caution.

Moreover, uncertainties abound that could force the Fed to tighten rates earlier in 2010.

The recovery could be stronger than expected. Commodity prices remain a wild card. And while officials do not expect inflation expectations will slip out of control in a world with a lot of excess capacity, they would react vigorously if evidence suggested their unorthodox actions were leading people to expect a post-crisis surge in inflation.

If this goes down, then you have been robbed again !

WASHINGTON – The race to repay federal bailout money could end up reducing the amount that taxpayers eventually get back.

Some banks that want out of the Troubled Asset Relief Program may be allowed to buy back the government’s investments at below-market prices. That could cut into taxpayers’ potential profits by billions of dollars.

Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. have notified federal regulators of their interest in returning their share of the $700 billion bailout. Returning the money would let banks avoid restrictions on executive pay and hiring.

Approval for big banks to repay TARP funds could start in early June, a Federal Reserve official said on condition of anonymity because the applications are still being reviewed.

But before big banks can repay a penny and quit the bailout, they must agree to a price for the warrants the government received in return for the original loan. Those warrants gave the government the option to buy stock at a set price over 10 years.

Since the start, a key selling point for the bailout has been that, as the financial crisis eased and banks regained their health, taxpayers would get to go along for the ride and benefit from the stock gains.

So far, only one publicly traded bank, Old National in Evansville, Ind., has bought back its warrants after repaying TARP funds in March. Old National paid $1.2 million to the government, just over 1 percent of its $100 million capital injection.

That deal was a bargain for Old National, according to Linus Wilson, a finance professor at the University of Louisiana at Lafayette. His calculations put a market value on the warrants at $1.5 million to $6.9 million.

In all, Wilson estimates the warrants in the roughly 570 banks that have received about $198 billion in bailout money would be worth between $2.4 billion and $10.9 billion.

If the government sells for less, “that’s definitely bad news for taxpayers,” Wilson said. “We’d be better-served if the Treasury would hold out for a very good negotiated settlement or market the investments to third-party investors.”

Old National CEO Bob Jones said his bank initially bid $600,000 for the warrants. Treasury rejected that figure before eventually agreeing to sell for twice the bank’s original offer.

“We think we got a fair deal for everyone,” Jones said, adding that his bank held TARP money for less than 90 days and paid $1.5 million in dividends. “We think the taxpayer got a good value for that short-term loan.”

The Treasury began pumping billions into the banking system in October, as the financial crisis threatened to push the economy over the edge. Six months later, some banks are rushing to uncoil themselves with the government. They worry the federal money carries too many strings and a nettlesome public stigma.

Another reason is that federal bailout money isn’t cheap. Banks must pay a 5 percent annual dividend for the first five years. If they don’t repay by then, the dividend rises to 9 percent — increasing the incentive for banks to cut ties with TARP.

Some banks think third-party estimates of the warrants’ value exaggerate their worth, said Frederick Cannon, an analyst with Keefe, Bruyette & Woods who has represented a small bank that repaid TARP money but didn’t buy back warrants. He wasn’t allowed to identify the bank because he doesn’t cover it for his research firm.

He said that under Treasury’s method for valuing the warrants, market volatility drives the prices higher than banks think they’re worth.

“The price being asked was too expensive” for the bank he represented to buy, Cannon said. “Because the market has been so volatile … that increases the theoretical value of the warrants to a level banks think is too high.”

Treasury spokesman Andrew Williams said the department would have a “robust process” for valuing the warrants. But he provided no details on how that would work.

Settling for less than market value would be an injustice to taxpayers who rescued the banks, said U.S. Rep. Brad Sherman, who voted against the bailout.

“We put up a lot of cash for the banks at the bleakest possible moment in our lifetimes,” said the California Democrat. “We took a huge risk. We’re going to lose money on some of these investments. So why take your winning investments and give them away?”

But others say the sooner the government gets out of the banking sector, the better. Banks that repay TARP funds but don’t buy back the government’s warrants could remain subject to restrictions on executive pay and hiring.

“I don’t think the banks are trying to shortchange taxpayers on the warrants,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “They just want to get the government out of their boardrooms.”

And not every bank that repays TARP wants the warrants back.

New York-based Signature Bank, one of a dozen smaller banks that have repaid TARP, said it has no intention of buying back the government’s warrants.

“If our stock goes up year after year, they’re going to be able sell those warrants for millions of dollars. They’re truly valuable,” said Signature Bank CEO Joseph DePaolo.

Others say there’s another reason for the government to hang onto its stakes in the banking industry: If the economy takes a turn for the worse, some banks “will be back” for more taxpayer money, said Daniel Alpert, managing director of investment bank Westwood Capital.

“Taxpayers stepped in as lender and equity provider of last resort, and they took risks,” Alpert said. “The way our system is supposed to work is, when you take risks you get rewards.”

They repeal what they approved many years ago: predatory lending

By ANNE FLAHERTY

WASHINGTON (AP) – The Senate voted overwhelmingly on Tuesday to rein in credit card rate increases and excessive fees, hoping to give voters some breathing room amid a recession that has left hundreds of thousands of Americans jobless or facing foreclosure.

The House was on track to pass the measure as early as Wednesday, paving the way for President Barack Obama to see the bill on his desk by week’s end.

“This is a victory for every American consumer who has ever suffered at the hands of a credit card company,” said Sen. Christopher Dodd, D-Conn., chairman of the Banking Committee. The bill passed the Senate 90-5.

If enacted into law as expected, the bill woul give the credit card industry nine months to change the way it does business: Lenders would have to post their credit card agreements on the Internet and let customers pay their bills online or by phone without an added fee. They’d also have to give consumers a chance to spare themselves from over-the-limit fees and provide 45 days notice and an explanation before interest rates are increased.

Some of these changes are already on track to take effect in July 2010, under new rules being imposed by the Federal Reserve. But the Senate bill would put these changes into law and go further in restricting the types of bank fees and who can get a card.

For example, the Senate bill requires those under 21 who seek a credit card to prove first that they can repay the money or that a parent or guardian is willing to pay off their debt if they default.

Bankers warned the measure would restrict credit at a time when Americans need it most. They defended their existing interest rates and fees on grounds that their business – lending money to consumers with no collateral and little more than a promise to pay it back – is very risky.

“What has been a short-term revolving unsecured loan will now become a medium-term unsecured loan, which is significantly more risky,” said Edward Yingling, president and CEO of the American Bankers Association.

“It is a fundamental rule of lending that an increase in risk means that less credit will be available and that the credit that is available will often have a higher interest rate,” Yingling added.

Voting against the Senate measure were GOP Sens. Lamar Alexander of Tennessee, Robert Bennett of Utah, Jon Kyl of Arizona and John Thune of South Dakota, as well as Democratic Sen. Tim Johnson of South Dakota.

But other senators didn’t want to face voters in the 2010 election without proof that they are listening to constituents crushed by foreclosure rates and joblessness. Recent reports show that the number of foreclosures jumped 32 percent in April compared with the same month last year, while the jobless rate that month rose to 8.9 percent.

The legislation would not cap interest rates as some lawmakers had hoped. It also wouldn’t prevent lenders from finding new ways to drain customers’ bank accounts or keep consumers from spending money they don’t have.

But it would give spenders more flexibility and outlaw many of the surprise costs associated with credit cards at a time when money is tight in most households. For example, under the bill, a cardholder would have to opt to be allowed to go over a credit limit. If customers don’t agree and the bank authorizes a charge that would push them over their limit, the lender couldn’t levy an over-limit fee.

Another boon for consumers is limiting a practice known as “universal default,” when a lender sharply increases a cardholder’s interest rate on an existing balance because the customer is late paying that bill or other, unrelated bills. Under the new legislation, a customer would have to be more than 60 days behind on a payment before seeing a rate increase on an existing balance.

Even then, the credit card company would be required to restore the previous, lower rate after six months if the cardholder pays the minimum balance on time.

House Democratic leaders said they planned to move quickly. Last month, the House approved, by 357-70, a similar credit card bill by Rep. Carolyn Maloney, D-N.Y.

Complicating the issue somewhat was a measure added to the Senate bill that would allow people to carry loaded guns in national parks and wildlife refuges. That provision, sponsored by Sen. Tom Coburn, R-Okla., passed, 67-29.

House Democratic Leader Steny Hoyer of Maryland told reporters on Tuesday that the House might vote separately on the gun proposal so as not to bog down the credit card overhaul.

If the two bills are passed separately as expected, they would be rejoined before being sent to the president as a single bill, said Hoyer.

FLY

Rosenberg

THE VERDICT

Commodity stocks and those who trade them led the charge into green territory

By Jonathan Burgos

May 20 (Bloomberg) — Most Asian stocks rose as the Japanese economy shrank less than economists estimated and oil prices rose to a six-month high. Finance companies declined.

Mitsubishi Corp., a Japanese trading company that gets more than half its profit from commodities, climbed 3.4 percent after Goldman, Sachs & Co. recommended buying the stock. BHP Billiton Ltd., Australia’s biggest oil producer, rose 0.6 percent. Kawasaki Kisen Kaisha Ltd., Japan’s No. 3 shipping line, added 1.8 percent as commodity shipping rates gained for a 13th- straight session.

“Demand for resources looks likely to rebound and investors are willing to buy commodity-related companies on expectations for an earnings recovery,” said Hiroichi Nishi, general manager at Nikko Cordial Securities Co.

The MSCI Asia Pacific Index rose 0.2 percent to 99.53 at 10:07 a.m. in Tokyo, set for its highest close since Oct. 6. Through yesterday, the gauge had surged 41 percent from a more than five-year low on March 9. Stocks on the measure traded at an average 22.4 times estimated profit, compared with 15.6 times for the MSCI World Index.

Japan’s Nikkei 225 Stock Average advanced 0.3 percent to 9,315.78. Gross domestic product contracted an annualized 15.2 percent in the three months ended March 31, the Cabinet Office said today in Tokyo. Economists predicted the economy would shrink 16.1 percent.

Australia’s S&P/ASX 200 Index lost 0.2 percent and South Korea’s Kospi index was little changed.

Brokerage Upgrade

Futures on the Standard & Poor’s 500 Index slipped 0.4 percent. The gauge dropped 0.2 percent in New York yesterday as a Commerce Department report showed housing starts sank 13 percent in April, while economists had expected an increase. Financial shares slumped after Moody’s Investors Service said commercial property values have tumbled.

Mitsubishi Corp. jumped 3.4 percent to 1,718 in Tokyo after Goldman upgraded its rating to “buy” from “neutral.” BHP Billiton gained 0.6 percent to A$34.07. Inpex Corp., Japan’s largest oil explorer, gained 1.6 percent to 718,000 yen.

Crude oil futures in New York rose 1.1 percent to $59.65 a barrel yesterday, the highest settlement since Nov. 10.

Kawasaki Kisen Kaisha added 1.8 percent to 393 yen. The Baltic Dry Index, a measure of shipping costs for commodities jumped for a 13th straight session to a level not seen in seven months.