Headlines For Friday June 26th 2009

Consumer Spending Rebounds Along With Sentiment

WASHINGTON (Reuters) – U.S. consumer spending rose last month for the first time since February as government stimulus pushed incomes sharply higher, the Commerce Department said on Friday, supporting the view the economy was close to pulling out of recession.

Consumer spending, which accounts for over 70 percent of U.S. economic activity, rose 0.3 percent in May after an upwardly revised flat reading in April, the department said.

Mark Vitner, an economist with Wachovia in Charlotte, North Carolina, said that while consumer spending was likely to drop further for the second quarter as a whole, the data suggested it was on a better trajectory heading into the third quarter.

“This confirms our forecast that the economy is going to move into positive territory in the third quarter,” he said.

China Calls For a New Reserve Currency

By Bloomberg News

June 26 (Bloomberg) — China’s central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members’ foreign-exchange reserves, triggering a decline in the U.S. dollar.

“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the People’s Bank of China said in its 2008 review released today. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said….

Cap & Trade May Result in the Closing of Refineries

By Joe Carroll and Edward Klump

June 26 (Bloomberg) — America’s biggest oil companies will probably cope with U.S. carbon legislation by closing fuel plants, cutting capital spending and increasing imports.

Under the Waxman-Markey climate bill that may be voted on today by the U.S. House, refiners would have to buy allowances for carbon dioxide spewed from their plants and from vehicles when motorists burn their fuel. Imports would need permits only for the latter, which ConocoPhillips Chief Executive Officer Jim Mulva said would create a competitive imbalance.

“It will lead to the opportunity for foreign sources to bring in transportation fuels at a lower cost, which will have an adverse impact to our industry, potential shutdown of refineries and investment and, ultimately, employment,” Mulva said in a June 16 interview in Detroit. Houston-based ConocoPhillips has the second-largest U.S. refining capacity.

BA Receives More Cancelations

By THE ASSOCIATED PRESS – 1 hour ago

Australia’s Qantas Airways Ltd. said Friday it had canceled orders for 15 Boeing 787s and delayed the delivery of a further 15 aircraft due to turbulent market conditions.

Qantas Chief Executive Alan Joyce said the decision had not been influenced by Boeing Co.’s announcement earlier this week of a design issue in the 787 and further delay to the aircraft’s first flight. He said discussions with Boeing about the order had started some months ago.

Qantas said it had reached a mutual agreement with Chicago-based Boeing Co. to defer the delivery of 15 Boeing 787-8 aircraft by four years and cancel orders for 15 Boeing 787-9s (which are slightly larger) scheduled for delivery in 2014 and 2015.

Japan To Order C To Hault Banking Operations

By YUKA HAYASHI and ALISON TUDOR

TOKYO – Japan’s financial regulator ordered Citigroup Inc.’s Citibank Japan Ltd. to suspend all promotional sales activities in its retail banking division for one month as punishment for lax compliance in preventing money laundering.

The suspension will start on July 15, the Financial Services Agency said in a press release Friday. The bank, however, is allowed to do business with customers who voluntarily contact the bank to purchase its products.

The agency said it has found “fundamental problems” with Citibank Japan’s compliance and governance systems for detecting and monitoring suspicious transactions including money laundering. The bank also lacked a sufficient system to control dealings with “anti-social forces,” a term used in Japan to describe organized crime groups.

UBS To Dilute Shareholders

UBS moved on Thursday to bolster its balance sheet by raising SFr3.8bn (£2.1bn) in an equity placing, following heightened pressure from regulators, and warned it would record a loss in the second quarter.

The announcements, issued last night, underline the bank’s struggles to rebound from a crisis that caused billions of dollars in losses and forced Berne to come to its rescue.

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Losses on credit card loans rose by 10% in May

Banks rush to rescue of credit card trusts

By Saskia Scholtes and Francesco Guerrera in New York

Published: June 24 2009 23:33 | Last updated: June 24 2009 23:33

Record credit card losses are pushing big US banks to come to the rescue of off-balance sheet vehicles they use to transform hundreds of billions of dollars in consumer loans into securities sold to investors.

The support provided by Citigroup, Bank of America, JPMorgan Chase and American Express underscores how the deteriorating health of the US consumer is opening new fronts in the financial crisis.

Losses on US credit cards as measured by Moody’s Credit Card Index rose beyond 10 per cent of total loans outstanding in May, a new high in the 20-year history of the index and the sixth consecutive monthly record.

Most credit card loans are placed into pools – structured as trusts – that are used to back bonds sold to investors.

Banks rely on such “securitisations” to fund their huge levels of credit card lending while keeping most of the risk off their books.

Although they are not obligated to support the pools of credit card receivables when losses mount, banks have done so to ensure investors continue to buy such securities.

The doomsday scenario facing banks is that credit card losses will rise to levels that force the vehicles to repay bondholders early.

Banks have been supporting card trusts by issuing – and then buying – bonds that would absorb the first layer of losses in the underlying loans.

This is designed to provide a protective buffer for existing bondholders.

BofA bought $8.5bn of junior debt from one of its trusts in the first quarter and put aside $750m to cover losses on the investment.

Citi bought $265m of so-called junior debt from one of its credit card trusts in October and an additional $2.3bn of junior debt from the same trust in April, according to a regulatory filing.

JPMorgan and Amex also have issued new junior debt for their credit card trusts.

In addition, JPMorgan has supported credit card bonds issued by Washington Mutual – the troubled lender bought by JPMorgan last year – by substituting its own credit card loans for WaMu’s lower quality ones.

The loss rate on the WaMu pool was 14.8 per cent in October. By comparison, a JPMorgan credit-card pool had an 8.1 per cent loss rate in May.

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A serious injection to unlock banking freeze

By Ralph Atkins in Frankfurt, Krishna Guha in Washington and David Oakley in London

Published: June 24 2009 11:05 | Last updated: June 24 2009 23:12

The European Central Bank on Wednesday pumped hundreds of billions of euros in one-year loans into the eurozone’s weakened banking system, making record amounts of emergency finance available in a bid to unlock credit markets and revive the region’s economies.

The move came as the US Federal Reserve pushed back against expectations of an early rise in US interest rates.

In a dramatic step dubbed “stimulus by stealth” in financial markets, the ECB lent €442.2bn for 12 months to more than 1,100 banks at its current benchmark interest rate of 1 per cent.

The high demand for the funds, in what was the ECB’s first ever auction for one-year loans, reflected a growing realisation by the banks that emergency funding may not be available again on such favour-able terms.

The central bank’s action could boost the eurozone’s recovery prospects by lowering market interest rates and creating more scope for banks to lend to the private sector.

On Wednesday night, the Fed left its key fed funds rate unchanged as expected.

It also made no change to its asset purchase plans, but said it “continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period”.

The US central bank said the recession was easing and noted that energy and commodity prices had increased. But it said “substantial resource slack is likely to dampen cost pressures” and it expected that “inflation will remain subdued for some time”.

The Organisation for Economic Co-operation and Development endorsed the view that the global economy was stabilising, revising upwards its growth forecasts.

It is now forecasting a fall in its 30 member states’ output for 2009 of 4.1 per cent, against its previous forecast of a contraction of 4.3 per cent. It now expects modest growth in 2010, versus a slight fall previously. However, it expects the UK economy to contract by 4.3 per cent this year, down from its earlier prediction of a 3.7 per cent decline, and fail to grow at all in 2010.

The OECD argued that the ECB still had room to cut official eurozone borrowing costs.

Economists said that the ECB’s focus on pumping unlimited liquidity could prove effective in helping engineer a eurozone recovery. The one-year offer at the ECB’s main interest rate of just 1 per cent was “a very smart move in a financial system dominated by banks”, said Elga Bartsch, European economist at Morgan Stanley.

The ECB action, which attracted 1,121 bidders – more than usual in ECB operations – had an immediate impact in driving down overnight and longer-term market interest rates, though the full effects are still to feed through.

Don Smith, economist at inter-dealer broker Icap, said: “The massive scale and undoubted success of this tender almost entirely reflects the cheapness of the funds on offer.”

The previous largest amount injected in a single ECB operation was €348.6bn in December 2007. The economic impact will depend on whether demand for liquidity in future ECB market operations is reduced as a result of Wednesday’s action, as well as whether banks step up lending. “They must pass it along,” Lorenzo Bini Smaghi, an ECB executive board member, said in Rome.

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