A Day Late & A Dollar Short

I’m a day late on this story while the banks a shorts

Moody’s Investors Service says that both the U.S. banking industry rating outlook and the industry’s broader fundamental credit outlook continue to be negative because of the recession.

In a new report, Moody’s indictaes that it expects rated U.S. banks will incur a total of approximately US$470 billion (pre-tax) of loan losses and writedowns in 2009 and 2010. The vast majority of this estimated loss, US$415 billion worth relates to expected loan losses, which represents 8% of the industry’s outstanding loans at the end of last year.

As a result of these substantial asset quality problems and the need to build reserves, many U.S. banks will be unprofitable in 2009, placing considerable strain on their capital levels, the rating agency believes. Moody’s notes that, despite heightened provisioning over the past several quarters, banks’ coverage of bad loans continues to drop; the ratio of allowance for loan losses to non-performing loans stood at 70% at March 31, versus 100% in the first quarter of 2008.

These projected losses have already been a major factor in the downgrade of the financial strength ratings of 35 U.S. banking groups during the last 12 months, notes vice president and senior credit officer, Craig Emrick.

Moody’s Bank Financial Strength Rating represents the agency’s opinion of a bank’s intrinsic safety and soundness and, as such, excludes certain external credit support elements. Over the past 12 months, he notes that, “the median U.S. BFSR has fallen by an entire notch, to C+ from B-, and nine banks have been downgraded to a BFSR that, in most cases, signifies a non-investment-grade stand-alone rating.”

“As it happened, the current macroeconomic scenario under which we are now positioning our BFSR ratings has turned out to be similar to, although more severe than, the worst-case forecast we had posited in last year’s industry outlook,” Emrick says.

Moody’s also contemplates the ratings impact of more severe macroeconomic conditions. If the global economic situation worsens in 2010, for instance, the rating agency believes there would be another heavy toll on U.S. BFSRs — both in the number of banks affected and in the intensity of the downgrades.

“Under more adverse conditions, numerous U.S. banks could become insolvent by the end of 2010,” says Emrick. “More specifically, based on our modeling of such an adverse scenario, we calculate that U.S. rated banks could incur a total of approximately US$640 billion (pre-tax) of loan and security losses and write-downs in 2009/2010; without additional capital, this means that more than a third would fall below investment grade on a standalone basis, as measured by our BFSRs.”

“Additionally, if the U.S. economy worsens beyond expectations U.S. banks would need to raise significant amounts of additional equity capital. For instance, under this adverse scenario we estimate that recapitalizing all rated banks back to a B- financial strength level would require a US$112 billion investment,” he adds.

Seeing as how they may be broke it is best to leave toxic assets where they lay

Remember back when the TARP was going to be about purchases our troubled assets from banks? Then the government switched to direct capital injections. And later the Federal Deposit Insurance Corp said it was launching a legacy loan program? Well, that’s been delayed again.

Later today the FDIC said it is postponing its planned June pilot sale of toxic bank loans. Of course, it says the overall program will continue but who knows. The official line is that banks have been raising so much money that they don’t really need to sell their assets through the Legacy Loan Program.

“As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector,” FDIC Chair Sheila Bair said in a statement.

Why not probe the banks you idiots !

By JESSICA E. VASCELLARO and JUSTIN SCHECK

The Justice Department is investigating whether a number of large U.S. companies violated antitrust laws by establishing agreements not to recruit each other’s employees, according to people briefed on the investigation.

The department has sought information from companies in the technology and biotech sectors, including Google Inc., Apple Inc., Yahoo Inc., Microsoft Corp., Intel Corp. and Genentech Inc., these people said. It is unclear which of the companies might be targets of the probe.

A Justice Department spokeswoman declined to comment.

A spokesman for Google and one for Genentech each said his company had been contacted about the probe and is cooperating. “Our understanding is that a number of companies received this request for information from the U.S. Department of Justice,” the Genentech spokesman said.

A spokeswoman for Yahoo declined to comment, as did a spokesman for Apple.

The inquiry, reported by the Washington Post on Tuesday evening, is the latest sign that the Obama administration is acting on its promise to enforce antitrust laws more aggressively. And it is further evidence that the administration intends to keep tech companies, in particular, in its sights.

The Justice Department continues to investigate whether Google’s proposed settlement with authors and publishers to resolve a copyright dispute over its book-search service violates antitrust laws, according to people familiar with the matter. And the Federal Trade Commission has inquired into whether the fact that two directors — Google Chief Executive Eric Schmidt and former Genentech CEO Art Levinson — sit on both the Apple and Google boards violates antitrust laws.

According to one person familiar with the latest investigation, businesses frequently agree, as part of business deals or merger agreements, not to poach each other’s employees. But the Justice Department is looking into whether companies have established blanket agreements to refrain from poaching, which may be considered collusion, this person said.

David Balto, a former FTC policy director, said the underlying issue is whether agreements between companies affect the ability of employees to change jobs and negotiate for higher wages. The companies may impose such agreements, he said, in part to prevent trade secrets from being transferred to competitors. “Here’s the key thing — is there a legitimate reason for these restrictions?” Mr. Balto said.

It’s common for tech companies to hire staff from competitors. Over the past year, Microsoft, for example, has hired numerous senior managers from Yahoo to work on Microsoft’s Internet efforts.

But sometimes such hiring leads to court battles. Last month, International Business Machines Corp. sued an executive for accepting a mergers-and-acquisitions post at Dell Inc. And a California judge this week limited the duties that a former EMC Corp. executive can perform at Hewlett-Packard Co., which he recently joined.
—Don Clark and Nick Wingfield contributed to this article.

What will the government do if the consumer can not pick up the slack ?

By Craig Torres and Brian Faler

June 3 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

Bernanke’s comments signal that the central bank sees risks of a relapse into financial turmoil even as credit markets show signs of stability. He said the Fed won’t finance government spending over the long term, while warning that the financial industry remains under stress and the credit crunch continues to limit spending.

The Fed chief said in his remarks to the House Budget Committee that deficit concerns are already influencing the prices of long-term Treasuries.

Yields on 10-year notes have climbed about 1 percentage point since the Fed announced plans in March to buy $300 billion of long-term government bonds. The notes yielded 3.54 percent at 5 p.m. in New York, down from 3.61 percent late yesterday, as Bernanke’s warnings on the need to reduce the deficit supported the market.

Rise in Yields

“In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen,” Bernanke said. “These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings.”

The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

“Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”

Bernanke also addressed banks’ efforts to bolster common equity in the aftermath of regulators’ stress tests on the 19 largest U.S. lenders. He said the 10 firms that were found to have a total capital shortfall of $75 billion have now sold or announced plans to boost common equity by $48 billion.

Bank Plans

“We expect further announcements shortly” as the banks submit plans due by June 8, Bernanke said.

This year’s projected budget deficit, four times the size of last year’s shortfall, has been driven up mostly by costs associated with the financial crisis.

“Bernanke knows that fiscal financing problems are already complicating monetary policy and are in danger of undermining Fed credibility,” said Alan Ruskin, chief international strategist at RBS Securities Inc. in Stamford, Connecticut. “He knows that there is only so much quantitative-easing financing that can be done.”

A fiscal stimulus of almost $800 billion, the government’s financial rescue effort, takeovers of Fannie Mae and Freddie Mac and increased costs of running safety-net programs such as unemployment insurance have added billions to spending.

President Barack Obama has pledged to halve the deficit by the end of his term. Even if successful, his administration anticipates the government will still run what would be, by historical standards, large deficits for the foreseeable future. Bernanke said the debt-to-gross domestic product ratio is set to reach the highest since the 1950s.

‘Hard Slog’

“It is fine to have this budget deficit now,” said Alan Blinder, a Princeton University economics professor and former Fed vice chairman. “It will also be a long hard slog to get the budget deficit down to a manageable level.”

House Majority Leader Steny Hoyer told reporters that Bernanke “is absolutely right, we need to be very concerned about incurring additional indebtedness.” The House plans to pass legislation before its July 4 recess to cut spending in one category before increasing it in another, he said. In addition, “we need to address entitlements.”

Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television May 21, said the administration’s goal is to cut the budget shortfall to 3 percent of GDP or smaller.

Rising government spending, forecasts for a record fiscal deficit and an unprecedented expansion of central bank credit have also fueled investor concerns that inflation will rise. Bernanke said inflation “will remain low” as the economy operates with slack resource use.

‘Dangerous’ Mix

Wisconsin Representative Paul Ryan, the ranking Republican on the committee, said in opening remarks that the Treasury’s debt issuance and the Fed’s monetary stimulus, including purchases of government bonds, “can be a dangerous policy mix” and risks “runaway inflation” in the longer term.

Ryan said he’s concerned about “substantial” political pressure on the Fed to delay plans to tighten credit should unemployment remain high.

“The Fed’s political independence is critical and essential for safeguarding its commitment to price stability,” Ryan said. “We policy makers should realize that our most challenging policy period is going to be ahead of us.”

In Europe, German Chancellor Angela Merkel said yesterday she views “with great skepticism what authority the Fed has and the leeway the Bank of England has created for itself,” to purchase a range of assets in their efforts to end the crisis. She urged central banks to return to a “policy of reason.”

Asked by a lawmaker about Merkel’s comments, Bernanke said, “I respectfully disagree with her views.”

‘Inflationary Consequences’

“I am comfortable with the policy actions that the Federal Reserve has taken,” he said. “We are comfortable that we can exit from those policies at the appropriate time without inflationary consequences.”

The central bank is buying as much as $1.75 trillion of housing debt and Treasuries this year to lower borrowing costs across the economy after reducing the benchmark interest rate almost to zero in December. Fed officials hold their next policy meeting June 23-24 in Washington.

Bernanke said during the hearing he wouldn’t support any measure that would have the Fed’s 12 regional Fed bank presidents nominated by the White House and confirmed by the Senate. Fed bank presidents are currently appointed by the regional bank boards with the approval of the Board of Governors.

Markets led down by mining & consumer companies

By Shani Raja

June 4 (Bloomberg) — Asian stocks dropped for the first time in five days, led by consumer and mining companies, after U.S. reports showed the service sector improved less than expected and more workers lost jobs.

Panasonic Corp., which gets 13 percent of its revenue in the Americas, sank 1.8 percent in Tokyo. Canon Inc., the world’s biggest camera maker, lost 0.6 percent. BHP Billiton Ltd., the world’s largest mining company, slumped 4.2 percent after oil fell the most in two weeks.

The MSCI Asia Pacific Index fell 0.7 percent to 104 as of 10:04 a.m. in Tokyo, ending a four-day, 4.6 percent advance. It had rallied 48 percent through yesterday from a five-year low on March 9 on optimism the worst of the financial crisis had passed.

“After the recent rallies, people will see this as a good day to take some profits,” said Ben Potter, a Melbourne-based analyst at IG Markets in Melbourne. “Investors still aren’t completely sure if the worst is over.”

Japan’s Nikkei 225 Stock Average fell 0.3 percent, while Australia’s S&P/ASX 200 Index sank 1.6 percent. New Zealand’s NZX 50 Index lost 0.5 percent.

In New York, the Standard & Poor’s 500 Index fell 1.4 percent, retreating from a seven-month high. The Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the world’s biggest economy, climbed to 44 from 43.7 in April. Economists predicted the index would rise to 45. A separate report showed U.S. companies cut 532,000 workers from payrolls.

“There’s concern shares have gotten too rich, and the service report gave U.S. investors an excuse to take profit,” said Mitsushige Akino, who oversees about $632 million at Ichiyoshi Investment Management Co. in Tokyo.

The rally since March drove the average valuation of companies on MSCI’s Asian index to 1.4 times the book value of assets on May 29, an increase of 17 percent from the end of 2008.

Ireland may be the next Iceland… no it can’t be

A dire warning that the Republic is a prime candidate to go bust has come from one of the world’s leading economic historians.

“The idea that countries don’t go bust is a joke,” said Niall Ferguson, Harvard professor and author of The Ascent of Money.

“The debt trap may be about to spring” he said, “for countries that have created large stimulus packages in order to stimulate their economies.”

His chosen prime candidate to go bust is “Ireland, followed by Italy and Belgium, and UK is not too far behind”.

Argentina is top of his list of shaky countries but “the argument that it can’t happen in major western economies is nonsense”.

Professor Ferguson believes the economists are ill qualified to analyse the current economic situation since they lack the overview of historians such as himself.

“There are economic professors in American universities who think they are masters of the universe, but they don’t have any historical knowledge. I have never believed that markets are self correcting. No historian could.”

The historian does not subscribe to the theory of the “Great Depression” repeating and says this scenario is unlikely because the Federal Reserve has “massively expanded the monetary base which is the opposite of what happened in the 1930s”.

The problem now is what happens when current monetary policy collides with a policy of “vast government borrowing” on a scale unknown since the 1940s.

“We have the fiscal policy of a world war without a war.”

Referring to the clash between inflation and deflation he added: “I don’t know who is going to win but we know that while the struggle goes on ordinary people will get trampled. There will be more economic volatility and ordinary people will pay.”

He has also warned that in Britain he expects “more riots in major cities this year” because of the economic situation and says the recent “drip feed” of the peccadilloes of British MPs and their expenses is “just the beginning of a crisis of political legitimacy that will be played out over the next 18 months”.

Ferguson, a native of Glasgow, specialises in financial and economic history as well as the history of the British empire.