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Monthly Archives: September 2011

IMF officials walk on Athens

BRUSSELS (AP) — Disagreements over Greece’s massive budget deficits and how to make up for the funding shortfalls led international debt inspectors to suspend their review and leave Athens on Friday, as the finance minister warned an even deeper recession will hurt its deficit-cutting efforts.

The unexpected departure of Greece’s debt inspectors — officials from the European Commission, the European Central Bank and the International Monetary Fund — marks yet another occasion of conflict between international institutions demanding greater reform efforts and a government and country that are reaching their limits.

Greek Finance Minister Evangelos Venizelos, who denied there were any serious disagreements, said Greece’s economy will likely shrink up to 5 percent this year — even more than the 4.5 percent decline seen in 2010 and far above the 3.75 percent drop in 2011 output expected just three months ago.

A return to growth next year also looks increasingly unlikely, Venizelos warned.

The ever worsening recession will make it harder for Greece to cut its budget deficit to 7.5 percent of gross domestic product by the end of this year, as it had promised in return for the bailout loans it needs to avoid bankruptcy.

Greece has been slashing spending and raising taxes since the government discovered in late 2009 that it was running a much larger deficit than its predecessors had claimed — some 15.4 percent of economic output — and that it had run up almost euro300 billion in debt.

As Venizelos prepared his nation for even more economic pain in a news conference Friday, the finance minister vowed that there will be no further “revenue generating measures,” government jargon for tax increases.

“The main thing for us is to halt the recession,” Venizelos told journalists. “To not have actions or omissions that will make the recession deeper and will not allow us in 2012 to have a better macroeconomic performance.”

Venizelos said the departure of the so-called troika had been foreseen and that the experts would return in less than two weeks, once the government had finished its draft budget for 2012.

The talks “were conducted and are being conducted in a very friendly and creative climate,” Venizelos added.

But a European Unions official told the Associated Press that the interruption of the troika’s mission was unplanned and that it came amid disagreements over the level of Greece’s deficit in 2011 and 2012 and how to deal with those budget shortfalls.

The mission had been expected to conclude early next week, the official said. He was speaking on condition of anonymity because of the sensitivity of the issue.

Greece was granted a euro110 billion ($157 billion) bailout from other eurozone countries and the IMF in May 2010 and has been promised an extra euro109 billion to keep it afloat until mid-2014.

Since then, the EU, the ECB and the IMF have been checking on the country’s reform efforts every three months, adjusting their economic projections and demanding more cuts to make up for shortfalls.

Their departure Friday brought back memories of a similar incident during their most recent mission in June, when the troika left Athens and only returned weeks later, after Greece’s parliament passed an extra euro28 billion in cuts and a euro50 billion privatization plan.

But it is unclear whether there is room for even more efforts this time.

Greece’s troubles are being worsened by a slowing global economy, with growth tapering off even in strong countries like Germany and the U.S.

Venizelos said Greece’s deficit targets have to be adjusted for the worse-than-expected recession, since much of the economic decline is outside the country’s control.

The finance ministry declined to release new projections for its 2011 deficit, but press reports have put the figure above 8 percent. The troika, meanwhile, insists that the technical adjustment for the steeper recession would raise the target only to about 7.7 percent from 7.5 percent currently.

Greece has been struggling to meet its targets, particularly those for revenue, not only because of poor economic growth but also because tax evasion remains rampant and it has been slow to implement reforms its creditors say will make it more competitive.

In a statement Friday, the troika said it “temporarily left Athens to allow the authorities to complete technical work, among other things, related to the 2012 budget and growth-enhancing structural reforms,” adding that it plans to return by mid-September.

That leaves little time for the troika to complete its final report before Greece has to receive its next aid installment, some euro8 billion, at the end of September.

Eurozone nations are also struggling to finalize the terms of the second Greek aid package. A demand from Finland to get collateral for its contributions to the rescue loans has angered other countries, while Greece has threatened to abandon a crucial bond swap deal for private investors unless it gets 90 percent participation.

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Will Buffet’s BoA move backfire?

I found this to be juicy, mostly because I already said it.

Last week, our financial Superman, the mild-mannered Midwesterner Warren E. Buffett, swooped in again to save another bank, the financial markets, the American economy and just maybe our precious way of life.

Buffett’s purchase of $5 billion worth of Bank of America preferred stock (on his usual generous terms, including long-lasting warrants to buy common stock at an attractive price) immediately stiffened the upper lips of chattering investors and pundits. Bank of America’s chairman hailed it as a “vote of confidence” in the bank. It was also celebrated as a signal that the worst was over in the rout recently experienced by the American financial sector.

For the moment, that all seems right: Bank of America (BAC) stock is up roughly 15% from the Aug. 25 announcement, and stocks of the other three major American banks — JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) — are also up.

But as the news is digested, it could set off the opposite effect. The Buffett investment just might turn out to erode, not increase, confidence. And not only for Bank of America, but for the banking sector as a whole.

Does B of A need capital?

Buffett’s investment reveals something both infuriating and scary. Bank of America has not been talking straight about its need for capital.

“You cannot have the largest bank in the country saying, ‘We don’t need the money,’ and then paying this kind of price to Warren Buffett for capital they say they don’t need,” said Daniel Alpert, who runs the investment firm Westwood Capital. “Industrywide, it’s a potential boomerang because we think, ‘Why should we believe any of these guys when they say they don’t need the money?’ ”

“We’ve been through a massive crisis in 2007 and ’08 where executives of major financial institutions tried to hide their insolvency,” he added. “They said, ‘No, no, a thousand times no, we’re fine.’ And then they were gone.”

Sure, Buffett reportedly approached Brian T. Moynihan, Bank of America’s chief executive, who initially rebuffed the investment offer — suggesting that Bank of America didn’t really need capital. Even so, Moynihan’s reticence didn’t last long. And if the bank truly didn’t need capital, why make such an expensive deal that could dilute other shareholders?

The more investors think about it, the more Buffett’s announcement will intensify, not allay, their fears about Bank of America’s capital position. Indeed, Buffett is making something more resembling a loan than an equity investment. His $5 billion doesn’t count in the important measure of capital that regulators look at, called Tier 1.

That is perhaps why Bank of America’s money-raising has not stopped with Buffett. On Monday, the bank sold about half of its stake in China Construction Bank for more than $8 billion. And over the last year, Bank of America has been jettisoning multiple businesses to raise cash and shore up its capital.

Credibility at stake

Prudent, yes, and we can hope the bank’s management has learned a lesson about credibility. Last year, Mr. Moynihan suggested that the bank would be able to raise its dividend after it passed the Federal Reserve’s second round of stress tests. No such luck. That plan was blocked, rightly, by the Fed, whose exams revealed, among other perils, Bank of America’s overexposure to the sickly real estate sector.

Yet Moynihan and Bank of America persisted, with analysts expecting the bank to come back in the middle of the year to push the Fed to revisit the dividend issue. So much for that now.

Still, even with these moves, some investors and analysts do not think the bank’s actions will be sufficient and that it will have to sell common shares to raise capital.

Bank of America disagrees. Yes, the stock has “an overhang” thanks to economic and legal uncertainty, but “we understand that and are working very aggressively to address that,” said Jerome F. Dubrowski, a spokesman. “We have more than enough capital to run our business” based on current rules, he said.

The bank has clearly explained to investors and regulators how it will reach compliance with the new rules ahead of schedule, he added. The Buffett opportunity was too good to pass up, Dubrowski said: “There’s only one Warren Buffett. We are very happy to have him, but it wasn’t driven by capital.”

Yet Bank of America investors had whipped themselves into a panic in August because of the giant legal liability faced by the bank. The Buffett investment does not remove that, let alone any of the bank’s other millstones.

Not only does the bank still face billions in legal settlement costs from Countrywide Financial, but it also has to buy back billions in faulty mortgages. Bank of America’s questionable foreclosure practices continue to drag it down, and in addition it faces Securities and Exchange Commission investigations into the actions of its subsidiary, Merrill Lynch, in the lead-up to the financial crisis. Bank of America acquired Merrill in 2008, under heavy pressure from the Federal Reserve and the Treasury Department.

The big problem, however, is not the unknown legal costs, but the exceedingly well-known exposure to real estate, both home mortgages and home-equity lines of credit.

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Quake strikes off coast of Alaska

Or was that AR?

ANCHORAGE, Alaska (Reuters) – A 7.1 magnitude earthquake struck on Friday in the Aleutian Islands off Alaska, the U.S. Geological Survey reported, prompting a tsunami warning for a portion of Alaska’s coast that was lifted after an hour.

The warning had covered areas of the Aleutians that included Unalaska/Dutch Harbor, the region’s biggest community, and Adak.

But no destructive tsunami was reported, said the West Coast and Alaska Tsunami Warning Center, a National Oceanic and Atmospheric Administration agency located in Palmer, Alaska.

The agency has received no immediate reports of damage, said Paul Whitmore, its director.

“It did happen in a very remote area and there are no towns close to the epicenter,” he said.

The closest community is Atka, an Aleut village of about 60 people that is approximately 100 miles to the west of the epicenter, Whitmore said.

The Pacific Tsunami Warning Center had said earlier it did not see a threat of a widespread destructive tsunami from the quake. The quake, which struck at 10:55 GMT, was 22.1 miles deep, the USGS said.

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Fed asks BoA to procure options

(Reuters) – The Federal Reserve has asked Bank of America Corp to show what measures it could take if business conditions worsen, the Wall Street Journal said, citing people familiar with the situation.

BofA executives recently responded to the unusual request from the Federal Reserve with a list of options that includes the issuance of a separate class of shares tied to the performance of its Merrill Lynch securities unit, the people told the paper.

Bank of America and the Fed declined to comment to the Journal. Both could not immediately be reached for comment by Reuters outside regular U.S. business hours.

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Upgrades and Downgrades This Morning


PCP – Precision Castparts initiated with a Buy at CRT Capital

TD  – Toronto-Dominion Bank upgraded to Outperform from Neutral at Credit Suisse

GSM – Globe Specialty Metals assumed with a Buy at Jefferies

UPS – UPS upgraded to Outperform from Neutral at Credit Suisse

RIMM – Research In Motion tgt raised to $37 from $25 at BofA/Merrill

CSL – Carlisle Cos initiated with a Buy at Keybanc

LQDT – Liquidity Services upgraded to Outperform at Oppenheimer

AZSEY – Allianz SE upgraded to Buy from Hold at Collins Stewart

CAS – A.M. Castle coverage assumed with a Buy from Hold at Jefferies


SQM – Sociedad Quimica y Minera downgraded to Hold from Buy at Deutsche Bank

HINKY – Heineken downgraded to Hold from Buy at Citigroup

BCSI – Blue Coat upgraded to Neutral from Sell at Lazard

MMI – Motorola Mobility downgraded to Equal Weight from Overweight at Morgan Stanley

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Gapping Up and Down This Morning

Gapping up

GKK +14.9%, FNSR +9.7%, OCLR +5.5%, CASC +5.1%, JDSU +3.2%, CSTR +1.9%, SLV +1.7%, GLD +1.2%, SLV +2.2%,

EGO +2.1%, SLW +1.8%, HL +1.7%, GOLD +1.7%, GLD +1.7%, NEM +1.6%, ABX +1.2%, GG +1.2%, RIO +0.4%,

ZQK +2.2%,  CPB +2%,

Gapping down

NFLX -8.7%, ESL -6.1%, HRB -4.8%, BP -3.4%, NOK -2%, TOT -1.7%, RDS.A -1.4%, BHP -1.2%,  BBL -0.5%,

BTU -3.8% , BAC -6.5%, NBG -3.7%, BCS -3.3%, ING -3.0%, DB -2.4%, C -2.1%, JPM -1.9%, WFC -1.9%, MT -2.9%,

NOK -2%, AZN -1.5%, FDX -1.3%

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