Diggin’ In

Digging in their heels

U.S. leaders are moving away from compromise and hardening their positions on the debt ceiling, as the Aug. 2 deadline to avoid a default draws near. Senate Majority Leader Harry Reid, D-Nev., and House Speaker John Boehner, R-Ohio, offered competing plans. President Barack Obama backed Reid’s plan.

For cheap

Christopher Louis Pia, a former trader with Moore Capital Management, paid $1 million to settle a market-manipulation case brought by the U.S. Commodity Futures Trading Commission. The regulator said Pia tried to manipulate the prices of futures contracts for platinum and palladium on the New York Mercantile Exchange.

Crashed

In a televised speech, U.S. President Barack Obama asked Americans to tell their congressional representatives how they feel about the debt-limit standoff. Shortly afterward, many congressional websites crashed.

Advance disclosures are needed

The U.K. Financial Services Authority proposed requiring banks to disclose to regulators in advance when they want to swap assets with insurers. The disclosure would allow regulators to properly assess risks. “We expect firms contemplating liquidity swap transactions to notify us,” the FSA wrote. “Firms should make available to us sufficient information well in advance of the execution date so that we can make a proper assessment of the risks inherent in the proposed transactions.”

Ruined a perfect opportunity

Americans blame President Barack Obama and congressional Republicans equally for the weak economy, but they are more critical of the GOP than Democrats on unemployment, according to a Washington Post-ABC News poll. Sixty-five percent of Americans are unhappy with how Republicans are dealing with job creation, while 52% are displeased with Obama.

Big mistakes

Individual retirement account rollovers offer an excellent opportunity to help clients and bring in business, but financial advisers often don’t understand what their customers want and need, according to a report from McKinsey & Co. Advisers who try to impress clients with complex calculations are just as likely to scare them away. What clients want are simplicity and convenience, the report says.

The voice from the Down Under

Glenn Stevens, governor of the Reserve Bank of Australia, said that “in both the U.S. and European cases, the process of allowing things to go right to the brink of a very disruptive event before an agreement is reached on the way forward has been a source of great uncertainty and anxiety around the world … [and] that anxiety has extended to Australia.”

Again?!!

The latest assistance package for Greece bought Europe two days of calm on the sovereign-debt market, according to The Economist. Now, borrowing costs for Italy and Spain are surging again. The yield on Spain’s 10-year bond is above 6%. “What is clear is that until the euro zone demonstrates its awareness of the stresses imposed by currency union and its preparedness to build the machinery to offset them, markets will continue to question the union and push it toward dissolution,” an Economist Free Exchange blogger writes.

Like mortgage derivatives

Greece’s second rescue includes four options that ensure investors in the country’s debt will suffer losses. Analysts and investors are trying to untangle the complex plan.

Biggest, most vulnerable

U.S. Treasury Department data show that $9.66 trillion of America’s $14.27 trillion national debt is held by the public, a broad category that includes private investors, the Federal Reserve, and domestic and foreign banks, as illustrated by a chart created by Congressional Quarterly. The nation’s biggest foreign creditor is China, with $1.1 trillion, and Japan is a close second at $900 billion.

More popular

An analysis by Dow Jones Newswires found that currency trading continues to attract significant liquidity despite uncertainties about the global economy. Average daily global turnover in foreign exchange has reached $4.71 trillion, according to the analysis. The Bank for International Settlements said in a 2010 report that daily foreign exchange turnover was at $3.98 trillion, but the Dow Jones estimate includes official information from around the world.

Reining in inflation

Moving to control one of the highest inflation rates in the world, the Reserve Bank of India raised its benchmark interest rate by 0.5 percentage point, to 8%.

Unnoticed

A money market crisis might be quietly emerging, as short-term corporate debt becomes more difficult to roll over and the interbank market for lending beyond 30 days tightens, according to International Financing Review. Eric Rosengren, president of the Federal Reserve Bank of Boston, said action must be taken to reduce risks confronting money market funds in the event of a credit shock.

Thanks for reading!! Follow me on Twitter here.

 

Gaining Steam

Gaining supports

A bipartisan deficit-reduction plan backed by the U.S. Senate’s “Gang of Six” is drawing support from hard-liners. Republicans abandoned a commitment to oppose all tax increases, and Democrats eased opposition to entitlement cuts. In a largely symbolic act, the House passed a “cut, cap, and balance” bill.

Added pressures that are not needed

The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission were thrust into the spotlight by the global financial crisis, and the Dodd-Frank Act made the regulators’ jobs even more difficult. A year after Dodd-Frank was approved, the SEC and the CFTC continue to struggle to write rules mandated by the act.

No option, really.

A Wall Street Journal/NBC News poll conducted between Thursday and Sunday found that 38% of Americans supported raising the debt limit, while 31% opposed. A poll in June found that 28% of participants backed an increase.

Tech geek to FTC

Maureen Ohlhausen, a lawyer in technology and telecommunications policy, was nominated by President Barack Obama to the U.S. Federal Trade Commission. She was a director in the FTC’s Office of Policy Planning from 2004 to 2008.

Tax for Greece

A tax on eurozone banks, which advocates said could raise €30 billion over three years, is being considered to help pay for another Greek rescue, officials said.

Capital surcharge

The Financial Stability Board said 28 major banks initially would be subjected to a capital surcharge, but the task force did not name the financial institutions. The FSB confirmed that the surcharge would be between 1% and 2.5%. Leaders from the Group of 20 nations must approve the surcharge at their summit in November for it to become effective.

Need more collabo

To weather the sovereign-debt crisis, European nations need to more deeply integrate their economies, the International Monetary Fund said. Woes of debt-ridden nations are “casting a shadow” over the future of the eurozone, the IMF said. “Despite genuine efforts to strengthen governance and cooperation, the reaction by national authorities and economic agents has been one of retrenchment, threatening to turn back the clock on economic and financial integration,” according to the IMF.

Duhhhh

When their clients’ investment objective is long-term growth, financial advisers aren’t helping them by frequently drawing their attention to short-term volatility, according to research on behavioral finance. A research paper by Shlomo Benartzi and Richard H. Thaler suggests that investors are more sensitive to losses than gains. Giving too much attention to volatility can lead investors to give up opportunities for gains.

Getting beat up by Airbus

Boeing launched a last-minute effort to avoid losing a huge sale of single-aisle aircraft to Airbus. American Airlines is considering dividing an order for more than 200 planes between the Boeing 737 and the Airbus A320neo. Sources said Boeing came close to losing any order.

Insurance to fight back claw-back

Dozens of financial firms are buying insurance to cover losses from U.S. regulators using “claw-back” power to take away executive compensation, according to The Economist. “The clawback provision in the Dodd-Frank act was of course intended to make financial companies’ bosses fear personal consequences if their actions or inaction drove their firm to ruin,” an Economist Schumpeter blogger writes. “So, doesn’t insuring against this risk subvert the whole point of it?”

Less trading

Goldman Sachs’ second-quarter results came in well below analysts’ forecasts, because of lower income from fixed-income, currency and commodity trading. In recent years, that part of the bank’s businesses generated 35% to 48% of revenue. Last quarter, it came in at 22%.

Looking elsewhere

The German government is trying to attract highly skilled workers from southern Europe, where unemployment is high, said Monika Varnhagen, director of Germany’s Federal Employment Agency. Germany is short about 150,000 skilled workers, mostly in industries that require math and science knowledge, the agency says.

More expensive Thai rice

The Thai government is proceeding with a plan to double the price of rice. A rice-futures market would insulate the Pheu Thai Party government from losses it might suffer by acting as an intermediary.

Pffftttt

Robust economic growth would do a lot to help Europe through its sovereign-debt crisis, but its recovery appears to be slowing, according to The Economist. Construction output is down, according to the EU’s statistics agency, and German business confidence fell last month. “In other words, every potential driver of euro-zone growth is contracting or weakening,” an Economist Free Exchange blogger writes. “A return to recession seems unavoidable.”

Under downgrade watch

Moody’s Investors Service said the debt of five U.S. states with its highest municipal rating, Aaa, could be downgraded if the federal government defaults on its debt, because those states depend greatly on federal money. The states are Maryland, New Mexico, South Carolina, Tennessee and Virginia.

Thanks for reading!! Follow me on Twitter here.

 

Chuggin’ Along

Senate is chugging along

U.S. Senate leaders from both parties worked during the weekend to build support for legislation that would allow President Barack Obama to raise the debt limit. The effort, based on a proposal from Senate Minority Leader Mitch McConnell, R-Ky., has support from Senate Majority Leader Harry Reid, D-Nev. “At a minimum, Congress has a way to take action and avoid default on the U.S. debt,” said Jacob Lew, Obama’s budget director.

Still in the dark

Eight rules mandated by the U.S. Dodd-Frank Act could have major consequences for financial advisers, but because most of them haven’t yet been written, advisers still don’t know how they will affect their businesses. The full effect of Dodd-Frank probably won’t be known until the end of 2012.

Straight from Ohio

U.S. President Barack Obama plans to nominate former Ohio Attorney General Richard Cordray to run the Consumer Financial Protection Bureau, which officially goes into operation this week. Cordray led state efforts to protect consumers from fraud and other illegal practices by financial institutions.

What to do with it?

The U.S. Dodd-Frank Act mandates dozens of studies and hundreds of rules, but regulators have struggled to implement the changes because of political wrangling, opposition from the financial industry and disagreements over details of the rules.

Long bond for Greece

A proposal to replace Greece’s maturing debt with bonds bearing maturities as long as 40 years is picking up support, sources said. The option reportedly would reduce Greece’s short-term debt service without requiring banks holding the nation’s bonds to take write-downs.

A matter of determination

The euro remains a credible currency, and Europe has skills and resources to overcome challenges confronting it, said European Central Bank President Jean-Claude Trichet. “The Europeans can manage the issue,” he said. “It is not a question of technique. It is a question of will and determination.”

FSB is on board

The Financial Stability Board is expected Monday to endorse two proposals aimed at avoiding taxpayer rescues of collapsing financial institutions. The group of global regulators is meeting in Paris to discuss a capital surcharge for large banks and a bank-resolution proposal. Leaders of the Group of 20 nations will decide whether to approve the measures in November.

Market pressure

After markets closed Friday, the European Banking Authority announced that eight of 90 banks failed stress tests because of a €2.5 billion total capital shortfall. Investors are expected Monday to start pressuring those lenders to raise capital. Analysts and market participants also are scrutinizing the tests, saying European banks might need to raise as much as €80 billion more.

Late to adapt

For decades, the U.S. has urged other countries to make their economies more open, competitive and adaptable but done nothing to implement such policies at home, and the bill is coming due, according to The Economist. “Americans will for some time continue to resist the fact that we are poorer than we had thought,” an Economist Democracy in America blogger writes. “But it will soon sink in that American distributive politics is now less about who gets how much of the national bounty, and more about who loses how much — about who suffers how much from which broken promises.”

No leadership

The U.S. has failed to exercise global economic leadership and has become “defeatist” regarding the Doha round of trade negotiations, said World Bank President Robert Zoellick. He said the Obama administration’s refusal to cut ethanol tax breaks and farm subsidies doesn’t make sense when the U.S. is trying to reduce spending. “It’s a missed opportunity for a pro-growth strategy at a time when the U.S. — and the world — could use one,” Zoellick said.

Brazil to import ethanol

Because supply can’t meet Brazil’s demand for energy, the country might have to import ethanol, Energy Minister Edison Lobao said. Brazil is the world’s biggest producer and exporter of ethanol made from sugar cane.

Hungry and unemployed

Participation in the U.S. food stamp program has surged, with 1 in 7 Americans relying on it to have enough to eat, according to The Economist. Moody’s Analytics found that spending $1 on food stamps generates $1.73 in economic activity, which makes the program the most effective stimulus. “Most tax cuts yielded a dollar or less,” the magazine noted. “All the talk in Washington these days, however, is of cutbacks — even for the hungry.”

Thanks for reading!! Follow me on Twitter here.

 

More Problems Than Clarity

More problems than clarity

EU banks’ stress tests might lack the credibility to improve confidence in the financial sector. The tests are being criticized for failing to measure the consequences of a Greek bond default. Germany’s Helaba is refusing to let the European Banking Authority publish the bank’s full results.

Not now

The U.S. Commodity Futures Trading Commission put off implementation of swaps-market rules because it needs more time to write them. The delay could last into next year, the CFTC said.

Last ditch effort

With talks on raising the U.S. debt limit deadlocked, the Senate began work on a bipartisan plan to avert a default. The approach is based on a proposal by Senate Minority Leader Mitch McConnell, R-Ky., that would give President Barack Obama authority to raise the debt ceiling. McConnell’s “Plan B” aims to ensure that Obama would assume all political consequences of increasing the debt limit.

No to ring fencing

Former Federal Reserve Chairman Paul Volcker said he is skeptical of a British proposal to ring-fence retail banking and trading to prevent losses from bringing down a whole company. “The question will inevitably arise as to the financial and regulatory logic of maintaining a ‘retail bank’ as part of what in most cases would appear a much larger, highly diversified and ‘systemically significant’ organization,” he said.

For sure

Major banks and foreign investors are quietly warning the Obama administration that there is no way to avoid severe market disruption if the U.S. debt limit is reached and the government defaults, sources said. Failure to pay any obligation would undermine the U.S. financial system and alienate investors, Treasury Department officials reportedly were told.

Too long too dangerous

The European Central Bank’s special measures, including unlimited funding for banks, run the risk of undermining price stability if left in place longer than necessary, the ECB said in its July bulletin. “If non-standard measures are maintained for too long … they may encourage excessive risk taking by financial market participants, distort incentives and delay the necessary process of balance sheet adjustment by private and public sector entities,” according to the bulletin.

S&P is sounding its alarm

Standard & Poor’s said it might downgrade the U.S. credit rating from AAA to AA, even if the debt limit is raised before the Aug. 2 deadline. A downgrade is likely in the next 90 days if the White House and Congress can’t reach a credible solution to the government’s debt burden, the credit rating agency said.

No guarantee

It is widely believed that Democrats and Republicans will eventually agree to prevent the U.S. from defaulting on its debt, but it is not a sure thing, according to The Economist. Both parties have taken positions based on principles that would be difficult to abandon. “This is a season of dangerous brinkmanship in America,” the magazine’s Lexington columnist writes. “Compromise may still be possible, but there is nothing inevitable about it.”

LIBOR what?

Once a key interest-rate indicator, the London Interbank Offered Rate has faded in importance. Demand for bank credit has dropped dramatically since 2008, and banks are borrowing less from one another, dragging down interest rates.

Fell by a tick

Marketable U.S. debt held by foreign central banks fell $8.02 billion, to $3.445 trillion, in the week that ended Wednesday, the Federal Reserve said.

Shopping spree continues

The world’s biggest mining company, BHP Billiton, plans to acquire Petrohawk Energy for $12.1 billion, to take a major position in the U.S. natural gas industry. The deal will give the Australian company about 1 million acres of oil and gas fields in Texas and Louisiana

Surprise surprise

China’s move to allow trading partners to settle cross-border transactions in the yuan has brought unexpected consequences. Internationalization of the currency has opened a channel for “hot money” to enter China, created ways to make money from interest-rate disparities domestically and abroad, and contributed to inflation.

Thanks for reading!! Follow me on Twitter here.

 

It’s Good to Have This Much Power

It’s good to be a rating agency

Concerned about a U.S. debt default, Moody’s Investors Service placed the government’s Aaa credit rating under review for a downgrade. The credit rating agency cited a “rising possibility that the statutory debt limit will not be raised on a timely basis.” Treasury Secretary Timothy Geithner said the U.S. will default on its sovereign debt if the debt limit isn’t raised by Aug. 2.

More complication

The Committee on Payment and Settlement Systems and the technical committee of the International Organization of Securities Commissions proposed that central counterparties clearing foreign exchange options be able to guarantee the final settlement. The proposal surprised market participants, who said CCPs are not set up for such a requirement.

Internal division

Prominent Republicans in Congress are at odds with one another over raising the U.S. debt limit. Senate Minority Leader Mitch McConnell, R-Ky., warned that if Republicans are seen as driving the U.S. into default, they will guarantee President Barack Obama’s re-election.

More scrutiny

The Securities and Exchange Commission is examining banks’ estimates of possible liabilities related to mortgage issues, sources said. Bank of America said last month that it would take $20.6 billion in mortgage-related charges for the second quarter.

Like a disease

EU leaders have been trying for months to come up with a way to provide Greece with additional aid to resolve the country’s sovereign-debt crisis and keep it from spreading to other European nations, such as Spain and Italy. Sources said an emergency summit is in the works to tackle Greece’s debt problems. Meanwhile, the International Monetary Fund warned that Greece has little room for error as it implements austerity measures attached to a previous rescue.

More and more like it

Mary Miller, assistant U.S. Treasury secretary for financial markets, said the Dodd-Frank Act should survive its difficult first year and protect the economy in the future. “Scaling back or repealing major parts of the Dodd-Frank Act or not providing regulators with the funds they need to implement the act will leave our economy exposed to a cycle of collapses and crises,” Miller said.

QE @#%$@ 3

The Federal Reserve is ready to act if the U.S. economy weakens or the risk of deflation arises, Chairman Ben Bernanke told Congress. He said the central bank remains “prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate.” Bernanke said the Fed will “keep all options on the table.”

Closer look at the computer trading

An official at the Australian Securities & Investments Commission said breaches of market-integrity rules by traders who use computer-driven strategies won’t be tolerated. Greg Yanco of ASIC said concerns have been raised about “problematic algorithms.” The regulator told market participants that they should take steps to prevent problems with high-frequency trading.

Scramble

The European Banking Authority is poised to reveal results of stress tests on 91 banks Friday. However, as regulators adjust the terms of the assessments, bankers and lawmakers are scrutinizing the process. Involved parties are concerned about the credibility of the tests and how they will be perceived by markets.

Should be more

The role of the International Monetary Fund should go beyond lending money to countries in financial trouble, according to The Economist. “Post-crisis it seems the Fund can play a role in spotting systemic risks that could bring down the global economy,” an Economist Free Exchange blogger writes. “Of course, even if their economists have that foresight, countries don’t have to heed the Fund’s warnings until it is too late.”

Gotta cut down on my rice intake

The price of rice surged to its highest level since 2008 because of concern that Thailand’s government price support will increase the cost of exports, as global demand grows. Indonesia, the world’s third-biggest rice consumer, announced a plan to import to bolster its stockpile.

Lowest

Fitch Ratings downgraded Greece’s credit rating from B+ to CCC, giving it the lowest rating of any country. Fitch said there is a real possibility that Greece will default on its government debt.

Bye bye Bskyb

Rupert Murdoch’s News Corp. dropped its takeover bid for British satellite broadcaster BSkyB. The company faces a government inquiry into voice mail hacking and bribery of police by News of the World and other News Corp. publications. The media giant said it expects to “deploy our capital elsewhere.”

Argentina is under the microscope

The executive board of the International Monetary Fund said it might publish a report on the quality of Argentina’s economic data, including its inflation figures. Argentina’s government has been accused of manipulating inflation data for years. The nation’s Congress has decided to use private inflation estimates, rather than the government’s reports.

Thanks for reading!! Follow me on Twitter here.

 

More Shoes to Drop

More shoes to drop

The Bank for International Settlements said more countries — advanced and emerging markets — could face a sovereign-debt crisis similar to that plaguing Greece.

Who needs them?

Ewald Nowotny, a member of the European Central Bank Governing Council, said financial markets don’t need credit rating agencies, which he said have worsened the European sovereign-debt crisis. “It is all apparent from public statistics and whether these statistics are accurate or not, the rating agencies … do not give any more intrinsic knowledge, they simply give opinion,” Nowotny said. “And these opinions, they continue to give them in such a way that it worsens the crisis.”

Last ditch effort

U.S. Sen. Mitch McConnell, R-Ky., proposed a “last-choice option” to head off a debt default, as talks to raise the debt ceiling remained deadlocked. McConnell said Congress should consider giving President Barack Obama authority to raise the debt limit. The White House and Democrats expressed interest in the approach, but some conservative Republicans denounced it as a panic-driven sellout.

Some intended effects

Some say little has changed in the financial industry since the global crisis, but insiders stress that banks are subject to new regulations, many of which were mandated by the Dodd-Frank Act. “Many people think that not much has happened because so much of it is delayed and behind schedule,” said Roy C. Smith, a finance professor at the Stern School of Business at New York University. “That is not the case. In fact, the statute has pretty powerful provisions in it with respect to regulating systemic risks.”

Back to square one

Standard & Poor’s said U.S. regulators, lawmakers and other officials still might rescue a troubled systemically important financial institution rather than let it collapse.

Lipton to IMF

International Monetary Fund Managing Director Christine Lagarde selected David Lipton, an adviser to U.S. President Barack Obama, as her highest-ranking deputy. Lagarde also appointed China’s Zhu Min, a special adviser to the managing director, as a newly created fourth deputy manager.

Playing the rich uncle

Europe is poised to disclose this week results of the latest stress tests of banks, but EU governments already committed to backstopping financial institutions that don’t make the grade. Officials said troubled banks must either restructure or recapitalize themselves or be recapitalized by their governments. Officials also voiced concerns about analysts using data from the stress tests to conduct their own assessments.

New class

Financial advisers with clients older than age 55 should get ready for a class of retirees who see retirement as a new chapter in life, rather than an end to their working lives, according to a study by SunAmerica and Age Wave. Many Americans approaching retirement age plan to delay their departure from full-time employment, and many want to continue doing some work afterward, the survey found.

Some sort of solution is emerging

Europe’s next move to help Greece through its debt crisis is becoming clear, although many details remain to be spelled out, according to The Economist. “In exchange for a willingness by private bond-holders to support some form of debt rollover for Greece, euro-area members will have to support Greece in buying back its bonds from the secondary market,” according to the magazine’s Charlemagne’s Notebook. The compromise largely follows a proposal from the Institute of International Finance to make Greece’s debt burden sustainable.

This is scary

Italy is better able to manage its debt than many other major economies, according to The Economist. As illustrated by The Economist’s Daily Chart, Italy’s cyclically adjusted primary budget balance is 2.3% of projected 2011 gross national product, compared with negative balances for the U.S., Japan, Britain and Canada.

It’s over for the Aussie billionaire

British Prime Minister David Cameron plans to ask Parliament to back a Labor motion that calls on Rupert Murdoch’s News Corp. to abandon its attempt to take over satellite broadcaster BSkyB. The move comes as a scandal related to voice mail hacking by shuttered News of the World spreads to other News Corp. publications.

WTF?

The Federal Reserve is standing by its decision to end its bond-buying program on schedule, but officials are still considering more stimulus, according minutes from the central bank’s most recent meeting. Some officials said that if unemployment does not fall “meaningfully,” they should consider new stimulus measures.

Slowing down

Responding to the government’s efforts to cut inflation, China’s economic growth slowed last quarter. Gross domestic product increased 9.5% in the second quarter from the second quarter of 2010, compared with a 9.7% annual rate in the first quarter.

Thanks for reading!! Follow me on Twitter here.

Not-So-Mexican Standoff

No-so-Mexican standoff

As the Aug. 2 deadline approaches to raise the U.S. debt limit or let the country default, talks at the White House ended after 75 minutes without progress. House Speaker John Boehner, R-Ohio, said Republicans won’t support President Barack Obama’s latest deficit-reduction plan because it includes taxes. Both parties appeared to harden their positions.

Borg on edge

Swedish Finance Minister Anders Borg was cautious before the global financial crisis and has been credited with the country’s ability to weather the turmoil relatively well. As Sweden’s situation improves, Borg has no intention to ease up. “I have a very strong ambition to keep Sweden on the safe side,” Borg said. “I have never in my life seen anyone taking damage from having too large safety margins.”

Still talking

EU President Herman Van Rompuy is gathering policymakers to discuss another rescue for debt-ridden Greece. European leaders continue to discuss whether the country’s private-sector creditors should share in the pain and, if so, how. The European Central Bank remains opposed to burden-sharing. Officials are also expected to discuss concern that the sovereign-debt crisis will spread to Italy.

Pulling the rein on short sale

Consob, Italy’s financial-market regulator, ordered short-sellers to reveal positions of 0.2% or more of a company’s capital to curtail the strategy. The move comes after a plunge in Italy’s benchmark stock index. Bonds also fell as investors became more concerned that Italy will be affected by Europe’s sovereign-debt crisis.

All options are on the table

Allowing Greece to go into technical default as part of a debt restructuring could gain support from eurozone finance ministers. Officials might take another look at a German proposal that would encourage bondholders to voluntarily exchange Greek bonds for debt with longer maturity.

Regulatory arbitrage

Analysts at JPMorgan Cazenove said the Dodd-Frank Act and rules from the Basel Committee on Banking Supervision are creating arbitrage opportunities upon which some banks are already capitalizing. “In our opinion, [it] has already resulted in US investment banks buying correlation books [and] re-securitised assets from European counterparts to benefit from regulatory arbitrage,” the analysts wrote.

Higher tax, lower spending

Every successful financial rescue of a nation involving the International Monetary Fund employed a combination of tax increases and spending cuts, which the U.S. might be wise to consider, according to The Economist. “Put simply, no fiscal consolidation that the IMF has judged to be successful relied on public spending cuts for more than 83% of its impact,” according to the Free Exchange blog. “In successful fiscal consolidations, tax rises accounted for between 17% and 33% of deficit-reduction measures.”

Keeps on surging

Chinese consumer inflation in June was the highest since June 2008, the National Bureau of Statistics said. Inflation was 6.4% last month, compared with 5.5% in June 2010. Food prices were up 14.4% from a year earlier.

Getting ready

Anticipating tax increases in the next few years, if not this year, U.S. financial advisers are increasing attention to the after-tax performance of clients’ portfolios. “Sometimes people forget — it’s the after-tax returns that matter most,” said Melissa Labont of the American Institute of Certified Public Accountants.

Still high

China’s trade surplus with the U.S. rose 8% in June, the biggest increase in four months, China’s General Administration of Customs said. The gap was $19.1 billion, according to the agency. Economists said they expect China’s expanding trade surplus to be followed by U.S. pressure for further increases in the value of the yuan.

The first

A base-metal commodity trader in Singapore is the first commercial user of a yuan-swap arrangement between China and Singapore, HSBC said. The People’s Bank of China and the Monetary Authority of Singapore entered a $30 billion bilateral currency-swap agreement to increase trade between the nations.

The Canadians are working

Canada’s economy created 28,400 jobs last month, about twice as many as economists forecast. But most of the growth was in part-time jobs that provide fewer benefits and lower pay than full-time positions.

Erratic

The latest unemployment report by the U.S. Bureau of Labor Statistics suggests that workers must be prepared for brief periods of encouraging news from the labor market, interrupted by soft patches and setbacks, according to The Economist. Unemployment rose in June for the fourth straight month, to 9.2%, and only 18,000 jobs were created. “In all likelihood, the employment data will improve in coming months as consumer purchasing power and business spirits recover from the fuel price surge,” an Economist Free Exchange blogger writes.

Gender gap

Researchers are unable to explain the reason women in the U.S. labor force are losing jobs while more men are getting hired. Over the past two years, women have lost 218,000 jobs while men have gained 768,000, according to the Pew Research Center.

Time bomb

Government benefits accounted for 20% of Americans’ incomes in 2010, and many of those payments are set to end this year. Economists fear that unless the labor market improves significantly, taking that much money out of the economy could be a major setback for the already shaky economic recovery. Loss of benefits will remove $37 billion from the U.S. economy in 2011, Moody’s Analytics said.

Thanks for reading!! Follow me on Twitter here.

 

All Together Now

All together now

U.S. House Speaker John Boehner, R-Ohio, emerged as an enthusiastic supporter of President Barack Obama’s proposal for a bipartisan compromise to cut the deficit. The deal would either be reached quickly or collapse because of partisan bickering, Boehner said. Obama called for reducing the deficit through cuts to Medicare, Medicaid and Social Security as well as measures to increase revenue.

Defeated

When JPMorgan Chase CEO Jamie Dimon challenged Federal Reserve Chairman Ben Bernanke publicly over banks’ capital requirements, it wasn’t clear whether banks were on the verge of victory or defeat in their battle with regulators. A month later, it looks like defeat, as banking regulators work on measures to increase capital requirements worldwide.

Bolstering the Portuguese

The European Central Bank moved to support Portugal’s banking sector after Moody’s Investors Service downgraded the nation’s credit rating. The ECB suspended its rule that government bonds accepted as loan collateral must have at least one investment-grade rating.

More bickering

Conflicts over details and timing are delaying progress toward global regulation of derivatives. Non-U.S. banks are unhappy about the possibility of having to follow U.S. rules to maintain access to U.S. markets.

Kill one to save the other

To save a deal to take full control of British broadcaster BSkyB, Rupert Murdoch will close the U.K.’s biggest-selling newspaper, the News of the World, after Sunday’s edition is published. The widening controversy over the newspaper’s voice-mail hacking raised the possibility that the British government would block Murdoch’s effort to buy the 61% of BSkyB that his company doesn’t already own.

Disclosure

The European Banking Authority will soon publish results of stress tests on 91 banks in 23 countries. The report is expected to include unprecedented amounts of detail about banks’ assets.

Need redesign

Capital markets might have to undergo a “redesign” to cope with systemic risk introduced by high-frequency trading, said Andy Haldane, executive director for financial stability at the Bank of England. The “race to zero” for the fastest execution is increasing market volatility, he said.

In effect

The U.S. Commodity Futures Trading Commission approved by a unanimous vote the first of a long list of rules mandated by the Dodd-Frank Act. The agency said the rules give it more power to deal with insider trading and market manipulation. The rules include one that requires large-volume traders to report their derivatives transactions to the commission.

Weird demand

Analysts were skeptical of Spain’s plan to go to the bond market so quickly after Moody’s Investors Service downgraded Portugal’s credit rating, but there was strong demand and the sale was at the high end of the government’s target. The auction confirmed that Spain still has access to the sovereign-debt market.

Stop borrowing

Reducing government debt is necessary and painful, but doing it the wrong way could cripple developed economies for many years, according to The Economist. Write-downs must be made in an orderly manner, maintaining at least some growth is essential and boosting exports is the least painful solution to national deleveraging. “Even if handled well, the difficult business of debt reduction will hold back the rich world’s economies for several more years,” the magazine noted. “Get used to it.”

Hiring who?

Private-sector U.S. employers hired 156,000 people in June, compared with 36,000 in May, payroll-processing firm ADP said. The increase was more than twice what economists had forecast.

Hiking…the rates

The European Central Bank raised its key interest rate 25 basis points, to 1.5%, the second increase this year. ECB President Jean-Claude Trichet suggested that the central bank will continue tightening monetary policy through year-end. Analysts said they expect a 25-basis-point increase every quarter.

Someone is shopping

June sales at major U.S. retail chains increased far more than what Wall Street analysts had expected. The Thomson Reuters Same-Store Sales Index rose 6.5%, compared with analysts’ estimate of 4.9%.

Thanks for reading!! Follow me on Twitter here.

 

Sneaky

Sneaky 401(k)

A U.S. law passed in 2006 intended to increase workers’ retirement savings ended up doing the opposite, according to an analysis performed for The Wall Street Journal by the Employee Benefit Research Institute. Automatic enrollment in a 401(k) plan, with opt-out allowed, resulted in contributions of 3% or less of wages, compared with 5% to 10% chosen by employees when they manually sign up, researchers found.

26 dropouts

Moody’s Investors Service said it will identify 26 European banks that “have a heightened risk of needing extraordinary external support.” The credit rating agency said it doesn’t anticipate many rating changes based on ongoing stress tests of 91 banks.

On overdrive

Working behind the scenes, a small team of Treasury Department officials is studying how to prevent the U.S. from defaulting on its debt, sources said. Among options being studied is whether the Constitution allows President Barack Obama to ignore the debt limit set by Congress.

Wrong approach

The Basel Committee on Banking Supervision should focus on systemic risk tied to simultaneous failure of multiple banks, writes Charles Goodhart, a former member of the Bank of England Monetary Policy Committee.

Close to settling

U.S. state and federal officials and major banks reportedly are close to a deal to resolve claims about improper foreclosure. The settlement could cost banks and mortgage servicers $20 billion, sources said. Lenders involved include Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.

Two sides of the same coin

The fiscal crises in the U.S. and Europe have much in common, and in both, democratic institutions seem incapable of dealing with them responsibly, according to The Economist. Meanwhile, China is on track to have the world’s biggest economy within 15 years. “The case for democracy is a moral one, not an economic one; but if democracies can’t handle responsible governance, either on economic or more general policy issues, then governance will gradually become less democratic, and the moral case will make little difference,” an Economist Democracy in America blogger writes.

Some progress

As the deadline approaches for raising the U.S. debt ceiling, House Majority Leader Eric Cantor, R-Va., said Republicans are prepared to eliminate some tax loopholes to make a deal. “If the president wants to talk loopholes, we’ll be glad to talk loopholes,” Cantor said. “We’ve said all along that preferences in the code aren’t something that helps economic growth overall.”

Cut

Analysts are cutting second-quarter earnings forecasts for the biggest U.S. investment banks. Fifteen of 22 analysts covering Goldman Sachs have reduced their forecasts since early June.

Goldman’s privilege

The Federal Reserve’s $15 billion loan to Goldman Sachs under its single-tranche open-market operation was the biggest loan made from the $80 billion emergency program. Details of the program were secret until the U.S. central bank was forced to release them under the Freedom of Information Act.

Up and up away

China’s central bank announced its third interest-rate increase this year as the government moves to slow inflation. Rates on one-year bank deposits and one-year bank loans were increased by 25 basis points.

Lehman borrowed a bunch

Three months before Lehman Brothers Holdings filed for the biggest bankruptcy in U.S. history, its brokerage borrowed as much as $18 billion in four loans from the Federal Reserve. The money came from a program that was kept secret until the U.S. central bank was forced to release details under the Freedom of Information Act. The brokerage paid off the loans the day before it went into liquidation, the Fed said.

Slow approach

German officials suggested that Europe take another look at a restructuring proposal that would allow Greece’s sovereign debt to be in technical default briefly. The move puts on the back burner a French proposal for a 30-year rollover of Greek debt, sweetened with incentives for bondholders.

Fewer managers

Financial advisers are using fewer asset managers, according to a Cerulli Associates research report. Scott Smith, head of Cerulli’s intermediary practice, said much of the shift can be attributed to the consolidation of asset managers and the savings they offer.

Stagnant feeling

Americans view their personal finances much as they did two years ago, according to a new McClatchy-Marist poll. Fifty-two percent of respondents said they thought their financial situations will not change, compared with 50% two years ago.

Thanks for reading!! Follow me on Twitter here.

 

Scaling the !@$%%^ back

Scaling wayyy the @$$%^& back

China is preparing to significantly reduce bank lending this year, as it dries up liquidity to lower the rate of inflation, the official China Securities Journal reported. Lending could drop to $1.04 trillion, from last year’s $1.23 trillion.

Bank consolidation option is back on the table

EU Competition Commissioner Joaquín Almunia said the region has a fragmented financial system, and he wouldn’t mind “observing a process of reducing the number of players at the European Union level.”

Portugal is trashed by Moody’s

Moody’s Investors Service downgraded Portugal’s credit rating from Baa1, an investment-grade rating, to Ba2, which classifies debt as junk. The credit rating agency said it expects Portugal to need a second financial rescue and assigned the country a “negative” outlook.

Another test: bailout test

Credit Suisse analysts complained that stress tests conducted on EU banks are “missing the point.” “Everyone can do arithmetic on balance sheets,” they wrote to clients. “The information that the markets need is whether there is a well-organized and well-capitalized structure in place to recapitalize the failures.”

Default or no default?

A proposed voluntary rollover of Greek debt would not be a default and trigger credit default swaps, said David Geen, general counsel for the International Swaps and Derivatives Association. The deal under discussion seems to be a “voluntary exchange,” he said. “A CDS is really trying to catch an actual default or something that’s very close to a default, and we never thought a voluntary exchange came that close to a default for CDS purposes,” Geen said.

WTO upheld US complaints

The World Trade Organization upheld complaints by the U.S., the EU and Mexico that China’s restrictions on the export of rare-earth materials give Chinese producers an unfair advantage over foreign competitors. An appeal is likely.

Either you like it or not…crap is coming

A standoff over the U.S. debt ceiling likely will damage the economy, even if the country doesn’t default on its debt, according to The Economist. “The Republican strategy will either lead Democrats to accept short-term cuts large enough to endanger recovery or will result in a short period of ‘prioritisation’, in which spending is suddenly and dramatically cut back to prevent a default,” according to the magazine’s Free Exchange blog. “America may make it through this episode with its credit rating intact and still sustain significant economic damage.”

Emerging problems

Among the most destructive consequences of the global financial crisis is the increase in youth unemployment, according to The Economist. Rigid labor laws that protect privileged classes of workers are often blamed for the problem, but unemployment among young people in countries with liberalized labor markets is also up, as illustrated by The Economist’s Daily Chart.

Record revenue

Profit recovered and revenue soared to an all-time high for independent registered investment advisers last year, according to Charles Schwab. After the 2008 market downturn, many investors left big investment firms and sought advice from independent advisers, said Bernie Clark, executive vice president and head of Charles Schwab Advisor Services.

Never ended

For many small businesses in the U.S., the recession continues. A U.S. Bancorp survey of companies with annual sales of $10 million or less found that 70% of them do not plan to add employees over the next year.

Dimon is sputtering

JPMorgan Chase, led by CEO Jamie Dimon, wants to extend its reach beyond the U.S., but it seems to be making little progress. Getting a bigger share of the world’s corporate-loan business would make the bank less dependent on the stagnant domestic economy. Instead, JPMorgan’s international revenue fell 10% last year.

Foreign buyers

Foreign buyers lured by low prices made even lower by the falling U.S. dollar are driving up U.S. home sales, according to the National Association of Realtors. The effect is greatest in warm-weather vacation destinations such as Florida and Arizona, the trade group said.

Fading

Investors are starting to realize that not everything linked to China’s rapidly rising yuan is a winner, with demand for yuan bonds diminishing. Sales of high-yield yuan-denominated debt nearly ground to a halt in recent few weeks, analysts and bankers said.

Wishful thinking

U.S. gasoline prices might go down slightly in the coming weeks, but no further significant declines are likely this summer, analysts said. The national average price of gas increased 0.5 cents per gallon to $3.579 last week, the Energy Information Administration reported.

Thanks for reading!! Follow me on Twitter here.