BWS Capital Partners, LLC

Next move would be?

At the U.S. Federal Reserve’s symposium in Jackson Hole, Wyo., monetary-policy experts indicated that they are unsure of their next step, with interest rates near zero for quite some time. Additionally, they differed greatly on how to manage central banks once the economy returns to “normal.”

Revoked

Finansinspektionen, the financial supervisor in Sweden, has revoked the license of HQ Bank, an investment bank. “The bank has grossly breached the most central provisions of Swedish legislation and [Finansinspektionen] will apply for the company to be entered into liquidation,” the watchdog said in a statement.

Describing the record

Elizabeth James, director of futures business at Barclays, told a U.S. bankruptcy court that the bank did not have a clear grasp of Lehman Bros.’ derivatives business when Barclays was looking into acquiring its derivatives trades in 2008. “Lehman’s books were in such a mess that I don’t think they knew where they were,” James said.

Don’t be scared

A sharp increase of the Nikkei 225 stock index because of news that the Bank of Japan is embracing a more expansionist policy holds a lesson for the U.S. Federal Reserve, according to The Economist. The move puts to rest an incorrect notion that a dramatic policy change by the Fed would frighten the market. No matter what it would signal about the Fed’s view of the economy, further effort by the central bank wouldn’t send the market tumbling, the magazine notes.

Broaden lending program

The International Monetary Fund said it will lend a significant amount of money to developing countries whose policies are generally endorsed by the fund. The IMF plans to offer a wider range of loans to encourage such nations to seek financial aid before crisis hits. The fund plans to offer a “precautionary credit line” in which nations would not incur interest charges on the money unless it used it.

More testaments

Former Lehman Bros. CEO Richard Fuld, Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corp. Chairwoman Sheila Bair and other insiders are scheduled to testify before the U.S. Financial Crisis Inquiry Commission this week. The hearing will focus on the “expectations and impact of extraordinary government intervention” during the financial crisis. The panel will explore the idea of “too big to fail” at its two-day hearing.

Moody’s concerns

China might be exposed if its economic outlook deteriorates because its growth is being fueled by a rapid expansion of banks’ balance sheets, Moody’s Investors Service said. “Pain lies ahead if China’s economic growth slows and the banking business model cannot adjust accordingly in time,” said Yvonne Zhang, senior analyst for China at Moody’s.

Better than expected

Estimated growth of Britain’s gross domestic product for the second quarter was revised upward to 1.2%, and underlying data paint an encouraging picture of the economic recovery, according to The Economist. Some economists had suspected that an earlier estimate showing growth was the result of a burst of election-eve spending by the government, but the latest data show that much of the growth came from businesses rebuilding their inventory, the magazine notes.

Nope!

American International Group’s sale of a Taiwanese life insurer, an effort to pay off debt to the U.S. government, ran into objections from Taiwan’s government. Regulators said they are concerned that capital from China is helping buyers Primus Financial Holdings and China Strategic Holdings finance the acquisition. Taiwan doesn’t allow Chinese investors to acquire a controlling interest in a local financial company.

Doing ok

India’s economy expanded 8.8% during the second quarter compared with the same period last year, led by 12.4% growth in manufacturing, an 8.9% gain for mining and a 7.5% increase in construction. The statistics mark the fastest expansion for India since the final quarter of 2007, when it grew 9.7%.

Obama vs. Republican on small biz bill

U.S. President Barack Obama lashed out at Republicans for preventing the Senate from voting on legislation to help small businesses create jobs and speed up the economic recovery. He called on Congress to “rise above the politics of the moment” and enact the Small Business Jobs and Credit Act when Congress reconvenes next month. Obama said he will support extension of tax cuts adopted under President George W. Bush but exclude households with an annual income of more than $250,000.

Still worrisome

Auto industry experts who have taken a close look at data showing that U.S. sales lifted consumer spending to 0.4% in July said the information might not indicate that Americans are ready to loosen up spending. An increase in new-car sales was driven largely by fleet sales, which are less profitable than sales to individuals and don’t tell analysts much about consumer sentiment, experts said.

Environmental risk

Major commercial lenders are increasingly deciding not to finance projects with significant environmental risk, fearing harm to their profit and reputation. Bank of America, Citigroup, Credit Suisse, JPMorgan Chase, Morgan Stanley and Wells Fargo are tightening up their evaluation of mountaintop mining projects or simply declining to finance them.

Sell

Stock analysts are turning pessimistic despite recently raising earnings-growth forecasts for the Standard & Poor’s 500 by 36%, leaving some investors puzzled. Less than 29% of analysts’ ratings on equities covered by the world’s brokerages are “buys,” the lowest rate since at least 1997, according to data compiled by Bloomberg.

Winding down is an option

Stock analysts are turning pessimistic despite recently raising earnings-growth forecasts for the Standard & Poor’s 500 by 36%, leaving some investors puzzled. Less than 29% of analysts’ ratings on equities covered by the world’s brokerages are “buys,” the lowest rate since at least 1997, according to data compiled by Bloomberg.

Slimming down

Bankrupt Japan Airlines said in a rehabilitation plan submitted to Tokyo District Court that cost-cutting measures will include shutting down 10 international and 39 domestic routes, as well as taking 103 aircraft out of operation. The company aims to achieve a 9.2% profit margin by March 2013.

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Ramping up supports

The Bank of Japan will bolster the amount of funds in a bank-loan program by 10 trillion yen, as it boosts monetary stimulus for the first time in months. The decision was made at an emergency meeting of the central bank, which was under pressure from the government to act. The focus is turning to the government’s plan to spur growth as economic ministers meet to discuss stimulus efforts.

Inadequacy

The Dodd-Frank act directs the U.S. Securities and Exchange Commission to conduct more than a dozen studies and address nearly 100 rules and proposals. However, a congressional fight over the federal budget could hinder the agency’s effort to work on the mandate. Robert M. Kurucza, a former SEC staffer, said the SEC’s resources are not enough.

Asset price bubble

At the U.S. Federal Reserve’s symposium late last week, central bankers from around the world and economists clashed over the best way to keep asset-price bubbles from developing. Some said regulatory tools are the most efficient way to deflate a boom without hindering the economy. Others said such tools are “unproven” and might shift central bankers’ focus away from adjusting interest rates properly. The debate is an example of challenges faced by central bankers. Participants also said the global economic recovery might be uneven, but it likely will remain on track. While optimism reigned, some officials were struck by pessimism about the U.S. economic recovery.

A year past and nothing was done

The International Monetary Fund started asking about how much capital could be raised through the sale of Allied Irish Banks assets as early as April 2009, according to government documents. The bank is attempting to sell several holdings to comply with the Irish banking regulator’s capital requirements.

Oh, now this speech

U.S. President Barack Obama said there is no “magic bullet” that will fix the economy, but there are measures awaiting congressional action that could move it in the right direction. “We should be passing legislation that helps small businesses get credit, that eliminates capital gains taxes so that they have more incentive to invest right now,” Obama said. “There are a whole host of measures we could take, no single element of which is a magic bullet.”

ECB domination

Jean-Claude Trichet, president of the European Central Bank, is lined up to head the European Systemic Risk Board, while other members of the ECB will be on the 60- to 70-member board, positioning the central bank to dominate the supervisory superpower. The situation could bolster the ECB’s influence in the greater financial system, but it could cloud the central bank’s monetary-policy role and cause issues to its credibility if another financial crisis emerges.

About time

Small businesses received 21.89% of the U.S. government’s spending for contracts in 2009, an improvement compared with the previous year but still short of a 23% target established by Congress, according to the Small Business Administration. Spending on procurement from small business totaled $96.8 billion, with $33.5 billion going to companies classified as disadvantaged.

Agreement on banking rule

Regulators worldwide will meet in Basel, Switzerland, next month to try to come to consensus on capital and liquidity rules for banks, in an effort to prevent a repeat of the financial crisis. Leaders of France, Germany, Japan and the U.S. have become involved in the discussion as the outcome is expected to affect major financial institutions. Negotiators are striving to pin down details during the mid-September meeting and then offer the Group of 20 nations’ leaders a package to approve at their November summit.

Oww, not a good sign

For decades, China has welcomed the expansion of aggressive, privately owned companies at the expense of inefficient state-run enterprises, but that trend is being reversed. World Bank data show that the proportion of industrial production by state-run businesses increased last year. Lending by state banks and government spending aimed at propping up China’s growth during the economic downturn have helped state-backed companies dramatically increase their investing.

Cutting lending risk

The Bank of England might for the first time impose a limit of loan-to-value ratio on home mortgages, requiring a deposit of 10% to 25% of a property’s value. Charlie Bean, the central bank’s deputy governor, said the bank is considering “direct constraints” on the availability of credit. Before the credit-market meltdown, some homebuyers were allowed to borrow 125% of the value of a property.

Buyer’s regret?

More than most industrialized nations, Germany has tied its future to the growth of China’s economy. At the same time, the government and major German companies are worried about what might happen next, with China clearly determined to build a high-tech economy, according to German magazine Der Spiegel. German Chancellor Angela Merkel said Chinese companies routinely siphon off technical skills and intellectual property from their German partners.

Some positives?

As widely anticipated, growth of the U.S. gross domestic product for the second quarter was revised downward, from 2.4% to 1.6%. On a more positive note, every major category of demand increased. “Investment showed particular strength,” according to the Donald Marron blog of The Christian Science Monitor. “Business investment in equipment and software … grew at a 25% pace, thus adding about 1.5 percentage points to overall GDP growth.”

Larger role needed

The International Monetary Fund might need to create a permanent liquidity fund to help the global economy get through times of crisis, said John Lipsky, the IMF’s first deputy managing director. The IMF has a crucial role to play in providing liquidity when financial markets dry up, he said. A permanent facility would provide credit to all IMF members under rules established in advance, rather than arranging loans on an emergency basis, Lipsky said.

Policy, not communication

U.S. Federal Reserve Chairman Ben Bernanke has made it clear that the central bank’s problem isn’t explaining the economy and what the bank plans to do about it, according to The Economist. The problem is figuring out what’s going on and deciding how to respond. “The recovery has stumbled and the central bank isn’t sure why,” the magazine notes. There will be more quantitative easing when Bernanke decides it is essential, The Economist concludes.

Need to be changed

A representative of Moody’s Investors Service said the U.S. regulatory-reform law has not prompted the credit rating agency to try to get agreement from municipal bond issuers regarding indemnification language for credit ratings. “Moody’s has made no changes to its indemnification language in over a year,” the spokesman said. “The indemnification clause included is common in business-services agreements. Over the past few years, we have been introducing standard rating agreements across all sectors, including the municipal sector.”

Need help

U.S. Federal Reserve Chairman Ben Bernanke tried to put to rest the idea that the central bank can help the struggling economy by manipulating the money supply and interest rates. “Central bankers alone cannot solve the world’s economic problems,” he said at the Fed’s annual policy symposium. If the economy is to move into a sustained recovery, business investment and consumer spending must take the lead, Bernanke said.

Earlier than planned

The Labor government under U.K. Prime Minister Tony Blair decided to raise the retirement age to 66 between 2024 and 2026, but Britain’s coalition government is moving to accelerate the process. Many expect the change would come as early as 2016 for men and 2020 for women. A tougher decision would be when to raise the retirement age beyond 66, according to The Economist. The number of people past retirement age who continue working has been on the increase for years, including during the recession.

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Eyes on him

Investors worldwide are waiting for Federal Reserve Chairman Ben Bernanke to indicate during a speech in Jackson Hole, Wyo., what the central bank plans to do if the U.S. economy weakens further. Economists said the Fed is far from being out of options to bolster the recovery, and some said they hope Bernanke will clarify what direction the central bank plans to take. This year’s annual conference, sponsored by the Federal Reserve Bank of Kansas City, comes after the release of a wave of disappointing economic data.

Fatal Flaws

The Urgent Issues Task Force, an influential watchdog, has warned that the accounting system for banks contains “fatal” and “dangerous” flaws. Tim Bush, a member of the task force, said the flaws were uncovered during a review of a proposed expansion of the International Financial Reporting Standards. The watchdog warned the U.K. government of a “regulatory fiasco” in which banks have been adhering to problematic reporting standards.

Reduced

Reports that the U.S. Commerce Department likely will cut in half its estimate of gross domestic product for the second quarter unnerved capital markets. The department estimated a month ago that the economy expanded 2.4%. Economists anticipate a substantial downward revision, after a significant increase in the trade deficit outstripped most forecasts.

Told to

China must accelerate the transformation of its economy by expanding the service sector, Vice Premier Li Keqiang told the National Development and Reform Commission. He said local authorities should be become more innovative and find ways to use their regulatory power to encourage development of the service industry.

Guidelines for the test

The Committee of European Banking Supervisors has released guidelines for banks’ stress tests focusing on risk-taking. Regulators are striving to force banks to improve their estimates of losses they might suffer during tumultuous periods so they can reserve enough capital and liquidity to keep from collapsing. “Institutions are expected to have an adequate assessment process that encompasses all the key elements of capital planning and management and generates an adequate amount of capital to set against those risks,” according to the CEBS guidelines.

Private creditors to pay

The Basel Committee on Banking Supervision is making progress in its search for ways to ensure that when banks fail, or get close to failing, the price is paid by private-sector creditors, not taxpayers, according to The Economist. The most promising approach for big banks with huge losses is giving regulators draconian powers over a small part of their balance sheets, principally the least senior slice of banks’ debt, known as Tier 2 capital. “The hope is that regulators might have a means to impose losses on the private sector in a controlled way, and not just face a binary choice between bail-out or oblivion,” the magazine notes.

Boom in M&A

Activity in mergers and acquisitions has surged during the past month and eventually will be a major boon to Goldman Sachs, Morgan Stanley and other investment banks, analysts said. However, trading has been weak and will have a more important effect on banks’ earnings. The increase in M&A activity will not make up for weak trading, experts said.

Stopping the flow

Mexican President Felipe Calderon proposed a package of measures against money laundering aimed at cutting off the flow of drug-cartel profit from the U.S. into Mexico. The proposal includes restrictions on cash purchases of big-ticket items, which are often used by drug traffickers to launder money from narcotics deals.

More cuts and closures

Reduced tax revenue is driving U.S. cities to make deep cuts in their fire departments, harming their ability to respond quickly to emergencies. Fire chiefs and labor leaders said they have never seen so many parts of the country hit by such severe cutbacks. Cities are laying off workers, closing fire stations and implementing “rolling brownouts,” shutting down different fire-department facilities on alternating days.

Little contribution

Economic recovery and stimulus have been primary factors in the rebound of the U.K. banking industry, and contribution from bank managers has been minimal, according to Standard & Poor’s. Several banks are overly dependent on central bank funding or government-guaranteed wholesale funding and are unprepared for a double-dip recession, the credit rating agency said.

Here comes food trouble

China’s food security is at risk because of a likely shortfall in its ability to produce grain for the next 10 years, the government said. The nation doesn’t have enough water or farmland to meet is grain-output targets, said Zhang Ping, minister of the National Development and Reform Commission.

Crack down on the dead

The Greek government discovered that it might have wasted hundreds of millions of euros by continuing retirement benefits after recipients died. “We are obliged to announce that some people in this country have been drawing pensions, though they may have died years ago,” said Deputy Labor Minister George Koutroumanis. The government is working on a registry of pensioners so it can put a stop to payments to the dead.

Trade deficit not good

Some experts are worried that a widening trade deficit in the U.S. signals a return to some of the behavior that pushed the country into recession, notably excessive consumption and reliance on foreign oil. The U.S. remains the world’s biggest exporter.

Bright spot

The number of Americans collecting unemployment benefits exceeded 10 million for the first time in four months last week, but initial claims posted a bigger drop than economists were expecting, according to the Labor Department. First-time claims declined 31,000 to 473,000.

Profit from TARP

The Obama administration’s Public-Private Investment Program, which invested in complex mortgage securities when the market dried up, is on the verge of delivering a big payoff. The 9-month-old program has created an estimated return of about 15.5%, according to an analysis by a professor at the University of Louisiana at Lafayette. For U.S. taxpayers, that amounts to a $657 million paper profit.

Duhhhh

The U.S. will have to do more than wait for the economy to recover if it is to bring unemployment down to an acceptable level, with joblessness becoming more structural and likely to be unaffected by increased demand for workers, according to The Economist. Policymakers need to look beyond stimulus measures and consider a different approach, such as help for workers trapped in a home with negative equity, making it tough to move somewhere for a job. Retraining needs to be better managed and more precisely targeted to skills employers need, The Economist notes.

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Free to take risk

Regulatory reform will not prevent U.S. banks from making the kind of high-risk deals that drove the economy into the severest recession since the 1930s, according to The New York Times. Banks are still free to take high-risk bets on behalf of clients, based on a mistaken belief that losses would not find their way onto the company’s balance sheet, the newspaper notes. Between April and July, Goldman Sachs and JPMorgan Chase each posted a loss of more than $100 million on trades made for customers.

Not a hindrance

Neal McGarity, a spokesman for the U.S. Financial Accounting Standards Board, said the resignation of Chairman Robert Herz will “not at all” hinder progress on mark-to-market accounting rules. McGarity said the board will hold public round tables after collecting comments on draft rules for financial-instrument accounting. “The FASB will evaluate all input in an effort to create standards that will best serve investors and others who rely on good financial accounting and reporting,” he said. “We expect a seamless transition in naming a fifth board member soon.”

Selling prime assets

Dubai World has surprised creditors with a plan to sell some strategic investments, including port assets of DP World and Jebel Ali Free Zone, according to a document. The information shows that the conglomerate’s debt totals $39.9 billion, much more than analysts estimated. Dubai World is trying to persuade creditors to back a restructuring plan before Oct. 1.

Huge benefits

The Economist asks whether there is a sensible balance to be reached between the cost of tightening capital requirements and the reward it would deliver in possibly preventing another financial meltdown. A report from the Basel Committee on Banking Supervision concludes that increasing the capital ratio by 1 percentage point would raise loan spreads by 13 basis points but reduce by one-third the frequency of crises. “What is astonishing here is how small the costs are with respect to potential benefits,” wrote Jean Pisani-Ferry, director of Bruegel, an economic think tank.

Nope, not now

BP’s damaged reputation has put the company out of the running for Arctic oil and gas exploration off the coast of Greenland. A spokesman for BP said the company is no longer seeking a drilling license for that area. Greenland’s government and the company recognize that “it would be political madness to give the green light to BP” given its controversial spill in the Gulf of Mexico, a source said.

Running the show

The U.S. Securities and Exchange Commission adopted a rule to give shareholders a bigger voice in selecting corporate management, as part of an effort to make boards of directors more accountable to investors. The measure allows shareholders who have owned 3% or more of a company’s stock for at least three years to nominate directors. Small public companies have a three-year exemption from the procedure.

Looking for signal

Investors are awaiting Federal Reserve Chairman Ben Bernanke’s speech in Jackson Hole, Wyo., hoping for assurance that the central bank is ready with a strong, swift response if the U.S. economic rebound collapses. The central bank has been sending out a mixed signal, with policymakers contradicting one another on the economy. This muddled message might be undercutting the recovery by unnerving financial markets, analysts said.

Tightening the noose

The U.K. Financial Services Authority released a discussion paper that considers a number of approaches to stricter trading rules for banks. “The FSA believes that the delivery of a new, robust, long-term approach to prudential requirements for trading activities is one of the key areas of regulatory reform that must be delivered to build a strong financial system,” the regulator said.

Give them up

Europe and the U.S. are moving toward a standoff over giving power to emerging economies within the International Monetary Fund. The U.S. wants Europe to give up some of its nine seats on the 24-member board, but Europe is divided on how to respond to the proposal. “The IMF will be in crisis unless a solution is found in time,” a senior official said.

Levy on banks

The German government expects a levy imposed on banks to cover future financial crises to raise about €1 billion annually. Germany is following in the footsteps of the U.K. and France, but there has yet to be consensus on a global bank tax. Analysts said Germany’s levy will eat into the banking sector’s profit starting next year.

Irresponsible

Major financial institutions are speculating in agricultural commodities, driving up the price of wheat, barley and other grains and putting the health of millions of people at risk, said economist Joachim von Braun. Grain exporters could bring the problem under control by forming what would amount to a central bank for the commodity to cap extreme price increases, von Braun said.

Reform on the order

French President Nicolas Sarkozy said the Group of 20 economies need to overhaul global monetary order and noted that discussing exchange rates without China is “nonsense.” When France heads the G-20, starting in November, stabilization of foreign exchange and commodity markets will be key, Sarkozy said.

Done

Sales of newly built houses in the U.S. decreased last month to their lowest level since the government began keeping records 47 years ago. The number declined 12% between June and July. Economists are worried that historically low interest rates and falling prices are not enough to head off a collapse in new-home sales.

Jump in profit

Geely Automobile Holdings, the largest auto manufacturer in China, posted a $118 million profit for the first half of the year, a 35% gain compared with the same period last year. Sales increased 55% to $1.36 billion. The company said it expects to reach a target of 400,000 unit sales for this year.

Almost non existent

Statistics on new-home sales in the U.S. are as troublesome as those for existing homes, according to The Economist. Last month, 25,000 new homes were sold, a 90% drop from nearly 120,000 in July 2005. “When one takes into account that sales aren’t spread evenly around the country — most are taking place in tighter markets experiencing job growth — it becomes clear that in some metropolitan areas housing markets have all but shut down,” the magazine notes.

Ireland vs. S&P

The government agency restructuring Ireland’s banks called a Standard & Poor’s downgrade of the nation’s credit rating “not a realistic approach.” Some economists and analysts agreed, saying they don’t share the credit rating agency’s assumption than the government will not recover anything from assets used to secure loans purchased from banks. The yield spread for Irish bonds above benchmark German bunds widened to a record 344 basis points.

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Plunging

Sales of existing U.S. homes fell to their lowest level since 1999 in July, raising concern that the economy is weakening and headed into a long period of stagnation or a double-dip recession. The National Association of Realtors said home sales dropped 27.2% between June and July, a bigger decline than expected. For single-family houses, which account for most residential transactions, the sales rate was at its lowest since May 1995.

Contradiction

German Chancellor Angela Merkel came to power by promising to lighten the tax burden, but the economic downturn put that effort on the back burner, according to Der Spiegel. The government is pressing for a long list of tax increases, including a bigger deduction from paychecks. Merkel wants to slash Germany’s budget deficit quickly, but walking away from her campaign promise is starting to cause discontent among political parties in the coalition government, analysts said.

Gross wants more government

Bill Gross, head of Pacific Investment Management, said there is no practical alternative to major U.S. government support for housing finance. He proposed merging all government entities involved in housing, including Fannie Mae and Freddie Mac, into a single entity responsible for helping people get home mortgages.

Need more boost

Bill Gross, head of Pacific Investment Management, said there is no practical alternative to major U.S. government support for housing finance. He proposed merging all government entities involved in housing, including Fannie Mae and Freddie Mac, into a single entity responsible for helping people get home mortgages.

Getting better

Recent mortgage modifications in the U.S. are more successful at keeping borrowers from losing their homes in foreclosure than those completed earlier in the housing crisis, according to a report by the State Foreclosure Prevention Working Group. Homeowners who obtained a mortgage modification in 2009 were nearly 50% less likely to fall 60 days behind on their payments compared with those whose mortgages were modified in 2008, according to the report.

A regular thing

The EU is looking into how often banks’ stress tests should be conducted to bolster confidence in the industry, said Olli Rehn, commissioner for economic and monetary affairs at the EU. “This is something I have to talk to the finance ministers about,” he said. Stress tests of financial institutions make up “a very useful instrument of reinforcing confidence for transparency and sound and solid analysis.”

Migration

A report prepared for Britain’s taxing authority shows that about 20% of major companies have looked into moving offshore to get out from under the nation’s system of taxation. The study notes that 62% of the biggest firms think complying with tax rules has become more difficult in the past 12 months. Many businesses said the taxing agency has become less transparent in its decision-making.

Herz to step down

Robert Herz, chairman of the Financial Accounting Standards Board, will leave next month. He headed the U.S. board when it pushed for financial disclosure to give investors better information on the condition of banks, then caved to political pressure and backed away from the position, according to Fortune. The incident brought the board’s independence into question and severely damaged its credibility.

Snitch

Beginning next year, the U.S. Internal Revenue Service will require companies to report any accounting practices that are of debatable legality. Businesses will be required to briefly summarize uncertain tax positions and explain the reasoning behind them. Some private tax experts said the requirement might make audits even more confrontational.

Tech is the culprit

Revised industrial policy, trade sanctions against China and a cheap U.S. dollar are powerless to reverse a loss of manufacturing jobs in the U.S., a trend that has been under way for a half century despite growth in the sector, according to The Economist. Manufacturing has become more productive and less labor-intensive through technology, and that’s not going to change. “Time to accept that reality and figure out how best to prepare workers for the good jobs to come,” the magazine notes.

Yuan Bond

A decision by China’s central bank to open up the interbank-debt market has prompted plans by Citigroup, Standard Chartered, CIMB Group Holdings and HSBC Holdings to apply to invest in yuan bonds. “There will be a level of interest on the part of central banks and foreign participants,” said Andrew Au, CEO of Citigroup’s Chinese unit. “China is already the world’s second-largest economy based on government data in the second quarter. It would be logical for a lot of international players to be interested.”

Early start

Some rigs for deep-water oil drilling could be given permission to resume operation before the scheduled Nov. 30 expiration of the U.S. government’s moratorium, said Michael Bromwich, head of the Bureau of Ocean Energy Management, Regulation and Enforcement. He said certain types of drilling rigs could get an exemption, once critical safety and spill-containment issues are resolved.

Lowered

Standard & Poor’s took Ireland’s credit rating down one notch as the risk premium demanded by government-bond buyers widened to an all-time high, measured against the benchmark German bund. S&P downgraded Ireland’s credit rating from AA to AA-minus, an action that might further increase the country’s borrowing costs.

It’s OK

The Obama administration’s six-month ban on deep-water oil drilling hasn’t hit the Gulf Coast economy as hard as experts and officials expected, according to The New York Times. Unemployment claims growing out of the ban have numbered in the hundreds, not thousands. Of 33 deep-water rigs operating in the Gulf of Mexico before BP’s spill, only two have left the area.

Germany expanding

Household consumption accounted for a significant portion of Germany’s 2.2% expansion in gross domestic product for the second quarter, according to statistics office Destatis. The period marked the first time in a year that domestic spending increased. European Economic Affairs Commissioner Olli Rehn said consumer demand from Germany could diminish an economic imbalance within the eurozone.

Thanks, yo!

Growth in Germany’s export sector is boosting neighboring countries in a way that often isn’t understood by the public, according to German magazine Der Spiegel. In the first half of this year, Germany imported 6% more from France, 9% more from Greece and 12% more from Spain compared with the same period last year. In specialized sectors, such as machine tools and chemicals, Germany is selling products that other European economies don’t offer.

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Bond bubble

Buyers’ appetite for 10-year U.S. Treasurys has grown so much that experts are starting to worry about a government-bond bubble. The flight to Treasurys might indicate that investors are getting carried away with their enthusiasm, similar to investors’ infatuation with technology stocks in 2000, analysts said. After yielding nearly 4% in April, the 10-year note’s yield had fallen to 2.62% by Friday.

Tit for tat again?

Eight Republican senators have called for an inquiry into a bid by China’s Huawei to sell telecommunications equipment to Sprint Nextel for use in the U.S. The lawmakers said in a letter to Treasury Secretary Timothy Geithner and Lt. Gen. James R. Clapper Jr., director of national intelligence, that the deal could present a threat to national security. “Sprint Nextel supplies important equipment to the U.S. military and law enforcement agencies, and it offers a broad array of devices, systems, software and services to the private sector,” the senators wrote.

Debt sale for Dubai

The door is open for a sale of government debt this year by Dubai, United Arab Emirates, but no decision has been made and there’s no urgent need to raise money, said Abdulrahman al-Saleh, director general of the Department of Finance. Analysts said Dubai’s upcoming road show for Asian fixed-income investors suggests the government might sell bonds later this year as part of a debt restructuring.

Try again

Trade officials are making a renewed effort to get a U.S.-South Korean free-trade agreement ratified after seeing it bottled up without action in the U.S. Senate for three years. The Obama administration said the treaty would increase exports by more than $10 billion a year and create tens of thousands of jobs. Both countries are trying to put to rest disputes about U.S. automakers’ access to the South Korean market and restrictions on beef exported from the U.S.

Still no clue

After 15 weeks, U.S. regulators still can’t determine with certainty what caused the “flash crash” that sent the stock market plunging May 6. Independent researchers offer a wide range of theories, including computer-assisted market manipulation for profit and a financial version of cyberwarfare. Others suspect stock exchange computers couldn’t keep up with all of the data they were getting.

Accountability gap

Britain’s coalition government is expected to get warnings from the biggest banks that going ahead with a plan to scrap the Financial Services Authority would put too much regulatory power in the hands of a small, unelected group, sources said. Bankers are worried that the move would create a dangerous “accountability gap,” the sources said.

Faster

The Irish government agency buying troubled assets from banks has told executives that it wants an increased effort on disclosure for loans being acquired from the financial institutions. This week, the National Asset Management Agency is expected to pay nationalized Anglo Irish Bank less than €4.8 billion for loans worth €8 billion.

Broaden the competition

The China Securities Regulatory Commission said it is taking steps to bring more companies into initial public offerings and introduce greater transparency to the process. The regulator said it wants more companies to participate in book building and increase incentives for more competitive pricing.

Challenges for Blackstone

Since the credit market dried up in 2007, big names in private equity have had a harder time financing buyouts that generate profit, and The Blackstone Group is no exception, according to The Economist. The internal rate of return on its 2003 buyout fund was almost 40%, while its 2006 fund turned out a -11.2% rate as of March, compared with an average -11.9% for that year’s large buyout funds. Blackstone has benefited from diversification and is expected to keep rolling out products and entering markets. However, that will expose the firm to more competition and potentially create conflicts of interest within the company, The Economist notes.

Attempting but impossible

The Basel Committee on Banking Supervision is proposing for banks an instrument that behaves like equity in bad times and debt in good times. The committee is trying to avoid taxpayers’ subsidization of bondholders in future bank bailouts. The group is running into challenges in trying to figure out how to make its ideas work in practice, according to The Wall Street Journal.

Hope not

Individual investors in the U.S. are making a big shift from stocks to bonds as they flee from risk, analysts said. In the first seven months of this year, investors took $33.12 billion out of domestic stock market mutual funds, according to the Investment Company Institute. After previous economic downturns, retail investors recovered their confidence in stocks, but the pattern of investment this time is completely different, experts said.

Getting more expensive

Loan charges and bank fees are costing British small businesses more compared with last year, according to the Institute of Chartered Accountants in England and Wales. Many small businesses are finding it impossible to borrow because of the greater expense and tighter lending criteria, the institute said.

Turning point

General Motors’ plan for an initial public offering, coming 15 months after the company filed for bankruptcy, marks a spectacular rebound, not only for GM but also for the U.S. auto industry, according to The Economist. Competitors in Detroit were worried that a GM collapse would take down a highly integrated network of auto-part suppliers, putting the entire industry at risk. GM, Chrysler and Ford Motor, which didn’t seek bankruptcy protection or a government bailout, are making money in a sluggish economy, The Economist notes.

Oucchhhh

The Bank of England could be forced to push interest rates up to 8% within two years to control inflation, according to research by the Policy Exchange think tank. Andrew Lilico, the group’s chief economist, said Britain is returning to a boom-and-bust pattern, and inflation might sent the nation back into recession in 2013 or 2014.

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On track for more loan

The European Commission said Greece is ahead in meeting obligations for reducing its deficit and making structural changes. Commissioners expect finance ministers from across the euro region to approve the next loan installment for Greece in early September, said Amadeu Altafaj, a representative for the commission.

Can’t shake it off

U.S. Treasury Secretary Timothy Geithner has repeatedly been misidentified as a former Goldman Sachs executive, a label he’s tried to shake without much success. Geithner worked for three years as a researcher for a consulting firm founded by Henry Kissinger, but otherwise, he has toiled at government agencies — never in banking

Quants not so great?

Quantitative-investment managers were once considered some of the brightest minds in the finance industry because they could outsmart Wall Street. Quants blundered through the financial crisis, however, raising concern about their strategies. Total assets of quantitative funds specializing in U.S. shares have dropped from $1.2 trillion in 2007 to $467 billion, according to eVestment Alliance.

Get them off the guarantee

Brian Lenihan, finance minister for Ireland, said banks should soon be off the government’s guarantee scheme, after some lenders called for an extension of the program. “We want to see them off the guarantee as soon as possible,” Lenihan said. “Elements of the guarantee will not be continued from September, and what we’re talking about here is the phasing out of the guarantee over time.”

Nine months high

The number of unemployed workers applying for first-time benefits in the U.S. reached 500,000 last week, the highest rate this year, according to the Labor Department. In a healthy economy, initial claims would average fewer than 400,000 per week, economists said. The Conference Board’s Leading Economic Index increased 0.1% last month, indicating a “weak economy with little forward momentum.”

Nordics say no to Basel

Nordic banks are preparing to do battle with the Basel Committee on Banking Supervision over proposed capital rules. The banks said Basel III fails to consider specific characteristics of their financial systems. “The latest Basel proposal does not take into account the particularities of the Danish mortgage system, both in its functionality and its position within the national financial system,” said Peter Rostrup-Nielsen, chief risk officer at Danske Bank.

Small biz legislation

U.S. President Barack Obama called for the Senate to vote on his proposal to give tax breaks and loans to small businesses. Information suggesting that unemployment is headed back up “compels us to stand with the small-business men and women who are trying to grow their companies and make payroll and hire new workers,” Obama said.

Loss under Basel

The Basel Committee on Banking Supervision has proposed that during a crisis, debt that is counted as bank capital be written off or converted to stock, a move that would make bondholders suffer some of the cost of a rescue. The committee’s proposal is one of several made to address future financial crises.

Hmmmmm….

The Congressional Budget Office said making tax cuts adopted by President George W. Bush permanent would give “considerable” help to the U.S. economy for a few years but contribute to a deficit that would be a serious problem by 2020. The CBO’s analysis is part of a bigger report that forecasts a $1.34 trillion deficit this year, slightly less than last year’s estimate.

Upgrade for the Germans

Increasing employment and consumer spending will accelerate Germany’s economic growth this year and allow the government to reduce its budget deficit faster than expected, the central bank said. After Germany posted for the second quarter the strongest growth since the fall of the Berlin Wall, the Bundesbank increased its forecast for gross domestic product growth this year from 1.9% to 3%.

TARP cost is down

The U.S. Congressional Budget Office has estimated that the Troubled Asset Relief Program will cost about $66 billion overall, down sharply from an initial estimate of $350 billion. As the price of the program falls, controversy surrounding it appears to fade, according to Reuters. However, lawmakers who voted for the program might face challenges as the election nears.

Right direction

The yen declined on the foreign exchange market after a newspaper reported that Japan is moving to bring down short-term interest rates and reduce the currency’s value — an encouraging development for not only Japan but also other developed economies, according to The Economist. “Now, if everyone does what Japan does, then Japan will gain no exchange rate advantage from the move,” the magazine notes. “But Japan will benefit, along with everyone else, from the fact that central banks have pumped a significant amount of new monetary stimulus into the system.”

Still refusing

Oil-equipment company Transocean has accused BP of refusing to release documents needed for an internal investigation into the Gulf of Mexico spill. The company said in a letter that BP failed to provide “even the most basic information.” A BP spokesman said the accusation is “nothing more than a publicity stunt evidently designed to draw attention away from Transocean’s potential role in the Deepwater Horizon tragedy.”

True competitor

Competition between China and India will have consequences for the entire world, and it is unfortunate that they can’t turn to serious institutions to moderate their conflicts, according to The Economist. China and India should have a bigger voice in the rule-based system that the West set up during the 20th century to channel rivalry into healthy competition. A good first step would be for China and India to resolve a few long-standing disagreements, notably border disputes, the magazine notes.

Activity surges

August is usually a slow month for mergers and acquisitions, but businesses are starting to put nearly $3 trillion in cash to work. This month is on track to be the busiest for M&A deals in 2010, according to Bloomberg. The total value of announced transactions hit more than $175 billion when Intel agreed to buy McAfee.

Revived by vultures

“Vulture” companies are accelerating their purchase of troubled home loans in the U.S. and are expected to securitize the assets. The move is expected to help reinvigorate the market for private mortgage bonds. The market collapsed during the 2008 subprime-mortgage meltdown and has been dormant ever since.

Good news for high yields

Financial markets are embracing the idea that the global economic recovery is stumbling, but few suggest a double-dip recession is on the way, giving a boon to owners of high-yield bonds. High-yield debt outperforms equity in an economy that is growing slowly, market experts said.

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Upping the borrowing cost

The risk premium demanded by buyers of eurozone sovereign debt has been tightening since May, but concern about a decelerating world economy raises doubt about a continuation of the trend, economists said. The appetite of sovereign-debt buyers will be put to the test in September, when the volume of government offerings is scheduled to increase, according to Reuters. Italy, Ireland, Portugal and Spain are all set to return to the bond market.

NJ is accused of fraud

The U.S. Securities and Exchange Commission accused New Jersey of securities fraud, saying the state lied about properly funding its pension plan. The SEC issued a cease-and-desist order to settle the claim, and the state accepted without admitting or denying wrongdoing.

Mission accomplished…nothing

The U.S. government spent $230 billion last year to support homeownership but accomplished almost nothing beyond putting money into the pocket of the rich, experts told a conference on housing policy. The rate of homeownership in the U.S. is about the same as in Canada and less than that of Australia, Britain, Ireland and Spain, which all offer little in the way of homeownership tax breaks. The Urban Institute said tax incentives for U.S. mortgage holders are worth $5,459 a year to people making more than $250,000 but only $91 a year to those earning less than $40,000.

Done and did it

Eugen Haltiner, head of the Swiss Financial Market Supervisory Authority, announced that he will step down later this year, after leading the regulator since 2006. “Although it was not an easy decision to make, the time is now right for me to step down. The merger into FINMA was successfully concluded thanks to the commitment of everyone involved,” Haltiner said, referring to last year’s merger of banking, insurance and money-laundering authorities in Switzerland.

Stupid gifts from the twins

Fitch Ratings said the four biggest banks in the U.S. might suffer losses of as much as $42 billion if forced to buy back mortgages from Fannie Mae and Freddie Mac. The pool of loans at risk for Bank of America, Citigroup, JPMorgan Chase and Wells Fargo in an “extremely adverse scenario” could total as much as $180 billion, the credit rating agency said.

Cautious dark pools

Regulators in Asia are reluctant to give alternative trading systems, such as dark pools, free reign, making them less of a threat to traditional exchanges compared with Western counterparts. Industry insiders said Asian financial watchdogs will take a more cautious approach to alternative trading systems, waiting to see how they pan out in the U.S. and elsewhere.

Welcome

The People’s Bank of China said it will open up the domestic bond market to foreign investors as part of an effort to promote the yuan’s use in global trade. The program will open additional channels for overseas investors, a crucial move in the internationalization of the yuan.

Bigger gov’t

A little-noticed provision of the Dodd-Frank act gives U.S. regulators power to adopt rules governing pay at financial firms. Regulatory agencies have crucial decisions to make in deciding how to use that power, according to The Washington Post. The law requires them to take action within nine months.

BK level at highest

Quarterly bankruptcy filings in the U.S. have increased to their highest level since the last quarter of 2005. Business and personal bankruptcies spiked then because a law revision that tightens the procedure was about to come into effect, and many who filed wanted to use the looser process, according to The Economist. The Administrative Office of the U.S. Courts said bankruptcy filings increased 20% in the year that ended June 30 compared with the same period a year earlier.

Easing

Iceland reduced its benchmark interest rate by 1 percentage point to 7%, responding to easing inflation and a strengthening krona. Inflation is falling more quickly than anticipated, the central bank said, and it might be able to lower interest rates further in coming months.

Money good, mental bad

Draconian cost-cutting measures adopted by Greece have shrunk the deficit 39.7%, but workers and businesses are paying a terrible price for the reform, plus tension is rising, according to Spiegel Online. In some areas, unemployment has reached 70%. Of retail shops in Athens, 17% have filed for bankruptcy. Additionally, Greece’s gross domestic product contracted 1.5% in the second quarter.

Increase in unemployment benefits seeker

For the third consecutive month, Canadians collecting unemployment benefits increased in June, Statistics Canada said. The number went up 8,400, with Ontario the only province that saw a decline.

No comment

The U.S. economy is recovering, but it is a slow comeback, much like gaining strength day by day after an illness, President Barack Obama said at an informal gathering in North Columbus, Ohio. “We’ve made progress, but let’s face it, the progress hasn’t been fast enough,” he said. Obama said he would like to see the government do more to help working parents cope with the cost of child care.

Money to build

Spanish Finance Minister Elena Salgado said reduced borrowing costs have opened the door for the nation to put money back into highway and rail projects, which were put on the back burner because of austerity. The country’s deficit-reduction target won’t be affected by putting $644 million into such projects, Salgado said.

Powerless

Many who follow the U.S. economy closely have been wondering why the Federal Reserve isn’t moving aggressively to cope with unemployment, and a speech by Federal Reserve Bank of Minneapolis President Narayana Kocherlakota might contain part of the answer, according to The Economist. Most of the joblessness is structural, the result of a mismatch between unemployed workers’ skills and ones needed by businesses — a problem that monetary policy can’t fix, Kocherlakota said.

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August 18, 2010

BY TOM PLATE

NEW YORK CITY — What’s the one major issue the West absolutely and totally must get right in the years ahead? If the obvious answer is not peaceful international relations with a fast-rising and increasingly assertive China, then it has to be the West’s ever-more complicated relationship with the world’s Muslims.

And this assignment is predicted to be difficult at best. Certainly this would-be “clash of civilizations,” as the famed late Harvard professor Sam Huntington dubbed it, seemed all but inescapable in the wake of the horrific leveling of the World Trade Center twin towers in

2001 by Islamic hyper-terrorists.

Sensible people on both sides of the Islamic line accept that demented terrorists of all stripes will always exist, whether in the mountains of Pakistan or in the flatlands of Oklahoma.  They can be contained but not eliminated. Are our own misconceptions and prejudices when dealing with the worldwide Islamic community, of well more than a billion mainly innocent souls, are also vital to contain.  If all Muslims are extremists, then we should have to say that all Christians are crusaders and all Protestants are Christian fundamentalists.

To understand the complexity and cope with different challenges, it is especially important that our leaders avoid demagoguery and embrace humanitarianism without exception. The few standouts can provide invaluable stand-up examples for many.

Recent, two of New York City’s most prominent public figures did just that. By rising promptly to the occasion, they offered us the opportunity for wider reflection on how we can best relate to the Muslims immediately among us — and across the globe at large. The standouts were Mayor Michael Bloomberg and United Nations Secretary Ban Ki-moon.

Beset with the raging controversy over the proposed establishment of a Muslim community center within throwing distance of the 9-11 site, New York Mayor Bloomberg has stuck to the high ground. The easy course for the mayor would have been to give way to the fierce opposition and rack up the populist ratings by opposing the facility. But on the principle of American tolerance for religious diversity, Bloomberg refused to alienate the city’s many Muslims by catering to emotion.

That mosque is no danger, and its existence would speak volumes about our strength as a truly tolerant society. Its distance from the former Twin Towers site is but a few blocks, but in Manhattan a few blocks is a dense impossible forest of concrete and steel. In no way would the center overshadow or impinge on the tragic ground.

The other notable move last week for sensitivity on issues Muslim came from United Nations Secretary General Ban Ki-moon. This workaholic, often-traveling world diplomat is something else again: he is practically a one-man refutation for allegations of UN inefficiency!

Last week was classic: As reports came in from Muslim Pakistan that the cataclysmic flooding has not waned but was worsening, Ban abruptly scotched long-settled weekend plans to fly to the scene of the devastation. It was no easy trip: The decision was made late in the week and neatly-linking commercial flights were hard to find (unlike the U.S. President and many other heads of state, the UNSG, astonishingly, is not provided a private plane).

But there in Pakistan by the weekend was the doughty former South Korean foreign minister, rain hat in hand, boots in mud and water, aides at his side, showing the UN flag, and letting the country’s 170 million Muslims know that people all over the world truly did care and in fact was there to help.

The UNSG’s trip was of course hugely appreciated not only in the region but also beyond. Observed Nimmi Gowrinathan, director of South Asia Programs for Operation USA, a privately funded disaster relief group, “I think the hope is that the Secretary-General’s humanitarian trip to Pakistan raised awareness about human suffering, which helps the public move beyond political prejudices.”

In fact, the tireless Ban had not even returned to New York when several donor countries upped their contribution to Pakistan, most notably the Japanese, who so often are ready with the money. Suddenly private U.S. aid organizations shifted into higher gear. And the UNSG’s trip garnered an extra jolt of major international news-media attention, notably from the BBC and Al-Jazeera.

The use of the UN Secretary General’s office to highlight humanitarian crises is hardly new with Ban. But no Secretary General has started out in his first term doing more of this. He was one of the first in Haiti after the horrendous hurricane, and was one of the first to Chile after the earthquake. This is not political grandstanding but humanitarian flag planting. Ban’s message is clear and admirable: if we do not care about others when they are hurting badly, we forfeit a part of our humanity.

It may be that the Muslim community center in the end may not get built on that site near the 9-11 tragedy, and Pakistan’s recovery from these epic floods will prove slow.  But Bloomberg and Ban last week gave it their best. In this time of great worry about our relations with the Muslim world, their efforts need to be more widely noted, applauded — and emulated.

Veteran U.S. journalist and syndicated Asia columnist Tom Plate – the newly appointed Distinguished Scholar of Asian and Pacific Studies at Loyola Marymount University in Los Angeles — is currently writing volume two in the “Giants of Asia” series, on former Malaysian Prime Minister Mahathir Mohammad. The first volume – “Conversations With Lee Kuan Yew” – is a runaway bestseller in Asia. © 2010, Pacific Perspective Media Center, Beverly Hills, California.