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Continuous guarantee

U.S. Treasury Secretary Timothy Geithner told participants at a housing summit that policymakers must figure out how to develop a mortgage system that would not result in a repeat of the collapse of Fannie Mae and Freddie Mac. Geithner also said the government’s role of guaranteeing mortgages likely will continue. The Obama administration is expected to offer a proposal for overhauling housing finance early next year, but the summit offered a hint of what officials are thinking.

Lease accounting

The International Accounting Standards Board and the Financial Accounting Standards Board unveiled a long-awaited proposal to revamp lease-accounting rules. As widely expected, the proposal focuses on requirements to keep leases on a firm’s balance sheet, even those that used to stay off the books. Comments on the proposal are being accepted until Dec. 15.

Mass refinancing

Bill Gross of Pacific Investment Management promoted the idea of allowing U.S. homeowners by the masses to refinance mortgages at reduced rates. He said homeowners paying more than 5% interest could refinance with loans backed by the Federal Housing Administration, Fannie Mae and Freddie Mac. Gross told reporters that the refi idea doesn’t “have a ghost of a chance,” while other panelists during a housing summit avoided addressing the subject.

Clamping down on investment products

The China Banking Regulatory Commission recently ordered investment-trust companies to no longer sell investment products in cooperation with banks. Regulators were concerned that trusts and banks were joining forces and using the products to finance loans as a way to evade rules implemented to scale back lending.

The battle rages on

Fannie Mae and Freddie Mac are leading the charge to make mortgage-loan originators repurchase delinquent loans in the U.S. The government-owned mortgage giants are searching through loans for any questionable statements made by lenders or borrowers in loan applications. Banks are battling Fannie and Freddie on loan buybacks, with Bank of America CEO Brian Moynihan saying “it’s a loan-by-loan fight.”

IMF vs. Germany

The International Monetary Fund said Germany’s ban on certain types of naked short-selling, which was issued May 19, did not achieve the goal of keeping asset prices from dropping. Instead, the ban impeded markets, according to the IMF. “Market efficiency and quality in fact deteriorated substantially following the introduction” of bans in Germany and other countries, the IMF said in a report.

Staying on top

Moody’s Investors Service said Britain, France, Germany and the U.S. have responded to investor concern by reducing their budget deficit after the European sovereign-debt crisis and likely will maintain their top credit rating. “They are all very strongly Aaa rated, but now those four countries are a bit more pressured than they were previously,” said Alexander Kockerbeck, a co-author of the Moody’s report.

Long term benefits

The world’s top financial authorities released reports showing that costs of requiring banks to hold larger reserves are outweighed by longer-term benefits of stricter regulation of the financial industry. The reports, from the Basel Committee on Banking Supervision and the Financial Stability Board, are meant to counter concerns about regulatory changes. “The analysis shows that the macroeconomic costs of implementing stronger standards are manageable, especially with appropriate phase-in arrangements, while the longer term benefits to financial stability and more stable economic growth are substantial,” FSB Chairman Mario Draghi said in a statement.

Nope. Try again

U.S. District Judge Emmet Sullivan did not approve a $298 million settlement between the U.S. and Barclays regarding claims that the bank violated trade law. The judge called the proposed settlement a “sweetheart deal” and questioned the reason the government is not getting tough on banks. Sullivan is the third judge within a year to reject a settlement between the government and a bank.

Long way to go

The Chinese economy has overtaken Japan as the second-largest economy in the world, but the U.S. doesn’t need to be looking over its shoulder, economists said. China’s economy will total about $5.4 trillion this year, compared with $14.8 trillion for the U.S., according to the International Monetary Fund. “They probably will not surpass us for 20 years under current growth rates,” said Jay Bryson, international economist at Wells Fargo Economics. “But even when they do, they won’t be anywhere close to our standard of living.”

Solar blind

China’s National Energy Administration received 135 bids to build solar-power projects nationwide. Only one is from a foreign company, which faces price competition because domestic companies have lower labor costs. Price isn’t the only reason foreigners are reluctant to enter the market. Uncertainty about the kind of return generated also raises a red flag.

Keeping it liquid

The Federal Reserve bought more than $2.55 billion in U.S. Treasurys to prevent cash from being drained from the system. It is the central bank’s first outright purchase of government debt in 10 months. The securities mature from August 2014 to February 2016, according to the Federal Reserve Bank of New York.

Presence in Africa

American International Group’s International Lease Finance is in talks with African airlines as it seeks to double its footprint on the continent by 2015, Vice President Ozzie Chraibi said. The company has about 20 aircraft in the region, leasing Boeing and Airbus planes in about eight countries. Major airline South African Airways is a customer. “We are following the market and are actively pursuing many airlines in Africa; definitely Nigeria is one of the countries we are considering,” Chraibi said.

Foreign tax credit

As part of HR 1586, a jobs bill that provides education and Medicaid funding, the U.S. House passed legislation that limits corporations’ use of foreign tax credits and ends advance refundability of the earned income credit. President Barack Obama promptly signed the bill into law.

Noooo

BHP Billiton, an Anglo-Australian mining company, offered $38.6 billion to acquire Potash Corporation of Saskatchewan, betting that developing economies will bolster demand for food supply worldwide. The unsolicited offer is expected to spark a long battle. Potash’s board called the bid “grossly inadequate,” despite a 16% premium to the company’s closing price Monday.

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Still stressed out

Investors are concerned that the global economic recovery is cooling, possibly exacerbating financial woes in Europe’s weaker nations. Costs of protecting against defaults on sovereign debt from Italy, Greece and Ireland have surged, indicating investors are concerned with the countries’ ability to repay debt. “As global risk increases, [Europe's] periphery gets hit, and Ireland has been hit harder than the other countries because of the banking issues,” said Brian Devine, an economist at NCB Stockbrokers.

Citi not off the hook

U.S. District Judge Ellen Huvelle said she needs more information before deciding whether to approve Citigroup’s $75 million settlement with the Securities and Exchange Commission regarding the bank’s subprime-mortgage investments. The SEC said the bank failed to properly disclose its exposure to potential losses on the securities.

Ahh more capital needed

The biggest U.S. banks have built up their capital levels since the end of 2008 to surpass regulatory standards. A group of economists, however, said the benchmark might be a starting point for policymakers, who would then add a substantial capital buffer to cope with systemic threats. How a higher capital ratio would affect the economy remains a controversial subject.

OK, this is good

State insurance commissioners in most of the U.S. are getting $1 million from the Obama administration to help them monitor increases in health insurance premiums. The grants will allow states to hire experts to evaluate insurance rates and provide information to consumers. Alaska, Georgia, Iowa, Minnesota and Wyoming didn’t get a grant because they didn’t apply for one.

Record level

The Congressional Oversight Panel warned that deteriorating construction loans are hitting banks with bigger losses than any other type of real estate loan. Nearly 17% of all construction loans in the U.S. banking system were classified as noncurrent as of March because they were at least 90 days late or in trouble for some other reason, according to the Federal Deposit Insurance Corp. That compares with less than 5.5% for all loans.

Going EU

Hedge funds in the U.S. and the U.K. are taking a serious look at setting themselves up as registered mutual funds in the EU as the simplest way to cope with proposed rules in the region. Traditional hedge fund domiciles, such as Delaware and the Cayman Islands, fall short of the proposed Directive on Alternative Investment Fund Managers. A recent relaxation of EU rules makes it easier to run hedge fund strategies within the European mutual fund structure.

It’s banned!!

he U.S. Federal Reserve said it is moving to prohibit yield-spread premiums in home-mortgage lending, a transaction that allows lenders and mortgage brokers to give themselves bigger fees by charging borrowers higher-than-market interest rates. The practice has been widely blamed for contributing to the housing boom and the subprime-mortgage crisis that followed.

Review order

The U.S. Interior Department said it will ban all “categorical exclusions” that permit deep-water oil drilling without environmental reviews. The action will end the kind of exemption that allowed BP to drill its blown-out well in the Gulf of Mexico without a thorough study of risks to the environment in the event of a spill.

Loosening up

The U.S. Federal Reserve said its quarterly survey of senior loan officers shows a relaxation of lending standards, primarily among major banks. Despite the loosening, demand for consumer and business loans is flat, the central bank said.

Be gentle with the twins from hell

U.S. policymakers are poised to discuss the fate of Fannie Mae and Freddie Mac today, but completely winding down the government-sponsored enterprises is not seen as a viable option, given the fragility of the housing market. White House officials said a “thoughtful approach” is needed in any credible proposal to overhaul Fannie and Freddie to prevent another housing meltdown.

China fueling competition

China controls most of the world’s supply of rare-earth minerals — 17 minerals that produce powerful magnets, or improve a metal’s ability to withstand high temperatures — but its export restrictions are fueling the development of additional sources in Australia and the U.S. Restrictions on Chinese exports are driving up prices and making it profitable, for the first time, for competitors to develop their own supply, according to The Wall Street Journal.

Inflation signal

The eurozone’s inflation rate accelerated from a 1.4% annual rate in June to 1.7% in July. Food and energy costs accounted for the greatest portion of the increase. At 5.5%, Greece posted the highest inflation, while Ireland produced a negative 1.2% rate.

Retirement in a different way?

Saving enough money to retire at the same age as done by one’s parents probably isn’t realistic, given the rate of growth the U.S. economy likely will see in the coming decades, according to The Economist. It might make more sense to change what retirement means than to try to find a way to continue retirement in its form. “Retirement may not be an abrupt exit from the labour force, but a slow phase out starting with part-time work,” the magazine notes.

Warning from Korea

Kim Choong Soo, governor of the Bank of Korea, said economic uncertainty worldwide might fuel turbulence in financial markets. Kim said “heightened” volatility in key nations’ business activity could occur because of uncertainty from cooling economies, such as the U.S. and China. However, the “underlying pattern is that of a continuing modest recovery in economic activity” in major countries, including the U.S., Kim said.

Traditional positioning

China’s success in overtaking Japan as the world’s second-largest economy shouldn’t come as a surprise to anyone who knows the economic history of China, according to The Economist. Angus Maddison, an economist who died this year, compiled data that suggest China and India were the world’s biggest economies for most of the past 2,000 years. Their robust economic growth today is less of a mystery than how they fell behind Western economies, the magazine notes.

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Move aside Japan

Japan’s gross domestic product for the second quarter confirmed that China is the biggest economy in Asia and the second-largest in the world, after the U.S. The Cabinet Office said second-quarter economic output reached $1.28 trillion, slightly less than China’s $1.33 trillion. Experts said China is on track to replace the U.S. as the world’s biggest economy as soon as 2030.

Transparency

The Federal Reserve, the Federal Deposit Insurance Corp., the Securities and Exchange Commission and the Commodity Futures Trading Commission announced plans for a transparent process of writing rules for the U.S. Dodd-Frank act. “We owe it to the public to have an open-door policy so that people can see for themselves how financial-services reform is going to be implemented,” said FDIC Chairwoman Sheila Bair.

The battle to save or kill the twins from hell

U.S. policymakers are preparing wrestle with the question of what to do with mortgage giants Fannie Mae and Freddie Mac. Many are searching for a way to ensure that the housing market can keep functioning without taxpayer support, even when the economy gets in deep trouble. Some Republicans argue for privatizing Fannie and Freddie, while many Democrats want a guarantee that a federal agency is always available to buy and sell mortgages.

High speed trading

The International Organization of Securities Commissions proposed strict rules for monitoring high-speed trading by companies that have “direct electronic access” to exchanges. In a report, IOSCO said the firms, such as hedge funds and proprietary firms, should be monitored for risky practices pre- and post-trade.

Dilemma for Trichet

Jean-Claude Trichet, president of the European Central Bank, has some difficult decisions to make as Germany’s economic expansion accelerates while other European countries struggle. “This is going to become a very serious headache for the ECB,” said Marco Annunziata, chief economist at UniCredit. “If the ECB were the Bundesbank, it would be raising rates very quickly. But Spain, Greece, Italy — they can’t afford it.”

No easing yet

Bankers and other industry participants are still deciphering regulation amendments proposed by the Basel Committee on Banking Supervision, but some said convincing authorities that the trade-finance market is not as risky as other forms of lending will be difficult. “From what we can tell so far, on the specific trade issue, I don’t see that they’ve made any change at all,” said Dan Taylor, head of an international association that represents bankers in trade finance. Bankers are concerned that Basel III would hurt trade finance.

Work in progress

The U.S. government might be able to sell its stake in Citigroup by spring, but it will take longer to see whether the bank has ceased to be as accident-prone as it was during the financial crisis, when it required three taxpayer-financed bailouts, according to The Economist. The bank is maintaining high liquidity, has a higher ratio of Tier 1 common equity than many other banks and produced a $7.1 billion profit in the first half of the year. Citi has yet to show big success with its retail or investment banking, the magazine notes.

Another one to beat Japan

By 2031, South Korea’s per-capita economic output is expected to reach $72,432, ahead of Japan’s $71,788, IHS Global Insight said. In the years that follow, South Korea will widen the lead, the company said.

Waky waky Europe!

Europe’s Markets in Financial Instruments Directive has led to a loss of market share for the region’s main stock exchanges, including the London Stock Exchange, NYSE Euronext and Deutsche Borse. The exchanges’ biggest rivals are multilateral trading facilities, such as BATS Europe and Chi-X Europe, as well as dark pools. Executives at the exchanges tout their “breadth of offering” and “independence and neutrality.”

Still declining

House prices in the U.K. dropped 1.7% during the past month, after a 0.6% decline from mid-June to mid-July, according to British property website Rightmove. The number of properties listed with real estate agents has been increasing for six months, the company said.

World’s biggest

Strong sales in Shanghai boosted the size of Agricultural Bank of China’s initial public offering to $22.1 billion, making it the biggest IPO in history. A last-minute expansion, with 3.34 billion shares, edged AgBank’s total past the previous record of $21.9 billion, set by Industrial and Commercial Bank of China in 2006. AgBank is the last of China’s major banks to go public.

Back and forth

As robust growth in Germany leads Europe out of its doldrums, economists are turning to challenges facing the U.S. economy, where the housing and the labor market remain distressed, experts said. The picture is darkening for the U.S., after a surprise increase in the trade deficit forced economists to revise downward gross domestic product data for the second quarter.

A drag

Baby boomers coming into retirement age represents an obstacle to economic recovery, as aging Americans reduce their standard of living to adjust for asset value lost because of the recession and historically low interest rates, experts said. Economists once thought aging boomers would cope with the problem by working longer, but deterioration in the labor market has largely eliminated that option.

Not easy but will continue

Recovery of the U.S. economy has slowed down, but warnings of a double-dip recession are overblown, according to The Economist. Economic activity fell off because warehouses and stores are full of merchandise again, but a burst of spending driven by replenished inventory has tapered off. Businesses would have to again draw down stock, slash capital spending and lay off workers to drive the U.S. back into recession. A huge amount of cash accumulated by corporate America makes that unlikely, the magazine notes.

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Steaming ahead

Economic growth in Germany increased in the second quarter at the fastest rate since the fall of the Berlin Wall. Between April and June, Europe’s biggest economy expanded 2.2% compared with the first quarter, according to statistics office Destatis. Economy Minister Rainer Bruderle said growth for the full year might come in higher than 2%.

Dual pressures

Greece’s gross domestic product went down 3.5% in the second quarter compared with the same period last year, after declining 2.3% in the first quarter, the Hellenic Statistical Authority said. The unemployment rate increased from 11.9% in April to 12% in May.

Carbon capture

Underground storage of greenhouse gases technically is feasible and offers a promising solution to global climate change, an Obama administration task force concluded. Many environmentalists and scientists, as well as some utility officials, have proposed the approach, known as carbon capture and storage, as the only practical way to prevent global warming while continuing to use huge coal reserves in the U.S. as an energy source.

Profit lid

Brazil’s state-controlled Petroleo Brasileiro is expected to report the smallest increase in profitability for the second quarter among major oil companies, despite a strong oil price, analysts said. Only BP will show a worse result. Price controls set by the government block Petrobras from passing along increasing oil costs.

GM on IPO

General Motors is putting final touches on a securities filing for the biggest initial public offering in the U.S., after reporting a $1.33 billion second-quarter profit. Edward Whitacre said he will step down as CEO on Sept. 1, to be replaced by board member Dan Akerson. Chief Financial Officer Chris Liddell said the automaker will show “solid profitability” for the entire year.

Keep ‘em falling

U.S. mortgage giant Freddie Mac said the average interest rate on a 30-year fixed-rate mortgage dropped to 4.44%, the lowest since the company started collecting such data in 1971. Mortgage rates, which generally follow interest paid on Treasurys, have been falling since the spring.

Record fine

BP will pay a $50.6 million fine for safety violations at a refinery in Texas City, Texas, where an explosion in 2005 killed 15 workers. “The size of the penalty rightly reflects BP’s disregard for workplace safety and shows that we will enforce the law so workers can return home safe at the end of their day,” said U.S. Labor Secretary Hilda Solis. The Occupational Safety and Health Administration said it is pursuing an additional $30 million penalty, which is being contested by BP Products North America.

Test tube

The U.K.’s coalition government has emerged as a surprisingly radical force, reforming the way the government maintains the economy, as it narrows the budget deficit more through cost reduction than tax increases, according to The Economist. It is a gamble but one that other developed economies probably will have to take to curb their debt burden. For better or worse, they’ll end up looking to Britain for ideas, the magazine notes.

Bonanza

Wheat farmers in the U.S. stand to see additional profit as a lengthy and severe drought slashes production in Russia and neighboring countries. The drop-off in foreign wheat exports is driving up prices and will increase demand, economists said.

No to failure criticism

Bank of England Governor Mervyn King rejected scrutiny of the central bank’s credibility and criticism of its forecasts in the Inflation Report. “Over the past three years, inflation has been volatile and above target for much of that time,” he said. “That does not mean the [Monetary Policy Committee] has taken its eye off the inflation ball, nor has gone soft on inflation. We have not.”

Down a bracket

As debate heats up about whether Bush-era tax cuts for the rich should expire, a tax cut for the almost-rich has gone unnoticed, experts said. The Obama administration’s proposal would move people earning between $171,850 and $195,550 a year from the 33% tax bracket to the 28% one, possibly reducing their income tax more than $1,000, according to the congressional Joint Committee on Taxation.

Subdued growth

The European Central Bank released results of a survey of forecasters that found that the eurozone likely will experience sluggish growth during the next two years. The prediction comes despite recent indications of a pickup in activity, led by Germany. Meanwhile, Greece reported a significant decline in quarterly gross domestic product, raising more concern about Europe’s economic recovery.

Resume CP borrowing

Numerous European banks were shut out of the U.S. commercial paper market earlier this year because of concern about exposure to troubled nations. Foreign banks have returned to the market, however, after passing stress tests and restoring investor confidence. Borrowing by foreign banks has reached the highest level since March, according to industry data.

Double dip?

U.S. labor statistics confirm that a much-feared jobless recovery has become a fact, according to The Economist. Last month, there were 52,000 fewer nonfarm workers compared with July 2009, when the country emerged from recession. “Comparing the latest recession with previous ones is unflattering,” the magazine notes.

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Always the creative one

U.S. regulatory reform will play to Goldman Sachs’ strength and have little effect on areas once thought vulnerable, Forbes reported. The bank welcomes shifting over-the-counter derivatives trading to exchanges. Goldman tends to come out on top in businesses in which execution speed and volume generate profit, and there is no better market for that than exchanges and electronic trading platforms, Forbes notes in its analysis.

Permanent power

The U.S. Securities and Exchange Commission gave its enforcement division permanent authority to issue subpoenas to compel testimony and produce documents. The regulator launched a trial program in August 2009 allowing Enforcement Director Robert Khuzami to issue subpoenas without first getting authorization from the full commission.

Top top top

U.S. banks made $1 trillion in home equity loans during the housing boom, and a huge amount of that is unpaid and largely impossible to collect because value has collapsed, industry experts said. The delinquency rate for home equity loans is higher than that for car and boat loans, credit card accounts, and all other forms of consumer debt. Last year, lenders wrote off $19.9 billion in home equity lines of credit and $11.1 billion in home equity loans, more than write-offs on primary mortgages.

Saving the Germans and French

The Congressional Oversight Panel said France and Germany benefited from the U.S. government’s aid to American International Group despite not taking on any financial risk. “France and Germany were among the greatest beneficiaries of AIG’s rescue, yet the U.S. government bore the entire $70 billion risk of the AIG capital injection program,” according to a report from the panel, set up to monitor the Troubled Asset Relief Program.

More Tier 1

The Basel Committee on Banking Supervision likely will propose that banks’ Tier 1 capital ratio be increased from 2% to as much as 6% in an effort to increase stability of the financial system, banking and regulatory sources said. The panel is working on capital and liquidity requirements as well as a “countercyclical buffer,” in which banks would stockpile reserves in good times.

Loosen

A Chinese regulator is working toward allowing foreign banks to underwrite more debt that trades on the country’s interbank-bond market. The National Association of Financial Market Institutional Investors is developing a way to assess underwriters. A time frame for the assessment was not given, and it is unclear how many banks would be involved.

To prevent unintended tightening

The Federal Reserve’s decision to reinvest funds from maturing bond holdings won’t help the U.S. economy much, but it is a necessary step, according to Barron’s. “What the Fed isn’t doing is changing policy or monetizing the federal deficit,” Randall W. Forsyth writes. “What it is doing is to prevent an inadvertent tightening of monetary policy that would have taken place had the central bank not taken steps to reinvest maturing securities.”

Close eye on the twin from hell

How an overhaul of the U.S. housing market, particularly Fannie Mae and Freddie Mac, would shake out is unknown, but Wall Street executives are closely watching the development. The government-sponsored enterprises have reined in their business with Wall Street, but they remain some of the biggest clients of investment banks.

Welcome to the club, King!

Mervyn King, governor of the Bank of England, indicated that the U.K.’s fragile economic recovery is more worrisome than the high inflation rate. “It will take several years before we can adjust back to anything that we can remotely call normal,” King said. “What we’re doing now is trying to generate a steady recovery.” King’s comments fueled speculation that the central bank will return to stimulus measures if the economy falters.

Canada under scrutiny

Consequences of BP’s spill in the Gulf of Mexico have encouraged U.S. policymakers to take a closer look at production in Canada, the biggest supplier of foreign oil to the U.S. Much of Canada’s oil is extracted from oil sands using a process much dirtier and more expensive compared with other sources, according to The Economist. Canada uses 20% of domestic natural gas to turn tar sands into crude oil. Because many companies extracting oil from Canada’s tar sands are based in the U.S., efforts by Washington, D.C., to force changes likely will run into stiff opposition, the magazine notes.

Fresh conflict

Nobody would benefit from deterioration in trade relations between the U.S. and China, but with Congress incapable of enacting a deficit-reduction plan or additional stimulus, the nations are drifting toward increased turmoil, according to The Economist. The U.S. trade deficit with China has widened, while China reported its biggest trade surplus in more than a year. With high unemployment lingering and an election coming up, the U.S. is ripe for protectionist populism, with a “real trade blow-up” likely, the magazine notes.

Fortress buying AIG unit

American International Group edged closer to paying back U.S. government aid by selling an 80% stake in its American General Finance unit to hedge fund Fortress Investment Group. The insurer decided to hold onto 20% because it has confidence in the consumer-credit operation’s business model, AIG CEO Bob Benmosche said.

Ouchhhh

Data on the U.S. economy might force a major downward revision for gross domestic product in the second quarter, economists said. John Ryding and Conrad DeQuadros of RDQ Economics said a surprise 18.8% widening of the trade deficit in June, coming on the heels of weak construction and inventory data, probably will lead to a substantial cut, from 2.4% growth to an increased of 1.1% to 1.2%.

Fighting for benefit

U.S. retirees who lost medical, disability and pension benefits when bankruptcy judges relieved companies in Chapter 11 protection of their obligation to provide such benefits are increasingly fighting to get them back, and many are winning. Some companies dropped their proposal to cut benefits when confronted with former employees ready to fight them in court. Nortel Networks withdrew a plan to cut off benefits after a Justice Department watchdog noted that it paid $50 million in bonuses to executives while in liquidation.

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Need some change

Implementation of the massive overhaul of financial regulation in the U.S. is already facing challenges, as some officials suggested that changes might be necessary. Meeting at the Federal Deposit Insurance Corp., regulators voiced concern about a provision in the Dodd-Frank act that bans the use of private credit ratings by government agencies. The change has held up a proposal that would revise capital standards for banks.

Unwilling to act or can’t?

The Federal Open Market Committee released a statement confirming that the U.S. economic recovery is proceeding much more slowly than expected, but the Federal Reserve’s resulting decision to hold its investment in securities level is the “minimum possible” action to avoid contradicting itself, according to The Economist. “Perhaps it is interested in demonstrating that it is aware of the economic risks but not yet convinced that further action is warranted,” the magazine notes. “For now, though, it seems as though the Fed has acknowledged risks but refused to do anything substantive about them.”

Hiding or selective reporting?

The China Banking Regulatory Commission ordered banks to move assets tied to wealth-management products provided by trust companies onto their books and make provisions for any that might default, sources said. The demands might pressure Chinese banks to raise more capital. Fitch Ratings recently noted that Chinese banks had more than $339 billion in off-balance-sheet assets.

Revision on fees

The China Banking Regulatory Commission is considering changing regulation of banks’ service fees charged to customers. The move comes after customers complained when Industrial and Commercial Bank of China increased fees for withdrawing from its ATMs.

No revival till then

Moody’s Investors Service surveyed attendees at an industry conference and found that nearly three-quarters think the U.S. market for home-loan securities will not make a substantial comeback before 2012. Issuance reached nearly $1.2 trillion in 2005 and 2006 and then essentially froze in 2007. “The pipeline is just kind of starting to wake up again,” said Linda Stesney, managing director at Moody’s.

Claw back revenue

The U.K.’s plan to claw back a percentage of cash bonuses at banks operating in the country would raise about £3.07 billion, six times what was originally estimated. The result could be a boon for the government, but it likely would raise doubt about whether the measure would rein in banks’ compensation.

World’s biggest

French company GDF Suez’s deal to acquire 70% of the U.K.’s International Power will create the world’s biggest electricity supplier, with $111.5 billion in annual revenue. GDF will get the stake in return for transferring several assets to International Power. GDF said one major reason for the deal is that it speeds up expansion into emerging markets while providing access to the U.K. and Australia.

Tough capital ratio

Michael Barr, assistant secretary for financial institutions at the U.S. Treasury Department, said the government is seeking a tough capital ratio in international negotiations for banking standards. “In the Basel III negotiations, we are pushing hard to set minimum capital ratios at a level that will represent a significant increase in firms’ requirements,” Barr said. “These new requirements include the creation of a capital conservation buffer above the minimums, which if breached will restrict firms’ ability to pay dividends or buy back stock. Such restrictions will help shore up a firm’s capital base before it reaches a point of no return.”

Lifeline for the states or for the administration?

U.S. President Barack Obama quickly signed into law a $26 billion bill to provide financial aid to states, after the House passed the measure with a 247-161 vote. The law provides $16 billion for Medicaid and $10 billion for education. The legislation also takes back some previous help for the poor by cutting $11.9 billion from the food stamp program and ending advance refunds under the earned income tax credit.

Prepping for an upturn?

Corporate spending on equipment and software increased at the fastest rate in more than a decade during the second quarter, the U.S. Commerce Department said. An inflation-adjusted increase of 21.9% was driven by a need to replace aging equipment and boost efficiency, not expanded production, the agency said.

The silver lining

For those who held onto their jobs, the lengthy U.S. economic downturn has paid off nicely, according to The New York Times. Nominal pay for those still employed increased through the downturn, and, except for brief periods in 2009, falling inflation boosted the purchasing power of those dollars. “The typical jobless person has been out of work six months,” the newspaper notes. “The typical worker has received a raise.”

Confident Downunder

Australia’s consumers are eager to start shopping as they become more optimistic about the economy, according to an index from Westpac Banking and the Melbourne Institute. Consumer sentiment improved 5.4% this month, after advancing 11.1% in July.

Old problem, new showing

After 1939, nonfarm employment in the U.S. increased for six decades and then faded into a decade-long plateau. During those final 10 years, the population grew by more than 30 million. Retirement offset some growth but not enough to make zero net job increase acceptable, according to The Economist. “It is worth remembering that America’s economic difficulties go deeper than the current weak recovery,” the magazine notes.

Slowing China

China still has the world’s fastest-growing economy, but several government benchmarks show that the expansion speed is slowing. Bank-lending data, fixed-asset investment, industrial output and retail sales indicate a gradual cool-off, encouraged by government policy aimed at preventing an overheated economy. The amount of decline in bank lending surprised analysts.

Asian’s American concern

Asian shares mostly declined Wednesday, weighed down by concern about the fragile recovery of the U.S. economy. Japan’s Nikkei 225 dropped 2.7%, Australia’s S&P/ASX 200 gave up 1.9% and South Korea’s Kospi Composite slid 1.3%. Hong Kong’s Hang Seng Index went down 0.8%, Taiwan’s Taiex shed 1% and China’s Shanghai Composite gained 0.5%. New Zealand’s NZX 50 inched down 0.3%, while Singapore’s Straits Times Index lost 1.1% and India’s Sensex was down 0.4% in afternoon trading.

Deflation monster

The U.S. is moving closer to deflation and a long period of stagnant growth, much like what Japan experienced in the 1990s, according to Pacific Investment Management. “There are striking similarities between the U.S. and Japan with respect to fundamental causes of the crisis,” said Scott Mather, a Pimco portfolio manager. Getting ready for deflation is an “important step” for investors, Mather said.

Warrant gains?

Strong grain and soybean production as well as auto shipments to Brazil are driving the performance of warrants tied to Argentina’s gross domestic product to well above what investors could get from government bonds, analysts said. During the past month, securities that pay when growth outpaces the government’s forecast increased 26%, compared with 11% for bonds.

Maintaining security for growth

Federal Reserve officials decided to reinvest principal payments on mortgage bonds into long-term U.S. Treasurys in an effort to bolster the economy. Officials from the Federal Open Market Committee determined that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

A quandary

A stock market rally arriving at the same time as when bond yields decline suggests that equity investors aren’t worried and that bond buyers are either becoming risk averse or expecting a double-dip recession or deflation, according to The Economist. This comes at a time when it is clear that the Federal Reserve’s quantitative easing isn’t reviving the U.S. economy. “So the bond market is surely betting that the Fed’s actions won’t work and that Japan is the template; the equity market is betting that the Fed will be successful and the Goldilocks economy will return,” the magazine notes.

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More money more money

Mortgage giant Fannie Mae reported its 12th consecutive quarterly loss and said it needs $1.5 billion from the U.S. Treasury Department to cover the cost of defaulted home loans. A $1.2 billion second-quarter loss was substantially less than the $14.8 billion loss posted in the same quarter last year. The company said it expects housing prices to “decline slightly” through the end of 2011.

Not next week

The Bank of Japan isn’t convinced that an increasing yen is a crisis and will leave bond purchases and its bank-loan program unchanged when it meets Tuesday, economists predicted. Of 17 economists polled by Bloomberg News, all but one said they expect the central bank to delay action to step up monetary stimulus.

Crooked

A Fannie Mae consultant said in a lawsuit that the U.S. mortgage company disregarded the needs of homeowners in trouble in order to generate profit. Caroline Herron, a former Fannie executive who returned as a consultant for the Home Affordable Modification Program, said she was fired for bringing to light the fact that the organization was running the program to benefit itself, not to help homeowners and taxpayers.

Unchanged for now

A 1.1% expansion of the U.K. economy in the second quarter wasn’t enough to persuade the Bank of England to begin tightening fiscal policy. The central bank held its benchmark interest rate at a historic low of 0.5% and made no changes to quantitative-easing activities.

Next round of rescue

A team from the EU and the International Monetary Fund spent weeks evaluating Greece’s austerity measures, then described the progress as “impressive.” The EU, the IMF and the European Central Bank said in a joint statement that Greece has “made a good start.” The finding allows Greece to draw additional funds through Europe’s rescue program at rates less than those demanded by the sovereign-debt market.

Better than expected

European Central Bank President Jean-Claude Trichet said the region’s economy is growing faster than forecast, but it still isn’t time for the bank to raise interest rates. “The available data for the third quarter are better than expected,” he said. Trichet called the benchmark interest rate of 1% “appropriate.”

Risk in selling junk

When the day comes for the U.S. Federal Reserve to remove from its balance sheet troubled assets purchased from banks during the credit-market meltdown, it will face some tricky and unpleasant options, according to The Christian Science Monitor’s Mises Economics Blog. The central bank has several options, but they differ largely in how much inflation they would introduce and when they would be felt. “Until the Fed finally decides to unwind its subprime balance-sheet positions, entrepreneurs will have to function in an era of uncertainty as to what price inflation lies ahead,” the blog notes.

Food price is a concern

Increasing food prices hold potential to sidetrack growth in emerging economies, right as enthusiasm for them is rising on equity and debt markets, economists said. The cost of food in emerging economies increases more quickly in response to commodity prices than it does in richer nations, they said. Food accounts for between 20% and 50% of consumer price indexes in emerging economies.

Separating trading

The biggest U.S. banks are trying to find the best way to separate much of their trading operations from themselves, to comply with restrictions in the financial-regulatory reform. The Dodd-Frank act phases in a ban on most proprietary trading by banks. Many on Wall Street are uncertain about how far the change must go.

Smarter stimulus

The Obama administration’s effort to stimulate economic growth was a big gamble that isn’t paying off, said Nobel Prize-winning economist Joseph E. Stiglitz. Because the “anemic recovery” isn’t creating enough jobs, the government will have to enact another round of “better-designed” stimulus, he said.

Might cause inflation and shortage

Russia’s decision to block all wheat exports might trigger a food shortage and an inflation spike next year, experts said. A continuing drought in Russia could have serious implications in 2011 and 2012, the U.N. Food and Agriculture Organization said. The agency said it doubts that a global food crisis will arise this year.

Bringing job back in

U.S. manufacturers increasingly are bringing home operations that were sent overseas. Higher shipping costs and increased wages in China are undercutting advantages of outsourcing. Also, companies are having difficulty responding to changing consumer preference because a product manufactured elsewhere takes longer to get to market.

Flash crash

A close examination of the May 6 “flash crash” shows that the computer-driven market is so fragile that a similar event can strike again, experts said. Unnerved by the incident, many investors are pulling out of stocks. As it turns out, several fund managers scaled back trading in the days before the crash because they observed stock prices behaving in a way that didn’t make sense.

Early sign of deflation

Japan’s yen is closing in on a historic high against the U.S. dollar, and the currency’s strength is difficult to explain, according to The Economist. The relationship between the yen and gold, a classic inflation hedge, might offer a clue. “The recent fall in the gold price in yen terms is hard to spot on a long-term scale,” the magazine notes. “But it seems plausible that the yen’s strength and the decline in bond yields indicate that the markets are currently edging towards a deflationary view.”

Bill for BP

With the flow of oil from BP’s blown-out well in the Gulf of Mexico apparently stopped for good, the U.S. government’s attention turns to fines and penalties for the company responsible for the spill, according to The Economist. A customary $1,100-per-barrel fine might become $4,300 if it is determined that the spill was caused by gross negligence. “Avoiding such a finding could … be worth some $13 billion to the company,” the magazine notes.

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By Tom Plate

Los Angeles — The Obama Administration is raising the U.S. profile in the South China Sea and in the newly troubled seas around the Korean Peninsula. Its decisions are sound enough, and they have been put forth carefully and with proportionality. But they do entail risks and may test the China-U.S. relationship. This column is meant as a warning signal.

Let’s take a look at the two main aspects of this development.

The first involves South and North Korean waters. These are now bobbing with U.S. and South Korean warships in a military display.

This is for the benefit of North Korea, whose navy apparently was the culprit that sank a South Korean vessel in March, killing 46 seamen.

The aim is to deter the Communist regime in the north from further foolishness.

The other audience for the military show is the South Korean public.

The March sinking of the Cheonan vessel shocked the South Korean public, which expected more retaliatory spunk from its Navy. But now the secret is out: the South Korean military, whatever its virtues, probably is not ready for prime time. It is not ready to run its own show. It still needs the U.S. there helping call the shots.

So there will be a delay for at least a few years in the planned handover of command of forces in the South from the U.S. to the national government of the Republic of Korea (ROK). That development dismays Beijing, greatly preferring a reduced American regional profile. But since the Chinese apparently can’t keep their North Korean allies out of trouble, there’s not much they can do about it except complain.

At the same time, Chinese Premier Wen Jiabao has quietly promised that Beijing will not protect the guilty party, though it claims not to be convinced that the North is the perpetrator (who else could it be?

Space invaders!). But so far that is exactly what they have done, watering down a proposed United Nations Security Council resolution that would otherwise have condemned North Korea for aggression. In return, though, Beijing has arranged for the immediate resumption of the on-again, off-again Six Party Talks.

China is probably more upset about the U.S. naval ships rolling around in the South China Sea, however.  This is the second theater where the Obama Administration has staged a show.  Earlier in the year Beijing issued a decree, which could be read to suggest that it viewed those seas as virtually its personal pond. The idea sent shudders throughout Asia, especially in Taiwan, the Philippines, Vietnam, Malaysia, Brunei and Indonesia, with their tinier “fleets.” (It irritated Japan, too, but it has a serious fleet, and so that’s a whole different kettle of piranhas.) These Asian nations have quarrels with China over island territories in these waters and regard the South China Sea as an international commercial highway.

So does the United States, which has made that point of view plain.

Nobody in the region wants a fight with China, so none of those worried Asian nations are waving American flags to thank President Obama for ordering more ships into that area. But in fact they are pleased by the move – and by Secretary of State Hillary Clinton’s firm resolve at a big regional meeting last month in Hanoi.

The American expression of solidarity strengthens their hand so that the resolution of these island-ownership disputes can be settled through negotiation, not fear – at least as long as the U.S. keeps its ships bobbing over the horizon.  Because the South China Sea represents waters territorially adjacent to the mainland, China might well go ballistic if it sees U.S. interference.  But that would tarnish its image and raise questions about whether its economic rise will be so peaceful, as Beijing has often claimed.

At least now the U.S. is being viewed as helpfully standing up to the Chinese giant that has of late occasionally seemed bullying in manner.

East Asia clearly is at a tipping point. But the proper role of the United States is not to provoke China or violate its true sovereignty but to balance its rising military power. In recent years China’s naval buildup has been extraordinary and muscles are being flexed. The American balancing on both fronts is an effort to remind the Chinese that they are not the only muscle man on the block.

Handled carefully, the U.S. effort could actually serve everyone’s interest, including Beijing’s. For China is not ready to rule the Pacific unilaterally. That day may come, but it is off onto the far horizon – or at least as long as the U.S. Navy is bobbing around in a friendly and polite manner. Speak softly, someone once famously advised, but carry a big stick.

Syndicated U.S. columnist Tom Plate’s new book “Conversations With Lee Kuan Yew” is on bestseller lists in Asia. He is working on the next book in the series “Giants of Asia” — about former Malaysian Prime Minister Mahathir Mohamad, due out from Marshall Cavendish Ltd. early next year.  © 2010, Pacific Perspectives Media Center.

Journalist and professor Tom Plate, a board member of the Pacific Century Institute, a senio fellow at the USC Center for the Digital Future, and a member of the Pacific Council on International Policy, is the author of the series, GIANTS OF ASIA. © 2010, Tom Plate. Distributed by the Pacific Perspectives Media Center.

It has begun…here we go

U.S. Treasury Secretary Timothy Geithner said allowing tax breaks for the rich to expire is important to the future of the country because it demonstrates a commitment to bringing down the budget deficit. He said letting the cuts expire would have relatively little impact on economic activity.

Friends or foes?

One surprising outcome of U.S. President Barack Obama’s effort to isolate Iran, through economic and diplomatic sanctions, is his success at depriving Iran of some of the support it once received from Russia, according to The Economist. “Whether … pressure will persuade Iran to abandon its alleged ambition to become a military nuclear power (an allegation it strenuously denies) remains to be seen,” the magazine notes. “It may be telling that … Obama himself is playing down expectations and beginning to talk more about the other unspecified ‘options on the table’.”

Forced buyback

Major investors have long said banks should be required to repurchase defaulted loans that they securitized, and the Federal Reserve Bank of New York is taking the same position. The New York Fed’s stance is part an effort to improve the value of its Maiden Lane portfolio.

At risk

U.S. Sen. Christopher Dodd, D-Conn., chairman of the Senate banking committee, said he is worried that the midterm election will create an opportunity for lobbyists to weaken rules on derivatives that are part of the financial-regulatory overhaul. Industry lobbyists opposed the rules, making them “in some jeopardy,” he said.

No thank you

U.S. Sen. Christopher Dodd, D-Conn., chairman of the Senate banking committee, said he is worried that the midterm election will create an opportunity for lobbyists to weaken rules on derivatives that are part of the financial-regulatory overhaul. Industry lobbyists opposed the rules, making them “in some jeopardy,” he said.

Exit strategy

The European Central Bank might be encouraged enough by the region’s economic rebound to start pulling cheap money out of the banking system, experts said. The central bank is already winding down emergency bond purchases.

Get ready

China’s banks were instructed to stress-test for a decline of as much as 60% in house prices, and it will be bad news for the world if a housing meltdown materializes, according to The Economist. The government likely would respond to a housing-market collapse with additional support for the export sector, the magazine notes. “If it does, it will siphon demand away from other economies,” according to The Economist. “But if it doesn’t, the housing hit to China’s economy will be more severe, which will have much the same effect — a reduction in the demand boost from China to the rest of the world.”

The unit

The U.S. Internal Revenue Service said it is giving a unit that deals with international tax evaders more authority and centralizing the division’s operations. The move reflects the agency’s decision to make international tax investigation and enforcement a top priority, said Commissioner Douglas H. Shulman. The reorganization will “build up our expertise and sharpen our focus,” he said.

Help is coming

A bill to give financially desperate U.S. states $26 billion — support for Medicaid and to avoid laying off teachers, police, firefighters and other government employees — passed in the Senate with a 61-38 vote, after Democrats overcame a Republican procedural move to block final action. House Speaker Nancy Pelosi, D-Calf., said she will call the House back from recess to act on the measure.

A million a day

Venezuela plans to increase oil shipment to China to 1 million barrels a day by 2012, in order to boost investment in the domestic economy, including projects to diversify exports, said Oil Minister Rafael Ramirez. Venezuela, South America’s largest oil producer, is already exporting 200,000 barrels a day to China, paying off a $20 billion loan to invest in technology, agriculture and power generation.

Payback

American International Group reduced its draw against a Federal Reserve line of credit, received as part of its bailout, during 10 of the past 12 weeks and brought the total to $23.4 billion at the end of July, according to data from the U.S. central bank. During the past three months, the company repaid $3.5 billion of its borrowing, the Fed said.

Get them older

A financial crisis awaits the U.K. that will force the the retirement age to be raised earlier than expected, the Office for National Statistics said. Government officials said they are seriously considering raising the retirement age to 66 within five years and to 68 by 2038, if not sooner.

Less fearful

The U.S. labor market is at a reduced risk of slipping into another downturn, with companies in the service industry adding employees at a faster rate than expected, economists said. Nonmanufacturing businesses, which account for 90% of the economy, expanded and increased hiring in July, according to the Institute for Supply Management. The institute’s index moved up from 53.8 in June to 54.3 in July.

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The biggest hoarder is….

China’s emergence as the top consumer of energy, overtaking the U.S., is a major turning point for the world, according to The Guardian’s Data Blog. During the past decade, China’s energy use more than doubled, while U.S. energy consumption only modestly increased between 2000 and 2008, according to preliminary data from the International Energy Agency.

Good enough?

The Economist took note of recent news indicating that the U.S. Federal Reserve isn’t tightening fiscal policy or introducing additional stimulus. “Neither … indicate that the Fed is anywhere near a move to significant tightening,” the magazine notes. “But with growth falling short of the Fed’s forecast, inflation expectations still declining, wages and consumer spending stagnant, housing markets weakening, manufacturing growth petering out, and stimulus ending, ‘not tightening’ just might not cut it.”

Guess again

Harold “Terry” McGraw III, chairman and CEO of McGraw-Hill, which owns Standard & Poor’s, challenged a charge by a Chinese credit rating agency that Western counterparts are responsible for the financial crisis. “If you’re in a populist mood, you’ve got to find the villain,” he told Financial Times.

One doesn’t mean the other

Some financial institutions argued that requiring them to hold more capital would force them to scale back lending or boost the cost of loans. At least three studies call their assertion into question. “The industry has very significantly exaggerated the likely impact of the capital changes,” said Douglas J. Elliott, a fellow at the Brookings Institution.

Another bubble bubbling

A real estate bubble caused by China’s economic stimulus is in danger of collapsing, with potentially catastrophic consequences for all major economies, experts said. Xu Shaoshi, China’s minister of land and resources, said he expects the real estate market to experience a “total correction” this quarter. Kenneth Rogoff, former chief economist for the International Monetary Fund, said property value is already collapsing and that banks will be the next sector to be hit.

Little to do with it?

The Federal Reserve’s loose monetary policy and low interest rates have been blamed for the U.S. housing bubble, but a paper suggests that the central bank’s role in creating the problem was fairly minimal. A working paper from the National Bureau of Economic Research states that low interest rates accounted for only about 20% of a 53% increase in house prices during the 10 years that ended in 2006.

Risk based

The coming years likely will bring swings in valuation and investment returns outside the normal range, according to a report from State Street. Liquidity management has become an important challenge after the financial crisis, which was driven by credit, the report states. “Increasingly, investors are turning to regime-specific risk analysis to form a more complete picture of portfolio risk,” said Will Kinlaw, managing director and head of portfolio and risk-management research at State Street Global Markets.

Regulation is not innovation killer

The financial-reform law will be implemented in a way that won’t prevent the U.S. from reaping benefits of financial innovation, Treasury Secretary Timothy Geithner said. However, he rejected the idea of an innovative approach to mortgage giants Fannie Mae and Freddie Mac. Geithner seemed to be taking the position that Fannie and Freddie will get only a “rehabbing,” according to The Wall Street Journal.

Selling advice

One of the biggest unnoticed trends on Wall Street since the financial meltdown is a migration of bankers from behemoth investment banks to small, boutique firms that never trade for their account or loan to clients. They sell advice on mergers, acquisitions and restructurings to CEOs. The fastest-growing of these is Evercore Partners, founded by Roger Altman, a former senior official at the U.S. Treasury Department.

The UK needs financials sector

The City’s brokerages, banks and insurance companies played a big part in cutting the U.K.’s trade deficit last year, even as the financial sector suffered a huge decline, according to TheCityUK. The value of the financial sector’s exports in 2009, although down from 2008, was still the second-highest in history, the group said.

Slashing pay to avoid layoffs

Furloughs and pay freezes were once the tough medicine taken by local governments in the U.S. to cope with plummeting tax revenue. State and municipal officials are starting to take the next step: cutting pay. Governors are pressing unions to go along with reduced pay, without getting extra days off in return.

Spain coming back around?

The arrival of tourist season boosted the recovery of Spain’s labor market. The number of workers registering for unemployment benefits declined 1.9% between June and July, the Labor Ministry said. It was the fourth consecutive monthly drop for first-time registration.

Detroit coming back around?

Demand for fleet expansion, pickups and new models increased the Detroit Three’s sales in July compared with the same month last year. Sales went up 5% at Chrysler, 3.1% at Ford Motor and 5.4% at General Motors. Meanwhile, Toyota Motor’s sales fell 3.2% and Honda Motor saw a 2% decline.

Ireland in trouble

Bank of Ireland joined a growing list of mortgage lenders in raising interest rates. The bank said an increasing cost of wholesale funding for the bank made existing rates unsustainable.

Inflation down under

Australia’s economy is edging toward inflation, based on the strength of its trade surplus and housing prices, economists said. The trade surplus widened to 16% of gross domestic product in June, topping an all-time high set in 2008, the Australian Bureau of Statistics said. In the second quarter, the index for house prices in major cities increased 3.1%.

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