The Federal Reserve has taken the primary role in determining how much new capital the nation’s biggest banks need to weather the economic slump, people familiar with the matter said.
Putting the Fed in charge may help ease concern that different assessments by different agencies would lead to some firms being judged less strictly than others. Treasury Secretary Timothy Geithner has said he anticipates the results, due at the end of April, will result in “large” capital needs for some companies, offering investors a way of differentiating between weaker and stronger lenders.
Fed examiners are deployed alongside counterparts from three other agencies that oversee parts of the 19 banks that are involved in the so-called stress tests.
“You could argue this is a systemic risk issue and it is good to have another regulator step in and assert a uniform set of standards,” said Kevin Fitzsimmons, analyst at Sandler O’Neill & Partners LP in New York, and a former bank examiner at the Federal Reserve Bank of Boston. “The Fed has its hands on every institution that is a holding company.”
All 19 of the firms under scrutiny, from American Express Co. and GMAC LLC to SunTrust Banks Inc. and Citigroup Inc., are bank holding companies, giving the Fed an overarching role.
‘Consistency’ of Tests
Geithner unveiled the stress tests on Feb. 10. They were billed as a comprehensive set of standards for the financial system’s most important banks, regardless of their regulator. He stressed “consistency” and “realism” in congressional hearings that week.
While U.S. regulators don’t intend to publish the details of their stress tests, the results will effectively become known once it is determined how much capital each bank is required to raise. Under the terms of the February plan, firms will be given six months to raise the funds either from private investors or the government.
The tests are designed to mesh with the administration’s effort to remove distressed mortgage assets from banks’ balance sheets, which have hampered lending to consumers and businesses. Officials aim to have the first purchases of the toxic assets by private investors financed by the government within weeks of the conclusion of the capital-need assessments.
“Banks are going to have an incentive” to sell their devalued assets because they want to “go raise private capital from the markets,” Geithner said in an interview with NBC’s “Meet the Press” March 29.
Price of Assets
Still, it’s unclear whether most of the big banks will be willing to sell loans and securities at prices that may be below the current valuations on their balance sheets.
Bank of America Corp. Chief Executive Officer Kenneth Lewis said in a Bloomberg Television interview March 27 that the pricing of the assets is “going to be the key” determinant of his bank’s participation online cash advance.
Citigroup CEO Vikram Pandit told reporters after a group of bank chief executives met with President Barack Obama March 27 that “we want to do whatever it takes” and work with officials “to promote a recovery.”
All of the 19 banks are bank or financial holding companies, according to the Federal Deposit Insurance Corp.’s Web site. Some of them have units overseen by the FDIC, Office of the Comptroller of the Currency and Office of Thrift Supervision.
OCC spokesman Kevin Mukri referred to prior Treasury statements noting that federal supervisors would coordinate in the tests.
OTS Ouster
Geithner removed OTS Acting Director Scott Polakoff last week amid concern about how the agency handled accounting for capital raised by banks it oversaw. John Bowman, the deputy director and chief counsel, was named acting director, becoming the third OTS chief so far this year.
The OTS failed to uncover “unsafe and unsound” practices at Pasadena, California-based IndyMac Bancorp Inc., an audit concluded last month. The Treasury’s inspector general disclosed on Jan. 30 that the OTS permitted IndyMac and four other unidentified lenders to improperly backdate a capital infusion, which helped them avoid regulatory restrictions.
“If these stress tests are going to be meaningful, as they should be, then banks are going to require more capital,” Patrick Cave, a former Treasury official who is now chief executive officer of Cypress Group LLC, said in an interview on Bloomberg Television. He added that the administration is right to pursue a “tough love” approach to any further assistance.
Economic Projections
Regulators’ assessments are based on two scenarios for the economy. The “baseline” forecast projected a 2 percent economic contraction and an 8.4 percent jobless rate in 2009, followed by 2.1 percent growth and 8.8 percent unemployment in 2010.
The “alternative more adverse” scenario had a 3.3 percent contraction in 2009, accompanied by 8.9 percent unemployment, followed by 0.5 percent growth and 10.3 percent jobless in 2010.
The Treasury estimates it has about $135 billion left in the $700 billion financial-rescue fund enacted in October. Banks who already received government funding also could get a capital boost if the Treasury agrees to convert its preferred shares into common equity. Obama administration officials haven’t said when they may need more rescue money and ask for congressional authorization.
The Obama administration task force is likely to recommend more aid for struggling U.S. automakers, a senior senator said Wednesday.
Carl Levin of Michigan told reporters that "it is clear" any assistance would be tied to new conditions on restructuring.
The task force has a March 31 deadline to determine whether General Motors Corp. (GM, Fortune 500) and Chrysler LLC can be competitive and worthy of up to $22 billion in additional bailout funds.
The two received $17.4 billion in taxpayer assistance in December.
Levin said he had no specifics on any aid plan, but optimism for helping GM and Chrysler rose last week when the task force approved $5 billion in aid for stressed industry suppliers.
GM shares fell 6% in regular trade but rose 1 cent after hours to $3.
It remains unclear, however, how the task force overseen by the White House and Treasury Department would tailor a new bailout package payday loan.
Other lawmakers previously have said they were told by task force leaders that any plan would include separate recommendations for GM and Chrysler.
GM has asked for more than $16 billion in aid, while Chrysler is seeking $5 billion.
The rescue extended by the Bush administration required specific concessions on wages and retiree health care costs by the United Auto Workers, and debt reduction through GM bondholders.
While the companies have made progress on UAW givebacks, final agreements have not been struck. Additionally, there has been no deal at GM with bondholders on a proposal to swap a sizable portion of the $27 billion in debt they hold for equity.
BERLIN–German business morale fell in March to its lowest level since reunification in 1990 on concerns the recession in Europe's largest economy has yet to reach its low point.
The Ifo economic research institute said on Wednesday its business climate index, based on a monthly poll of around 7,000 firms, fell to 82.1 from 82.6 in February. A Reuters poll of 45 economists had pointed to a reading of 82.2.
Ifo last recorded a lower reading in November 1982, though that reflected corporate sentiment in then-West Germany.
"The Ifo index leaves little room for hope of an economic stabilisation in the second half of the year," said Ulrich Wortberg at Helaba investment house.
The euro fell briefly against the dollar after the release of the data, before recovering to trade higher.
Finance Minister Peer Steinbrueck said the government would not be able to keep its forecast for the economy to contract by 2.25 per cent this year, telling a banking conference: "Germany is in a deeper recession than we have known before."
Germany has made a weak start to 2009, with industrial orders slumping 8 percent and output by a record 7.5 percent in January as the trade-reliant economy suffers from a collapse in foreign demand.
Pointing to these declines, Commerzbank forecast on Monday a contraction in GDP of 6 to 7 per cent in 2009, easily the gloomiest outlook of any leading bank or think tank.
"It will take some time and a substantial confidence improvement to end the contraction," said Carsten Brzeski, economist at ING Financial Markets. "A recovery, worth its name, will only come in the course of 2010."
In neighbouring France, Germany's biggest trading partner, business confidence stuck at a record low in March as bosses fretted about empty order books paydayloan.
Reflecting the current weakness, an Ifo index of current conditions fell to 82.7 from 84.3 in February. A separate expectations index edged up to 81.6, its highest level since September 2008, from 80.9.
Economy Minister Karl-Theodor zu Guttenberg said the rise in the expectations component leant hope to the prospect of the economy bottoming out this year.
However, Ifo economist Klaus Abberger said: "We don't see any signals of a turnaround yet."
"The speed of the decline is decreasing. But the bottom level is not yet in sight," Abberger told Reuters, adding that the European Central Bank should cut interest rates again.
German companies are feeling the slowdown, with retail group Metro saying on Tuesday it expected growth to slow this year. "The global economic downturn is likely to deepen this year," Metro Chief Executive Eckhard Cordes said.
Ifo said retailers reported a more downbeat view of their current conditions, and their business outlook in March. Germans' retail habits are key to the overall economy's performance as consumer spending accounts for over half of GDP.
The VDA German Automotive Association said earlier this month that the market for German trucks plummeted in February, with new orders from abroad falling by 95 per cent.
Ifo chief Hans-Werner Sinn said last week the economy would contract by over 4 per cent this year.
St. Louis bankers are a sour lot these days. Profits are down. More borrowers can’t pay their debts. Bank stocks are as popular as hay fever during the first week of spring.
But amid the gloom, bankers are seeing glimmers of hope that the economic slump in St. Louis may be nearing the bottom. And once the recession passes, they’re counting on a return to a more financially conservative era, in which both bankers and their customers will be tighter with a buck.
"A lot of things, albeit small things, are showing signs of life" said Robert Witterschein, president of Southwest Bank. "People are starting to feel a little bit better. I’m thinking maybe the worst was the fourth quarter."
Local banks largely avoided major investments in subprime mortgage securities, which morphed into toxic waste on bank balance sheets. Still, they have seen rising foreclosures, even among prime mortgages. Several banks also took hits on loans to bankrupt developers. Other borrowers have weakened as well.
Now, bankers are detecting some stirring amid the housing wreckage.
Bottom fishers are appearing, an early sign of revival. On the suburban fringes, investors are buying new but unsold houses in bulk from distressed developers.
Such purchases are on the low end of the market, among houses selling for about $120,000, says Peter Benoist, chief executive of Enterprise Financial, parent of Enterprise Bank & Trust in Clayton.
The investors may be counting on a new $8,000 federal credit for first-time homebuyers to boost sales.
Several developers went broke over the past year when they could no longer keep up the payments on land they purchased for development. Now, a few builders are starting to shop for lots again, said Benoist, whose bank specializes in serving small and mid-size businesses.
These are "early, early, early" signs that a bottom may be near for the local economy, Benoist says.
Industrial companies in St. Louis seem to be holding up better than expected, bankers say. They cut back sharply on production last fall, which is helping them wait out the slump.
DROPPING PROFITS
After an awful year, bankers are anxious for any sign of improvement. Of the 25 largest banks operating in St. Louis, 20 saw their profits drop last year as more borrowers defaulted.
Seven banks lost money. The losers include big super-regionals based elsewhere, such as Regions Bank of Alabama and National City of Cleveland, which is being taken over by PNC Financial of Pittsburgh.
Among St. Louis-based banks, First Banks lost $241 million, largely through misadventures in California residential real estate. The bank had to be shored up with capital injections from the federal government and from its owners, the Jim Dierberg family.
Other banks with losses included Truman, Southern Commercial, St. Louis and Premier banks. Truman bank has signed an agreement with regulators calling for improvements in management and capital. Tiny Westbridge Bank was slapped with a more serious "cease and desist" order from regulators.
Among the Top 25, only five banks managed to make more money last year than in 2007. They were First National, Reliance, Midwest Bank Center, Carrollton Bank and Kansas City-based UMB.
All St. Louis-based banks remain "well capitalized" under federal guidelines, says Julie Stackhouse, a senior vice president in charge of banking supervision at the Federal Reserve Bank of St paperless payday loans. Louis. That means they are in no immediate danger of failure.
Still, she suspects that a few smaller banks might not survive the recession. About 140 banks now operate in St. Louis.
Small banks are under extra pressure from rising FDIC insurance rates, says Stackhouse, and they may try to team up with bigger partners.
Banks here are working through problems in the housing market, says Stackhouse.
But now local bankers are facing the other problems that come with a recession: Job losses and worried consumers lead to slower retail sales, which spills over into losses for commercial real estate operators.
Many analysts think that commercial real estate loans will be the next domino to fall for bankers, followed by rising credit card defaults.
The office market in St. Louis was never overbuilt, but shopping centers are "suffering greatly," says Benoist, of Enterprise Bank.
RETURN TO OLD MODEL
When the slump finally ends, the banking business will be headed back to the future.
"The world of banking will look like the world of banking 10 years ago," says Joe Stieven of Stieven Capital Advisors, and the dean of St. Louis bank analysts. "That was before Wall Street and the shadow banking system let the credit genie out of the bottle."
It was before Congress tore down the Depression-era wall that separated commercial banking from investment banking, letting giants such as Citigroup entangle themselves in capital markets around the world.
It was before the major explosion of loan securitization, in which piles of real estate loans and consumer debt were wrapped into bonds and traded. This let the people who made the loans pass the credit risk to other investors, who had no reliable way to tell if borrowers could pay their debts.
LOANS MADE THE
old-fashioned way
Securitization won’t go away. Before the crunch, that business provided nearly half the credit for consumers and business.
The expectation is that the market for prime securitized loans will recover. But the market for subprime loans — on houses, cars, credit cards — will remain buried, leaving less credit for those down on their luck.
The shadow banking system — a crowd of Wall Street firms, insurance companies and other non-bank lenders — will rise again, but it won’t be as big as in the past, bankers and analysts say. More loans will be made the old fashioned way — by banks that know their borrowers and keep their paper.
"The traditional banking system’s importance will increase, and actually that’s healthy," Stieven said. "Here in St. Louis, we want bankers to be funding good sound projects and saying no to unsound projects."
Banks will make fewer loans, but better ones, bankers say.
"Historically after recessions, banks will be more conservative. But probably not as conservative as they’re being right now," said Rick Bagy, president of First National Bank in Clayton.
jgallagher@post-dispatch.com | 314-340-8390
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European Central Bank council member Axel Weber said the bank will lower interest rates again and may extend the maturities of its loans to banks to push down long-term borrowing costs.
The ECB still has “room to maneuver” on interest rates “which we will use,” Weber, who heads Germany’s Bundesbank, said in a speech in Berlin today. In addition, offering banks loans for longer periods may “contribute to a desired flattening of the interbank yield curve” and “could help to guarantee financing security,” he said.
Weber’s comments suggest he favors expanding the ECB’s existing policy of lending banks as much cash as they want rather than following the U.S. Federal Reserve and the Bank of England and buying government or corporate debt to revive the economy. The Frankfurt-based ECB is under increasing pressure to outline a strategy for how it will counter the worst recession since World War II once it runs out of room to lower interest rates.
“The urgency of delivering further stimulus in the near term implies that the Council is ready to ease on April 2,” said Julian Callow, chief European economist at Barclays Capital. Before Weber’s speech he had expected the ECB to wait until May before cutting its key rate to 1 percent from 1.5 percent.
The bank this month lowered its benchmark lending rate to 1.5 percent, a record low. That’s still the highest among the Group of Seven nations. The Fed and the Bank of Japan have lowered their key rates to close to zero and the Bank of England’s is at 0.5 percent.
‘Different Animal’
All three of those central banks have said they will purchase government bonds in an effort to reduce long-term interest rates and revive economic growth, a policy known as quantitative easing cash advance.
“The ECB is a totally different animal to the Fed and the other central banks,” said Laurent Bilke, an economist at Nomura International in London and a former ECB forecaster. “The furthest it may push out the boat at this point in time is to enhance what it already has.”
The ECB currently offers banks loans at its prevailing benchmark rate for up to six months. Banks can borrow as much money as they want against eligible collateral.
“We’re not yet at a point where we would have to say that the provision of loans to the economy is no longer functioning,” Weber said.
The bank, which sets interest rates for the 16-nation euro region, is hemmed in by European Union rules that forbid it from buying bonds directly from governments. Any decision to buy debt in the open market may spark a dispute over which country’s securities to purchase.
French President Nicolas Sarkozy today urged the ECB to boost the euro-area economy by broadening the collateral it accepts when making loans and buying commercial paper.
“The central bank must widen the quality of paper it accepts,” Sarkozy told reporters after a meeting of European Union leaders in Brussels.
Xerox Corp, the world’s top supplier of digital printer and document management services, warned first-quarter earnings will fall far short of its earlier forecast as a slowdown in technology spending undercuts revenue.
Hurt by falling sales of equipment and printer-based supplies, the company said on Friday that revenue in January and February was 18 percent below year-ago levels. It also blamed poor results from its venture with Fuji, which handles sales for the Xerox group in Asia.
The Xerox outlook comes on the heels of downbeat comments this week by two other household names, FedEx Corp and Nike Inc. These warnings suggest many corporations are still in the thick of the recession and it could be some time before they are able to turn around earnings.
Earlier this month, hopes about a recovery had been lifted by optimistic comments by Bank of America Corp, JP Morgan Chase & Co and others in the troubled banking sector.
With technology spending staggering, Xerox forecast first-quarter earnings of 3 cents to 5 cents per share, compared with an earlier outlook of 16 cents to 20 cents. Analysts looked for 17 cents per share, according to Reuters Estimates.
Spurred by solid profits and improved market share, the Norwalk, Connecticut-based company, whose rivals include Oce NV, Canon and Ricoh, had rebounded from severe financial troubles earlier this decade.
However, efforts to boost revenue have been derailed by the recession fast cash now. In recent months, some large clients have been hesitant about purchasing higher-end technology, analysts have said. Increased sales of lower-priced products have hurt Xerox’s gross margins.
Shares of the company, down about 33 percent for the year through Thursday, dropped a further 10.6 percent to $4.77 in premarket trade.
Chief Executive Anne Mulcahy, who was an economic adviser to Barack Obama during the U.S. presidential transition, said Xerox would continue to increase market share yet cautioned in a statement that “enterprise spending on technology will continue to decline this year.”
As a result, Xerox said it would seek to cut some $300 million in costs, on top of the $250 million in savings it previously planned. It did not say where the additional savings would come from, but its restructuring late last year included about 3,000 job cuts.
Xerox also said it would cut total debt during the first quarter and would continue to do so throughout the year. It said it has a $2 billion line of credit and would tap credit markets only on an “opportunistic” basis.
Xerox is due to release first-quarter earnings on April 24.
(Reporting by Paul Thomasch; editing by Jeffrey Benkoe and Steve Orlofsky)
Boeing Co.’s first batch of 787 Dreamliners will be overweight, trailing airlines expectations for performance, said the plane’s biggest customer, Steven Udvar-Hazy, head of International Lease Finance Corp.
“Boeing is putting a lot of resources into rectifying the problem and implementing improvements as quickly as possible in the production line,” Udvar-Hazy, chief executive of the world’s largest aircraft lessor, said Tuesday in a presentation at an International Society of Transport Aircraft Trading conference in Scottsdale, Ariz fast payday loan.
“In the long run, this will be an excellent family of aircraft, I just pity those airlines that will get the first few, because those will not be the standard by which the 787 will be built on later,” he told an audience of about 1,000 aircraft brokers, lessors and finance bankers.
The Canadian Auto Workers union says it has not reached agreement with Chrysler or Ford on the value of concessions at General Motors, which is holding up their restructuring plans to qualify for government loans.
CAW president Ken Lewenza said yesterday the union and two companies will continue meetings today in efforts to find some consensus on how much the GM concessions will save them during the next three years.
"Until we agree on the numbers, there’s not much point going forward," he said at a downtown hotel free credit report and score. "They’re still crunching numbers."
GM workers voted for wage freezes and benefit cuts last week. But Ford and Chrysler are trying to buck that "pattern" deal and say they need more savings to become competitive in Canada and get the public aid. The CAW has insisted on the same GM deal at Ford and Chrysler.
Australia extended its review of Chinese aluminum maker Chinalco’s $19.5 billion investment in global miner Rio Tinto on Monday as major Rio shareholders voiced growing concern over the deal.
The Foreign Investment Review Board’s (FIRB) decision to extend its review to June was widely expected, given the deal is China’s biggest single offshore investment, is complex and has sparked both shareholder and political concerns.
Under the deal, announced last month, state-owned Chinalco would pay $12.3 billion for stakes in debt-saddled Rio’s key iron ore, copper and aluminum assets and $7.3 billion for convertible notes that could double its equity stake in Rio to 18 percent.
Rio Tinto’s fourth-largest shareholder in its Sydney-listed shares, Australian Foundation Investment Co (AFIC), raised concern about the deal on Monday, echoing protests by Rio’s top UK shareholders and flagging potential conflicts of interest.
“Significant influence has been given to Chinalco with no premium paid,” AFIC said in a shareholder presentation released to the Australian stock exchange.
The fund manager owns a A$112 million stake in Rio Tinto Ltd. One of AFIC’s board members and a member of its investment committee is Don Argus, chairman of Rio Tinto’s spurned suitor, BHP Billiton.
“We are deeply concerned about Chinalco becoming involved with the running of the business,” AFIC said, noting Chinalco was government-owned and was a customer and competitor.
Rio Tinto has argued that the Chinalco deal would give it access to cheaper financing, a badly needed benefit for the company which is saddled with $39 billion in debt no fax payday loans.
“Shareholders are entitled to their view, and we continue to listen to them,” a Rio Tinto spokesman said. Rio declined to comment on the extension. Chinalco spokesman Lu Youqing said the delay was normal procedure for such a large deal.
The Association of British Insurers, whose 400 members account for nearly a fifth of investments in the London stock market, said many shareholders would prefer to vote on a special resolution on the Chinalco deal that would require 75 percent approval.
“The fact that it has been structured as an ordinary resolution rather than a special resolution is unwelcome to many shareholders,” Peter Montagnon, director of investment affairs at the group, told Reuters.
An ordinary resolution requires 50 percent approval.
NATIONAL INTEREST
Rio Tinto shares fell 2.0 percent in London to 2,035 pence by 0944 GMT, slightly underperforming a 1.7 percent fall the UK mining index .FTNMX1770. Rio shares lost 2.4 percent in Australia.
China’s Export-Import Bank is talking to Rio Tinto about setting up a lending facility for joint venture projects with Chinalco or other Chinese companies, according to a letter, dated February 12, signed by Feng Zengbing, the deputy general manager of China ExIm Bank, and released by Rio on Monday.
VIENNA–Switzerland, Austria and Luxembourg offered yesterday to relax strict bank secrecy in some tax evasion cases in a response to a global crackdown on tax havens that is rattling the offshore banking industry.
The three countries made the concessions ahead of a meeting starting yesterday of G20 finance ministers that was to discuss tax havens.
Similar moves were made by Andorra and Liechtenstein on Thursday.
All five were on a list handed to the G20 this week by the Organization for Economic Co-operation and Development (OECD), which deems bank secrecy rules as undesirable.
British Prime Minister Gordon Brown, who is chairing a G20 summit in April, welcomed the Swiss move and said he hoped this was the beginning of the end for tax havens. "The summit in London next month is an opportunity for global agreement on the further actions we need to take to clean up the global financial system," Brown said.
Switzerland will now co-operate in cases of suspected tax evasion, at least once double taxation agreements are renegotiated with other countries, which may take time. It also said it could seek an amnesty for existing clients.
Previously, the world’s biggest offshore banking centre would only co-operate with foreign authorities once outright tax fraud could be proved, which has recently hindered American access to client data of Switzerland’s biggest bank UBS in an ongoing tax probe.
Switzerland’s finance minister, Hans-Rudolf Merz, who also holds his country’s rotating presidency, said Switzerland is now co-operating because being put on a blacklist, and the possibility of sanctions, would have hurt the economy.
The OECD blacklist currently includes Liechtenstein, Andorra and Monaco, but France and Germany have been pushing for others, including Switzerland, to be added.
The tax debate is crucial for the wealth-management industry, which handles an estimated $7 trillion (U.S.) of assets out of offshore centres around the globe, of which about $2 trillion is held in Switzerland and about $1 trillion in Luxembourg.
Merz said it is hard to say whether yesterday’s moves would prompt an outflow of money, noting that other tax havens such as rising Asian rivals Singapore and Hong Kong have also adopted the OECD’s rules recently no credit check payday loans.
The European countries insist the move will not lead to "fishing expeditions" by other states for client data and say banking secrecy rules would be otherwise upheld.
"It is not an open-door policy," Merz said. "It is an easing of access to information in respect to tax crime."
Switzerland has accused the United States of being on a "fishing expedition" by pursuing a civil case against UBS to try to access details of 52,000 clients, even after the Swiss bank paid $780 million to avert related U.S. criminal charges.
In a separate statement yesterday, the Swiss government said it would instruct a U.S. law firm to defend the country’s position in the civil case against UBS.
The right-wing Swiss People’s Party said the government had betrayed citizens and bank customers with its concessions. "With today’s decision the government is sacrificing a centuries-old principle of protecting citizens," it said in a statement.
The moves by Austria and Luxembourg, both European Union members, may not be enough to satisfy fellow member states such as Germany, which has been vocal in the fight against tax havens since it obtained bank data of citizens suspected of parking money in Liechtenstein last year.
Luxembourg’s treasury and budget minister, Luc Frieden, said the OECD framework for case-by-case information exchange should be the only principles applied in the EU and the Commission gave a guarded welcome to Friday’s announcements.
A study for British charity Oxfam showed that developing countries miss out on tax receipts worth more than the billions of dollars they receive in foreign aid because their own nationals put cash in offshore tax havens.
They lose as much as $124 billion in taxes a year, more than their yearly $103 billion in foreign aid, the study showed.
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