NEW YORK (Reuters) - The planned $700 billion bailout to shore up the battered U.S. financial system looked set to drag into next week as Washington lawmakers haggled over how exactly they could make Wall Street pay for its rescue.
Stocks and the U.S. dollar tumbled on Monday as emerging details of the plan left many players skeptical that the rescue, which would give powers to the U.S. Treasury Department to buy up toxic mortgage-related debt from financial groups, would work.
"The big detail we want to know is how is the government going to buy these securities, and what they will pay, how that reverse auction will work," said Giri Cherukuri, head trader at OakBrook Investments LLC in Lisle, Illinois. "And the big question is, 'Will this bring us out of the woods?"'
A day after America's last two big investment banks, Goldman Sachs (NYSE:GS - News) and Morgan Stanley (NYSE:MS - News), ended Wall Street's swashbuckling era by securing Federal Reserve approval to become commercial banks, all eyes shifted to Washington.
U.S. lawmakers and Bush administration officials were hammering out details of a deal they hope will end the worst U.S. financial crisis since the Great Depression.
U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke start two-days of congressional hearings on Tuesday to hasten approval of the bailout.
With the economy the No. 1 issue in a U.S. presidential election that is about six weeks away, lawmakers want a plan in place quickly, fearing delay could send markets reeling again.
But with one-third of the U.S. Senate and the entire U.S. House of Representatives up for re-election on November 4, lawmakers will want to sound tough on such hot-button issues as the pay of reckless executives.
"We are not sending a blank check to Wall Street," House Speaker Nancy Pelosi said after holding bipartisan talks.
With so many ideas being floated in Washington on Monday, one congressional aide who asked not to be identified likened the scene to a "Turkish bazaar of public policy ideas."
The crisis has unsettled world markets, and Group of Seven finance ministers and central bank heads promised "heightened close cooperation" to safeguard the global economy.
The latest jitters came after the deal late Sunday scrapped the investment bank model synonymous with Wall Street, ensuring Goldman Sachs Group Inc and Morgan Stanley will avoid the fate of rivals that collapsed or were bought in the brutal meltdown of recent weeks.
Morgan Stanley went a step further, striking a deal with Japan's largest bank, Mitsubishi UFJ Financial Group Inc (Tokyo:8306.T - News), on Monday to spend as much as $8.5 billion for about one-fifth of the prestigious 73-year-old investment bank, sending Morgan's shares higher before closing down.
ANGER AT BAILOUT
After Monday's talks, U.S. Rep. Barney Frank, a top Democrat, said the U.S. government would take equity in the companies seeking a bailout. But the U.S. Treasury is against that idea, sources close to Treasury told Reuters.
The White House said it agreed to an oversight board to monitor the bailout, which Democrats had pushed for. And Frank said there was also agreement that the plan should minimize the number of Americans who will lose their homes to foreclosure.
But lawmakers and Treasury officials were at odds on the emotional issue of whether executives at the companies in need of rescue must agree to limits to their compensation.
With details still in dispute, Frank said the legislation could take until next week to complete.
Earlier, U.S. President George W. Bush said, "Failure to act would have broad consequences far beyond Wall Street."
But U.S. Rep. Henry Waxman, chairman of the House Committee on Oversight and Government Reform, voiced outrage at the notion of any bailout without a cap on executive pay.
"The (Bush) administration's plan ... would enrich the Wall Street executives whose reckless investments caused the financial crisis," the powerful California Democrat said. "The taxpayer is being asked to risk billions to protect the bonuses of investment bankers."
Even some Republicans came out against the bailout.
Alabama Sen. Richard Shelby, the top Republican on the Senate Banking Committee, said he feared the bailout was "neither workable nor comprehensive."
"It would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted," he said.
Sen. Chuck Hagel, a Nebraska Republican, told Reuters after a meeting of fellow Senate Banking Committee members, "I suspect there will be opposition. We're not there. We don't even have a product yet."
South Carolina Republican Sen. Jim DeMint called the Bush plan "completely unacceptable."
The uncertainty caused stocks to lose most of the gains seen on Friday, when word of the plan sparked Wall Street's best one-day gain since 1987. The S&P 500 index (^SPX - News) dropped 3.8 percent.
Buoyed by the dollar's near 2 percent decline, U.S. crude oil futures soared $16.37 to settle at $120.92, the biggest ever jump in a trading session. At one point, oil was up a stunning $25.45, or 24.3 percent.
In a crisis that has lurched from issue to issue since the U.S. economy first showed weakness and home prices began to tumble last year, prompting a credit crunch and the collapse of investment banking, some wondered where it would end.
"The thing that scares me is the breadth of it," said Robert MacMahon, managing director for restructuring at GE (NYSE:GE - News) Corporate Lending.
Democrats, who control both chambers of Congress, pushed for changes to the plan on concerns that it could expand the powers of the executive branch without adequate oversight -- a frequent Democratic criticism of the Bush administration.
GLOBAL CRISIS
The crisis is threatening global markets. Central banks from Europe to Japan sought to shore up banks by injecting money into the banking system. (ID:nLM163631). Even in the oil-rich Gulf region, the crisis was felt.
The United Arab Emirates Central Bank launched its first-ever emergency funding facility to help fund banks as global lending between institutions shriveled.
The Fed's agreement to convert the once high-flying Goldman and Morgan Stanley investment banks into more conventional depositary institutions was Washington's latest effort to restore calm to chaotic markets and avoid a deep recession.
Both Goldman and Morgan will now face a thicket of new regulations, which will bolster their resources but also curb the spectacular profit growth that made investment bankers among the highest paid in the nation.
The rescue came together after seismic shifts on Wall Street that saw Lehman Brothers Holdings Inc (Other OTC:LEHMQ.PK - News) file for bankruptcy, Merrill Lynch & Co Inc (NYSE:MER - News) agree to sell itself to Bank of America (NYSE:BAC - News), and the Fed stage an $85 billion rescue of American International Group Inc (NYSE:AIG - News).
AIG shares gained 23 percent on Monday on reports its investors were hatching a plan to prevent the insurer from falling into government ownership, by repaying the Fed's loan.
Goldman and Morgan Stanley were the last of the big five investment banks that shaped 20 years of Wall Street history after Bear Stearns collapsed earlier this year.
Showing posts with label Banks Gain. Show all posts
Showing posts with label Banks Gain. Show all posts
Tuesday, September 23, 2008
Sunday, September 21, 2008
$700B rescue plan may not save some troubled banks
NEW YORK (AP) -- A sweeping government plan to buy up to $700 billion in bad mortgages may not be enough to save some banks, which experts say may be forced to absorb big losses if they sell their troubled assets.
The proposal for the government to soak up the mortgage-backed securities would be the biggest bailout plan since the Great Depression, but experts say a critical issue will be how much it actually pays for the troubled assets.
How the government might acquire banks' toxic debt is still being ironed out, but one approach suggested by Treasury Secretary Henry Paulson involves a process under which financial institutions would propose a price for their mortgage-backed securities and the government would choose the lowest bids.
If banks sell at the proposed price -- say 50 cents on the dollar -- accounting rules would require firms to take the losses on their balance sheets before getting the damaged assets off their books. For weaker banks buffeted by the deepening credit crisis, the losses may hinder their ability to go out raise capital, make loans and ultimately stay afloat, according to industry experts.
"There is a risk that there will be bank failures to come," said Vincent R. Reinhart, former director of the Federal Reserve's monetary affairs division.
While the reverse auctions could help banks set a clearing price for mortgage-related assets, Reinhart said, that "price doesn't mean that every financial firm will be solvent" after those assets are sold.
Another risk is that if the auctions set too low a price for mortgage-related assets, other institutions with bad debt may be forced to take the distressed valuation onto their books under mark-to-market accounting rules, Reinhart said. Mark-to-market rules involve adjusting the price of an asset to reflect its current market value.
"If the auctions don't go well, it will drag down everybody's balance sheet who marks to market," Reinhart said.
The financial system has been battered by $500 billion in losses from the mortgage mess, and the International Monetary Fund has estimated the price tag could ultimately top $1 trillion.
The crisis has forced 11 federally insured banks and thrifts into failure this year. Another 117 banks and thrifts were considered to be in trouble in the second quarter -- the highest level since 2003 -- with the total assets of troubled banks tripling to $78 billion, according to the Federal Deposit Insurance Corp. The agency does not disclose which institutions are on its list, but on average, 13 percent of banks that make the list fail.
Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics, has predicted that 110 banks with assets worth $850 billion are in danger of failing by next summer. He said the Treasury Department's rescue plan hasn't given him reason to be more optimistic.
"If the government comes in and buys these assets at a discount and you're a strong bank, you don't care because you're getting cash and you go off and do business. If you're a weak bank and you take a big hit, you may not have that option," Whalen said.
He said the government may decide that the only option to save some banks is to pay full price for the assets in exchange for equity, which could be sold later.
But that could be risky because if the government pays too high a price, it will be difficult if not impossible to go out and sell the assets for a profit in the future, meaning any losses incurred would be absorbed by taxpayers. But paying too little also is problematic because banks will be forced to take steeper losses that they may not be able to recover from.
"The government should be able to arrange to pick a price that helps the banks but also that allow the government to turn around and make a profit down the line," said Marvin Goodfriend, professor of economics at Carnegie Mellon University.
The proposal for the government to soak up the mortgage-backed securities would be the biggest bailout plan since the Great Depression, but experts say a critical issue will be how much it actually pays for the troubled assets.
How the government might acquire banks' toxic debt is still being ironed out, but one approach suggested by Treasury Secretary Henry Paulson involves a process under which financial institutions would propose a price for their mortgage-backed securities and the government would choose the lowest bids.
If banks sell at the proposed price -- say 50 cents on the dollar -- accounting rules would require firms to take the losses on their balance sheets before getting the damaged assets off their books. For weaker banks buffeted by the deepening credit crisis, the losses may hinder their ability to go out raise capital, make loans and ultimately stay afloat, according to industry experts.
"There is a risk that there will be bank failures to come," said Vincent R. Reinhart, former director of the Federal Reserve's monetary affairs division.
While the reverse auctions could help banks set a clearing price for mortgage-related assets, Reinhart said, that "price doesn't mean that every financial firm will be solvent" after those assets are sold.
Another risk is that if the auctions set too low a price for mortgage-related assets, other institutions with bad debt may be forced to take the distressed valuation onto their books under mark-to-market accounting rules, Reinhart said. Mark-to-market rules involve adjusting the price of an asset to reflect its current market value.
"If the auctions don't go well, it will drag down everybody's balance sheet who marks to market," Reinhart said.
The financial system has been battered by $500 billion in losses from the mortgage mess, and the International Monetary Fund has estimated the price tag could ultimately top $1 trillion.
The crisis has forced 11 federally insured banks and thrifts into failure this year. Another 117 banks and thrifts were considered to be in trouble in the second quarter -- the highest level since 2003 -- with the total assets of troubled banks tripling to $78 billion, according to the Federal Deposit Insurance Corp. The agency does not disclose which institutions are on its list, but on average, 13 percent of banks that make the list fail.
Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics, has predicted that 110 banks with assets worth $850 billion are in danger of failing by next summer. He said the Treasury Department's rescue plan hasn't given him reason to be more optimistic.
"If the government comes in and buys these assets at a discount and you're a strong bank, you don't care because you're getting cash and you go off and do business. If you're a weak bank and you take a big hit, you may not have that option," Whalen said.
He said the government may decide that the only option to save some banks is to pay full price for the assets in exchange for equity, which could be sold later.
But that could be risky because if the government pays too high a price, it will be difficult if not impossible to go out and sell the assets for a profit in the future, meaning any losses incurred would be absorbed by taxpayers. But paying too little also is problematic because banks will be forced to take steeper losses that they may not be able to recover from.
"The government should be able to arrange to pick a price that helps the banks but also that allow the government to turn around and make a profit down the line," said Marvin Goodfriend, professor of economics at Carnegie Mellon University.
Friday, September 19, 2008
Europe's Stoxx 600, FTSE 100 Surge Most on Record; Banks Gain
Sept. 19 (Bloomberg) -- European stocks surged, sending the Dow Jones Stoxx 600 Index and the FTSE 100 to their biggest gains on record, after the U.S. government announced plans to halt the credit-market seizure and regulators cracked down on short sellers.
UBS AG, the European bank hardest hit by the subprime crisis, climbed 32 percent after U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed removing troubled assets from the balance sheets of financial companies. Barclays Plc advanced 29 percent as the U.K.'s Financial Services Authority banned speculators from betting against financial shares until Jan. 16.
The Stoxx 600 rose the most since data for the index began in 1987, adding 8.3 percent to 278 at 4:37 p.m. in London, led by a rally in banks, insurers and basic resource companies. The FTSE 100 posted a record advance of 9.3 percent, while Russia's RTS Index jumped 22 percent after a two-day suspension and President Dmitry Medvedev's pledge of $20 billion to prop up the market.
``At the start of the week, equity investors weren't just facing a loss but an absolute loss,'' said Gary Dugan, London- based chief investment officer for Europe at Merrill Lynch Global Wealth Management, which oversees $2 trillion. ``Now what they are saying is every financial institution is virtually underwritten by this proposal to drop those assets into a life boat.''
Lehman, AIG
The Stoxx 600 still lost 0.9 percent this week after Lehman Brothers Holdings Inc. filed for bankruptcy, the U.S. government seized control of American International Group Inc. and Merrill Lynch & Co. was forced to sell itself to Bank of America Corp. More than $500 billion in credit losses and writedowns at banks have pushed the global economy toward a recession.
U.S. Treasuries and European government bonds fell today on speculation Paulson and Bernanke's plan will increase demand for stocks over bonds. The Treasury also announced a $50 billion program to insure the holdings of money-market mutual funds for a year.
The dollar rose the most in more than five months against the yen, while the cost of default protection on corporate bonds dropped by the most since the bailout of Bear Stearns Cos. in March.
National benchmark indexes climbed in all 18 western European markets. Germany's DAX jumped 5.6 percent while France's CAC 40 rose 9.3 percent, the most on record.
`Arms Around'
``This resolution will get its arms around the entire financial sector and allow them to no longer be an anchor on the rest of the economy,'' said Neil Dwane, chief investment officer for Europe at Allianz Global Investors' RCM unit, where he helps oversee $65 billion. ``For sentiment the worst could be over for financials.''
UBS added 32 percent to 21 francs. Deutsche Bank AG, Germany's largest bank, jumped 14 percent to 57.50 euros, while Credit Suisse Group, Switzerland's second-biggest bank, climbed 19 percent to 56 francs.
HBOS Plc gained 29 percent to 222.5 pence, trimming its weekly decline to 21 percent. Barclays rose 29 percent to 389 pence, leaving it with a 11 percent gain for the week. Lloyd's TSB Group Plc, the U.K.'s biggest provider of checking accounts, advanced 20 percent to 285.75 pence.
The U.K. Financial Services Authority said today its ban on short selling of financial shares will apply to 29 companies including HBOS and Barclays.
Irish Shorts
Ireland's financial regulator also banned short selling of the country's banking stocks to ``ensure the orderly conduct of the market,'' following the move by its U.K. counterpart. Bank of Ireland Plc gained 39 percent to 5.27 euros amid speculation Spain's Banco Santander SA may bid for the country's second biggest bank.
The Irish lender said today it has not received an approach or entered into discussions with Banco Santander or any other party.
Volkswagen AG was one of just 27 stocks in the Stoxx 600 to fall today. Europe's largest carmaker dropped 14 percent to 262 euros as investors decided recent gains were overdone following a 47 percent surge in the past three days.
Christian Aust, an analyst with Munich-based Unicredit, said the ``irrational levels'' that Volkswagen stock reached this week, amid a rally that included short-sellers unwinding positions in the wake of the bankruptcy of Lehman Brothers, couldn't be sustained
UBS AG, the European bank hardest hit by the subprime crisis, climbed 32 percent after U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed removing troubled assets from the balance sheets of financial companies. Barclays Plc advanced 29 percent as the U.K.'s Financial Services Authority banned speculators from betting against financial shares until Jan. 16.
The Stoxx 600 rose the most since data for the index began in 1987, adding 8.3 percent to 278 at 4:37 p.m. in London, led by a rally in banks, insurers and basic resource companies. The FTSE 100 posted a record advance of 9.3 percent, while Russia's RTS Index jumped 22 percent after a two-day suspension and President Dmitry Medvedev's pledge of $20 billion to prop up the market.
``At the start of the week, equity investors weren't just facing a loss but an absolute loss,'' said Gary Dugan, London- based chief investment officer for Europe at Merrill Lynch Global Wealth Management, which oversees $2 trillion. ``Now what they are saying is every financial institution is virtually underwritten by this proposal to drop those assets into a life boat.''
Lehman, AIG
The Stoxx 600 still lost 0.9 percent this week after Lehman Brothers Holdings Inc. filed for bankruptcy, the U.S. government seized control of American International Group Inc. and Merrill Lynch & Co. was forced to sell itself to Bank of America Corp. More than $500 billion in credit losses and writedowns at banks have pushed the global economy toward a recession.
U.S. Treasuries and European government bonds fell today on speculation Paulson and Bernanke's plan will increase demand for stocks over bonds. The Treasury also announced a $50 billion program to insure the holdings of money-market mutual funds for a year.
The dollar rose the most in more than five months against the yen, while the cost of default protection on corporate bonds dropped by the most since the bailout of Bear Stearns Cos. in March.
National benchmark indexes climbed in all 18 western European markets. Germany's DAX jumped 5.6 percent while France's CAC 40 rose 9.3 percent, the most on record.
`Arms Around'
``This resolution will get its arms around the entire financial sector and allow them to no longer be an anchor on the rest of the economy,'' said Neil Dwane, chief investment officer for Europe at Allianz Global Investors' RCM unit, where he helps oversee $65 billion. ``For sentiment the worst could be over for financials.''
UBS added 32 percent to 21 francs. Deutsche Bank AG, Germany's largest bank, jumped 14 percent to 57.50 euros, while Credit Suisse Group, Switzerland's second-biggest bank, climbed 19 percent to 56 francs.
HBOS Plc gained 29 percent to 222.5 pence, trimming its weekly decline to 21 percent. Barclays rose 29 percent to 389 pence, leaving it with a 11 percent gain for the week. Lloyd's TSB Group Plc, the U.K.'s biggest provider of checking accounts, advanced 20 percent to 285.75 pence.
The U.K. Financial Services Authority said today its ban on short selling of financial shares will apply to 29 companies including HBOS and Barclays.
Irish Shorts
Ireland's financial regulator also banned short selling of the country's banking stocks to ``ensure the orderly conduct of the market,'' following the move by its U.K. counterpart. Bank of Ireland Plc gained 39 percent to 5.27 euros amid speculation Spain's Banco Santander SA may bid for the country's second biggest bank.
The Irish lender said today it has not received an approach or entered into discussions with Banco Santander or any other party.
Volkswagen AG was one of just 27 stocks in the Stoxx 600 to fall today. Europe's largest carmaker dropped 14 percent to 262 euros as investors decided recent gains were overdone following a 47 percent surge in the past three days.
Christian Aust, an analyst with Munich-based Unicredit, said the ``irrational levels'' that Volkswagen stock reached this week, amid a rally that included short-sellers unwinding positions in the wake of the bankruptcy of Lehman Brothers, couldn't be sustained
Subscribe to:
Posts (Atom)
