By Stuart Kelly
Sept. 22 (Bloomberg) -- Australia's corporate regulator extended its ban on short selling to include so-called ``covered'' transactions, following similar moves by U.S. and U.K. regulators in an attempt to alleviate volatility in the stock market.
Traders won't be allowed to transact covered short sales, in which stock is borrowed for the purposes of betting on share price declines, from the start of trading today, the Australian Securities and Investments Commission said on its Web site yesterday. It abolished so-called ``naked'' short sales, in which traders never borrow the shares, last week.
The move comes after the U.S. Securities and Exchange Commission halted short selling of financial companies in a bid to stymie speculators seeking to benefit from the credit crisis that led to the collapse of Lehman Brothers Holdings Inc. and American International Group Inc.
``In the current climate and, in light of the actions taken by other regulators, we need a circuit breaker to assist in maintaining and restoring confidence,'' ASIC Chairman Tony D'Aloisio said in the statement. ``These measures are necessary to maintain fair and orderly markets. Because of the relatively small size and the structure of the Australian market, it is necessary to extend the prohibition to all stocks.''
Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.
ASIC and the Australian Securities Exchange on Sept. 19 abolished ``naked'' short selling, in which traders never borrow the shares, raising concerns that investors are flooding markets with sell orders to drive down prices.
The changes will be reviewed in 30 days, ASIC said yesterday.
Sunday, September 21, 2008
Friday, September 19, 2008
Paulson, Bernanke Expand U.S. Power to Rescue Markets (Update4)
By Rebecca Christie and John Brinsley
Sept. 19 (Bloomberg) -- The U.S. government moved to cleanse banks of troubled assets and halt an exodus of investors from money markets in the biggest expansion of federal power over the financial system since the Great Depression.
``We're talking hundreds of billions,'' Treasury Secretary Henry Paulson said in a press conference. ``This needs to be big enough to make a real difference and get to the heart of the problem.''
The Treasury is likely to run the program, which would involve auctions where the government buys devalued assets, said House Financial Services Committee Chairman Barney Frank. The plan, which will apply to U.S.-based financial institutions seeking to sell mortgage assets, is designed as a comprehensive approach after a series of individual rescues failed to stem the crisis.
Paulson and Fed Chairman Ben S. Bernanke's plans, which include the removal of illiquid mortgage securities from companies' balance sheets, sent stocks from the U.K. to China soaring. The dollar gained, while two-year Treasury notes tumbled, sending the yield up the most in 23 years.
The Treasury tapped all $50 billion in the country's Exchange Stabilization Fund to insure money-market mutual fund holdings, and the Federal Reserve expanded lending to commercial banks. The measures were aimed at credit markets teetering on the edge of collapse, as investors pulled a record $89.2 billion from money-market funds Sept. 17.
`Giant Step'
``This is taking a giant step toward a cure and a giant step toward creating some clarity in the market,'' said Alan Blinder, a professor at Princeton University and a former Fed vice chairman. ``This needs to be drafted very carefully. What's needed is something large and systemic.''
The effort is a recognition that Paulson and Bernanke's earlier efforts failed to revive financial and housing markets. The government took over American International Group Inc., Fannie Mae and Freddie Mac in the past 12 days, a period when Lehman Brothers Holdings Inc. filed for bankruptcy and Americans pulled a record $89 billion from money-market funds.
Congressional leaders who met with Paulson and Bernanke late yesterday in Washington said they aim to pass legislation soon. The initiative is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the 1930s.
Paulson and Bernanke told lawmakers late yesterday that the consequence of inaction would be ``disaster,'' Frank said in an interview with Bloomberg Television.
Short-Selling Ban
Securities and Exchange Commission Chairman Christopher Cox, who attended the gathering with lawmakers, said the SEC planned to consider more rules to guarantee market liquidity. Today, the SEC temporarily banned short-selling of financial companies' shares until Oct. 2 after Morgan Stanley fell 39 percent earlier this week. The U.K. took a similar step yesterday.
Stocks surged around the world after a three-day slide earlier this week wiped about $1.9 trillion in market value from the MSCI World Index. The U.K.'s benchmark FTSE 100 index rose almost 9 percent. The Standard & Poor's 500 Index climbed as much as 4.9 percent and Japan's Nikkei 225 Stock Average climbed 3.8 percent.
Two-year note yields climbed 44 basis points, or 0.44 percentage point, the most since February 1985, to 2.14 percent at 1:39 p.m. in New York, according to BGCantor Market Data. It had dropped to 1.36 percent yesterday.
Options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff. They spoke on condition of anonymity because the plans may change.
Previous Rescues
The likelihood of the government taking on yet more devalued assets, after the seizures of Fannie, Freddie and AIG and the earlier assumption by the Fed of $29 billion of Bear Stearns Cos. investments, may spur concern about its own balance sheet.
The Treasury has pledged to buy up to $200 billion of Fannie and Freddie stock to keep them solvent, while the Fed agreed Sept. 16 to an $85 billion bridge loan to AIG. The Treasury also plans to buy $5 billion of mortgage-backed debt this month under an emergency program.
``It sounds like there's going to be a giant dumpster for illiquid assets,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. ``It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative'' to the size of the American economy, he said.
Skepticism
Senator Richard Shelby of Alabama and some other Republicans have criticized the takeovers of AIG, Fannie and Freddie for imposing a potentially high cost on taxpayers.
``This could be the biggest bailout in the history of the country and could ultimately cost $500 billion to $1 trillion,'' Shelby, the top Republican on the Senate Banking Committee, said in a Bloomberg Television interview today. ``Congress is not going to rubber stamp something.''
Still, Representative John Boehner, the head of the Republicans in the House, told reporters after the meeting with Paulson and Bernanke that he was ``hopeful that in the coming days we'll have a proposal that will pass this Congress.''
Senator Charles Schumer of New York, a Democrat who chairs the congressional Joint Economic Committee, warned yesterday against leaving the Fed with an expanding role for addressing the credit crisis.
Liquidity Measures
``It's hard for them to do monetary policy, which is their primary task, and then run all these businesses,'' Schumer said yesterday in Washington.
The Treasury the past two days announced $200 billion in special bill sales to help the Fed expand its balance sheet. The U.S. central bank extended a record $59.8 billion in loans to investment banks and $33.4 billion to commercial banks as of Sept. 17. The Fed yesterday also joined its counterparts from around the world to pump $180 billion into global money markets.
An increasing number of lawmakers are advocating a stronger response to the crisis sparked by record homeowner defaults.
Schumer proposed an agency to inject capital into troubled financial companies in exchange for rewriting mortgages to make them more affordable. It would be modeled on the Great Depression-era Reconstruction Finance Corp., he said. Others have floated a type of Resolution Trust Corp., which was a 1990s fund to manage devalued assets from failed savings and loans.
Citigroup Inc., JPMorgan, Bank of America Corp., Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers alone had more than $500 billion of so-called Level 3 assets as of June 30, according to data in a Sept. 15 report from New York-based bond research firm CreditSights Inc. The holders of these assets say their values can only be determined through internal models because of illiquid markets.
Senator Christopher Dodd, who chairs the Senate Banking Committee, said it was a ``sober'' gathering. The plan would likely come from the Treasury and Fed this weekend and ``nothing is more important than this,'' Dodd said.
Sept. 19 (Bloomberg) -- The U.S. government moved to cleanse banks of troubled assets and halt an exodus of investors from money markets in the biggest expansion of federal power over the financial system since the Great Depression.
``We're talking hundreds of billions,'' Treasury Secretary Henry Paulson said in a press conference. ``This needs to be big enough to make a real difference and get to the heart of the problem.''
The Treasury is likely to run the program, which would involve auctions where the government buys devalued assets, said House Financial Services Committee Chairman Barney Frank. The plan, which will apply to U.S.-based financial institutions seeking to sell mortgage assets, is designed as a comprehensive approach after a series of individual rescues failed to stem the crisis.
Paulson and Fed Chairman Ben S. Bernanke's plans, which include the removal of illiquid mortgage securities from companies' balance sheets, sent stocks from the U.K. to China soaring. The dollar gained, while two-year Treasury notes tumbled, sending the yield up the most in 23 years.
The Treasury tapped all $50 billion in the country's Exchange Stabilization Fund to insure money-market mutual fund holdings, and the Federal Reserve expanded lending to commercial banks. The measures were aimed at credit markets teetering on the edge of collapse, as investors pulled a record $89.2 billion from money-market funds Sept. 17.
`Giant Step'
``This is taking a giant step toward a cure and a giant step toward creating some clarity in the market,'' said Alan Blinder, a professor at Princeton University and a former Fed vice chairman. ``This needs to be drafted very carefully. What's needed is something large and systemic.''
The effort is a recognition that Paulson and Bernanke's earlier efforts failed to revive financial and housing markets. The government took over American International Group Inc., Fannie Mae and Freddie Mac in the past 12 days, a period when Lehman Brothers Holdings Inc. filed for bankruptcy and Americans pulled a record $89 billion from money-market funds.
Congressional leaders who met with Paulson and Bernanke late yesterday in Washington said they aim to pass legislation soon. The initiative is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the 1930s.
Paulson and Bernanke told lawmakers late yesterday that the consequence of inaction would be ``disaster,'' Frank said in an interview with Bloomberg Television.
Short-Selling Ban
Securities and Exchange Commission Chairman Christopher Cox, who attended the gathering with lawmakers, said the SEC planned to consider more rules to guarantee market liquidity. Today, the SEC temporarily banned short-selling of financial companies' shares until Oct. 2 after Morgan Stanley fell 39 percent earlier this week. The U.K. took a similar step yesterday.
Stocks surged around the world after a three-day slide earlier this week wiped about $1.9 trillion in market value from the MSCI World Index. The U.K.'s benchmark FTSE 100 index rose almost 9 percent. The Standard & Poor's 500 Index climbed as much as 4.9 percent and Japan's Nikkei 225 Stock Average climbed 3.8 percent.
Two-year note yields climbed 44 basis points, or 0.44 percentage point, the most since February 1985, to 2.14 percent at 1:39 p.m. in New York, according to BGCantor Market Data. It had dropped to 1.36 percent yesterday.
Options that U.S. officials are considering include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff. They spoke on condition of anonymity because the plans may change.
Previous Rescues
The likelihood of the government taking on yet more devalued assets, after the seizures of Fannie, Freddie and AIG and the earlier assumption by the Fed of $29 billion of Bear Stearns Cos. investments, may spur concern about its own balance sheet.
The Treasury has pledged to buy up to $200 billion of Fannie and Freddie stock to keep them solvent, while the Fed agreed Sept. 16 to an $85 billion bridge loan to AIG. The Treasury also plans to buy $5 billion of mortgage-backed debt this month under an emergency program.
``It sounds like there's going to be a giant dumpster for illiquid assets,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets. ``It brings up the more troubling question of whether the U.S. government is big enough to take on this whole problem, relative'' to the size of the American economy, he said.
Skepticism
Senator Richard Shelby of Alabama and some other Republicans have criticized the takeovers of AIG, Fannie and Freddie for imposing a potentially high cost on taxpayers.
``This could be the biggest bailout in the history of the country and could ultimately cost $500 billion to $1 trillion,'' Shelby, the top Republican on the Senate Banking Committee, said in a Bloomberg Television interview today. ``Congress is not going to rubber stamp something.''
Still, Representative John Boehner, the head of the Republicans in the House, told reporters after the meeting with Paulson and Bernanke that he was ``hopeful that in the coming days we'll have a proposal that will pass this Congress.''
Senator Charles Schumer of New York, a Democrat who chairs the congressional Joint Economic Committee, warned yesterday against leaving the Fed with an expanding role for addressing the credit crisis.
Liquidity Measures
``It's hard for them to do monetary policy, which is their primary task, and then run all these businesses,'' Schumer said yesterday in Washington.
The Treasury the past two days announced $200 billion in special bill sales to help the Fed expand its balance sheet. The U.S. central bank extended a record $59.8 billion in loans to investment banks and $33.4 billion to commercial banks as of Sept. 17. The Fed yesterday also joined its counterparts from around the world to pump $180 billion into global money markets.
An increasing number of lawmakers are advocating a stronger response to the crisis sparked by record homeowner defaults.
Schumer proposed an agency to inject capital into troubled financial companies in exchange for rewriting mortgages to make them more affordable. It would be modeled on the Great Depression-era Reconstruction Finance Corp., he said. Others have floated a type of Resolution Trust Corp., which was a 1990s fund to manage devalued assets from failed savings and loans.
Citigroup Inc., JPMorgan, Bank of America Corp., Goldman Sachs Group Inc., Merrill Lynch & Co. and Lehman Brothers alone had more than $500 billion of so-called Level 3 assets as of June 30, according to data in a Sept. 15 report from New York-based bond research firm CreditSights Inc. The holders of these assets say their values can only be determined through internal models because of illiquid markets.
Senator Christopher Dodd, who chairs the Senate Banking Committee, said it was a ``sober'' gathering. The plan would likely come from the Treasury and Fed this weekend and ``nothing is more important than this,'' Dodd said.
Thursday, September 18, 2008
Paulson, Bernanke Consider Plan to Stem Deepening Credit Crisis
By Alison Vekshin
Sept. 18 (Bloomberg) -- Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are considering immediate steps to address the deepening credit crisis in advance of possible legislation that would inject new capital into troubled financial institutions.
Paulson and Bernanke will speak with congressional leaders this evening on current market conditions, Treasury spokeswoman Michele Davis said. Lawmakers warned this week the legislative calendar makes it difficult for Congress to act quickly enough to address a plunge in confidence in U.S. financial markets.
Democratic Senators Christopher Dodd and Charles Schumer have said the Federal Reserve, which is getting $200 billion in special funding from the Treasury this month, has the authority to take on a broader role.
``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' said Schumer, who today proposed an agency to pump capital into troubled banks. ``I've been talking to them about it,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today.
Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable.
Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would ``simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said.
Stronger Response
An increasing number of lawmakers are advocating a stronger response to the crisis sparked by record homeowner defaults. The turmoil swept Lehman Brothers Holdings Inc. into bankruptcy three days ago and prompted government takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.
The Fed's role expanded further when the central bank agreed on Sept. 14 to accept a broader range of collateral, including equity, in exchange for loans to investment banks. The central bank today said loans to securities firms soared to a record $59.8 billion yesterday.
At the Fed's request, the Treasury yesterday instituted a supplemental funding program for the central bank allowing it to expand its balance sheet. The Treasury has announced a total of $200 billion of bill auctions so far under the program.
``Right now, we're working with the tools we have,'' Paulson said in remarks at the White House Sept. 15. Treasury and regulatory officials are ``all working together and we're going to do what's necessary to protect this system with the tools we have,'' he said.
Congressional Calendar
Setting up an RTC-type of fund would require an act of Congress. House Majority Leader Steny Hoyer said Sept. 16 a proposal to have the U.S. create an agency to buy distressed debt won't be considered before Congress adjourns ahead of the Nov. 4 elections.
Fed spokeswoman Michelle Smith declined to comment.
Discussions with the Treasury and Fed focus on ``trying to do something more permanent'' after the series of government interventions, the New York senator said. For the Fed, ``it's hard for them to do monetary policy, which is their primary task, and then run all these businesses,'' he said.
Fed officials announced an $85 billion takeover of AIG two days ago, hours after leaving their benchmark interest rate unchanged in a decision that rebuffed some investors' calls for a cut.
``There is some preliminary discussions about how to sort of encapsulate and separate the two -- both to keep focus on monetary policy by the main Fed leaders, but also to prevent any conflicts of interest,'' Schumer said.
Ad Hoc Actions
Lawmakers are weighing responses to a crisis that prompted Paulson to seize Fannie and Freddie and caused the bankruptcy of Lehman Brothers Holdings Inc. in the past two weeks. The Fed's takeover of AIG followed its March agreement to take on $29 billion of Bear Stearns Cos. assets to secure the company's takeover by JPMorgan Chase & Co.
``The series of ad-hoc interventions in the market over the past 10 days were important to avoid a systemic disaster,'' Schumer said. ``But we cannot continue to act in such an uncoordinated and ad-hoc fashion.''
Under Schumer's RFC plan, ``the government would come first,'' he said. ``The government would get repaid before the others in the financial chain.''
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, this week proposed Congress create a federal entity to buy bad loans. Senator Hillary Clinton of New York, a former candidate for the Democratic nomination for president, proposed resurrecting a 1930s-era agency to stem foreclosures.
`Quarantining' Needed
``We need a modern day Home Owners' Loan Corporation,'' Clinton said in remarks at the Senate today. ``There will not be any semblance of a normal or orderly market'' without ``quarantining'' the devalued loans outstanding, she said.
The HOLC bought up outstanding mortgage and issued new, more affordable loans that helped people stay in their homes, Clinton said.
White House spokeswoman Dana Perino yesterday indicated the White House is open to options.
Senate Democrats huddled at the U.S. Capitol today with former Treasury Secretary Lawrence Summers, who urged Congress to consider legislation to provide a short-term stimulus to the economy, said North Dakota Democrat Kent Conrad, who attended the meeting.
Summers, a Harvard University economist who served as President Bill Clinton's last Treasury secretary, recommended such a stimulus because ``now there is a loss of confidence and there is a significant decline in borrowing and spending, therefore a reduction in demand,'' Conrad said.
Sept. 18 (Bloomberg) -- Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are considering immediate steps to address the deepening credit crisis in advance of possible legislation that would inject new capital into troubled financial institutions.
Paulson and Bernanke will speak with congressional leaders this evening on current market conditions, Treasury spokeswoman Michele Davis said. Lawmakers warned this week the legislative calendar makes it difficult for Congress to act quickly enough to address a plunge in confidence in U.S. financial markets.
Democratic Senators Christopher Dodd and Charles Schumer have said the Federal Reserve, which is getting $200 billion in special funding from the Treasury this month, has the authority to take on a broader role.
``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' said Schumer, who today proposed an agency to pump capital into troubled banks. ``I've been talking to them about it,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today.
Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable.
Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would ``simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said.
Stronger Response
An increasing number of lawmakers are advocating a stronger response to the crisis sparked by record homeowner defaults. The turmoil swept Lehman Brothers Holdings Inc. into bankruptcy three days ago and prompted government takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.
The Fed's role expanded further when the central bank agreed on Sept. 14 to accept a broader range of collateral, including equity, in exchange for loans to investment banks. The central bank today said loans to securities firms soared to a record $59.8 billion yesterday.
At the Fed's request, the Treasury yesterday instituted a supplemental funding program for the central bank allowing it to expand its balance sheet. The Treasury has announced a total of $200 billion of bill auctions so far under the program.
``Right now, we're working with the tools we have,'' Paulson said in remarks at the White House Sept. 15. Treasury and regulatory officials are ``all working together and we're going to do what's necessary to protect this system with the tools we have,'' he said.
Congressional Calendar
Setting up an RTC-type of fund would require an act of Congress. House Majority Leader Steny Hoyer said Sept. 16 a proposal to have the U.S. create an agency to buy distressed debt won't be considered before Congress adjourns ahead of the Nov. 4 elections.
Fed spokeswoman Michelle Smith declined to comment.
Discussions with the Treasury and Fed focus on ``trying to do something more permanent'' after the series of government interventions, the New York senator said. For the Fed, ``it's hard for them to do monetary policy, which is their primary task, and then run all these businesses,'' he said.
Fed officials announced an $85 billion takeover of AIG two days ago, hours after leaving their benchmark interest rate unchanged in a decision that rebuffed some investors' calls for a cut.
``There is some preliminary discussions about how to sort of encapsulate and separate the two -- both to keep focus on monetary policy by the main Fed leaders, but also to prevent any conflicts of interest,'' Schumer said.
Ad Hoc Actions
Lawmakers are weighing responses to a crisis that prompted Paulson to seize Fannie and Freddie and caused the bankruptcy of Lehman Brothers Holdings Inc. in the past two weeks. The Fed's takeover of AIG followed its March agreement to take on $29 billion of Bear Stearns Cos. assets to secure the company's takeover by JPMorgan Chase & Co.
``The series of ad-hoc interventions in the market over the past 10 days were important to avoid a systemic disaster,'' Schumer said. ``But we cannot continue to act in such an uncoordinated and ad-hoc fashion.''
Under Schumer's RFC plan, ``the government would come first,'' he said. ``The government would get repaid before the others in the financial chain.''
House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, this week proposed Congress create a federal entity to buy bad loans. Senator Hillary Clinton of New York, a former candidate for the Democratic nomination for president, proposed resurrecting a 1930s-era agency to stem foreclosures.
`Quarantining' Needed
``We need a modern day Home Owners' Loan Corporation,'' Clinton said in remarks at the Senate today. ``There will not be any semblance of a normal or orderly market'' without ``quarantining'' the devalued loans outstanding, she said.
The HOLC bought up outstanding mortgage and issued new, more affordable loans that helped people stay in their homes, Clinton said.
White House spokeswoman Dana Perino yesterday indicated the White House is open to options.
Senate Democrats huddled at the U.S. Capitol today with former Treasury Secretary Lawrence Summers, who urged Congress to consider legislation to provide a short-term stimulus to the economy, said North Dakota Democrat Kent Conrad, who attended the meeting.
Summers, a Harvard University economist who served as President Bill Clinton's last Treasury secretary, recommended such a stimulus because ``now there is a loss of confidence and there is a significant decline in borrowing and spending, therefore a reduction in demand,'' Conrad said.
Wednesday, September 17, 2008
Deutsche Bank Limits Credit Swaps Adding to Bank Risk (Update2)
By Jody Shenn
Sept. 17 (Bloomberg) -- Deutsche Bank AG is taking steps to slow credit-default swap trades that expose it to the risk of failure among Wall Street firms, according to three investors told of the policy.
Germany's largest bank is requiring risk managers to approve trades where the company takes over an investor's contract with another dealer, said the people, who declined to be identified because they do business with Deutsche Bank. Signing off on so- called novations can take an hour, deterring investors from the trades with the Frankfurt-based institution, they said.
Financial companies are seeking to limit exposure to competitors after Lehman Brothers Holdings Inc. went bankrupt and the government rescued American International Group Inc., sparking concern that other dealers may fail. Credit-default swaps on Goldman Sachs Group Inc. and Morgan Stanley surged to a record today, as their shares fell the most in at least a decade.
``Counterparties are being judicious in their actions at this point, given what's happened,'' said J.J. McKoan, who oversees about $65 billion as director of global credit at AllianceBernstein Holding LP in New York. ``Few are willing to take on new risk positions.''
Credit-default swaps are financial instruments that are used to speculate on a company's ability to repay debt. The agreements between so-called counterparties trade over-the-counter, leaving each side exposed to the risk that their partner will fail to pay its obligations. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
`Heightened Sensitivity'
If a holder is concerned about the dealer on the other end of the trade, he can find a second dealer to take over the contract, known as a novation. Ted Meyer, a spokesman in New York for Deutsche Bank, declined to comment.
Several financial companies have made similar changes since last week, said Thomas Priore, the chief executive officer of Institutional Credit Partners LLC, a New York-based fixed-income advisory and investment firm that manages $13 billion. He declined to name the other firms.
``There's heightened sensitivity around novations and that's pretty consistent across the Street,'' said Priore. ``There's so much fear about the systemic issues engulfing the market that you can't really blame your counterparts for dotting every `I' and crossing every `T'.''
The price of insuring against defaults by securities firms and banks jumped today as investors retreated from all but the safest government debt. Yields on three-month Treasury bills dropped as much as 67 basis points to 0.0203 percent, the lowest since World War II.
Costs Surge
Sellers of credit-default swaps on Morgan Stanley demanded as much as 21 percentage points upfront and 5 percentage points a year today to protect the company's bonds for five years, according to broker Phoenix Partners Group. That means it would cost $2.1 million initially and $500,000 a year to protect $10 million in bonds. Contracts on Goldman climbed as much as 265 basis points to 685 basis points.
Greater difficulty and costs in doing novations may be driving investors to try to hedge against counterparty defaults with swaps on securities firms and banks, helping push their debt protection costs wider, Brian Yelvington, a strategist at New York-based bond research firm CreditSights Inc., said.
``It probably is exacerbating the situation,'' Yelvington said in a telephone interview. ``It's kind of a house of cards, though: Who do you hedge with, with respect to counterparty exposure?''
Bigger Losses
At the beginning of 2007, before the losses on securities created from subprime mortgages contaminated financial markets, contracts on Goldman and Morgan Stanley traded below 20 basis points. The companies are based in New York. Goldman fell $18.51, or 14 percent, to $114.50 in New York Stock Exchange composite trading. Morgan Stanley dropped $6.95, or 24 percent, to $21.75.
``As we reported yesterday, Morgan Stanley has a strong capital and liquidity position, as evidenced by nearly $180 billion in liquidity,'' Morgan Stanley spokesman Mark Lake said. Michael DuVally, a spokesman for Goldman, declined to comment.
Money-market rates jumped this week as lending between banks seized up. The London interbank offered rate, or Libor, that banks charge each for three-month loans rose the most since 1999, to 3.06 percent, the British Bankers' Association said.
Hedge funds are assessing their exposure to banks after the collapse of New York-based Lehman, one of the 10 largest providers of credit-default swaps, ICP's Priore said.
``There's now been bigger losses in the fund community from the dealers than there has been among the dealers from the funds,'' said Doug Dachille, chief executive officer of First Principles Capital Management in New York, which oversees $7 billion in fixed-income investments.
Sept. 17 (Bloomberg) -- Deutsche Bank AG is taking steps to slow credit-default swap trades that expose it to the risk of failure among Wall Street firms, according to three investors told of the policy.
Germany's largest bank is requiring risk managers to approve trades where the company takes over an investor's contract with another dealer, said the people, who declined to be identified because they do business with Deutsche Bank. Signing off on so- called novations can take an hour, deterring investors from the trades with the Frankfurt-based institution, they said.
Financial companies are seeking to limit exposure to competitors after Lehman Brothers Holdings Inc. went bankrupt and the government rescued American International Group Inc., sparking concern that other dealers may fail. Credit-default swaps on Goldman Sachs Group Inc. and Morgan Stanley surged to a record today, as their shares fell the most in at least a decade.
``Counterparties are being judicious in their actions at this point, given what's happened,'' said J.J. McKoan, who oversees about $65 billion as director of global credit at AllianceBernstein Holding LP in New York. ``Few are willing to take on new risk positions.''
Credit-default swaps are financial instruments that are used to speculate on a company's ability to repay debt. The agreements between so-called counterparties trade over-the-counter, leaving each side exposed to the risk that their partner will fail to pay its obligations. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
`Heightened Sensitivity'
If a holder is concerned about the dealer on the other end of the trade, he can find a second dealer to take over the contract, known as a novation. Ted Meyer, a spokesman in New York for Deutsche Bank, declined to comment.
Several financial companies have made similar changes since last week, said Thomas Priore, the chief executive officer of Institutional Credit Partners LLC, a New York-based fixed-income advisory and investment firm that manages $13 billion. He declined to name the other firms.
``There's heightened sensitivity around novations and that's pretty consistent across the Street,'' said Priore. ``There's so much fear about the systemic issues engulfing the market that you can't really blame your counterparts for dotting every `I' and crossing every `T'.''
The price of insuring against defaults by securities firms and banks jumped today as investors retreated from all but the safest government debt. Yields on three-month Treasury bills dropped as much as 67 basis points to 0.0203 percent, the lowest since World War II.
Costs Surge
Sellers of credit-default swaps on Morgan Stanley demanded as much as 21 percentage points upfront and 5 percentage points a year today to protect the company's bonds for five years, according to broker Phoenix Partners Group. That means it would cost $2.1 million initially and $500,000 a year to protect $10 million in bonds. Contracts on Goldman climbed as much as 265 basis points to 685 basis points.
Greater difficulty and costs in doing novations may be driving investors to try to hedge against counterparty defaults with swaps on securities firms and banks, helping push their debt protection costs wider, Brian Yelvington, a strategist at New York-based bond research firm CreditSights Inc., said.
``It probably is exacerbating the situation,'' Yelvington said in a telephone interview. ``It's kind of a house of cards, though: Who do you hedge with, with respect to counterparty exposure?''
Bigger Losses
At the beginning of 2007, before the losses on securities created from subprime mortgages contaminated financial markets, contracts on Goldman and Morgan Stanley traded below 20 basis points. The companies are based in New York. Goldman fell $18.51, or 14 percent, to $114.50 in New York Stock Exchange composite trading. Morgan Stanley dropped $6.95, or 24 percent, to $21.75.
``As we reported yesterday, Morgan Stanley has a strong capital and liquidity position, as evidenced by nearly $180 billion in liquidity,'' Morgan Stanley spokesman Mark Lake said. Michael DuVally, a spokesman for Goldman, declined to comment.
Money-market rates jumped this week as lending between banks seized up. The London interbank offered rate, or Libor, that banks charge each for three-month loans rose the most since 1999, to 3.06 percent, the British Bankers' Association said.
Hedge funds are assessing their exposure to banks after the collapse of New York-based Lehman, one of the 10 largest providers of credit-default swaps, ICP's Priore said.
``There's now been bigger losses in the fund community from the dealers than there has been among the dealers from the funds,'' said Doug Dachille, chief executive officer of First Principles Capital Management in New York, which oversees $7 billion in fixed-income investments.
Monday, September 15, 2008
U.S. Stocks Drop, S&P 500 Sinks Most Since 2001 Terror Attacks
By Lynn Thomasson and Elizabeth Stanton
Sept. 15 (Bloomberg) -- U.S. stocks tumbled, pushing the Standard & Poor's 500 Index to the steepest drop since the September 2001 terrorist attacks, as Lehman Brothers Holdings Inc.'s bankruptcy and declining commodities increased speculation that credit-market losses and the economic slowdown will worsen.
Stocks erased more than $600 billion in value as financial shares in the S&P 500 decreased the most since at least 1989, according to data compiled by Bloomberg. American International Group Inc. sank 61 percent and Washington Mutual Inc. decreased 27 percent. Concern the U.S. is heading for a recession pushed oil lower, prompting a drop in energy stocks, and sent General Electric Co. down 8 percent.
``Fear is in charge,'' said Henry Herrmann, president and chief executive officer of Waddell & Reed Financial Inc. in Overland Park, Kansas, which manages $70 billion. ``This blows another hole in the banking system's ability to extend credit.''
The S&P 500 declined 59 points, or 4.7 percent, to 1,192.70, the lowest level since October 2005. The Dow Jones Industrial Average tumbled 504.48, or 4.4 percent, to 10,917.51. The MSCI World Index of developed-market equities slumped the most in six years while the 7.6 percent drop in Brazil's Bovespa was the steepest since Sept. 11, 2001. The dollar weakened the most against the yen in a decade and two-year Treasury notes surged.
More than 24 stocks slipped for each that rose on the New York Stock Exchange on concern financial shares will continue their slump. The S&P 500 has fallen 23 percent since an October record as bank losses from the first nationwide decline in U.S. home values since the Great Depression reached $514.6 billion.
`Remember Where You Were?'
``It really goes to the heart of the financial system,'' said Stephen Wood, who helps oversee $213 billion as senior portfolio strategist at Russell Investment Group in New York. ``It'll be one of those days where people say in 10 years, `Do you remember where you were?'''
The Dow average pared its decline by half at midday in New York after plunging more than 330 points in the first 30 minutes of trading. Losses accelerated at 2 p.m. when Treasury Secretary Henry Paulson said the U.S. wasn't considering a ``bridge loan'' to bail out AIG.
GE, which makes power-plant turbines and jet engines and offers commercial loans, retreated $2.15 to a five-year low of $24.60. The company may miss profit estimates because of credit- market turmoil, according to Citigroup Inc.
Caterpillar Inc., the world's largest maker of construction equipment, fell 3.4 percent to $63.21. AK Steel Holding Corp. slumped 19 percent to $31.82.
Loss Insurance
Investors paid up for protection from further losses. The Chicago Board Options Exchange Volatility Index jumped 24 percent to 31.70, the highest since the March bailout of Bear Stearns Cos. The VIX measures the cost of using options as insurance against declines in the S&P 500.
``We need to get to the bottom of the credit crisis before financials are the sort of place that we want to put a lot of money,'' said Bruce McCain, the Cleveland-based chief investment strategist at Key Private Bank, which oversees about $30 billion.
Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday and the company lost 94 percent of its market value this year. Lehman sank 94 percent to 21 cents.
Citigroup Inc., the largest U.S. bank by assets, declined 15 percent to $15.24 for the steepest drop since July 2002. Bank of America retreated 21 percent, the most since at least July 1982, to $26.55 after agreeing to purchase Lehman rival Merrill Lynch & Co. for $50 billion. American Express Co., the biggest U.S. credit card company by purchases, fell 8.9 percent to $35.48.
`Down The Drain'
``It's all basically going down the drain,'' said Franz Wenzel, who helps oversee about $830 billion as deputy director for investment strategy at Axa Investment Managers in Paris. ``The rhythm of the shoes that drop has accelerated. That's what we follow with caution.''
AIG lost $7.38 to $4.76, the lowest price since June 1988. The biggest U.S. insurer fell after failing to present a plan to raise capital and stave off credit downgrades. AIG may need to raise $20 billion in capital and sell $20 billion of assets to ease a cash crunch brought on by the collapse of U.S. mortgage markets, people familiar with insurer's plans said.
Goldman Sachs Group Inc. fell 12 percent, the most since April 2000, to $135.50. JPMorgan Chase & Co. retreated 10 percent to $37. Their shares were downgraded by Merrill Lynch.
Goldman Sachs was cut to ``neutral'' on the likelihood Lehman's bankruptcy will reduce profitability for the biggest U.S. securities firm. The analysts cut their recommendation on JPMorgan to ``underperform'' and predicted the lender will report a third-quarter loss.
Morgan Stanley, the biggest U.S. securities firm other than Goldman Sachs, fell 14 percent to $32.19.
Betting Against Financials
The Financial Select Sector SPDR Fund, an exchange-traded fund linked to financial companies, had 42.6 million shares on loan on Sept. 11, or 87 percent more than a week earlier, according to Alexander Hofmann, an analyst at Data Explorers in London. Shares on loan can be an indication of short positions.
Former Fed Chairman Alan Greenspan said the financial crisis that began with the collapse of the subprime-mortgage market last year ``is probably a once in a century event'' that will lead to the failure of more firms.
``There's no question that this is in the process of outstripping anything I've seen, and it is still not resolved,'' Greenspan said in an interview yesterday on ABC's ``This Week with George Stephanopoulos.'' Greenspan, 82, retired from the Fed in January 2006 after serving for 18 years as chairman.
Junk Status
Washington Mutual retreated 27 percent to $2, the lowest price since October 1990. The company may cost taxpayers as much as $24 billion in the event of a U.S. government bailout, said Richard Bove, an analyst at Ladenburg Thalmann & Co. After the close of exchanges, Standard & Poor's lowered the bank's credit rating to junk because of the deteriorating housing market.
``You may get an assisted merger with a limit on how much the private buyer would pay for the bank with the government giving a guarantee for the rest,'' Bove said in an interview with Bloomberg Radio.
Some investors said Lehman's failure may allow financial markets to rebound.
``The air will be clean within the next one month and we can get a fairly good rebound starting from the middle of October until the spring of next year,'' Gloom, Boom & Doom Report publisher Marc Faber said in a Bloomberg Television interview from Thailand.
Merrill climbed 0.1 percent to $17.06, almost fully erasing a 33 percent surge. Bank of America, the biggest U.S. consumer bank, agreed to buy the company in a stock transaction now valued at $22.82 a share as the credit crisis claimed another of America's oldest financial institutions.
Short-Sale Restrictions
The U.S. Securities and Exchange Commission will likely stiffen rules targeting manipulative short selling, a person familiar with the matter said.
The SEC may strengthen rules this week by requiring brokers to deliver shares that have been sold short, according to the person, who declined to be identified because the plans aren't complete. The SEC also will consider it securities fraud when short sellers deceive brokers about their intention to deliver shares to buyers, the person said.
The S&P 500 Energy Index lost 6.9 percent. Chevron Corp. fell 4.9 percent to $80.09, and Valero Energy Corp. decreased 13 percent to $31.19.
Crude oil plunged 5.4 percent to $95.71 a barrel in New York as refineries along the Gulf of Mexico escaped major damage from Hurricane Ike.
Rate-Cut Odds
Stocks pared their losses during the first 1 1/2 hours of trading, led by gains in consumer companies including Procter & Gamble Co. and McDonald's Corp., on speculation the Federal Reserve will reduce rates tomorrow. Traders in futures contracts gave 60 percent odds the Fed will shift its target for overnight loans between banks to 1.75 percent from 2 percent.
European and Asian stocks slumped on concern turmoil in the U.S. banking industry will infect financial institutions and economies abroad. The MSCI World Index lost 3.6 percent to 1,236.90, a three-year low, as of 4:33 p.m. in New York.
Europe's Dow Jones Stoxx 600 Index retreated 3.5 percent to 270.68 for the biggest decline since March 17. The MSCI Asia Pacific excluding Japan Index slipped 1.9 percent to 347.26, the lowest since October 2006. Markets in Japan, South Korea, Hong Kong and China were closed for holidays.
Sept. 15 (Bloomberg) -- U.S. stocks tumbled, pushing the Standard & Poor's 500 Index to the steepest drop since the September 2001 terrorist attacks, as Lehman Brothers Holdings Inc.'s bankruptcy and declining commodities increased speculation that credit-market losses and the economic slowdown will worsen.
Stocks erased more than $600 billion in value as financial shares in the S&P 500 decreased the most since at least 1989, according to data compiled by Bloomberg. American International Group Inc. sank 61 percent and Washington Mutual Inc. decreased 27 percent. Concern the U.S. is heading for a recession pushed oil lower, prompting a drop in energy stocks, and sent General Electric Co. down 8 percent.
``Fear is in charge,'' said Henry Herrmann, president and chief executive officer of Waddell & Reed Financial Inc. in Overland Park, Kansas, which manages $70 billion. ``This blows another hole in the banking system's ability to extend credit.''
The S&P 500 declined 59 points, or 4.7 percent, to 1,192.70, the lowest level since October 2005. The Dow Jones Industrial Average tumbled 504.48, or 4.4 percent, to 10,917.51. The MSCI World Index of developed-market equities slumped the most in six years while the 7.6 percent drop in Brazil's Bovespa was the steepest since Sept. 11, 2001. The dollar weakened the most against the yen in a decade and two-year Treasury notes surged.
More than 24 stocks slipped for each that rose on the New York Stock Exchange on concern financial shares will continue their slump. The S&P 500 has fallen 23 percent since an October record as bank losses from the first nationwide decline in U.S. home values since the Great Depression reached $514.6 billion.
`Remember Where You Were?'
``It really goes to the heart of the financial system,'' said Stephen Wood, who helps oversee $213 billion as senior portfolio strategist at Russell Investment Group in New York. ``It'll be one of those days where people say in 10 years, `Do you remember where you were?'''
The Dow average pared its decline by half at midday in New York after plunging more than 330 points in the first 30 minutes of trading. Losses accelerated at 2 p.m. when Treasury Secretary Henry Paulson said the U.S. wasn't considering a ``bridge loan'' to bail out AIG.
GE, which makes power-plant turbines and jet engines and offers commercial loans, retreated $2.15 to a five-year low of $24.60. The company may miss profit estimates because of credit- market turmoil, according to Citigroup Inc.
Caterpillar Inc., the world's largest maker of construction equipment, fell 3.4 percent to $63.21. AK Steel Holding Corp. slumped 19 percent to $31.82.
Loss Insurance
Investors paid up for protection from further losses. The Chicago Board Options Exchange Volatility Index jumped 24 percent to 31.70, the highest since the March bailout of Bear Stearns Cos. The VIX measures the cost of using options as insurance against declines in the S&P 500.
``We need to get to the bottom of the credit crisis before financials are the sort of place that we want to put a lot of money,'' said Bruce McCain, the Cleveland-based chief investment strategist at Key Private Bank, which oversees about $30 billion.
Lehman was forced into bankruptcy after Barclays Plc and Bank of America Corp. abandoned takeover talks yesterday and the company lost 94 percent of its market value this year. Lehman sank 94 percent to 21 cents.
Citigroup Inc., the largest U.S. bank by assets, declined 15 percent to $15.24 for the steepest drop since July 2002. Bank of America retreated 21 percent, the most since at least July 1982, to $26.55 after agreeing to purchase Lehman rival Merrill Lynch & Co. for $50 billion. American Express Co., the biggest U.S. credit card company by purchases, fell 8.9 percent to $35.48.
`Down The Drain'
``It's all basically going down the drain,'' said Franz Wenzel, who helps oversee about $830 billion as deputy director for investment strategy at Axa Investment Managers in Paris. ``The rhythm of the shoes that drop has accelerated. That's what we follow with caution.''
AIG lost $7.38 to $4.76, the lowest price since June 1988. The biggest U.S. insurer fell after failing to present a plan to raise capital and stave off credit downgrades. AIG may need to raise $20 billion in capital and sell $20 billion of assets to ease a cash crunch brought on by the collapse of U.S. mortgage markets, people familiar with insurer's plans said.
Goldman Sachs Group Inc. fell 12 percent, the most since April 2000, to $135.50. JPMorgan Chase & Co. retreated 10 percent to $37. Their shares were downgraded by Merrill Lynch.
Goldman Sachs was cut to ``neutral'' on the likelihood Lehman's bankruptcy will reduce profitability for the biggest U.S. securities firm. The analysts cut their recommendation on JPMorgan to ``underperform'' and predicted the lender will report a third-quarter loss.
Morgan Stanley, the biggest U.S. securities firm other than Goldman Sachs, fell 14 percent to $32.19.
Betting Against Financials
The Financial Select Sector SPDR Fund, an exchange-traded fund linked to financial companies, had 42.6 million shares on loan on Sept. 11, or 87 percent more than a week earlier, according to Alexander Hofmann, an analyst at Data Explorers in London. Shares on loan can be an indication of short positions.
Former Fed Chairman Alan Greenspan said the financial crisis that began with the collapse of the subprime-mortgage market last year ``is probably a once in a century event'' that will lead to the failure of more firms.
``There's no question that this is in the process of outstripping anything I've seen, and it is still not resolved,'' Greenspan said in an interview yesterday on ABC's ``This Week with George Stephanopoulos.'' Greenspan, 82, retired from the Fed in January 2006 after serving for 18 years as chairman.
Junk Status
Washington Mutual retreated 27 percent to $2, the lowest price since October 1990. The company may cost taxpayers as much as $24 billion in the event of a U.S. government bailout, said Richard Bove, an analyst at Ladenburg Thalmann & Co. After the close of exchanges, Standard & Poor's lowered the bank's credit rating to junk because of the deteriorating housing market.
``You may get an assisted merger with a limit on how much the private buyer would pay for the bank with the government giving a guarantee for the rest,'' Bove said in an interview with Bloomberg Radio.
Some investors said Lehman's failure may allow financial markets to rebound.
``The air will be clean within the next one month and we can get a fairly good rebound starting from the middle of October until the spring of next year,'' Gloom, Boom & Doom Report publisher Marc Faber said in a Bloomberg Television interview from Thailand.
Merrill climbed 0.1 percent to $17.06, almost fully erasing a 33 percent surge. Bank of America, the biggest U.S. consumer bank, agreed to buy the company in a stock transaction now valued at $22.82 a share as the credit crisis claimed another of America's oldest financial institutions.
Short-Sale Restrictions
The U.S. Securities and Exchange Commission will likely stiffen rules targeting manipulative short selling, a person familiar with the matter said.
The SEC may strengthen rules this week by requiring brokers to deliver shares that have been sold short, according to the person, who declined to be identified because the plans aren't complete. The SEC also will consider it securities fraud when short sellers deceive brokers about their intention to deliver shares to buyers, the person said.
The S&P 500 Energy Index lost 6.9 percent. Chevron Corp. fell 4.9 percent to $80.09, and Valero Energy Corp. decreased 13 percent to $31.19.
Crude oil plunged 5.4 percent to $95.71 a barrel in New York as refineries along the Gulf of Mexico escaped major damage from Hurricane Ike.
Rate-Cut Odds
Stocks pared their losses during the first 1 1/2 hours of trading, led by gains in consumer companies including Procter & Gamble Co. and McDonald's Corp., on speculation the Federal Reserve will reduce rates tomorrow. Traders in futures contracts gave 60 percent odds the Fed will shift its target for overnight loans between banks to 1.75 percent from 2 percent.
European and Asian stocks slumped on concern turmoil in the U.S. banking industry will infect financial institutions and economies abroad. The MSCI World Index lost 3.6 percent to 1,236.90, a three-year low, as of 4:33 p.m. in New York.
Europe's Dow Jones Stoxx 600 Index retreated 3.5 percent to 270.68 for the biggest decline since March 17. The MSCI Asia Pacific excluding Japan Index slipped 1.9 percent to 347.26, the lowest since October 2006. Markets in Japan, South Korea, Hong Kong and China were closed for holidays.
Dollar Trades Near 2-Month Low Versus Yen on Fed Rate Cut Bets
By Stanley White and Ye Xie
Sept. 16 (Bloomberg) -- The dollar traded near a two-month low against the yen on speculation the Federal Reserve will cut the target lending rate today after Lehman Brothers Holdings Inc. filed for bankruptcy.
Japan's yen and the Swiss franc may extend gains against major currencies as the Wall Street firm's collapse encourages investors to sell higher-yielding assets and pay back low-cost loans in Japan and Switzerland. The dollar rose against the Brazilian real and the Mexican peso yesterday as widening credit market losses prompted investors to seek the relative safety of U.S. Treasuries.
``Dollar selling is all but unavoidable,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``A rate cut is likely because the Fed needs to do something to stabilize the financial system. Risk aversion will also help the yen rise.''
The dollar traded at 104.35 yen at 7:56 a.m. in Tokyo from 104.66 yesterday. It earlier touched 104.19 yen, the lowest level since July 16. The dollar fell to $1.4268 per euro from $1.4243. The pound declined to $1.7970 from $1.8007. The dollar may weaken to 103.90 yen today, Soma forecast.
Japan's currency rose 0.2 to 148.76 per euro and 1.8 percent to 83.31 versus the Australian dollar as Lehman's bankruptcy prompted investors to reduce carry trades in which they borrow in countries with low borrowing costs and buy higher-yielding assets elsewhere.
Lehman's Bankruptcy
``Carry trades had a double-whammy as concern about financial firms fed into risk aversion and concern about global growth compounded the hit,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. ``It's a perfect storm.''
Lehman filed for the biggest bankruptcy filing in history after Bank of America Corp. and Barclays Plc pulled out of talks to buy the New York-based bank. Bank of America, the biggest U.S. consumer bank, instead agreed to acquire Merrill Lynch & Co. for about $50 billion, as the credit crisis claimed another of America's oldest financial companies.
``It's hard to imagine anything more cataclysmic than this,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``It will be hard to top that kind of news flow. The yen hasn't looked so good for quite a while.''
American International Group Inc., the largest U.S. insurer by assets, was given permission to access $20 billion of capital in its subsidiaries to free up liquidity, New York Governor David Paterson said yesterday.
Franc's Gains
The Swiss franc increased 1.3 percent to 1.5869 per euro yesterday and 2 percent to 1.1079 per dollar, the biggest gain since June 6. Japan's 0.5 percent target lending rate and Switzerland's 2.75 percent benchmark compare with 4.25 percent in Europe and 12 percent in South Africa.
Futures on the Chicago Board of Trade showed yesterday a 74 percent chance the central bank will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point today, compared with no chance a week ago.
Policy markers are scheduled to announce their decision at 2:15 p.m. in Washington. One hundred of 105 economists surveyed by Bloomberg News expected the Fed to keep the rate on hold, while the rest forecast a cut.
Implied volatility on one-month euro-dollar options surged to 14.34 percent yesterday, the highest level since the aftermath of the Sept. 11, 2001, terrorists attacks, indicating traders see more price fluctuation in the next month.
Dollar's Gains
The dollar rose 1.9 percent to 1.8149 Brazilian real yesterday and 1.4 percent to 10.7437 Mexican pesos as U.S. investors repatriated capital and bought Treasuries.
``The vicious cycle of the credit crunch causing a slowdown in the U.S. economy will continue,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third- biggest lender. ``For the dollar, there will be a flight to quality into Treasuries.''
A rally in Treasuries pushed the yield on the two-year note down 0.42 percentage point to 1.78 percent yesterday, the most since the Sept. 11 attacks. It was the first time the yield fell below 2 percent since April. The 10-year note's yield dropped 0.20 percentage point to 3.52 percent.
The yield advantage of the benchmark 10-year note over comparable-maturity Japanese government securities decreased to 1.90 percentage points yesterday, the narrowest since 1993, making the U.S. securities less attractive.
Stocks tumbled yesterday, with the Standard & Poor's 500 Index dropping 4.7 percent. The Dow Jones Stoxx 600 Index retreated 3.5 percent.
The dollar has gained about 12 percent since touching an all-time low of $1.6038 per euro on July 15 as the European economy slowed and crude oil dropped 35 percent from its peak of $147.27 a barrel.
`` The appetite for the U.S. dollar has not reversed,'' said Jack Spitz, a managing director of foreign exchange at National Bank of Canada in Toronto. ``Risk reduction provides support.''
Sept. 16 (Bloomberg) -- The dollar traded near a two-month low against the yen on speculation the Federal Reserve will cut the target lending rate today after Lehman Brothers Holdings Inc. filed for bankruptcy.
Japan's yen and the Swiss franc may extend gains against major currencies as the Wall Street firm's collapse encourages investors to sell higher-yielding assets and pay back low-cost loans in Japan and Switzerland. The dollar rose against the Brazilian real and the Mexican peso yesterday as widening credit market losses prompted investors to seek the relative safety of U.S. Treasuries.
``Dollar selling is all but unavoidable,'' said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. ``A rate cut is likely because the Fed needs to do something to stabilize the financial system. Risk aversion will also help the yen rise.''
The dollar traded at 104.35 yen at 7:56 a.m. in Tokyo from 104.66 yesterday. It earlier touched 104.19 yen, the lowest level since July 16. The dollar fell to $1.4268 per euro from $1.4243. The pound declined to $1.7970 from $1.8007. The dollar may weaken to 103.90 yen today, Soma forecast.
Japan's currency rose 0.2 to 148.76 per euro and 1.8 percent to 83.31 versus the Australian dollar as Lehman's bankruptcy prompted investors to reduce carry trades in which they borrow in countries with low borrowing costs and buy higher-yielding assets elsewhere.
Lehman's Bankruptcy
``Carry trades had a double-whammy as concern about financial firms fed into risk aversion and concern about global growth compounded the hit,'' said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. ``It's a perfect storm.''
Lehman filed for the biggest bankruptcy filing in history after Bank of America Corp. and Barclays Plc pulled out of talks to buy the New York-based bank. Bank of America, the biggest U.S. consumer bank, instead agreed to acquire Merrill Lynch & Co. for about $50 billion, as the credit crisis claimed another of America's oldest financial companies.
``It's hard to imagine anything more cataclysmic than this,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``It will be hard to top that kind of news flow. The yen hasn't looked so good for quite a while.''
American International Group Inc., the largest U.S. insurer by assets, was given permission to access $20 billion of capital in its subsidiaries to free up liquidity, New York Governor David Paterson said yesterday.
Franc's Gains
The Swiss franc increased 1.3 percent to 1.5869 per euro yesterday and 2 percent to 1.1079 per dollar, the biggest gain since June 6. Japan's 0.5 percent target lending rate and Switzerland's 2.75 percent benchmark compare with 4.25 percent in Europe and 12 percent in South Africa.
Futures on the Chicago Board of Trade showed yesterday a 74 percent chance the central bank will lower its 2 percent target rate for overnight lending between banks by a quarter-percentage point today, compared with no chance a week ago.
Policy markers are scheduled to announce their decision at 2:15 p.m. in Washington. One hundred of 105 economists surveyed by Bloomberg News expected the Fed to keep the rate on hold, while the rest forecast a cut.
Implied volatility on one-month euro-dollar options surged to 14.34 percent yesterday, the highest level since the aftermath of the Sept. 11, 2001, terrorists attacks, indicating traders see more price fluctuation in the next month.
Dollar's Gains
The dollar rose 1.9 percent to 1.8149 Brazilian real yesterday and 1.4 percent to 10.7437 Mexican pesos as U.S. investors repatriated capital and bought Treasuries.
``The vicious cycle of the credit crunch causing a slowdown in the U.S. economy will continue,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third- biggest lender. ``For the dollar, there will be a flight to quality into Treasuries.''
A rally in Treasuries pushed the yield on the two-year note down 0.42 percentage point to 1.78 percent yesterday, the most since the Sept. 11 attacks. It was the first time the yield fell below 2 percent since April. The 10-year note's yield dropped 0.20 percentage point to 3.52 percent.
The yield advantage of the benchmark 10-year note over comparable-maturity Japanese government securities decreased to 1.90 percentage points yesterday, the narrowest since 1993, making the U.S. securities less attractive.
Stocks tumbled yesterday, with the Standard & Poor's 500 Index dropping 4.7 percent. The Dow Jones Stoxx 600 Index retreated 3.5 percent.
The dollar has gained about 12 percent since touching an all-time low of $1.6038 per euro on July 15 as the European economy slowed and crude oil dropped 35 percent from its peak of $147.27 a barrel.
`` The appetite for the U.S. dollar has not reversed,'' said Jack Spitz, a managing director of foreign exchange at National Bank of Canada in Toronto. ``Risk reduction provides support.''
Sunday, September 14, 2008
Bernanke May Be Wrong: Next Rate Move Might Be Down (Update1)
By Rich Miller
Sept. 12 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke and his fellow policy makers agreed at their August meeting that their next move on interest rates would probably be up. They may turn out to be wrong.
Inflation looks likely to ebb, thanks to falling commodity prices and contained labor costs. The U.S. economy, meanwhile, may be set to take another lurch down as consumer spending gives way and the credit crunch intensifies with the plunge in Lehman Brothers Holdings Inc.'s shares.
``If the consumer balance sheet starts to unwind quickly, you'd get another disinflationary force and then the Fed would be brought back into play with lower rates,'' says Mohammed El- Erian, co-chief executive officer of Pacific Investment Management Co. in Newport Beach, California.
Bernanke and his colleagues are likely to hold their benchmark rate at 2 percent when they meet Sept. 16 and may keep it there until 2009, trading in federal funds futures indicates. Still, the odds of a rate cut by year-end have been growing. Futures trading shows more than a 40 percent chance of a December reduction, up from zero odds at the beginning of September.
Traders increased their bets after government figures today showed sales at U.S. retailers unexpectedly dropped in August and a bigger-than-forecast decline in wholesale prices signaled inflationary pressures may ease.
San Francisco Fed President Janet Yellen left open the possibility of a rate cut in comments to reporters after a Sept. 4 speech in Salt Lake City. ``There is some chance'' of easing credit ``if things start going seriously wrong,'' she said.
Policy Decision
She made clear, though, that she agreed with her fellow policy makers, who ``generally anticipated that the next policy move would be a tightening,'' according to the minutes of the Fed's last meeting on Aug. 5.
If the Fed instead ends up lowering borrowing costs, it wouldn't be the first time Bernanke and his colleagues have been forced to shift their stance from fighting inflation to supporting growth. When the credit crisis first struck in August 2007, the Fed cut its discount rate on loans to banks just 10 days after declaring that inflation was its overriding concern.
Investors have remained on edge since then, even after the Fed-assisted takeover of Bear Stearns Cos. in March and the rescue of Fannie Mae and Freddie Mac this month. Shares in Lehman Brothers dropped more than 70 percent this week as the firm reported a record $3.9 billion loss for the third quarter and concern mounted about its capital levels.
`Feedback Loop'
The big risk is what some at the Fed have called an ``adverse feedback loop'' as the credit crisis and the weak economy aggravate each other. Now, officials also fear that another spiral could take hold as the U.S. housing collapse and credit crunch weaken economies overseas, in turn curbing U.S. exports.
``The balance of risks in the American economy is now towards contraction and a vicious cycle in which declining economic performance exacerbates financial strains, which feeds back to hurt the economy,'' Harvard University professor and former Treasury Secretary Lawrence Summers said in congressional testimony Sept. 9.
Jan Hatzius, chief U.S. economist at Goldman, Sachs & Co. in New York, reckons that the credit squeeze will bring the economy to a halt in the fourth quarter of this year and the first quarter of next, after growth of 2 percent this quarter.
``The headwinds pushing against the economy look to be a good bit stronger than those experienced in the early 1990s,'' when the country last faced a credit crunch, Boston Fed President Eric Rosengren said in a speech Sept. 3.
`Tapping the Brakes'
Wachovia Corp. of Charlotte, North Carolina, the fourth- largest U.S. bank, is ``tapping the brakes'' on lending as credit losses mount, Chief Executive Officer Robert Steel told investors Sept. 9.
Debt-laden consumers appear particularly vulnerable as house prices continue to fall and unemployment rises. Credit- card payments 30 or more days overdue rose to 4.7 percent of total card debt in the second quarter, the highest level in 4 1/2 years, according to the Federal Deposit Insurance Corp.
The Fed reported in its latest regional economic survey, released Sept. 3, that consumer spending was slow in most of the country, ``with purchasing concentrated on necessary items.'' Nondiscretionary outlays -- including rent, taxes, food and fuel -- accounted for a record 57.8 percent of expenditures in July, up from 56.3 percent a year earlier.
Even some well-off consumers are feeling the pinch. Cie. Financiere Richemont SA, the Geneva-based maker of Cartier necklaces and Piaget watches, said Sept. 10 that the lower and middle range of the luxury-goods market in the U.S. is facing ``difficult'' market conditions.
Threat to Exports
The spread of the weakness abroad is threatening to undercut one of the U.S. economy's few strengths: exports, which accounted for virtually all of the growth in second-quarter gross domestic product. On Sept. 10, the Japanese government said the world's second-largest economy is ``deteriorating,'' and the European Commission forecast a recession for Germany.
``Not only is the U.S. in a recession, but the rest of the world is slowing down,'' Ford Motor Co. Chief Executive Officer Alan Mulally said in a Sept. 8 speech. ``I've never seen anything quite like it.''
The global slowdown does have one silver lining: It's sapping demand for everything from oil to soybeans, dragging down their prices and taking the edge off inflation. The Reuters/Jefferies CRB Index of 19 raw materials has tumbled 25 percent since hitting a record in July. Crude-oil prices dropped close to $100 a barrel this week from a high of $147.27 just two months ago.
`Very Hopeful'
``I am very hopeful that inflation will come down quite substantially,'' Yellen said in a Sept. 5 speech, pointing in particular to the drop in commodity prices.
Consumers' troubles will also help to temper inflation -- which ran at a year-over-year rate of 5.6 percent in July, the fastest pace in 17 years -- by making it tougher for companies to raise prices. Some may even be forced into reducing them.
Medford, Oregon-based Harry & David Holdings Inc., which markets gift baskets and other products, said Sept. 7 that it is cutting shipping charges to its customers by as much as one- third from last year as it prepares for what analysts expect will be a tough holiday-selling season.
``With the risk of inflation steadily disappearing and the economic risk rising, the Fed will cut rates,'' says Ethan Harris, chief U.S. economist at Lehman Brothers in New York.
Sept. 12 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke and his fellow policy makers agreed at their August meeting that their next move on interest rates would probably be up. They may turn out to be wrong.
Inflation looks likely to ebb, thanks to falling commodity prices and contained labor costs. The U.S. economy, meanwhile, may be set to take another lurch down as consumer spending gives way and the credit crunch intensifies with the plunge in Lehman Brothers Holdings Inc.'s shares.
``If the consumer balance sheet starts to unwind quickly, you'd get another disinflationary force and then the Fed would be brought back into play with lower rates,'' says Mohammed El- Erian, co-chief executive officer of Pacific Investment Management Co. in Newport Beach, California.
Bernanke and his colleagues are likely to hold their benchmark rate at 2 percent when they meet Sept. 16 and may keep it there until 2009, trading in federal funds futures indicates. Still, the odds of a rate cut by year-end have been growing. Futures trading shows more than a 40 percent chance of a December reduction, up from zero odds at the beginning of September.
Traders increased their bets after government figures today showed sales at U.S. retailers unexpectedly dropped in August and a bigger-than-forecast decline in wholesale prices signaled inflationary pressures may ease.
San Francisco Fed President Janet Yellen left open the possibility of a rate cut in comments to reporters after a Sept. 4 speech in Salt Lake City. ``There is some chance'' of easing credit ``if things start going seriously wrong,'' she said.
Policy Decision
She made clear, though, that she agreed with her fellow policy makers, who ``generally anticipated that the next policy move would be a tightening,'' according to the minutes of the Fed's last meeting on Aug. 5.
If the Fed instead ends up lowering borrowing costs, it wouldn't be the first time Bernanke and his colleagues have been forced to shift their stance from fighting inflation to supporting growth. When the credit crisis first struck in August 2007, the Fed cut its discount rate on loans to banks just 10 days after declaring that inflation was its overriding concern.
Investors have remained on edge since then, even after the Fed-assisted takeover of Bear Stearns Cos. in March and the rescue of Fannie Mae and Freddie Mac this month. Shares in Lehman Brothers dropped more than 70 percent this week as the firm reported a record $3.9 billion loss for the third quarter and concern mounted about its capital levels.
`Feedback Loop'
The big risk is what some at the Fed have called an ``adverse feedback loop'' as the credit crisis and the weak economy aggravate each other. Now, officials also fear that another spiral could take hold as the U.S. housing collapse and credit crunch weaken economies overseas, in turn curbing U.S. exports.
``The balance of risks in the American economy is now towards contraction and a vicious cycle in which declining economic performance exacerbates financial strains, which feeds back to hurt the economy,'' Harvard University professor and former Treasury Secretary Lawrence Summers said in congressional testimony Sept. 9.
Jan Hatzius, chief U.S. economist at Goldman, Sachs & Co. in New York, reckons that the credit squeeze will bring the economy to a halt in the fourth quarter of this year and the first quarter of next, after growth of 2 percent this quarter.
``The headwinds pushing against the economy look to be a good bit stronger than those experienced in the early 1990s,'' when the country last faced a credit crunch, Boston Fed President Eric Rosengren said in a speech Sept. 3.
`Tapping the Brakes'
Wachovia Corp. of Charlotte, North Carolina, the fourth- largest U.S. bank, is ``tapping the brakes'' on lending as credit losses mount, Chief Executive Officer Robert Steel told investors Sept. 9.
Debt-laden consumers appear particularly vulnerable as house prices continue to fall and unemployment rises. Credit- card payments 30 or more days overdue rose to 4.7 percent of total card debt in the second quarter, the highest level in 4 1/2 years, according to the Federal Deposit Insurance Corp.
The Fed reported in its latest regional economic survey, released Sept. 3, that consumer spending was slow in most of the country, ``with purchasing concentrated on necessary items.'' Nondiscretionary outlays -- including rent, taxes, food and fuel -- accounted for a record 57.8 percent of expenditures in July, up from 56.3 percent a year earlier.
Even some well-off consumers are feeling the pinch. Cie. Financiere Richemont SA, the Geneva-based maker of Cartier necklaces and Piaget watches, said Sept. 10 that the lower and middle range of the luxury-goods market in the U.S. is facing ``difficult'' market conditions.
Threat to Exports
The spread of the weakness abroad is threatening to undercut one of the U.S. economy's few strengths: exports, which accounted for virtually all of the growth in second-quarter gross domestic product. On Sept. 10, the Japanese government said the world's second-largest economy is ``deteriorating,'' and the European Commission forecast a recession for Germany.
``Not only is the U.S. in a recession, but the rest of the world is slowing down,'' Ford Motor Co. Chief Executive Officer Alan Mulally said in a Sept. 8 speech. ``I've never seen anything quite like it.''
The global slowdown does have one silver lining: It's sapping demand for everything from oil to soybeans, dragging down their prices and taking the edge off inflation. The Reuters/Jefferies CRB Index of 19 raw materials has tumbled 25 percent since hitting a record in July. Crude-oil prices dropped close to $100 a barrel this week from a high of $147.27 just two months ago.
`Very Hopeful'
``I am very hopeful that inflation will come down quite substantially,'' Yellen said in a Sept. 5 speech, pointing in particular to the drop in commodity prices.
Consumers' troubles will also help to temper inflation -- which ran at a year-over-year rate of 5.6 percent in July, the fastest pace in 17 years -- by making it tougher for companies to raise prices. Some may even be forced into reducing them.
Medford, Oregon-based Harry & David Holdings Inc., which markets gift baskets and other products, said Sept. 7 that it is cutting shipping charges to its customers by as much as one- third from last year as it prepares for what analysts expect will be a tough holiday-selling season.
``With the risk of inflation steadily disappearing and the economic risk rising, the Fed will cut rates,'' says Ethan Harris, chief U.S. economist at Lehman Brothers in New York.
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