Archive for May, 2009

Fed mulled increasing debt purchases in April (Reuters)

Wednesday, May 20th, 2009 | Finance News

WASHINGTON (Reuters) –
The Federal Reserve said on Wednesday it saw modest improvements in the U.S. economy last month, but it still saw big risks and left open the possibility of increasing its purchases of mortgage-related and government debt to keep credit flowing and spur recovery.

Despite a pickup in household and business confidence that Fed officials saw helping to steady spending when they met in late April, they viewed the evidence as too tentative to erase risks facing the recession-mired economy.

The policy-makers cut their forecasts for economic growth over the next three years and debated whether they should further ramp up planned purchases of mortgage agency and government securities, minutes of their April 28-29 meeting said.

The Fed in recent months has turned to asset purchases as a means to keep credit flowing since running out of scope to further lower benchmark interest rates after bringing them down to close to zero percent last year.

"Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery," the minutes of the Federal Open Market Committee's meeting said.

"All members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train before deciding whether to adjust the size or timing of asset purchases," they added.

In fresh quarterly forecasts, the Fed projected the U.S. economy would contract by between 1.3 percent and 2.0 percent this year, with the unemployment rate rising to between 9.2 percent and 9.6 percent.

In January, the Fed had forecast a milder contraction of between 0.5 percent and 1.3 percent, with the jobless rate rising to between 8.5 percent and 8.8 percent.

U.S. stocks fell on the gloomier economic forecast, while debt prices rallied on the prospect the Fed could boost its securities purchases.

"The tone of the minutes is a little more optimistic, and the forecasts are a little more pessimistic," said Christopher Low, chief economist for FTN Financial in New York.

The minutes showed the Fed staff last month had offered a sunnier forecast than the policy-makers, with the staff revising up their outlook for economic activity. They anticipated that growth would expand at a rate well above its potential in 2011 and that the unemployment rate would decline significantly.

"Key factors expected to drive the acceleration in economic activity were the boost to spending from fiscal stimulus, the bottoming out of the housing market, a turn in the inventory cycle from liquidation to modest accumulation, and ongoing gradual recovery of financial markets," the minutes said.

DEFLATION RISKS SUBDUED

At its April meeting, the Fed held its target for its benchmark federal funds interest rate unchanged at close to zero, the level reached in December, and took no other actions to boost the amount of money in the economy.

A month earlier, it had shocked financial markets by expanding purchases of mortgage agency securities and debt by $850 billion and pledging to buy $300 billion of longer-term Treasury securities over the next six months, the first time since the 1960s it has bought Treasuries.

The minutes said inflation looked to remain subdued, and many officials at the meeting also felt the danger had diminished that the United States would suffer a Japan-style deflation of widespread and lasting price declines.

"The combination of green shoots in the economy, some easing of financial market conditions, and less deflation risk or even some inflation risks, apparently reassured the (policy) committee that the economy is on the right track," UniCredit Markets & Investment Banking economist Harm Bandholz wrote in a note to clients.

(Editing by Leslie Adler)

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Obama signs mortgage bill into law (AP)

Wednesday, May 20th, 2009 | Finance News

WASHINGTON – President Barack Obama said homeowners facing foreclosure would have a second chance under a measure he signed into law on Wednesday, but he added consumers still must live within their means.

The law encourages banks to spare homeowners from foreclosure and cracks down on lenders who take advantage of them. The bill passed Congress earlier this week and Obama bypassed a promised five-day waiting period to make it law.

"There are Americans desperate to find a job or unable to make ends meet, despite work in multiple jobs, Americans who pay their bills on time but can't keep their heads above water," Obama said in the White House's East Room.

"Americans living in fear that they're one illness or one accident away from losing their home, hardworking Americans who did all the right things, met all of their responsibilities, yet still find the American dream slipping out of reach."

The law — officially called the Helping Families Save Their Homes Act — expands an existing $300 billion program that encourages lenders to adjust a mortgage if the homeowner agrees to pay an insurance premium. The program, set to expire in 2011, would swap out a homeowner's high-interest rate for a 30-year fixed loan backed by the Federal Housing Administration.

Because of strict eligibility requirements, only about 50 homeowners are refinancing through the program compared to the 400,000 people it was estimated to help.

"Too many administrative and technical hurdles made it very difficult to navigate, and most borrowers didn't even bother to try," Obama said. "And this bill removes those hurdles, getting folks into sustainable and affordable mortgages and, more importantly, keeping them in their homes."

The lending industry helped scuttle a tougher measure that would have forced lenders to reduce the monthly payments of owners in bankruptcy.

Obama also blamed greed among lenders and irresponsibility among borrowers for part of the financial crisis that has led to 1.3 million jobs lost since February.

"Now, much of what caused this crisis was an era of recklessness, where short-term gains were too often prized over long-term prosperity," Obama said. "And too often in our nation's capital, we said the right words, we patted ourselves on the back, but ultimately failed to do what we were actually sent here to do — and that is to stand up to the special interests and stand up for the American people."

The bill also extends through 2013 an increase in deposit insurance by the FDIC from $100,000 to $250,000.

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Obama’s financial watchdog plan faces big hurdles (AP)

Wednesday, May 20th, 2009 | Finance News

WASHINGTON – The head of the Securities and Exchange Commission is objecting to a plan being weighed by the Obama administration to create a new financial watchdog for consumers that would assume oversight of mutual funds.

The SEC chief's split with the administration shows how hard it may be for a broad overhaul of financial rules to overcome turf wars among various regulators and for a consensus to be reached on Capitol Hill.

SEC Chairman Mary Schapiro on Wednesday said she opposed the plan discussed Tuesday night by Treasury Secretary Timothy Geithner and other administration officials that would chip away at the SEC's own powers. She said giving any new entity authority over mutual funds would lessen the government's protection of investors — her agency's core mission.

"I would question pretty profoundly any model that would try to move investor protection functions out of the Securities and Exchange Commission," Schapiro told reporters at the agency's headquarters. "Investor protection is woven through everything that happens in this organization."

Many of the SEC's responsibilities — such as companies' financial disclosures, shareholder rights, stock trading, brokerage firm practices and mutual funds — involve investor protection, Schapiro said.

"So it's not a discrete thing that gets moved away without really damaging the fabric of the entire investor protection regime," she said.

The plan the administration is weighing would centralize the enforcement of laws that protect consumers of financial products, such as credit cards, mortgages and mutual funds. That mission is now spread across a patchwork of federal and state agencies, including the SEC, Federal Reserve and Federal Trade Commission.

Any changes to the nation's financial oversight would require congressional action. And it's unclear whether lawmakers will unite behind a single approach this year.

Rep. Barney Frank, D-Mass., who heads the House Financial Services Committee, favors in principle changes that would bolster consumer protection, but in this case "there's no proposal right now to endorse," said his spokesman, Steve Adamske.

Adamske declined to comment on the issue raised by Schapiro concerning mutual funds.

Schapiro's comments marked her first sharp public breach with the administration over an overhaul of rules designed to prevent another financial crisis. Schapiro in recent weeks has told Congress, which is debating the changes, that she thinks the SEC must play a key role as an independent watchdog protecting investors in any new regulatory system.

Schapiro also has said she favors an idea floated by Sheila Bair, head of the Federal Deposit Insurance Corp., for a new "systemic risk council" to monitor large institutions against financial threats. This council would include the Treasury Department, Federal Reserve, FDIC and SEC.

By contrast, the White House leans toward recommending that the Fed alone become a new supercop for "too-big-to-fail" financial companies that could set off another meltdown.

Schapiro says she's concerned about an "excessive concentration of power" over financial risk in any single agency.

Lawmakers are divided. The Fed has been widely criticized in Congress for failing to constrain aggressive mortgage lending that fueled the economic crisis. As a result, some have questioned whether the Fed should be entrusted with the responsibility of policing big financial institutions.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, recently said he is "more attracted to the council idea" than having a single regulator play that role. But other key lawmakers, including Frank, lean toward giving the responsibility to the central bank.

Dodd couldn't immediately be reached for comment Wednesday on the new consumer regulator proposal.

Officials said the administration has been exploring the new approach on a financial watchdog for consumers in meetings over the past few days with executives of the financial industry. Some industry groups already have expressed opposition to the plan. It was discussed at a dinner Tuesday at the Treasury Department attended by Geithner and Lawrence Summers, director of President Barack Obama's National Economic Council.

"I find it surprising that this is what the administration wants," said Chester Spatt, a former chief economist of the SEC. "If one is concerned about 'systemic crises,' why create a regulator with different goals?"

Schapiro, who didn't attend the dinner, said she has spoken with administration officials about her views on the issue and didn't view the proposal as being in its final form.

"I certainly hope they'll be refining it," she said. "And I will tell you that I very strongly represented the view ... that the SEC's sole responsibility is investor protection, and we will not flinch from that."

An administration official who confirmed that the dinner had taken place said no final decisions had been reached. Financial industry officials expect a finalized plan to be proposed within about two weeks.

Under one possible approach, some federal banking agencies might be combined and some powers over consumer products might be consolidated into a new body.

Geithner was asked about the proposal at the Senate hearing Wednesday and whether he was seeking to establish a "financial products safety commission."

"I believe that as part of regulatory reform we need to put in place stronger protections for consumers that are enforced more effectively and evenly across institutions that offer those products," Geithner said. "And as part of that, we are examining whether we should change the oversight structure so that we have better enforcement of stronger rules."

A leading advocate of the commission approach has been Elizabeth Warren, the Harvard law professor who heads the Congressional Oversight Panel for the government's $700 billion financial rescue effort.

Democratic Sens. Richard Durbin of Illinois, Charles Schumer of New York and Edward Kennedy of Massachusetts introduced legislation earlier this year that would create a commission like the one proposed by Warren.

The Financial Services Roundtable, which represents some of the biggest institutions, has argued against separating the regulation of financial products from the regulators who oversee the institutions selling the products. It wants the Fed and SEC to each maintain oversight of the products from companies they regulate.

It was unclear whether the administration will propose creating a new agency to house the commission or placing the commission under an existing agency.

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Associated Press writers Martin Crutsinger and Jim Kuhnhenn contributed to this report.

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