Archive for June, 2010

Bank bill gets patched up, moves closer to passage (AP)

Wednesday, June 30th, 2010 | Finance News

WASHINGTON – Despite a last-minute patch to secure his vote, Republican Sen. Scott Brown said Wednesday he needs more time to study a sweeping overhaul of financial regulations before committing his vote.

His stance could leave Democrats short, for now, of the 60 votes they need to overcome procedural hurdles to the bill. It almost certainly means the Senate will have to wait until after the weeklong July 4 congressional break to take up the bill.

The House was expected to vote on a final, combined House-Senate bill, later Wednesday.

Congressional Democrats have been inching closer to passage of a major rewrite of financial industry regulations, making fixes as they go in hopes of securing the votes of straying Republicans.

On Tuesday, House and Senate negotiators reconvened to remove a $19 billion fee on large banks and hedge funds after Brown threatened to vote against the bill. Brown, of Massachusetts, supported a Senate version of the bill last month but said he objected to the fee, inserted by negotiators last week.

In a statement Wednesday, Brown said he appreciated the removal of the fee, but said he would review the bill over next week's recess.

"I remain committed to putting in place safeguards to prevent another financial meltdown, ensure that consumers are protected, and that this bill is paid for without new taxes," he said.

The death of Sen. Robert Byrd, D-W.Va., this week and fresh objections from Brown and Susan Collins and Olympia Snowe of Maine had threatened to derail the bill, already a year in the making.

Eager to salvage one of President Barack Obama's legislative priorities, Democrats dropped the fee that would have helped pay for the legislation. Banks with assets of over $50 billion and hedge funds with assets of more than $10 billion would have footed the bill.

Instead, House and Senate negotiators, voting along party lines, agreed to pay for the bill with $11 billion generated by ending the unpopular Troubled Asset Relief Program — the $700 billion bank bailout created in the fall of 2008 at the height of the financial scare.

They also agreed to increase premium rates paid by commercial banks to the Federal Deposit Insurance Corp. to insure bank deposits. The premiums would increase from 1.15 percent of insured deposits to 1.35 percent by September 2020. The additional premium would be paid by banks with assets greater than $10 billion.

It was a solution Democrats weren't keen on and most Republicans denounced. But in the Senate, with 60-vote thresholds needed to overcome procedural hurdles, a single senator has the leverage to change a bill. Brown, Collins and Snowe were three of 61 senators who had previously backed a Senate version of the bill.

The Senate has little time to take it up this week. In a rare honor, Byrd was to lie in repose in the Senate chamber for six hours Thursday. That and work on other unfinished legislation were likely to push the bill into the week of July 12.

White House spokesman Robert Gibbs conceded as much Tuesday, but added, "I don't think there is a question now whether it will get done."

Besides the three Republicans, Democrats also were working to win the support of Sen. Maria Cantwell, D-Wash., who voted against the Senate version last month. She complained the bill was not tough enough on banks.

If unable to secure 60 votes, Democrats would have to wait for West Virginia's Democratic governor, Joe Manchin, to appoint Byrd's successor. Manchin has said he has no timetable for his decision.

The far-reaching legislation would rewrite financial regulations by putting new limits on bank activities, creating an independent consumer protection bureau and adding new rules for largely unregulated financial instruments.

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Goldman’s Cohn, AIG face crisis panel (Reuters)

Wednesday, June 30th, 2010 | Finance News

WASHINGTON (Reuters) –
Goldman Sachs and bailed out insurer American International Group face a rough two days of questioning about the destructive relationship that contributed to the 2008 financial crisis.

The Financial Crisis Inquiry Commission (FCIC) will zero in on the ties between Goldman Sachs and AIG, and how the two financial giants sold derivatives that deepened the crisis.

The congressionally appointed panel begins two days of hearings on Wednesday, headlined by former AIG Financial Products head Joseph Cassano and Goldman President Gary Cohn.

A key focus will be "how the interaction of these two financial giants may or may not have contributed to the causes of the financial crisis," Phil Angelides, chairman of the commission, said in a call with reporters on Tuesday.

Goldman has long been criticized for benefiting from the U.S. taxpayers' bailout of AIG. Taxpayers pledged up to $182 billion to address problems at AIG's financial products division.

U.S. and European banks that had purchased credit protection from AIG were quickly made whole after the U.S. government bailed out AIG. Goldman, as a major trading partner of the insurer, was one of the biggest beneficiaries of the government rescue of AIG.

AIG said in March, 2009, that $93 billion had been paid to banks, including $12.9 billion to Goldman Sachs, which was the most received by any bank.

Cassano, who has evaded public appearances since leaving the bailed-out insurer more than two years ago, participated in more than five hours of preliminary interviews with the commission's staff, Angelides and vice chairman Bill Thomas said.

"He was at the center of this. He obviously knows a lot about not just what they did, but the interrelationship with Goldman Sachs," Angelides said.

THE ROLE OF DERIVATIVES

AIG Financial Products wrote a form of insurance, known as credit-default swaps, on bonds created out of the home mortgage loan market during the U.S. housing boom.

When the loans began to sour and the bonds lost value, firms that had taken out the insurance demanded collateral from AIG, leading to the insurance industry's equivalent of a run on a bank.

Under the financial regulatory reform legislation nearing a vote in Congress, banks would be allowed to continue dealing credit-default swaps, as long as they go through a clearinghouse.

Goldman has found itself under fire stemming from its marketing and packaging of derivative products.

On April 16, the SEC charged Goldman with civil fraud relating to the Abacus collateralized debt obligation, an investment product linked to the performance of a group of mortgages.

Goldman Chief Executive Lloyd Blankfein later in April faced tough questioning from U.S. Sen. Carl Levin during a Senate subcommittee hearing in April about Goldman's other mortgage-linked products that turned toxic during the financial crisis.

Earlier this month, Goldman was criticized by the FCIC for failing to be responsive to its requests for information. The FCIC said Goldman dumped some 2.5 billion pages of digital documents on the commission in response to a request.

The commission said on Tuesday that Goldman has been better about responding to requests, but that there were still information outstanding.

EXECUTIVES TAKE STAND

The commission said that a "raft" of Goldman executives, including Chief Executive Lloyd Blankfein, also participated in preliminary interviews for this week's derivatives-focused hearing. Blankfein, who testified before the commission in January, is not scheduled to participate in this week's hearings.

Among those due to appear are Goldman Chief Financial Officer David Viniar, former AIG Chief Executive Martin Sullivan, and AIG Chief Risk Officer Robert Lewis.

The FCIC has been holding both public hearings and private meetings with financial industry players, including investor Warren Buffett, to piece together the causes and impact of the financial meltdown.

The commission is supposed to issue a report by December 15, detailing the crisis that peaked in late 2008 after the collapse of former investment banking giant Lehman Brothers.

The report will serve as a public record of the historic event and will not likely include thorough recommendations for reform.

(Reporting by Steve Eder, Karey Wutkowski, and Kim Dixon in Washington; Editing by Tim Dobbyn)

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Bank of England rate-setter fears new UK recession (AP)

Wednesday, June 30th, 2010 | Finance News

LONDON – Britain could be pushed back into recession by the government's austerity moves and slow recovery in key export markets, a member of the Bank of England's rate-setting Monetary Policy Committee said Wednesday.

Adam Posen said he sees the British economy is poised between a weak recovery and a drop back into recession, but believes current monetary policy and sustained growth outside Europe can keep Britain out of recession.

If that proves to be the case, Posen said Britain would continue to have above-target inflation. He added that once a recovery is secure he would support a rise in the base rate from the present all-time low of half a percent.

The new coalition government in Britain has recently announced further cuts in spending — 25 percent for most departments — and some tax increases in response to last year's record budget deficit.

The Guardian newspaper on Wednesday reported that a Treasury document forecast that as many as 120,000 jobs could be lost from the public sector and 140,000 from the private sector in each of the next five years.

"I have laid awake a number of nights recently trying to figure out how big is the risk that the major economies are repeating the mistake of the US in 1937 — or in milder form Japan in 1997 — by tightening fiscal policy too much, too rapidly," Posen said in a speech to the Society of Business Economists in London.

That issue has divided the G-20 major industrial and developing nations, with U.S. President Barack Obama warning against killing recovery by retrenching too rapidly. At the group's recent summit in Canada, G-20 nations committed developed countries to cutting deficits in half by 2013 and stabilizing total debt burdens by 2016. But they also left room for countries who can afford it to continue economic stimulus.

"For the U.K. specifically, unlike the U.S. or Japan then — or even now — there may simply be no choice the structural budget deficit is now too large, the state share of the economy has become too high, and the risk of savings leaving our markets remains very small but still too great," Posen said.

The case of austerity in low-debt economies in Europe and Asia is less clear, and he said he was "halfway convinced" that the world will not fall back into a deep recession even if there is excessive austerity.

"In my opinion, that leaves the U.K. economy tentatively in the recovery state, but still subject to switching back into the recession state," Posen said.

Posen voted with the majority of the Monetary Policy Committee this month to hold the base rate at 0.5 percent, but member Andrew Sentance advocated a hike to 0.75 percent because of his concern about inflation — currently 3.4 percent compared to the government target of 2 percent.

In an effort to pull Britain out of a deep recession which lasted 18 months, the Bank dropped the rate to its current low in March 2009 and at the same time launched an asset-purchases program which eventually pumped 200 billion pounds ($300 billion) into the economy.

"If we are fortunate, our present monetary policy stance combined with the U.K.'s economy's natural tendency to recover and with sustained global growth outside of Europe will be sufficient to get the U.K. to the good outcome," Posen said. "That would result in more inflation overshooting in the interim, given our policy stance, and in that state of affairs I would be only too happy to vote for an interest rate increase."

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