Archive for September, 2010

Regulators start putting Volcker rule in place

Thursday, September 30th, 2010 | Finance News

WASHINGTON (Reuters) – U.S. regulators begin tackling two of the most contentious parts of financial reform this week as they try to convince lawmakers they can police Wall Street and prevent another financial crisis.

At the first meeting of a new risk council on Friday, they will discuss steps for putting in place the Volcker rule, which restricts risky bank trading and investing, a Treasury official said in prepared testimony for a Senate Banking Committee hearing on Thursday.

They will also get started on the list of too-big-to-fail firms that will join some of the largest banks among the group designated for closer regulatory scrutiny to avoid a repeat of 2008 when the disorderly collapse of Lehman Brothers set off a global panic.

"We expect that the council will be in a position to take important steps toward fulfilling several of its core responsibilities at its meeting tomorrow," Deputy Treasury Secretary Neal Wolin said.

At Thursday's hearing on implementing the Dodd-Frank regulatory reforms, Federal Reserve Chairman Ben Bernanke and other top regulators will tell lawmakers how they plan to craft hundreds of rules aimed to making the financial system safer.

They put up a united front in their prepared testimony but questions remain about how well the various regulators will cooperate and whether Congress will allocate enough money to get the job done under tight deadlines.

"GREED AND RECKLESSNESS"

The small hearing room was standing-room only, with many lobbyists crammed in. But it was only sparsely attended by senators, many of whom had already made plans to leave town to campaign for the November 2 congressional election.

Senator Christopher Dodd, the Democrat who chairs the committee and is not seeking re-election, said the reform law that bears his name would arm regulators with the tools to safeguard the economy from the next bout of financial turmoil.

"Mark my words: There will be another crisis," Dodd said. "Greed and recklessness will rear their heads again."

Some Republicans have said they would seek to roll back some regulatory provisions if their party wins control of one or both houses of Congress in November's election.

Senator Richard Shelby, the committee's top-ranking Republican who would be chairman next year if his party wins enough seats to control the Senate, called the regulatory reforms a symbol of big-government Democratic policies.

"The Dodd-Frank legislation adheres to the worn out Washington theory that more is better," Shelby said, adding the law "delegated to bureaucrats" the authority to devise dozens of financial market rules.

Shelby told Reuters last week he would reopen the reform bill if he chairs the banking committee.

The reform measures aim to close gaping holes in oversight that were exposed during the worst financial crisis in 80 years. Regulators want to crack down on risky lending and investing without choking off the flow of credit vital to sustaining an economic recovery.

Included in the law was the creation of a "systemic risk" council of regulators to look out for potential financial trouble spots and of measures designed to safely shut down failing firms and avoid costly, unpopular government bailouts.

But skeptics question whether the provisions really will end the problem of firms being too big to fail.

(Additional reporting by Donna Smith, Kim Dixon and Christopher Doering; Writing by Emily Kaiser; Editing by John O'Callaghan)

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Economy loses speed in spring; more weakness ahead

Thursday, September 30th, 2010 | Finance News

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WASHINGTON – The nation's economic growth tailed off sharply in the spring and probably isn't faring any better now.

Gross domestic product — the broadest measure of the economy's health — expanded at a feeble 1.7 percent annual rate in the April-June quarter, The Commerce Department reported Thursday.

That's a notch higher than the 1.6 percent growth rate the government estimated a month ago. The slight change was mostly due to a little more spending by consumers than first estimated. Still, that's not enough to have a major impact on the economy.

The second quarter estimate is a sharp slowdown from a 3.7 percent growth rate logged in the first quarter.

Most economists expect growth to be similarly weak in the July-September quarter, with estimates ranging between 1.5 percent and 2 percent. The government's first report on third quarter GDP will be released Oct. 29. Unemployment — now at 9.6 percent — is expected to stay high or even rise in the coming months.

Americans aren't spending enough to give companies the kind of confidence in the economy that leads to rapid hiring.

Consumers did boost their spending in the second quarter at a 2.2 percent pace. It was a tad better than the government's previous estimate of 2.0. But it is still considered lackluster for this point in the recovery by historical standards. Economists think consumers will spend at a slightly slower pace through the rest of this year.

Consumer spending is important because it accounts for roughly 70 percent of economic activity.

In the second quarter, Americans saved 5.9 percent of their disposable income, the most in a year. Before the recession, they saved just 2.1 percent.

The economy is the top issue heading into the congressional midterm elections. Voter backlash could cause Democrats to lose control of Congress.

GDP measures the value of all goods and services produced in the U.S.

The sharp drop off in the second quarter mainly reflected fallout from a bigger trade deficit. A surge in imported goods swamped growth in U.S. exports to other countries. The bigger trade gap that resulted shaved 3.5 percentage points from second quarter growth, the most since 1947.

Another major factor in the economy's slowdown: Businesses added to their stockpiles of goods at a slower pace in the spring, reflecting concerns about the spending appetites of their customers.

The economy's growth has to be much stronger than what the U.S. has been logging to lower unemployment. Under one rule of thumb, the economy would have to expand by at least 5 percent for an entire year to drive down the jobless rate by one percentage point.

The Federal Reserve is weighing new action to bolster the economy. One likely step is to buy more government debt. Doing so would be aimed a lowering rates on mortgages, corporate loans and other debt. The Fed's goal: get Americans to boost their spending, which would strengthen the economy.

Thursday's report also showed that prices — excluding food and energy — rose at a slower pace in the second quarter. They increased at a 1 percent annual rate. That was down from a 1.2 percent in the first quarter and was the slowest pace since the beginning of 2009.

One of the things that Fed doesn't want to see happen is for the weak economy to lead to a dangerous bout of deflation, a widespread drop in prices of goods and services, in wages, and in the value of homes, stocks and other assets.

Meanwhile, the GDP report also showed that corporations' after-tax profits rose at a slower pace in the spring. Less generous profits are likely to make businesses think twice about making big capital purchases or stepping up hiring.

When the government reported in late August that the economy's growth had slowed to just a 1.6 percent pace, it stoked fears the economy might fall back into a recession. Since then, those fears have receded a bit, with reports showing that sales at retailers and activity at factories are holding up. Nonetheless, with the economy so fragile, it is more vulnerable to being hurt by any negative forces.

For each quarter, the government makes three estimates of GDP. It revises the figures based on more complete data. Thursday's was the third and final estimate for the second quarter. The government makes it first estimate of the economy's third-quarter performance at the end of October.

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Goldman’s Tourre says SEC suit should be dismissed

Thursday, September 30th, 2010 | Finance News

NEW YORK (Reuters) – Fabrice Tourre, a central figure in a controversial Goldman Sachs Group Inc transaction, asked a judge to throw out a U.S. regulator's fraud lawsuit against him, 2-1/2 months after the bank settled its part of the case for $550 million.

Citing a recent U.S. Supreme Court ruling, Tourre said the U.S. Securities and Exchange Commission case must be dismissed because the 2007 "Abacus" transaction, which involved collateralized debt obligations tied to subprime mortgages, took place outside the United States.

The Supreme Court, in the case Morrison v. National Australia Bank Ltd, ruled in June that Australian shareholders who bought that bank's stock outside the United States could not raise securities fraud claims in U.S. courts.

Several judges have since applied the ruling to bar U.S. lawsuits in other scenarios, including where the plaintiffs are not foreign investors.

The SEC lawsuit accused Goldman and Tourre, a vice president, of misleading investors about Abacus by failing to reveal that the hedge fund Paulson & Co helped choose the underlying securities and bet against them.

In a filing late Wednesday in Manhattan federal court, Tourre said Abacus did not involve a purchase or sale in the United States or a security listed on a U.S. exchange, as required under Morrison's "transactional test."

Citing 10 million pages of documents the SEC turned over in August and September, he said the CDOs were not listed on any exchange, and their sole investor was Germany's IKB Deutsche Industriebank AG, which invested overseas.

The Morrison ruling "makes clear that the antifraud provisions of the federal securities laws can be applied if, and only if, the securities transaction at issue takes place in the United States," Tourre said.

"The complaint fails," he added.

SEC spokesman John Nester declined to discuss the filing. He said the agency plans to file a response within 14 days. Pamela Chepiga, a partner at Allen & Overy LLP who represents Tourre, declined to comment, her assistant said.

Tourre remains a Goldman employee but is on paid leave, spokesman Michael DuVally said on Thursday.

Goldman settled with the SEC on July 16 without admitting wrongdoing. U.S. District Judge Barbara Jones approved that accord and is handling the Tourre case. Tourre is the only Goldman employee sued individually by the SEC.

The case is SEC v. Goldman Sachs & Co et al, U.S. District Court, Southern District of New York, No. 10-03229.

(Reporting by Jonathan Stempel; editing by John Wallace)

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