Archive for August, 2011

Grim Fed pondered even bolder easing in August

Tuesday, August 30th, 2011 | Finance News

WASHINGTON (Reuters) – The central bank in early August discussed a range of unusual tools it could use to help the economy, with some officials pressing for bold new steps to help the economy.

Before settling on a promise to keep rates near zero at least until mid-2013, the Fed examined an array of policy options to shore up a flagging recovery, including tying the path of interest rates to either unemployment or inflation.

"Participants noted a deterioration in labor market conditions, slower household spending, a drop in consumer and business confidence and continued weakness in the housing sector," according to minutes from the central bank's August 9 meeting released on Tuesday.

The minutes said that the few officials who pressed for going beyond the low-rates vow the Fed offered viewed the new guidance "as a step in the direction of additional accommodation."

Prices for U.S. government bonds and oil futures rose after the minutes were released, and the dollar briefly pared earlier gains it had made against the euro.

The U.S. economy sputtered in the first six months of 2011, with gross domestic product expanding at less than a 1 percent annual pace. The jobless rate, meanwhile, remains stuck above 9 percent.

The latest dark sign for the economy came on Tuesday when data showed confidence among consumers plunged in August to its lowest level in more than two years.

At its meeting, the Fed also discussed engaging in further asset buys or shifting the composition of bonds on the central bank's portfolio toward longer-dated maturities.

Purchases of longer-dated securities could further depress long-term rates, though some Fed officials expressed doubt that any of these steps would offer much support to growth.

Still, given the prospect of a protracted snail-paced recovery and tighter fiscal policy, Fed officials scrambled for unorthodox ways they could bolster the recovery.

"In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate," the minutes said.

FORK ON POLICY ROAD

Comments from two top Fed officials on Tuesday highlighted the divided nature of the central bank's Federal Open Market Committee, which sets official interest rates.

Charles Evans, president of the Chicago Federal Reserve Bank and a noted policy dove, said he favored strong central bank accommodation "for a substantial period of time," since the economy now looks to be moving "sideways."

But Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank stopped well short of signaling support for further easing, showing he remains firmly on the hawkish wing of the Fed's policy-setting panel.

Markets are primed for the Fed's next policy meeting on September 20-21, and Evans' comments on CNBC television on Tuesday fueled expectations that the Fed could build on its series of unprecedented moves to prop up the economy.

The remarks by the two policymakers came on the heels of Fed's annual conference in Jackson Hole, Wyoming, where Fed Chairman Ben Bernanke on Friday stopped short of detailing further action by the central bank.

Evans told CNBC television he backs "some of the most aggressive policy actions" now being considered by the Fed, adding that the labor market, with its 9.1 percent jobless rate, looks to be in a recession.

The central bank cut short-term interest rates to near zero in December 2008 and bought $2.3 trillion in mortgage-related and government debt in an effort to spur recovery.

Its decision to announce that it expected to hold interest rates near zero into 2013 sparked three dissents, the most in nearly 20 years, including one from Kocherlakota.

The minutes, however, showed there were also supporters for a more aggressive easing of monetary policy.

(Additional reporting by Jonathan Spicer and Leah Schnurr in New York, and Ann Saphir in Bismarck, North Dakota; Editing by Andrea Ricci)

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Bank of America sued by US Bancorp over mortgages

Tuesday, August 30th, 2011 | Finance News

NEW YORK – The lawsuits against Bank of America are piling up.

The latest comes from U.S. Bancorp, which wants Bank of America Corp. to repurchase poorly-written mortgages sold by Countrywide Financial in 2005.

Bank of America bought Countrywide Financial Corp. in 2008. Bank of America is based in Charlotte, N.C.

The lawsuit, which was filed in New York on Monday, claims Countrywide sold U.S. Bancorp a pool of over 4,000 loans originally valued at $1.75 billion. U.S. Bancorp claims Countrywide ignored its own mortgage underwriting guidelines when issuing those loans.

Bank of America's stock fell 26 cents, or 3 percent, to $8.13 at 1:30 p.m.

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Exclusive: Bank of America kept AIG legal threat under wraps

Tuesday, August 30th, 2011 | Finance News

NEW YORK (Reuters) – Top Bank of America Corp lawyers knew as early as January that American International Group Inc was prepared to sue the bank for more than $10 billion, seven months before the lawsuit was filed, according to sources familiar with the matter.

Bank of America shares fell more than 20 percent on August 8, the day the lawsuit was filed, adding to worries about the stability of the largest U.S. bank. It wasn't until Warren Buffett stepped up with a $5 billion investment that those fears were eased, though hardly eliminated.

The bank made no mention of the lawsuit threat in a quarterly regulatory filing with the U.S. Securities and Exchange Commission just four days earlier. Nor did management discuss it on conference calls about quarterly results and other pending legal claims.

The SEC's rules for litigation disclosure are murky, and some lawyers said Bank of America may have been justified in not revealing AIG's lawsuit before it was filed. The bank's litigation disclosures are in line with those of many rivals.

But other lawyers said banks have an obligation to disclose legal threats that could have major consequences.

"Publicly owned companies are supposed to disclose material threatened litigation under generally accepted accounting principles," said Richard Rowe, a former director of the SEC's Division of Corporation Finance, who was commenting generally and not specifically about Bank of America.

Rowe, now a partner in the Washington, D.C., office of law firm Proskauer Rose, said bank executives must make a "judgment call" as to what is material, but "the general rule is, if it's threatened litigation and it's material, and you can put a number on it, you should disclose it."

AIG's lawsuit shows why investors are so fearful: they have no idea how much litigation lurks behind closed doors.

"Management surely has a credibility problem with investors," said Jonathan Finger, whose Finger Interests Number One Ltd in Houston owns Bank of America shares. "They continue to under-address or under-disclose on the mortgage issue."

Finger in 2009 sued the bank over its disclosures related to the takeover of Merrill Lynch & Co.

Bank of America and AIG declined to comment for this article.

DISCLOSING MORE

SEC staff have this year advised banks including Bank of America, JPMorgan Chase & Co, Citigroup Inc, Wells Fargo & Co, Goldman Sachs Group Inc, and Morgan Stanley to disclose more information about lawsuits that have been filed, as well as legal proceedings that they know the government is considering.

Banks have responded by providing additional information, including legal loss estimates in some cases.

But the agency has given banks more leeway in disclosing the expected cost of early-stage litigation, or threats of litigation whose outcome is more difficult to predict, according to securities lawyers and current and former regulatory officials.

There are two standards for disclosing legal liabilities. One under banks' legal proceedings relies on whether losses are "reasonably probable" and "reasonably estimable." Another, under management's discussion and analysis, is based on whether losses are "reasonably possible." Disclosure relies heavily on management's assessment of the merits of a case.

Companies might need to disclose large potential lawsuits, even if they believe a loss is improbable, as well as less consequential cases if a loss appears certain, said Meredith Cross, director of the agency's Division of Corporation Finance, in an interview with Reuters about the SEC's disclosure requirements.

"The goal has been to have better disclosures, which should result in fewer surprises," said Cross, who was speaking generally and not commenting on any specific institution.

Legal experts say it is difficult for top bank executives to decide exactly what they have to disclose in relation to pending and potential legal matters. That is particularly true in the current environment, they said, in which confidence in large banks is so easily shaken by legal threats that may or may not have merit.

"This is a classic problem in the disclosure regime with litigation," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "You're required to disclose anything material. The question is, 'is it material?' You have to gauge the size and the probability of success, which is very hard to evaluate."

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