WASHINGTON (Reuters) - Merrill Lynch & Co Inc (MER.N)
struck a deal with the U.S. Securities and Exchange Commission
to buy back billions of dollars of auction-rate securities, in
a settlement little different from one the bank reached a day
earlier with several states.
Merrill agreed to buy back $7 billion of untradable debt
instruments from investors, small businesses and charities who
bought them from the bank, the SEC said on Friday .
The figure excludes ARS that have already been redeemed by
the issuer, such as a municipality, according to an SEC
official. That explains the difference between the SEC amount
and the $10 billion to $12 billion in the agreement announced
by New York State Attorney GeneralAndrew Cuomo on Thursday.
The deals are part of an industry-wide investigation by
state and federal regulators into the debt securities, which
offer interest rates that reset periodically. Auctions began to
fail earlier this year, and government officials accused banks
of misleading clients by marketing them as safe and liquid.
Deutsche Bank AG () and Goldman Sachs Group Inc
(GS.N) also agreed to buy back billions of dollars of
securities in the agreement announced Thursday.
The SEC deal -- which officials called tentative, subject
to the prospect of a financial penalty and finalization of
terms -- also requires Merrill to make its best efforts to
provide liquidity for $1.5 billion of the securities held by
business and institutional customers.
On Thursday, Cuomo said Merrill agreed to pay a $125
million fine, the second-highest after UBS's $150 million among
banks that had settled so far, and agreed to buy back between
$10 billion and $12 billion in ARS from individual investors.
Merrill on Thursday neither admitted nor denied allegations
of wrongdoing as part of that agreement and said it would
compensate individuals who sold the securities at a loss
between February 13 and the date of the deal.
Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N), Morgan
Stanley (MS.N), UBS (UBSN.VX) and Wachovia Corp (WB.N) had
previously settled with the New York attorney general.
JACKSON HOLE, Wyoming (Reuters) - Federal Reserve Chairman
Ben Bernanke on Friday said the stronger dollar and lower oil
prices, along with the weak economy, should curb inflation, in
a hint that interest rates would stay on hold, though he warned
the inflation outlook is "highly uncertain."
Bernanke called a recent decline in commodity prices and
stabilization of the U.S. dollar "encouraging."
"If not reversed, these developments, together with a pace
of growth that is likely to fall short of potential for a time,
should lead inflation to moderate later this year and next," he
told the annual Kansas City Federal Reserve Bank conference on
monetary policy in Jackson Hole, Wyoming..
At the same time, a top European Central Bank official told
the same gathering that monetary policy cannot solve the credit
crisis alone and keeping inflation in check may be the best way
to help strained financial markets.
"At times of extraordinary volatility and dramatic risk
re-pricing, maintaining price stability could be the best
contribution that monetary policy could give to the return to
financial stability," ECB governing council member Mario Draghi
said in a speech.
The dollar, which earlier this week hit a six-month high
against the euro, surged on Friday as gloomy British growth
data backed views of a slowing global economy and raised
prospects of interest rate cuts outside the United States,
Investors, meanwhile, bet that Bernanke's remarks were evidence
of little inclination at the U.S. central bank to raise rates
while markets remain strained and growth is challenged by the
housing contraction.
U.S. Treasury debt prices fell as Bernanke's remarks
reduced safe-haven bids for government bonds, while stocks
jumped.
"There will be no change in monetary policy for the
foreseeable future," said Kevin Flanagan, fixed income
strategist, global wealth management, at Morgan Stanley in
Purchase, New York. "The emphasis still is on the economic and
market risks, but still trying to walk a fine line on inflation
as well," he said.
Interest rate futures currently imply a 14 percent chance
the Fed will raise interest rates by a quarter point at its
next scheduled policy meeting, on September 16, with a 38
percent likelihood of a hike by year-end. This was up from odds
of 32 percent before.
Meanwhile, European Central Bank Governing Council Axel
Weber said at the conference that policy-makers should look not
only to monetary policy to contain financial instability but
should keep regulatory efforts "firmly in focus."
Weber also said in an interview on CNBC that current euro-dollar exchange rates are more in line with longer-term
developments.
Separately, Bernanke and ECB President Jean-Claude Trichet
were scheduled to have dinner together as guests of former World Bank President James Wolfensohn, according to a person
invited to the dinner.
At the conference, Bernanke said the U.S. central bank's
current low interest-rate strategy was conditioned on oil and
commodity prices stabilizing as the global economy slows, a
trend that appeared to be occurring.
"Nevertheless, the inflation outlook remains highly
uncertain, not least because of the difficulty of predicting
the future course of commodity prices, and we will continue to
monitor inflation and inflation expectations closely," Bernanke
told the gathering of global central bankers.
The policy-setting Federal Open Market Committee "is
committed to achieving medium-term price stability and will act
as necessary to attain that objective," Bernanke said.
Crude oil prices on Friday posted their biggest one-day
slide since 2004, falling 5.4 percent. Even from the fall from
a record peak of $147 a barrel set in mid-July, oil prices
remain up about 15 percent so far this year.
Meanwhile, Bernanke said a "gale force" financial storm
prompted by a surge in mortgage delinquencies, the collapse of U.S. housing markets and the freezing of credit has not yet
subsided.
"Add to this mix a jump in inflation, in part the product
of a global commodity boom, and the result has been one of the
most challenging economic and policy environments in memory,"
he said.
Bernanke also outlined the additional steps taken by the
Fed to make billions of dollars available in emergency credit
to keep financial markets from freezing in panic over massive subprime mortgage losses that have savaged bank capital.
"We will continue to review all of our liquidity facilities
to determine if they are having their intended effects or
require modification," he said.
He made no explicit reference to troubled U.S.
government-sponsored enterprises Fannie Mae (FNM.N) or Freddie
Mac (FRE.N) in the speech. But he did acknowledge that the
Fed's rescue of investment bank Bear Stearns created a
potentially problematic "moral hazard" that could prompt
excessive risk-taking if investors believe that some firms are
too big to fail.
Moral hazard is the concept that investors might take
greater risks on the belief that government policy will protect
them from suffering losses.
(Additional reporting by Glenn Somerville and David Lawder
in Washington, John Parry in New York and Ros Krasny in
Chicago; Editing by Leslie Adler)
NEW YORK (Reuters) -
What should be a holiday lull of a
week looks set to be anything but, with Wall Street on high
alert for the latest twists and turns in the credit crisis,
more volatility in commodity prices and key developments in the
race for the White House.
Fallout from the credit crisis continues to plague markets,
with investors increasingly believing in the likelihood of a
federal bailout of home-funding giants Fannie Mae (FNM.N) and
Freddie Mac (FRE.N). Some market watchers expect the Federal
Reserve and U.S. Treasury Secretary Henry Paulson to take
action as early as this weekend.
"Look for the Fed and Paulson to take steps on Fannie and
Freddie -- the time is ripe. The market wants resolution here,"
said John Schloegel, vice president of investment strategies
for Capital Cities Asset Management in Austin, Texas.
Lehman Brothers (LEH.N) will also remain firmly in the
spotlight, after state-run Korea Development Bank (KDB.UL) said
on Friday that the U.S. investment bank was one of its options
for acquisitions. That announcement came a day after veteran
bank analyst Dick Bove said Lehman could become a target of a hostile takeover.
Financials aside, the sharp and frequent turnarounds in the
direction of the price of oil have played a key role in the
market's daily fortunes. Mounting geopolitical tensions between
the West and Russia and any economic data showing slowing
global growth could tug oil either way next week.
The U.S. presidential campaign also will take a more
central role, with Republican John McCain and Democrat Barack
Obama set to reveal their vice presidential running mates and
the Democratic Party's national convention in Denver.
Investors will look for how Wall Street-friendly the vice
presidential picks are, analysts said.
"There are a lot of cross-currents here. You've got oil,
financials and politics coming together, and it's hard to see
that combining in a way that's a perfect storm to the downside
or a perfect environment to the upside," said Jeffrey Kleintop,
chief market strategist at LPL Financial Services in Boston.
All these cross-currents come in the week before the Labor
Day holiday, and analysts said the low trading volume could
exacerbate swings in the major stock indexes.
"I think it's important that the week ahead is the last
week in August and so whatever happens, we should take it with
a grain of salt," said Linda Duessel, market strategist at Federated Investors in Pittsburgh.
For the week ended August 22, the Dow Jones industrial
average (.DJI) dipped 0.3 percent, while the Standard & Poor's
500 Index (.SPX) declined 0.5 percent, and the Nasdaq Composite
Index (.IXIC) lost 1.5 percent.
LOOKING FOR THE SILVER LINING
Housing will be a dominant theme at the beginning of the
week, with July existing home sales on Monday, followed on
Tuesday by the S&P Case-Shiller home price index and new home
sales for July.
"What we've been saying about housing is, 'Just show us
some stability!' We're looking for a silver lining," said
Federated Investors' Duessel.
Consumer confidence data on Tuesday, plus consumer
sentiment and personal income data on Friday could give the
market more clues about the health of consumer spending and the
economy as the boost from tax-rebate checks wanes, said John
Praveen, chief investment strategist at Prudential
International Investments Advisers LLC in Newark, New Jersey.
The personal income data includes the Fed's preferred
inflation gauge.
Preliminary real GDP data on Thursday is expected to show
second-quarter growth at an annual rate of 2.7 percent,
compared with 1.9 percent in the first quarter.
"The second-quarter GDP data will be revised higher because
of the trade numbers, but the market will be looking more
closely at some of the more forward-looking data to see what
will happen next, what is the extent of the economic slowdown
going forward," said Prudential International Investments'
Praveen.
July durable goods orders on Wednesday and initial jobless
claims data on Thursday could also provide more clues on the
economic outlook, Praveen said.
(Wall St Week Ahead runs weekly. Questions or comments on
this column can be e-mailed to: kristina.cooke(at))
(Additional reporting by Deepa Seetharaman and Herb Lash;
Editing by Jan Paschal)