NEW YORK (Reuters) - Gloomy economic data and warnings from the U.S. Federal Reserve that hard times were still to come wiped out two days of relative optimism about the credit crisis and sent markets into free-fall on Wednesday.
In the worst one-day percentage declines since the stock market crash of 1987, the Dow Jones industrial average ended down 733 points or 7.87 percent, and the S&P 500 index lost 9 percent. The losses reversed Monday's record surges that had been sparked by optimism about bank bailouts.
Fed Chairman Ben Bernanke warned that credit market turmoil posed a "significant threat" to an already weak economy.
European shares shed 6 percent and U.S. crude fell more than $4 a barrel to a 13-month low of $74.54.
France, Germany and Britain called for leaders of the Group of Eight major industrialized countries to gather next month with the heads of emerging economies to consider a radical overhaul of the world's 60-year-old financial architecture.
The White House said G8 leaders were expected to meet this year on the worst financial crisis since the Great Depression.
The United States reported its biggest monthly decline in retail sales in more than three years, and Europe offered negative economic data and outlooks of its own.
Governments around the world have pledged $3.2 trillion in emergency measures, including taking stakes in banks to help them stabilize, rallying world markets on Monday.
Optimism quickly gave way to fears that major economies were headed for recession despite government intervention.
GLOOMY OUTLOOK FROM FED
"By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," Bernanke said.
Suggesting an openness to further interest-rate cuts, Bernanke said concerns about inflation were diminishing. He said it would take time to restore normal flows of credit.
Fed Vice Chairman Donald Kohn said latest readings on the U.S. economy have become more downbeat and the impact of a recent emergency interest rate cut had been "overwhelmed" by escalating mistrust among financial institutions unwilling to lend to one another.
The U.S. housing market has yet to hit bottom, and inventories of unsold homes are likely to remain elevated, Kohn said. It was probable the economy would remain "subpar" well into next year, gradually improving in late 2009 and 2010, he said.
As stocks around the world plunged and emerging markets were pummeled, the dollar and safe haven assets such as gold and short term U.S. treasuries rose.
"It looks like everything that's economically sensitive is getting hit pretty good," said Scott Vergin, portfolio manager at Thrivent Financial in Minneapolis, Minnesota.
"The thing is, how much has the credit crunch already impacted the real economy?" added Vergin. "That's what everyone's really worried about."
SUMMIT TO REFORM FINANCIAL SYSTEM
At a European Union summit in Brussels, British Prime Minister Gordon Brown led calls for an international summit and urged a rebuilding of the International Monetary Fund (IMF) as the keystone of global market regulation.
EU leaders called for a summit soon to revamp financial structures set up at the Bretton Woods conference in 1944.
Dutch Finance Minister Wouter Bos said a stronger role for the IMF was needed "in the absence of American leadership at the moment." French President Nicolas Sarkozy told the summit a "new form of capitalism" was needed.
The United States on Tuesday offered to take up to $250 billion worth of equity in its banks, an astonishing move in the home of free market capitalism.
U.S. President George W. Bush stressed that the move was temporary. "I'm confident in the long run this economy will come back," he told reporters.
The U.S. action followed an agreement by European leaders to undertake a 2.2 trillion euro ($3 trillion) rescue of European banking giants, which have been hit by a credit crisis brought on by defaulting mortgages in the United States.
SIGNS OF RECESSION
Signs of a looming recession abounded on Wednesday.
The U.S. government said retail sales dropped 1.2 percent in September, the biggest monthly decline in three years, and wholesale prices slipped 0.4 percent.
The Fed's Beige Book report said economic activity weakened across the United States in September as businesses revised capital investments and consumers curtailed spending.
U.S. bank JPMorgan Chase said third-quarter profit plunged 84 percent, while Wells Fargo & Co reported a 25 percent drop in earnings.
British unemployment rose to 5.7 percent, its highest level in eight years, according to government data. And German economic growth will only be slightly above zero in 2009, Finance Minister Peer Steinbrueck said.
The European Central Bank said it would allow banks to swap a larger range of their assets for central bank funds and offer extra U.S. dollar liquidity through foreign exchange swaps.
Southeast Asian nations, backed by $10 billion from the World Bank, were the latest to join the rescue effort, agreeing to create a multibillion fund to help banks.
Iceland, driven close to bankruptcy by the effects of frozen credit markets on its banks, cut interest rates a staggering 3.5 percentage points as its officials pursued help from Russia via a multibillion-euro loan.
The economy is dominating the U.S. presidential campaign, which sees a final debate between the candidates on Wednesday.
Democrat Barack Obama has accused Republicans of presiding over unfettered financial deregulation while John McCain has sought to regain his footing on economic issues after drawing criticism for saying U.S. fundamentals were strong.
Thursday, October 16, 2008
RBI cuts CRR by 100 basis points
The Reserve Bank of India on Wednesday cut the Cash Reserve Ratio (CRR) further by 100 basis points to 6.5 per cent of NDTL with effect from the current reporting fortnight that began on October 11, 2008. This measure will release additional liquidity into the system of the order of Rs.40,000 crore.
On Tuesday, October 14, 2008, the RBI decided to conduct a special 14 day Repo at 9 per cent per annum for a notified amount of Rs 20,000 crore with a view to enabling banks to meet the liquidity requirements of mutual funds. Rs 3,500 crore of this facility was utilised by banks yesterday.
Further, the Reserve Bank announced this morning that this 14 day repo facility will now be conducted every day until further notice upto a cumulative amount of Rs 20,000 crore for the same purpose. Banks obtain liquidity from the Reserve Bank under the Liquidity Adjustment Facility (LAF) against the collateral of eligible securities that are in excess of their prescribed Statutory Liquidity Ratio (SLR).
It has been decided, purely as a temporary measure, that banks may avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their NDTL. This additional liquidity support will terminate 14 days from the closure of this special term repo facility announced on October 14, 2008. This accommodation will be in addition to the temporary measure announced on September 16, 2008 permitting banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL.
RBI instituted a mechanism of Special Market Operations (SMO) for public sector oil marketing companies in June-July 2008 taking into account the extraordinary situation then prevailing in the money and forex markets. RBI will institute a similar facility when oil bonds become available.
Under the Agricultural Debt Waiver and Debt Relief Scheme Government had agreed to provide to commercial banks, RRBs and co-operative credit institutions a sum of Rs.25,000 crore as the first instalment. At the request of the Government, RBI has agreed to provide the sum to the lending institutions immediately. This liquidity support will be provided by the Reserve Bank of India under Section 17(3b) and Section 17(4E) of RBI Act to scheduled banks and NABARD respectively.
Interest Rates on FCNR (B) Deposits
Currently, the interest rate ceiling on FCNR(B) deposits of all maturities has been fixed at Libor/Euribor/Swap rates for the corresponding maturities minus 25 basis points for the respective foreign currencies. In view of the prevailing market conditions, RBI has decided to increase, with immediate effect, the interest rate ceiling on FCNR (B) deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 25 basis points.
Interest Rate on NR(E) RA Deposits
Currently, the interest rate ceiling on NR(E) RA for one to three years maturity should not exceed the Libor/Euribor/Swap rates plus 50 basis points for US dollar of corresponding maturity. In view of the prevailing market conditions, RBI has decided to increase, with immediate effect, the interest rate ceiling on NR(E)RA deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 100 basis points.
Banks will be allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired Tier I capital as at the close of the previous quarter or $10 million, whichever is higher, as against the existing limit of 25 per cent.
The above measures will be reviewed on a continuous basis in the light of the evolving liquidity conditions.
The Reserve Bank is monitoring developments in the financial markets closely and continuously and would respond swiftly and even pre-emptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations. The Reserve Bank is committed to maintaining financial stability and active, and flexible liquidity management using all policy instruments is an integral part of this objective.
On Tuesday, October 14, 2008, the RBI decided to conduct a special 14 day Repo at 9 per cent per annum for a notified amount of Rs 20,000 crore with a view to enabling banks to meet the liquidity requirements of mutual funds. Rs 3,500 crore of this facility was utilised by banks yesterday.
Further, the Reserve Bank announced this morning that this 14 day repo facility will now be conducted every day until further notice upto a cumulative amount of Rs 20,000 crore for the same purpose. Banks obtain liquidity from the Reserve Bank under the Liquidity Adjustment Facility (LAF) against the collateral of eligible securities that are in excess of their prescribed Statutory Liquidity Ratio (SLR).
It has been decided, purely as a temporary measure, that banks may avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their NDTL. This additional liquidity support will terminate 14 days from the closure of this special term repo facility announced on October 14, 2008. This accommodation will be in addition to the temporary measure announced on September 16, 2008 permitting banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL.
RBI instituted a mechanism of Special Market Operations (SMO) for public sector oil marketing companies in June-July 2008 taking into account the extraordinary situation then prevailing in the money and forex markets. RBI will institute a similar facility when oil bonds become available.
Under the Agricultural Debt Waiver and Debt Relief Scheme Government had agreed to provide to commercial banks, RRBs and co-operative credit institutions a sum of Rs.25,000 crore as the first instalment. At the request of the Government, RBI has agreed to provide the sum to the lending institutions immediately. This liquidity support will be provided by the Reserve Bank of India under Section 17(3b) and Section 17(4E) of RBI Act to scheduled banks and NABARD respectively.
Interest Rates on FCNR (B) Deposits
Currently, the interest rate ceiling on FCNR(B) deposits of all maturities has been fixed at Libor/Euribor/Swap rates for the corresponding maturities minus 25 basis points for the respective foreign currencies. In view of the prevailing market conditions, RBI has decided to increase, with immediate effect, the interest rate ceiling on FCNR (B) deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 25 basis points.
Interest Rate on NR(E) RA Deposits
Currently, the interest rate ceiling on NR(E) RA for one to three years maturity should not exceed the Libor/Euribor/Swap rates plus 50 basis points for US dollar of corresponding maturity. In view of the prevailing market conditions, RBI has decided to increase, with immediate effect, the interest rate ceiling on NR(E)RA deposits by 50 basis points, i.e., to Libor/Euribor/Swap rates plus 100 basis points.
Banks will be allowed to borrow funds from their overseas branches and correspondent banks up to a limit of 50 per cent of their unimpaired Tier I capital as at the close of the previous quarter or $10 million, whichever is higher, as against the existing limit of 25 per cent.
The above measures will be reviewed on a continuous basis in the light of the evolving liquidity conditions.
The Reserve Bank is monitoring developments in the financial markets closely and continuously and would respond swiftly and even pre-emptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations. The Reserve Bank is committed to maintaining financial stability and active, and flexible liquidity management using all policy instruments is an integral part of this objective.
Nifty stock futures fall 6 pc in Singapore
SINGAPORE: Nifty stock index futures fell 6 per cent in Singapore on Thursday, indicating a sharply lower market open as global markets reeled from recession worries.
By 0215 GMT, Nifty futures were down 200 points at 3,139. On Wednesday, India's 50-share NSE index fell 5.1 per cent to 3,388.4, while the main 30-share BSE index declined 5.9 per cent.
The MSCI index of Asia-Pacific shares outside of Japan traded 5.4 per cent lower on Thursday after downbeat US economic data spread fears of a deep global slowdown.
On Wednesday, India's central bank slashed its cash reserve requirement for banks for the second time in a week on Wednesday, releasing 400 billion rupees ($8.2 billion) into the banking system to boost money market liquidity.
By 0215 GMT, Nifty futures were down 200 points at 3,139. On Wednesday, India's 50-share NSE index fell 5.1 per cent to 3,388.4, while the main 30-share BSE index declined 5.9 per cent.
The MSCI index of Asia-Pacific shares outside of Japan traded 5.4 per cent lower on Thursday after downbeat US economic data spread fears of a deep global slowdown.
On Wednesday, India's central bank slashed its cash reserve requirement for banks for the second time in a week on Wednesday, releasing 400 billion rupees ($8.2 billion) into the banking system to boost money market liquidity.
Wednesday, October 15, 2008
Indian economy in danger, say three wise men of BJP
The BJP has held the UPA government responsible for the current liquidity crisis. Describing the crisis as “the UPA government’s own creation,” the BJP maintained that it was the government’s preference for monetary measures that is responsible for the crisis.
Going a step further, the BJP said that the Indian economy was in real danger and that finance minister P Chidambaram was misleading the country by stating that the fundamentals of the economy were strong. Warning that the finance minister’s regular reiteration of the Indian economy’s strong fundamentals was meaningless, senior BJP leaders Jaswant Singh, Yashwant Sinha and Arun Shourie drew attention to the fate of economies of southeast Asia, Brazil and Argentina as well as the western economies, which despite strong fundamentals now find themselves in deep crisis.
“If the government continues to fail in taking appropriate measures, India may face the situation of Brazil and Argentina. Our already vulnerable economy is now in real danger of being seriously destabilised. To go on chanting the lullaby, ‘our fundamentals are strong’, is worse than useless.
Nothing happened to the fundamentals of southeast Asian economies overnight, yet their currencies, their financial systems, and eventually their economies collapsed,” senior BJP leader Arun Shourie said. The BJP has argued that far from the fundamentals of the Indian economy being strong, these have been “decidedly weakened” by the UPA government. “What we have today is a crisis of confidence and trust: These cannot be restored by empty pep talk. They have to be restored by specific measures,” the BJP leaders said.
The BJP locates the cause of the current economic crisis in the country to the preference for monetary measures to tackle inflation. Former finance minister Yashwant Sinha said that the government ignored “the supply side, which was responsible for this inflation”. The party has called short-term responses to the liquidity crunch as well as longer term measures to strengthen the economy. Countering charges from the government, that the main Opposition party “only criticised without offering solutions”, the BJP put forth a 12 step programme to deal with the crisis.
The party’s contention is that the Indian economy, which was already facing a crisis arising out of the government’s mismanagement has now been “severely mauled” by the prevailing global financial crisis. Senior BJP leader Jaswant Singh said, “the global economic tsunami has hit India as well. There are global dynamics to the crisis but there are national challenges as well.
There is a problem of solvency of the national government and institutional solvency”. Countering finance minister p Chidambaram’s contention that a bailout like the West would resolve India’s liquidity crisis, Mr Sinha said that the current liquidity crisis has little to do with the global crisis “The stock market crisis is just one manifestation of it. Equally badly affected are the money market and the exchange market.
Sentiment is weak and loss of confidence is palpable. The violent fluctuations, noticed in these markets in the last couple of weeks, is the surest sign of the nervousness which has gripped these markets. It is the crisis in the real economy, however, which is the cause for more serious concern”, the former finance minister said.
The BJP maintained that the government’s mismanagement had already resulted in imbalances such as the high fiscal deficit, high current account deficit, elevated inflation levels, and a collapsing real estate sector. None of these, according to Mr Sinha, were the creation of the global crisis. Instead these are all the direct result of the “complacency and the cavalier attitude of the UPA government which slept on the wheel while the crisis was brewing”. The senior leader said that the government contributed to this problems by its acts of omission and commission.
Going a step further, the BJP said that the Indian economy was in real danger and that finance minister P Chidambaram was misleading the country by stating that the fundamentals of the economy were strong. Warning that the finance minister’s regular reiteration of the Indian economy’s strong fundamentals was meaningless, senior BJP leaders Jaswant Singh, Yashwant Sinha and Arun Shourie drew attention to the fate of economies of southeast Asia, Brazil and Argentina as well as the western economies, which despite strong fundamentals now find themselves in deep crisis.
“If the government continues to fail in taking appropriate measures, India may face the situation of Brazil and Argentina. Our already vulnerable economy is now in real danger of being seriously destabilised. To go on chanting the lullaby, ‘our fundamentals are strong’, is worse than useless.
Nothing happened to the fundamentals of southeast Asian economies overnight, yet their currencies, their financial systems, and eventually their economies collapsed,” senior BJP leader Arun Shourie said. The BJP has argued that far from the fundamentals of the Indian economy being strong, these have been “decidedly weakened” by the UPA government. “What we have today is a crisis of confidence and trust: These cannot be restored by empty pep talk. They have to be restored by specific measures,” the BJP leaders said.
The BJP locates the cause of the current economic crisis in the country to the preference for monetary measures to tackle inflation. Former finance minister Yashwant Sinha said that the government ignored “the supply side, which was responsible for this inflation”. The party has called short-term responses to the liquidity crunch as well as longer term measures to strengthen the economy. Countering charges from the government, that the main Opposition party “only criticised without offering solutions”, the BJP put forth a 12 step programme to deal with the crisis.
The party’s contention is that the Indian economy, which was already facing a crisis arising out of the government’s mismanagement has now been “severely mauled” by the prevailing global financial crisis. Senior BJP leader Jaswant Singh said, “the global economic tsunami has hit India as well. There are global dynamics to the crisis but there are national challenges as well.
There is a problem of solvency of the national government and institutional solvency”. Countering finance minister p Chidambaram’s contention that a bailout like the West would resolve India’s liquidity crisis, Mr Sinha said that the current liquidity crisis has little to do with the global crisis “The stock market crisis is just one manifestation of it. Equally badly affected are the money market and the exchange market.
Sentiment is weak and loss of confidence is palpable. The violent fluctuations, noticed in these markets in the last couple of weeks, is the surest sign of the nervousness which has gripped these markets. It is the crisis in the real economy, however, which is the cause for more serious concern”, the former finance minister said.
The BJP maintained that the government’s mismanagement had already resulted in imbalances such as the high fiscal deficit, high current account deficit, elevated inflation levels, and a collapsing real estate sector. None of these, according to Mr Sinha, were the creation of the global crisis. Instead these are all the direct result of the “complacency and the cavalier attitude of the UPA government which slept on the wheel while the crisis was brewing”. The senior leader said that the government contributed to this problems by its acts of omission and commission.
Friday, October 10, 2008
India's Central Bank Cuts Cash Reserve Ratio to 7.5%
India's central bank deepened a cut in the amount of cash lenders need to set aside as reserves to cushion Asia's third-largest economy from a global slowdown.
The Reserve Bank of India reduced the cash reserve ratio to 7.5 percent from 9 percent effective tomorrow. The measure will release 600 billion rupees ($12.2 billion) into the financial system, the bank said in a statement in Mumbai.
The move by Governor Duvvuri Subbarao comes after the Federal Reserve, the European Central Bank, the People's Bank of China and other monetary authorities slashed rates this week to avert a global recession. India's bonds rallied while the benchmark Sensitive index, which fell as much as 9.6 percent today, pared losses, after the announcement.
Today's cut extends the 50 basis point reduction in cash reserves the Reserve Bank announced on Oct. 6, the first reduction in five years.
The Reserve Bank of India reduced the cash reserve ratio to 7.5 percent from 9 percent effective tomorrow. The measure will release 600 billion rupees ($12.2 billion) into the financial system, the bank said in a statement in Mumbai.
The move by Governor Duvvuri Subbarao comes after the Federal Reserve, the European Central Bank, the People's Bank of China and other monetary authorities slashed rates this week to avert a global recession. India's bonds rallied while the benchmark Sensitive index, which fell as much as 9.6 percent today, pared losses, after the announcement.
Today's cut extends the 50 basis point reduction in cash reserves the Reserve Bank announced on Oct. 6, the first reduction in five years.
Stock funds lose $43 billion so far in Oct: TrimTabs
Investors pulled a net $43.3 billion from all equity mutual funds so far in October, extending the record outflows experienced during September, TrimTabs Investment Research said on Thursday.
Funds investing mostly in US stocks had a net outflow of $27.3 billion so far this month, while funds investing mostly in non-US stocks had an outflow of $16 billion. In September, stock funds suffered net outflows of $43.5 billion. In addition, bond funds had a net outflow of $8.8 billion so far in October, following net outflows of $8.1 billion the previous week.
"It is extremely unusual to see this drawdown, not only in stock funds but bond funds," Conrad Gann, TrimTabs' president and chief operating officer, said in an interview. "Investors are putting their money in savings accounts, insured checking deposits and any fund that has a 'Treasury sticker' on it -- anything else isn't being considered," he added.
In September, investors pulled a record $72 billion from U.S.-managed stock and bond mutual funds, as shareholders took $43.5 billion from stock funds last month and $28.8 billion from bond funds, according TrimTabs. TrimTabs, which reports exchange-traded fund activity separately, said that ETFs investing in US stocks had inflows of $4 billion in the latest week ending Wednesday, following inflows of $15 billion in the previous week.
TrimTabs is a research firm headquartered in Sausalito, California.
Funds investing mostly in US stocks had a net outflow of $27.3 billion so far this month, while funds investing mostly in non-US stocks had an outflow of $16 billion. In September, stock funds suffered net outflows of $43.5 billion. In addition, bond funds had a net outflow of $8.8 billion so far in October, following net outflows of $8.1 billion the previous week.
"It is extremely unusual to see this drawdown, not only in stock funds but bond funds," Conrad Gann, TrimTabs' president and chief operating officer, said in an interview. "Investors are putting their money in savings accounts, insured checking deposits and any fund that has a 'Treasury sticker' on it -- anything else isn't being considered," he added.
In September, investors pulled a record $72 billion from U.S.-managed stock and bond mutual funds, as shareholders took $43.5 billion from stock funds last month and $28.8 billion from bond funds, according TrimTabs. TrimTabs, which reports exchange-traded fund activity separately, said that ETFs investing in US stocks had inflows of $4 billion in the latest week ending Wednesday, following inflows of $15 billion in the previous week.
TrimTabs is a research firm headquartered in Sausalito, California.
Singapore, in Recession, Ends Currency Gain Policy
Singapore fell into the first recession since 2002 as manufacturing slumped, prompting the central bank to end a policy favoring gains in its currency in an effort to support the economy.
The Monetary Authority of Singapore, which relies on the currency rather than interest rates as its policy tool, said today it's shifting to a ``zero-percent appreciation'' stance. Gross domestic product contracted an annualized 6.3 percent in the third quarter from the previous three months, after shrinking a revised 5.7 percent between April and June.
A weaker Singapore dollar, which fell today, would help electronics exporters such as Venture Corp. and Chartered Semiconductor Manufacturing Ltd. by making their products cheaper overseas. Central banks around the world are loosening monetary policy and cutting interest rates as a worsening global credit crisis saps growth.
``The whole world has gone on an easing policy and Singapore is no different,'' said Song Seng Wun, an economist at CIMB-GK Securities Pte in Singapore. ``We are likely to face a prolonged period of slow growth or recession, maybe for the next two years. This downturn is unlike previous downturns.''
The Singapore currency slid 0.6 percent to 1.4769 against the U.S. dollar as at 11:01 a.m. local time.
The trade ministry said today the city's economy will grow about 3 percent in 2008 from a year earlier, slower than a previous estimate of as much as 5 percent. That would be the weakest pace in seven years.
Inflation Peaks
``Asian countries cannot avoid the impact of weakening U.S., European and Japanese economies,'' Singapore Prime Minister Lee Hsien Loong said today. ``We must prepare for a rough ride at least over the next year, and quite possibly longer.''
The Monetary Authority of Singapore's new policy is a reversal of its stance six months ago when it called for faster exchange-rate appreciation to damp inflation. The Singapore currency has dropped 8.1 percent against the U.S. dollar in that period. Singapore manages its dollar against an undisclosed basket of currencies.
Inflation, which reached a 26-year high earlier this year, has peaked, the central bank said. Consumer prices will increase between 6 percent and 7 percent this year, and gains will ease to between 2.5 percent and 3.5 percent in 2009, it predicted.
``Against the backdrop of a weakening external economic environment and continuing stresses in global financial markets, the growth of the Singapore economy is expected to remain below potential in the period ahead,'' the monetary authority said. ``Inflation is expected to trend down in 2009 as the global and domestic economies slow.''
Rate Cuts
The Federal Reserve, European Central Bank and four other central banks lowered interest rates on Oct. 8 in an emergency coordination that was followed in Asia by China, Taiwan and South Korea. Australia cut its key rate by one percentage point on Oct. 7, the most since a recession in 1992.
Singapore's $161 billion economy declined 0.5 percent last quarter from a year earlier, compared with a revised 2.3 percent gain between April and June.
Growth has deteriorated as a slump in export demand forced factories to cut production, tourist arrivals faltered and a real-estate boom ended.
The island's manufacturing industry, which accounts for a quarter of the economy, contracted 11.5 percent last quarter from a year earlier, compared with a revised 4.9 percent drop in the previous three months, according to today's report.
Exports Slump
Singapore's government expects exports to decline as much as 4 percent this year, and the island's shipments of electronics goods have fallen for 19 consecutive months. That's hurting profits at companies including Venture Corp., the city's biggest publicly traded electronics maker.
Services climbed 6.1 percent in the third quarter from a year earlier, slowing from a 7 percent pace in the previous three months. Singapore will probably miss a government target of 10.8 million visitors in 2008, the tourism board said on Sept. 23, after visitor arrivals dropped 7.7 percent in August.
``The financial services sector is likely to see slower growth in the coming months as the ongoing global financial crisis has heightened uncertainties for sentiment-sensitive segments such as stocks-trading and fund-management activities,'' the government said in today's report.
The construction industry grew 7.8 percent, easing from a revised rate of 19.8 percent in the previous quarter.
The annualized 6.3 percent economic contraction in the third quarter compares with the median forecast of 0.3 percent growth in a Bloomberg News survey. The figures today are computed from data for July and August. Revised numbers will be released next month.
The Monetary Authority of Singapore, which relies on the currency rather than interest rates as its policy tool, said today it's shifting to a ``zero-percent appreciation'' stance. Gross domestic product contracted an annualized 6.3 percent in the third quarter from the previous three months, after shrinking a revised 5.7 percent between April and June.
A weaker Singapore dollar, which fell today, would help electronics exporters such as Venture Corp. and Chartered Semiconductor Manufacturing Ltd. by making their products cheaper overseas. Central banks around the world are loosening monetary policy and cutting interest rates as a worsening global credit crisis saps growth.
``The whole world has gone on an easing policy and Singapore is no different,'' said Song Seng Wun, an economist at CIMB-GK Securities Pte in Singapore. ``We are likely to face a prolonged period of slow growth or recession, maybe for the next two years. This downturn is unlike previous downturns.''
The Singapore currency slid 0.6 percent to 1.4769 against the U.S. dollar as at 11:01 a.m. local time.
The trade ministry said today the city's economy will grow about 3 percent in 2008 from a year earlier, slower than a previous estimate of as much as 5 percent. That would be the weakest pace in seven years.
Inflation Peaks
``Asian countries cannot avoid the impact of weakening U.S., European and Japanese economies,'' Singapore Prime Minister Lee Hsien Loong said today. ``We must prepare for a rough ride at least over the next year, and quite possibly longer.''
The Monetary Authority of Singapore's new policy is a reversal of its stance six months ago when it called for faster exchange-rate appreciation to damp inflation. The Singapore currency has dropped 8.1 percent against the U.S. dollar in that period. Singapore manages its dollar against an undisclosed basket of currencies.
Inflation, which reached a 26-year high earlier this year, has peaked, the central bank said. Consumer prices will increase between 6 percent and 7 percent this year, and gains will ease to between 2.5 percent and 3.5 percent in 2009, it predicted.
``Against the backdrop of a weakening external economic environment and continuing stresses in global financial markets, the growth of the Singapore economy is expected to remain below potential in the period ahead,'' the monetary authority said. ``Inflation is expected to trend down in 2009 as the global and domestic economies slow.''
Rate Cuts
The Federal Reserve, European Central Bank and four other central banks lowered interest rates on Oct. 8 in an emergency coordination that was followed in Asia by China, Taiwan and South Korea. Australia cut its key rate by one percentage point on Oct. 7, the most since a recession in 1992.
Singapore's $161 billion economy declined 0.5 percent last quarter from a year earlier, compared with a revised 2.3 percent gain between April and June.
Growth has deteriorated as a slump in export demand forced factories to cut production, tourist arrivals faltered and a real-estate boom ended.
The island's manufacturing industry, which accounts for a quarter of the economy, contracted 11.5 percent last quarter from a year earlier, compared with a revised 4.9 percent drop in the previous three months, according to today's report.
Exports Slump
Singapore's government expects exports to decline as much as 4 percent this year, and the island's shipments of electronics goods have fallen for 19 consecutive months. That's hurting profits at companies including Venture Corp., the city's biggest publicly traded electronics maker.
Services climbed 6.1 percent in the third quarter from a year earlier, slowing from a 7 percent pace in the previous three months. Singapore will probably miss a government target of 10.8 million visitors in 2008, the tourism board said on Sept. 23, after visitor arrivals dropped 7.7 percent in August.
``The financial services sector is likely to see slower growth in the coming months as the ongoing global financial crisis has heightened uncertainties for sentiment-sensitive segments such as stocks-trading and fund-management activities,'' the government said in today's report.
The construction industry grew 7.8 percent, easing from a revised rate of 19.8 percent in the previous quarter.
The annualized 6.3 percent economic contraction in the third quarter compares with the median forecast of 0.3 percent growth in a Bloomberg News survey. The figures today are computed from data for July and August. Revised numbers will be released next month.
Nikkei dives more than 11%, eyeing biggest fall since '87 crash
The Nikkei average tumbled more than 11 percent on Friday, poised for its biggest one-day drop since the 1987 stock market crash, on fears of a global recession despite moves by global authorities to thaw frozen credit markets.
The stock sell-off led the Osaka Stock Exchange to trigger a circuit-breaker and briefly halt trade in the Nikkei futures. "No one is buying. Fundamentals don't matter any more and there's no explanation for such a plunge," said Yoshinori Nagano, chief strategist at Daiwa Asset Management.
"Fears about the US financial system have been rekindled. The US government is still debating whether it would inject money into financial institutions. It needs to act now even if that would be beyond the current law."
As of 0100 GMT, the benchmark Nikkei had recovered a little to be down 9.6 percent or 874.45 points at 8,283.04. If the fall is sustained until the end of Friday, it will surpass a 9.4 percent fall in the Nikkei earlier this week, which is the biggest fall since a 14.9 percent one-day slide during the 1987 stock market crash.
The broader Topix lost 7 percent to 841.98. The Dow Jones industrial average dropped 7.3 percent to 8,579.19 on Thursday, with bank and insurance stocks hammered again, as the previous day's coordinated global interest-rate cuts and myriad other official measures to unfreeze money markets did little to boost confidence in the financial sector.
The stock sell-off led the Osaka Stock Exchange to trigger a circuit-breaker and briefly halt trade in the Nikkei futures. "No one is buying. Fundamentals don't matter any more and there's no explanation for such a plunge," said Yoshinori Nagano, chief strategist at Daiwa Asset Management.
"Fears about the US financial system have been rekindled. The US government is still debating whether it would inject money into financial institutions. It needs to act now even if that would be beyond the current law."
As of 0100 GMT, the benchmark Nikkei had recovered a little to be down 9.6 percent or 874.45 points at 8,283.04. If the fall is sustained until the end of Friday, it will surpass a 9.4 percent fall in the Nikkei earlier this week, which is the biggest fall since a 14.9 percent one-day slide during the 1987 stock market crash.
The broader Topix lost 7 percent to 841.98. The Dow Jones industrial average dropped 7.3 percent to 8,579.19 on Thursday, with bank and insurance stocks hammered again, as the previous day's coordinated global interest-rate cuts and myriad other official measures to unfreeze money markets did little to boost confidence in the financial sector.
Wednesday, October 08, 2008
Investors lose $10 bn in US-listed Indian firms
Indian companies listed on the American bourses lost close to $10 billion during the past week, with IT bellwether Infosys witnessing the maximum erosion of about two billion dollars.
The 16 Indian firms listed on NYSE and Nasdaq saw their collective market capitalisation dip to $78.9 billion, from $88.7 billion at the beginning of the week.
The loss registered by the Indian American depository rates is mainly because of the meltdown at the US bourse and has been mostly in line with the broader market trends, analysts believe.
Among these firms, about half a dozen IT and ITeS firms together lost more than four billion dollars in their market value during the week.
However, Internet firm Sify Technologies posted a modest gain of about three million dollars.
While Wipro shed $1.69 billion, Satyam Computer Services saw a drop of $938 million in its valuation and Patni Computers witnessed a decline of $72 million.
Besides, ADRs of outsourcing firms Genpact, WNS and EXLService and that of Rediff.com dropped between 4-12 per cent during the week.
India's two largest private sector lenders -- ICICI Bank and HDFC Bank -- together saw their market cap plunging by nearly two billion dollars.
ICICI Bank dropped 8.6 per cent during the week, with the market capitalisation declining by $1.19 billion. HDFC Bank fell by six per cent, while its valuation decreased by $810 million.
Tata Motors lost $489 million, while Tata Communication shed $266 million during the week ended October 5.
The 16 Indian firms listed on NYSE and Nasdaq saw their collective market capitalisation dip to $78.9 billion, from $88.7 billion at the beginning of the week.
The loss registered by the Indian American depository rates is mainly because of the meltdown at the US bourse and has been mostly in line with the broader market trends, analysts believe.
Among these firms, about half a dozen IT and ITeS firms together lost more than four billion dollars in their market value during the week.
However, Internet firm Sify Technologies posted a modest gain of about three million dollars.
While Wipro shed $1.69 billion, Satyam Computer Services saw a drop of $938 million in its valuation and Patni Computers witnessed a decline of $72 million.
Besides, ADRs of outsourcing firms Genpact, WNS and EXLService and that of Rediff.com dropped between 4-12 per cent during the week.
India's two largest private sector lenders -- ICICI Bank and HDFC Bank -- together saw their market cap plunging by nearly two billion dollars.
ICICI Bank dropped 8.6 per cent during the week, with the market capitalisation declining by $1.19 billion. HDFC Bank fell by six per cent, while its valuation decreased by $810 million.
Tata Motors lost $489 million, while Tata Communication shed $266 million during the week ended October 5.
Tuesday, October 07, 2008
RBI cuts CRR 50 basis points to ease liquidity
In a move to ease liquidity and cool the markets, the Reserve Bank of India (RBI) announced an ad-hoc 50-basis-point reduction in the cash reserve ratio (CRR), or the proportion of deposits banks must keep with the central bank, from 9 per cent to 8.5 per cent.
The cut, the first such step by RBI Governor D Subbarao, will be effective from the fortnight starting October 11 and will release around Rs 20,000 crore into the system. This is the first CRR reduction since June 14, 2003, when it was lowered by 25 basis points to 2.50 per cent.
While bankers are not forecasting any immediate change in interest rates for borrowers, the flow of credit, which has nearly stopped in the last few weeks, is expected to improve. Deposit rates are also unlikely to fall.
“The move will release some tension in the market. But I do not expect any immediate cuts in lending rates. We will be very selective in disbursing funds. The first priority is to provide adequate resources to productive sectors, especially infrastructure and oil and fertiliser (which is more like working capital). The cut is a temporary measure and tight monetary policy is likely to continue because inflation is well above RBI’s comfort level,” said IDBI Bank Chairman & Managing Director Yogesh Agarwal.
“It’s too early to expect an impact on lending and borrowing rates,” said ICICI Bank Joint Managing Director and CFO Chanda Kochhar while adding that the bank was sanctioning and disbursing loans based on its lending parameters even during the tight liquidity situation in the last few weeks.
“It is a clear signal that the step is to cool down the market. For the last one week, nobody was extending credit for sanctioned limits and also not considering new proposals. This step should bring down rates in the inter-bank market,” added Andhra Bank Chairman and MD RS Reddy.
Reliance Capital CEO Sam Ghosh said there would be no major impact on consumers but the decision would reduce the huge blip in liquidity.
A senior State Bank of India executive said that RBI’s latest move might not ease liquidity tightness too much and another 50-basis-point reduction was expected in the monetary policy review on October 24.
“It is not enough given the huge demand for corporate credit. The move to cut CRR is more of an indication by the central bank that it will inject more liquidity to the system, if required. RBI may take more steps gradually if liquidity situation does not improve,” said Punjab National Bank Executive Director J M Garg.
“The regulators will watch every step. It is very tough to predict since the impact (of the moves) is multiple. There is an impact on inflation, liquidity and the growth rate,” added Kochhar.
Tight liquidity conditions in the market had seen banks use the liquidity adjustment facility to borrow around Rs 90,000 crore from RBI every day for the last few days. In the call money market, some banks had paid as much as 17 per cent to raise funds on Friday. Today, the rates cooled with the weighted average rate according to Clearing Corporation of India data 11.32 per cent.
Tight liquidity in the domestic and the international markets had prompted bankers to seek RBI intervention in the form of CRR reduction and a further relaxation in the statutory liquidity ratio (SLR), or the amount banks must mandatorily invest in government securities. Over the last fortnight, bankers had raised the issue with the RBI leadership at least twice.
The announcement of an ad-hoc CRR reduction follows RBI’s consultations with the government, sources said. The tight liquidity situation was one of the major issues discussed at last week’s meeting of the high-level committee on capital markets which has representatives from the central bank, the government and other financial sector regulators.
In a statement this evening, RBI said, “This measure is ad-hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions.”
On September 16, after the turmoil in the US increased, for banks in dire need of funds, RBI had announced several measures including a one percentage point relaxation in the SLR below the mandated 25 per cent level.
“Since then, there has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained. Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned/limited short selling of financial stocks. These new developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the LAF,” RBI's statement said.
The RBI will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants,” it added.
The cut, the first such step by RBI Governor D Subbarao, will be effective from the fortnight starting October 11 and will release around Rs 20,000 crore into the system. This is the first CRR reduction since June 14, 2003, when it was lowered by 25 basis points to 2.50 per cent.
While bankers are not forecasting any immediate change in interest rates for borrowers, the flow of credit, which has nearly stopped in the last few weeks, is expected to improve. Deposit rates are also unlikely to fall.
“The move will release some tension in the market. But I do not expect any immediate cuts in lending rates. We will be very selective in disbursing funds. The first priority is to provide adequate resources to productive sectors, especially infrastructure and oil and fertiliser (which is more like working capital). The cut is a temporary measure and tight monetary policy is likely to continue because inflation is well above RBI’s comfort level,” said IDBI Bank Chairman & Managing Director Yogesh Agarwal.
“It’s too early to expect an impact on lending and borrowing rates,” said ICICI Bank Joint Managing Director and CFO Chanda Kochhar while adding that the bank was sanctioning and disbursing loans based on its lending parameters even during the tight liquidity situation in the last few weeks.
“It is a clear signal that the step is to cool down the market. For the last one week, nobody was extending credit for sanctioned limits and also not considering new proposals. This step should bring down rates in the inter-bank market,” added Andhra Bank Chairman and MD RS Reddy.
Reliance Capital CEO Sam Ghosh said there would be no major impact on consumers but the decision would reduce the huge blip in liquidity.
A senior State Bank of India executive said that RBI’s latest move might not ease liquidity tightness too much and another 50-basis-point reduction was expected in the monetary policy review on October 24.
“It is not enough given the huge demand for corporate credit. The move to cut CRR is more of an indication by the central bank that it will inject more liquidity to the system, if required. RBI may take more steps gradually if liquidity situation does not improve,” said Punjab National Bank Executive Director J M Garg.
“The regulators will watch every step. It is very tough to predict since the impact (of the moves) is multiple. There is an impact on inflation, liquidity and the growth rate,” added Kochhar.
Tight liquidity conditions in the market had seen banks use the liquidity adjustment facility to borrow around Rs 90,000 crore from RBI every day for the last few days. In the call money market, some banks had paid as much as 17 per cent to raise funds on Friday. Today, the rates cooled with the weighted average rate according to Clearing Corporation of India data 11.32 per cent.
Tight liquidity in the domestic and the international markets had prompted bankers to seek RBI intervention in the form of CRR reduction and a further relaxation in the statutory liquidity ratio (SLR), or the amount banks must mandatorily invest in government securities. Over the last fortnight, bankers had raised the issue with the RBI leadership at least twice.
The announcement of an ad-hoc CRR reduction follows RBI’s consultations with the government, sources said. The tight liquidity situation was one of the major issues discussed at last week’s meeting of the high-level committee on capital markets which has representatives from the central bank, the government and other financial sector regulators.
In a statement this evening, RBI said, “This measure is ad-hoc, temporary in nature and will be reviewed on a continuous basis in the light of the evolving liquidity conditions.”
On September 16, after the turmoil in the US increased, for banks in dire need of funds, RBI had announced several measures including a one percentage point relaxation in the SLR below the mandated 25 per cent level.
“Since then, there has been a sharp deterioration in the global financial environment with the number of troubled financial institutions rising, stock markets weakening and money markets strained. Central banks across the world have stepped up their liquidity operations, including coordinated actions, and some have banned/limited short selling of financial stocks. These new developments have impacted domestic money and forex markets with a marked increase in volatility and a sharp squeeze on market liquidity as reflected in the movements in overnight interest rates and the high recourse to the LAF,” RBI's statement said.
The RBI will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants,” it added.
Investor's wealth plunges below Rs 40 tn mark
With domestic market buckling under deepening global financial crisis, investor's wealth on Bombay Stock Exchange plunged below the Rs 40 lakh crore mark, while the Sensex slipped under the 12,000 level for the first time in two years.
Total market capitalisation of all the listed-companies on the BSE dropped below the Rs 40 lakh crore-mark to Rs 38,22,354.61 crore today, witnessing an erosion of Rs 2.39 lakh crore in a single day.
The 30-share Sensex closed at 11,801, the lowest level seen since 2006, plunging 724 points.
However, RBI has cut the Cash Reserve Ratio by 50 basis points and market regulator SEBI has removed restrictions of 40 per cent cap on Overseas Derivative Instruments (ODI). Analysts believe the moves would help the markets recover.
Among the Sensex shares, Sterlite Industries was the biggest loser with a fall of over 15 per cent, followed by Reliance Infrastructure which dropped nearly 14 per cent and Jaiprakash Associates which fell 13.57 per cent.
Total market capitalisation of Anil Agarwal-led Sterlite Industries settled at Rs 23,756.83 crore on the bourse.
As Anil Ambani-led Reliance Infrastructure dropped 13.93 per cent to close at Rs 638, its market capitalisation also took a plunge to Rs 14,698 crore. Reliance Communications also ended 9.95 per cent down at Rs 300.05, while its M-cap stood at Rs 61,931.
Besides, the country's most valued firm Reliance Industries today dropped 6.76 per cent to close at Rs 246.45, while its market cap stood at Rs 2,38,685.26.
Further, the market capitalisation of state-run ONGC stood at Rs 2,09,630.90, followed by NTPC at Rs 139,100.98 crore, telecom major Bharti Airtel (Rs 138,491.89 crore) and SBI (Rs 91,054.48 crore).
Total market capitalisation of all the listed-companies on the BSE dropped below the Rs 40 lakh crore-mark to Rs 38,22,354.61 crore today, witnessing an erosion of Rs 2.39 lakh crore in a single day.
The 30-share Sensex closed at 11,801, the lowest level seen since 2006, plunging 724 points.
However, RBI has cut the Cash Reserve Ratio by 50 basis points and market regulator SEBI has removed restrictions of 40 per cent cap on Overseas Derivative Instruments (ODI). Analysts believe the moves would help the markets recover.
Among the Sensex shares, Sterlite Industries was the biggest loser with a fall of over 15 per cent, followed by Reliance Infrastructure which dropped nearly 14 per cent and Jaiprakash Associates which fell 13.57 per cent.
Total market capitalisation of Anil Agarwal-led Sterlite Industries settled at Rs 23,756.83 crore on the bourse.
As Anil Ambani-led Reliance Infrastructure dropped 13.93 per cent to close at Rs 638, its market capitalisation also took a plunge to Rs 14,698 crore. Reliance Communications also ended 9.95 per cent down at Rs 300.05, while its M-cap stood at Rs 61,931.
Besides, the country's most valued firm Reliance Industries today dropped 6.76 per cent to close at Rs 246.45, while its market cap stood at Rs 2,38,685.26.
Further, the market capitalisation of state-run ONGC stood at Rs 2,09,630.90, followed by NTPC at Rs 139,100.98 crore, telecom major Bharti Airtel (Rs 138,491.89 crore) and SBI (Rs 91,054.48 crore).
Easier PN rule may not lead to fresh inflows
Foreign portfolio investors, who have pulled out close to $10 billion so far this year may have reasons to be happy with the easing of the curbs imposed on their investments through P-Notes. But they do not reckon that Monday’s SEBI move will open the floodgates for portfolio investment for a while.
Labelling the decision announced by SEBI today as cosmetic in terms of a trigger to step up portfolio flows, some of the FIIs said there were enough investment vehicles to take an exposure to Indian equities. In October 2007, SEBI had banned the fresh issue of P-Notes by FIIs to rein in the massive inflow of foreign funds into the Indian stock markets. The regulator had issued restrictions on FIIs and their sub-accounts, prohibiting them from issuing or renewing PNs with underlying as derivatives and directing them to unwind their positions within 18 months.
“The SEBI directive is a healthy move in the current market climate. It may help attract investors back to India, particularly, since India has outperformed other emerging markets in this correction. Today’s decision removes an impediment to accessing this market. But how soon this stimulates capital redirection is hard to say, given the uncertain and tenuous state of investor confidence. With rescue packages and bailouts in key global financial markets, these are likely to soak up any spare liquidity. It is a welcome move regardless,” says Stuart Smythe, ED, Head equity of Macquarie Securities (India).
At the imposition of restrictions last year (October 2007) P-Note holdings were estimated at $88 billion. Markets have corrected nearly 40%, which would put current holdings at $53 billion, of which almost $10 billion has been sales, leaving an estimated $43 billion. If one were to factor in Monday’s correction, the amount would have seen a further erosion of roughly 5.5%, said a senior official at a leading foreign broking house.
“This will not impact the inflow into the country. What we are facing is a global confidence crisis and the money is flowing to safest assets the markets can identify, like the dollar. This is the time for government to implement policies in infrastructure, thereby making India less reliant on foreign savings and more reliant on domestic savings. This would effectively mean that India’s growth is on track, irrespective of global developments. Investors are looking for safe economies where earnings are not at risk,” said Amit Bhartia, Partner, GMO (Grantham, Mayo, Van Otterloo & Co.), a global institutional money management firm.
SEBI’s decision to revise the rules marks a change from last year when India was battling inflows which had pushed the rupee to a new high against the dollar since 1998 and helped power the stock market to record highs. The FM had than said India would have to moderate inflows to avoid a stock market bubble. FIIs continue to be net sellers in the Indian equities markets, having sold more than $9 billion worth shares in the past nine months.
Net foreign portfolio investments for the similar period last year were more than $14 billion.
Labelling the decision announced by SEBI today as cosmetic in terms of a trigger to step up portfolio flows, some of the FIIs said there were enough investment vehicles to take an exposure to Indian equities. In October 2007, SEBI had banned the fresh issue of P-Notes by FIIs to rein in the massive inflow of foreign funds into the Indian stock markets. The regulator had issued restrictions on FIIs and their sub-accounts, prohibiting them from issuing or renewing PNs with underlying as derivatives and directing them to unwind their positions within 18 months.
“The SEBI directive is a healthy move in the current market climate. It may help attract investors back to India, particularly, since India has outperformed other emerging markets in this correction. Today’s decision removes an impediment to accessing this market. But how soon this stimulates capital redirection is hard to say, given the uncertain and tenuous state of investor confidence. With rescue packages and bailouts in key global financial markets, these are likely to soak up any spare liquidity. It is a welcome move regardless,” says Stuart Smythe, ED, Head equity of Macquarie Securities (India).
At the imposition of restrictions last year (October 2007) P-Note holdings were estimated at $88 billion. Markets have corrected nearly 40%, which would put current holdings at $53 billion, of which almost $10 billion has been sales, leaving an estimated $43 billion. If one were to factor in Monday’s correction, the amount would have seen a further erosion of roughly 5.5%, said a senior official at a leading foreign broking house.
“This will not impact the inflow into the country. What we are facing is a global confidence crisis and the money is flowing to safest assets the markets can identify, like the dollar. This is the time for government to implement policies in infrastructure, thereby making India less reliant on foreign savings and more reliant on domestic savings. This would effectively mean that India’s growth is on track, irrespective of global developments. Investors are looking for safe economies where earnings are not at risk,” said Amit Bhartia, Partner, GMO (Grantham, Mayo, Van Otterloo & Co.), a global institutional money management firm.
SEBI’s decision to revise the rules marks a change from last year when India was battling inflows which had pushed the rupee to a new high against the dollar since 1998 and helped power the stock market to record highs. The FM had than said India would have to moderate inflows to avoid a stock market bubble. FIIs continue to be net sellers in the Indian equities markets, having sold more than $9 billion worth shares in the past nine months.
Net foreign portfolio investments for the similar period last year were more than $14 billion.
Tuesday, September 30, 2008
US bailout rejected; fear seizes markets
US lawmakers rejected a $700 billion bailout plan for the financial industry in a shock vote that sent global markets sliding as European authorities scrambled to prop up a slew of banks.
The Dow Jones industrial average posted its largest point decline ever while the benchmark S&P 500 had its worst day since the 1987 crisis with an 8.8 percent drop. Latin American stocks tumbled 13 percent, their biggest decline in more than a decade.
Even before the vote, Asian and European markets had plummeted on fears the crisis was spreading, while U.S. regional lender Wachovia became the latest big bank to succumb to the crisis.
And global money markets were frozen even as central banks poured hundreds of billions of dollars into the financial system to persuade financial firms to stop hoarding cash.
"There's a monster amount of fear out there. This is global contagion. It's no longer just the United States," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
The House of Representatives voted 228-to-205 against a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks. House Republicans, in particular, balked at spending so much taxpayer money just before the November 4 U.S. elections.
"I can't believe they weren't able to come together and come up with a solution. Complete disaster was predicted if it didn't pass," said Stephen Berte, senior equity trader at Standard Life in Boston. "I can't see what the upside is right now."
U.S. President George W. Bush huddled with economic advisers, including Federal Reserve Chairman Ben Bernanke, to consider the administration's next move.
"We need a plan that works," said U.S. Treasury Secretary Henry Paulson, the Bush administration's point man on the bailout since the first plan was announced over a week ago. "We need it as soon as possible, and we're just committed to working with congressional leaders to get it done."
Investors rushed to assets considered a safe haven. Government bond prices and gold jumped, and oil fell below $99 per barrel on the view that world demand will contract as the financial crisis puts the brakes on economic activity.
"What should have been a day of hope turned into a day of desperation," said Marco Annunziato, chief economist for UniCredit in London. "We are facing a systemic crisis of confidence in the global financial system that is pushing us increasingly close to a complete meltdown."
World stocks, as measured by the MSCI's world index, lost about $1.7 trillion for the day.
Bailout prospects uncertain
In Washington, the failure of the bailout bill -- after more than a week of intensive closed-door negotiation intended to hammer out a compromise plan -- brought new uncertainty about the response of the U.S. government to the worst financial crisis since the Great Depression.
Republican House members voted against the rescue package by a more than 2-to-1 margin. A majority of Democrats voted in favor.
Both parties blamed each other for the failure of the closely watched bill after hours of closed-door negotiations intended to add provisions to protect taxpayers and head off criticism that Washington was riding to the rescue of bankers many Americans blame for triggering the housing crisis.
"What happened today cannot stand. We must move forward," House Speaker Nancy Pelosi told reporters. "We are here to protect the taxpayer as we work to stabilize the markets."
U.S. presidential candidates Barack Obama and John McCain had both offered qualified support for the bailout proposal, which now dominates the election with just over a month before the vote.
Obama, a Democrat, said he believed lawmakers would regroup to pass a financial rescue plan. "I'm confident we're going to get there," Obama said as he campaigned in Colorado. "It's going to be a little rocky.
McCain, a Republican who suspended his campaign last week in a failed attempt to broker a bailout deal, called on lawmakers to go back to work. "Now is the time for all members of Congress to go back to the drawing board," he said.
The Senate returns on Wednesday and the House on Thursday after a break for the Jewish New Year holiday of Rosh Hashanah. No laws can be passed in their absence but their staffs could work on a revised plan.
The high-stakes political showdown on the bailout proposal came after Wachovia Corp agreed to sell most of its assets to Citigroup Inc in a deal brokered by regulators. It was one of three U.S. financial deals struck as the crisis deepened.
Global contagion
Investors said there were ample signs that a financial crisis that started with risky lending to the overheated U.S. property market had gone rapidly global.
"The crisis is going to affect everybody. It's a very difficult situation and it's going to affect economies everywhere," Mexican billionaire Carlos Slim said.
Earlier, the governments of Belgium, the Netherlands and Luxembourg moved to partly nationalize Belgian-Dutch group Fortis NV, and German lender Hypo Real Estate Holding AG secured a credit line from the German government.
Earlier, European shares had dropped to a 3-1/2-year closing low, with bank shares weighing heavily.
The world's central banks, led by the U.S. Federal Reserve, announced a $330 billion expansion of currency swap arrangements, which allows them to increase the amount of money they can provide in their home markets, effectively throwing more money at the crisis.
The Wachovia deal was the latest in a series of events that has transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.
The changes include the government takeover of mortgage finance companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings Inc, the failure of giant savings and loan Washington Mutual, and Bank of America Corp's purchase of Merrill Lynch & Co Inc.
Chronology of Fed Action
September 29
Fed increased swaps by $330 billion to $620 billion
Expands the size of 84 days TAF auctions to $75 billion per auction form $25 billon
September 26
Fed expands swaps with ECB by $10 billion to $120 billion
Total swaps now $290 billion, all swaps would expire on Jan 30, 2009
September 24
Fed established Swaps with Australia, Denmark, Norway, Sweden taking totalling $227 billion
September 21
Fed approves application of Goldman Sachs & Morgan Stanley to become bank holding cos.
September 18
Fed expands swaps to $247 billion, increasing line with ECB to $110 billion & line SNB to $27 billion
September 16
Fed agrees to lend up $85 billion to AIG
September 14
Fed expands collateral accepted for emergency loans
The Dow Jones industrial average posted its largest point decline ever while the benchmark S&P 500 had its worst day since the 1987 crisis with an 8.8 percent drop. Latin American stocks tumbled 13 percent, their biggest decline in more than a decade.
Even before the vote, Asian and European markets had plummeted on fears the crisis was spreading, while U.S. regional lender Wachovia became the latest big bank to succumb to the crisis.
And global money markets were frozen even as central banks poured hundreds of billions of dollars into the financial system to persuade financial firms to stop hoarding cash.
"There's a monster amount of fear out there. This is global contagion. It's no longer just the United States," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
The House of Representatives voted 228-to-205 against a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks. House Republicans, in particular, balked at spending so much taxpayer money just before the November 4 U.S. elections.
"I can't believe they weren't able to come together and come up with a solution. Complete disaster was predicted if it didn't pass," said Stephen Berte, senior equity trader at Standard Life in Boston. "I can't see what the upside is right now."
U.S. President George W. Bush huddled with economic advisers, including Federal Reserve Chairman Ben Bernanke, to consider the administration's next move.
"We need a plan that works," said U.S. Treasury Secretary Henry Paulson, the Bush administration's point man on the bailout since the first plan was announced over a week ago. "We need it as soon as possible, and we're just committed to working with congressional leaders to get it done."
Investors rushed to assets considered a safe haven. Government bond prices and gold jumped, and oil fell below $99 per barrel on the view that world demand will contract as the financial crisis puts the brakes on economic activity.
"What should have been a day of hope turned into a day of desperation," said Marco Annunziato, chief economist for UniCredit in London. "We are facing a systemic crisis of confidence in the global financial system that is pushing us increasingly close to a complete meltdown."
World stocks, as measured by the MSCI's world index, lost about $1.7 trillion for the day.
Bailout prospects uncertain
In Washington, the failure of the bailout bill -- after more than a week of intensive closed-door negotiation intended to hammer out a compromise plan -- brought new uncertainty about the response of the U.S. government to the worst financial crisis since the Great Depression.
Republican House members voted against the rescue package by a more than 2-to-1 margin. A majority of Democrats voted in favor.
Both parties blamed each other for the failure of the closely watched bill after hours of closed-door negotiations intended to add provisions to protect taxpayers and head off criticism that Washington was riding to the rescue of bankers many Americans blame for triggering the housing crisis.
"What happened today cannot stand. We must move forward," House Speaker Nancy Pelosi told reporters. "We are here to protect the taxpayer as we work to stabilize the markets."
U.S. presidential candidates Barack Obama and John McCain had both offered qualified support for the bailout proposal, which now dominates the election with just over a month before the vote.
Obama, a Democrat, said he believed lawmakers would regroup to pass a financial rescue plan. "I'm confident we're going to get there," Obama said as he campaigned in Colorado. "It's going to be a little rocky.
McCain, a Republican who suspended his campaign last week in a failed attempt to broker a bailout deal, called on lawmakers to go back to work. "Now is the time for all members of Congress to go back to the drawing board," he said.
The Senate returns on Wednesday and the House on Thursday after a break for the Jewish New Year holiday of Rosh Hashanah. No laws can be passed in their absence but their staffs could work on a revised plan.
The high-stakes political showdown on the bailout proposal came after Wachovia Corp agreed to sell most of its assets to Citigroup Inc in a deal brokered by regulators. It was one of three U.S. financial deals struck as the crisis deepened.
Global contagion
Investors said there were ample signs that a financial crisis that started with risky lending to the overheated U.S. property market had gone rapidly global.
"The crisis is going to affect everybody. It's a very difficult situation and it's going to affect economies everywhere," Mexican billionaire Carlos Slim said.
Earlier, the governments of Belgium, the Netherlands and Luxembourg moved to partly nationalize Belgian-Dutch group Fortis NV, and German lender Hypo Real Estate Holding AG secured a credit line from the German government.
Earlier, European shares had dropped to a 3-1/2-year closing low, with bank shares weighing heavily.
The world's central banks, led by the U.S. Federal Reserve, announced a $330 billion expansion of currency swap arrangements, which allows them to increase the amount of money they can provide in their home markets, effectively throwing more money at the crisis.
The Wachovia deal was the latest in a series of events that has transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.
The changes include the government takeover of mortgage finance companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings Inc, the failure of giant savings and loan Washington Mutual, and Bank of America Corp's purchase of Merrill Lynch & Co Inc.
Chronology of Fed Action
September 29
Fed increased swaps by $330 billion to $620 billion
Expands the size of 84 days TAF auctions to $75 billion per auction form $25 billon
September 26
Fed expands swaps with ECB by $10 billion to $120 billion
Total swaps now $290 billion, all swaps would expire on Jan 30, 2009
September 24
Fed established Swaps with Australia, Denmark, Norway, Sweden taking totalling $227 billion
September 21
Fed approves application of Goldman Sachs & Morgan Stanley to become bank holding cos.
September 18
Fed expands swaps to $247 billion, increasing line with ECB to $110 billion & line SNB to $27 billion
September 16
Fed agrees to lend up $85 billion to AIG
September 14
Fed expands collateral accepted for emergency loans
Monday, September 29, 2008
Payback provision in US bail-out plan
The US financial services sector could be forced to reimburse the US government for any losses on its $700bn rescue plan under a breakthrough agreement that paves the way for congressional approval as early as Monday.
But hours before a government bailout bill was due to move to the floor of the House of Representatives, Republican holdouts had yet to give an assurance they would help vote it into law.
After a weekend of frenzied talks, Hank Paulson, the Treasury secretary, and Nancy Pelosi, the Democratic House speaker, announced early on Sunday that a tentative deal had been reached authorising the government to buy up to $700bn of troubled assets from financial institutions.
The deal envisages historic restrictions on executive pay for banks involved in the programme and opens the door for the government to take equity warrants in those institutions.
More than half of Democrats in the Democratic-controlled House pledged to support the deal. But at a closed-door meeting of House Republicans late on Sunday, it was unclear whether enough would follow their party leaders to guarantee adoption of the package.
As the White House urged Republican opponents to come on board, John Boehner, House minority leader, appealed to Republicans “whose conscience will allow them” to support the bill. “The American people are angry and my colleagues are angry about the situation they find themselves in,” said Mr Boehner.
He acknowledged the bill was not exactly the one Republicans would have drafted but it contained elements they had helped to introduce.
Both Republicans and Democrats tried to claim credit for defending the interests of taxpayers amid public outrage at the prospect of spending $700bn to bail out Wall Street.
House Republicans, the most vocal opponents of the rescue plan, remained wary even after their leaders signed up to the agreement.
The two presidential candidates gave their qualified support on the basis of the outline of the deal. John McCain said: “Let’s get this deal done, signed by the president, and get moving.” The Republican came under fire from Democrats last week who claimed he slowed the outcome by intervening in the talks. Barack Obama, his Democratic rival, said if concerns on issues such as executive pay were addressed, “my inclination would be to vote for it, understanding that I’m not happy”.
Democratic legislators said they had earlier spoken by telephone to Warren Buffett, the billionaire investor, who warned them of “the biggest financial meltdown in American history” if they failed to act.
Although final details of the legislation were still being worked on throughout the morning, Capitol Hill aides said they expected the House and Senate would both approve the measures early in the week.
On Saturday night, negotiators found a way to address concerns that the bail-out plan insufficiently protected taxpayers. If, after five years, losses were incurred by the government on the sale of the troubled assets it purchases through the programme, the US president would have to present a plan to recover the money from those who benefited from it.
While imposing curbs on the compensation of executives at companies participating in the bail-out, Democrats dropped demands that shareholders be given a vote on pay. The $700bn would be authorised fully but released in three stages, beginning with an initial $250bn. Congress would review and could in principle block the final $350bn disbursement.
But hours before a government bailout bill was due to move to the floor of the House of Representatives, Republican holdouts had yet to give an assurance they would help vote it into law.
After a weekend of frenzied talks, Hank Paulson, the Treasury secretary, and Nancy Pelosi, the Democratic House speaker, announced early on Sunday that a tentative deal had been reached authorising the government to buy up to $700bn of troubled assets from financial institutions.
The deal envisages historic restrictions on executive pay for banks involved in the programme and opens the door for the government to take equity warrants in those institutions.
More than half of Democrats in the Democratic-controlled House pledged to support the deal. But at a closed-door meeting of House Republicans late on Sunday, it was unclear whether enough would follow their party leaders to guarantee adoption of the package.
As the White House urged Republican opponents to come on board, John Boehner, House minority leader, appealed to Republicans “whose conscience will allow them” to support the bill. “The American people are angry and my colleagues are angry about the situation they find themselves in,” said Mr Boehner.
He acknowledged the bill was not exactly the one Republicans would have drafted but it contained elements they had helped to introduce.
Both Republicans and Democrats tried to claim credit for defending the interests of taxpayers amid public outrage at the prospect of spending $700bn to bail out Wall Street.
House Republicans, the most vocal opponents of the rescue plan, remained wary even after their leaders signed up to the agreement.
The two presidential candidates gave their qualified support on the basis of the outline of the deal. John McCain said: “Let’s get this deal done, signed by the president, and get moving.” The Republican came under fire from Democrats last week who claimed he slowed the outcome by intervening in the talks. Barack Obama, his Democratic rival, said if concerns on issues such as executive pay were addressed, “my inclination would be to vote for it, understanding that I’m not happy”.
Democratic legislators said they had earlier spoken by telephone to Warren Buffett, the billionaire investor, who warned them of “the biggest financial meltdown in American history” if they failed to act.
Although final details of the legislation were still being worked on throughout the morning, Capitol Hill aides said they expected the House and Senate would both approve the measures early in the week.
On Saturday night, negotiators found a way to address concerns that the bail-out plan insufficiently protected taxpayers. If, after five years, losses were incurred by the government on the sale of the troubled assets it purchases through the programme, the US president would have to present a plan to recover the money from those who benefited from it.
While imposing curbs on the compensation of executives at companies participating in the bail-out, Democrats dropped demands that shareholders be given a vote on pay. The $700bn would be authorised fully but released in three stages, beginning with an initial $250bn. Congress would review and could in principle block the final $350bn disbursement.
Fortis Gets EU11.2 Billion Rescue From Governments
Fortis, the largest Belgian financial-services firm, received an 11.2 billion-euro ($16.3 billion) rescue from Belgium, the Netherlands and Luxembourg after investor confidence in the bank evaporated last week.
Belgium will buy 49 percent of Fortis's Belgian banking unit for 4.7 billion euros, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch banking business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49 percent of Fortis's banking division in that country.
Fortis is the largest European firm to be bailed out in the global financial crisis that drove Lehman Brothers Holdings Inc. into bankruptcy two weeks ago and prompted U.S. President George W. Bush to seek a $700 billion bank rescue package. Fortis dropped 35 percent last week in Brussels trading on concern the company would struggle to replenish capital depleted by the 24.2 billion-euro takeover of ABN Amro Holding NV units and credit writedowns.
``Confidence in Fortis needs to be restored,'' said Corne van Zeijl, a senior portfolio manager at SNS Asset Management in Den Bosch, the Netherlands, who oversees about $1.1 billion and owns Fortis shares.
Fortis plans to sell its stake in ABN Amro's consumer banking unit, though a buyer wasn't identified. Fortis joined with Royal Bank of Scotland Group Plc and Spain's Banco Santander SA last year to buy Amsterdam-based ABN Amro for 72 billion euros, just as the U.S. subprime mortgage market collapsed.
Lippens Resigns
Fortis Chairman Maurice Lippens stepped down and will be replaced by someone from outside the company, Fortis said. The firm picked company insider Filip Dierckx to succeed Herman Verwilst as chief executive officer on Sept. 26, just three months after former CEO Jean-Paul Votron was pushed out.
Fortis, formed in the 1990 merger of the Dutch insurance company NV Amev, Belgian insurer AG Group and the Dutch bank VSB, angered investors on June 26 by scrapping the interim dividend and announcing plans to sell shares to help strengthen its finances.
``We're buying power in the bank, getting more influence on the decisions that will be made, that's what savers need in these times,'' Dutch Finance Minister Wouter Bos told Dutch public television NOS. Bos said he couldn't comment on who'll buy the ABN Amro business.
The collapse of New York-based Lehman and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc. was seized by regulators last week in the biggest U.S. bank failure in history.
Bradford & Bingley
Bradford & Bingley Plc, Britain's biggest lender to landlords, may be taken over by another bank or nationalized today under a U.K. government-backed plan to protect 21 billion pounds ($39 billion) of customer deposits.
Hypo Real Estate Holding AG, Germany's second-biggest commercial-property lender, said today it received a credit facility, following a report by the Financial Times Deutschland that the company may collapse.
In the U.S., Bush and congressional leaders said yesterday in Washington that they had reached agreement on the rescue package, which is designed to revive moribund credit markets.
Fortis tried three days ago to assuage investor concerns by stating that its financial position was ``solid,'' and that it had identified banking and insurance businesses to sell worth as much as 10 billion euros. Fortis said it wouldn't sell assets at fire-sale prices, and didn't have an urgent need for funds.
`Over-Leveraged'
The remarks, presented in an impromptu press conference by Verwilst and Dierckx, failed to stem the selling. The stock ended the day down 20 percent.
``Markets thought that they were over-leveraged,'' European Central Bank Governing Council member Nout Wellink said. ``What's happening in the U.S. is having an impact on the rest of the world. At the end of the day Fortis is a good bank,'' said Wellink, who also heads the Dutch central bank.
Fortis has fallen 71 percent this year in Brussels, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros.
The company has about 3 billion euros of bonds maturing this year and needs to refinance an additional 7 billion euros next year, said Ivan Lathouders, an analyst at Banque Degroof SA in Brussels, in a report last week.
Short-Selling Restricted
Fortis reported a 49 percent decline in second-quarter profit on credit-related writedowns on Aug. 4. The banking business's core Tier I capital ratio, an indicator of a bank's ability to absorb losses, was 7.4 percent at the end of June, compared with Fortis's own target of 6 percent.
The company's structured credit portfolio, which includes collateralized debt obligations and U.S. mortgage-backed securities, amounted to 41.7 billion euros at the end of June. Fortis said Aug. 4 the pretax impact of the credit market turmoil on its earnings was 918 million euros in the first half.
Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.
Belgium will buy 49 percent of Fortis's Belgian banking unit for 4.7 billion euros, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch banking business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49 percent of Fortis's banking division in that country.
Fortis is the largest European firm to be bailed out in the global financial crisis that drove Lehman Brothers Holdings Inc. into bankruptcy two weeks ago and prompted U.S. President George W. Bush to seek a $700 billion bank rescue package. Fortis dropped 35 percent last week in Brussels trading on concern the company would struggle to replenish capital depleted by the 24.2 billion-euro takeover of ABN Amro Holding NV units and credit writedowns.
``Confidence in Fortis needs to be restored,'' said Corne van Zeijl, a senior portfolio manager at SNS Asset Management in Den Bosch, the Netherlands, who oversees about $1.1 billion and owns Fortis shares.
Fortis plans to sell its stake in ABN Amro's consumer banking unit, though a buyer wasn't identified. Fortis joined with Royal Bank of Scotland Group Plc and Spain's Banco Santander SA last year to buy Amsterdam-based ABN Amro for 72 billion euros, just as the U.S. subprime mortgage market collapsed.
Lippens Resigns
Fortis Chairman Maurice Lippens stepped down and will be replaced by someone from outside the company, Fortis said. The firm picked company insider Filip Dierckx to succeed Herman Verwilst as chief executive officer on Sept. 26, just three months after former CEO Jean-Paul Votron was pushed out.
Fortis, formed in the 1990 merger of the Dutch insurance company NV Amev, Belgian insurer AG Group and the Dutch bank VSB, angered investors on June 26 by scrapping the interim dividend and announcing plans to sell shares to help strengthen its finances.
``We're buying power in the bank, getting more influence on the decisions that will be made, that's what savers need in these times,'' Dutch Finance Minister Wouter Bos told Dutch public television NOS. Bos said he couldn't comment on who'll buy the ABN Amro business.
The collapse of New York-based Lehman and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc. was seized by regulators last week in the biggest U.S. bank failure in history.
Bradford & Bingley
Bradford & Bingley Plc, Britain's biggest lender to landlords, may be taken over by another bank or nationalized today under a U.K. government-backed plan to protect 21 billion pounds ($39 billion) of customer deposits.
Hypo Real Estate Holding AG, Germany's second-biggest commercial-property lender, said today it received a credit facility, following a report by the Financial Times Deutschland that the company may collapse.
In the U.S., Bush and congressional leaders said yesterday in Washington that they had reached agreement on the rescue package, which is designed to revive moribund credit markets.
Fortis tried three days ago to assuage investor concerns by stating that its financial position was ``solid,'' and that it had identified banking and insurance businesses to sell worth as much as 10 billion euros. Fortis said it wouldn't sell assets at fire-sale prices, and didn't have an urgent need for funds.
`Over-Leveraged'
The remarks, presented in an impromptu press conference by Verwilst and Dierckx, failed to stem the selling. The stock ended the day down 20 percent.
``Markets thought that they were over-leveraged,'' European Central Bank Governing Council member Nout Wellink said. ``What's happening in the U.S. is having an impact on the rest of the world. At the end of the day Fortis is a good bank,'' said Wellink, who also heads the Dutch central bank.
Fortis has fallen 71 percent this year in Brussels, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros.
The company has about 3 billion euros of bonds maturing this year and needs to refinance an additional 7 billion euros next year, said Ivan Lathouders, an analyst at Banque Degroof SA in Brussels, in a report last week.
Short-Selling Restricted
Fortis reported a 49 percent decline in second-quarter profit on credit-related writedowns on Aug. 4. The banking business's core Tier I capital ratio, an indicator of a bank's ability to absorb losses, was 7.4 percent at the end of June, compared with Fortis's own target of 6 percent.
The company's structured credit portfolio, which includes collateralized debt obligations and U.S. mortgage-backed securities, amounted to 41.7 billion euros at the end of June. Fortis said Aug. 4 the pretax impact of the credit market turmoil on its earnings was 918 million euros in the first half.
Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.
AIG eyes sale of more than 15 businesses- report
American International Group, the insurer bailed out by the US Federal Reserve earlier this month, is looking to sell more than 15 businesses, to repay its $85 billion government loan, a newspaper report said on Sunday.
Citing people close to the situation, the newspaper said AIG was prepared to consider selling most of its operations besides its international life insurance unit and US pension businesses. The company's board was meeting in New York on Sunday night to discuss possible sales, the newspaper said.
AIG was not immediately available to comment. Assets AIG is considering selling include its aircraft leasing unit International Lease Finance Corp, its 59 per cent stake in reinsurer Transatlantic Holdings as well as its property portfolio and private equity investments, according to the article.
The paper said no final decisions had been made on what assets to sell. AIG, once the world's most valuable insurer, needs to raise cash quickly to repay the $85 billion loan that allowed it to avoid bankruptcy after taking massive losses on mortgage derivatives. If the loan is not repaid, the US government has the right to take an almost 80 per cent stake, heavily diluting investors' stock.
Citing people close to the situation, the newspaper said AIG was prepared to consider selling most of its operations besides its international life insurance unit and US pension businesses. The company's board was meeting in New York on Sunday night to discuss possible sales, the newspaper said.
AIG was not immediately available to comment. Assets AIG is considering selling include its aircraft leasing unit International Lease Finance Corp, its 59 per cent stake in reinsurer Transatlantic Holdings as well as its property portfolio and private equity investments, according to the article.
The paper said no final decisions had been made on what assets to sell. AIG, once the world's most valuable insurer, needs to raise cash quickly to repay the $85 billion loan that allowed it to avoid bankruptcy after taking massive losses on mortgage derivatives. If the loan is not repaid, the US government has the right to take an almost 80 per cent stake, heavily diluting investors' stock.
Infy may top HCL bid with 720p offer
Infosys is likely to make a one-time move to match or surpass HCL’s offer to acquire London-headquartered SAP consulting firm Axon, but would guard itself from entering into an expensive bidding war, sources said.
Axon board, which received HCL’s 650 pence counter offer amounting to $811 mn on Friday, is expected to formally discuss the development after providing Infosys the mandatory 60-hour window to react.
Infosys, which made 600 pence offer to buy Axon for $753 mn last month, is expected to disclose its plan on Monday.
Banking sources who have tracked Infosys believe the Bangalore-based tech giant could make a conditional offer—either matching or going up to 710-720 pence—after getting an assurance from Axon that it would consider another revised bid by HCL, or any other player, only if it comes at 750-755 pence or more.
However, it remains to be seen if HCL and Infosys opt for a bidding war. Some bankers argued that Infosys’ aversion for expensive acquisitions may take it out of fray beyond 700-720 pence. However, anticipating an escalation in the bidding war, LSE-listed Axon saw its stock price gallop on Friday to close at 682 pence.
Banking sources said HCL’s counter offer with a narrow 8.3% premium was a strategy banking on Infy’s lack of appetite for an aggressive bidding war. “Why pay 15% premium straight away if you can get Infy out with 8.3%,” said one banker.
But then, as a sectoral analyst warned, Infosys may turn the heat on HCL game plan as its legendary organic growth story looks increasingly uncertain in the midst of economic slowdown. Analysts said it was interesting why Indian companies were now aggressively chasing Axon, which has been an acquisition target for around two years.
Infy’s original offer—valued at 24 times Axon’s EBITDA—was already perceived to be rich. If it makes revised offer, Infosys will lace the unfolding discussions with softer arguments like the benefits of aligning with a stronger company that has an acclaimed work culture. There is also a likelihood that given the legal concurrence given by the Axon management to Infosys, the latter might leverage it to rein in other shareholders.
But if it’s hard numbers doing the talk, as it often happens with shareholders of UK-listed companies, Infy is widely expected to opt out. The report last month on Infosys’ announcement of its intention of acquire Axon said that a counter-bid was likely. It is understood that Infosys had factored in the possibility that it may have to hike its offer by 15-20%.
An eventual HCL offer could be $1 bn in payout forcing the company to raise significant debt from StanChart and HSBC that have offered a line of credit. HCL has over $500 mn sitting on books, but is unlikely to plough all of that into the acquisition play. Infy, on other hand, has a reserve of over $1.8 bn and has been traditionally wary of expensive inorganic growth strategies.
The Axon acquisition tale may take many more twists as there is speculation that besides the Indian players, there are also European and Japanese entities looking into company very keenly. It was reported earlier this month that Japanese major Fujitsu may also enter the fray.
Axon board, which received HCL’s 650 pence counter offer amounting to $811 mn on Friday, is expected to formally discuss the development after providing Infosys the mandatory 60-hour window to react.
Infosys, which made 600 pence offer to buy Axon for $753 mn last month, is expected to disclose its plan on Monday.
Banking sources who have tracked Infosys believe the Bangalore-based tech giant could make a conditional offer—either matching or going up to 710-720 pence—after getting an assurance from Axon that it would consider another revised bid by HCL, or any other player, only if it comes at 750-755 pence or more.
However, it remains to be seen if HCL and Infosys opt for a bidding war. Some bankers argued that Infosys’ aversion for expensive acquisitions may take it out of fray beyond 700-720 pence. However, anticipating an escalation in the bidding war, LSE-listed Axon saw its stock price gallop on Friday to close at 682 pence.
Banking sources said HCL’s counter offer with a narrow 8.3% premium was a strategy banking on Infy’s lack of appetite for an aggressive bidding war. “Why pay 15% premium straight away if you can get Infy out with 8.3%,” said one banker.
But then, as a sectoral analyst warned, Infosys may turn the heat on HCL game plan as its legendary organic growth story looks increasingly uncertain in the midst of economic slowdown. Analysts said it was interesting why Indian companies were now aggressively chasing Axon, which has been an acquisition target for around two years.
Infy’s original offer—valued at 24 times Axon’s EBITDA—was already perceived to be rich. If it makes revised offer, Infosys will lace the unfolding discussions with softer arguments like the benefits of aligning with a stronger company that has an acclaimed work culture. There is also a likelihood that given the legal concurrence given by the Axon management to Infosys, the latter might leverage it to rein in other shareholders.
But if it’s hard numbers doing the talk, as it often happens with shareholders of UK-listed companies, Infy is widely expected to opt out. The report last month on Infosys’ announcement of its intention of acquire Axon said that a counter-bid was likely. It is understood that Infosys had factored in the possibility that it may have to hike its offer by 15-20%.
An eventual HCL offer could be $1 bn in payout forcing the company to raise significant debt from StanChart and HSBC that have offered a line of credit. HCL has over $500 mn sitting on books, but is unlikely to plough all of that into the acquisition play. Infy, on other hand, has a reserve of over $1.8 bn and has been traditionally wary of expensive inorganic growth strategies.
The Axon acquisition tale may take many more twists as there is speculation that besides the Indian players, there are also European and Japanese entities looking into company very keenly. It was reported earlier this month that Japanese major Fujitsu may also enter the fray.
Wednesday, September 24, 2008
Goldman Gets Buffet's Aid in $7.5 Billion Fundraising
Goldman Sachs Group Inc. won the backing of Warren Buffett, the world's preeminent stock-picker, as the Wall Street firm seeks to raise cash from investors whose faith in the investment-banking business model has been shaken.
For Goldman, Buffett's endorsement came at a price. Berkshire Hathaway Inc., led by the 78-year-old billionaire, is buying $5 billion of perpetual preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. The common stock closed yesterday at $125.05, providing Buffett with an instant paper profit of $437 million.
``It's a hell of a deal for Buffett,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. who rates Goldman stock ``market perform.'' ``The key thing for Goldman is making it through the credit cycle, and they're doing the right stuff.''
Goldman Chief Executive Officer Lloyd Blankfein is turning to Buffett, the second-richest American after Microsoft Corp. founder Bill Gates, to boost market confidence even though the investment bank hasn't reported a quarterly loss since it went public in 1999. The bankruptcy of Lehman Brothers Holdings Inc. and emergency sale of Merrill Lynch & Co. to Bank of America Corp. on Sept. 15 have fueled fears about firms that rely on bond markets for funding.
In addition to raising money from Buffett, Goldman said it plans to sell at least $2.5 billion of common stock to the public. It will be the firm's first common stock offering since 2000. No details of the planned offering were disclosed in a statement released by the New York-based company yesterday.
Lehman's Lesson
Sumitomo Mitsui Financial Group Inc., Japan's second-largest bank, will invest several hundred billion yen in Goldman, Kyodo news reported, without saying where it obtained the information. Chika Togawa, a spokeswoman for the Tokyo-based bank, said it hadn't decided to do so. Goldman spokeswoman Hiroko Matsumoto declined to comment.
Goldman surged in trading after the close of the New York Stock Exchange, following the announcement of the agreement with Buffett. The shares, which closed at $125.05 in composite trading, jumped as high as $138.88, an 11 percent increase, at 5:50 p.m. in New York.
``At this point you're better safe than sorry, I think that's the moral of Lehman,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``Everything's different because of the extraordinarily weak market conditions, as vividly described by our Treasury Secretary and Fed Chairman'' in congressional testimony yesterday, Hendler said.
Fickle Funding
Federal Reserve Chairman Ben S. Bernanke joined Treasury Secretary Henry Paulson in urging skeptical lawmakers yesterday to quickly pass a $700 billion rescue for financial institutions, saying the U.S. economy will shrink if markets don't begin functioning normally.
Wall Street's biggest firms lost investors' confidence this year as writedowns and losses on mortgage assets and other high- risk, high-yield loans swelled, wiping out profits and eroding shareholder equity at companies including Merrill and Lehman, both based in New York.
Bear Stearns Cos., the smallest of the five biggest U.S. securities firms, was forced into a government-assisted fire sale to JPMorgan Chase & Co. in March after losing access to short- term funds in the markets. JPMorgan, the third-largest U.S. bank by assets, is based in New York.
Lehman's collapse and Merrill's sudden sale this month reignited concern that Wall Street's depreciating assets and reliance on fickle bond-market funding mean the industry's ability to generate profit has diminished.
The Oracle
The decision to seek a cash infusion marks a reversal for Goldman, which this week transformed itself from the biggest U.S. securities firm to the nation's fourth-largest bank holding company. Less than a year ago, Goldman was posting record profits and awarding record bonuses: Blankfein and his two top deputies reaped payouts totaling more than $67 million apiece in 2007.
The company, while suffering from a decline in trading and investment banking revenue, has booked $4.9 billion of losses on devalued assets, a fraction of the writedowns taken by rivals such as Citigroup Inc., Merrill and Morgan Stanley.
``The investment will further bolster our strong capitalization and liquidity position,'' Blankfein, 54, said in the statement. Berkshire's commitment ``is a strong validation of our client franchise and future prospects,'' he said.
Known as the ``Oracle of Omaha,'' Buffett has become a cult figure among investors, drawing 31,000 people to an Omaha arena for his annual shareholders meeting this year.
`Affirmation'
Mutual funds and individuals mimic his stock picks in an effort to duplicate his success, and an academic study in 2007 found that using this strategy for 31 years would have delivered annualized returns of about 25 percent, double the return of the S&P 500.
Buffett transformed Berkshire over four decades from a failing textile manufacturer into a $200 billion holding company by buying out-of-favor stocks and companies whose business and management he deemed superior. In the process, he became the second-richest man in the U.S., according to Forbes magazine.
Buffett is ``getting very attractive terms, but Goldman is getting very attractive affirmation of their value from an investor with Warren's stature,'' said Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages more than $3 billion, including Berkshire shares.
The last time one of the biggest U.S. securities firms received an investment from Buffett was in 1987, when New York- based Salomon Inc. turned to him for a $700 million infusion to fend off an unwanted takeover.
Bank Conversion
The Goldman warrants Buffett is buying may themselves be worth $1.8 billion, according to Scott Roth, management partner at Severn River Capital Management, a $200 million hedge fund based in Greenwich, Connecticut. He said he calculated that Buffett is buying the preferred stock for about $3.2 billion, after accounting for the shares he's getting through warrants.
In contrast, Morgan Stanley agreed on Sept. 22 to sell as much as 20 percent of itself for about $8.4 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank.
Both Goldman and Morgan Stanley said this week that they are converting to bank holding companies supervised by the Federal Reserve, a move that allows them permanent access to borrowing from the Fed and permits more flexible accounting for some assets.
``It's a good move for Goldman, but at a very expensive price,'' said Roth, referring to Buffett's investment. Roth said he's betting on an increase in shares of Goldman, where he worked more than a decade ago. Buffett's getting ``more value than when he bought Salomon.''
`Intellectual Capital'
Berkshire's preferred stock in Goldman can be repurchased by the investment bank at any time at a 10 percent premium, according to the terms of the agreement. The stock's 10 percent dividend offers a lower yield than securities issued by Merrill Lynch in April and by Citigroup Inc. in May, Bloomberg data show.
``Goldman Sachs is an exceptional institution,'' said Buffett in the statement. ``It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.''
Buffett and Goldman have long-standing ties. Buffett has a close relationship with Byron Trott, a Goldman banker based in Chicago, and has singled him out for praise in his annual reports to shareholders.
Goldman's stock has dropped 42 percent since the start of 2008 and 19 percent since the beginning of last week. The cost of credit default swaps used to insure against a default in the firm's debt jumped 0.9 percentage points to 3.8 percentage points yesterday before the Buffett announcement, according to broker Phoenix Partners Group in New York.
Leverage Ratio
At that price, it cost $380,000 a year to protect $10 million of Goldman debt for five years. Last week the price reached a record $685,000.
One concern for investors has been the firm's leverage, or the amount of assets held with every dollar of shareholder equity. Goldman owned $23.70 of assets for every dollar of shareholder equity at the end of August, making the firm dependent on raising debt in the markets to help finance its $1.08 trillion balance sheet.
With an additional $7.5 billion of equity, the leverage ratio will drop to 20.3 times. That's more consistent with the level regulators will likely allow for commercial banks, which are overseen by the Fed, Bernstein's Hintz said.
For Goldman, Buffett's endorsement came at a price. Berkshire Hathaway Inc., led by the 78-year-old billionaire, is buying $5 billion of perpetual preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. The common stock closed yesterday at $125.05, providing Buffett with an instant paper profit of $437 million.
``It's a hell of a deal for Buffett,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. who rates Goldman stock ``market perform.'' ``The key thing for Goldman is making it through the credit cycle, and they're doing the right stuff.''
Goldman Chief Executive Officer Lloyd Blankfein is turning to Buffett, the second-richest American after Microsoft Corp. founder Bill Gates, to boost market confidence even though the investment bank hasn't reported a quarterly loss since it went public in 1999. The bankruptcy of Lehman Brothers Holdings Inc. and emergency sale of Merrill Lynch & Co. to Bank of America Corp. on Sept. 15 have fueled fears about firms that rely on bond markets for funding.
In addition to raising money from Buffett, Goldman said it plans to sell at least $2.5 billion of common stock to the public. It will be the firm's first common stock offering since 2000. No details of the planned offering were disclosed in a statement released by the New York-based company yesterday.
Lehman's Lesson
Sumitomo Mitsui Financial Group Inc., Japan's second-largest bank, will invest several hundred billion yen in Goldman, Kyodo news reported, without saying where it obtained the information. Chika Togawa, a spokeswoman for the Tokyo-based bank, said it hadn't decided to do so. Goldman spokeswoman Hiroko Matsumoto declined to comment.
Goldman surged in trading after the close of the New York Stock Exchange, following the announcement of the agreement with Buffett. The shares, which closed at $125.05 in composite trading, jumped as high as $138.88, an 11 percent increase, at 5:50 p.m. in New York.
``At this point you're better safe than sorry, I think that's the moral of Lehman,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``Everything's different because of the extraordinarily weak market conditions, as vividly described by our Treasury Secretary and Fed Chairman'' in congressional testimony yesterday, Hendler said.
Fickle Funding
Federal Reserve Chairman Ben S. Bernanke joined Treasury Secretary Henry Paulson in urging skeptical lawmakers yesterday to quickly pass a $700 billion rescue for financial institutions, saying the U.S. economy will shrink if markets don't begin functioning normally.
Wall Street's biggest firms lost investors' confidence this year as writedowns and losses on mortgage assets and other high- risk, high-yield loans swelled, wiping out profits and eroding shareholder equity at companies including Merrill and Lehman, both based in New York.
Bear Stearns Cos., the smallest of the five biggest U.S. securities firms, was forced into a government-assisted fire sale to JPMorgan Chase & Co. in March after losing access to short- term funds in the markets. JPMorgan, the third-largest U.S. bank by assets, is based in New York.
Lehman's collapse and Merrill's sudden sale this month reignited concern that Wall Street's depreciating assets and reliance on fickle bond-market funding mean the industry's ability to generate profit has diminished.
The Oracle
The decision to seek a cash infusion marks a reversal for Goldman, which this week transformed itself from the biggest U.S. securities firm to the nation's fourth-largest bank holding company. Less than a year ago, Goldman was posting record profits and awarding record bonuses: Blankfein and his two top deputies reaped payouts totaling more than $67 million apiece in 2007.
The company, while suffering from a decline in trading and investment banking revenue, has booked $4.9 billion of losses on devalued assets, a fraction of the writedowns taken by rivals such as Citigroup Inc., Merrill and Morgan Stanley.
``The investment will further bolster our strong capitalization and liquidity position,'' Blankfein, 54, said in the statement. Berkshire's commitment ``is a strong validation of our client franchise and future prospects,'' he said.
Known as the ``Oracle of Omaha,'' Buffett has become a cult figure among investors, drawing 31,000 people to an Omaha arena for his annual shareholders meeting this year.
`Affirmation'
Mutual funds and individuals mimic his stock picks in an effort to duplicate his success, and an academic study in 2007 found that using this strategy for 31 years would have delivered annualized returns of about 25 percent, double the return of the S&P 500.
Buffett transformed Berkshire over four decades from a failing textile manufacturer into a $200 billion holding company by buying out-of-favor stocks and companies whose business and management he deemed superior. In the process, he became the second-richest man in the U.S., according to Forbes magazine.
Buffett is ``getting very attractive terms, but Goldman is getting very attractive affirmation of their value from an investor with Warren's stature,'' said Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages more than $3 billion, including Berkshire shares.
The last time one of the biggest U.S. securities firms received an investment from Buffett was in 1987, when New York- based Salomon Inc. turned to him for a $700 million infusion to fend off an unwanted takeover.
Bank Conversion
The Goldman warrants Buffett is buying may themselves be worth $1.8 billion, according to Scott Roth, management partner at Severn River Capital Management, a $200 million hedge fund based in Greenwich, Connecticut. He said he calculated that Buffett is buying the preferred stock for about $3.2 billion, after accounting for the shares he's getting through warrants.
In contrast, Morgan Stanley agreed on Sept. 22 to sell as much as 20 percent of itself for about $8.4 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank.
Both Goldman and Morgan Stanley said this week that they are converting to bank holding companies supervised by the Federal Reserve, a move that allows them permanent access to borrowing from the Fed and permits more flexible accounting for some assets.
``It's a good move for Goldman, but at a very expensive price,'' said Roth, referring to Buffett's investment. Roth said he's betting on an increase in shares of Goldman, where he worked more than a decade ago. Buffett's getting ``more value than when he bought Salomon.''
`Intellectual Capital'
Berkshire's preferred stock in Goldman can be repurchased by the investment bank at any time at a 10 percent premium, according to the terms of the agreement. The stock's 10 percent dividend offers a lower yield than securities issued by Merrill Lynch in April and by Citigroup Inc. in May, Bloomberg data show.
``Goldman Sachs is an exceptional institution,'' said Buffett in the statement. ``It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.''
Buffett and Goldman have long-standing ties. Buffett has a close relationship with Byron Trott, a Goldman banker based in Chicago, and has singled him out for praise in his annual reports to shareholders.
Goldman's stock has dropped 42 percent since the start of 2008 and 19 percent since the beginning of last week. The cost of credit default swaps used to insure against a default in the firm's debt jumped 0.9 percentage points to 3.8 percentage points yesterday before the Buffett announcement, according to broker Phoenix Partners Group in New York.
Leverage Ratio
At that price, it cost $380,000 a year to protect $10 million of Goldman debt for five years. Last week the price reached a record $685,000.
One concern for investors has been the firm's leverage, or the amount of assets held with every dollar of shareholder equity. Goldman owned $23.70 of assets for every dollar of shareholder equity at the end of August, making the firm dependent on raising debt in the markets to help finance its $1.08 trillion balance sheet.
With an additional $7.5 billion of equity, the leverage ratio will drop to 20.3 times. That's more consistent with the level regulators will likely allow for commercial banks, which are overseen by the Fed, Bernstein's Hintz said.
Tuesday, September 23, 2008
Starting a New Era at Goldman and Morgan
The transformation of Wall Street picked up pace on Monday as Goldman Sachs and Morgan Stanley, the last big independent investment banks, moved to restructure into larger, less risk-taking organizations that will be subject to far greater regulation by the Federal Reserve.
The changes came after Goldman and Morgan Stanley on Sunday night received permission from the Federal Reserve to become bank holding companies. The change means they will be able finance their activities with insured deposits but in return must reduce the amount they can borrow to make the kind of big trading bets that drove huge profits, and massive bonuses for executives, over the last several years of Wall Street’s latest Gilded Age.
Morgan Stanley moved quickly into the new era on Monday, announcing that it planned to sell up to a 20 percent stake in itself to Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion. Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Goldman Sachs is also expected to move to increase its deposit base and add more capital to its balance sheet.
The changes by Morgan Stanley and Goldman essentially bring to an end the era of the big, independent Wall Street investment bank and a return to the model that dominated before the Glass-Steagall Act of 1933 forbade commercial banks from also owning securities firms.
Both banks said they requested the change in their status. But the changes also closely follow comments from executives at both investment houses saying their business model was not broken and that transforming into deposit-funded commercial banks would not necessarily help them perform better. This raised the question of whether the change was really voluntary, which both banks insist it was, or was mandated by a Federal Reserve eager not to have to come to the rescue of another flailing financial institution.
The changes, which came as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms, amount to a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.
It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives.
Commercial banks tend to produce both more modest profits and payouts to top executives.
“The kind of bonuses you saw on Wall Street over the last five years are not something you are likely to ever see again, not in our lifetime,” said Charles Geisst, a Wall Street historian and professor at Manhattan College.
By becoming bank holding companies, Morgan Stanley and Goldman are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.
For decades, firms like Morgan Stanley and Goldman Sachs thrived by taking bold bets with their own money, often using enormous amounts of debt to increase their profits, with little outside oversight.
They were the envy of Wall Street, dominating the industry’s most lucrative businesses, landing headline-grabbing deals and advising companies and governments on mergers, stock offerings and restructurings.
But that brash model was torn apart over the last several weeks as investors lost confidence in the way they made those bets during the recent credit boom, when investment banks expanded with aplomb into esoteric securities, the risks of which were not easily understood.
Over several harrowing days, clients started pulling their money, share prices plunged and these banks’ entire enterprises were brought to the brink.
In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities.
It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies.
The decision by the banks to become a holding company also raises questions about whether the Federal Reserve will seek to regulate hedge funds, many of the largest of which closely resemble investment banks like Goldman.
Just a year ago investment banks, the titans of global finance, considered bank regulation a millstone to be avoided at all costs. Commercial banks have to subject themselves to restrictions on how much money they can borrow and what kinds of businesses they can be in. Lobbyists for firms like Goldman spent years fending off closer supervision of their business.
As bank holding companies, the two banks, whose shares have lost about half their value this year, will have to reduce the amount of money they can borrow relative to their capital.
That will make them more financially sound but will also significantly limit their profits. Today, both Goldman Sachs and Morgan Stanley have $1 of capital for every $22 of assets. By contrast, Bank of America’s has less than $11 for every $1 of capital.
JPMorgan Chase acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion.
As bank holding companies, Morgan and Goldman will have greater access to the discount window of the Federal Reserve, which banks can use to borrow money from the central bank. While they were allowed to draw on temporary Fed lending facilities in recent months, they could not borrow against the same wide array of collateral that commercial banks could. The discount window access for investment banks is expected to be phased out in January.
It will take time for Goldman and Morgan to transform into fully regulated banks because they cannot quickly reduce how much money they borrow relative to their assets. Both banks are likely to seek waivers from the Federal Reserve to give them time to comply with the capital requirements imposed on deposit-funded commercial banks.
The Fed and the Securities and Exchange Commission have had examiners at investment banks since March, giving regulators huge insight into their operations.
Both banks already have limited retail deposit-taking businesses, which they plan to expand over time. Morgan Stanley had $36 billion in retail deposits as of Aug. 31 and Goldman Sachs had $20 billion in deposits.
“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,” Lloyd C.Blankfein, the chairman and chief executive of Goldman, said in a statement on Sunday night.
John J. Mack, the chairman and chief executive of Morgan Stanley, said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position — with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.”
In recent days, Morgan Stanley had sought other ways to bolster its capital and had been in advanced talks with China’s sovereign wealth fund and others about raising billions of dollars, people briefed on the matter said Sunday night. It had also been talking about a merger with Wachovia, a large commercial bank based in Charlotte, N.C.
With their transition to operating as bank holding companies, those talks are likely to take a different form, because now Morgan Stanley can buy a commercial bank.
The changes came after Goldman and Morgan Stanley on Sunday night received permission from the Federal Reserve to become bank holding companies. The change means they will be able finance their activities with insured deposits but in return must reduce the amount they can borrow to make the kind of big trading bets that drove huge profits, and massive bonuses for executives, over the last several years of Wall Street’s latest Gilded Age.
Morgan Stanley moved quickly into the new era on Monday, announcing that it planned to sell up to a 20 percent stake in itself to Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion. Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Goldman Sachs is also expected to move to increase its deposit base and add more capital to its balance sheet.
The changes by Morgan Stanley and Goldman essentially bring to an end the era of the big, independent Wall Street investment bank and a return to the model that dominated before the Glass-Steagall Act of 1933 forbade commercial banks from also owning securities firms.
Both banks said they requested the change in their status. But the changes also closely follow comments from executives at both investment houses saying their business model was not broken and that transforming into deposit-funded commercial banks would not necessarily help them perform better. This raised the question of whether the change was really voluntary, which both banks insist it was, or was mandated by a Federal Reserve eager not to have to come to the rescue of another flailing financial institution.
The changes, which came as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms, amount to a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.
It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives.
Commercial banks tend to produce both more modest profits and payouts to top executives.
“The kind of bonuses you saw on Wall Street over the last five years are not something you are likely to ever see again, not in our lifetime,” said Charles Geisst, a Wall Street historian and professor at Manhattan College.
By becoming bank holding companies, Morgan Stanley and Goldman are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.
For decades, firms like Morgan Stanley and Goldman Sachs thrived by taking bold bets with their own money, often using enormous amounts of debt to increase their profits, with little outside oversight.
They were the envy of Wall Street, dominating the industry’s most lucrative businesses, landing headline-grabbing deals and advising companies and governments on mergers, stock offerings and restructurings.
But that brash model was torn apart over the last several weeks as investors lost confidence in the way they made those bets during the recent credit boom, when investment banks expanded with aplomb into esoteric securities, the risks of which were not easily understood.
Over several harrowing days, clients started pulling their money, share prices plunged and these banks’ entire enterprises were brought to the brink.
In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities.
It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies.
The decision by the banks to become a holding company also raises questions about whether the Federal Reserve will seek to regulate hedge funds, many of the largest of which closely resemble investment banks like Goldman.
Just a year ago investment banks, the titans of global finance, considered bank regulation a millstone to be avoided at all costs. Commercial banks have to subject themselves to restrictions on how much money they can borrow and what kinds of businesses they can be in. Lobbyists for firms like Goldman spent years fending off closer supervision of their business.
As bank holding companies, the two banks, whose shares have lost about half their value this year, will have to reduce the amount of money they can borrow relative to their capital.
That will make them more financially sound but will also significantly limit their profits. Today, both Goldman Sachs and Morgan Stanley have $1 of capital for every $22 of assets. By contrast, Bank of America’s has less than $11 for every $1 of capital.
JPMorgan Chase acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion.
As bank holding companies, Morgan and Goldman will have greater access to the discount window of the Federal Reserve, which banks can use to borrow money from the central bank. While they were allowed to draw on temporary Fed lending facilities in recent months, they could not borrow against the same wide array of collateral that commercial banks could. The discount window access for investment banks is expected to be phased out in January.
It will take time for Goldman and Morgan to transform into fully regulated banks because they cannot quickly reduce how much money they borrow relative to their assets. Both banks are likely to seek waivers from the Federal Reserve to give them time to comply with the capital requirements imposed on deposit-funded commercial banks.
The Fed and the Securities and Exchange Commission have had examiners at investment banks since March, giving regulators huge insight into their operations.
Both banks already have limited retail deposit-taking businesses, which they plan to expand over time. Morgan Stanley had $36 billion in retail deposits as of Aug. 31 and Goldman Sachs had $20 billion in deposits.
“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,” Lloyd C.Blankfein, the chairman and chief executive of Goldman, said in a statement on Sunday night.
John J. Mack, the chairman and chief executive of Morgan Stanley, said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position — with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.”
In recent days, Morgan Stanley had sought other ways to bolster its capital and had been in advanced talks with China’s sovereign wealth fund and others about raising billions of dollars, people briefed on the matter said Sunday night. It had also been talking about a merger with Wachovia, a large commercial bank based in Charlotte, N.C.
With their transition to operating as bank holding companies, those talks are likely to take a different form, because now Morgan Stanley can buy a commercial bank.
Friday, September 19, 2008
Morgan Stanley, others may get gov't lifeline
America's battered financial services industry is close to getting the lifeline it was desperately seeking as government leaders sketched out a plan late Thursday to rescue banks from bad debts that threatened their survival.
Treasury Secretary Henry Paulson said after a meeting with congressional leaders that there was consensus on a plan to deal with illiquid real estate and other assets on the books of financial institutions.
That could require massive amounts of additional federal funding, but leaders from both parties in Congress said they are prepared to act quickly on legislation needed to save big Wall Street firms and Main Street banks alike from collapse amid the biggest realignment of the financial system since the Great Depression.
Though specific details have not been spelled out, the legislation could spare the weakest banking companies from failure. And it takes some of the immediate pressure off the two remaining major independent investment banks, Goldman Sachs and Morgan Stanley, to reach deals with deposit-taking institutions to ensure a steady flow of funds for their operations.
That was one of the reasons Merrill Lynch hastily agreed to be acquired by Bank of America Corp. earlier this week.
SEC Chairman Christopher Cox, who attended the closed-door meeting at the Capitol with Paulson and Federal Reserve Chairman Ben Bernanke, also had good news for financial companies struggling to fend off investors who sell their stock short _ a bet that they can buy it back later at a cheaper price and make a profit.
Cox told the lawmakers the SEC may order a temporary emergency ban on all short-selling _ not just the aggressive forms it already has targeted, according to a person familiar with the matter.
The ban might apply to stocks of selected financial companies, to all financial companies or even possibly to all public companies. Cox and the other four SEC commissioners were meeting Thursday night to consider the plan, according to the person, who spoke on condition of anonymity because the possible action hasn't been publicly announced.
These latest government moves come too late for Bear Stearns, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., the three Wall Street pillars that have lost independence or been toppled since the credit crisis began a year ago.
``This staves off judgment day,'' said Anthony Sabino, professor of law and business at St. John's University. ``This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them.''
Investors took comfort from the potential for some kind of government intervention. Shares of Goldman Sachs Group Inc. and Morgan Stanley shot up more than 10 percent in after-hours trading late Thursday.
Until a late reversal in the trading day Thursday, the dramatic slide in the shares of those two investment banks led many to think they had to act quickly to tie up with commercial banks or overseas investors with deep pockets.
The reason: Investment banks rely heavily on short-term borrowing to finance their proprietary trading and lending businesses, and the recent credit market disruptions have hammered home the point that they need to find more stable sources of funds to ride out market volatility.
``People are finally realizing that we are probably in the worst financial crisis since the Depression,'' said Alfred E. Goldman, chief market strategist for Wachovia Securities, a 49-year veteran of Wall Street. ``We're in a period of excessive fear.''
Economists including former Federal Reserve Chairman Alan Greenspan and investors like Wilbur Ross had been predicting more banks would fail in a shakeout reminiscent of the Great Depression. After the stock market's crash in 1929, 9,000 institutions failed and $140 billion of deposits were wiped out in the following decade.
The government adopted policies to protect bank depositors since then and government agencies have already closed nearly a dozen insolvent banks while making provisions to reopen them under new ownership in recent months.
Global banks and brokerages have written down more than $350 billion of distressed investments since the crisis began last year, and now bankers are looking to avoid becoming another statistic.
Morgan Stanley, the No. 2 U.S. investment bank, had been in talks with a number of potential suitors and investors to help it survive, according to people familiar with the situation who asked not to be identified by name because the discussions were still ongoing.
John J. Mack, chief executive of the 73-year-old securities firm, on Thursday told the company's 48,000 employees in a town hall meeting that he's doing everything possible to keep the embattled bank afloat. A day earlier, Mack complained in a memo to employees that their bank was ``in the midst of a market controlled by fear and rumors.''
He made a round of telephone calls late Wednesday to strike a deal or raise cash in a bid to calm investors and prevent more damage to Morgan Stanley's free-falling shares, these people said.
Morgan Stanley also opened up talks with China's sovereign wealth fund and state-owned bank Citic Group, and the Singapore Investment Fund about a possible cash infusion, people familiar with the discussions said.
There also were advanced negotiations with executives from retail bank Wachovia Corp., one person said. Other suitors could include big global banks such as Britain's HSBC Holdings PLC and Germany's Deutsche Bank.
Wachovia declined to comment about a potential deal. Spokesmen for GIC and Citic could not immediately be reached for comment.
Meanwhile, Seattle-based Washington Mutual, which has lost billions and seen its shares plummet due to subprime mortgage exposure, hired Goldman Sachs to contact potential bidders _ a list that so far includes Wells Fargo & Co., JP Morgan Chase & Co. and HSBC.
And in London, Britain's Lloyds TSB Lloyds TSB announced a $21.85-billion deal to take over struggling HBOS PLC, Britain's biggest mortgage lender.
``This isn't just a U.S. problem, it is a global problem,'' Stu Schweitzer, JPMorgan Chase & Co.'s global markets strategist told the bank's institutional clients on a conference call this week. ``The economy has its problems, the financial system has its problems, we can believe in Armageddon or believe that in the end, step by step and trial and error, the authorities will get it right.''
Treasury Secretary Henry Paulson said after a meeting with congressional leaders that there was consensus on a plan to deal with illiquid real estate and other assets on the books of financial institutions.
That could require massive amounts of additional federal funding, but leaders from both parties in Congress said they are prepared to act quickly on legislation needed to save big Wall Street firms and Main Street banks alike from collapse amid the biggest realignment of the financial system since the Great Depression.
Though specific details have not been spelled out, the legislation could spare the weakest banking companies from failure. And it takes some of the immediate pressure off the two remaining major independent investment banks, Goldman Sachs and Morgan Stanley, to reach deals with deposit-taking institutions to ensure a steady flow of funds for their operations.
That was one of the reasons Merrill Lynch hastily agreed to be acquired by Bank of America Corp. earlier this week.
SEC Chairman Christopher Cox, who attended the closed-door meeting at the Capitol with Paulson and Federal Reserve Chairman Ben Bernanke, also had good news for financial companies struggling to fend off investors who sell their stock short _ a bet that they can buy it back later at a cheaper price and make a profit.
Cox told the lawmakers the SEC may order a temporary emergency ban on all short-selling _ not just the aggressive forms it already has targeted, according to a person familiar with the matter.
The ban might apply to stocks of selected financial companies, to all financial companies or even possibly to all public companies. Cox and the other four SEC commissioners were meeting Thursday night to consider the plan, according to the person, who spoke on condition of anonymity because the possible action hasn't been publicly announced.
These latest government moves come too late for Bear Stearns, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., the three Wall Street pillars that have lost independence or been toppled since the credit crisis began a year ago.
``This staves off judgment day,'' said Anthony Sabino, professor of law and business at St. John's University. ``This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them.''
Investors took comfort from the potential for some kind of government intervention. Shares of Goldman Sachs Group Inc. and Morgan Stanley shot up more than 10 percent in after-hours trading late Thursday.
Until a late reversal in the trading day Thursday, the dramatic slide in the shares of those two investment banks led many to think they had to act quickly to tie up with commercial banks or overseas investors with deep pockets.
The reason: Investment banks rely heavily on short-term borrowing to finance their proprietary trading and lending businesses, and the recent credit market disruptions have hammered home the point that they need to find more stable sources of funds to ride out market volatility.
``People are finally realizing that we are probably in the worst financial crisis since the Depression,'' said Alfred E. Goldman, chief market strategist for Wachovia Securities, a 49-year veteran of Wall Street. ``We're in a period of excessive fear.''
Economists including former Federal Reserve Chairman Alan Greenspan and investors like Wilbur Ross had been predicting more banks would fail in a shakeout reminiscent of the Great Depression. After the stock market's crash in 1929, 9,000 institutions failed and $140 billion of deposits were wiped out in the following decade.
The government adopted policies to protect bank depositors since then and government agencies have already closed nearly a dozen insolvent banks while making provisions to reopen them under new ownership in recent months.
Global banks and brokerages have written down more than $350 billion of distressed investments since the crisis began last year, and now bankers are looking to avoid becoming another statistic.
Morgan Stanley, the No. 2 U.S. investment bank, had been in talks with a number of potential suitors and investors to help it survive, according to people familiar with the situation who asked not to be identified by name because the discussions were still ongoing.
John J. Mack, chief executive of the 73-year-old securities firm, on Thursday told the company's 48,000 employees in a town hall meeting that he's doing everything possible to keep the embattled bank afloat. A day earlier, Mack complained in a memo to employees that their bank was ``in the midst of a market controlled by fear and rumors.''
He made a round of telephone calls late Wednesday to strike a deal or raise cash in a bid to calm investors and prevent more damage to Morgan Stanley's free-falling shares, these people said.
Morgan Stanley also opened up talks with China's sovereign wealth fund and state-owned bank Citic Group, and the Singapore Investment Fund about a possible cash infusion, people familiar with the discussions said.
There also were advanced negotiations with executives from retail bank Wachovia Corp., one person said. Other suitors could include big global banks such as Britain's HSBC Holdings PLC and Germany's Deutsche Bank.
Wachovia declined to comment about a potential deal. Spokesmen for GIC and Citic could not immediately be reached for comment.
Meanwhile, Seattle-based Washington Mutual, which has lost billions and seen its shares plummet due to subprime mortgage exposure, hired Goldman Sachs to contact potential bidders _ a list that so far includes Wells Fargo & Co., JP Morgan Chase & Co. and HSBC.
And in London, Britain's Lloyds TSB Lloyds TSB announced a $21.85-billion deal to take over struggling HBOS PLC, Britain's biggest mortgage lender.
``This isn't just a U.S. problem, it is a global problem,'' Stu Schweitzer, JPMorgan Chase & Co.'s global markets strategist told the bank's institutional clients on a conference call this week. ``The economy has its problems, the financial system has its problems, we can believe in Armageddon or believe that in the end, step by step and trial and error, the authorities will get it right.''
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