105岁的周有光老人对富士康和悟本堂事件感慨万千，在他看来，中国现阶段的工业化和信息化水平都很低，不存在“中国奇迹”；权贵资本主义的问题只有靠走民主化道路才能解决；中国必须走全世界共同的发展道路
【《财经》记者 马国川】“最近两大新闻，一个是富士康的新闻，一个是悟本堂，说明中国落后是惊人的，我们的现代化没法说”。
这话出自一位105岁的老人周有光之口。
周有光被称为“汉语拼音之父”，他主持编制的国际通用的“汉语拼音方案”泽被亿万人。但很少有人知道，周有光老人的前半生是一个经济学家。他在银行供职二十多年，和几个著名经济学家在上海主办刊物《经济周报》，还在复旦大学经济研究所和上海财经学院讲授经济学。
直到1955年，周有光才奉命改行从事语言文字研究。这让他逃脱了两年后的一场劫难。在1957年的反右运动中，上海经济学界几乎全军覆没，著名经济学家、复旦大学经济研究所所长沈志远自杀，周有光的一个学生王世璋也自杀了。
虽然离开经济学界半个多世纪，但周有光老人对现实问题依然保持着清醒的认识。在接受《财经》记者采访时，他对中国经济的发展作出了自己的判断。在他看来，不存在“中国奇迹”，“没有奇迹，只有常规”，“中国要建立一个模式，我想可能性不是很大。”
《财经》：近年来，您提出社会发展的三大规律：经济，从农业化到工业化再到信息化；政治上，从神权到君权再到民权；文化，从神学到玄学再到科学。在您看来，现阶段的中国经济处于什么阶段呢？
周有光：在经济方面，中国已经进入工业化，同时进入信息化，但是水平非常低。中国的工业化是廉价劳动和外包经济，这是低水平的工业化。最近的“富士康事件”就是一个很好的例证。工人一个月正常工作只能拿到几百块钱，生活都不够，工会不能保护工人的利益。你去看看英国工业发展史，富士康这样的企业跟英国最落后时代的血汗工厂差不多。
至于信息化，我们的信息化水平也是很低的。罗斯福讲四大自由，现在我们要超越“四大自由”的自由，第五大自由就是网络自由。
网络自由是头等重要的问题，中国还没有了解自由的重要，原来“四大自由”都没有，第五大更谈不上。全球化时代是透明化的，反对透明化就是逆历史潮流而动。苏联经不起透明，一透明就垮掉了，我们难道害怕透明吗？
《财经》：随着中国经济实力的增长，这两年不断有人鼓吹“中国模式”，认为中国为世界提供了一个榜样。您怎么评价所谓的“中国模式”呢？
周有光：据我看到的资料，关于“中国模式”国内外有两种讲法。第一种讲法，是社会主义国家发展经济的中国模式。中国原来是一个社会主义国家，搞计划经济，反对市场经济。后来放弃计划经济，实行市场经济，于是经济就发展了。还有人想模仿我们，越南模仿，也很成功。
第二种讲法，认为美国的民主模式不行了，美国在慢慢衰弱下去，要衰亡，中国的模式起来了，大国崛起嘛。这种说法鼓吹说，将来世界中国模式代替美国模式。那么我就找一找，哪个国家学习我们？没有。所以我想这不是真的。
中国改革不是一步一步走的，是半步半步走的，走了半步，大家已经很满意了。外国人研究中国的社会，认为中国已经发展到日本的明治维新时代，简单来讲，就是“半封建半资本”，在政治权力高度集中的制度之下发展经济。
《财经》：政治权力高度集中的制度之下也能够发展经济？
周有光：可以发展经济。归纳起来，有几种社会转型的现象是相似的。第一种是日本的明治维新，四大财阀垄断了日本的资源。第二种是苏联瓦解以后的俄罗斯，今天俄罗斯的大资本家都是苏联原来的官员。第三种是中国，叫做“翻牌公司”，“公营”一翻牌就变成“私营” 了。第四种是印尼，苏哈托上台以后经济发展了，搞的是“裙带资本主义”。国外研究认为，这四种转型是同一个模型，都是原始积累。原始积累很难逃过。
《财经》：当前转型中的中国社会矛盾尖锐，贫富分化严重，有人说中国有堕入“权贵资本主义”的危险。您认同这种说法吗？
周有光：国内外部分研究者认为，中国不是有权贵资本主义的危险，而是已经进入权贵资本主义时代。权贵资本主义跟印尼的裙带资本主义、日本明治维新四大财阀是同一个类型，跟苏联官僚摇身变为大资本家是一个模式。俄罗斯学者写了很多文章，可惜我们很少能够看到。
《财经》：那么，权贵资本主义问题怎么解决呢？
周有光：不走民主道路是不可能解决的。专制，有野蛮专制，也有开明专制，走开明专制也可以解决一部分，但是不能彻底解决问题。本来苏联是一个集权模式，中国是学苏联的，许多国家学苏联的。学苏联最厉害的一个高潮，一共有40个国家走社会主义道路，今天还有几个呀？说明苏联这个模式失败了。中国要建立一个模式，我想可能性不是很大。中国的社会结构水平还是很低的。
最近新加坡李光耀发表了一篇很长的谈话，他说，中国是在起来，是在发展，也发展得很快，但是要追上美国，至少要30年，而且这30年美国不是站着不动的。中国是在发展，但是太乐观不行。我觉得李光耀讲得对。
《财经》：一百多年来，中国的现代化道路曲折，教训多多。您认为有哪些教训值得汲取？您理想中的现代化中国是什么样的？
周有光：最大的一个教训就是向苏联“一边倒”，苏联自己不是都垮掉了吗？
我理想的中国的未来是什么呢？我想，很简单，我们必须走全世界共同的发展道路，走这条道路，中国会发展；离开这条道路，中国受灾难。没有第二条道路、第三条道路可走。
《财经》：这些年出现的新情况，有些人觉得中国能够走出一条新路来，好像我们发展经济的方式还挺管用，我们不是创造“中国奇迹”了吗？
周有光：中国搞“社会主义市场经济”，外国朋友开玩笑说，你们不是参加WTO了，有几个WTO？改革开放以后，新加坡大学邀请我去参加国际学术会议。新加坡大学规模不大，各方面非常好。空闲下来，我和一位英国教授到公园散步聊天，我问他，许多人说新加坡是一个奇迹，你是什么看法？英国教授告诉我，世界上没有奇迹，只有常规。什么叫常规呢？按照国际先进的先例来做，但是有一个前提条件，这个国家要是民主的，要是开放的，有这个条件就可以得到国际帮助。新加坡本来是马来西亚的一部分，后来被赶了出来，李光耀大哭，我们又小又穷，又没有人才，又没有资源，怎么建立国家呢？后来召集国际会议，说建设一个新国家很简单，没有就请求帮助。新加坡走民主道路，搞开放，很短时间就“起飞”了，成为“亚洲四小龙”之一。前些年大家都说“大国崛起”，我写了一篇文章叫《小国崛起》，新加坡就是典型。
从经济学上讲，不存在“中国奇迹”。没有奇迹，只有常规。■
Wednesday, June 30, 2010
Deflationary Mindset Makes Itself at Home
By KELLY EVANS
Policy makers generally have an easier time slowing an overheating economy than trying to stimulate a contracting one. The current state of the housing market bears that out.
Although mortgage rates are at multidecade lows, borrowing activity is falling, not rising. On Wednesday, the Mortgage Bankers Association will release its indexes of purchase and refinancing activity for the week ended June 25.
The report is notoriously volatile, but its trend over the past few months is clear. Purchase applications have tumbled by 39% since late April.
Meanwhile, average borrowing rates for a 30-year, fixed-rate mortgage have dropped to about 4.75% from just over 5%
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Of course, the drop in applications partly reflects the expiration in April of the government's home-buyer tax credit. Still, similar weakness in the pace of refis also suggests that falling rates may be losing their punch.
When average, 30-year mortgage rates slipped below 5% in June 2003, MBA's refi index jumped to an all-time high of nearly 10,000.
In the years since, each dip below that key rate had a lesser impact. The latest move below 5% in May didn't spur the refi index any higher than about 3,500.
"We probably need to move squarely to 4.5% now to start generating more interest from borrowers," says Credit Suisse economist Jonathan Basile.
One problem is that many mortgage holders have refinanced in the past year or two, so rates have to fall still further to justify the costs tied to a new loan.
This is especially an issue since many lenders are raising fees, Mr. Basile notes, to offset losses elsewhere.
Tighter lending standards are another roadblock at a time when many households remain cash-strapped. Only 1.9% of consumers surveyed by the Conference Board plan to buy a home in the next six months, one of the lowest readings since 1982.
The bigger worry may be that a deflationary mindset has taken hold in the housing market. This has buyers in no hurry to lock in even today's low rates.
It is precisely this thinking that the Federal Reserve is trying to keep from taking hold in the broader economy. Housing shows, though, that even with super-low rates, the Fed can find itself pushing on a string.
Policy makers generally have an easier time slowing an overheating economy than trying to stimulate a contracting one. The current state of the housing market bears that out.
Although mortgage rates are at multidecade lows, borrowing activity is falling, not rising. On Wednesday, the Mortgage Bankers Association will release its indexes of purchase and refinancing activity for the week ended June 25.
The report is notoriously volatile, but its trend over the past few months is clear. Purchase applications have tumbled by 39% since late April.
Meanwhile, average borrowing rates for a 30-year, fixed-rate mortgage have dropped to about 4.75% from just over 5%
When average, 30-year mortgage rates slipped below 5% in June 2003, MBA's refi index jumped to an all-time high of nearly 10,000.
In the years since, each dip below that key rate had a lesser impact. The latest move below 5% in May didn't spur the refi index any higher than about 3,500.
"We probably need to move squarely to 4.5% now to start generating more interest from borrowers," says Credit Suisse economist Jonathan Basile.
One problem is that many mortgage holders have refinanced in the past year or two, so rates have to fall still further to justify the costs tied to a new loan.
This is especially an issue since many lenders are raising fees, Mr. Basile notes, to offset losses elsewhere.
Tighter lending standards are another roadblock at a time when many households remain cash-strapped. Only 1.9% of consumers surveyed by the Conference Board plan to buy a home in the next six months, one of the lowest readings since 1982.
The bigger worry may be that a deflationary mindset has taken hold in the housing market. This has buyers in no hurry to lock in even today's low rates.
It is precisely this thinking that the Federal Reserve is trying to keep from taking hold in the broader economy. Housing shows, though, that even with super-low rates, the Fed can find itself pushing on a string.
ECB Lends Less Than Forecast in Three-Month Tender (Update2)
By Gabi Thesing
June 30 (Bloomberg) -- The European Central Bank said it will lend banks 131.9 billion euros ($161.5 billion) for three months, less than economists forecast and a sign that the region’s financial industry may be stronger than investors estimated.
Banks tomorrow need to repay 442 billion euros in 12-month funds, the biggest amount ever awarded by the ECB and a key plank in its efforts to fight the financial crisis last year. Demand for the three-month cash today was a litmus test for the health of Europe’s banking system, economists said.
Demand was “surprisingly low and certainly a lot less than markets expected,” said Nick Kounis, chief European economist at Fortis Bank NV in Amsterdam. “It suggests that while there are certainly stresses in the system in some regions, it’s not as bad across the board as many people thought.”
European banks climbed after the announcement and U.S. stock futures extended gains. The euro strengthened more than half a cent to $1.2290.
Financial institutions are wary of lending to each other after Europe’s sovereign debt crisis fueled concern that some governments may struggle to refinance their debts, prompting investors to shun bonds sold by nations including Greece, Portugal and Spain. While the ECB no longer offers banks 12- month loans, the debt crisis has forced it to extend some of its other non-standard measures and to start buying the bonds of big-deficit governments.
171 Banks
The Frankfurt-based ECB still lends banks as much cash as they want at its benchmark rate of 1 percent for periods of up to six months. It said 171 banks asked for the three-month funds today. Banks can currently borrow three-month money from each other in the market at about 0.76 percent.
Eliminating the 12-month facility was part of the ECB’s long-term exit strategy and the bank has taken “every precaution” to avoid a liquidity squeeze, Governing Council member Ewald Nowotny said in Vienna yesterday.
“A lot of the original 442 billion was taken by banks who didn’t need it, banks that saw an opportunity for arbitrage,” said Patrick Jacq, head of interest rate strategy at BNP Paribas SA in Paris. “There was never going to be a repeat of the full amount.”
The ECB flooded the financial system with cheap cash after the collapse of Lehman Brothers Holdings Inc. in September 2008 to unfreeze credit markets and to help pull the economy out of the worst recession since World War II.
Perceived Tightening
Today’s loans may see short-term market borrowing costs rise as there is less excess cash in the system, Commerzbank AG analysts said. With “excess liquidity vanishing,” monetary conditions are “perceived to be tightening,” said Christoph Rieger, an interest rate strategist at Commerzbank in Frankfurt.
Still, the significance of the low take-up in the three- month tender is a “red herring” as European banks will be able to access unlimited ECB funds at various other tenders up until October and probably beyond, said Simon Maughan, a London-based banking analyst at MF Global Securities Ltd.
“Also, the benefit of unlimited cheap money is that you can use it for carry trades and play the yield curve,” he said. “Right now all the uncertainty out there about Spain, Greece and Portugal means that you don’t want to be doing that.”
Europe’s fiscal crisis continues to push up gauges of credit risk as officials conduct stress tests of European banks’ ability to withstand further market turmoil.
The difference between the three-month dollar London interbank offered rate and the overnight indexed swap rate, a gauge of banks’ reluctance to lend, climbed to 0.338 percentage point on June 25, the widest spread in a year. It was at 0.328 percentage point today. European bank shares dropped yesterday, with Allied Irish Banks Plc and Credit Agricole SA leading the declines.
To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net
June 30 (Bloomberg) -- The European Central Bank said it will lend banks 131.9 billion euros ($161.5 billion) for three months, less than economists forecast and a sign that the region’s financial industry may be stronger than investors estimated.
Banks tomorrow need to repay 442 billion euros in 12-month funds, the biggest amount ever awarded by the ECB and a key plank in its efforts to fight the financial crisis last year. Demand for the three-month cash today was a litmus test for the health of Europe’s banking system, economists said.
Demand was “surprisingly low and certainly a lot less than markets expected,” said Nick Kounis, chief European economist at Fortis Bank NV in Amsterdam. “It suggests that while there are certainly stresses in the system in some regions, it’s not as bad across the board as many people thought.”
European banks climbed after the announcement and U.S. stock futures extended gains. The euro strengthened more than half a cent to $1.2290.
Financial institutions are wary of lending to each other after Europe’s sovereign debt crisis fueled concern that some governments may struggle to refinance their debts, prompting investors to shun bonds sold by nations including Greece, Portugal and Spain. While the ECB no longer offers banks 12- month loans, the debt crisis has forced it to extend some of its other non-standard measures and to start buying the bonds of big-deficit governments.
171 Banks
The Frankfurt-based ECB still lends banks as much cash as they want at its benchmark rate of 1 percent for periods of up to six months. It said 171 banks asked for the three-month funds today. Banks can currently borrow three-month money from each other in the market at about 0.76 percent.
Eliminating the 12-month facility was part of the ECB’s long-term exit strategy and the bank has taken “every precaution” to avoid a liquidity squeeze, Governing Council member Ewald Nowotny said in Vienna yesterday.
“A lot of the original 442 billion was taken by banks who didn’t need it, banks that saw an opportunity for arbitrage,” said Patrick Jacq, head of interest rate strategy at BNP Paribas SA in Paris. “There was never going to be a repeat of the full amount.”
The ECB flooded the financial system with cheap cash after the collapse of Lehman Brothers Holdings Inc. in September 2008 to unfreeze credit markets and to help pull the economy out of the worst recession since World War II.
Perceived Tightening
Today’s loans may see short-term market borrowing costs rise as there is less excess cash in the system, Commerzbank AG analysts said. With “excess liquidity vanishing,” monetary conditions are “perceived to be tightening,” said Christoph Rieger, an interest rate strategist at Commerzbank in Frankfurt.
Still, the significance of the low take-up in the three- month tender is a “red herring” as European banks will be able to access unlimited ECB funds at various other tenders up until October and probably beyond, said Simon Maughan, a London-based banking analyst at MF Global Securities Ltd.
“Also, the benefit of unlimited cheap money is that you can use it for carry trades and play the yield curve,” he said. “Right now all the uncertainty out there about Spain, Greece and Portugal means that you don’t want to be doing that.”
Europe’s fiscal crisis continues to push up gauges of credit risk as officials conduct stress tests of European banks’ ability to withstand further market turmoil.
The difference between the three-month dollar London interbank offered rate and the overnight indexed swap rate, a gauge of banks’ reluctance to lend, climbed to 0.338 percentage point on June 25, the widest spread in a year. It was at 0.328 percentage point today. European bank shares dropped yesterday, with Allied Irish Banks Plc and Credit Agricole SA leading the declines.
To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net
Tuesday, June 29, 2010
Fast Traders Face Off With Big Investors Over 'Gaming'
By SCOTT PATTERSON
A high-tech, high-speed poker game is playing out in the stock market, and billions of dollars are at stake.
The adversaries are high-frequency traders and big investors such as mutual funds. High-speed firms are using computers to detect large "buy" and "sell" orders to adjust their trades, and traditional investors are scrambling to trade undetected.
The showdown has led to an escalating arms race, with players on both sides plowing money into ever-more-powerful technology to trade effectively. It also has led to growing tension between these camps as conventional investors call for greater regulation of their high-frequency counterparts.
The clash came to the fore after the May 6 "flash crash," which underscored the rising use of computers and algorithms to trade stocks. In testimony last week before federal regulators investigating the market plunge, high-speed firms contended they are misunderstood and that critics spread false rumors about their trading methods. Traditional money managers said fast traders have harmed their ability to trade stocks and regulators need to step in.
[Gaming]
"Attempts to classify some trading styles as 'desirable' or 'undesirable' are unproductive," said Dave Cummings, chairman of Tradebot Systems Inc., a Kansas City, Mo., high-speed firm, at the June 22 hearing.
Jeff Engelberg, a trader at Southeastern Asset Management Inc., a Memphis, Tenn., value-investing firm with about $35 billion under management, said high-speed traders are jumping ahead of his firm's trades. "Short-term traders are able to get an instantaneous glimpse into the future" through direct feeds to exchange data, he said, turning the market into "something nearer to a casino."
High-frequency trading accounts for about two-thirds of U.S. stock-market volume, according to industry estimates. Advocates of the practice include some heavy hitters, such as mutual-fund giant Vanguard Group Inc., which says it helps lower trading costs by narrowing the spread between what investors pay to buy and sell shares.
Traditional money managers largely agree that some costs have dropped. But some say they find certain trades have become more expensive to carry out, thanks to a practice critics call "gaming." With gaming, if a high-speed firm's computers detect a large buy order for a stock, for instance, the firm will instantly start snapping up the stock, expecting to quickly sell it back at a higher price as the investor keeps buying.
Phillip Krauss, head of stock trading at Chicago's Harris Investment Management, says his firm's orders are getting picked off by high-speed trading firms that use computer programs to detect orders. "They front-run us," said Mr. Krauss, whose firm manages $15 billion in assets.
To protect themselves, traditional investors like Mr. Krauss are stepping up investments in "antigaming" computer power and expertise. Big firms such as Bank of America Corp., acting on behalf of thousands of individual investors who trade through its vast brokerage network, have been rolling out high-tech platforms to help their traders avoid getting gamed.
"Antigaming was a big focus for us last year, and it's going to be a big focus for us this year," says Lee Morakis, head of sales for Bank of America's execution services for the Americas unit.
On Capitol Hill, Sen. Ted Kaufman (D., Del.), an advocate of regulation of high-speed trading, said his office has been fielding complaints from players across Wall Street who say gaming is tilting the field against them.
The Securities and Exchange Commission in January issued a report outlining its concerns about high-frequency trading and related consequences of recent changes in the structure of markets. The agency recently unveiled a plan to give large high-frequency firms unique identification codes to better track their activities.
While gaming isn't blamed for the May 6 crash, that day's downdraft has increased scrutiny of high-speed trading generally. High-speed firms have touted their ability to smooth trading by constantly stepping in to buy and sell stocks. But when trading became chaotic that day, many of these firms—along with other investors—pulled back.
Thirty-eight percent of so-called buy-side money managers—typically long-term investors—say they have a more negative view of high-frequency trading than before the flash crash, according to a recent survey by Tabb Group; 17% expressed positive views.
In many ways, the gaming dynamic isn't new but instead represents an evolution of the market. Wall Street insiders have always tried to use information about competitors' intentions to gain an edge.
Now, information is embedded in streaming market data and computer codes. Algorithms are expected to account for about 60% of stock trading this year, up from 28% in 2005, according to Aite Group, a Boston firm that tracks electronic trading.
A sharp fall in trading size shows the impact of algorithmic trading, which is typically done in 100- or 200-share chunks. The average size of a trade of a stock listed on the New York Stock Exchange was 268 shares through most of 2009, down from 724 in 2005, according to the SEC.
That has made it much more difficult for traders to buy or sell large chunks of stocks. Now, traders must parcel out orders in tiny bits—and some high-speed firms are monitoring the activity for signs of a big trade.
Henri Waelbroeck, research director at New York electronic brokerage Pipeline Financial Group Inc., has designed a trading system that alternates algorithms to keep gamers off the scent of big trades. "You need to understand what the games are and how to defend yourself," Mr. Waelbroeck said.
Write to Scott Patterson at scott.patterson@wsj.com
A high-tech, high-speed poker game is playing out in the stock market, and billions of dollars are at stake.
The adversaries are high-frequency traders and big investors such as mutual funds. High-speed firms are using computers to detect large "buy" and "sell" orders to adjust their trades, and traditional investors are scrambling to trade undetected.
The showdown has led to an escalating arms race, with players on both sides plowing money into ever-more-powerful technology to trade effectively. It also has led to growing tension between these camps as conventional investors call for greater regulation of their high-frequency counterparts.
The clash came to the fore after the May 6 "flash crash," which underscored the rising use of computers and algorithms to trade stocks. In testimony last week before federal regulators investigating the market plunge, high-speed firms contended they are misunderstood and that critics spread false rumors about their trading methods. Traditional money managers said fast traders have harmed their ability to trade stocks and regulators need to step in.
[Gaming]
"Attempts to classify some trading styles as 'desirable' or 'undesirable' are unproductive," said Dave Cummings, chairman of Tradebot Systems Inc., a Kansas City, Mo., high-speed firm, at the June 22 hearing.
Jeff Engelberg, a trader at Southeastern Asset Management Inc., a Memphis, Tenn., value-investing firm with about $35 billion under management, said high-speed traders are jumping ahead of his firm's trades. "Short-term traders are able to get an instantaneous glimpse into the future" through direct feeds to exchange data, he said, turning the market into "something nearer to a casino."
High-frequency trading accounts for about two-thirds of U.S. stock-market volume, according to industry estimates. Advocates of the practice include some heavy hitters, such as mutual-fund giant Vanguard Group Inc., which says it helps lower trading costs by narrowing the spread between what investors pay to buy and sell shares.
Traditional money managers largely agree that some costs have dropped. But some say they find certain trades have become more expensive to carry out, thanks to a practice critics call "gaming." With gaming, if a high-speed firm's computers detect a large buy order for a stock, for instance, the firm will instantly start snapping up the stock, expecting to quickly sell it back at a higher price as the investor keeps buying.
Phillip Krauss, head of stock trading at Chicago's Harris Investment Management, says his firm's orders are getting picked off by high-speed trading firms that use computer programs to detect orders. "They front-run us," said Mr. Krauss, whose firm manages $15 billion in assets.
To protect themselves, traditional investors like Mr. Krauss are stepping up investments in "antigaming" computer power and expertise. Big firms such as Bank of America Corp., acting on behalf of thousands of individual investors who trade through its vast brokerage network, have been rolling out high-tech platforms to help their traders avoid getting gamed.
"Antigaming was a big focus for us last year, and it's going to be a big focus for us this year," says Lee Morakis, head of sales for Bank of America's execution services for the Americas unit.
On Capitol Hill, Sen. Ted Kaufman (D., Del.), an advocate of regulation of high-speed trading, said his office has been fielding complaints from players across Wall Street who say gaming is tilting the field against them.
The Securities and Exchange Commission in January issued a report outlining its concerns about high-frequency trading and related consequences of recent changes in the structure of markets. The agency recently unveiled a plan to give large high-frequency firms unique identification codes to better track their activities.
While gaming isn't blamed for the May 6 crash, that day's downdraft has increased scrutiny of high-speed trading generally. High-speed firms have touted their ability to smooth trading by constantly stepping in to buy and sell stocks. But when trading became chaotic that day, many of these firms—along with other investors—pulled back.
Thirty-eight percent of so-called buy-side money managers—typically long-term investors—say they have a more negative view of high-frequency trading than before the flash crash, according to a recent survey by Tabb Group; 17% expressed positive views.
In many ways, the gaming dynamic isn't new but instead represents an evolution of the market. Wall Street insiders have always tried to use information about competitors' intentions to gain an edge.
Now, information is embedded in streaming market data and computer codes. Algorithms are expected to account for about 60% of stock trading this year, up from 28% in 2005, according to Aite Group, a Boston firm that tracks electronic trading.
A sharp fall in trading size shows the impact of algorithmic trading, which is typically done in 100- or 200-share chunks. The average size of a trade of a stock listed on the New York Stock Exchange was 268 shares through most of 2009, down from 724 in 2005, according to the SEC.
That has made it much more difficult for traders to buy or sell large chunks of stocks. Now, traders must parcel out orders in tiny bits—and some high-speed firms are monitoring the activity for signs of a big trade.
Henri Waelbroeck, research director at New York electronic brokerage Pipeline Financial Group Inc., has designed a trading system that alternates algorithms to keep gamers off the scent of big trades. "You need to understand what the games are and how to defend yourself," Mr. Waelbroeck said.
Write to Scott Patterson at scott.patterson@wsj.com
Monday, June 28, 2010
Fear Feeding Greed With S&P 500 Correlation to Bonds (Update1)
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By Whitney Kisling and Elizabeth Stanton
June 28 (Bloomberg) -- U.S. stock prices are mirroring government bond yields more than ever, a signal to bulls that shares may be poised to rally.
The Standard & Poor’s 500 Index and 10-year Treasury rates posted a correlation coefficient of 0.8412 in the 60 trading days through June 16, showing stock prices and bond yields were the most linked in Bloomberg data going back to 1962. The last time the relationship was almost this strong during an economic expansion was at the beginning of the 2002 to 2007 bull market, when the benchmark gauge for U.S. equities doubled.
Rising correlations show investors are ignoring relative values among industries and assets and reacting to day-to-day signals on the economy, convinced Europe’s debt crisis will spur the second global contraction in three years. Invesco Ltd., Wells Capital Management Inc. and Chemung Canal Trust Co., who together manage $957 billion, say those concerns are overblown and shares will advance as the fastest profit growth since the mid-1990s restores confidence.
“When you add up the fundamentals, they’re there,” said Fritz Meyer, a Denver-based senior market strategist at Invesco, which oversees $580 billion. “The problem is this emotional aspect,” he said. “The historical truth in the stock market is you want to buy stocks when there’s skepticism and fear all over the place and sell when everyone’s feeling complacent.”
Deflation Threat
September futures on the S&P 500 rose 0.3 percent to 1,078.40 as of 10:09 a.m. in London.
The gauge lost 3.7 percent to 1,076.76 last week after new- home sales sank to a record low and the Federal Reserve signaled that European indebtedness may lead to a weaker U.S. economy. Deflation, or a general decline in prices, is possible within the next few years, Nobel Prize-winning economist Paul Krugman said at a June 22 conference in Tel Aviv.
When the S&P 500 dropped 3.9 percent on May 20 following higher-than-forecast U.S. jobless claims, yields on 10-year Treasuries plunged 0.156 percentage point. The stock index slid 3.4 percent and the rate on notes fell 0.162 point on June 4, after employment growth trailed economists’ estimates.
Equities are also moving in lockstep with each other and assets tied to economic growth. The correlation coefficient between the S&P 500 and the Thomson Reuters/Jefferies CRB Index of 19 raw materials has been above 0.5 since April 13 and climbed to 0.77 on May 14, the highest since at least 1956, data compiled by Bloomberg using 30 days of trading show. Almost 80 percent of swings in stocks within the S&P 500 are related to movements in the broader market, according to London-based Barclays Plc.
Correlation Study
“Correlation is one of the great lessons of the whole crisis, and it hasn’t let its grip on the markets go,” said Barry Knapp, the New York-based head of U.S. equity strategy for Barclays. Knapp estimates the S&P 500 will climb 13 percent to end the year at 1,210. “Whatever the nature of the crisis, the one decision investors seem to make is whether they should be in risky assets or out.”
Linkages among markets are so high because investors are worried about a repeat of the 2008 credit crisis, which sent U.S. equities, commodities and real estate prices to their worst losses in half a century, Knapp said. The correlation level between the U.S. equity benchmark and 10-year Treasury yields averaged 0.5711 from October 2007 through March 2009, when the S&P 500 plunged 57 percent.
Home Sales
Reports on sales of new and previously owned homes last week showed that purchases reversed course in May after getting a bump higher from government stimulus programs including a buyer tax credit. About half of 106 U.S. forecasters in a study from Madison, New Jersey-based MacroMarkets LLC expect price declines in 2010 and half anticipate either little-changed or increasing values.
Congressional negotiators approved the most sweeping overhaul of U.S. financial regulation since the Great Depression on June 25. Financial companies in the S&P 500 rose 2.8 percent after the bill was announced as analysts said it won’t fundamentally reshape Wall Street’s biggest firms. The S&P 500 has lost 5.4 percent since President Barack Obama proposed banning proprietary trading by banks on Jan. 21.
“Investors are very worried about which direction the global economy is going to take,” said Bart Zeldenrust, senior fund manager at Rotterdam-based Robeco Group, which oversees about $167 billion. “Correlation was very high during the financial crisis because there was only one bet that you could make in your portfolio: risk is on or risk is off. And it’s still very much so. It’s not a good sign.”
Diversification Failure
The lockstep moves are hurting strategies designed to smooth out fluctuations across equities, industries and assets. Standard deviation, a measure of the variation in returns, for mutual funds investing in the biggest U.S. companies that have an average value similar to the S&P 500 fell to 5.8 percent in the first quarter, based on data compiled by Lipper & Co. and Bloomberg. That’s the lowest level in three years.
“It’s been impossible for stock pickers lately,” Savita Subramanian, quantitative strategist at Bank of America Corp. in New York. “It’s been less about stock selection, less about fundamentals or company management, and it’s been all about macro.”
U.S. equity markets have lost $1.78 trillion since April 23 on concern the European debt crisis will spread. Ryan Caldwell, whose $20.7 billion Ivy Asset Strategy Fund has beaten 98 percent of its rivals in the past five years, said the S&P 500 will rebound from May’s 8.2 percent loss should concerns about deficits in Greece, Portugal and Spain subside.
Picking Stocks
“No matter what you’re doing on the stock-picking portion of the portfolio now, it’s clearly being trumped by the macro environment,” said Caldwell, a fund manager for Overland Park, Kansas-based Waddell & Reed Financial Inc. “If you see the macro worries recede, I think you’ll see a pretty quick recovery in asset prices.”
Periods of risk aversion, when investors sell volatile assets and buy securities perceived as havens, have lasted an average of two months in the past, according to data since the 1930s compiled by Deutsche Bank AG. That suggests stocks will start rebounding in mid-July, says Binky Chadha, the firm’s New York-based chief U.S. equity strategist, who predicts the S&P 500 will rise 28 percent to end the year at 1,375.
Expanding Economy
The last time movements between Treasury yields and stocks were this similar during an economic expansion was in October 2002. The S&P 500 jumped 34 percent in the next 12 months and another 51 percent through October 2007 as corporate earnings recovered from the bursting of the technology bubble. U.S. gross domestic product grew at a 2 percent annual rate in the quarter that ended Sept. 30, 2002, compared with 2.7 percent in the first three months of this year.
“The market is worried about deflation and depression,” said James Paulsen, who helps oversee about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “For this correlation to go away, you’re going to have to first have confidence the recovery is sustainable, which means stocks go up.”
Economists predict a 3.2 percent expansion in U.S. GDP this year, the biggest since 2004, according to estimates compiled by Bloomberg. Earnings for S&P 500 companies may rise 32 percent in 2010 and 17 percent in 2011, the largest two-year advance since the period ended in 1995. The index is trading for 13.2 times forecasted 2010 earnings, compared with an average multiple of about 16.4 since 1954 using reported profit, the data show.
May Losses
McDonald’s Corp. may rally once investors’ focus returns to earnings and valuation, said Tom Wirth, senior investment officer for Chemung Canal, which manages $1.6 billion in Elmira, New York. Shares of the world’s largest restaurant operator fell 5.3 percent in May as the S&P 500 dropped 8.2 percent. The Oak Brook, Illinois-based company beat estimates for the quarter ended March 31 and said this month that May global sales rose more than analysts projected. Its dividend yield is 3.26 percent, compared with 3.11 percent for the 10-year Treasury.
“When fear enters the market, then you sell first and ask questions later,” Wirth said. “Investing is for the long term, so if you can buy high-quality stocks at these prices, you do it. If they’re high-quality companies, they’ll come back.”
To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Elizabeth Stanton in New York at estanton@bloomberg.net.
By Whitney Kisling and Elizabeth Stanton
June 28 (Bloomberg) -- U.S. stock prices are mirroring government bond yields more than ever, a signal to bulls that shares may be poised to rally.
The Standard & Poor’s 500 Index and 10-year Treasury rates posted a correlation coefficient of 0.8412 in the 60 trading days through June 16, showing stock prices and bond yields were the most linked in Bloomberg data going back to 1962. The last time the relationship was almost this strong during an economic expansion was at the beginning of the 2002 to 2007 bull market, when the benchmark gauge for U.S. equities doubled.
Rising correlations show investors are ignoring relative values among industries and assets and reacting to day-to-day signals on the economy, convinced Europe’s debt crisis will spur the second global contraction in three years. Invesco Ltd., Wells Capital Management Inc. and Chemung Canal Trust Co., who together manage $957 billion, say those concerns are overblown and shares will advance as the fastest profit growth since the mid-1990s restores confidence.
“When you add up the fundamentals, they’re there,” said Fritz Meyer, a Denver-based senior market strategist at Invesco, which oversees $580 billion. “The problem is this emotional aspect,” he said. “The historical truth in the stock market is you want to buy stocks when there’s skepticism and fear all over the place and sell when everyone’s feeling complacent.”
Deflation Threat
September futures on the S&P 500 rose 0.3 percent to 1,078.40 as of 10:09 a.m. in London.
The gauge lost 3.7 percent to 1,076.76 last week after new- home sales sank to a record low and the Federal Reserve signaled that European indebtedness may lead to a weaker U.S. economy. Deflation, or a general decline in prices, is possible within the next few years, Nobel Prize-winning economist Paul Krugman said at a June 22 conference in Tel Aviv.
When the S&P 500 dropped 3.9 percent on May 20 following higher-than-forecast U.S. jobless claims, yields on 10-year Treasuries plunged 0.156 percentage point. The stock index slid 3.4 percent and the rate on notes fell 0.162 point on June 4, after employment growth trailed economists’ estimates.
Equities are also moving in lockstep with each other and assets tied to economic growth. The correlation coefficient between the S&P 500 and the Thomson Reuters/Jefferies CRB Index of 19 raw materials has been above 0.5 since April 13 and climbed to 0.77 on May 14, the highest since at least 1956, data compiled by Bloomberg using 30 days of trading show. Almost 80 percent of swings in stocks within the S&P 500 are related to movements in the broader market, according to London-based Barclays Plc.
Correlation Study
“Correlation is one of the great lessons of the whole crisis, and it hasn’t let its grip on the markets go,” said Barry Knapp, the New York-based head of U.S. equity strategy for Barclays. Knapp estimates the S&P 500 will climb 13 percent to end the year at 1,210. “Whatever the nature of the crisis, the one decision investors seem to make is whether they should be in risky assets or out.”
Linkages among markets are so high because investors are worried about a repeat of the 2008 credit crisis, which sent U.S. equities, commodities and real estate prices to their worst losses in half a century, Knapp said. The correlation level between the U.S. equity benchmark and 10-year Treasury yields averaged 0.5711 from October 2007 through March 2009, when the S&P 500 plunged 57 percent.
Home Sales
Reports on sales of new and previously owned homes last week showed that purchases reversed course in May after getting a bump higher from government stimulus programs including a buyer tax credit. About half of 106 U.S. forecasters in a study from Madison, New Jersey-based MacroMarkets LLC expect price declines in 2010 and half anticipate either little-changed or increasing values.
Congressional negotiators approved the most sweeping overhaul of U.S. financial regulation since the Great Depression on June 25. Financial companies in the S&P 500 rose 2.8 percent after the bill was announced as analysts said it won’t fundamentally reshape Wall Street’s biggest firms. The S&P 500 has lost 5.4 percent since President Barack Obama proposed banning proprietary trading by banks on Jan. 21.
“Investors are very worried about which direction the global economy is going to take,” said Bart Zeldenrust, senior fund manager at Rotterdam-based Robeco Group, which oversees about $167 billion. “Correlation was very high during the financial crisis because there was only one bet that you could make in your portfolio: risk is on or risk is off. And it’s still very much so. It’s not a good sign.”
Diversification Failure
The lockstep moves are hurting strategies designed to smooth out fluctuations across equities, industries and assets. Standard deviation, a measure of the variation in returns, for mutual funds investing in the biggest U.S. companies that have an average value similar to the S&P 500 fell to 5.8 percent in the first quarter, based on data compiled by Lipper & Co. and Bloomberg. That’s the lowest level in three years.
“It’s been impossible for stock pickers lately,” Savita Subramanian, quantitative strategist at Bank of America Corp. in New York. “It’s been less about stock selection, less about fundamentals or company management, and it’s been all about macro.”
U.S. equity markets have lost $1.78 trillion since April 23 on concern the European debt crisis will spread. Ryan Caldwell, whose $20.7 billion Ivy Asset Strategy Fund has beaten 98 percent of its rivals in the past five years, said the S&P 500 will rebound from May’s 8.2 percent loss should concerns about deficits in Greece, Portugal and Spain subside.
Picking Stocks
“No matter what you’re doing on the stock-picking portion of the portfolio now, it’s clearly being trumped by the macro environment,” said Caldwell, a fund manager for Overland Park, Kansas-based Waddell & Reed Financial Inc. “If you see the macro worries recede, I think you’ll see a pretty quick recovery in asset prices.”
Periods of risk aversion, when investors sell volatile assets and buy securities perceived as havens, have lasted an average of two months in the past, according to data since the 1930s compiled by Deutsche Bank AG. That suggests stocks will start rebounding in mid-July, says Binky Chadha, the firm’s New York-based chief U.S. equity strategist, who predicts the S&P 500 will rise 28 percent to end the year at 1,375.
Expanding Economy
The last time movements between Treasury yields and stocks were this similar during an economic expansion was in October 2002. The S&P 500 jumped 34 percent in the next 12 months and another 51 percent through October 2007 as corporate earnings recovered from the bursting of the technology bubble. U.S. gross domestic product grew at a 2 percent annual rate in the quarter that ended Sept. 30, 2002, compared with 2.7 percent in the first three months of this year.
“The market is worried about deflation and depression,” said James Paulsen, who helps oversee about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “For this correlation to go away, you’re going to have to first have confidence the recovery is sustainable, which means stocks go up.”
Economists predict a 3.2 percent expansion in U.S. GDP this year, the biggest since 2004, according to estimates compiled by Bloomberg. Earnings for S&P 500 companies may rise 32 percent in 2010 and 17 percent in 2011, the largest two-year advance since the period ended in 1995. The index is trading for 13.2 times forecasted 2010 earnings, compared with an average multiple of about 16.4 since 1954 using reported profit, the data show.
May Losses
McDonald’s Corp. may rally once investors’ focus returns to earnings and valuation, said Tom Wirth, senior investment officer for Chemung Canal, which manages $1.6 billion in Elmira, New York. Shares of the world’s largest restaurant operator fell 5.3 percent in May as the S&P 500 dropped 8.2 percent. The Oak Brook, Illinois-based company beat estimates for the quarter ended March 31 and said this month that May global sales rose more than analysts projected. Its dividend yield is 3.26 percent, compared with 3.11 percent for the 10-year Treasury.
“When fear enters the market, then you sell first and ask questions later,” Wirth said. “Investing is for the long term, so if you can buy high-quality stocks at these prices, you do it. If they’re high-quality companies, they’ll come back.”
To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Elizabeth Stanton in New York at estanton@bloomberg.net.
Personal Income and Outlays
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| Highlights The consumer sector got another boost with a jump in spending power in May. Consumer spending was sluggish but mainly related to a drop in gasoline prices. Personal income in May rose a solid 0.4 percent, following a 0.5 percent advance in April. Analysts had called for a 0.5 percent increase in personal income for the latest month. The key wages & salaries component gained 0.5 percent, matching April's improvement. A jump in auto sales helped offset softness in gasoline and other subcomponents in nondurables. Overall, personal consumption rose a modest 0.2 percent, following no change in April. The May figure came in equaled the market forecast for a 0.2 percent increase. By components, PCEs were led by a 0.8 percent boost in durables-reflecting motor vehicle sales. But services also were robust with a 0.5 percent jump. Nondurables declined 0.9 percent with prices effects explaining most of the weakness. Still, nondurables slipped 0.2 percent in real terms. Inflation was mixed in May. The headline PCE price index was flat in May as was also the case the prior month. The core rate, however, firmed to 0.2 percent from 0.1 percent in April. Overall, the consumer sector is slowly gaining strength in terms of spending power. Purchases have been a little erratic due to off and on auto incentives and consumer caution in general. Overall, the consumer sector took one step forward in May, helping the recovery continue. On the news, equity futures were down slightly as were Treasury yields. The dollar was little changed. More detail coming. Please check back. | |||||||||||||||||||||||||||||||||
| Market Consensus Before Announcement Personal income posted a solid 0.4 percent increase for April, matching the gain the month before. Importantly, the latest increase was in what really counts as the wages & salaries component advanced 0.4 percent after rising 0.3 percent in March. But overall, personal consumption was flat, following a 0.6 percent rise the prior month. The April decline in PCEs was led by a 0.6 percent drop in nondurables and was mostly price related. Inflation at the consumer level is still almost nonexistent. The headline PCE price index was unchanged in April-easing from up 0.1 percent in March. The core rate also was soft, gaining only 0.1 percent and matching both March and the consensus forecast. More recently, aggregate weekly earnings were up 0.6 percent in May, suggesting a nice boost in the wages & salaries component of personal income. But spending may be down. Retail sales excluding autos dropped 1.1 percent in May. However, unit new motor vehicle sales rebounded 3.8 percent for the month and should soften the overall decline in sales or even boost it. PCE inflation should be soft based on a 0.2 percent decline in May's headline CPI and a 0.1 percent rise in the core CPI. | |||||||||||||||||||||||||||||||||
| Definition Personal income is the dollar value of income received from all sources by individuals. Personal outlays include consumer purchases of durable and nondurable goods, and services. Why Investors Care | |||||||||||||||||||||||||||||||||
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Consumer Spending in U.S. Increased in May More Than Forecast
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By Bob Willis
June 28 (Bloomberg) -- Consumer spending in the U.S. rose in May more than forecast, a sign households are gaining confidence in the recovery and the job market.
Purchases rose 0.2 percent after little change the prior month, Commerce Department figures showed today. Incomes climbed 0.4 and the savings rate increased to the highest level in eight months.
Demand may accelerate as gains in payrolls, longer workweeks and rising pay are giving Americans the means to spend. Federal Reserve policy makers last week pledged to keep interest rates low to ensure households weather the fallout from the European debt crisis, unemployment hovering near a 26-year high and tight credit.
“The labor market is gradually improving, labor income is picking up and that should continue to support spending,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said before the report. “We see a solid, trend-like growth in spending” in coming months.
The median estimate of 61 economists surveyed by Bloomberg news called for a 0.1 percent gain in spending. Projections ranged from an increase of 0.3 percent to a 0.5 percent drop.
The median estimate of economists surveyed called for a 0.5 percent advance in incomes. Wages and salaries in May rose 0.5 percent for a second month.
The savings rate increased to 4 percent last month, the highest level since September, to $454.3 billion.
Prices Stabilizing
The report showed inflation was stabilizing. The inflation gauge tied to spending patterns increased 1.9 percent from May 2009 after a 2 percent increase in the 12 months through April.
The Fed’s preferred price measure, which excludes food and fuel, rose 0.2 percent in May from the prior month, exceeding the 0.1 percent median estimate of economists surveyed.
The Fed last week said the labor market is “improving gradually,” changing April’s assessment that it was “beginning to improve.” Consumer spending still “remains constrained” by joblessness and “tight credit,” it said.
Adjusted for inflation, purchases rose 0.3 percent last month after little change in April. Price-adjusted spending on durable goods, including automobiles and appliances, increased 1.1 percent after a 0.5 percent drop. Demand for nondurable goods decreased 0.2 percent, the first decline this year, while spending on services increased 0.3 percent.
‘Less Cautious’
“Consumers are less cautious than they were previously,” Robert Niblock, chief executive officer at Lowe’s Cos., the second-largest home-improvement chain, said in a June 23 teleconference. “But they still know that we’re still not out of the woods yet.”
Confidence among U.S. consumers rose in June to the highest level since January 2008, indicating the decline in stock prices prompted by the European debt crisis has failed to weigh on sentiment, figures from Thomson Reuters/University of Michigan showed last week. The group’s final sentiment index increased to 76 from 73.6 in May. The index has averaged 84.5 over the past decade.
Consumer spending grew at a 3 percent annual pace in the first three months of 2010, less than previously estimated, the Commerce Department said last week. The report showed the economy grew 2.7 percent in the first quarter.
Economists surveyed this month projected purchases will expand at a 3 percent rate in the April-to-June period and 2.6 percent in the second half of the year.
To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net
By Bob Willis
June 28 (Bloomberg) -- Consumer spending in the U.S. rose in May more than forecast, a sign households are gaining confidence in the recovery and the job market.
Purchases rose 0.2 percent after little change the prior month, Commerce Department figures showed today. Incomes climbed 0.4 and the savings rate increased to the highest level in eight months.
Demand may accelerate as gains in payrolls, longer workweeks and rising pay are giving Americans the means to spend. Federal Reserve policy makers last week pledged to keep interest rates low to ensure households weather the fallout from the European debt crisis, unemployment hovering near a 26-year high and tight credit.
“The labor market is gradually improving, labor income is picking up and that should continue to support spending,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said before the report. “We see a solid, trend-like growth in spending” in coming months.
The median estimate of 61 economists surveyed by Bloomberg news called for a 0.1 percent gain in spending. Projections ranged from an increase of 0.3 percent to a 0.5 percent drop.
The median estimate of economists surveyed called for a 0.5 percent advance in incomes. Wages and salaries in May rose 0.5 percent for a second month.
The savings rate increased to 4 percent last month, the highest level since September, to $454.3 billion.
Prices Stabilizing
The report showed inflation was stabilizing. The inflation gauge tied to spending patterns increased 1.9 percent from May 2009 after a 2 percent increase in the 12 months through April.
The Fed’s preferred price measure, which excludes food and fuel, rose 0.2 percent in May from the prior month, exceeding the 0.1 percent median estimate of economists surveyed.
The Fed last week said the labor market is “improving gradually,” changing April’s assessment that it was “beginning to improve.” Consumer spending still “remains constrained” by joblessness and “tight credit,” it said.
Adjusted for inflation, purchases rose 0.3 percent last month after little change in April. Price-adjusted spending on durable goods, including automobiles and appliances, increased 1.1 percent after a 0.5 percent drop. Demand for nondurable goods decreased 0.2 percent, the first decline this year, while spending on services increased 0.3 percent.
‘Less Cautious’
“Consumers are less cautious than they were previously,” Robert Niblock, chief executive officer at Lowe’s Cos., the second-largest home-improvement chain, said in a June 23 teleconference. “But they still know that we’re still not out of the woods yet.”
Confidence among U.S. consumers rose in June to the highest level since January 2008, indicating the decline in stock prices prompted by the European debt crisis has failed to weigh on sentiment, figures from Thomson Reuters/University of Michigan showed last week. The group’s final sentiment index increased to 76 from 73.6 in May. The index has averaged 84.5 over the past decade.
Consumer spending grew at a 3 percent annual pace in the first three months of 2010, less than previously estimated, the Commerce Department said last week. The report showed the economy grew 2.7 percent in the first quarter.
Economists surveyed this month projected purchases will expand at a 3 percent rate in the April-to-June period and 2.6 percent in the second half of the year.
To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net
Sunday, June 27, 2010
G-20 Agrees to Cut Debt
Rich Nations Back Halving Deficits by 2013, Signaling Intent to Ease Stimulus
By BOB DAVIS
TORONTO—The wealthiest of the Group of 20 countries said they would halve their government deficits by the year 2013 and "stabilize" their debt loads by 2016, a signal to international markets and domestic political audiences they are taking seriously the need to wean themselves from stimulus spending.
The weekend G-20 meeting suggested the world economy has moved into a new phase since the financial crisis was in full flow. Then, these industrialized and developing nations focused heavily on promoting stimulus spending. Now, countries at least rhetorically are preoccupied by deficits and debts as a key to sustaining growth.
Expectations were limited for the Toronto session, largely because most of the issues of financial regulation weren't scheduled for completion until the end of the year at the Seoul summit. But the conference became a way for major nations to try to address fears in the market that government spending was spinning out of control.
The meeting's concluding statement, a compromise between two competing visions of the international economy, masked divisions between the U.S. and Europe evident in the run-up to the summit. The U.S. has warned that moving too fast to cut deficits and reduce stimulus spending could risk another global recession. European nations, especially Germany, have cautioned that moving too slowly could produce unsustainable debt loads, higher interest rates and even defaults.
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German Chancellor Angela Merkel talks with British Prime Minister David Cameron as they attend the opening Plenary Session at the G20 Summit in Toronto.
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More
* The G-20 Toronto Summit Declaration
* Divisions Remain on Financial Regulations
* Agenda: Bond Vigilantes Are in Charge
* Hu Urges Caution on Stimulus Exits
* Japan's Kan Makes Summit Debut
* G-8 Warns Recovery Remains Fragile
* Nearly 500 Protesters Arrested
* Read the full statement from G-8 leaders.
* Toronto Locks Down for G-20
* G-20 Dispatches | Photos | Full Coverage
* Video: To Get Attention, Be Creative
* Austerity on the Table Everywhere
With each side pushing, the U.S., and Europe cut what a U.S. official called a "combo deal." The U.S. agreed to make the goal of halving deficits a G-20 initiative, in exchange for G-20 support for language making growth the top priority, said a European official. President Barack Obama has already made similar deficit commitments back at home.
The statement characterized the recommended pace of deficit cutting as "growth friendly" — meaning it was supposed to demonstrate a will to reduce deficits, but didn't envision stepping too quickly off the accelerator. India, Brazil, China and other emerging countries were wary of undermining global growth especially in the U.S., the world's largest economy.
Chinese President Hu Jintao said, "We must act in a cautious and appropriate way concerning the timing, pace and intensity of an exit from the economic stimulus packages and consolidate the momentum of recovery of the world economy."
A G-20 statement called the global recovery "uneven and fragile" and said that to sustain growth, "we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand."
"The conversations were by and large pretty nuanced," said a senior U.S. official. "A variety of countries were saying, 'Let's be careful about the impact of synchronized withdrawal [of stimulus] but also be on the path of announcing to restoring strong public finances.'"
Germany, which has held itself out as the champion of austerity, took some potshots. German Finance Minister Wolfgang Schäuble used an interview in the French newspaper Le Monde to throw a jab at the U.S., saying Mr. Obama's giant stimulus spending has had little impact on the country's jobless rate, which remains well above 9%.
By Sunday, German Chancellor Angela Merkel was declaring solidarity with the U.S. and other nations.
French President Nicolas Sarkozy, meanwhile, seemed less than committed to the deficit-reduction goal, calling "a compromise, a point of equilibrium" rather than an "instruction from the G-20."
According to documents passed among G-20 countries, the U.S. and Germany, as well as France, Britain and Canada, are on similar paths of halving their deficits; the G-20 summit gave them a way of making those commitments more clear.
The U.S. estimates it will reduce its deficit to 4.2% of gross domestic product by 2013 from 10.1% currently, while Germany is looking at a 3% deficit in 2013, down from 5.5% in 2010. But the U.S. depends more on economic growth to reach its goal than does Germany, which is expected to grow at a slower pace.
They might have to make deeper cuts in deficits to comply with its pledge. A White House statement said that government debt in the fiscal year ending Sept. 30, 2015, would be at an "acceptable level." President Obama said that next year he would present "very difficult choices" to the country in an effort to meet deficit goals.
"Historically, summit commitments have helped countries to do what they wanted to do anyhow," said Ted Truman, a former Obama administration official who is now an economist at the Peterson Institute of International Economics. In the 1990s, he said, U.S. commitments in international forums to reduce its budget deficit "was widely viewed as maintaining the focus of deficit hawks on the issue," he said—although similar pressure didn't work in the 1980s.
G-20 Toronto Summit
View Slideshow
[SB10001424052748703485304575330960095850770]
European Pressphoto Agency
The G-20 said it remained committed to the so-called rebalancing effort, started at the Pittsburgh G-20 summit in September 2009. In that exercise, countries with trade surpluses—especially China—were expected to commit to policy changes to reduce exports and boost domestic consumption, while trade-deficit countries—especially the U.S.—were expected to do the opposite in the so-called rebalancing initiative. The overall goal is to reduce dependence on recession-scarred U.S. consumers who are likely to spend less on imports than they did before the financial crisis.
In a economic simulation prepared for the G-20, the IMF estimated that if the U.S. and other wealthy countries slash budget deficits somewhat deeper than they are planning and China and other large emerging boost domestic consumption more strongly, global growth would expand 2.5% faster than it otherwise would in five years.
IMF Managing Director Dominique Strauss-Kahn praised the meeting's progress on Sunday, noting "I am encouraged by the conclusions of the G-20 Summit, including the active engagement of the leaders in developing the G-20 framework for strong, sustainable and balanced growth."
The Toronto summit was dogged by some of the largest demonstrations targeting an international economic meeting since the Seattle World Trade Organization riots of 1999. About 600 people were arrested in protests that started off peacefully but disintegrated into roving bands of violent youths. Some news briefings were interrupted by the violence, but the fights were far from where the leaders were meeting and didn't disrupt negotiations, as occurred in Seattle.
View Full Image
obamaharper0627
Getty Images
Canadian Prime Minister Stephen Harper, right, greets U.S. President Barack Obama during the G-20 summit.
obamaharper0627
obamaharper0627
Twenty Economies, One Communiqué
Among the pledges G-20 nations made at the Toronto summit:
* Advanced economies that make up the group committed to slashing their government deficits by at least half by 2013 and cap debt ratios within the following three years.
* Member nations said banks should be required to keep a level of capital sufficient to deal with "stresses of a magnitude associated with the recent financial crisis."
* Absent consensus on a bank tax, leaders agreed that financial institutions should help pay for any interventions to help the financial sector, but noted a range of options.
* Following the recent oil spill in the Gulf of Mexico, leaders recognized the need to "share best practices to protect the marine environment, prevent accidents related to offshore exploration and development, as well as transportation, and deal with their consequences."
The G-20 session had remarkably little focus on problems or requirements of big developing countries. For China and India, the most significant part of the summit may have been that it was on the international calendar, allowing them to use it as a deadline to press for changes.
Both Washington and central bank officials in Beijing used the specter of the session to win Chinese government approval to let the its currency, the yuan, appreciate. In April, U.S. Treasury Secretary Timothy Geithner made clear that the U.S. expected a currency move by the G-20 summit when he delayed issuing Treasury's twice-yearly report on international currency practices. That could have used to accuse Beijing of manipulating the yuan to gain an edge in international trade.
In Beijing, says Eswar Prasad, a Cornell University economist who was the International Monetary Fund's chief China hand, the G-20 deadline helped officials in the central bank, who favored currency flexibility, in their fights with trade officials who wanted to keep the currency undervalued.
Indeed, there wasn't a specific mention in the G-20 statement pressing China to follow through on its commitment to let the currency appreciate. Rather it referred to the need for "greater exchange rate flexibility in some emerging markets."
The Indian government said Friday, just ahead of the summit, it would sharply reduce consumer subsidies for gasoline and kerosene. That would lower government spending and boost energy efficiency, complying with a longtime G-20 goal of reducing energy subsidies.
Much of the agenda, especially efforts to tighten capital and liquidity standards and other financial regulations won't be decided until the next G-20 leaders session in Seoul in November.
"What's left over for Seoul?" asked Hyun Song Shin, an adviser to South Korea's president. "Everything."
The G-20 toughened its ambitions, noting it wanted a level of capital that would enable banks to handle ""without extraordinary government support – stresses of a magnitude associated with the recent financial crisis." Previously, the G-20 hadn't set a qualitative goal.
But there remains hard bargaining ahead, particularly on setting a specific number as to how much capital is sufficient. A meeting in Basel, Switzerland, in July is aiming to make progress on that issue. Mario Draghi, chairman of the Financial Stability Board, which is working on the regulations, in a letter to G-20 leaders, noted that "good progress has been made in recent weeks towards new global standards to strengthen bank capital and liquidity, and limit leverage."
U.S. and European countries remain divided on an international leverage ratio and on whether to recommend taxes on banks. The U.S., Germany, U.K. and France back a levy to pay for the costs of bailouts while countries including Canada, Brazil and India, which didn't have to lay out public funds to recapitalize banks, oppose the idea.
President Obama added to the Seoul agenda when he said he wanted to rework parts of the Korean Free Trade Agreement during negotiations with South Korea and have a deal in hand by the Seoul summit.
—Nirmala Menon, Monica Gutschi and Ian Talley contributed to this article.
By BOB DAVIS
TORONTO—The wealthiest of the Group of 20 countries said they would halve their government deficits by the year 2013 and "stabilize" their debt loads by 2016, a signal to international markets and domestic political audiences they are taking seriously the need to wean themselves from stimulus spending.
The weekend G-20 meeting suggested the world economy has moved into a new phase since the financial crisis was in full flow. Then, these industrialized and developing nations focused heavily on promoting stimulus spending. Now, countries at least rhetorically are preoccupied by deficits and debts as a key to sustaining growth.
Expectations were limited for the Toronto session, largely because most of the issues of financial regulation weren't scheduled for completion until the end of the year at the Seoul summit. But the conference became a way for major nations to try to address fears in the market that government spending was spinning out of control.
The meeting's concluding statement, a compromise between two competing visions of the international economy, masked divisions between the U.S. and Europe evident in the run-up to the summit. The U.S. has warned that moving too fast to cut deficits and reduce stimulus spending could risk another global recession. European nations, especially Germany, have cautioned that moving too slowly could produce unsustainable debt loads, higher interest rates and even defaults.
View Full Image
merkel0627
Getty Images
German Chancellor Angela Merkel talks with British Prime Minister David Cameron as they attend the opening Plenary Session at the G20 Summit in Toronto.
merkel0627
merkel0627
More
* The G-20 Toronto Summit Declaration
* Divisions Remain on Financial Regulations
* Agenda: Bond Vigilantes Are in Charge
* Hu Urges Caution on Stimulus Exits
* Japan's Kan Makes Summit Debut
* G-8 Warns Recovery Remains Fragile
* Nearly 500 Protesters Arrested
* Read the full statement from G-8 leaders.
* Toronto Locks Down for G-20
* G-20 Dispatches | Photos | Full Coverage
* Video: To Get Attention, Be Creative
* Austerity on the Table Everywhere
With each side pushing, the U.S., and Europe cut what a U.S. official called a "combo deal." The U.S. agreed to make the goal of halving deficits a G-20 initiative, in exchange for G-20 support for language making growth the top priority, said a European official. President Barack Obama has already made similar deficit commitments back at home.
The statement characterized the recommended pace of deficit cutting as "growth friendly" — meaning it was supposed to demonstrate a will to reduce deficits, but didn't envision stepping too quickly off the accelerator. India, Brazil, China and other emerging countries were wary of undermining global growth especially in the U.S., the world's largest economy.
Chinese President Hu Jintao said, "We must act in a cautious and appropriate way concerning the timing, pace and intensity of an exit from the economic stimulus packages and consolidate the momentum of recovery of the world economy."
A G-20 statement called the global recovery "uneven and fragile" and said that to sustain growth, "we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand."
"The conversations were by and large pretty nuanced," said a senior U.S. official. "A variety of countries were saying, 'Let's be careful about the impact of synchronized withdrawal [of stimulus] but also be on the path of announcing to restoring strong public finances.'"
Germany, which has held itself out as the champion of austerity, took some potshots. German Finance Minister Wolfgang Schäuble used an interview in the French newspaper Le Monde to throw a jab at the U.S., saying Mr. Obama's giant stimulus spending has had little impact on the country's jobless rate, which remains well above 9%.
By Sunday, German Chancellor Angela Merkel was declaring solidarity with the U.S. and other nations.
French President Nicolas Sarkozy, meanwhile, seemed less than committed to the deficit-reduction goal, calling "a compromise, a point of equilibrium" rather than an "instruction from the G-20."
According to documents passed among G-20 countries, the U.S. and Germany, as well as France, Britain and Canada, are on similar paths of halving their deficits; the G-20 summit gave them a way of making those commitments more clear.
The U.S. estimates it will reduce its deficit to 4.2% of gross domestic product by 2013 from 10.1% currently, while Germany is looking at a 3% deficit in 2013, down from 5.5% in 2010. But the U.S. depends more on economic growth to reach its goal than does Germany, which is expected to grow at a slower pace.
They might have to make deeper cuts in deficits to comply with its pledge. A White House statement said that government debt in the fiscal year ending Sept. 30, 2015, would be at an "acceptable level." President Obama said that next year he would present "very difficult choices" to the country in an effort to meet deficit goals.
"Historically, summit commitments have helped countries to do what they wanted to do anyhow," said Ted Truman, a former Obama administration official who is now an economist at the Peterson Institute of International Economics. In the 1990s, he said, U.S. commitments in international forums to reduce its budget deficit "was widely viewed as maintaining the focus of deficit hawks on the issue," he said—although similar pressure didn't work in the 1980s.
G-20 Toronto Summit
View Slideshow
[SB10001424052748703485304575330960095850770]
European Pressphoto Agency
The G-20 said it remained committed to the so-called rebalancing effort, started at the Pittsburgh G-20 summit in September 2009. In that exercise, countries with trade surpluses—especially China—were expected to commit to policy changes to reduce exports and boost domestic consumption, while trade-deficit countries—especially the U.S.—were expected to do the opposite in the so-called rebalancing initiative. The overall goal is to reduce dependence on recession-scarred U.S. consumers who are likely to spend less on imports than they did before the financial crisis.
In a economic simulation prepared for the G-20, the IMF estimated that if the U.S. and other wealthy countries slash budget deficits somewhat deeper than they are planning and China and other large emerging boost domestic consumption more strongly, global growth would expand 2.5% faster than it otherwise would in five years.
IMF Managing Director Dominique Strauss-Kahn praised the meeting's progress on Sunday, noting "I am encouraged by the conclusions of the G-20 Summit, including the active engagement of the leaders in developing the G-20 framework for strong, sustainable and balanced growth."
The Toronto summit was dogged by some of the largest demonstrations targeting an international economic meeting since the Seattle World Trade Organization riots of 1999. About 600 people were arrested in protests that started off peacefully but disintegrated into roving bands of violent youths. Some news briefings were interrupted by the violence, but the fights were far from where the leaders were meeting and didn't disrupt negotiations, as occurred in Seattle.
View Full Image
obamaharper0627
Getty Images
Canadian Prime Minister Stephen Harper, right, greets U.S. President Barack Obama during the G-20 summit.
obamaharper0627
obamaharper0627
Twenty Economies, One Communiqué
Among the pledges G-20 nations made at the Toronto summit:
* Advanced economies that make up the group committed to slashing their government deficits by at least half by 2013 and cap debt ratios within the following three years.
* Member nations said banks should be required to keep a level of capital sufficient to deal with "stresses of a magnitude associated with the recent financial crisis."
* Absent consensus on a bank tax, leaders agreed that financial institutions should help pay for any interventions to help the financial sector, but noted a range of options.
* Following the recent oil spill in the Gulf of Mexico, leaders recognized the need to "share best practices to protect the marine environment, prevent accidents related to offshore exploration and development, as well as transportation, and deal with their consequences."
The G-20 session had remarkably little focus on problems or requirements of big developing countries. For China and India, the most significant part of the summit may have been that it was on the international calendar, allowing them to use it as a deadline to press for changes.
Both Washington and central bank officials in Beijing used the specter of the session to win Chinese government approval to let the its currency, the yuan, appreciate. In April, U.S. Treasury Secretary Timothy Geithner made clear that the U.S. expected a currency move by the G-20 summit when he delayed issuing Treasury's twice-yearly report on international currency practices. That could have used to accuse Beijing of manipulating the yuan to gain an edge in international trade.
In Beijing, says Eswar Prasad, a Cornell University economist who was the International Monetary Fund's chief China hand, the G-20 deadline helped officials in the central bank, who favored currency flexibility, in their fights with trade officials who wanted to keep the currency undervalued.
Indeed, there wasn't a specific mention in the G-20 statement pressing China to follow through on its commitment to let the currency appreciate. Rather it referred to the need for "greater exchange rate flexibility in some emerging markets."
The Indian government said Friday, just ahead of the summit, it would sharply reduce consumer subsidies for gasoline and kerosene. That would lower government spending and boost energy efficiency, complying with a longtime G-20 goal of reducing energy subsidies.
Much of the agenda, especially efforts to tighten capital and liquidity standards and other financial regulations won't be decided until the next G-20 leaders session in Seoul in November.
"What's left over for Seoul?" asked Hyun Song Shin, an adviser to South Korea's president. "Everything."
The G-20 toughened its ambitions, noting it wanted a level of capital that would enable banks to handle ""without extraordinary government support – stresses of a magnitude associated with the recent financial crisis." Previously, the G-20 hadn't set a qualitative goal.
But there remains hard bargaining ahead, particularly on setting a specific number as to how much capital is sufficient. A meeting in Basel, Switzerland, in July is aiming to make progress on that issue. Mario Draghi, chairman of the Financial Stability Board, which is working on the regulations, in a letter to G-20 leaders, noted that "good progress has been made in recent weeks towards new global standards to strengthen bank capital and liquidity, and limit leverage."
U.S. and European countries remain divided on an international leverage ratio and on whether to recommend taxes on banks. The U.S., Germany, U.K. and France back a levy to pay for the costs of bailouts while countries including Canada, Brazil and India, which didn't have to lay out public funds to recapitalize banks, oppose the idea.
President Obama added to the Seoul agenda when he said he wanted to rework parts of the Korean Free Trade Agreement during negotiations with South Korea and have a deal in hand by the Seoul summit.
—Nirmala Menon, Monica Gutschi and Ian Talley contributed to this article.
Friday, June 25, 2010
Finally, AgBank IPO Meetings Start
By ALISON TUDOR
HONG KONG—Agricultural Bank of China Ltd. kicked off its potentially record-breaking share offering Thursday by pitching its credentials as a proxy for China's growth.
A lunchtime meeting with investors in the basement of the swanky Island Shangri-La Hotel was packed with fund managers as journalists jostled at the entrance for a glimpse of AgBank's management team.
Many people found standing-room only as they listened to AgBank's management talk about their company, emphasizing the rapid urbanization in the western part of China. According to AgBank's 2008 annual report, 30% of the bank's 24,000 branches are in western China, one of the country's poorest regions. "The future is really very bright. There are so many people moving into the cities," one executive said.
Analysts have said AgBank, as it is known, could benefit from the government's efforts to equalize the wealthy coastal regions and the poorer interior, to avoid political instability.
Motley Crew
Breakdown of H-Share Cornerstone Investors
Management said AgBank has the lowest overseas exposure among its peers and that only about 3.6% of loans are to exporters, so if China allows the yuan to appreciate, it shouldn't have a significant effect on the bank's loan book.
Last weekend China announced it would allow the yuan to fluctuate in value, raising some concerns that a rising currency could hurt exporters because their foreign-currency earnings would translate into fewer yuan.
AgBank set the share-price range for its listing in Hong Kong late Wednesday at 2.88 to 3.48 Hong Kong dollars (about 37 U.S. cents to 45 cents), according to people familiar with the deal. The range for its dual listing in Shanghai hasn't been set. The Hong Kong portion could raise as much as US$13.08 billion, if the overallotment to meet strong demand is exercised.
The Hong Kong shares have been valued at 1.55 to 1.79 times 2010 book value, the people said. That is on par with its peer Bank of China Ltd. and at a slight discount to China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd.
China's third-largest bank could raise as much as US$24.5 billion from investors, if pricing in Shanghai is comparable to Hong Kong and overallotment options are fully used in the event of strong demand. To grab the mantle of the world's biggest IPO, AgBank would have to raise more than the $21.9 billion fetched by ICBC from its 2006 stock offering.
So far, investors' reaction has been mixed, with overseas investors slightly more inclined to buy than locals. Shanghai-based investors have voiced concerns about a slowdown in China's economic growth and the quality of AgBank's loan book.
"People are also worried about asset quality because in the last year the government has borrowed so much from banks, and local governments may not be able to pay all the loans back," said Jeremiah Fung, a fund manager at HSBC Holdings PLC's China asset-management joint venture based in Shanghai.
Mr. Fung, who oversees about $100 million across two mutual funds targeted at domestic Chinese investors, said he thought AgBank's valuation offered little potential upside over the short to medium term once the shares are listed.
AgBank is the last of China's four big state banks to go public and many foreign investors see this as a rare opportunity to get exposure to the fast-growing economy.
Julian Mayo, who helps manage $3 billion at Charlemagne Capital in London, said he thinks the government's gradual cooling of the economy was mostly reflected in share prices. In the future, policy may become looser as China strives to avoid overly stilting growth, he said.
"The Chinese will take the foot off the brake pedal a bit. The recent outperformance of the major Chinese banks' shares signals we are returning to more normalized policy," he said.
Mr. Mayo added that, for him, the AgBank IPO's round of meetings with prospective investors provided more data on the Chinese banking sector for investors to analyze, which he thinks will highlight the attraction of Bank of China shares. AgBank shares are slated to start trading mid-July.
—Ellen Sheng contributed to this article.
HONG KONG—Agricultural Bank of China Ltd. kicked off its potentially record-breaking share offering Thursday by pitching its credentials as a proxy for China's growth.
A lunchtime meeting with investors in the basement of the swanky Island Shangri-La Hotel was packed with fund managers as journalists jostled at the entrance for a glimpse of AgBank's management team.
Many people found standing-room only as they listened to AgBank's management talk about their company, emphasizing the rapid urbanization in the western part of China. According to AgBank's 2008 annual report, 30% of the bank's 24,000 branches are in western China, one of the country's poorest regions. "The future is really very bright. There are so many people moving into the cities," one executive said.
Analysts have said AgBank, as it is known, could benefit from the government's efforts to equalize the wealthy coastal regions and the poorer interior, to avoid political instability.
Motley Crew
Breakdown of H-Share Cornerstone Investors
Management said AgBank has the lowest overseas exposure among its peers and that only about 3.6% of loans are to exporters, so if China allows the yuan to appreciate, it shouldn't have a significant effect on the bank's loan book.
Last weekend China announced it would allow the yuan to fluctuate in value, raising some concerns that a rising currency could hurt exporters because their foreign-currency earnings would translate into fewer yuan.
AgBank set the share-price range for its listing in Hong Kong late Wednesday at 2.88 to 3.48 Hong Kong dollars (about 37 U.S. cents to 45 cents), according to people familiar with the deal. The range for its dual listing in Shanghai hasn't been set. The Hong Kong portion could raise as much as US$13.08 billion, if the overallotment to meet strong demand is exercised.
The Hong Kong shares have been valued at 1.55 to 1.79 times 2010 book value, the people said. That is on par with its peer Bank of China Ltd. and at a slight discount to China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd.
China's third-largest bank could raise as much as US$24.5 billion from investors, if pricing in Shanghai is comparable to Hong Kong and overallotment options are fully used in the event of strong demand. To grab the mantle of the world's biggest IPO, AgBank would have to raise more than the $21.9 billion fetched by ICBC from its 2006 stock offering.
So far, investors' reaction has been mixed, with overseas investors slightly more inclined to buy than locals. Shanghai-based investors have voiced concerns about a slowdown in China's economic growth and the quality of AgBank's loan book.
"People are also worried about asset quality because in the last year the government has borrowed so much from banks, and local governments may not be able to pay all the loans back," said Jeremiah Fung, a fund manager at HSBC Holdings PLC's China asset-management joint venture based in Shanghai.
Mr. Fung, who oversees about $100 million across two mutual funds targeted at domestic Chinese investors, said he thought AgBank's valuation offered little potential upside over the short to medium term once the shares are listed.
AgBank is the last of China's four big state banks to go public and many foreign investors see this as a rare opportunity to get exposure to the fast-growing economy.
Julian Mayo, who helps manage $3 billion at Charlemagne Capital in London, said he thinks the government's gradual cooling of the economy was mostly reflected in share prices. In the future, policy may become looser as China strives to avoid overly stilting growth, he said.
"The Chinese will take the foot off the brake pedal a bit. The recent outperformance of the major Chinese banks' shares signals we are returning to more normalized policy," he said.
Mr. Mayo added that, for him, the AgBank IPO's round of meetings with prospective investors provided more data on the Chinese banking sector for investors to analyze, which he thinks will highlight the attraction of Bank of China shares. AgBank shares are slated to start trading mid-July.
—Ellen Sheng contributed to this article.
GDP Q1 2010
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| Market Consensus Before Announcement GDP growth for the first quarter was revised down to an annualized 3.0 pace from the initial estimate of 3.2 percent. The overall revision was net many small changes and was not a result of a large change to any one component. But there still is strength in a number of components compared to the fourth quarter and earlier. Real PCEs growth is moderately strong while investment in equipment and software posted a healthy 12.7 percent boost. Inventory investment contributed to growth significantly. However, net exports worsened as import gains outpaced improvement in exports. Nonresidential and residential structures both declined. The GDP price index was revised up incrementally to 1.0 percent annualized from the initial estimate of 0.9 annualized. | |||||||||||||||||||||||||||||
| Definition Gross Domestic Product (GDP) is the broadest measure of aggregate economic activity and encompasses every sector of the economy. Why Investors Care | |||||||||||||||||||||||||||||
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![[Chart]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_vqmlX7X6cVxJdIRei6gvKn6TVOioZLxDA4Xb-eEo50Ixstq-CqUMlE3ktKxjHP_z5-bjTc7I23JpZ07By_L9p9COULc0S8MMOwet_V5ts4hjkIjFaWEsIrx8WRlg=s0-d)
![[Chart]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_sbQTAzy_hyEUTY1OLoSuqbTMmOxgXTNBQHfulS3w9DzKtnKcp4RzTvf2XwLoNd-N_QUw75YyoO25HJGkKcQAMdHXDIYVGHw9WtiWNQcuUYiw6kOmFEwQsq7m5Vzw=s0-d)
Jobless Bill Dies Amid Deficit Fears
By GREG HITT And SARA MURRAY
WASHINGTON—Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago.
The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.
The impasse has been weeks in the making and reflects the deepening concern on Capitol Hill with the nation's fiscal situation, as well as a hardening of Republican opposition. Democrats had moved several times to pare the cost of the bill in an effort to win support from centrist Republicans and to make up defections from their own ranks.
On Thursday, Senate Democrats failed to secure the 60 votes needed to break off a GOP-led filibuster. Sen. Ben Nelson (D., Neb.) voted with Republicans in a 57-41 roll call. Senate Majority Leader Harry Reid (D., Nev.) said this third vote on the matter would be the last, allowing the Senate to move on to modest legislation cutting taxes for small businesses.
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* FAQ: Unemployment-Benefits Extension
Obama administration officials have argued that cutting off government support for the economy too quickly could harm the nascent recovery, and have been pressing both Congress and their international peers to keep the cash flowing. Conservative economists, Republicans and some European leaders say deficit reduction should be a higher priority. The sudden move by Congress provides an unexpected test of that argument.
Up in the air are other provisions that were to be included in the legislation, including some $50 billion in new taxes designed to help offset its cost. They included an increase in levies paid by private investment groups, including hedge-fund firms and real-estate partnerships, a provision long sought by some Democrats that will likely return another day.
Under a program initially enacted last year—which expired June 2—jobless workers could receive up to 99 weeks of aid, including 26 weeks of basic assistance provided by states plus longer-term federal payments. The Labor Department estimates that the long-term unemployed, meaning those out of a job for at least six months, make up 46% of all jobless workers in the U.S.
There are economic risks in ending benefits. Workers receiving them tend to funnel money back into the economy immediately, helping prop up demand and jobs.
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In addition, said Harvard economist Lawrence Katz, if workers are unable to find work and no longer eligible for unemployment benefits, some will turn to other government programs, such as disability and Social Security. "If you're really concerned about the long-term deficit, you should be really concerned about the long-term unemployed," Mr. Katz said.
Other economists argue that extended benefits have played a part in keeping people out of the labor force. "There's a very large body of research that says that more generous benefits and benefits that last longer…encourage people to stay out of work longer," said Bruce Meyer, an economist and public policy professor at the University of Chicago.
James Sherk, a labor economics analyst at the conservative Heritage Foundation think tank, said that while it could be argued that the benefits made available last year were too extensive, cutting off workers who expected to receive the full 99 weeks of benefits isn't ideal either. "You don't sort of pull the rug out from someone halfway through," he said.
The labor market is slowly improving, which could make the transition to fewer weeks of benefits easier. "I don't think there's going to be a big disaster by letting the extended unemployment insurance expire," said Phillip Swagel, a former Bush Treasury official and a Georgetown University professor. Still, he said, "it's going to be tough for some people."
With unemployment expected to remain high for months, Democrats argued the government should not pull back. Struggling families "are counting on us to come through," Senate Finance Chairman Max Baucus (D., Mont.) said before the final vote. Democrats Thursday night weren't talking about returning to the bill any time soon, if at all.
[SPENDINGjp]
Sen. Reid lashed out at Republicans immediately after the vote, saying they had "turned a deaf ear" to jobless workers. "This is not a good day for America," he said. The leader said the Senate would turn next to a small-business tax bill, and give up for now on efforts to push forward with the jobless-benefits extension. Asked whether it could ever be brought back to the floor, he snapped: "You are going to have to talk with Republicans."
Republicans said the government can't afford further increases in the budget deficit, expected to reach $1.4 trillion this fiscal year, and said that Democrats have lost sight of the economic risks posed by the nation's rapidly mounting total debt.
In the give and take, the contours of the 2010 midterm election debate have become clear. Senate Minority Leader Mitch McConnell (R., Ky. ) chided Democrats for refusing to fully pay for the legislation with offsetting savings or revenue increases.
"The principle Democrats are defending is that they will not pass a bill unless it adds to the deficit," Sen. McConnell said.
The bill would also have provided aid to cash-strapped states, created a youth summer jobs program, and renewed several lapsed tax breaks, including a credit to support business research.
The last version of the legislation had a price tag of $85.5 billion. That was down some $20 billion from last week and well below the more than $120 billion bill initially brought to the floor. Even after the changes, the bill added about $35 billion to the deficit, roughly the cost of the six-month extension of jobless benefits in the bill.
Deficit concerns weren't the only issue for senators. Nebraska Sen. Nelson, an opponent of the legislation, cited deficit concerns but also said that the tax on investment partnerships would discourage real-estate deals.
One element that will survive in a different form: a proposal to suspend a 21% cut in Medicare payments to doctors that's set to take effect this month. That was stripped from the bill last week in a cost-cutting step and sent to the House as a stand-alone measure. The House, voting 417 to 1, approved the six-month suspension of the cuts late Thursday.
—John D. McKinnon contributed to this article.
Write to Greg Hitt at greg.hitt@wsj.com and Sara Murray at sara.murray@wsj.com
WASHINGTON—Spooked by concern about deficits, the Senate shelved a spending bill that included an extension of unemployment benefits, suddenly cutting off a federal cash spigot opened by President Barack Obama when he took office 18 months ago.
The collapse of the wide-ranging legislation means that a total of 1.3 million unemployed Americans will have lost their assistance by the end of this week. It will also leave a number of states with large budget holes they had expected to fill with federal cash to help with Medicaid costs.
The impasse has been weeks in the making and reflects the deepening concern on Capitol Hill with the nation's fiscal situation, as well as a hardening of Republican opposition. Democrats had moved several times to pare the cost of the bill in an effort to win support from centrist Republicans and to make up defections from their own ranks.
On Thursday, Senate Democrats failed to secure the 60 votes needed to break off a GOP-led filibuster. Sen. Ben Nelson (D., Neb.) voted with Republicans in a 57-41 roll call. Senate Majority Leader Harry Reid (D., Nev.) said this third vote on the matter would be the last, allowing the Senate to move on to modest legislation cutting taxes for small businesses.
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Obama administration officials have argued that cutting off government support for the economy too quickly could harm the nascent recovery, and have been pressing both Congress and their international peers to keep the cash flowing. Conservative economists, Republicans and some European leaders say deficit reduction should be a higher priority. The sudden move by Congress provides an unexpected test of that argument.
Up in the air are other provisions that were to be included in the legislation, including some $50 billion in new taxes designed to help offset its cost. They included an increase in levies paid by private investment groups, including hedge-fund firms and real-estate partnerships, a provision long sought by some Democrats that will likely return another day.
Under a program initially enacted last year—which expired June 2—jobless workers could receive up to 99 weeks of aid, including 26 weeks of basic assistance provided by states plus longer-term federal payments. The Labor Department estimates that the long-term unemployed, meaning those out of a job for at least six months, make up 46% of all jobless workers in the U.S.
There are economic risks in ending benefits. Workers receiving them tend to funnel money back into the economy immediately, helping prop up demand and jobs.
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In addition, said Harvard economist Lawrence Katz, if workers are unable to find work and no longer eligible for unemployment benefits, some will turn to other government programs, such as disability and Social Security. "If you're really concerned about the long-term deficit, you should be really concerned about the long-term unemployed," Mr. Katz said.
Other economists argue that extended benefits have played a part in keeping people out of the labor force. "There's a very large body of research that says that more generous benefits and benefits that last longer…encourage people to stay out of work longer," said Bruce Meyer, an economist and public policy professor at the University of Chicago.
James Sherk, a labor economics analyst at the conservative Heritage Foundation think tank, said that while it could be argued that the benefits made available last year were too extensive, cutting off workers who expected to receive the full 99 weeks of benefits isn't ideal either. "You don't sort of pull the rug out from someone halfway through," he said.
The labor market is slowly improving, which could make the transition to fewer weeks of benefits easier. "I don't think there's going to be a big disaster by letting the extended unemployment insurance expire," said Phillip Swagel, a former Bush Treasury official and a Georgetown University professor. Still, he said, "it's going to be tough for some people."
With unemployment expected to remain high for months, Democrats argued the government should not pull back. Struggling families "are counting on us to come through," Senate Finance Chairman Max Baucus (D., Mont.) said before the final vote. Democrats Thursday night weren't talking about returning to the bill any time soon, if at all.
[SPENDINGjp]
Sen. Reid lashed out at Republicans immediately after the vote, saying they had "turned a deaf ear" to jobless workers. "This is not a good day for America," he said. The leader said the Senate would turn next to a small-business tax bill, and give up for now on efforts to push forward with the jobless-benefits extension. Asked whether it could ever be brought back to the floor, he snapped: "You are going to have to talk with Republicans."
Republicans said the government can't afford further increases in the budget deficit, expected to reach $1.4 trillion this fiscal year, and said that Democrats have lost sight of the economic risks posed by the nation's rapidly mounting total debt.
In the give and take, the contours of the 2010 midterm election debate have become clear. Senate Minority Leader Mitch McConnell (R., Ky. ) chided Democrats for refusing to fully pay for the legislation with offsetting savings or revenue increases.
"The principle Democrats are defending is that they will not pass a bill unless it adds to the deficit," Sen. McConnell said.
The bill would also have provided aid to cash-strapped states, created a youth summer jobs program, and renewed several lapsed tax breaks, including a credit to support business research.
The last version of the legislation had a price tag of $85.5 billion. That was down some $20 billion from last week and well below the more than $120 billion bill initially brought to the floor. Even after the changes, the bill added about $35 billion to the deficit, roughly the cost of the six-month extension of jobless benefits in the bill.
Deficit concerns weren't the only issue for senators. Nebraska Sen. Nelson, an opponent of the legislation, cited deficit concerns but also said that the tax on investment partnerships would discourage real-estate deals.
One element that will survive in a different form: a proposal to suspend a 21% cut in Medicare payments to doctors that's set to take effect this month. That was stripped from the bill last week in a cost-cutting step and sent to the House as a stand-alone measure. The House, voting 417 to 1, approved the six-month suspension of the cuts late Thursday.
—John D. McKinnon contributed to this article.
Write to Greg Hitt at greg.hitt@wsj.com and Sara Murray at sara.murray@wsj.com
Cameron’s Tax-and-Axe Austerity Sets Benchmark for G-20 Summit
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By Simon Kennedy and Theophilos Argitis
June 25 (Bloomberg) -- U.K. Prime Minister David Cameron is showing the way on fiscal austerity as he attends his first summit of world leaders today. Whether his path leads to recovery or another recession is driving a transatlantic dispute that will dominate the talks in Canada.
Chastened by the Greek crisis, Cameron’s six-week old government this week proposed Britain’s biggest round of budget cuts since World War II to reduce a deficit worth 11 percent of gross domestic product, the largest in the Group of 20.
European policy makers fear failure to patch up public finances now risks reviving a bond market selloff that required a bailout for Greece last month, while President Barack Obama says deficit reduction could hurt economic growth and employment. The U.K. presents a test case for G-20 politicians as they argue how quickly to act.
“This is going to be one of the biggest experiments, and the U.S. can sit and watch and look to see what happens to the U.K. output data, which I suspect is about to collapse,” David Blanchflower, a former Bank of England policy maker, said in a radio interview with Tom Keene on “Bloomberg Surveillance.”
Cameron, Obama and colleagues from the Group of Eight meet today in Huntsville, Ontario, and join their G-20 counterparts tomorrow in Toronto. Leaders last year anointed the enlarged group as the main forum for global economic coordination.
At Odds
Just as they split on how much to spend fighting the global credit crisis, governments are now at odds over when to start trimming a G-20 debt load that the International Monetary Fund estimates will average 110 percent of GDP in 2015.
While China’s decision to allow a more flexible yuan may cool discussions over exchange rates, divisions also exist over what buffers banks should introduce to avoid future crises and how to force them to cover the cost of a potential rescue.
“Consensus among the G-20 has been the hallmark of prior summits and the source of its effectiveness,” said Daniel Price, who organized the November 2008 G-20 summit for former President George W. Bush. “That consensus may be fragmenting.”
Chancellor of the Exchequer, George Osborne, began June 22 with an emergency budget that imposed a levy on banks, raised the sales tax and slashed spending. The plan, alongside measures proposed by the prior government, will generate 113 billion pounds ($168 billion) of deficit cuts, 15 percent of the 737 billion-pound budget foreseen for 2015, the Treasury said.
Market Endorsement
Cameron’s plan this week won the endorsement of bond investors and credit rating companies. Fitch Ratings said the “ambitious” budget ensured Britain would keep its AAA credit rating, while Moody’s Investors Service said the U.K.’s budget is “supportive” of the top credit level.
U.K. gilts gained for a fourth day yesterday. The 10-year gilt yield fell 5 basis points, or 0.05 percentage point, to 3.39 percent, after touching 3.38 percent, the lowest level since Oct. 13. The 4.75 percent security maturing in March 2020 rose 4 pounds per 1,000-pound ($1,499) face amount, to 111.8.
Sterling traded at 82.48 pence per euro, from 82.30 pence yesterday. It climbed earlier to 81.81 pence, the first time it traded stronger than 82 pence since Nov. 12, 2008. The pound rose 0.2 percent to $1.4992, from $1.4957.
Deputy Prime Minister Nick Clegg said the U.K. could have been the next victim of a “market panic” sweeping Europe if the government had not acted. Such concerns may have driven up local borrowing costs for companies such as Tesco Plc, the U.K.’s biggest retailer, and GlaxoSmithKline Plc.
‘False Choice’
Osborne’s Labour predecessor, Alistair Darling, yesterday told a Bloomberg Link conference in London that if you “take all this money out of the economy” its recovery may stumble. Osborne dismisses the view that nations can’t reduce deficits and support growth in lockstep as presenting a “false choice.”
“The crisis in the euro-zone shows that unless we deal with our debts there will be no growth,” he said. “A credible plan to cut our budget deficit goes hand in hand with a steady and sustained recovery.”
“The assertion that fiscal tightening reduces growth is far from proven,” said Ben Broadbent, an economist at Goldman Sachs Group Inc. in London, who says budget cuts can be offset by looser monetary conditions such as a falling exchange rate. He predicts the U.K. will expand 3.1 percent next year compared with the 2.3 percent forecast of the Office for Budget Responsibility.
‘Absolutely Necessary’
Cameron’s call for prudence is echoed elsewhere in Europe six weeks after the region’s governments united to save Greece from default. German Chancellor Angela Merkel, whose Cabinet this month backed budget cuts worth more than 80 billion euros ($98 billion) through 2014, said June 22 that she told Obama reducing debt is “absolutely necessary.”
Countries including Greece and Spain are already introducing austerity plans, and outside Europe, Japanese Prime Minister Naoto Kan this week pledged to cap spending for three years and overhaul the tax system.
The recent experience of countries from Canada to Ireland proves it is possible to slash budgets and maintain economic growth, according to Andrew Lilico, chief economist at the Policy Exchange, a London-based research group.
That’s not stopping Obama from warning against a premature retraction of stimulus given unemployment remains near 10 percent and synchronized cuts worldwide would leave countries jostling to export their way out of trouble. The White House is pushing an election-year jobs bill in the Senate, adding to last year’s $862 billion stimulus package.
1937 Lesson
“We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth,” Treasury Secretary Timothy F. Geithner and Lawrence Summers, director of the White House’s National Economic Council, wrote on the Wall Street Journal’s website on June 22.
The nightmare scenario for leaders is a repeat of the U.S.’s woes in 1937 and Japan’s six decades later when governments tipped their economies into renewed recessions by cutting support. In the mid-1930s, then U.S. President Franklin Roosevelt began chopping spending and raising taxes after an initial rebound only to lengthen the Great Depression. Japan’s government helped trigger another 20 month recession when it raised its sales tax in 1997 to 5 percent from 3 percent.
‘Depressed’ Economies
Nobel laureate Paul Krugman sides with Obama, arguing that with central bank interest rates so low fiscal policy needs to remain stimulative and markets aren’t signaling an immediate need to repair state balance sheets. Past fiscal turnarounds, such as Canada’s in the 1990s and Ireland’s in the 1980s, were accompanied by strong growth elsewhere in the world that aided exports or interest rate cuts, he says.
“We continue to need fiscal stimulus, we are depressed, we’re in danger of falling into a deflationary trap,” Krugman, a professor at Princeton University in New Jersey, said in a speech in Tel Aviv on June 22. The European push to balance budgets is a “deeply destructive move.”
Governments could still get a lift from markets by outlining how they will eventually clean up their budgets and tackling long-term fiscal challenges such as aging populations, says Ethan Harris at Bank of America Merrill Lynch.
Canadian Prime Minister Stephen Harper, who will chair the meetings, is seeking such a solution by calling on leaders to “send a clear message” that they will halve deficits by 2013. There is a consensus to maintain stimulus now with the focus on deficits in the “medium-term,” he said in a June 21 interview.
The best mix may be for Europe to lead the way, given the dollar’s reserve currency status will ensure it lures the foreign capital needed to plug its deficit, said Michael Amey, executive vice-president of U.K. fixed income in London for Pacific Investment Management Co.
“If everybody tightens at the same time then you have a big problem,” Amey said in a Bloomberg Television interview.
To contact the reporters on this story: Simon Kennedy in London at skennedy4@bloomberg.net; Theophilos Argitis in Ottawa at targitis@bloomberg.net
By Simon Kennedy and Theophilos Argitis
June 25 (Bloomberg) -- U.K. Prime Minister David Cameron is showing the way on fiscal austerity as he attends his first summit of world leaders today. Whether his path leads to recovery or another recession is driving a transatlantic dispute that will dominate the talks in Canada.
Chastened by the Greek crisis, Cameron’s six-week old government this week proposed Britain’s biggest round of budget cuts since World War II to reduce a deficit worth 11 percent of gross domestic product, the largest in the Group of 20.
European policy makers fear failure to patch up public finances now risks reviving a bond market selloff that required a bailout for Greece last month, while President Barack Obama says deficit reduction could hurt economic growth and employment. The U.K. presents a test case for G-20 politicians as they argue how quickly to act.
“This is going to be one of the biggest experiments, and the U.S. can sit and watch and look to see what happens to the U.K. output data, which I suspect is about to collapse,” David Blanchflower, a former Bank of England policy maker, said in a radio interview with Tom Keene on “Bloomberg Surveillance.”
Cameron, Obama and colleagues from the Group of Eight meet today in Huntsville, Ontario, and join their G-20 counterparts tomorrow in Toronto. Leaders last year anointed the enlarged group as the main forum for global economic coordination.
At Odds
Just as they split on how much to spend fighting the global credit crisis, governments are now at odds over when to start trimming a G-20 debt load that the International Monetary Fund estimates will average 110 percent of GDP in 2015.
While China’s decision to allow a more flexible yuan may cool discussions over exchange rates, divisions also exist over what buffers banks should introduce to avoid future crises and how to force them to cover the cost of a potential rescue.
“Consensus among the G-20 has been the hallmark of prior summits and the source of its effectiveness,” said Daniel Price, who organized the November 2008 G-20 summit for former President George W. Bush. “That consensus may be fragmenting.”
Chancellor of the Exchequer, George Osborne, began June 22 with an emergency budget that imposed a levy on banks, raised the sales tax and slashed spending. The plan, alongside measures proposed by the prior government, will generate 113 billion pounds ($168 billion) of deficit cuts, 15 percent of the 737 billion-pound budget foreseen for 2015, the Treasury said.
Market Endorsement
Cameron’s plan this week won the endorsement of bond investors and credit rating companies. Fitch Ratings said the “ambitious” budget ensured Britain would keep its AAA credit rating, while Moody’s Investors Service said the U.K.’s budget is “supportive” of the top credit level.
U.K. gilts gained for a fourth day yesterday. The 10-year gilt yield fell 5 basis points, or 0.05 percentage point, to 3.39 percent, after touching 3.38 percent, the lowest level since Oct. 13. The 4.75 percent security maturing in March 2020 rose 4 pounds per 1,000-pound ($1,499) face amount, to 111.8.
Sterling traded at 82.48 pence per euro, from 82.30 pence yesterday. It climbed earlier to 81.81 pence, the first time it traded stronger than 82 pence since Nov. 12, 2008. The pound rose 0.2 percent to $1.4992, from $1.4957.
Deputy Prime Minister Nick Clegg said the U.K. could have been the next victim of a “market panic” sweeping Europe if the government had not acted. Such concerns may have driven up local borrowing costs for companies such as Tesco Plc, the U.K.’s biggest retailer, and GlaxoSmithKline Plc.
‘False Choice’
Osborne’s Labour predecessor, Alistair Darling, yesterday told a Bloomberg Link conference in London that if you “take all this money out of the economy” its recovery may stumble. Osborne dismisses the view that nations can’t reduce deficits and support growth in lockstep as presenting a “false choice.”
“The crisis in the euro-zone shows that unless we deal with our debts there will be no growth,” he said. “A credible plan to cut our budget deficit goes hand in hand with a steady and sustained recovery.”
“The assertion that fiscal tightening reduces growth is far from proven,” said Ben Broadbent, an economist at Goldman Sachs Group Inc. in London, who says budget cuts can be offset by looser monetary conditions such as a falling exchange rate. He predicts the U.K. will expand 3.1 percent next year compared with the 2.3 percent forecast of the Office for Budget Responsibility.
‘Absolutely Necessary’
Cameron’s call for prudence is echoed elsewhere in Europe six weeks after the region’s governments united to save Greece from default. German Chancellor Angela Merkel, whose Cabinet this month backed budget cuts worth more than 80 billion euros ($98 billion) through 2014, said June 22 that she told Obama reducing debt is “absolutely necessary.”
Countries including Greece and Spain are already introducing austerity plans, and outside Europe, Japanese Prime Minister Naoto Kan this week pledged to cap spending for three years and overhaul the tax system.
The recent experience of countries from Canada to Ireland proves it is possible to slash budgets and maintain economic growth, according to Andrew Lilico, chief economist at the Policy Exchange, a London-based research group.
That’s not stopping Obama from warning against a premature retraction of stimulus given unemployment remains near 10 percent and synchronized cuts worldwide would leave countries jostling to export their way out of trouble. The White House is pushing an election-year jobs bill in the Senate, adding to last year’s $862 billion stimulus package.
1937 Lesson
“We must demonstrate a commitment to reducing long-term deficits, but not at the price of short-term growth,” Treasury Secretary Timothy F. Geithner and Lawrence Summers, director of the White House’s National Economic Council, wrote on the Wall Street Journal’s website on June 22.
The nightmare scenario for leaders is a repeat of the U.S.’s woes in 1937 and Japan’s six decades later when governments tipped their economies into renewed recessions by cutting support. In the mid-1930s, then U.S. President Franklin Roosevelt began chopping spending and raising taxes after an initial rebound only to lengthen the Great Depression. Japan’s government helped trigger another 20 month recession when it raised its sales tax in 1997 to 5 percent from 3 percent.
‘Depressed’ Economies
Nobel laureate Paul Krugman sides with Obama, arguing that with central bank interest rates so low fiscal policy needs to remain stimulative and markets aren’t signaling an immediate need to repair state balance sheets. Past fiscal turnarounds, such as Canada’s in the 1990s and Ireland’s in the 1980s, were accompanied by strong growth elsewhere in the world that aided exports or interest rate cuts, he says.
“We continue to need fiscal stimulus, we are depressed, we’re in danger of falling into a deflationary trap,” Krugman, a professor at Princeton University in New Jersey, said in a speech in Tel Aviv on June 22. The European push to balance budgets is a “deeply destructive move.”
Governments could still get a lift from markets by outlining how they will eventually clean up their budgets and tackling long-term fiscal challenges such as aging populations, says Ethan Harris at Bank of America Merrill Lynch.
Canadian Prime Minister Stephen Harper, who will chair the meetings, is seeking such a solution by calling on leaders to “send a clear message” that they will halve deficits by 2013. There is a consensus to maintain stimulus now with the focus on deficits in the “medium-term,” he said in a June 21 interview.
The best mix may be for Europe to lead the way, given the dollar’s reserve currency status will ensure it lures the foreign capital needed to plug its deficit, said Michael Amey, executive vice-president of U.K. fixed income in London for Pacific Investment Management Co.
“If everybody tightens at the same time then you have a big problem,” Amey said in a Bloomberg Television interview.
To contact the reporters on this story: Simon Kennedy in London at skennedy4@bloomberg.net; Theophilos Argitis in Ottawa at targitis@bloomberg.net
EU Said to Discuss Applying Stress-Tests to Cajas
By Ben Moshinsky
June 25 (Bloomberg) -- European Union officials are meeting today in Brussels to discuss whether Spanish savings banks and Germany’s state-owned regional Landesbanken should be included in the current round of stress tests, according to two people familiar with the discussions.
The meeting will also examine whether to include the chance of a sovereign-debt default in the stress test scenario and on which day to release the results of the tests, said the people, who declined to be identified because the discussions are private.
“Commissioner Barnier has stated he believes in the principle of transparency is essential,” Chantal Hughes, spokeswoman for financial services commissioner Michel Barnier, said in an interview today.
EU leaders agreed last week to disclose how banks perform in stress tests, seeking to show investors that the financial system can withstand shocks. German Chancellor Angela Merkel’s government won’t compel banks to agree to the publication of the tests, relying on market pressure for transparency to achieve the same result.
The Spanish government has said it is already performing stress tests on its 45 savings banks, also known as cajas.
The meeting will include officials from the European Central Bank, national governments in the 27-member bloc, the European Commission and the Committee of European Banking Supervisors.
Cross-Border Banks
European authorities have come under pressure to widen the scope of the stress tests, which so far only include large European cross-border banks.
“We cannot judge how serious the situation is until the results are published,” billionaire investor George Soros said in a speech in Berlin on June 23. “Indeed we shall not be able to judge even then because the report will deal only with the 25 largest banks and the biggest problems are in the smaller banks, notably the Cajas in Spain and the Landesbanken in Germany.”
Germany’s Landesbanken and savings banks will probably write down $143 billion for the years 2007 to 2010, the International Monetary Fund said in April.
Spanish savings banks may borrow around 10 billion euros ($12.3 billion) from the country’s bank-rescue fund, known as the FROB, Bank of Spain Governor Miguel Angel Fernandez Ordonez told lawmakers in Madrid on June 22.
Adair Turner, chairman of the U.K. Financial Services Authority, said he’s confident that U.K. banks will pass European Union stress tests in a speech in London yesterday.
“The domestic stress tests are more severe” than those being conducted by the European Union, Turner said. “We are not at all concerned,” he said. “We have been doing very extensive stress tests.”
The U.S. last year released the results of evaluations it carried out on 19 financial institutions to determine whether they needed more capital following the subprime mortgage crisis.
To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net;
June 25 (Bloomberg) -- European Union officials are meeting today in Brussels to discuss whether Spanish savings banks and Germany’s state-owned regional Landesbanken should be included in the current round of stress tests, according to two people familiar with the discussions.
The meeting will also examine whether to include the chance of a sovereign-debt default in the stress test scenario and on which day to release the results of the tests, said the people, who declined to be identified because the discussions are private.
“Commissioner Barnier has stated he believes in the principle of transparency is essential,” Chantal Hughes, spokeswoman for financial services commissioner Michel Barnier, said in an interview today.
EU leaders agreed last week to disclose how banks perform in stress tests, seeking to show investors that the financial system can withstand shocks. German Chancellor Angela Merkel’s government won’t compel banks to agree to the publication of the tests, relying on market pressure for transparency to achieve the same result.
The Spanish government has said it is already performing stress tests on its 45 savings banks, also known as cajas.
The meeting will include officials from the European Central Bank, national governments in the 27-member bloc, the European Commission and the Committee of European Banking Supervisors.
Cross-Border Banks
European authorities have come under pressure to widen the scope of the stress tests, which so far only include large European cross-border banks.
“We cannot judge how serious the situation is until the results are published,” billionaire investor George Soros said in a speech in Berlin on June 23. “Indeed we shall not be able to judge even then because the report will deal only with the 25 largest banks and the biggest problems are in the smaller banks, notably the Cajas in Spain and the Landesbanken in Germany.”
Germany’s Landesbanken and savings banks will probably write down $143 billion for the years 2007 to 2010, the International Monetary Fund said in April.
Spanish savings banks may borrow around 10 billion euros ($12.3 billion) from the country’s bank-rescue fund, known as the FROB, Bank of Spain Governor Miguel Angel Fernandez Ordonez told lawmakers in Madrid on June 22.
Adair Turner, chairman of the U.K. Financial Services Authority, said he’s confident that U.K. banks will pass European Union stress tests in a speech in London yesterday.
“The domestic stress tests are more severe” than those being conducted by the European Union, Turner said. “We are not at all concerned,” he said. “We have been doing very extensive stress tests.”
The U.S. last year released the results of evaluations it carried out on 19 financial institutions to determine whether they needed more capital following the subprime mortgage crisis.
To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net;
Thursday, June 24, 2010
Commodities Star Trader Andrew Hall Absorbs Loss
By GREGORY ZUCKERMAN
Wall Street's $100 million man has stumbled, a potential warning sign for traders poised to bolt banks for hedge funds.
Andrew Hall, the legendary energy trader who left Citigroup Inc. last year after his lofty compensation ignited controversy about pay practices at banks receiving government support, has hit a rough patch running his own hedge fund.
His commodities fund posted a decline of more than 10% last month, its weakest month in the last two years, to put it down nearly 10% this year through May, which is behind similar hedge funds. Mr. Hall was bullish as shares of commodity producers and other energy investments declined.
"Unfortunately, we did not dodge the onslaught," Mr. Hall, 59 years old, wrote in a June 1 letter to his investors. "We did reduce risk but not fast enough. We did hedge but not well enough. And we did re-enter some markets that we had exited, prematurely, as it turned out."
Mr. Hall's setback comes amid a debate on Capitol Hill about whether big banks that take in government-insured deposits should be permitted to let aggressive traders like Mr. Hall invest the bank's cash. A legislative proposal, known as the Volcker rule after former Federal Reserve Chairman Paul Volcker, would curb so-called proprietary trading within banks. Partly as a result, a number of traders are considering leaving for hedge-fund firms or have done so.
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Late last year, Citigroup agreed to sell the unit Mr. Hall headed, its lucrative Phibro LLC energy-trading business, for a bargain-basement price. The unit churned out hefty profits, but Citigroup, which had taken substantial government aid in the financial crisis, came under pressure from the U.S. government's pay czar to spring Mr. Hall in light of his big paycheck.
Some felt the move was misguided given Mr. Hall's golden touch for Citigroup. Others said his pay symbolized excessive Wall Street compensation practices that encouraged risk-taking that fueled the financial crisis.
In addition to continuing to run Phibro, which was purchased by Los Angeles-based Occidental Petroleum Corp., Mr. Hall also is running his own hedge fund business, Astenbeck Capital Management LLC, where he has seen the losses.
Whether Mr. Hall's performance is related to his new environment remains unclear. He declined to comment.
[HALL]
Money managers say life within a bank sometimes can be easier than in the hedge-fund world. With large balance sheets that can absorb losses, banks sometimes allow a trader more leeway for bets, such as by providing additional capital, and can help traders absorb losses.
Lately, Mr. Hall, an oil-and-gas specialist, has been reducing his "overall risk exposures," he told his investors, despite continued optimism about energy prices. It isn't clear how the group has done in June.
Mr. Hall "was incredibly successful but his strategy has volatility, and at a bank there's an implicit or explicit backing of your activity, whereas a hedge fund has a finite amount of capital," said Charles McNally of Lyster Watson & Co., which invests in hedge funds.
The challenges for Mr. Hall, one of the world's largest collectors of contemporary art, reflect the tough times many hedge-fund managers are facing after a postcrisis rebound in 2009. The average commodity-focused hedge fund was down nearly 5% through May, according to Hedge Fund Research Inc.
Other hedge funds trading in a variety of investments also had a rough May, including veteran trader Louis Bacon, who showed a decline of 9.2% in the month in his firm's largest fund.
These managers sometimes can quickly turn their performance around. Mr. Hall's team showed a decline of nearly 10% in July 2008, for example, before ending the year with a gain of almost 5%.
Occidental spent about $370 million for Phibro, a price that essentially was the value of the unit's net assets at the time of the deal.
The company has said that Phibro's earnings for this year's first quarter weren't significant to the oil company.
"Over months performance tends to even out, you can't take a month as indicative of what a year will look like," said Occidental spokesman Richard Kline. "We believe Mr. Hall has tremendous insight and is an outstanding asset to Occidental."
At Citigroup, Phibro's earnings averaged $371 million a year for the five years before the deal, and the fund was consistently profitable for more than a decade.
The profits and a pay package that allowed him to keep a big percentage of the unit's profits helped Mr. Hall earn compensation of around $100 million in 2008; he was on tap for a similar package last year.
Since jettisoning Phibro, Citigroup has begun rebuilding oil-and-metals trading in its commodities unit. After keeping headcount flat last year, the commodities business is expected to grow by 10% to 15% this year, according to bank officials. The government still owns about 20% of Citigroup and has been steadily selling its stake.
Mr. Hall and his team began running their hedge fund and managing money for some outside investors in 2007 while still at Citigroup, fund documents say.
In raising money for his hedge fund this year, the British-born Mr. Hall demanded a $25 million minimum investment, well above the $5 million or so that many funds charge. He charges a more-typical 2% management fee on assets and 20% of any profits.
Mr. Hall owns 80% of Astenbeck, based in Westport, Conn. Occidental owns the remaining 20%, Astenbeck documents show.
Mr. Hall, who obtained a chemistry degree from Oxford University, has more than $1 billion in the offshore version of the fund, according to a securities filing this week, making it one of the largest commodity-focused hedge funds. He has $50 million of his own money in the hedge fund, according to fund documents. Mr. Hall profited in recent years by turning bullish on energy prices before most others in the market. He generally likes to establish long-term strategy, and doesn't always trade markets actively, though others on his team do. In his June letter to investors, Mr. Hall sounded an upbeat tone about energy prices and precious metals.
"It is our belief that we are not on the eve of another 2008 Lehman event," he wrote.
Mr. Hall argued that oil consumption is rapidly recovering. He said the huge oil spill in the Gulf of Mexico will push prices higher, though the spill and potential government taxes on energy producers might hurt shares of some companies.
"Much of the world's incremental oil production over the next decade was meant to come from" deep-water offshore locations, he told investors. "At a minimum, costs will now be significantly higher due to more stringent safety measures … this will remove oil from the market and also as importantly raise the price hurdle for future investments."
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
Wall Street's $100 million man has stumbled, a potential warning sign for traders poised to bolt banks for hedge funds.
Andrew Hall, the legendary energy trader who left Citigroup Inc. last year after his lofty compensation ignited controversy about pay practices at banks receiving government support, has hit a rough patch running his own hedge fund.
His commodities fund posted a decline of more than 10% last month, its weakest month in the last two years, to put it down nearly 10% this year through May, which is behind similar hedge funds. Mr. Hall was bullish as shares of commodity producers and other energy investments declined.
"Unfortunately, we did not dodge the onslaught," Mr. Hall, 59 years old, wrote in a June 1 letter to his investors. "We did reduce risk but not fast enough. We did hedge but not well enough. And we did re-enter some markets that we had exited, prematurely, as it turned out."
Mr. Hall's setback comes amid a debate on Capitol Hill about whether big banks that take in government-insured deposits should be permitted to let aggressive traders like Mr. Hall invest the bank's cash. A legislative proposal, known as the Volcker rule after former Federal Reserve Chairman Paul Volcker, would curb so-called proprietary trading within banks. Partly as a result, a number of traders are considering leaving for hedge-fund firms or have done so.
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Late last year, Citigroup agreed to sell the unit Mr. Hall headed, its lucrative Phibro LLC energy-trading business, for a bargain-basement price. The unit churned out hefty profits, but Citigroup, which had taken substantial government aid in the financial crisis, came under pressure from the U.S. government's pay czar to spring Mr. Hall in light of his big paycheck.
Some felt the move was misguided given Mr. Hall's golden touch for Citigroup. Others said his pay symbolized excessive Wall Street compensation practices that encouraged risk-taking that fueled the financial crisis.
In addition to continuing to run Phibro, which was purchased by Los Angeles-based Occidental Petroleum Corp., Mr. Hall also is running his own hedge fund business, Astenbeck Capital Management LLC, where he has seen the losses.
Whether Mr. Hall's performance is related to his new environment remains unclear. He declined to comment.
[HALL]
Money managers say life within a bank sometimes can be easier than in the hedge-fund world. With large balance sheets that can absorb losses, banks sometimes allow a trader more leeway for bets, such as by providing additional capital, and can help traders absorb losses.
Lately, Mr. Hall, an oil-and-gas specialist, has been reducing his "overall risk exposures," he told his investors, despite continued optimism about energy prices. It isn't clear how the group has done in June.
Mr. Hall "was incredibly successful but his strategy has volatility, and at a bank there's an implicit or explicit backing of your activity, whereas a hedge fund has a finite amount of capital," said Charles McNally of Lyster Watson & Co., which invests in hedge funds.
The challenges for Mr. Hall, one of the world's largest collectors of contemporary art, reflect the tough times many hedge-fund managers are facing after a postcrisis rebound in 2009. The average commodity-focused hedge fund was down nearly 5% through May, according to Hedge Fund Research Inc.
Other hedge funds trading in a variety of investments also had a rough May, including veteran trader Louis Bacon, who showed a decline of 9.2% in the month in his firm's largest fund.
These managers sometimes can quickly turn their performance around. Mr. Hall's team showed a decline of nearly 10% in July 2008, for example, before ending the year with a gain of almost 5%.
Occidental spent about $370 million for Phibro, a price that essentially was the value of the unit's net assets at the time of the deal.
The company has said that Phibro's earnings for this year's first quarter weren't significant to the oil company.
"Over months performance tends to even out, you can't take a month as indicative of what a year will look like," said Occidental spokesman Richard Kline. "We believe Mr. Hall has tremendous insight and is an outstanding asset to Occidental."
At Citigroup, Phibro's earnings averaged $371 million a year for the five years before the deal, and the fund was consistently profitable for more than a decade.
The profits and a pay package that allowed him to keep a big percentage of the unit's profits helped Mr. Hall earn compensation of around $100 million in 2008; he was on tap for a similar package last year.
Since jettisoning Phibro, Citigroup has begun rebuilding oil-and-metals trading in its commodities unit. After keeping headcount flat last year, the commodities business is expected to grow by 10% to 15% this year, according to bank officials. The government still owns about 20% of Citigroup and has been steadily selling its stake.
Mr. Hall and his team began running their hedge fund and managing money for some outside investors in 2007 while still at Citigroup, fund documents say.
In raising money for his hedge fund this year, the British-born Mr. Hall demanded a $25 million minimum investment, well above the $5 million or so that many funds charge. He charges a more-typical 2% management fee on assets and 20% of any profits.
Mr. Hall owns 80% of Astenbeck, based in Westport, Conn. Occidental owns the remaining 20%, Astenbeck documents show.
Mr. Hall, who obtained a chemistry degree from Oxford University, has more than $1 billion in the offshore version of the fund, according to a securities filing this week, making it one of the largest commodity-focused hedge funds. He has $50 million of his own money in the hedge fund, according to fund documents. Mr. Hall profited in recent years by turning bullish on energy prices before most others in the market. He generally likes to establish long-term strategy, and doesn't always trade markets actively, though others on his team do. In his June letter to investors, Mr. Hall sounded an upbeat tone about energy prices and precious metals.
"It is our belief that we are not on the eve of another 2008 Lehman event," he wrote.
Mr. Hall argued that oil consumption is rapidly recovering. He said the huge oil spill in the Gulf of Mexico will push prices higher, though the spill and potential government taxes on energy producers might hurt shares of some companies.
"Much of the world's incremental oil production over the next decade was meant to come from" deep-water offshore locations, he told investors. "At a minimum, costs will now be significantly higher due to more stringent safety measures … this will remove oil from the market and also as importantly raise the price hurdle for future investments."
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
中国沿袭香港房地产开发模式
由于居高不下的房地产价格让人担心中国房地产市场正在形成泡沫，中国中央政府已采取措施为市场降温。但现在人们又开始担心另一个问题：这些稳定市场的措施是否过火并导致市场进入下跌通道？尽管不能排除这种可能性，但令投资者感到安慰的是，并非所有存在泡沫的亚洲房地产市场最终都以泡沫破裂告终。
看一看香港和新加坡的房地产市场。基于通用的经济合作与发展组织(OECD)的房屋价格可承受比率，这两个城市的住宅房地产非常昂贵。香港和新加坡的收入中值仅略高于美国的一半，然而平均住宅价格却高许多。在高档住宅方面，在香港购买一套高档顶层住宅的钱能在欧洲买下一座城堡。在世界住宅房地产价格最贵的城市中，香港排名第五。去年上市的许多顶级公寓的价格在2,500万美元至5,000万美元之间。
香港和新加坡房地产市场数十年来一直保持泡沫不破有两个原因。首先，政府依靠房地产作为主要的收入方式，因此采取了限制土地供应等政策以保持房价高企。其次，为那些无力购房或租房之人提供居所 ──这两个城市中约50%的人口居住在公共住房内。
显然，中国并不是一个土地稀缺的城邦，而是一个幅员辽阔的国家；人口超过13亿人，但只有一半居住在城镇地区。然而，中国的城市中心与香港和新加坡有许多共同之处，即公共收入对售地的依存度畸高。关键的不同之处在于，中国的公共住房不多，且房地产开发市场非常分散，实际上有数百家小型公司相互竞争，争相建造并出售房屋。投资者应当密切关注近期的政策走向，这些政策将缩小这些差距。
今年，中国预计将开建580万套公共住房，是去年总量的近两倍，占住宅开工总量的三分之一左右。决策者将如何实现这一目标令人关注。与新加坡和香港不同，中国的公共住宅由私营公司兴建，并以确定的价格出售给符合条件的购房人。
由于收益不太高，开发商一直不太积极。北京现在怎样让开发商合作呢？答案或许是简单地命令他们这样做。无论如何，重要的是要承认把这种情况变成一种补偿交易有多么容易。如果大型开发商能够得到私有住宅领域的重要合同，他们会更加愿意建造公共住房。而确保他们这样做的一个办法就是制订偏向大型开发商的土地拍卖制度。这样我们就又回到了香港模式。
香港智库──思汇政策研究所(Civic Exchange)的布朗(Stephen Brown)曾说，由于香港的土地拍卖制度要求提供巨额首付以换取开发权，因此房地产市场完全由少数开发商主导。结果，只有具有强大融资渠道的最大型蓝筹公司才能定期参与土地拍卖。
显然北京已经研究过香港的制度。今年3月，北京大幅提高了参加中国土地拍卖的门槛：赢标者必须在一个月内支付土地成本的50%（比之前的比例多一半以上），并且参加拍卖必须支付高额的保证金。随着时间的推移，此类措施将把小型开发商逐出市场，并让其它的开发商获得更高的利润。作为回报，更大型的开发商应当十分乐于在兴建公共住房方面帮把手。
部分经济学家或许认为推动鼓励房地产泡沫的政策过于草率，但我们能看出中国为什么义无反顾地走向这条路。基于出售土地获得的收入，中国得以推迟实施扩大税基的计划，而这是一项具有风险性和政治敏感性的计划。此外，在经济刺激计划实施期间，地方政府背负了数万亿元的债务。提高土地价值将挽救他们的资产负债表。
最后，中国为什么不发挥其文化优势呢？靠把居民装进公共住房便能脱身的社会并不多，看看这种办法给英国、法国和美国造成的社会问题吧。但由于中国内地与香港和新加坡是本质相同的华人社会，中国也能依靠相同的解决办法，即利用公共住房保护其贫困的公民不受高涨的房地产价格所累。
然而，高地价机制一旦确定下来便难以回头。香港前特首董建华提出的大幅扩大新土地和住宅供应的计划重击了市场之后，他也被迫下台。各方对中国内地居民无法负担高房价的困境进行了大量的公开讨论，但未来更多的压力将来自房主们──他们希望自己的投资得到保护。这部分人的影响力自然更大。
（更新完成）
（Cathy Holcombe是香港金融服务公司GaveKal的研究编辑。）
看一看香港和新加坡的房地产市场。基于通用的经济合作与发展组织(OECD)的房屋价格可承受比率，这两个城市的住宅房地产非常昂贵。香港和新加坡的收入中值仅略高于美国的一半，然而平均住宅价格却高许多。在高档住宅方面，在香港购买一套高档顶层住宅的钱能在欧洲买下一座城堡。在世界住宅房地产价格最贵的城市中，香港排名第五。去年上市的许多顶级公寓的价格在2,500万美元至5,000万美元之间。
香港和新加坡房地产市场数十年来一直保持泡沫不破有两个原因。首先，政府依靠房地产作为主要的收入方式，因此采取了限制土地供应等政策以保持房价高企。其次，为那些无力购房或租房之人提供居所 ──这两个城市中约50%的人口居住在公共住房内。
显然，中国并不是一个土地稀缺的城邦，而是一个幅员辽阔的国家；人口超过13亿人，但只有一半居住在城镇地区。然而，中国的城市中心与香港和新加坡有许多共同之处，即公共收入对售地的依存度畸高。关键的不同之处在于，中国的公共住房不多，且房地产开发市场非常分散，实际上有数百家小型公司相互竞争，争相建造并出售房屋。投资者应当密切关注近期的政策走向，这些政策将缩小这些差距。
今年，中国预计将开建580万套公共住房，是去年总量的近两倍，占住宅开工总量的三分之一左右。决策者将如何实现这一目标令人关注。与新加坡和香港不同，中国的公共住宅由私营公司兴建，并以确定的价格出售给符合条件的购房人。
由于收益不太高，开发商一直不太积极。北京现在怎样让开发商合作呢？答案或许是简单地命令他们这样做。无论如何，重要的是要承认把这种情况变成一种补偿交易有多么容易。如果大型开发商能够得到私有住宅领域的重要合同，他们会更加愿意建造公共住房。而确保他们这样做的一个办法就是制订偏向大型开发商的土地拍卖制度。这样我们就又回到了香港模式。
香港智库──思汇政策研究所(Civic Exchange)的布朗(Stephen Brown)曾说，由于香港的土地拍卖制度要求提供巨额首付以换取开发权，因此房地产市场完全由少数开发商主导。结果，只有具有强大融资渠道的最大型蓝筹公司才能定期参与土地拍卖。
显然北京已经研究过香港的制度。今年3月，北京大幅提高了参加中国土地拍卖的门槛：赢标者必须在一个月内支付土地成本的50%（比之前的比例多一半以上），并且参加拍卖必须支付高额的保证金。随着时间的推移，此类措施将把小型开发商逐出市场，并让其它的开发商获得更高的利润。作为回报，更大型的开发商应当十分乐于在兴建公共住房方面帮把手。
部分经济学家或许认为推动鼓励房地产泡沫的政策过于草率，但我们能看出中国为什么义无反顾地走向这条路。基于出售土地获得的收入，中国得以推迟实施扩大税基的计划，而这是一项具有风险性和政治敏感性的计划。此外，在经济刺激计划实施期间，地方政府背负了数万亿元的债务。提高土地价值将挽救他们的资产负债表。
最后，中国为什么不发挥其文化优势呢？靠把居民装进公共住房便能脱身的社会并不多，看看这种办法给英国、法国和美国造成的社会问题吧。但由于中国内地与香港和新加坡是本质相同的华人社会，中国也能依靠相同的解决办法，即利用公共住房保护其贫困的公民不受高涨的房地产价格所累。
然而，高地价机制一旦确定下来便难以回头。香港前特首董建华提出的大幅扩大新土地和住宅供应的计划重击了市场之后，他也被迫下台。各方对中国内地居民无法负担高房价的困境进行了大量的公开讨论，但未来更多的压力将来自房主们──他们希望自己的投资得到保护。这部分人的影响力自然更大。
（更新完成）
（Cathy Holcombe是香港金融服务公司GaveKal的研究编辑。）
Fed Grows More Wary on Economy
By JON HILSENRATH
The Federal Reserve offered a subdued assessment of the U.S. economy Wednesday and affirmed that short-term interest rates would remain near zero for "an extended period," which most economists now believe could mean well into 2011 and possibly into 2012.
."Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," namely in Europe, the central bank said after a two-day policy meeting.
Market expectations for when the Fed will raise interest rates have already shifted notably in the past two months, amid economic turmoil in Europe and signs that the U.S. economy hasn't built much momentum after turning around in mid-2009.
.The Fed on Wednesday said the recovery from the deep recession is "proceeding," a departure from its April assessment that the recovery "continued to strengthen." Consumer spending is "increasing but remains constrained," the job market is improving "gradually," housing is "depressed" and inflation—already low—has "trended lower," the central bank said.
The federal-funds interest rate—a Fed-influenced rate at which banks lend to each other overnight—has been between zero and 0.25% for 18 months. Economists, on average, expect the Fed to keep it there until March 2011, according to a survey conducted by The Wall Street Journal this week.
In the past three weeks, 15 of 44 economists surveyed regularly said they have delayed their predictions for when the Fed will raise rates to a later date. As recently as April, the bulk of the forecasters expected such a move before the end of 2010; now a few say it won't happen until 2012.
Global Rate Tracker
View Interactive
..The Fed's statement did little to dissuade economists from their latest views. "We're looking at this as a very slight downgrade of their business-conditions assessment," said Maury Harris, chief U.S. economist for UBS Securities, which pushed its forecast of a rate increase to January 2011; two weeks ago, it predicted September 2010.
"High unemployment and low inflation will keep the Fed sidelined," said Bruce Kasman, J.P. Morgan Chase's chief economist. He moved his forecast to November 2011 from April 2011.
Most central-bank officials are in wait-and-see mode, trying to preserve their flexibility to raise interest rates soon if employment grows briskly and financial markets settle down, or to hold off further if joblessness proves stubborn or the economic outlook deteriorates. At some point after raising rates, Fed officials also are inclined to gradually sell the bank's massive holdings of mortgage-backed securities, acquired over the past year-and-a-half to pull down mortgage rates.
.Speedy action looks increasingly unlikely. Several officials said before this week's meeting that financial turmoil in Europe could dent U.S. growth, and they reaffirmed that worry with their latest reference to developments abroad. Persistently high numbers of Americans seeking unemployment insurance are another concern. Some officials went into this week's meeting wanting to discuss how the Fed would respond if the economy unexpectedly underperforms expectations. Minutes with details of the discussions will be released in three weeks.In a new sign of the economy's fragility, the Commerce Department reported Wednesday that sales of new homes fell 32.7% in May as a tax credit for home purchases expired
Some at the Fed still want to raise rates soon. Thomas Hoenig, president of Kansas City Federal Reserve, dissented from the central bank's decision for the fourth time this year, arguing that its assurance of low rates for a long time wasn't now warranted.
There are risks to the Fed's strategy. In the early 2000s, it kept short-term interest rates at 1% for a year, a move critics say spurred the housing bubble and excessive borrowing. "If I were Ben Bernanke, I would start preparing people, especially as Europe cools down, that interest rates are going to move to more normal, but still low levels," said Raghuram Rajan, a professor at the University of Chicago Booth School of Business.
Ben Bernanke
.But Fed officials see few signs that either inflation or asset bubbles are brewing, and thus don't feel great pressure to act. Inflation is running below the Fed's target. There had been some internal debate at the Fed earlier in the year about whether the inflation slowdown was broad-based or concentrated in housing. That debate is now largely settled.
"Prices of energy and other commodities have declined somewhat in recent months," the Fed said Wednesday, adding, "underlying inflation has trended lower."
And banks, rather than spurring a bubble with money the Fed has pumped into the economy, have continued to rein in lending. Since January, bank holdings of Treasury bonds have risen 3%, while their commercial and industrial loan portfolios have fallen by 4% and real-estate loans have contracted by 2%.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
The Federal Reserve offered a subdued assessment of the U.S. economy Wednesday and affirmed that short-term interest rates would remain near zero for "an extended period," which most economists now believe could mean well into 2011 and possibly into 2012.
."Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," namely in Europe, the central bank said after a two-day policy meeting.
Market expectations for when the Fed will raise interest rates have already shifted notably in the past two months, amid economic turmoil in Europe and signs that the U.S. economy hasn't built much momentum after turning around in mid-2009.
.The Fed on Wednesday said the recovery from the deep recession is "proceeding," a departure from its April assessment that the recovery "continued to strengthen." Consumer spending is "increasing but remains constrained," the job market is improving "gradually," housing is "depressed" and inflation—already low—has "trended lower," the central bank said.
The federal-funds interest rate—a Fed-influenced rate at which banks lend to each other overnight—has been between zero and 0.25% for 18 months. Economists, on average, expect the Fed to keep it there until March 2011, according to a survey conducted by The Wall Street Journal this week.
In the past three weeks, 15 of 44 economists surveyed regularly said they have delayed their predictions for when the Fed will raise rates to a later date. As recently as April, the bulk of the forecasters expected such a move before the end of 2010; now a few say it won't happen until 2012.
Global Rate Tracker
View Interactive
..The Fed's statement did little to dissuade economists from their latest views. "We're looking at this as a very slight downgrade of their business-conditions assessment," said Maury Harris, chief U.S. economist for UBS Securities, which pushed its forecast of a rate increase to January 2011; two weeks ago, it predicted September 2010.
"High unemployment and low inflation will keep the Fed sidelined," said Bruce Kasman, J.P. Morgan Chase's chief economist. He moved his forecast to November 2011 from April 2011.
Most central-bank officials are in wait-and-see mode, trying to preserve their flexibility to raise interest rates soon if employment grows briskly and financial markets settle down, or to hold off further if joblessness proves stubborn or the economic outlook deteriorates. At some point after raising rates, Fed officials also are inclined to gradually sell the bank's massive holdings of mortgage-backed securities, acquired over the past year-and-a-half to pull down mortgage rates.
.Speedy action looks increasingly unlikely. Several officials said before this week's meeting that financial turmoil in Europe could dent U.S. growth, and they reaffirmed that worry with their latest reference to developments abroad. Persistently high numbers of Americans seeking unemployment insurance are another concern. Some officials went into this week's meeting wanting to discuss how the Fed would respond if the economy unexpectedly underperforms expectations. Minutes with details of the discussions will be released in three weeks.In a new sign of the economy's fragility, the Commerce Department reported Wednesday that sales of new homes fell 32.7% in May as a tax credit for home purchases expired
Some at the Fed still want to raise rates soon. Thomas Hoenig, president of Kansas City Federal Reserve, dissented from the central bank's decision for the fourth time this year, arguing that its assurance of low rates for a long time wasn't now warranted.
There are risks to the Fed's strategy. In the early 2000s, it kept short-term interest rates at 1% for a year, a move critics say spurred the housing bubble and excessive borrowing. "If I were Ben Bernanke, I would start preparing people, especially as Europe cools down, that interest rates are going to move to more normal, but still low levels," said Raghuram Rajan, a professor at the University of Chicago Booth School of Business.
Ben Bernanke
.But Fed officials see few signs that either inflation or asset bubbles are brewing, and thus don't feel great pressure to act. Inflation is running below the Fed's target. There had been some internal debate at the Fed earlier in the year about whether the inflation slowdown was broad-based or concentrated in housing. That debate is now largely settled.
"Prices of energy and other commodities have declined somewhat in recent months," the Fed said Wednesday, adding, "underlying inflation has trended lower."
And banks, rather than spurring a bubble with money the Fed has pumped into the economy, have continued to rein in lending. Since January, bank holdings of Treasury bonds have risen 3%, while their commercial and industrial loan portfolios have fallen by 4% and real-estate loans have contracted by 2%.
Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
RBS 2009
Asset quality and provision
-- provision is relatively low: risk elements in loans (REIL) $ E 38 bil, provision coverage only 45% in 2009 (page 95)
--but write-off is only $E 7 bil while, charge to income statement (provision) in 2009 was $E 14, this might be really conservative (note 12, page 248)
http://www.sec.gov/Archives/edgar/data/844150/000095010310001203/dp16844_20f.htm
-- provision is relatively low: risk elements in loans (REIL) $ E 38 bil, provision coverage only 45% in 2009 (page 95)
--but write-off is only $E 7 bil while, charge to income statement (provision) in 2009 was $E 14, this might be really conservative (note 12, page 248)
http://www.sec.gov/Archives/edgar/data/844150/000095010310001203/dp16844_20f.htm
Wednesday, June 23, 2010
U.S. Pulls Out Late Win, Advances In World Cup
Landon Donovan scored in the first minute of stoppage time off a rebound, advancing the United States to the second round at the World Cup with a 1-0 win over Algeria.
With the U.S. perhaps three minutes from elimination, Jozy Altidore was stopped on a breakaway by goalkeeper Rais Bolihi. Donovan hustled in and kicked in the rebound to win Group C Wednesday.
After his U.S. record 44th international goal, Donovan joyously ran to the corner flag and his teammates ran down the touchline to mob him. Donovan was in tears when the game ended and the United States had moved into the second round.
England (1-0-2), which beat Slovenia moments earlier, also had five points but finished second because the U.S. scored four goals to two for the English. Slovenia (1-1-1) was third with four points, missing advancing because of Donovan’s heroics. and Algeria (0-2-1) was last with one.
Until Donovan’s goal, it appeared the officiating would again be the focus.
Clint Dempsey put the ball in the net in the 21st minute off the rebound of Herculez Gomez’s shot. But the goal was called offside, just as Maurice Edu’s late goal was disallowed against Slovenia last week, a score that would have given the Americans a victory. Replays appeared to show Dempsey was onside.
Dempsey had another great chance in the 57th minute when Michael Bradley stole the ball and sent Altidore streaking down the right side. Altidore crossed, but Dempsey’s hit the goalpost. He shot wide on the rebound.
With the U.S. perhaps three minutes from elimination, Jozy Altidore was stopped on a breakaway by goalkeeper Rais Bolihi. Donovan hustled in and kicked in the rebound to win Group C Wednesday.
After his U.S. record 44th international goal, Donovan joyously ran to the corner flag and his teammates ran down the touchline to mob him. Donovan was in tears when the game ended and the United States had moved into the second round.
With just its fifth shutout in World Cup play, the United States (1-0-2) won a World Cup group for the first time since 1930 and will face the runner-up in Group D this weekend.
England (1-0-2), which beat Slovenia moments earlier, also had five points but finished second because the U.S. scored four goals to two for the English. Slovenia (1-1-1) was third with four points, missing advancing because of Donovan’s heroics. and Algeria (0-2-1) was last with one.
Until Donovan’s goal, it appeared the officiating would again be the focus.
Clint Dempsey put the ball in the net in the 21st minute off the rebound of Herculez Gomez’s shot. But the goal was called offside, just as Maurice Edu’s late goal was disallowed against Slovenia last week, a score that would have given the Americans a victory. Replays appeared to show Dempsey was onside.
Dempsey had another great chance in the 57th minute when Michael Bradley stole the ball and sent Altidore streaking down the right side. Altidore crossed, but Dempsey’s hit the goalpost. He shot wide on the rebound.
Goldman Sachs, Morgan Stanley Least Affected By Swaps Proposal
By Phil Mattingly and Robert Schmidt
June 23 (Bloomberg) -- Three of the five U.S. banks that dominate swaps trading already perform most transactions outside their depository institutions and would face minimal disruption from a congressional proposal to reorder the derivatives business, financial statements and banking records show.
JPMorgan Chase & Co. and Citigroup Inc. would be hit hardest by the proposal, crafted by Arkansas Senator Blanche Lincoln, to wall off swaps desks from commercial banks. JPMorgan had 98 percent of its $142 billion in current value derivatives holdings inside its bank in the first quarter of this year while Citigroup had 89 percent of $112 billion, the records show.
Morgan Stanley and Goldman Sachs Group Inc., each of which entered the commercial banking business in 2008 in the midst of the financial crisis, would be less affected. Morgan Stanley kept just over 1 percent of its $86 billion in derivatives holdings in its bank in the first quarter, and Goldman Sachs Group’s held 32 percent of its $104 billion. Bank of America Corp., which absorbed broker-dealer Merrill Lynch in 2009, had 33 percent of its $115 billion in its bank.
Lincoln, a Democrat, contends the swaps-desk measure would reduce taxpayers’ exposure to risky banking activities. The banking industry has been lobbying against the idea for weeks, saying it would drive up costs and send business to foreign lenders. The trading numbers call into question the extent of the impact and whether the congressional action would favor one business model over another. While JPMorgan and Citigroup might have to spend billions to re-capitalize their trading desks, the three others might have much smaller costs.
‘Pick and Choose’
“Any time that Congress tries to pick and choose what parts of the genie to put back in the bottle, we’re going to be creating some pretty strange creatures,” said Bill Brown, a Duke University law professor and former global co-head of listed derivatives at Morgan Stanley.
JPMorgan has the vast majority of swaps trades in its bank, though the percentage may be inflated due to the double counting of a small amount of transactions in other parts of the its businesses, according to a person familiar with the company’s derivatives operations.
Spokespeople for Morgan Stanley, Citigroup, Bank of America and Goldman Sachs declined to comment for this story.
$615 Trillion
The swaps-desk provision is the most contentious of a larger set of rules aimed at reducing risk in the system by imposing for the first time a regulatory structure for the $615 trillion over-the-counter derivatives market. The changes would also require standardized derivatives trades to be cleared through a third party and traded on an exchange or so-called swap-execution facility and would regulate the foreign-exchange swaps market.
A committee of lawmakers reconciling the House and Senate versions of financial-regulatory reform is scheduled to take up derivatives language tomorrow. Lawmakers said they have left it for the end of the debate because of its complexity.
The swaps-desk measure introduced in April by Lincoln, who is chairman of the Senate Agriculture Committee, has cleared several hurdles in the legislative process while being criticized by the banking industry, the administration of President Barack Obama, the Federal Reserve and the Federal Deposit Insurance Corp. Last week, seven U.S. regional lenders, including U.S. Bancorp and SunTrust Banks Inc., came out against the measure.
Representative Barney Frank, the Massachusetts Democrat who is leading the House negotiations, said in May that he thought the Lincoln provision “goes too far.” He has changed his stance recently, telling reporters yesterday that “the essence” of the Lincoln proposal would be in the final legislation.
“Certainly they will be totally insulated from any insured deposits,” Frank said.
Volcker
Last month Frank raised the idea that one way to achieve Lincoln’s goals without unintended consequences could be to expand the scope of another proposal in the bill -- the so- called Volcker rule, a ban on proprietary trading by banks. That notion has failed to gain traction in the talks, because the majority of the swaps trading by the banks is executed for other customers and might not be covered by a prohibition on banks’ trading for their own accounts.
Negotiations have been continuing on possible exemptions for banks to the Lincoln proposal for certain types of customer- driven derivatives products. Frank said yesterday Lincoln has pushed back against those, including an exemption for desks that serve as market-makers.
“Senator Lincoln wants that to go outside” the depository institution, Frank said. “And I think she’s going to win that one.”
Lucrative Business
Selling over-the-counter derivatives is among the most lucrative businesses for the largest financial companies. U.S. commercial banks held derivatives with a notional value of $212.8 trillion in the fourth quarter, according to the Office of the Comptroller of the Currency. JPMorgan, Citigroup, Bank of America, Goldman and Morgan Stanley hold 97 percent of that total.
The calculation of derivatives holdings for the five largest banks is based on a Bloomberg News analysis of the financial records of the bank holding companies and their subsidiaries, as well as records filed with federal banking regulators and posted publicly by the Federal Financial Institutions Examination Council.
Swaps and other derivatives are financial instruments based on the value of another security or benchmark. Some instruments, including contracts that insured mortgage-backed bonds, have been blamed for fueling a financial crisis that led to the worst recession since the Great Depression.
Fed Lending
Lincoln and her supporters argue that separating swaps trading from commercial banking would protect depositors and other small customers from potentially risky trading that could bring down a firm. They also say it would prevent bailouts by denying swaps traders the assistance that the government gives to banks, such as access to emergency lending from the Fed or deposit insurance from the FDIC.
“We view this as an essential component of making the system sound so that we can get back to where banks are lending to businesses that are growing and creating jobs,” said Heather Slavkin, a senior legal and policy adviser at the AFL-CIO. “When banks use their resources to gamble in the derivatives markets, they have less capital to invest in businesses that will create good jobs for working people and grow the middle class.”
Substantial Cost
Analysts from Citigroup last week wrote that longtime commercial banks would bear the brunt of the rule, noting that they would have to give up the benefit of funding their derivatives deals with funds from deposits. The June 16 report concluded that while it is “very difficult” to determine how much it would cost to capitalize a free-standing swaps desk, the price tag is likely to be “substantial.”
“It all comes down to the cost of funding and it’s always easier inside the bank where the credit rating is going to be higher, the source of funding is more stable and it’s cheaper,” said Brian Gardner, an analyst at investment firm Keefe Bruyette & Woods. “Can you do it in a broker-dealer? Yep. People have done it before and if they have to, they’ll do it again.”
Short-Term Disadvantage
While the swaps-desk rule, if adopted, would put JPMorgan and Citigroup at a short-term disadvantage with their competitors, the big dealers have been arguing on Capitol Hill that the bigger concern is that U.S. banks will be put at a competitive disadvantage with foreign counterparts. Large dealers such as Credit Suisse AG,Deutsche Bank AG and Barclays Plc, would be even less affected by the requirement, analysts said.
Neither the European Union nor Asian countries are looking at requiring banks to wall off their derivatives trading as part of their responses to the credit crisis.
“I’m getting a lot of calls, hearing from a lot from folks who do this for a living and they really think this is going to drive the business away from U.S. banks,” Representative Scott Garrett, a New Jersey Republican, said in an interview.
To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net.
June 23 (Bloomberg) -- Three of the five U.S. banks that dominate swaps trading already perform most transactions outside their depository institutions and would face minimal disruption from a congressional proposal to reorder the derivatives business, financial statements and banking records show.
JPMorgan Chase & Co. and Citigroup Inc. would be hit hardest by the proposal, crafted by Arkansas Senator Blanche Lincoln, to wall off swaps desks from commercial banks. JPMorgan had 98 percent of its $142 billion in current value derivatives holdings inside its bank in the first quarter of this year while Citigroup had 89 percent of $112 billion, the records show.
Morgan Stanley and Goldman Sachs Group Inc., each of which entered the commercial banking business in 2008 in the midst of the financial crisis, would be less affected. Morgan Stanley kept just over 1 percent of its $86 billion in derivatives holdings in its bank in the first quarter, and Goldman Sachs Group’s held 32 percent of its $104 billion. Bank of America Corp., which absorbed broker-dealer Merrill Lynch in 2009, had 33 percent of its $115 billion in its bank.
Lincoln, a Democrat, contends the swaps-desk measure would reduce taxpayers’ exposure to risky banking activities. The banking industry has been lobbying against the idea for weeks, saying it would drive up costs and send business to foreign lenders. The trading numbers call into question the extent of the impact and whether the congressional action would favor one business model over another. While JPMorgan and Citigroup might have to spend billions to re-capitalize their trading desks, the three others might have much smaller costs.
‘Pick and Choose’
“Any time that Congress tries to pick and choose what parts of the genie to put back in the bottle, we’re going to be creating some pretty strange creatures,” said Bill Brown, a Duke University law professor and former global co-head of listed derivatives at Morgan Stanley.
JPMorgan has the vast majority of swaps trades in its bank, though the percentage may be inflated due to the double counting of a small amount of transactions in other parts of the its businesses, according to a person familiar with the company’s derivatives operations.
Spokespeople for Morgan Stanley, Citigroup, Bank of America and Goldman Sachs declined to comment for this story.
$615 Trillion
The swaps-desk provision is the most contentious of a larger set of rules aimed at reducing risk in the system by imposing for the first time a regulatory structure for the $615 trillion over-the-counter derivatives market. The changes would also require standardized derivatives trades to be cleared through a third party and traded on an exchange or so-called swap-execution facility and would regulate the foreign-exchange swaps market.
A committee of lawmakers reconciling the House and Senate versions of financial-regulatory reform is scheduled to take up derivatives language tomorrow. Lawmakers said they have left it for the end of the debate because of its complexity.
The swaps-desk measure introduced in April by Lincoln, who is chairman of the Senate Agriculture Committee, has cleared several hurdles in the legislative process while being criticized by the banking industry, the administration of President Barack Obama, the Federal Reserve and the Federal Deposit Insurance Corp. Last week, seven U.S. regional lenders, including U.S. Bancorp and SunTrust Banks Inc., came out against the measure.
Representative Barney Frank, the Massachusetts Democrat who is leading the House negotiations, said in May that he thought the Lincoln provision “goes too far.” He has changed his stance recently, telling reporters yesterday that “the essence” of the Lincoln proposal would be in the final legislation.
“Certainly they will be totally insulated from any insured deposits,” Frank said.
Volcker
Last month Frank raised the idea that one way to achieve Lincoln’s goals without unintended consequences could be to expand the scope of another proposal in the bill -- the so- called Volcker rule, a ban on proprietary trading by banks. That notion has failed to gain traction in the talks, because the majority of the swaps trading by the banks is executed for other customers and might not be covered by a prohibition on banks’ trading for their own accounts.
Negotiations have been continuing on possible exemptions for banks to the Lincoln proposal for certain types of customer- driven derivatives products. Frank said yesterday Lincoln has pushed back against those, including an exemption for desks that serve as market-makers.
“Senator Lincoln wants that to go outside” the depository institution, Frank said. “And I think she’s going to win that one.”
Lucrative Business
Selling over-the-counter derivatives is among the most lucrative businesses for the largest financial companies. U.S. commercial banks held derivatives with a notional value of $212.8 trillion in the fourth quarter, according to the Office of the Comptroller of the Currency. JPMorgan, Citigroup, Bank of America, Goldman and Morgan Stanley hold 97 percent of that total.
The calculation of derivatives holdings for the five largest banks is based on a Bloomberg News analysis of the financial records of the bank holding companies and their subsidiaries, as well as records filed with federal banking regulators and posted publicly by the Federal Financial Institutions Examination Council.
Swaps and other derivatives are financial instruments based on the value of another security or benchmark. Some instruments, including contracts that insured mortgage-backed bonds, have been blamed for fueling a financial crisis that led to the worst recession since the Great Depression.
Fed Lending
Lincoln and her supporters argue that separating swaps trading from commercial banking would protect depositors and other small customers from potentially risky trading that could bring down a firm. They also say it would prevent bailouts by denying swaps traders the assistance that the government gives to banks, such as access to emergency lending from the Fed or deposit insurance from the FDIC.
“We view this as an essential component of making the system sound so that we can get back to where banks are lending to businesses that are growing and creating jobs,” said Heather Slavkin, a senior legal and policy adviser at the AFL-CIO. “When banks use their resources to gamble in the derivatives markets, they have less capital to invest in businesses that will create good jobs for working people and grow the middle class.”
Substantial Cost
Analysts from Citigroup last week wrote that longtime commercial banks would bear the brunt of the rule, noting that they would have to give up the benefit of funding their derivatives deals with funds from deposits. The June 16 report concluded that while it is “very difficult” to determine how much it would cost to capitalize a free-standing swaps desk, the price tag is likely to be “substantial.”
“It all comes down to the cost of funding and it’s always easier inside the bank where the credit rating is going to be higher, the source of funding is more stable and it’s cheaper,” said Brian Gardner, an analyst at investment firm Keefe Bruyette & Woods. “Can you do it in a broker-dealer? Yep. People have done it before and if they have to, they’ll do it again.”
Short-Term Disadvantage
While the swaps-desk rule, if adopted, would put JPMorgan and Citigroup at a short-term disadvantage with their competitors, the big dealers have been arguing on Capitol Hill that the bigger concern is that U.S. banks will be put at a competitive disadvantage with foreign counterparts. Large dealers such as Credit Suisse AG,Deutsche Bank AG and Barclays Plc, would be even less affected by the requirement, analysts said.
Neither the European Union nor Asian countries are looking at requiring banks to wall off their derivatives trading as part of their responses to the credit crisis.
“I’m getting a lot of calls, hearing from a lot from folks who do this for a living and they really think this is going to drive the business away from U.S. banks,” Representative Scott Garrett, a New Jersey Republican, said in an interview.
To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net; Robert Schmidt in Washington at rschmidt5@bloomberg.net.
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