Financial Industry 01 (Jul 08 - Aug 09)

[millionairemind]

At least some one is not hiding his head under the sand.

Goldman chief backs fair value rules

By Jennifer Hughes in Tel Aviv

Published: June 10 2009 22:44 | Last updated: June 10 2009 22:44

More use of marking assets to market prices would have provided an “early warning” of the financial crisis, according to Lloyd Blankfein, chief executive of Goldman Sachs.

The comments are controversial in the banking world because of the efforts made by so many of Goldman’s rivals to soften the existing rules to flatter their results.

Mark-to-market, or fair value, accounting requires financial institutions to report their assets at their current market value.

As markets have plummeted, executives have been forced to report hundreds of billions in losses. Critics of fair value complain that these are only paper losses and have forced banks into firesales and undermined their capital cushions when they could least afford it.

Mr Blankfein, however, said the practice forced managers to face up to problems as they began.

“It’s painful to mark these things down, but it’s more painful to have to mark them down beyond the point where you can no longer afford the capital [to hold them],” he said.

“Had fair market been implemented more widely . . . then people would have had an early warning and seen value erode.”

Mr Blankfein was speaking at the annual conference of the International Organisation of Securities Commissions in Tel Aviv.

His comments come after both the International Accounting Standards Board and its US counterpart have been forced in the past year to soften their rules in ways that allow banks to smooth the effects of market volatility on their earnings, boosting their profits.

Both sets of rule changes followed pressure from politicians and lobbying from the banking industry. In the US, a group of financial institutions called the Fair Value Coalition has lobbied intensely for an easing of the rules.

Mr Blankfein also said the prevalence of off-balance sheet accounting provided one of the lessons that must be learnt from the financial crisis. More items needed to be visible in financial statements, he said.

“We were supposed to have learnt this at the time of Enron,” he said. As a simple principle, he said banks’ books should reflect “things for which you might have to cough up”.

Accounting rules allowed banks to move vast swathes of assets off their books, freeing up capital.

However, as the short-term funding markets that supported the vehicles dried up, banks were forced to step in – even in cases where they had no legal obligation to do so.

Mr Blankfein’s stance echoed that of Mario Draghi, a member of the European Central Bank’s governing council and head of the Financial Stability Board. Speaking earlier, Mr Draghi described the rules allowing off-balance sheet vehicles as one of the “regulatory failures” that led to the crisis.

Mr Draghi did, however, call for a “recovery” of securitisation – the process by which pools of loans were parcelled up and sold to investors. Many off-balance sheet vehicles were created to manage these loan pools.

“We don’t want to go back to what it was before,” he said. “There is a balance to be drawn as to how far regulation can go and how far we can trust the market.”

Copyright The Financial Times Limited 2009

[millionairemind]

US banks

Published: June 10 2009 14:54 | Last updated: June 10 2009 18:56

As an investor, would you touch the following bank with a cattle prod?

Its total assets dwarf common equity by 25 times to one – higher than the average for US banks over the past decade. Think of this another way: just a 4 per cent hit to the balance sheet and wave goodbye to shareholders’ equity. Even comparing tier one capital with risk-weighted assets reveals that its gearing is 14 times.

What about those assets then? Barely at the start of a household deleveraging process that will last for years, two-thirds of its outstanding loans are to consumers, with mortgages accounting for quarter and credit cards for 10 per cent. Yet its non-performing loan ratio of 12 per cent for mortgages in the first quarter, for example, was the highest of all the banks that are covered by Barclays Capital. That ratio increased by almost 250 basis points versus the previous quarter, and there are few signs that house prices have stopped falling yet.

Then there are its off-balance sheet investment vehicles. This bank still has a $93bn exposure – eclipsing common equity – a third of which relates to conduits that purchase securities funded by commercial paper. True, outside investors are technically first in line to take any hit. But if things get really bad, banks usually have to step up. What is more, it has so-called “level three” assets equivalent to 126 per cent of tangible common equity. These are assets which cannot be valued using observable inputs such as market prices – you just have to trust the bank’s internal calculations.

Finally, like all banks, its past earnings power will be diminished due to lower economic growth and rising regulation. Unlike others, however, it is now free from the troubled asset relief programme. It is also considered by far the healthiest of the big US banks.

[millionairemind]

Published June 15, 2009

Treasury faces pressure on TARP exit price

Rescue watchdogs, lawmakers seek fair return for taxpayers on banks' warrants

(WASHINGTON) The US Treasury Department is facing mounting pressure to ensure that taxpayers get a fair return on banks' warrants as the largest firms prepare to shake off government ownership stakes.

At the same time, Treasury is mired in negotiations with the banks, who want to lower the warrants' multi-billion dollar price tag and avoid another big hit to their capital position.

'The pricing of the warrants held by Treasury ... will be critical to ensuring an appropriate return on investment for the government and, consequently, American taxpayers,' the two chief watchdogs of the financial rescue wrote last week in a letter obtained by Reuters.

A financial industry source said banks' negotiations with Treasury over the value of the warrants are 'calm' but said 'the price ranges are all over the place.' The debate over the warrants is coming to a head as this week 10 of the biggest banks will begin to repay almost US$70 billion in Troubled Asset Relief Program (TARP) funds, freeing the firms of a public stigma and restrictions on executive pay.

Repaying rescue funds will involve banks buying back the preferred shares that many sold to the government when financial markets were squeezed by a credit crunch last fall.

But banks also wish to repurchase the warrants that give the government the right to buy common stock at a pre-set price for up to 10 years.

Some big banks, including JPMorgan Chase & Co, argue they should get a discount on the warrants because they did not want the money in the first place. Lawmakers say Treasury should give taxpayers their fair share of the gains in the banks' stock prices.

'We will be working with the government on the timing and valuation of all payments,' Ron Gruendl, a spokesman for Bank of New York Mellon, said.

Bank of New Mellon is on the list of banks green lighted last week to exit TARP. Others include American Express, BB&T, Goldman Sachs, JPMorgan, Morgan Stanley, and US Bancorp.

As negotiations continue, Treasury is facing more scrutiny from the two primary TARP watchdogs which have begun a project to 'estimate a reasonable range of values' for the warrants.

In a letter last Wednesday to leading lawmakers on the House and Senate financial committees, Neil Barofsky, the TARP special inspector general, and Elizabeth Warren, the chairwoman of the Congressional oversight panel for TARP, said they will work together to ensure taxpayers get a good return.

The project will also include an audit of the warrant repurchase process, they said.

Treasury has said it will sell back the warrants at 'fair market value' but experts say pricing can be difficult since the investments are unique in the marketplace. That means banks can negotiate on the buyback price.

'We are in the process of going through a judgment about what fair market value for those warrants is likely to be,' Treasury Secretary Timothy Geithner told a Senate panel on Tuesday.

'Some of the estimates now are in the several billion dollar range for those initial banks that are repaying.' Treasury is facing pressure from lawmakers who want to make sure taxpayers see the upside promised to them when the government made the investments last October.

Last Tuesday, Jack Reed, a leading Democrat on the Senate Banking Committee, discussed the warrants issue with Mr Geithner and urged him to make sure taxpayers are paid their due. But the banks want to get a good deal, especially after paying billions of dollars in dividends to the government.

The ten banks that have won the right to return their warrants have paid the Treasury about US$1.8 billion over the past seven months, according to official data. In all, finance companies that have gotten government investments have paid about US$4.5 billion to the Treasury.

Bank of America Securities-Merrill Lynch Research said on Friday that repayment of federal funds by Goldman Sachs, JPMorgan and Morgan Stanley will force a reversal of value for the remaining warrants. The analysts cut second- quarter profit estimates for the big US banks.

'While the firms should generate more than ample income to absorb the adjustment related to the main TARP payback, the warrant-related hit to capital is unavoidable,' analyst Guy Moszkowski said in a note to clients.

The banks do have the option of exiting TARP by buying back the preferred shares, and letting Treasury liquidate the warrants.

But the banks won't want to dilute their current shareholders and keep the fingerprints of government on their financial reports, said Wayne Abernathy, executive director for financial institutions policy at American Bankers Association. 'They don't want a lingering reminder that they were under a government programme,' Mr Abernathy said. -- Reuters

[millionairemind]

Wall Street and the taxpayer
Thanks, for nothing

Jun 11th 2009
From The Economist print edition
Banks should be encouraged to pay back governments—but not to rewrite history
http://www.economist.com/opinion/displa ... d=13829437

[millionairemind]

US ECONOMY
New US financial reforms

WASHINGTON - THE Obama administration will target critical weaknesses in the troubled US financial system, such as thin bank capital cushions and eroded lending standards, when it proposes an overhaul of financial regulation this week, two senior officials said on Monday.

In the fullest summary to date of the administration's reform proposal, Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers said the plan will also urge stronger consumer and investor protections and new powers for the Federal Reserve.

The two officials outlined the plan in The Washington Post ahead of the release on Wednesday of a detailed package of proposals that has been under discussion for six months.

Months of debate in Congress over the plan lie ahead, with time on the side of the status quo, especially if the economy continues to improve and public outrage at the banks begins to fade. Administration officials have argued a rewrite of U.S. financial rules is needed to prevent future crises.

The outline offered few new details on elements of the plan that were already known and sidestepped unanswered questions about streamlining bank supervision, restraining executive pay and regulating over-the-counter (OTC) derivatives.

But it did clearly underline the administration's determination to give the Fed a central role, and to create a new way for the federal government to handle troubled firms whose failure could pose a risk to the economy.

President Barack Obama will make remarks on Wednesday on 'his comprehensive plan for new rules of the road for the financial industry,' a White House official said. Mr Geithner will joint him at the event.

The Treasury secretary and Mr Summers said that a key administration goal will be "raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms.'

In addition, they said, large and interconnected firms whose failure could threaten the stability of the system 'will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system.'

These dual proposals - making the Fed a 'systemic risk' regulator and creating a related inter-agency council in the same area -- come amid concerns by some lawmakers and other regulators about the Fed getting too much power. - REUTERS

[millionairemind]

Regulators
Bair Cautions Banking Crisis Is Not Over
Joshua Zumbrun, 06.12.09, 05:20 PM EDT
As focus turns to regulation reform, she says ''many more bank failures'' lay ahead.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said Friday that while the crisis that swept through the financial world last year has subsided somewhat, it was far from over and there would be "many more bank failures" ahead.
http://www.forbes.com/2009/06/12/shelia ... -bair.html

[winston]

DJ MARKET TALK: CS Keeps Underweight On Hong Kong Banking Sector

1009 [Dow Jones] Credit Suisse keeps Underweight on HK banking sector. "We think the recent recovery in P/B multiples are justified by balance sheet relief. For further P/B multiple expansion from here, we believe the banks must show signs of growth and ROE recovery," it writes.

Notes revenue momentum remains poor based on HKMA quarterly bulletin, with NIM down sharply due to decline in loan-to-deposit ratio and low interest rates. Adds, revenue outlook remains a challenge, coupled with weakness in wealth management and banking fees. Among HK banks, Hang Seng Bank (0011.HK) down 0.6% at HK$107.90, Bank of East Asia (0023.HK) flat at HK$23.90, BOC HK (2388.HK) flat at HK$13.08. HSI down 0.3%.

[winston]

RESEARCH ALERT-Deutsche ups target price for Singapore banks

SINGAPORE, June 22 (Reuters) - Deutsche Bank on Monday revised up its target prices for Singapore's three banks, citing further improvement in net interest margins and a recovery of the residential property sector.

The brokerage lifted the target price for the island-state's biggest lender, DBS Group Holdings , to S$14.00 from S$12.80 previously, and raised the target for United Overseas Bank to S$14.50 from S$11.30.

The target price for Oversea-Chinese Banking Corp was lifted to to S$5.80 from S$5.30.

[winston]

No more China growth story ? So now, it's an Indonesian story ?

BUSINESS TIMES - Faced with a contracting economy at home, Singapore's three local banks, DBS Group , United Overseas Bank and Oversea-Chinese Banking Corporation , are banking on their Indonesian units for growth

[winston]

And the leakage continues. And is it a Systemic Risk ?

================================

China finds lending irregularities in major banks

SHANGHAI: Three major Chinese banks said Tuesday the nation's top auditor had uncovered lending irregularities in their business, adding the findings would not impact their financial results.

The National Audit Office found violations last year by Industrial and Commercial Bank of China (ICBC), China Construction Bank and China CITIC Bank, the lenders said in separate statements.

ICBC, the country's largest lender, said the auditors found "non-compliance issues in the business operation and weaknesses in the operation and management of certain branches of the bank."

China Construction Bank and China CITIC Bank said some branches had been found to have extended loans that violated government rules.

"In certain suspected cases, insufficient regulation of individual sub-branches also allowed for certain individual enterprises to fraudulently obtain bank loans by colluding with the bank's employees," China Construction Bank said.

The vast majority of the non-complying loans have been recovered and the outstanding amount will be collected shortly, it added.

None of the three lenders disclosed the size of the irregular loans, only claiming they had dealt with the matters and taken steps to improve risk management and internal controls.

The admissions came amid concerns over Chinese banks' lending spree to heed Beijing's aggressive efforts to stimulate the economy by boosting fiscal spending in government projects such as infrastructure.

In February, the country's top auditor said six billion yuan (878 million dollars) was misused in 20 major cases uncovered during investigation of financial institutions in 2008.

About half of the cases involved ICBC, Bank of China and China Construction Bank, said Liu Jiayi, auditor-general of the National Audit Office.

- AFP/yt