State Street Global Advisors Portfolio Manager, Brian Kinney, Speaks to CFA Society of Milwaukee

Brian Kinney Talks to CFA Society of Milwaukee About the U.S. Government Bailout Programs

by Brian Finnie, AIM Class of 2010

Fixed income manager describes creation, impact of TALF, PPIP government programs

Milwaukee, WI — Wednesday, May 27, 2009. Brian Kinney, Vice President of State Street Global Advisors (SSgA), provided his insights into the various asset purchase programs created by the U.S. government in response to the tight credit and lending markets at the May 27th Chartered Financial Analyst (CFA) Society of Milwaukee luncheon held at the Milwaukee Athletic Club. Regarding the Term Asset-Backed Loan Facility (TALF) program that was restructured in March, Mr. Kinney noted, "It has been successful, at least the early indications are, on both a (interest rate yield) spread level and also on a broader level of acceptance from the issuers and their ability to access the markets." Kinney also spoke on the White House Public Private-Investment Program (PPIP).

Mr. Kinney, CFA, manages aggregate and mortgage-backed securities (MBS) bond portfolios for the Fixed Income Department at SSgA and has managed fixed income portfolios since joining the firm in 2003.

"Part of TALF's slow start had to do with the skepticism of the markets. TALF is quite onerous in terms of complying with the considerable regulatory requirements of the program," Mr. Kinney said. "Now there is a wider array of investors that understand the way the program works. This has allowed for some flexibility in the money management world and broader investment community to understand how to use TALF in ways that meet investment objectives in ways that they had not thought of in the past."

The CFA Society of Milwaukee meetings provide an opportunity for investment professionals, students, and interested parties to engage in a timely discussion of relevant events in the financial markets. The CFA Society of Milwaukee promotes ethical and professional standards within the investment industry, encourages professional development through the CFA® Program, and facilitates the open exchange of information and opinions. The Milwaukee Society is a member of the CFA Institute, a global association of investment professionals promoting the highest ethical standards along with offering educational opportunities.

The article can be found at:

Crude Oil's Rally: Is It a Blessing or Curse?

Oil had its biggest monthly gain in ten years (+30% in May), but is the surge a blessing or a curse? Mark Waggoner, of Excel Futures, and CNBC contributor Ron Insana share their insight. Oil drives the U.S. Dollar and bond yields - keep watching the spot price of crude: it could take the legs out of the economic recovery.

Watch Out For Inflation: Kudlow's Discussion on the Economy

Checking the economy's pulse, with Michelle Girard, RBS Greenwich Capital; Joe LaVorgna, Deutsche Bank; and CNBC's Larry Kudlow - who is all worked up over the potential for inflation.

Faber Predicts Hyper-Inflation: Has Concerns About the Longer Term View of Inflation

"Super-Bear" Marc Faber says we will see hyper inflation and he doesn't think that the threat of inflation is going to be bearish for the stock.



Weaker U.S. Dollar - Higher Commodity Prices (especially oil and copper) - support the threat about the return of inflation.

Discussion Among Thought Leaders About U.S. Economy: No Visibility Ahead: Predicting What's Next

Interesting analysis and discussion with Professor Joseph Stiglitz of Columbia University, Meredith Whitney of Meredith Whitney Advisory Group, Oliver Sarkozy of Carlyle Group, Jack Welch;Former General Electric CEO and Austan Goolsbee of White House Senior Economic Adviser on the topic of where the U.S. is headed.

Bill Gross Gives Advice To Harvard, Yale

Bill Gross has some investment advice for Harvard and Yale. He says they may need to reduce their investment in private equities and hedge funds. (Bloomberg News)

The Economist: Regulatory overhaul in U.S. faces big challenges

Regulators, lawmakers and other officials in the U.S. are looking into overhauling financial oversight, but the efforts are running into resistance from bankers, industry insiders and, in some cases, other regulators. "Opinion has splintered. Everyone is fighting everyone," said Bert Ely, a consultant on regulatory issues. Some critics slammed proposals as being hastily thrown together, while others said officials are not moving fast enough. The result will probably be that few, if any, financial reforms will be approved this year, pundits said.

White House looks at reining in oversight revamp: The Obama administration is considering whether it bit off more than it can chew with its broad proposal of overhauling financial regulation and might scale back some of the more aggressive measures, sources said. Specifically, officials are looking into whether to reorganize the regulatory framework or simply implement new rules at existing regulatory agencies.

Higher Oil Prices and Bond Yields Could Slow U.S. Economic Recovery

Analysis: Rising oil prices jeopardize recovery beginnings
With the U.S. looking to consumers to spend and help drive the economy back to growth, five weeks of rising oil prices threaten the strategy. Since April 21, oil has risen 48%, peaking at slightly more than $65 a barrel this week. If the increase continues much longer, it might "postpone some of the recovery we'd been hoping for," said James Hamilton, an economics professor at the University of California, San Diego. Reuters (28 May.)

Recovery called into question by exploding U.S. debt
Worries about the U.S. government's skyrocketing debt are prompting doubt about a turnaround for the economy. Government bonds have come under heavy selling pressure, driving up yields. A recovery could be derailed by increased borrowing costs for consumers and businesses, economists said. Financial Post (Canada)/Reuters (28 May.)

Soaring Supply Drives Up Treasury Yields

All the government spending creates history in the treasury market. (Bloomberg News)

U.S. officials close in on plan for single banking regulator

Former U.S. Treasury Secretary Henry Paulson suggested last year that a single banking/securities regulator made sense for the U.S. - and this was before the September financial meltdown.

U.S. Treasury Secretary Timothy Geithner and other officials are expected to send Congress a proposal next month for overhauling regulation of financial markets. A major part of that proposal is a single regulator to supervise the banking sector. "The president is committed to signing a regulatory-reform package by the end of the year, and officials at the White House and the Treasury Department are continuing work with Congress on the final phases of a proposal, but there is no final proposal in place, and any announcement will not be for a couple of weeks," said White House spokeswoman Jennifer Psaki.

Senior officials have reached agreement on aspects of the plan, according to a person familiar with the discussions. They favor vesting the Federal Reserve with new powers as a systemic risk regulator, with broad responsibility for detecting threats to the financial system. The powers would include oversight of previously unregulated markets, such as the derivatives trade, and of market participants such as hedge funds. Officials also favor the creation of a new agency to enforce laws protecting consumers of financial products such as mortgages and credit cards.

And they want to merge the Securities and Exchange Commission and the Commodity Futures Trading Commission, which share responsibility for protecting investors from fraud. Other aspects of the plan remain under discussion, sources said, speaking on condition of anonymity because they were not authorized to disclose details.

Among these ideas is the creation of a single agency to regulate banks. The new regulator would assume responsibility for the safety and soundness of banks, currently divided among the Fed and three other agencies: the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. The OCC and the OTS would probably disappear, while the Fed and the FDIC would retain other responsibilities.

Under the current system, banks can choose their regulator. Because the OCC, OTS and FDIC are funded by fees from the banks, the regulators have an incentive to compete for business by offering more lenient oversight. The system also divides supervision of the largest financial conglomerates among multiple agencies, each with responsibility for certain subsidiaries, creating gaps in coverage that companies have exploited. Many experts say these failures of regulation contributed to the financial crisis.

State Street Portfolio Manager Speaks to CFA Society of Milwaukee

Fixed income manager describes creation, impact of TALF, PPIP government programs Reported by Brian Finnie, AIM Program student.

Brian Kinney, Vice President of State Street Global Advisors (SSgA), provided his insights into the various asset purchase programs created by the U.S. government in response to the tight credit and lending markets at the May 27th Chartered Financial Analyst (CFA) Society of Milwaukee luncheon held at the Milwaukee Athletic Club. Regarding the Term Asset-Backed Loan Facility (TALF) program that was restructured in March, Mr. Kinney noted, “It has been successful, at least the early indications are, on both a (interest rate yield) spread level and also on a broader level of acceptance from the issuers and their ability to access the markets.” Kinney also spoke on the White House Public Private-Investment Program (PPIP).

Mr. Kinney, CFA, manages aggregate and mortgage-backed securities (MBS) bond portfolios for the Fixed Income Department at SSgA and has managed fixed income portfolios since joining the firm in 2003. The topic of the luncheon, which was attended by over 30 CFAs, was the government’s TALF and the Public Private Investment Program (PPIP).

“Part of TALF’s slow start had to do with the skepticism of the markets. TALF is quite onerous in terms of complying with the considerable regulatory requirements of the program,” Mr. Kinney said. “Now there is a wider array of investors that understand the way the program works. This has allowed for some flexibility in the money management world and broader investment community to understand how to use TALF in ways that meet investment objectives in ways that they had not thought of in the past.”

The CFA Society of Milwaukee meetings provide an opportunity for investment professionals, students, and interested parties to engage in a timely discussion of relevant events in the financial markets.

The CFA Society of Milwaukee promotes ethical and professional standards within the investment industry, encourages professional development through the CFA® Program, and facilitates the open exchange of information and opinions. The Milwaukee Society is a member of the CFA Institute, a global association of investment professionals promoting the highest ethical standards along with offering educational opportunities.

U.S. government debt to keep top rating, Moody's says

Moody's Investors Service said the sovereign debt of the U.S. will continue to be rated Aaa, the agency's highest category, despite concerns about the nation's exploding debt. The growing burden could put "negative pressure on the rating in the future," said Steven Hess, vice president and senior credit officer at Moody's, but the Aaa rating is stable for now.

GM's Bond Issue

Analysis and Discussion with Wesley Sparks of Schroder Investment Management (Bloomberg News)

Roadmap to Recovery, But Not Until 2010

Why the U.S. recession will persist beyond 2009, with Felix Rohatyn, former U.S. ambassador to France and CNBC's Maria Bartiromo.

GM Bankruptcy Looms

Analysis and Discussion with UCLA Law Professor Lynn LoPucki (Bloomberg News)

Treasury Bond Prices Send Stocks Lower

The stock market put its rally back on hold as investors grew worried about rising borrowing costs. S&P Falls 1.9%; Dow Falls 2%; Nasdaq Falls 1.1%; Financials and Materials Worst Performing Groups of the Day.

The Post-Lehman Recovery

Nine months since Lehman Brothers' collapse triggers a meltdown in the financial system. Stocks are taking the longest time to heal from the Lehman debacle.

The Economy's "New Normal"

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New Bill Would Give CFTC Derivatives Oversight

A bill introduced to the U.S. Congress would give the Commodity Futures Trading Commission regulatory oversight over carbon dioxide derivatives.

Representative Bart Stupak (Democrat, Michigan) has revised his Prevent Unfair Manipulation of Prices (Pump) Act, which aims to “close loopholes that have speculators to manipulate energy markets and artificially inflate prices,” according to a statement by Stupak.

The congressman is a member of the House Energy and Commerce Committee, which is considering the American Clean Energy and Security Act. This act would create a new carbon emissions trading market, which Stupak sees as an opportunity for speculators to ramp up prices.

Geithner Dismisses GOP Socialism Charge as 'Ridiculous'

The Washington Post picks up the story in Geithner Dismisses GOP Socialism Charge as 'Ridiculous.'It has been interesting to watch this - Geithner is dismissing GOP Socialism Charge as 'Ridiculous'.

Inflation Debate - Not a Risk to U.S. AAA Bond Rating

"The economy may be at greater risk of inflation than the conventional wisdom indicates", says Charles Plosser.

The New Wall Street: "Brain Drain" Threat Legit as Boutiques, Foreign Firms Rise

Contrary to popular opinion and the view of many politicians, the "brain drain" issue on Wall Street is real, says Dave Kansas, author of "The End of Wall Street as We Know It." Kansas, a Wall Street Journal contributing editor, notes the concurrent trends of foreign-born workers returning to their home countries and Wall Street's homegrown "risk-takers" joining smaller firms or opening their own boutiques.

In other words, when CEOs like Morgan Stanley's John Mack and Citigroup's Vikram Pandit complain about the risk of losing the "best and brightest" if the government imposes onerous restrictions on compensation, there's validity to their claims, Kansas says.

These trends - compensation restrictions, the rise of boutique firms, more competition from international competitors and big shops becoming more risk-averse - come in the wake of a largely self-made cataclysm that hit Wall Street in the past 18months. And Kansas notes it's "early innings" in terms of both the industry's transformation and the new regulatory environment that's certain to come down the D.C. beltway.

Failure of BankUnited FSB ($12.8B Florida Bank)

The FDIC Friday voted to impose an emergency fee on member banks in order to replenish its insurance fund, Bloomberg reports. Earlier, the failure of BankUnited FSB, a Florida thrift with $12.8 billion in assets and $8.6 billion deposits, is a stark reminder the crisis in the banking sector is far from over. But it's also a reminder that deposits at FDIC-insured banks are safe, up to the $250,000 limit.

"There's going to be more bank failures, there's no question about it," says Dave Kansas, a contributing editor at The Wall Street Journal. "The FDIC is going to have a lot more work to do this year."

A private equity team has agreed to buy BankUnited's banking operations, and retail branches were scheduled to be open normal hours on Friday. But BankUnited's failure will cost the FDIC's insurance fund $4.9 billion, a pretty big hit considering the fund stood at $19 billion at the end of 2008.

"Bank deposit insurance is the bedrock of the financial system," says Kansas. "I cannot envision a scenario where [the Federal government] does not permit the FDIC to be fully flush."

Australia's Raw Materials

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Interview with Paul Volker

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The VIX In The Financial Crisis

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Gross Warns About Potential Cut in US AAA Rate - US Commits Cutting Deficit - Geithner

U.S. is at risk of losing its AAA status. Gross says the likelihood has increase after Standard and Poor’s revised its rating from negative to stable.




Timothy Geithner indicates that the U.S. is aware of the risk of credit worthiness.

Mixed Signals About U.S. Economic Recovery

U.S. to see growth again in year's second half, CBO says
The U.S. economy will return to growth in the second half of this year, but joblessness will continue to climb well into the second half of 2010, the Congressional Budget Office said. The agency expects unemployment to peak at 10.5%.

Upturn in U.S. economic indicators outpaces predictions
The Conference Board's closely watched index of leading economic indicators surged in April, posting a greater improvement than economists expected. The 1% increase topped an 0.8% rise predicted by economists surveyed by Thomson Reuters. Ken Goldstein, an economist with The Conference Board, said the data raise prospects for the U.S. economy to return to growth in the second half of this year.

Fed official anticipates "rather slow recovery" for U.S.
When the U.S. economy shifts back in the direction of growth, it will be slowed down by a weak employment market, consumers who are limiting spending to boost savings and banks that are unloading problem assets, said Eric Rosengren, president of the Federal Reserve Bank of Boston. "My best judgment is that a rather slow recovery is likely," he said.

UK Could Lose AAA Rating

The UK came one step closer to losing its prized AAA rating Thursday after Standard and Poor’s revised its outlook for the UK to negative from stable. Sarah Hewin from Standard Chartered Bank and James Shugg from Westpac Bank discuss.

Initial Jobless Claims Fall

First-TIme Jobless Claims fall by 12,000 but continuing claims hit record high.

Bull vs. Bear Debate

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Shapiro to question any shifting of powers away from SEC

The chairman of the Securities and Exchange Commission yesterday pushed back against the possibility that her agency might lose regulatory control over mutual funds to a new federal commission on consumer financial products.

As reports emerge that the Obama administration is discussing the creation of such a commission, SEC Chairman Mary L. Schapiro argued that her agency has the right experience to continue regulating investor products such as mutual funds. "It's not a discrete thing to get moved away without damaging the fabric of the entire investment protection regime that is built up over many years here," she said.

Schapiro's remarks are likely to presage an intense debate over the future of financial regulation. A major business lobby yesterday expressed skepticism about adding a layer of regulation. Meanwhile, prominent consumer groups, which have long argued that regulatory agencies have not adequately protected consumers from risky mortgages and tricky credit cards, welcomed the idea of a new commission.

"This is by far the best idea that has surfaced in the last decade on how to protect financial consumers and the economy from many of the problems we've seen," said Travis Plunkett, director of legislative and regulatory affairs for the Consumer Federation of America.

Administration officials have been weighing the creation of a commission that would consolidate oversight of a range of financial products marketed to consumers, possibly including credit cards, mortgages and mutual funds. Regulation of consumer financial products is currently distributed among a patchwork of federal agencies.

Plunkett said consumer protection has long been an afterthought for regulators, who are primarily interested in the financial profitability of firms they oversee. "If you rein in risky lending, they're less profitable. If they're less profitable, their balance sheets are less strong," he said.

The U.S. Chamber of Commerce, the nation's largest business lobby, supports plugging gaps in consumer protections, but has expressed concern about any proposal that would siphon consumer protections into a separate agency. Along with other groups, including the Mutual Fund Directors Forum, the chamber is wary of removing the SEC's authority over mutual funds.

"What you want is regulators who really know the businesses they're regulating. Defusing expertise among regulators is not a good idea," said David Hirschmann, president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

Harvard University law professor Elizabeth Warren, chairwoman of the Congressional Oversight Panel on economic recovery, has long advocated for the creation of a consumer financial products commission. Her proposal is serving as a launching point for much of the discussion.

In an interview yesterday, she said the central problem is that consumers are unable to make informed financial decisions because the most relevant information often is concealed or obscured.

"I could hand you five credit cards, and the odds are good that neither one of us could figure out which one would be best for you," she said. "What the financial products safety commission is about, is just making these products easy to read, so that you can look at credit card A, B and C and understand what the differences are."

She said the sale of financial products with problematic terms was a major cause of the current recession. "This is an issue about the economic stability of our country," she said. "Remember that the financial crisis started with selling one lousy mortgage at a time, household by household."

Warren said that creating a new agency also would be a way to foster a new approach to regulation. She said it made more sense for the government to organize regulation around products rather than companies.

"Our regulations need to learn and change as the market innovates," Warren said. "Congress can outlaw practice X and practice Y, but to get real change and nuanced change takes a regulatory agency with expertise and flexibility."

Schapiro, the SEC chairman, said that the discussion over starting a consumer protection agency did not amount to a "concrete proposal" and that she hopes she and others will "be refining it."

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Can the SEC Survive Madoff?

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Distressed Banks Raise Capital

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SEC Proposes More Shareholder Say in Board Elections

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Geithner Says Treasury May Move ‘Quickly’ to Sell TARP Warrants

Treasury Secretary Timothy Geithner said he’s inclined to “quickly” sell warrants the government got when injecting capital into banks, offering prospects of a speedy exit to lenders seeking to retire government stakes.

“In general, our objective will be to sell these warrants as quickly as we can,” Geithner told the Senate Banking Committee today. “What I’m reluctant to do is have the government be in a position where we hold these investments for a long period of time, longer than is desirable, in the hopes that we’re going to maximize value.”

The Treasury received warrants with nearly every capital injection it made with its $700 billion bank-rescue fund, called the Troubled Asset Relief Program. As big banks begin to pay back the assistance years earlier than expected, the Treasury may use market bidding to break a logjam over how to value a key component of the government’s equity stakes.

“We’ve got a carefully designed program in place to make sure we’re getting the best price for those warrants as possible,” Geithner said in answering questions at today’s hearing.

The total value of the government’s bank warrants is roughly $5 billion, according to Treasury calculations.

If the Treasury can’t agree with banks about the value of the warrants, the government may try to sell them at auctions, a Treasury official said in an interview this week. That’s because investor offers may be the only way to put a clear value on warrants that can vary widely depending on the model used.

Differing Values

Big banks may value their warrants at an amount that is hundreds of millions of dollars below the prices that other models might generate, the Treasury official said. That range makes it hard for the government to find a price that protects taxpayer funds without penalizing the banks.

“You don’t know the future, so that leads to wildly differing assumptions,” said Joseph Mason, a banking professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.

Escalating federal demands on the banks have spurred institutions including Goldman Sachs Group Inc. and JPMorgan Chase & Co. to seek an early exit from the TARP. The warrants issue is yet another complication in the rescue effort, which has sparked an outcry among both lawmakers and some bankers.

Restrictions on Banks

As long as the government hangs on to the warrants -- which give it the right to buy stock in the future at a preset price - - the banks will continue to face some restrictions related to the aid. Other limits, such as executive pay caps, are lifted when the banks buy back the Treasury’s preferred stock, in the first step of the TARP repayment process.

Geithner today reiterated that the government can sell the warrants back to the bank or to a third party.

New legislation, passed by Congress late yesterday, removes previously imposed deadlines for extinguishing the warrants once a bank repays the government’s main equity stake, allowing the government more flexibility.

The Treasury says banks can choose whether to negotiate over the warrants or not. The department plans to examine the warrants from four different perspectives, two provided by the Treasury and two by outside financial advisers, the official said.

If the bank refuses or can’t agree on a price, then the government will sell the warrants to a third party, as outlined in the original contracts.

Auctions Likely

Auctions are the most likely mechanism, the Treasury official said. In cases where the Treasury owned a large number of warrants, the department could choose to auction them in blocks to avoid flooding the market.

The Treasury doesn’t see the warrants as posing any kind of prepayment penalty to banks seeking to exit TARP, the Treasury person said. Officials have been discussing whether to consider some type of assistance for small banks that repay TARP early.

At the same time, a few banks have been working on quick deals to exit the government rescue program. Old National Bancorp, the Evansville, Indiana, lender that repaid $100 million from the U.S. bank rescue fund, has also bought back a warrant issued to the Treasury for $1.2 million, the company said in a May 11 statement.

The Issues Associated With Paying Back TARP

Several banks apply to pay back their TARP funds. The guide is likely to be quizzed by senators on the subject. (Bloomberg News)

US Considers Stripping SEC Of Powers

The Obama administration might move toward giving the Federal Reserve more powers, while stripping some authority from the Securities and Exchange Commission, sources said. Some functions might shift from the SEC to the Fed, while others might go to other federal agencies. The SEC has taken heat for failing to detect the financial crisis as well as industry scandals, but critics said stripping the commission of its power is not the answer.

In another matter, the SEC is expected to propose rules on executive pay, board nominations. The U.S. Securities and Exchange Commission is scheduled to invite public comment on its proposed rules giving shareholders a stronger voice in setting executive compensation and electing directors to corporate boards. Although the rules are technically nothing more than proposals at the moment, they have a good chance of being adopted. Of the regulator's five commissioners, three have already publicly announced their support for the measures.

Obama administration considers all-new financial regulator

(Washington Post). The Obama administration is actively discussing the creation of a regulatory commission that would have broad authority to protect consumers who use financial products as varied as mortgages, credit cards and mutual funds, according to several sources familiar with the matter.

The proposed commission would be one of the administration's most significant steps yet to overhaul the financial regulatory system. It would also be one of its first proposals to address causes of the financial crisis such as predatory mortgage lending. Plans for a new body remain fluid, but it could be granted broad powers to make sure the terms and marketing of a wide range of loans and other financial products are in the interests of ordinary consumers, sources said.

Sources, who spoke on condition of anonymity because discussions are ongoing, said talks have begun with industry officials, lawmakers and other financial experts about the proposal, which would require legislation. Last night, senior policymakers, including Treasury Secretary Timothy F. Geithner and National Economic Council Director Lawrence H. Summers, were to discuss the idea at a dinner held at the Treasury Department.

Responsibility for regulation of consumer financial products is currently distributed among a patchwork of federal agencies. Some of these regulators regard consumer protection as a low priority. And some financial products are not regulated at all. The proposal could centralize enforcement of existing laws and create a vehicle for imposing tougher rules. The idea is likely to face significant opposition from industry groups, which argue that stricter regulation limits the availability of financial products to consumers.

It could also trigger a massive regulatory turf war. Banking regulators and agencies such as the Securities and Exchange Commission, which regulates mutual funds, could stand to lose powers, personnel and funding. Those agencies are likely to argue they are positioned to protect consumers because they oversee the financial firms directly and have experience writing and enforcing rules governing financial products.

The proposal is part of the administration's broader plan to improve financial regulation. Officials have proposed the creation of a systemic risk regulator whose job would be to spot threats to the health of the overall financial system. Officials also have called for tighter regulation of individual financial firms and markets, including new rules governing hedge funds and derivatives. While those proposals focus on the guts of the financial system, this new plan would concentrate on the front end -- consumers who borrow money to buy homes and products and who invest their money for retirement, college education and savings.

The leading proponent of such a commission is Elizabeth Warren, a Harvard University law professor who now chairs the Congressional Oversight Panel for the government's financial rescue initiative. Her plan is the kernel of the idea the White House is now considering, sources said. Warren wrote in a 2007 article in the journal Democracy that the government had failed to protect American consumers in their relationships with financial companies.

"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street," Warren wrote. "Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?"

Warren proposed creating a new commission modeled on the Consumer Product Safety Commission, which protects buyers of products such as bicycles and baby cribs. Such a commission could be very powerful. A number of sweeping federal laws already offer broad protection to consumers of financial products, but those laws have been lightly enforced in recent years. The Department of Housing and Urban Development, for example, has clear authority to crack down on companies that charge excessive closing costs on mortgage loans, but repeatedly postponed planned reforms in the face of industry opposition.

Warren's proposal initially found little support in Washington, but the mood has shifted dramatically with the onset of the financial crisis and the election of a Democratic administration. In March, Sen. Richard J. Durbin (D-Ill.) introduced legislation to create a commission like the one that Warren had described. The legislation is co-sponsored by Sen. Charles E. Schumer (D-N.Y.) and Sen. Edward M. Kennedy (D-Mass.). The White House's support would greatly improve its chances of passing.

In proposing the legislation, the senators said that the commission would be responsible for identifying emerging problems and for educating consumers. They were also critical of the existing process. "The Federal Reserve was supposed to do this, but they were asleep at the switch," Schumer said at the time.

China subtly diminishes exposure to U.S. Treasuries

BEIJING (Reuters) - China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt.

Beijing has been far and away the single biggest foreign buyer of Treasuries over the past year, but this apparent vote of confidence belies how it has turned its back on long-term U.S. debt in favor of shorter maturities. China's move to the shorter end of the U.S. debt spectrum is a defensive tactic adopted by the wider market as well on the view that the United States will have to raise interest rates down the road to control inflationary pressures when the economy recovers from the financial crisis.

But the shift also comes after pointed comments from Beijing expressing worries over the security of its U.S. investments and calls from Chinese government economists for a tough line with Washington in return for continued access to loans. "The United States is making policy decisions purely according to domestic considerations and is giving little thought to the outside world," said Zhang Ming, an economist at the Chinese Academy of Social Sciences (CASS), a leading think-tank.

"This being so, the Chinese government should prepare its defenses," he said. "We can keep buying U.S. debt but we have to attach some conditions." But China's leverage may be limited, despite sitting on the world's largest stockpile of foreign exchange reserves at $2 trillion. The very surge in U.S. debt -- the Treasury plans gross issuance this fiscal year of $8 trillion -- means China's heavy buying is increasingly looking like a drop, albeit a very big one, in the ocean.

PLAY IT SHORT

Beijing has also taken pains to stress that, while uneasy about the U.S. economic outlook, it views Treasuries as a safe investment. And it knows that it would lose a lot from a plunging dollar with so much invested in the U.S. already.

So rather than cut off financing for the U.S.'s record budget deficit for this fiscal year, China has instead, little by little, shifted its buying out of longer-term bonds. Between August 2008 and March 2009, China bought $171.3 billion of bills, debt that carries a maturity of up to a year, compared with just $22.9 billion of longer-term notes and bonds with a maturity of two years or more. It also sold $23.5 billion of long-term agency debt, U.S. data shows. That followed purchases of just $9.6 billion of bills against $47.8 billion of bonds and $45.6 billion of agency debt in the first half of 2008.

Perspective on Obama's Fuel-Efficiency Standards

WASHINGTON (Reuters) - President Barack Obama took aim at climate-warming greenhouse gases on Tuesday and ordered the struggling auto industry to make more fuel-efficient cars under tough new national standards to cut emissions and increase gas mileage. Obama said the standards, announced at a White House ceremony attended by auto industry and union leaders, would reduce U.S. dependence on foreign oil and give five years of cost certainty to an industry battling to survive.

"The status quo is no longer acceptable," Obama said in an announcement that will pressure carmakers to transform and modernize the industry to produce more efficient vehicles. "We have done little to increase fuel efficiency of America's cars and trucks for decades," he said, calling the standards the start of a transition to a clean energy economy.

Obama has made fighting climate change a priority, and lawmakers in Congress have begun wrangling over a historic bill many hope will provide broader guidelines for controlling greenhouse gas emissions. Growing public support for efforts to battle climate change and the weakened state of the U.S. auto industry, which is staying afloat through federal bailouts and restructuring at the government's direction, gave Obama a window of opportunity to impose the rules.

Criticism of Obama's announcement was limited, and focused on the higher production costs, the safety concerns created by producing lighter cars and fears from some observers about increasing government involvement in the industry. "The government is now designing our cars. It's out of the hands of vehicle manufacturers," said auto industry consultant Larry Rinek.

Under the new standards, U.S. passenger vehicles and light trucks must average 35.5 miles per gallon (6.62 litres/100km) by 2016. The current law, approved by the Bush administration, requires a similar gain by 2020. Obama said the new standards would save 1.8 billion barrels of oil over the lifetime of the program -- the equivalent of taking 58 million cars off the road for a year.

The Environmental Protection Agency would regulate and reduce tailpipe emissions for the first time under the standards. The U.S. Congress does not have to approve the standards, which will be implemented through rules developed by the Department of Transportation and Environmental Protection Agency, which could take more than a year to complete.

Great News! April Housing Starts Plummet to Record Low

New housing starts fell 12.8% in April to a record low annual pace of 458,000 while building permits also fell to record lows.
This is actually great news -- unless you're a construction worker, home builder or supplier of related materials.

Why? An oversupply of homes, some 2 million units according to economist Gary Shilling, remains one of the main obstacles to finding a bottom in the housing market. And that 2 million figure doesn't include the "shadow supply" of homes that will come on the market if/when the environment improves; this phenomenon may help explain why DIY retailers Lowe's and Home Depot posted better-than-expected results this week.

Thus, it's paradoxically good news that April starts were down so much and potentially a worrisome sign that construction of single-family units were actually up for a second-straight month. (A steep drop in apartment building construction accounted for the overall decline). The 2.8% rise in single-family homes may explain why home-builder sentiment was stronger-than-expected yesterday, but doesn't help resolve the bigger issue of oversupply.

Twisted TARP: Compensation, Competition Issues Crimp Banks' Ability to Exit

On Monday, Treasury Secretary Tim Geithner put a pin in the administration's pay caps-for-Wall Street trail balloon: "I don't think our government should set caps on compensation," Geithner said in an interview at the National Press Club.
But, like everything else in Bailout Nation, it's not a simple case of that being the end of it. Geithner also said: "I think we should be trying to get the incentives better."

In a nutshell, the administration wants compensation tied to long-term performance and disclosed clearly to shareholders, who would have the opportunity to vote on executive packages, a.k.a. "say on pay."

It's no coincidence this discussion on compensation is coinciding as banks, including Goldman Sachs, JPMorgan, Morgan Stanley, American Express and State Street, are reportedly seeking approval to pay back TARP funds.

The government is putting restrictions on banks' ability to repay TARP and also concerned about making sure there's a "level playing field" for banks still under the program when it comes to compensation.

If banks that escape TARP are able to pay employees whatever they like (i.e. whatever the market will bear) then those banks still in the program will be at a competitive disadvantage; that will put the government's investment in those latter banks at risk.

Of course, there doesn't seem to be enough concern about how the taxpayer will fare on investments in banks that are seeking to get out from under TARP, as The NY Times reports.

Schumer Talks About Regulation and Executive Pay

Bloomberg interview with Sen. Charles Schumer (D) of New York on executive pay and increased financial services regulation.

What Happens When Chinese Stop Saving?

Chinese stocks hit a 10 month high today. Until the financial markets are liberalized, individuals don't have much choice about where to put their money in China, according to Andrew B. Bernard from the Tuck School of Business. Dollar-denominated assets will continue to be popular, he added. Bernard is optimistic about China and Asian financial markets.

Signs of Hope for Housing - Highest Levels of Confidence Since Last Summer

Homeowner confidence is higher than it has been in recent months as home improvment retailers are reporting better than expected earnings, with Jeffrey Saut, Raymond James and Beth Ann Bovino, Standard & Poor's.

Bloomberg Interview with Martin Fridson - High Yield Bond Specialist

Marty Fridson Talks High Yield Investing and "Tulip Mania" aka The History of Bubbles. He's increasingly optimistic that the market is slowly moving back toward normality.

Market Outlook - Global Economic Recovery Starts in Late '09

According to Australian Central Bank Governor; Further Analysis and Discussion with Macquarie Rate Cut Strategist Rory Robertson

Icap welcomes plans to curb OTC derivatives

Icap, the world’s largest inter-dealer broker, has welcomed sweeping US proposals to clamp down on over-the-counter derivatives markets, arguing that it was well positioned to take advantage of the move.

Tim Geithner, US Treasury secretary, last week outlined the Obama administration’s first steps in bringing greater transparency to the OTC derivatives markets, parts of which have been blamed for contributing to the financial crisis.

It said it would require “standardised” OTC contacts to be processed through a central clearing house; called for the shifting of standardised parts of the OTC markets to regulated exchanges and “regulated transparent electronic trade execution systems”; and for the development of a system by which prices could be made more transparent.

The move was widely seen as positive for traditional exchanges, especially those with their own clearers. But it could hurt inter-dealer brokers, which act as intermediaries in the negotiation of OTC contracts between banks and clients. ichael Spencer, Icap chief executive, said the proposals were “not surprising, logical and a good thing”.

“I think it is just a directional push by the regulators to say ‘we want a broadly different approach from the OTC market’. Icap, which today reports full-year figures, said it was less at risk of losing business as a result of the Geithner initiative because it has already been developing post-trade services that accompany clearing.

The company argues it is also less dependent than rivals Tullett-Prebon, GFI Group and BGC Partners on voice-brokered OTC contracts for revenues. Icap is part of a consortium bidding for LCH.Clearnet, Europe’s largest independent clearing house and a large clearer of OTC interest rate swaps. If successful, the consortium would give Icap a stake in a crucial piece of clearing infrastructure at a time when such businesses are set to gain from the Geithner plans.

Want some good news? LIBOR indicates the credit crunch might be over

Libor indicates credit crunch is over, economists say
For the first time since May 2007, Libor returned to a normal level, prompting economists to say the credit crunch has ended. "This marks a return to normal territory and gives us hope that we can cope with anything that comes now," said Peter Chatwell, an interest-rate strategist at Credit Agricole's Calyon. "It indicates that the banks are well capitalized, with no more surprises. It gives us hope that we have a functioning banking system and that we can now go about the job of running the broader economy." The Times (London)

To view the TED spread, go to: http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND

Increased Regulatory Actions

Derivative Plan Lifts CME, ICE Stock. Plans to regulate the over-the-counter derivative market helped lift share prices at CME Group and IntercontinentalExchange, Reuters reports.

CME and ICE, which both operate clearinghouses for derivatives saw stock price rise 6.2% and 5.4%, respectively, after watching it plunge 43% and 37% over the past 12 months. CME stock rose $16.96 to $291.06, while ICE’s climbed $5.33 to $101.92, making them among the best performers on the S&P Financial Index on Thursday. Analysts have raised their rating of CME from neutral to underweight.

S. Korean regulator to ask banks to stress-test derivatives. South Korea's Financial Supervisory Service plans to ask both foreign and domestic banks to conduct stress tests on their over-the-counter derivatives products. "OTC derivatives subject to this testing include currency options, currency forwards and interest-rate swaps," said Soomi Kim, a representative of the FSS.

ECB pushes for increased disclosure to help ABS market. The European Central Bank wants more details on asset-backed securities, including information on the loans that back the securities, disclosed to credit rating agencies. The central bank is advocating the increased disclosure as part of an effort to revive the ABS market. "It is hoped by improving transparency in the surveillance process, market participants can regain confidence in the work performed by ratings agencies in the securitization markets, thereby allowing their reactivation," the ECB said in a bulletin.

Bill Gross, PIMCO Founder, To Run High Income Fund

Pacific Investment Management Company (PIMCO) has appointed Bill Gross to manage the PIMCO High Income Fund, The Wall Street Journal reports. Gross founded PIMCO in the early 1970s and is also co-CIO at the firm.

The fund was previously run by Mark Hudoff who joined the firm in 1996 and has been heading its European team and its global high-yield products. PIMCO has agreed to repurchase several hundred million dollars of the securities. Hudoff has left PIMCO.

Indian Stocks Soar After Congress-Led Election Victory

Indian stock benchmarks surged more than 17% Monday as investors cheered a decisive election victory by the Congress Party-led coalition, with trading halted and then suspended for the day as the deluge of buy orders trigged market circuit-breakers.

Other stock markets in the region ended mixed, in part because India's surge helped turn around sentiment; markets that closed earlier such as Japan ended in the red, while later exchanges like China ended higher.

"The election in India is showing a clear mandate there, and probably underlines to a lot of investors there that Asia is going to be the growth area for the next six to nine months, whereas growth in Europe and U.S. could take much longer," said Andrew Sullivan, a trader at Main First Securities in Hong Kong.

Minutes after the opening, the the 30-stock Sensitive Index, or Sensex, rose 10.7% while the National Stock Exchange Nifty rose 14.5%, triggering a two-hour trading suspension. Immediately at the resumption of trade, they surged further, prompting a trading suspension for the rest of the day. The Sensex closed 17.3% higher at 14284.21, while the 50-stock S&P CNX Nifty rallied 17.7% to 4323.15.

"A pro-reform/stable government is just what India needs, amid signs of economic expectations bottoming out, to inspire investor confidence. We have argued that the stability of the newly-elected government, rather than the coalition dynamics, would be crucial for" sentiment, said analysts at Standard Chartered.

Some participants and analysts were disappointed. Sharmila Joshi, an investment adviser in Mumbai, said "I have never seen anything like this… These kind of gap-up openings are ultimately bad for the market, as they don't give one a chance to participate. Today, it was impossible to participate."

Among the big gainers, shares of market heavyweight Reliance Industries climbed 20.6% and ICICI Bank advanced 25.4%, while property major DLF gained 25.9%.

The local currency also surged, with the U.S. dollar recently down to 47.96 rupees from a previous close of 49.38 rupees.

Morgan Stanley raised its earnings estimate and Sensex targets after the poll outcome. Analysts there said they now expect the Sensex companies to post aggregate earnings growth of 2.5% this fiscal year, compared with a prior forecast of a 10% contraction. It raised its Sensex target for 2009 to 15,300.

Saturday, the Congress-led United Progressive Alliance secured 262 seats out of the 543 up for grabs, falling just short of the 272 majority mark but expected to muster that with support from smaller parties and independents. The outcome beat the most optimistic exit polls.

President Obama's OMB Director Peter Orszag says on CNN that the economy has bottomed out

The worst seems to be over, President Barack Obama's budget director said Sunday. But he also warned against taking signs of economic recovery as a reason to celebrate or delay changes in health care policy.

Peter Orszag said the U.S. economy appears to have bottomed out, even as the White House prepared to revise its budget projections to reflect higher-than-expected unemployment. He said an improving economy and changes to how the United States provides health care would help narrow federal deficits.

"I think what happened is the free-fall in the economy seems to have stopped and we're -- I guess the analogy (is) there are some glimmers of sun shining through the trees, but we're not out of the woods yet," said Orszag, the director of the White House Office of Management and Budget. "We do have more work ahead."

Work, Orszag said on CNN's "State of the Union," that would include passing this year Obama's health care plans despite the economic crisis. "Let's be very clear. We've always said health care reform has to be deficit neutral over a five- or 10-year window and much better than that over the long term," said Orszag, whose knowledge of health policy has strengthened his Cabinet-level position. "So we are committed to making sure health care reform is self-financing and also brings down costs over time, both for families and for the federal government."

The administration, however, faces serious challenges. Some 1.3 million jobs have been lost since February and the auto and financial industries are in precarious positions. Obama's Democratic allies have been reluctant to endorse the White House's health proposals while Republicans have vowed to stop them; Republican National Committee chairman Michael Steele told NBC television's "Meet the Press" that he doesn't think health care will pass this year.

Meanwhile, Orszag said the administration would update its budget numbers in the coming months. "You have to remember the deficit is very sensitive to the state of the economy," said Orszag, noting that officials always planned to revise those figures. "As the economy starts to recover the deficit comes down quickly."

Rivelle of Metropolitan West Asset Management Likes Investment Grade Corporate Bonds

Ted Rivelle, CIO of Metropolitan West Asset Management, likes investment grade corporate bonds.

ROAD TO RUIN: Mortgage Fraud Scandal Brewing

Criminal fraud may be the most underreported aspect of our current financial crisis. In this "Road to Ruin" report, former subprime lenders from Ameriquest, once the country's largest lender, describe a system rife with fraud. They describe how a "by-any-means-necessary" policy pushed employees to cut corners and falsify documents on bad mortgages and then sell the toxic assets to Wall Street banks eager to make fast profits.

Two Bears Talk About The Economy

Rogoff sees a W recovery. "I think there will be a bounce in the second half of the year from the massive stimulus package," [Kenneth Rogoff, professor at Harvard University's Department of Economics] said. "But I think the longer run trend is very slow, so we're vulnerable to dipping down again sometime in the next couple of years, like Japan."

Roubini sees yellow weeds. "People talk about a bottom of the recession in June, but I see it more like six to nine months from now," Roubini said. "The green shoots everyone talks about are more like yellow weeds to me."

Congratulations AIM Class of 2009

Click to Enlarge.

Are Obama's Health Care Reform Pieces Falling in Place?

Discussing whether the pieces are falling where President Obama needs them to get a major reform completed, with Andrew Busch, BMO Capital Markets and Greg Valliere, Soleil Securities.

Should GM Make It's Cars in China?

Should GM build cars in China and sell them in the U.S., with Peter Navarro, University of CA, Irving and CNBC's Dennis Kneale.

Chart of the Day - LIBOR-OIS Narrows to Lowest Level in Months

Libor Drops by most in 4 months. The TED spread is now at the lowest level since the crisis began. Interview with Bloomberg's Editor at Large Tom Keene.

FDIC's Shelia Bair Comments on Banks

Interview with FDIC Chairman Sheila Bair. Troubled assets are still there, but the liquidity crisis is over - according to Bair.

How About Some Ethical Behavior From Our Regulators?

Authorities investigate SEC lawyers accused of insider trading
Federal criminal authorities are looking into two lawyers at the U.S. Securities and Exchange Commission who are accused of trading stock using insider information, a source said. A report from the SEC inspector general said the lawyers traded stock in a large financial-services company. "We take seriously even the suggestion that any SEC employee would engage in insider trading. We note that the inspector-general report neither accuses any SEC employee of insider trading nor concludes that any such conduct took place," an SEC representative said. Reuters (15 May.)

Former chief of U.S. pension insurer likely to be investigated
Charles Millard, former head of the U.S. Pension Benefit Guaranty Corp., is expected to be investigated after a federal watchdog accused him of interfering with a contracting process, leading to the hiring of Goldman Sachs, JPMorgan Chase and BlackRock. Millard is also accused of receiving job-seeking help from Goldman afterward. BusinessWeek (14 May.)

Investment Advisers Would Face More Scrutiny Under SEC Proposal

(Washington Post). The Securities and Exchange Commission yesterday proposed rules to better protect the assets of people who use investment advisers to manage money. The proposals would require investment advisers to show evidence to an independent accountant that they actually have the assets they tell clients they have. Clients turn over their savings to advisers and often leave it up to them to decide how to invest it.

The rules respond to concerns among regulators that it is too easy for investment advisers to misuse client assets and then cover up the abuse by sending clients false reports about their accounts. That was what happened in a number of recent financial frauds, including the Bernard L. Madoff scheme.

"We are taking this action in response to major investment scams -- such as Madoff -- and many other potential Ponzi schemes," SEC Chairman Mary L. Schapiro said. "Many clients understandably are concerned about whether their investment advisers are properly handling their hard-earned dollars."

Nationwide, there are about 11,000 investment advisers, who register with the SEC and manage tens of trillions of dollars in assets. Vanguard and Fidelity are among the best-known investment advisory firms. Most firms are small, with fewer than 10 employees. Investment advisers generally charge clients a fee based on percentage of assets under management per year.

One proposal would require advisers to undergo an annual surprise exam by an independent accountant. The accountant would verify the existence of assets that advisers claim.

The SEC's second proposal addresses the minority of investment advisers who do not use independent firms as a custodian for client assets. These advisers would still be subject to a surprise exam. But each year they would also have to show a federally regulated accounting firm that they have the proper procedures in place to safeguard client assets.

Karen L. Barr, general counsel for the Investment Advisory Association, said the industry supports additional oversight for advisers who do not use independent custodians. But she said the industry is generally opposed to new burdens on advisers who use independent custodians.

"The potential risks in those situations are relatively minimal compared to the risks in a self-custody situation. I'm not sure the costs outweigh the benefits in that circumstance," she said.

Six Insurers Named to Get U.S. Taxpayer Aid

Six major insurance companies have received preliminary approval to get billions of dollars in fresh capital as part of the government’s financial rescue program, a Treasury Department spokesman confirmed on Thursday.

The department said the Hartford Financial Services Group, Prudential Financial, Lincoln National, Allstate, Ameriprise and Principal Financial Group have all received approval for capital infusions, subject to terms still to be negotiated.

While the extension of additional capital to insurers had been widely expected, these are the first companies that have been identified to receive aid after the near-collapse of American International Group. According to the Treasury spokesman, Andrew Williams, these insurers qualified for capital infusions under the department’s Capital Purchase Program because each had restructured itself as a bank holding company and met the November deadline for the program.

Hundreds of other financial institutions are still in the pipeline for review and will be approved on a rolling basis, the Treasury Department said. As the financial crisis erupted last fall, A.I.G. became the first insurer to receive substantial government aid before a broad-based program to help financial firms was established. Its problems stemmed from complex derivatives that greatly increased its obligations to its trading partners.

This recent group of insurers is far less troubled than A.I.G., but they still have been hurt by the collapse in real estate prices. Amid the housing boom, many insurers invested in complex mortgage-related securities that have since turned sour, weakening their balance sheets.

GM maps legal strategy, Chrysler cuts dealerships

General Motors Corp said on Thursday night it would most likely pursue the same legal strategy as Chrysler if it spirals into bankruptcy, while Chrysler unveiled details for slashing its dealer network.

Rattling the industry further, the Financial Times reported on its website that Toyota Motor Co is planning one of the most drastic management shakeups in its 70-year history next month when Akio Toyoda, grandson of the company's founder, takes over as chief executive. Toyota will replace 40 percent of its senior managers and is said to be preparing a sweeping reorganization of its North American business that would unify sales and manufacturing arms, the report said.

In a bright spot, Ford Motor Co, the only Detroit automaker not taking government bailout funds or dogged by bankruptcy or bankruptcy expectations, assured shareholders it is on track to at least break even in 2011, sending shares higher.

The GM disclosure, in a regulatory filing, marked the first time the automaker has said it would most likely follow the same legal strategy Chrysler is using under federal oversight to slash debt and restructure dealerships. GM faces a June 1 deadline to restructure its bond debt and reach a sweeping deal with the United Auto Workers. The company restated in its filing with the Securities and Exchange Commission that it expects to seek Chapter 11 if negotiations with bondholders fall short.

CHRYSLER CUTTING DEALERSHIPS

Chrysler said it would terminate business with 789 of its 3,181 dealerships as of June 9, a move that could cost up to 40,000 jobs, according to the leading dealer trade group. Dealers in Pennsylvania, Texas, Ohio, Illinois and Michigan -- where Chrysler is based -- would be hit hardest.

"The bankruptcy process that we are in allows us a once-in-a-lifetime chance to achieve a right-sized dealer body," Chrysler Vice Chairman Jim Press said on a conference call. "We do not have enough production or sales to keep all the dealers alive or prosperous.

Chrysler sought permission from a U.S. bankruptcy court in New York to terminate franchise agreements with the dealers. Fifty percent of its U.S. dealers account for 90 percent of sales, according to court documents. GM also plans to announce up to 2,000 dealer terminations as early as this week, sources have told Reuters.

Chrysler and GM face pressure to bring large sales networks in line with those run by more successful automakers. Toyota has 1,200 dealers in the United States.
Chrysler dealers reacted with a mix of anger and sadness, but most, even those surprised by the news, entertained little hope they could stop Chrysler.

Mike Jackson, chief executive of AutoNation Inc, the largest public dealership group, said Chrysler's dealer consolidation plan was long overdue but noted it could put pressure on vehicle prices in the short term. Two family-owned Chrysler dealers in New Jersey are forced to close as the troubled car giant makes cuts.

Market Update - 2nd Worst Stock Market in Last 100 Years

Despite the March/April rally, this is still the 2nd worst S&P 500 / DOW bear market in the U.S. in 100 years.

"That's Not the American Way": Chrysler's Bailout and the Road to Ruin

Chrysler's plan to close about 25% of its dealers is the natural outcome of a series of very unnatural events surrounding its bankruptcy, says an outraged Howard Davidowitz, chairman of Davidowitz & Associates. Specifically, Davidowitz was speaking about how the Chrysler bankruptcy was "hijacked" by the Federal government, which allegedly threaten creditors "if they didn't go along with the fiasco of turning the company over to the unsecured lenders."

Barack Obama's plan is to "sustain the union" in an effort to secure future votes in five key Midwestern states, Davidowitz says, without hesitation. "We the taxpayers are bailing out the union [and] bailing out Chrysler, which is an inefficient company that shouldn't survive and can't survive in the long run, anyway."

More generally, the Chrysler saga is evidence of how "we keep putting more money into hopeless companies," he says. "That's not the American way. We let inefficient companies collapse and be replaced by more efficient companies. That's the only way this economy can work."

By propping up inefficient companies and keeping zombie banks alive, Davidowitz says "we are exactly on the same path as Japan," which is now two decades into its economic malaise.

But there's one key difference between the U.S. and Japan: While they had about $16 trillion in savings and a 19% savings rate when their bubble burst in 1989, the U.S. savings rate was negative a year ago, a now a relatively meager 4.2%.

"That's a big problem for the financial stability of the U.S.," says Davidowitz, who had a hard time envisioning an alternative to a very grim scenario for America: "With big government, mad borrowing, and not letting things fail, there's no way we can have [rising] living standards," he says.

Credit Card Crackdown - CNBC Report

President Obama wants to sign the Credit Card Bill of Rights into law by Memorial Day, and Jared Bernstein, chief economist for Vice President Biden, discusses the legislation.

Jim Rogers Says U. S. Banks Are Already Bankrupt

According to Jim Rogers, "Balance sheets shows banks are under water and stress test makes it look better than it actually is." He says to let them go bankrupt. Rogers also is optimistic about rising commodity prices.

In-Depth Look - Wholesale Food Prices Rose 1.5% in April

Wholesale Egg Prices Surge 44% - Analysis and Discussion with Roy Huckabay of Linn Group. Economists expected only a 0.5% increase.

Jobless Claims Reflect Auto Industry Woes

Jobless Claims increase as Chrysler's bankruptcy leaves thousands unemployed.

Here It Comes: U.S. Regulators Seek Trace-like Reporting for OTC Derivatives

May 14 (Bloomberg) -- U.S. regulators may impose the same price reporting and transparency requirements on over-the- counter derivatives that reduced bank profits by almost half in the corporate bond market when the Trace system was adopted seven years ago.

“I think it’s something we’ll look at very closely as a potential model,” Securities and Exchange Chairwoman Mary Schapiro said yesterday at a news conference in Washington, in which regulators laid out potential structural changes to improve policing of the $684 trillion OTC derivatives market.

Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, gives anyone with an Internet connection access to trading data for corporate bonds. The system, in full operation since February 2005, reduced the difference in prices that banks charge to buy and sell bonds by almost half.

Treasury Secretary Timothy Geithner, Schapiro and Michael Dunn, the acting chairman of the Commodity Futures Trading Commission, called for increased oversight of over-the-counter derivatives to reduce risk to the financial system. Lax regulation contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., leading to the seizure of credit markets and causing more than $1.4 trillion in writedowns amid the worst financial crisis since the Great Depression.

‘Accept the Reality’

“Dealers have to accept the reality that this business -- where margins were compressing already -- is getting less profitable,” said Stephen Bruel, research director for securities and capital markets for Tower Group, a research and advisory firm in Needham, Massachusetts. “A lot of the action you’ll see is to contain the size and scope and profitability of this market.”

The bid-ask spread on investment-grade corporate bonds was about seven basis points before Trace was implemented and about four basis points immediately after, according to a study by Kumar Venkataraman, an associate finance professor at Southern Methodist University’s Cox School of Business in Dallas, published in the Journal of Financial Economics. A basis point is 0.01 percentage point.

Schapiro helped developed the Trace system in 2002 when she was president of the NASD, which was consolidated into Finra. Schapiro, Geithner and Dunn pledged at the news conference to work together on changes in the market.

‘Significant Gaps’

“Significant gaps in the basic framework of oversight over critical institutions” helped cause the financial crisis, Geithner told reporters. “A series of comprehensive reforms to create a stronger system, less vulnerable to crisis, with stronger protections for consumers and investors” will be hashed out with Congress, he said.

Part of his plan is to push banks to increase price transparency by adopting electronic trading systems for over- the-counter derivatives. Over-the-counter derivatives transactions are now typically conducted over the phone between banks and customers.

Geithner sent a proposal to Congressional leaders listing four main objectives: to protect against systemic risk by creating a more resilient market, improve efficiency and transparency, prevent manipulation and fraud and reduce risks to less-sophisticated investors, Geithner said.

“Some of the U.S. authorities have said we were pretty close to a meltdown and I actually think listed marketplaces with multilateral clearing are part of the answer to that question,” said Thomas Kloet, chief executive officer of TMX Group Inc., owner of Canada’s main equities and derivatives market. “I hope authorities don’t let go of that. I think they have to address that.”

Shares Rise

Shares of CME Group Inc. and Intercontinental Exchange Inc. rose yesterday after Bloomberg News reported Geithner’s plan. Chicago-based CME Group, the world’s largest futures exchange, soared $15.62, or 6 percent, to $274.10 as of 4 p.m. in Nasdaq Stock Market trading. Intercontinental of Atlanta, the second- largest U.S. futures market, rose as much as 5.2 percent, before closing up 9 cents to $96.59 on the New York Stock Exchange.

“This is the best Wall Street can hope for,” said James Cox, a securities law professor at Duke University in Durham, North Carolina. “This will allow them to stay in business and still make money. It also cuts off what potentially would have been more regulation.”

Once a Day

Only about 10 percent of bank customers use electronic systems to trade over-the-counter derivatives, according to Paul Zubulake, a senior analyst with Boston-based Aite Group. That compares with about 90 percent of inter-bank trades that are done electronically through inter-dealer brokers such as London- based ICAP Plc or Dealerweb, according to Zubulake.

Prices for indexes of credit-default swaps, contracts used to hedge against or speculate on corporate debt, have been made public once a day since March by Markit Group Ltd. and Intercontinental Exchange, the first company to guarantee the contracts with a clearinghouse. Prices for other over-the- counter contracts, such as interest-rate swaps, are not widely available.

The need for transparency in the over-the-counter derivatives market was stressed by Theo Lubke, a senior vice president at the Federal Reserve Bank of New York, last month at a derivatives industry conference in Beijing.

More Information

Lubke, who was appointed in 2007 to oversee OTC derivatives by Geithner when he was president of the New York Fed, said the credit swap prices now available are not sufficient, according to a transcript of his comments.

Because investors don’t know when trades took place or how many occurred, more information is needed, he said April 23 at the International Swaps and Derivatives Association general meeting in Beijing.

“That window of opportunity to make changes as opposed to having those changes brought to the market by external forces is narrowing,” he said. “It is in market participants’ interest as well as the interest of regulators to see continued rapid movement.”

Derivatives are contracts whose values are tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

“ISDA welcomes the recognition of industry measures to safeguard smooth functioning of privately negotiated derivatives,” Robert Pickel, chief executive officer of ISDA, said in an e-mailed statement.

Lubke said at the ISDA conference that the major banks’ control of the over-the-counter derivatives market must end by allowing hedge funds and other investors more input into how market decisions are made.

“It is simply unacceptable in today’s environment that the design and structure of the OTC derivatives market can be controlled by a handful of large dealers,” Lubke said. “There is opacity in the OTC market that doesn’t have commensurate public policy benefits,” he said. “This is not something that can continue.”