Thursday, June 25, 2009

Market Outlook - No New Improvements in Home Sales

Analysis and Discussion with David Malpass of Encima Global

Obama Speaks on Energy Bill - Bloomberg

From the White House: President Barack Obama Holds News Conference

Grilling Bernanke

Insight on the behind the scenes deal making of Bank of America's acquisition of Merrill Lyncb, with Rep. Paul Kanjorski (D, PA).

Green Shoots Blossom

Insight on why Barclays Capital is optimistic on the global economy, with Larry Kantor, Barclays Capital head of research.

Faber on the Future of Wall Street

CNBC's David Faber sheds light on the future of Wall Street.

Wall St. to Taxpayers: "Thanks for the Bailouts, Have Some Higher Fees"

Wall Street is responding to new proposed regulations in classic form: They're trying to circumvent restrictions on compensation and want to pass along the cost of compliance to their clients, namely you and me.
JPMorgan Chase has informed clients its raising fees on balance transfers and cash advances to 5%, the highest among the nation's big banks. (Earlier this month, Bank of America raised similar fees to 4%.)

In a notice to customers, JPMorgan cited "new federal regulations" as the rationale for higher fees, The LA Times reports.

Get used to being nickled and dimed by the banks (even more than usual), says Diane Garnick, investment strategist at Invesco, who notes deflation has hit every other asset class in the past year, save ATM fees.

"We're going to get hit with all of these small fee coming from the banks," she says, noting banks' institutional customers are both smaller in number and much more cost conscious after the credit bust. "The way we're going to see these fees really come about will be on the retail side.
They're saying, the people who borrowed from Mastercard to pay Visa -- the little guys -- we're going to bump those fees all the way up."

Higher credit card fees: Think of it as just one more way of Wall Street saying "thanks" to the American taxpayer for bailing them out last year.

Bernanke vs. Buffett: Who's Right on the Economy?

Ben Bernanke is in the hot-seat today for his role in the extraordinary events of late 2008 (more on that later). Just 24 hours ago, however, the Fed chairman was making headlines for more pedestrian reasons: the conduct of monetary policy.

With a slight upgrade to its view on the economy, the Fed gave support to the "green shoots" crowd, which this week is also pointing to a surge in durable goods in May, rising housing prices and a better-than-expected revision to first-quarter GDP. (Final tally: down 5.5% vs. the 5.7% expected.)

On the other hand, both existing and new home sales were weaker than expected, jobless claims unexpectedly rose again and no less an authority than Warren Buffett stomped on the green shoots theory in various media appearances this week.

Despite having cataract surgery, Buffett jokingly told CNBC he can't see the green shoots. "The risk of a collapse in the financial system has past, but we have not got the economy moving again," he said.

Put Diane Garnick, investment strategist at Invesco, in the same camp as the Oracle of Omaha.

"It's too soon" to be talking recovery, Garnick says, suggesting Americans are too impatient and desirous of instant gratification. "It's going to take a little while for us to see whether the green shoots are here to stay or we're going to have to add more stimulus on top of what's already there."

Garnick also agrees with Buffett's concerns about inflation, and says Treasury Inflation Protection Securities (TIPS) are "such a good investment right now" because they are currently priced for very low inflation 20- and 30-years out.

"Rock Star" Ben Bernanke Holds Up Under Congressional Fire

Ben Bernanke faced hostile fire from Congressmen of both parties Thursday as the inquiries into the government's role in the Bank of America-Merrill Lynch deal continue.
Bernanke steadfastly defended his actions, and the Fed's action, during that dark chapter in American financial history. "The Federal Reserve acted with the highest integrity throughout the discussions with Bank of America regarding that company's acquisition of Merrill Lynch," Bernanke said in prepared testimony.

The chairman also denied threatening BofA CEO Ken Lewis for trying to get out of the deal in December, amid mounting losses in Merrill's mortgage-backed portfolio.

Bernanke gave a good accounting of himself, judging by the stock market's reaction. Another successful Treasury auction and month- and quarter-end considerations probably didn't hurt, but investors could take solace in Bernanke's testimony, says Syd Finkelstein, a professor of management at Dartmouth's Tuck School.

"Ben was a rock star," Finkelstein says. "He took one shot after another [and] displayed tremendous credibility. It's tough to walk away and not believe everything he said was truthful and accurate."

Still, the co-author of Think Again and Why Smart Executives Fail, admitted "there's still some missing data" on the question of who said what to whom. In an ideal world, Bernanke, Hank Paulson and Ken Lewis would all testify at the same time.

While that's highly unlikely to occur, Oversight Committee Chairman Edolphus Towns (D-NY) did conclude Thursday's hearing by saying the investigation will continue.

Among the still unanswered questions:

- Was Ken Lewis victimized by overzealous government bureaucrats who forced him to do the Merrill deal (Paulson and Bernanke)? Or did Lewis threaten to back out of the deal as a way to exert promises of more bailout money, which BofA ultimately did receive?
- What role did the SEC and FDIC play in the transaction?
Is Bernanke being used as a pawn in the political fight over whether the Fed should become the "systemic risk" regulator?
- Will Bernanke be reappointed to another term, and did today's appearance effect President Obama's decision either way?
- Why didn't Congress exert any oversight of the TARP funds to begin with? (Don't hold your breath for Congress to get to far with this one.)

Housing Outlook - Home Sales May Ultimately Determine GDP

Radar Logic's Monthly Housing Report - Interview with CEO Michael Feder

Reaction to Bernanke Testimony

Analysis and Discussion with Phil Orlando of Federated Investors

In-Depth Look - Bernanke Testifies In BofA/Merrill Deal

Interview and discussion with Henry Kaufman of the Henry Kaufman & Co. He talks about Ben Bernanke's testimony in the Bank of America and Merrill Lynch deal.

Another Stimulus Needed - Buffett

Buffett says the U.S. economy needs second stimulus to get it going. Rising unemployment is the main reason why.

Bankers Are Fighting Back

Wall Street's largest lobbying group starts an international campaign to restore its battered image.

In-Depth Look - Health-Care Reform Effectivity

Interview and discussion with the Former Senate Majority Leader, Tom Daschle. He shares his insights regarding about the health-care reform President Obama is pushing.

Obama Defends National Health Insurance

President Obama defends his push for government involvement in a national health-care system. He answers questions about overhauling health care.

Google Investigates Service Shutdown In China

Google service resumes for some users after nationwide shutdown apparently ordered by the government.

Thursday, June 18, 2009

Fuss Won’t Touch U.S. Debt for Loomis Fund as Deficit Mounts

June 18 (Bloomberg)By Charles Stein --- Daniel Fuss, the Loomis Sayles bond fund manager who has matched Bill Gross’s returns for the past decade, isn’t tempted by U.S. Treasuries even after yields on the 10-year note have climbed more than 64 percent this year.

“The U.S. government keeps making bonds available to us at increasing rates of interest,” Fuss, 75, said in an interview in his Boston office. “Their funding requirements are horrific.”

Yields on the 10-year note rose to 3.63 percent from 2.21 percent at the beginning of the year as the government borrows to finance a deficit that may quadruple to more than $1.85 trillion by Sept. 30, according to the nonpartisan Congressional Budget Office. Investors are demanding higher yields to offset the effect of a possible increase in the inflation rate and a falling dollar on the value of the debt.

Fuss, who helps manage $50 billion in bonds, said the government’s spending and an improving economy could push the yield on the 10-year note to as much as 6.25 percent in the next four to five years. Bond yields rise as prices fall.

The $15.5 billion Loomis Sayles Bond Fund, which Fuss co- manages, returned 6.91 percent annually for the 10 years ended in May, according to Morningstar Inc., the Chicago-based research firm. Gross’s $157 billion Pimco Total Return Fund, the largest mutual fund, returned 6.92 percent a year.

Bond Allocations

Gross, the co-chief investment officer of Pacific Investment Management Co., had 66 percent of his assets in bonds rated AAA by Standard & Poor’s at the end of May, according to the Web site of the Newport Beach, California-based firm. Four percent of assets were in bonds rated below investment grade, the site said.

Fuss had 19 percent of his money in AAA bonds and 27 percent in bonds below investment grade, according to Morningstar.

“This is not the kind of fund you want for the safe part of our portfolio,” said Miriam Sjoblom, an analyst at Morningstar, in a telephone interview. She described Fuss’s fund as “one of the most volatile.”

The Loomis Sayles Bond Fund lost 22 percent last year, dragged down by its holdings of high-yield debt and foreign bonds, according to a regulatory filing. The fund gained 17 percent this year through June 16, Bloomberg data show. Investors put $1.61 billion into the fund through May, according to Morningstar.

Investing Career

Fuss, who has a master’s in business administration from Marquette University in Milwaukee, has worked in the investment business since 1958, the last 33 years for Loomis Sayles. He constructs charts and tables on bonds, commodities and currencies on graph paper using colored pencils. Fuss said he spends two hours every weekend doing the work by hand.

Washington’s ongoing need to borrow will pressure interest rates to rise, Fuss said.

“The tide of borrowing will not retreat,” he said. “It is going to keep coming at you.”

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered more than $1.47 trillion of writedowns and credit losses at banks and other financial institutions and sent the global economy into its first recession since World War II, according to data compiled by Bloomberg. The government has responded with increased spending, lowered interest rates and corporate bailouts.

Record Borrowing

The government may borrow an unprecedented $3.25 trillion in the fiscal year ending Sept. 30, almost four times the $892 billion of 2008, according to Goldman Sachs Group Inc. Federal Reserve Chairman Ben Bernanke told Congress earlier this month that deficit concerns are already influencing the prices of long-term Treasuries.

“Unfortunately, the trend for Treasuries is higher over the next few years,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

The Loomis Sayles Bond Fund had no holdings of U.S. government securities at the end of April, according to Morningstar.

The fund had 63 percent of its holdings in U.S. corporate bonds, with the biggest concentration, 31 percent, in bonds rated BBB, the second-lowest investment grade at Standard & Poor’s, the New York-based rating company. U.S. corporate bonds rated BBB returned 15.6 percent this year through June 16, according to the Merrill Lynch & Co. U.S. Corporate BBB Index.

Corporate Bonds

Fuss said the rally in BBB bonds “has quite a bit to go.” He said gains in bonds of higher quality would be more muted. He called parts of the high-yield market “downright scary” because some companies borrowed too much money as the economy grew. The fund has about two-thirds of the level of high-yield bonds it typically holds, Fuss said.

The Loomis Sayles Bond Fund can have as much as 20 percent of its assets in bonds from outside the U.S. and Canada. Fuss said the fund is currently “bumping up against the limit” of global holdings.

Fuss said his international investments are influenced by his view of China’s expanding role in the world economy.

“Rising demand from China and Asia will be a huge surprise going forward,” he said in the interview.

Countries such as Thailand, Malaysia, Indonesia, Australia and New Zealand would benefit from China’s rise, he said. As a holder of government and corporate bonds denominated in those currencies, he said he expects to profit as the currencies appreciate against the dollar.

The Australian dollar has climbed 27 percent against the dollar since hitting a low for the year March 2, Bloomberg data show. The New Zealand dollar has gained 29 percent.

Fuss said bonds from the two countries are especially attractive because their governments set aside money to pay for retirement obligations to residents.

Wednesday, June 17, 2009

Double Dip Or Roaring Recovery?

Assessing where the markets are headed next, with Doug Kass, Seabreeze Partners Management; Jason Trennert, Strategas Research; and CNBC's Larry Kudlow.

More Power to the Fed

Debating whether the Fed should be granted more power, with Michael Pento, Delta Global Advisors; Frank Sorrentino, North Jersey Community Bank; Peter Morici, University Of Maryland; and CNBC's Larry Kudlow

Unwrapping Obama's Financial Package

Why the Fed comes out as a key winner today, with Bart Chilton, Commodities Futures Trading Commission; Leo Tilman, "Financial Darwinism" author; and CNBC's Dennis Kneale.

A Look at the Proposed Regulatory Overhaul

Roundtable Discussion Featuring Columbia Law School Professor John Coffee and Brookings Institution Fellow Douglas Elliott (Bloomberg News)

Obama Announces Financial Regulations Plan

President Barack Obama Held News Conference on Proposed Financial Regulations

Congress aims to adopt U.S. health care expansion by August

Democratic lawmakers intend to get the biggest expansion of the U.S. health care system since the launch of Medicare in 1965 through both houses of Congress and on the way to President Barack Obama's desk before they go home for the August recess. "I don't think we've ever had anything this large in American history aimed to go this quickly that touches everybody's lives," said Robert J. Blendon, a professor of health policy and political analysis at Harvard University.

June 17 (Bloomberg) -- The largest expansion of U.S. health care since the creation of Medicare in 1965 may emerge from legislation designed to reshape the medical industry and change how Americans receive and pay for care.

Congress today begins crafting legislation that Democratic leaders plan to push through both chambers by their August recess. The measure may require all Americans to get medical insurance, force insurers to accept all patients and end the tax break for employer-paid health benefits. These changes may be hammered out with unprecedented speed at the urging of President Barack Obama, who four days ago said “this is the moment.”

Obama has made a health-care overhaul his top domestic priority, using his February budget proposal to call it a “moral” imperative to extend coverage to the country’s 46 million uninsured. Obama also tied the long-term fiscal soundness of the U.S. to controlling medical costs. Health care consumes 18 percent of the U.S. economy and may rise to 34 percent by 2040, the White House Council of Economic Advisers reported June 2.

“I don’t think we’ve ever had anything this large in American history aimed to go this quickly that touches everybody’s lives,” said Robert J. Blendon, a professor of health policy and political analysis at Harvard University in Cambridge, Massachusetts, in a telephone interview. “They’re moving at a pace we’ve never seen before.”

‘Moment is Right’ The U.S. will spend more than $2 trillion this year on health care, the Health and Human Services department reported in February. Today, the Senate Health committee will begin debating a bill that includes “gateways” where consumers may compare coverage plans. The Senate Finance Committee later this week will unveil a bill that among its provisions will call for taxes on health benefits, and House committees will release a draft of their own comprehensive measure that would create a government-backed plan to compete with private insurance.

“We know the moment is right for health care reform,” Obama told the American Medical Association in Chicago in a speech June 15. “We know this is a historic opportunity we’ve never seen before and may not see again.”

The coming weeks will be pivotal if the House and Senate are to meet their goal to send Obama a single bill in October, said Drew Altman, president of the Henry J. Kaiser Family Foundation, based in Menlo Park, California, one of the nation’s largest private foundations devoted to health.

‘Planets Are Aligned’ “We have these big debates about comprehensive health reform every 19 or 20 years in our country, and we’ve failed every time,” Altman said by telephone. “This time, the planets are aligned as they’ve never been aligned before, but there still are a lot of obstacles before we’ll know whether they’ve pulled it off or we’ve failed again.”

The timetable may be slowed as Democrats on the Finance Committee seek a bipartisan compromise. Republicans in the Senate have been pushing for more time to assess the costs of the various proposals. A portion of the health committee bill, proposed by its chairman, Democrat Edward Kennedy of Massachusetts, and fellow Democrat Christopher Dodd of Connecticut, may cost as much as $1 trillion over 10 years while covering just 16 million more people, the Congressional Budget Office said June 15.

Senator Mitch McConnell, a Kentucky Republican and minority leader, says he is skeptical of the “chaotic” legislative process. He complained that the bills haven’t been seen by Republicans or “scored” -- assessed to see how much they will cost to implement.

“We don’t have bills,” he told reporters yesterday. “We don’t have scores. And at the same time the majority is saying we need to act quickly. I think it would be highly irresponsible in the extreme.”

Reid’s Response. The Senate Democratic Leader, Harry Reid of Nevada, scoffed at McConnell’s complaint, saying: “We are moving too fast on health care, we’re moving far too fast, in their mind, on energy, and certainly we’re moving too fast” on Supreme Court nominee Sonia Sotomayor. “Is there anything that we’re moving just right?”

Presidents from Harry Truman to Bill Clinton have tried and failed to reshape the health-care system, running into opposition from industry and doctors. Truman’s efforts to provide insurance for all Americans in the 1940s were criticized by the U.S. Chamber of Commerce as a step toward “socialized medicine.” The American Medical Association shared that assessment.

President Lyndon Johnson defeated similar opposition in 1965 when he pushed Medicare, the government’s health program for the elderly and disabled, through Congress. Johnson benefited from a landslide victory for Democrats in the 1964 elections and U.S. attention to widespread poverty.

Positions Will Emerge. Unlike Clinton’s 1993 attempt to change medical care, when industry opposed attempts to rework the system, insurers, drug- and device-makers, doctors and hospitals have committed to cut costs over a decade in support of Obama’s agenda.

As details of the bills emerge, the health-care groups will take positions, said Altman, of the Kaiser Family Foundation. “The real debate will only begin when we have legislation on the table,” he said in the interview. “Then we learn which interest groups are at the table and which ones aren’t. As hot as this has gotten, we haven’t seen real opposition yet.”

In the House and Senate, Democratic leaders are trying to push proposals through on a six-week timetable more often seen with bills dealing with a national crisis rather than broad- based social policy.

Two Weeks of Deliberations. In the Senate, the health committee today will start what it expected to be at least two weeks of deliberations on the Kennedy-Dodd plan. Senate Finance Committee Chairman Max Baucus, of Montana, said yesterday he hopes his plan draws support from the top Republican on his panel, Senator Charles Grassley of Iowa. The Finance Committee is scheduled on June 23 to begin work on its bill. Baucus said yesterday he will release his proposal this week.

The Senate committees’ schedules call for finishing their separate bills before the week-long Independence Day recess begins June 29, and merging the proposals upon their return. Democratic leaders plan for the Senate to take up a measure sometime soon after the recess, although debate hasn’t been set.

The packed schedule will be a particular challenge for the slower, more deliberate Senate. Democrats, who control 59 votes, must be able to secure the backing of 60 senators to overcome the possibility of a filibuster. The fast pace also may be an asset, said Senate historian Donald Ritchie.

“Sometimes there’s an advantage in setting a short schedule,” Ritchie said. “That gets people responding to the bill, it’s easier to schedule votes, people are more willing to cut a deal and compromise. Leadership around here often gets their best work done here before a recess when everyone has a plane ticket in their pocket.”

House Action. In the Democratic-controlled House, three committees working on the same legislation plan to release a detailed draft outline later this week. Representative Charles Rangel of New York, chairman of the House Ways and Means Committee, said his panel may release an outline of health policy changes first, followed days later with the details of the necessary tax increases and spending cuts.

Rangel said he wants the more popular aspects of the health-care overhaul, such as expanding coverage to the uninsured, before spelling out the way to pay for the changes that will cause “heartburn” for many lawmakers.

Employer Benefits. One issue is taxing employer-provided health benefits, which Obama opposed during his presidential campaign. In an interview yesterday with Bloomberg News, Obama said he wouldn’t rule out such a proposal. “I don’t want to predetermine the best way to do this,” he said. “I’ve already put forward what I think is the best way. Let me see what comes out of the Hill and we’ll have that debate then.”

Rangel’s panel and the other two House committees - Energy and Commerce and Education and Labor -- may hold hearings next week before the July break, said Nadeam Elshami, a spokesman for House Speaker Nancy Pelosi. All three panels would then work to approve the legislation in July and the full House would take it up by month’s end.

The Democratic leadership in both chambers plan to use the summer recess and early fall to put together one package that can pass the Senate and House and go to the president. “The president wants a bill by Oct. 15,” Baucus said in an interview yesterday. “He’ll get it.”

Geithner Reveals Regulation Revamp Plan

U.S. Treasury secretary Tim Geithner and Larry Summers, the director of the national economic council, have promised to unveil a comprehensive plan to “modernize financial regulation and supervision” within days.

Writing in yesterday’s Washington Post, Geithner and Summers said that after months of discussions with “Congress, regulators, business and consumer groups, academics and experts,” the Obama administration will announce its plan to “create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.”

While Geithner and Summers made no announcement of the specific details of the plan, the U.S. Treasury secretary and the director of the national economic council said “harmonizing the regulation” of futures and securities, more robust safeguards of payment and settlement systems and strong oversight of over-the-counter derivatives market would be at the heart of the plan.

Obama's regulatory overhaul targets every corner of U.S. markets

Federal oversight would extend to every part of the U.S. financial system, ranging from sales of consumer loans to trades of complex derivatives, under a series of regulatory reform proposals set to be unveiled Wednesday by the Obama administration. The administration decided to revamp the system from within the shell of existing agencies rather than starting over fresh. The proposals call for the creation of a consumer-protection agency and a federal insurance office.

Tuesday, June 16, 2009

Obama moving cautiously on financial regulation

His economic team appears to have focused on issues directly related to the crisis rather than on a more ambitious overhaul, says Rep. Melissa Bean (D-Ill.) of the House Financial Services Committee.

Reporting from Washington -- Obama administration officials appear to have had two key concerns in writing the most significant financial rules since the Great Depression -- moving quickly, before the momentum for reform evaporates, and avoiding withering turf battles with regulators and lawmakers that could derail the effort.

More details of the plan emerged Tuesday as President Obama prepared to unveil it Wednesday at the White House. A key component will be the creation of a Consumer Financial Protection Agency with "broad authority" over credit cards, mortgages and other consumer products, according to an administration summary.

The administration also has said it wants Congress to give the government new power to monitor the financial system for danger signs and allow it to seize and dismantle large companies at risk of failure in the way that it now does with insolvent banks. The regulatory plan also will include new oversight over largely unregulated derivatives markets and requirements on how banks turn their investments, such as mortgages, into complex securities -- two issues that led to the crisis.

"We are going to put forward a very strong set of regulatory measures that we think can prevent this kind of crisis from happening again," Obama said.

The proposed regulatory overhaul will be far-reaching, administration officials have said. But it is not expected to tackle some key changes that critics have long called for, particularly merging the four existing bank regulatory agencies into one to reduce oversight gaps and to keep institutions from shopping for the most lenient oversight.

Obama's economic team appears to have decided to focus on issues directly related to the crisis, such as providing more oversight over the complex derivatives markets, rather than on an even more ambitious overhaul, said Rep. Melissa Bean (D-Ill).

"They're being very practical and prioritizing what they see as the "gotta do's" that address restoring confidence and market stability because that's where the concerns are and those longer-term comprehensive reforms will be addressed later," said Bean, who serves on the House Financial Services Committee. Congress must approve the administration's proposals.

The administration's approach ruled out creating one super regulator of the financial industry, which probably would have triggered turf fights among the various agencies -- and their constituencies -- that now regulate different aspects of the financial sector.

Instead, Obama is expected to approve a more modest streamlining by eliminating the Office of Thrift Supervision, the regulator for savings and loan institutions that has come under strong criticism for failing to react to warning signs before the failure of IndyMac Bancorp last summer.

Obama has made passing new financial regulations a top priority this year, and delivered a message directly to Wall Street in interviews with CNBC and the Bloomberg news service. He dismissed suggestions that he wanted to over-regulate the financial industry.

"If we've got rules of the road, that's what makes capitalism thrive," he told CNBC. "That's why people invest in this country."

But business groups are concerned that the new regulations might go too far in some areas, such as with the new consumer watchdog agency, and that the administration is attempting to fix problems in the nation's patchwork of regulatory agencies with a piecemeal approach.

"There are too many regulators, too many gaps," said David Hirschmann, president of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce. "We're not hung up on who gets merged with who, but you can't leave all the current dysfunction in place."

John Taylor, president of the National Community Reinvestment Coalition, a group that promotes access to basic banking services, said the White House knows it needs to act quickly to seize on momentum for reform generated by the financial crisis. For that reason, administration officials don't want to propose too many changes for fear the legislative process would be bogged down, he said.

"They've got to move swiftly," said Taylor, who has attended four administration meetings over the drafting of the plan. "They can't get stuck in the mud of reinvention of the entire system as the only alternative."

In-Depth Look - High Yield Recovery - Bloomberg

In-Depth Look - High Yield Recovery - Bloomberg

Fed's Bullard on the Economy

St. Louis Federal Reserve Bank President James Bullard discusses the economy with CNBC's Steve Liesman.

Getting Regulation Right

An outlook on regulation, with Peter Morici, University Of Maryland; Chris Mayer, Columbia Business School; and CNBC's Larry Kudlow.

Housing Outlook - Encouraging News Amid Continuing Decline

According to Deutsche Bank, U.S. Home Prices to Fall 14% More - Further Analysis and Discussion with Patrick Newport of IHS Global Insight: Housing Off to a Good Start (Bloomberg News)

Economic Expectations - Is Global Balance of Power Shifting?

Interview with Blackstone Group Co-Founder Peter Petersen, Author of "The Education of an American Dreamer" (Bloomberg Taking Stock)

Lack of Regulation Didn't Cause the Crisis and More Rules Won't Prevent the Next One

On Monday, Tim Geithner and Larry Summers penned an op-ed piece in the Washington Post entitled A New Financial Foundation. On Wednesday, President Obama is expected to put his full weight behind this vision of a new regulatory framework for Wall Street.
Before this discussion goes any further, Jeff Matthews of Ram Partners, wants you (and presumably policymakers) to remember this: "The epicenter of the financial crisis that almost brought the world to its knees was the regulated portion of the U.S. financial system -- in particular Fannie Mae and Freddie Mac, two of the most regulated entities ever created."

Furthermore, "every publicly traded bank that has gone out of business had financial statements signed by their CFOs and CEOs," the veteran money manager notes. Such assurances were prescribed by Sarbanes Oxley, the legislation that emerged in the aftermath of the corporate scandals at Enron, WorldCom and others earlier this decade.

As discussed in the accompanying video, every bubble in history has been followed by regulatory attempts to prevent its repeat, and yet bubbles continue to be a regular occurrence in market-based capitalism.

That's not to say the latest attempts at re-regulating Wall Street will prove equally inept, "but I'll believe it when I see it," Matthews says.

Still, the money manager and blogger "hopes for the best" and gives the administration credit for trying. He even has some positive things to say about one element of the plan: A requirement that dealers of asset-backed securities, such as mortgage-backed securities, "retain a financial interest in its performance," as Geithner and Summers put it. In other words, make Wall Street eat its own cooking, which really would be a change of pace.

Second-Half Recovery Is "Nonsensical": Economy Still Descending, Ritholtz Says

Wednesday's report of a 17% monthly rise in housing starts made for some dramatic headlines, but don't confuse that with an actual recovery, says Barry Ritholtz, CEO of Fusion IQ and author of Bailout Nation.
"Housing Starts did not ‘soar' as Bloomberg claimed; you soar high in the sky, and a move from ankle to knee level does not qualify," Ritholtz writes on his popular blog, The Big Picture. "This was not, as The WSJ asserted, a ‘Surge in Home Construction.' Rather, it was a bounce off of record lows."

Ritholtz's bigger point is that the free fall from September to March was so agonizing, it feels good to be in a "normal" recessionary environment, as he believes we're currently experiencing. Ritholtz compares the economy today to a skydiver right after the parachute opens - the fall is now controlled, but you're still descending.

Furthermore, the fund manager says hopes for a second-half recovery are "nonsensical" citing the continued pressure on U.S. consumers and lack of evidence of a business recovery, as evinced by today's capacity utilization data, the lowest on record going back to 1967.

Having been notably bullish in early March and again in mid-May, Ritholtz is now reigning in his optimism after the rapid-fire 40% rally. His fund is now 70% stocks and 30% cash, and he sees higher probability of a retest of the March lows this fall vs. another significant leg to the advance.

Bailout Nation: Was TARP Just a Ruse to Protect Citigroup?

With JPMorgan, Morgan Stanley and other big banks reportedly set to start repaying TARP funds as early as tomorrow, many are ready to turn the page on this sordid chapter in our nation's financial history. But Barry Ritholtz, CEO of Fusion IQ and author of Bailout Nation, is still trying to figure out why we went through the whole exercise in the first place.

In his new book Bailout Nation, Ritholtz discusses the possibility that TARP was all a giant ruse, "a Hank Paulson engineered scam to cover up the simple fact that Citigroup was teetering on the brink of implosion," has he writes in his popular blog The Big Picture. "A loan just to Citi alone would have been problematic, went this line of brilliant reasoning, so instead, we gave money to all the big banks."

We delve further into this theory in the accompanying video. While it can never be fully proven, Ritholtz's "just a ruse to protect Citi" idea seems plausible given:

- The reaction of many other banks forced to take TARP funds;
- The extraordinary level of bailouts and debt guarantees aimed specifically at Citi;
- Regulators' fears last fall about the "systemic risk" if a big bank were allowed to fail.

We also discuss the future prospects for Citigroup, the company and the stock, now that other banks are coming out from under TARP. Ritholtz believes one of two courses is likely: Either Citi will need and get more bailouts or the government ultimately puts the bank into receivership.

White House rejects California's request for bailout

California's appeal for emergency financial aid was turned down by the Obama administration. U.S. officials are worried that if they give California what it wants, the federal government will be buried under an avalanche of similar requests from other states.

Russia might invest in bonds issued by Brazil, India, China

To diversify its currency reserves, Russia is thinking about buying bonds issued by Brazil, India and China, its fellow members of the BRIC countries, said Arkady Dvorkovich, the Russian government's top economic adviser. Russia would expect the other BRIC countries to reciprocate by purchasing the country's bonds, he said. The Wall Street Journal/The Associated Press.

China to loan Russia, Central Asian nations $10 billion: The Shanghai Cooperation Organization, of which Russia and four Central Asian nations are members, will get a $10 billion loan from China to bolster its members' economies. Chinese President Hu Jintao announced the deal at a summit of the organization in Yekaterinburg, Russia.

Obama To Unveil Regulatory Overhaul

The Obama administration will unveil its regulatory reform package tomorrow.

Opposition to financial regulatory revamp likely despite compromises
The Obama administration has already scaled back its proposed overhaul of the financial regulatory system, but some of the initiatives are still expected to face opposition. The proposal includes establishing a systemic federal regulator, providing greater oversight for derivatives and giving the government the authority to seize large institutions. "I think this is significant; I think they're headed in the right direction," said Lawrence White, a former economist and regulator at the White House. "They're trying to go up with a politically feasible proposal rather than a pie-in-the-sky one."

New Power For Fed

Financial regulatory overhaul, the Obama administration focus on this. The Fed may be the big winner. (Bloomberg News)

Obama's regulatory overhaul focuses on asset-backed securities

On Wednesday, the Obama administration is set to unveil its proposed overhaul of financial regulations and the regulatory framework. The changes would include a revamp of asset-backed securities. Buyers would get more information about the securities' underlying assets, while sellers would share in any losses. The EU also plans to adopt a requirement that sellers share in losses, a move that would prevent firms from simply shifting sales of asset-backed securities to European markets.

US Data May Indicate Bottoming

Economic reports are due this morning which may show we are within months of hitting bottom. (Bloomberg News)

Geithner: U.S. faces "exceptionally challenging time" Recovery of the U.S. economy will not come quickly, and unemployment will continue to rise, even after the healing process begins, Treasury Secretary Timothy Geithner said. "Recovery will be slower than we would normally see," he said. "This is still going to be an exceptionally challenging time for business and consumers."

BRIC Nations Meet in Russia

BRIC nations meet in Russia, while Boeing and Airbus battle for orders at the Paris Auto Show. CNBC's Guy Johnson and Yonotan Pomrenze have the highlights.

Inflation Concerns Brewing?

Inflation isn't a worry this year or next, but will be further down the road, Max King from Investec Asset Management told CNBC Tuesday. Ross Walker from Royal Bank of Scotland joined the discussion.

Monday, June 15, 2009

Dollar Rises As Russia Affirms Support

Dollar is rising against the Euro this morning after Russian Finance Minister says he has full confidence in the green back.

Obama Health Care Plan

The Obama plan calls for the creation of governments' insurance plan that operates along side private coverage.

Financial Regulatory Reform Plan

Obama prepares to unveil financial regulatory reform plan this week.

Health Care Proposals Likely to Divide Congress

Democrats divided on taxes to pay for health care

U.S. President Barack Obama is being pulled in opposite directions by fellow Democrats who are divided over how to pay for an overhaul of the health care system. Eager to win over Republican votes by limiting the deficit, some Democrats are pushing for health care taxes that might force Obama to break his promise not to raise taxes on the middle class. Other Democrats remain adamant that health care should be paid for by taxes on the rich.

The Long Predicted Regulatory Proposals Are Here

Obama to propose sweeping regulatory overhaul Wednesday

U.S. President Barack Obama's proposed revamp of the financial regulatory framework is expected to reach into every corner of the financial system. The plan includes giving the Federal Reserve authority to oversee the largest, most systemically important financial institutions and establishing a regulatory agency for consumer protection related to financial products. Lawmakers are expected to object to several of the proposal's more controversial ideas.

From today's Wall Street Journal

President Barack Obama is expected Wednesday to propose the most sweeping reorganization of financial-market supervision since the 1930s, a revamp that would touch almost every corner of banking from how mortgages are underwritten to the way exotic financial instruments are traded.

At the center of the plan, which administration officials are referring to as a "white paper," is a move to remake powers of the Federal Reserve to oversee the biggest financial players, give the government the power to unwind and break up systemically important companies -- much like the Federal Deposit Insurance Corp. does with failed banks -- and create a new regulator for consumer-oriented financial products, according to people involved in the process.

The plan stops short of the complete consolidation of power that some lawmakers have advocated. For example, it will allow several agencies to continue supervising banks. It also won't place specific limits on the size or scope of financial institutions, but it will make it much harder for large companies to be so overleveraged that they threaten the broader economy.

After Mr. Obama details his proposal, the process will quickly move to Capitol Hill, where Congress would have to pass legislation to enact the changes. Treasury Secretary Timothy Geithner is scheduled to appear before both Senate and House panels on Thursday, where he is likely to face questions and criticisms.

Lawmakers are expected to take issue with several of the plan's more thorny issues, including how to create a system that won't simply bail out large financial companies when they topple. Giving the Fed more clout -- in light of recent criticism from lawmakers, both Republican and Democratic, of its secrecy and accumulation of power -- will also be a controversial idea.

Democrats in Congress could push for more consumer-protection powers and stricter limits on executive compensation than administration officials want. And bureaucratic turf wars could emerge as some authorities are reapportioned. Administration officials say their goal is to make it less likely the economy will ever again teeter on the brink of collapse by giving policy makers more tools to arrest a crisis the next time one occurs.

They envision a less volatile financial marketplace where banks are encouraged, through tougher capital, liquidity and leverage requirements, to take fewer risks that have the potential to destabilize the economy. Hedge funds would be forced to register with the government and may face federal supervision if they are large and complex enough. Mortgages and other consumer products would be monitored by a new watchdog, and there would be global transparency rules over exotic financial instruments.

"Considerations of stability, safety and systemic risk have to loom larger in the planning, thinking, and strategizing of every financial institution going forward than they have in the past," White House National Economic Council Director Lawrence Summers said in a speech on Friday.

The proposal won't sweep away the confusing and sometimes overlapping patchwork of state and federal supervisors that often clash over jurisdiction. Critics say institutions have been shopping around for the regulator with the lightest touch and that systemwide problems fell through the cracks.

In fact, the proposal could lead to the abolishment of just one agency -- the Office of Thrift Supervision. With the proposed new consumer agency, the number of agencies overseeing finance would remain unchanged.

Officials say the goal is to distribute power in such a way that gaps in oversight are removed and the opportunities for regulator shopping reduced. Policy makers have pushed sweeping changes over the regulation of financial markets before with mixed results. In March 2008, then Treasury Secretary Henry Paulson proposed an overhaul of supervision, but Congress didn't take up the ideas.

Other efforts have had unintended consequences. The Clinton administration won legislation that broke down Depression-era barriers between commercial banking, investment banking and insurance, among other things. Mr. Obama has criticized that law for helping create some of the financial behemoths that threatened the economy last year.

The current White House, which made the revamp a centerpiece of its early months in office, is keen to move fast. "Experience teaches that once the crisis has passed, the will to reform will pass as well," Mr. Summers said in his speech.

The plan calls on the Fed to oversee financial institutions, products, or practices that could pose a systemic risk to the economy. It will create a "council" of regulators to monitor this area as well. Government officials believe this arrangement will forestall companies from growing large and overleveraged without substantial federal supervision, as happened, for example, in the case of giant insurer American International Group Inc.

The Fed will likely have the power to set capital and liquidity requirements for the U.S.'s largest financial companies and scour the books of a wide range of firms. It is unclear what enforcement powers the central bank will have; that likely will be a point of contention as lawmakers debate the issue.

How the Fed interacts with this council also will be a subject of debate. Administration officials envision the council being able to recommend that a specific company, product or practice be subject to Fed supervision, with the central bank ultimately accountable for each area or company that poses the systemic risk. This could set up clashes between the Fed and the council, especially if one is more hawkish than the other.

The goal is to avoid repeating a situation akin to the collapse of Lehman Brothers Holdings Inc., where the government had no authority to smoothly unwind the failing institution. A step such as this is expected to be exercised only rarely, and it could first require approval by the Treasury Department, Federal Reserve, and FDIC, people familiar with the process said. Once a company is placed into receivership, the process will likely be run by the FDIC. It is unclear how such a program will be financed.

On some potentially divisive issues, the administration tried to find a delicate balance, people familiar with the process said. For example, it won't call for the Securities and Exchange Commission to merge with the Commodity Futures Trading Commission, being unwilling to expend political capital on the battles with congressional fiefdoms that this move would spark.

But the proposal will push for much more "harmonization" between these two agencies. There has long been tension between them because many of the companies overseen by the SEC trade derivatives and other products regulated by the CFTC.

The new regulator overseeing consumer protection is expected to take some areas that once belonged to the Fed -- such as credit cards and mortgages -- but isn't expected to siphon off supervision of investment products such as mutual funds from the SEC.
Mr. Obama will call for several requirements to be adopted globally, such as tougher capital requirements for the largest financial institutions and the power to wind down large, globally interconnected banks. Administration officials also are calling for more transparency over complex derivatives that are traded by large, multinational companies.

"Risk and leverage will always tend to migrate to where the constraints are weakest," Mr. Geithner said Saturday after a meeting in Italy of finance ministers from the Group of Eight major powers. "We need a level playing field globally, or the effectiveness of our national safeguards against risk will be undermined."

House Financial Services Committee Chairman Barney Frank (D., Mass.) is expected to take up the measure on Capitol Hill soon and could have a comprehensive package passed by August. Senate Banking Committee Chairman Christopher Dodd (D., Conn.) said his panel could hold votes in the fall with a final measure completed by the end of the year. That is consistent with the administration's timetable.

Sunday, June 14, 2009

Ahmadinejad defiant as defeated rival protests vote

Iranian President Mahmoud Ahmadinejad defended his re-election at a mass victory rally on Sunday but his defeated rival demanded the result be scrapped, setting the stage for further tense confrontations after the authorities cracked down on opposition protests. Addressing a sea of thousands of flag-waving supporters packed into central Tehran, the hardline Ahmadinejad denied the result of Friday's vote another four years was "distorted."

Regulatory Reform Of Obama Administration

Analysis and discussion with Sen. Joseph Lieberman of Connecticut. He talks about the plans of the government to boost economy and for peace in the Muslim world.

Australia Welcomes Chinese Investment

Chinese investment is welcomed in Australia, reassures Australian minister for resources, energy & tourism at Martin Ferguson, after the failed deal between Chinalco and Rio Tinto left China fuming. He speaks with CNBC's Amanda Drury & Sri Jegarajah.

Obama plans sweeping financial regulations

Overhaul of Wall Street, Bank rules could be biggest changes since 1930s

President Barack Obama is ready to roll out an overhaul of the intricate rules and systems that govern America's troubled financial institutions, proposing the most ambitious revision since the Great Depression of the 1930s.

The goal is to prevent a recurrence of the economic crisis that erupted in the United States and exploded last fall with devastating consequences still reverberating around the world.

Unlike the government's temporary ownership stake in automakers and major financial companies, the regulatory changes set to be announced Wednesday are designed to be permanent. They could result in a major realignment of power and authority among government agencies that set the rules for banking, lending and investing and touch American lives through daily transactions, from credit cards to mortgages and mutual funds.

The proposals already are the source of a spirited debate in Congress over whether Obama's measures will prove too timid or place too heavy a hand on the levers of capitalism.

At issue is a 21st century system of high-stakes swaps and trades, bets and losses where trillions of dollars worth of investment products have grown too intricate for a 20th century regulatory structure.

Imagine today's financial transactions as an athletic contest where the referees have lost their vantage point. Plays occur out of their sight and fouls go undetected. Some referees halt play while others let it go on.

Even the players have had enough.

"On a macro-basis, we're very supportive of reform," said Tim Ryan, president and chief executive of the Securities Industry and Financial Markets Association.

In devising new regulations and oversight, the administration is looking to address four perceived weaknesses in the current system:

- The lack of an all-seeing federal entity to detect institutional stresses that threaten the financial system, and the government's inability to step in and unwind large institutions before they choke the system. The Federal Deposit Insurance Corp. can do this with banks. But the government lacked the power to do the same with a behemoth such as the insurer American International Group Inc.
- The undercapitalization of large financial institutions. Heading into the financial crisis, too many banks were leveraged with significantly more debt than equity. "If you give people enough leverage, they can lose an unbelievably large amount of their own money and that of their clients," Obama's chief economic adviser, Lawrence Summers, said last week.
- The emergence of large, lightly regulated markets, such as hedge funds, and of big insurers, such as AIG, without a federal overseer. The administration wants large private investment funds to register with the Securities and Exchange Commission and is weighing the creation of a federal charter for insurance firms.
- Consumers and lenders whose unwitting or reckless credit and borrowing decisions placed families under staggering debts and contributed to the instability of the financial system. Obama is likely to recommend creating a financial services consumer protection body with oversight powers over mortgages and credit cards and other consumer financial products.

Internally, the administration has vacillated over whether to streamline the vast array of regulatory agencies. At one point, Treasury and White House officials floated the idea of a single financial services regulator to oversee banks and certain insurers. But it didn't get a warm reception from the chairman of the Senate Banking, Housing and Urban Affairs Committee or the chairman of the House Financial Services Committee.

The administration backed away from the idea. But last week, Democratic Sen. Chuck Schumer of New York, a key player in financial issues, called on Treasury Secretary Timothy Geithner to include a single banking regulator in the administration's overhaul plan. House Republicans want streamlining, too, but would take power away from the Federal Reserve and the FDIC.

The administration considered merging the Securities and Exchange Commission, the powerful stock market regulator, and the Commodities Futures Trading Commission, which oversees commodity futures and some options markets. But the move would have meant congressional and regulatory turf battles. At a dinner two weeks ago, Geithner told key lawmakers he would not propose the merger.

"The Obama administration — because they're working in a more realistic environment — are into the art of the possible," Ryan said.

One way or another, the Fed could be a winner in the administration's plan.

The administration and Fed Chairman Ben Bernanke would like the central bank to be the overarching "systemic risk" regulator, lording over the financial system in search of flaws and weak stress points. Such a role would give the Fed exceptional authority as both the manager of monetary policy and the overseer of the enterprises with the biggest financial footprint in the country, if not the world.

Industry officials now expect Obama and Geithner to propose a system that makes the Fed a supervisor of systemic risk assisted by a council of regulators that would advise the central bank about potential dangers.

Also in the debate is how to handle failing institutions that pose a threat to the entire financial system. The administration wants a beefed up FDIC to carry out that function provided such intervention is triggered by Fed or Treasury regulators.

Republicans prefer that companies be restructured or liquidated in bankruptcy court.
Alabama Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, urged lawmakers to reject a regulatory system "that depends on the infallibility of the government regulators, who have so far shown themselves unable to anticipate crisis, let alone prevent them."

In a speech Friday to the Council on Foreign Relations, Summers offered the administration's counterpoint: "Any financial institution that is big enough, interconnected enough or risky enough that its distress necessitates government writing substantial checks, is big enough, risky enough or interconnected enough that it should be some part of the government's responsibility to supervise it on a comprehensive basis."

Thursday, June 11, 2009

Economic Outlook

Michael Pento, of Delta Global Advisors, and David Kotok, of Cumberland Advisors, share their outlooks on the economy.

Inside Look - Was Lewis Forced Into Merrill Deal?

Exclusive Interview with Rep. Eldophus Towns (D) of New York, Chairman of House Oversight Committee (Bloomberg News)

Inside Look - The Future of the U.S. Banking System

Roundtable Discussion with Lawrence White of NYU Stern School of Business and Dan Greenhaus of Miller Tabak.

Energy Outlook - Can the Oil Rally Sustain?

Oil Tops $73 a Barrel - Analysis and Discussion with Oil Outlooks & Opinions President Carl Larry (Bloomberg's Taking Stock)

American Consumer: Down But Not Out

U.S. retail sales edged up 0.5 percent in May, sparked in part by deep discounts, notably in autos. Definitely goods news, indicating the U.S. consumer is recovering. On a related note of optimism, home-improvement retailer Home Depot said fiscal year earnings may not fall as much as feared.

And yet another sign of the shifting consumer: investors are dipping into equities again. Long-term mutual funds have had positive inflows for 12-straight weeks, according to Investment Company Institute.

But reality looks more like a search for a "new normal," as noted by Mohammed El-Erian, CEO and co-CIO of Pimco. Case in point the U.S. auto sector: U.S. auto sales peaked at 17 million in 2005, but a new normal of 10 to 12 million a year going forward seems more likely and hopeful. So the consumer may be coming out of the bunker, but with unemployment on the rise and debt levels still very high, don't expect a recovery to the free-spending days of a few years ago anytime soon.

Rising Treasury Yields a Sign of "Healing," Not Inflation Fears, Kedrosky Says

Thursday's $11 billion auction of 30-year Treasury bonds debunked a myth about foreigners not wanting U.S. debt anymore, and provides another opportunity to discuss what rising Treasury yields "really" mean.

First, for all the hysteria over foreigners fading willingness to buy U.S. debt, an awful lot of them participated in the auction. Indirect bidders, which include foreign central banks, bought 49% of Thursday's auction vs. an average of 25.2% in the past 10 auctions, Bloomberg reports. (Notably, even Wednesday's "bad" 10-year auction saw indirect bidders take 34.2% of the $19 billion total vs. an average of 23.2% for the previous five, says Moody's

The bottom line: There is demand for U.S. debt at the "right" price and a lot of tough talk from foreign central banks is just rhetoric, at least for now.

Second, rising Treasury yields are a sign of "healing" in the financial markets -- not necessarily a signal of inflation fears as is often stated, says Paul Kedrosky, blogger and senior fellow at the Kauffman Foundation. Yields got artificially low during the heart of the crisis late last year and their rise is a signal of both economic stabilization and investors' renewed appetite for risk, Kedrosky says. The rally in stocks - the S&P 500 hit a 7-month high Thursday - is the most obvious example, with advancing commodity prices being a close second. But fixed-income investors are also moving out of the "safest" assets and into riskier sectors, which is a big reason why Treasury yields are rising, he notes.

Thursday, June 4, 2009

Bond Investors Bet On 'New' GM

G.M. may end up being worth more than Ford. Once G.M. leaves court protection, it will have a market value of roughly $33 billion. (Bloomberg News)

Regulatory Talk Is Front and Center in Washington DC

Lawmakers urge SEC to crack down on "naked" short selling

A bipartisan group of U.S. senators said the Securities and Exchange Commission needs to consider additional restrictions to curb "naked" short selling. For example, traders might be required to preborrow, or borrow shares before they attempt to short-sell the stock. "Unless the SEC can develop an appropriate alternative, a strict preborrow requirement may be the only way to adequately protect shareholders' rights," said Sen. Chuck Grassley, R-Iowa.

White House to detail regulatory overhaul June 17

The Obama administration plans to explain its proposal to reform financial regulation June 17, a source said. The plan is expected to be a blueprint for Congress as lawmakers try to restructure oversight of financial institutions and securities. On June 18, U.S. Treasury Secretary Timothy Geithner will testify before a House panel about the proposal, the source said. Lawmakers and the administration are striving to pass regulatory reform legislation by the end of the year.

SEC looks into claim of improper use of Lehman research

The U.S. Securities and Exchange Commission is investigating whether Lehman Brothers employees and others misused stock research, according to a letter made public by a senator. Edward Parmigiani, a former Lehman research analyst, raised the allegation involving information about impending upgrades and downgrades of shares.

CFA Involved in Criticism of Mark-to-Market Rule Change

Banks try to delay changes to off-balance-sheet accounting rule

A group of organizations from the financial-services industry sent a letter to U.S. Treasury Secretary Timothy Geithner saying changes to an accounting rule should be adopted "cautiously and seek to minimize any chilling effect on our frozen credit markets."

The changes, which could mean some companies would have to raise more capital, would force companies to move some off-balance-sheet vehicles, known as qualifying special purpose entities, onto their books. Investor groups, including the CFA Institute Centre for Financial Market Integrity, were considering their response to the banks' efforts on the off-balance-sheet and other accounting rules.

LIBOR Falls to Lowest Level Ever

Libor falls to record low as counterparty-risk fears recede The TED spread is now down to 50 bps - a level not seen since pre-Lehman crisis.

Amid increasing investor appetite for risk and a tightening of credit default swaps, Libor fell to the lowest rate since the British Bankers' Association began publishing it more than two decades ago. BBA data show the three-month U.S. dollar Libor, which peaked at 4.81875% in October, has plunged to 0.63688%.

Wednesday, June 3, 2009

Is There Any Growth Left in Information Technology?

Venture capitalist Vinod Khosla may have the largest cleantech portfolio in Silicon Valley, but he made his fame and fortune as an IT guy. So does the about-face mean IT growth is officially dead? Not if you pick and chose wisely. Khosla cites his investment in Aliph, the company that makes the Jawbone Bluetooth headsets. It did $500,000 in revenues in 2006 and a whopping $140 million last year. Guess what? It’s still growing even in the recession.

In the final segment of our rare sit-down interview with one of Silicon Valley’s most renowned investors, Khosla talks about what he likes in IT these days and what kind of companies he’s avoiding. The former Sun-founder also gives his thoughts on the Sun-Oracle deal.

But it’s not just IT that’s changed. The venture business itself has grown and matured during Khosla’s multi-decade career as an investor, and not all for the better. His thoughts on why venture capitalists need to focus more on the “venture part” and less on the “capital” on the clip.

The Great Jobs Debate

Insight on where the jobs market is heading next, with Craig Columbus, Advanced Equities Asset Mgmt.; Joseph LaVorgna, Deutsche Bank; and CNBC's Dennis Kneale.

GM's Real Cause of Death

Investigating the real reason that GM fell, with Peter Flaherty, National Legal & Policy Center; Martin Weiss, Weiss Research; and CNBC's Dennis Kneale.

Inside Look - Inflation vs. Deflation

Roundtable Discussion Featuring Former Fed Vice Chairman Alan Blinder and David Levy of the Jerome Levy Forecasting Center (Bloomberg News).

Inside Look - Has Anything Changed on Wall Street?

Future of the U.S. Banking System - a Bloomberg interview with William Cohan, Author of "House of Cards."

Tom Keene on the Economic Recovery

Interview and discussion with Tome Keene, Bloomberg Editor at large. He discuss the Baltic Dry Index moving in a boomlet attitude. "Nice bounce upward in the Baltic Dry Index."

Rep. Barney Frank Wants New Wall Street Regulations Sooner Rather Than Later

Rep. Frank wants house vote in regulatory reforms by end of July.

Investors pour money into inflation-protected Treasuries

Investors are concerned that stimulus efforts might spark a rise in prices, prompting them to flock to inflation-protected U.S. Treasuries. The yield gap between 10-year nominal notes and 10-year Treasury inflation-protected securities exceeded 2 percentage points for the first time since Lehman Brothers collapsed in September. The developments suggest investors expect annualized inflation to surpass 2% during the next 10 years.

Also, PIMCO Files To Enter Bond ETF Marketplace

It was probably just a matter of time. Pacific Investment Management Co., the home of bond fund maven Bill Gross and the world's largest bond fund manager, registered Tuesday for exemptive relief from the Securities and Exchange Commission to enter the exchange-traded funds market.

Although its filings still weren't up on the SEC's Web site in the morning, PIMCO officials confirmed that they've started the process to come out with a series of bond ETFs.

The first will track the Lehman Bros. Aggregate Bond index, one of the most widely followed U.S. benchmarks. Other ETFs on the market following that same benchmark include the $9.3 billion iShares Lehman Aggregate Bond index (NYSEArca: AGG) and the $1.8 billion Vanguard Total Bond Market ETF (AMEX: BND).

"We think it's a very logical extension. We view the ETF as an important delivery mechanism for our strategies," said Tammie Arnold, a managing director at PIMCO. The Newport Beach, Calif.-based firm now manages about $224 billion in U.S. mutual fund assets. "We have a long history as an active manager," Arnold said. "In respect to our ETF effort, we're evaluating a variety of strategies, both active and passive."

PIMCO also has a large separate accounts business. "We view the ETF business as an important additional vehicle for delivering strategies to our clients," added Arnold. Through June 30, PIMCO managed a total of $830 billion in assets. "Now, we're adding ETFs as another important vehicle," Arnold noted.

The first of PIMCO bond ETFs are likely to follow third-party benchmarks. That indicates at least a passive, or even quantitative, strategy. But with a successful record of managing active bond portfolios, can it be long before an active bond ETF is introduced by the fund giant?

Active Bond ETFs Coming?

The first active ETF was actually a bond fund. That's the Bear Stearns Low Duration Portfolio (AMEX: YYY), which launched on March 25. Its assets aren't readily available on Bear Stearns' Web sites. But a May tally of top ETFs by found YYY had about $50.2 million in assets. That's barely above the nearly $50.1 million it started out with (most likely through seed money Bear Stearns figured it needed to create enough liquidity to launch an ultra-short bond fund).

On April 11, the Invesco PowerShares Active Low Duration Fund (NYSE: PLK) came out. It was also marketed as an active bond ETF. But it has only attracted about $2.5 million in assets so far. By contrast, bond ETFs as a whole had slightly more than $45 billion in assets through June, according to the Investment Company Institute, an industry trade group. That was just a fraction of the nearly $578.1 billion in assets for ETFs as a whole. But it represented a big leap from $25.9 billion a year ago.

"PIMCO's entering the field is great news for the ETF marketplace," said Tom Lydon, a Newport Beach, Calif.-based advisor who also runs "We're still near record lows in terms of interest rates," he added. "With stock markets down, a proven asset manager like PIMCO could be entering at a very opportune time."

The ETF market has seen many new bond competitors come into the field during the past 18 months, he notes. "What PIMCO is probably positioning itself to do is become a major player by getting into bond ETFs early in the game," Lydon said, noting that fixed-income ETFs didn't start proliferating in the marketplace until last year.

A big question, however, is how active PIMCO's offerings will be as its lineup grows. "As of today, there are no active ETFs in the marketplace that don't offer daily transparency," Lydon said. "It'll be interesting to see if PIMCO's filing will attempt to do anything different—if and when they actually enter the active bond ETF market."

Get Ready for More of This: Chinese Company Tengzhong to Buy GM's Hummer

General Motors Corp., seeking to shed assets to emerge from bankruptcy, agreed to sell the Hummer sport-utility vehicle brand to China’s Sichuan Tengzhong Heavy Industrial Machinery Co. Tengzhong will assume Hummer’s dealer agreements and a senior management team, the companies said in a joint statement yesterday. GM and Tengzhong also plan to form a long-term contract assembly and supply agreement. Hummer is worth an estimated $500 million, GM said in bankruptcy court documents.

Selling Hummer will secure more than 3,000 U.S. jobs and help GM move toward a goal of offloading four U.S. brands to exit bankruptcy as a leaner, more profitable company. The deal may also help Tengzhong grow in China’s SUV market, which surged 25 percent last year on rising affluence.

“There are a lot of new rich in China who like niche brands such as Hummer,” said Ricon Xia, a Daiwa Institute of Research (H.K.) Ltd. analyst in Shanghai. “A lot of private companies like Tengzhong have emerged because of the economic boom and they will strike more surprising deals like this one.”

Detroit-based GM has won court approval to sell assets as soon as next month after collapsing under $172.8 billion in debt and failing to adapt to consumer demands for cars that use less fuel. GM also plans to sell Saturn and Saab and wind down the Pontiac line. Sixteen potential buyers have expressed interest in Saturn, Chief Financial Officer Ray Young said on a conference call yesterday.

Tengzhong’s Expansion

For Tengzhong, a privately owned maker of special-use vehicles, structural components for highways and bridges, and construction machinery, buying Hummer will add a brand with cachet it can use to expand in emerging markets, said Desmond Wong, chief executive officer of Chicago-based Sino Strategies Group.

“This is a good acquisition for Sichuan Tengzhong and a good sale for GM,” said Wong. “They can do the manufacturing and marketing in the U.S., but in addition to that they can produce Hummer elsewhere for markets such as China, India and the Middle East.”

The Hummer sale should be completed by the end of the third quarter. Credit Suisse Group AG is acting as financial adviser and Shearman & Sterling is serving as international legal counsel to Chengdu, China-based Tengzhong. Citigroup Inc. is acting as financial adviser to GM.

Chinese Deals

Tengzhong follows SAIC Motor Corp., China’s biggest domestic automaker, and Geely Holding Group Co. in pursuing overseas acquisitions as Chinese automakers seek technology to build more sophisticated and profitable vehicles. Sichuan, where Tengzhong is based, is also a mountainous province full of winding roads suitable for off-road vehicles.

Still, Chinese automakers haven’t always benefited from overseas deals. SAIC bought rights for cars designed by U.K. automaker MG Rover Group Ltd. in 2005 to temper its reliance on partners GM and Volkswagen AG. Last year, GM and Volkswagen vehicles still accounted for more than 90 percent of sales. SAIC’s South Korean unit, Ssangyong Motor Co., entered receivership in February after sport-utility-vehicles sales plunged.

Geely, China’s biggest private automaker, in March agreed to buy Australian gearbox-maker Drivetrain Systems International. The carmaker is also in talks to buy Ford Motor Co.’s Volvo Car Corp. unit, according to people familiar with the situation.

U.S. Support

GM is getting more than $50 billion of loans from the U.S. government to help reorganize after filing for bankruptcy earlier this week. Bill Burton, deputy White House press secretary, reiterated in an e-mailed statement President Barack Obama’s pledge to take a “hands-off” approach to GM.

The U.S. government “is not going to get involved in the day-to-day business decisions of GM -- and this is an example in which it did not,” Burton said. “GM reached an agreement that will keep thousands of Americans working in a situation that could have ended instead with a devastating liquidation of this company.”

GM bought the license for the Hummer brand from AM General in 1999 and started selling the $140,000 H1, a 7,600-pound (3,400-kilogram) SUV patterned after the all-terrain military vehicle popularized for road use by actor Arnold Schwarzenegger, now California’s governor.

While the H1 never sold more than 875 units a year, the model won enough of a following for GM to add the 6,600-pound H2 in 2002. The 4,700-pound H3 followed in 2005. GM also started building the H3 in South Africa in 2006 for Europe, the Middle East and Africa.

Rising gasoline prices eventually eroded demand. GM halted production of the H1 in 2006 as sales dwindled. Hummer’s U.S. deliveries peaked at 71,524 that year, according to Autodata Corp. U.S. sales of the SUVs, which start at about $31,000 for the H3, fell 51 percent in 2008 and 67 percent this year through April.