financial crisis

Letters: Letters: Protests and Solutions

December 17, 2011 by NewsMaker Leave a Comment

In “Know What You’re Protesting” (Economic View, Dec. 4), N. Gregory Mankiw repeats the often-heard complaint that many Occupy protesters — and, in his case, students who walked out of his own course — have “no clear policy prescriptions” for our current economic mess.

But why should students in an introductory economics class, or others without economic training, be the ones to come up with solutions? The purpose of the protests is to keep the problem in the public limelight and, it is hoped, force elected officials to do something about it rather than just kick the can down the road and take political postures.

Solutions exist, but part of the problem is that we are dealing with conflicting economic theories that have been taken to extreme positions by both sides. Until Washington relearns the art of compromise, this mess will continue. Charles Repka

East Windsor, N.J., Dec. 5

To the Editor:

In the column, N. Gregory Mankiw makes this statement: “I don’t view the study of economics as laden with ideology.” He then goes on to say that “the recent financial crisis, economic downturn and meager recovery are vivid reminders that we still have much to learn.”

He seems not to understand that economists aren’t really objective and dispassionate scientists. Economics is merely a set of tools with which we build the kind of society we want to live in. Defining what that means is, of course, an ideological proposition, and thus all economic “theory” is freighted with ideological baggage.

And by treating the current economic crisis as a teachable moment, not as a result of very specific economic policies, the column pooh-poohs anyone who would hold economic ideas accountable for the mess we are in.

Indeed, to judge by the economic policies being promoted by Mitt Romney, whom Mr. Mankiw serves as an adviser, neither Mr. Romney nor Mr. Mankiw has learned anything about what caused our economy to fall off the cliff in 2007. Steven Conn

Yellow Springs, Ohio, Dec. 4

The writer is a history professor at Ohio State University.

Article source: http://feeds.nytimes.com/click.phdo?i=029207a616a20e0f07f4d9108e6963b2

Filed Under: Business News Tagged With: economic downturn, financial crisis, mitt romney

Nick Clegg Criticizes David Cameron on Europe Vote

December 12, 2011 by NewsMaker Leave a Comment

Mr. Clegg told the BBC that the decision by Prime Minister David Cameron, a Conservative, to veto proposed European treaty changes left Britain in danger of being “isolated and marginalized” in Europe. He added that if he had been in charge, “of course things would have been different.”

Mr. Cameron vetoed the proposals early Friday after seeking, and failing to secure, safeguards he said were vital for the health of London’s financial sector. But with the 26 other members of the European Union either agreeing to the proposed plan outright or saying they would put the matter before their Parliaments, Mr. Cameron’s veto left Britain alone on the margins at a time of great upheaval on the Continent, with the European Union struggling to resolve its financial crisis.

On Friday, Mr. Clegg appeared to support Mr. Cameron’s decision, although he warned the Conservative Party’s anti-Europe wing against being too triumphant about the problems facing the European Union. But his stance hardened over the weekend, and on Sunday he appeared to have backtracked, or at least tried to finesse his explanation to show that was in line with his party’s pro-Europe principles.

In fact, Mr. Clegg told the BBC that when Mr. Cameron called him at 4 a.m. Friday with the news that Britain had vetoed the plan: “I said this was bad for Britain. I made it clear that it was untenable for me to welcome it.”

Mr. Clegg has already lost the confidence of many Liberal Democrats by appearing to betray the party’s position when he has supported the government on other issues, like increasing the amount of tuition colleges can charge.

After the summit meeting, many prominent Liberal Democrats went further than Mr. Clegg.

A former party leader, Paddy Ashdown, described Mr. Cameron’s veto as a “catastrophically bad move” and said it would do nothing to shield London’s financial district, the City, from future European regulations. “In the name of protecting the City, we have made it more vulnerable,” he said.

Lord Ashdown also warned that the move had alienated Europe in a way that would haunt the United Kingdom.

“The anti-European prejudice of some in the Tory party,” he said, “has now created anti-British prejudice in Europe.”

Mr. Clegg, a former member of the European Parliament, said he would now “fight, fight and fight again” to make sure Britain remained an influential force inside the European Union. He said he would resist “tooth and nail” efforts by some Conservatives to take the country completely out of the union, particularly since the United States has found Britain a useful conduit to Europe.

“A Britain that leaves the E.U. will be considered irrelevant by Washington and a pygmy in the world, when I want us to stand tall in the world,” he said.

Mr. Clegg criticized Conservatives who had hailed Mr. Cameron as a “British bulldog” for his tough line on Europe.

“There’s nothing bulldog about Britain hovering somewhere in the mid-Atlantic, not standing tall in Europe, not being taken seriously in Washington,” he said.

To which one Conservative member of Parliament, Mark Pritchard, retorted, “Better to be a British bulldog than a Brussels poodle,” The Associated Press reported.

Mr. Cameron, meanwhile, was welcomed as a hero by his party’s anti-Europe right wing. “Up Eurs,” was the headline in Rupert Murdoch’s populist, anti-European tabloid newspaper, The Sun, along with a photograph of Mr. Cameron in a Churchillian bowler hat, holding two fingers up to Europe — the equivalent of an American middle finger.

“He did what I would have expected Margaret Thatcher to have done,” Andrew Rosindell, a Conservative member of Parliament, said approvingly.

But Kenneth Clarke, the Justice secretary and the Conservatives’ most prominent pro-Europe member, said in a radio interview that Mr. Cameron’s veto was a “disappointing, very surprising outcome.” He said he would be listening carefully to the prime minister’s statement in Parliament on the matter on Monday.

As upset as he is, Mr. Clegg said he did not want the coalition government to collapse.

“It would be even more damaging for us as a country if the coalition government was to fall apart,” he said. “That would cause economic disaster for the country at a time of great economic uncertainty.”

Article source: http://feeds.nytimes.com/click.phdo?i=7bae711affbc0e0abf23a7fec966e894

Filed Under: Economy News Tagged With: conservative party, financial crisis, paddy ashdown

Signs of Broad Contagion in Europe as Growth Slows

November 16, 2011 by NewsMaker Leave a Comment

Published data showed that the euro zone economy grew marginally in the third quarter, kept above water by France and Germany, in what analysts interpreted as probably a last gasp before debt problems dragged the Continent into recession.

Traders said the big moves in the bond markets came as investors continued to shed exposure to European debt.

With few buyers, interest rates on Italian government bonds again rose above 7 percent — the kind of market pressure that last week led to the ouster of Prime Minister Silvio Berlusconi.

But they also continued to increase in France, Spain and Belgium. They also moved upward in Finland, Austria and the Netherlands, which have relatively strong underlying financial positions and until recently had mostly been spared the full effects of the financial crisis.

“The concern is spilling over to the other candidates that could be next for the domino effect behind Italy,” said Millan Mulraine, an interest rate strategist at TD Securities in New York. “The ubiquitous nature of the increase in yields suggests that the problem is spreading well beyond the troubled peripheral countries.”

In recent weeks, the European Central Bank has been regularly buying government bonds to try to push down interest rates. But Mr. Mulraine said the bank bought a smaller amount than usual on Tuesday.

Without the central bank’s usual presence in the markets, bond prices fell and yields rose, and investors appeared to worry that a widening circle of European nations could be dragged into the Continent’s problems.

“While France has for weeks been under some market pressure, with fears over the country’s AAA-rating to the fore, the likes of the Netherlands and Finland had proved immune,” analysts at Daiwa wrote in a research note. “That no longer appears to be the case.”

Yields jumped a quarter of a percentage point in Spain, to nearly 6.35 percent, and about the same in France, to nearly 3.7 percent. They spiked even more in Italy and crossed the 7 percent level, which economists consider unsustainable. The gap between those rates and Germany’s 1.8 percent yield also widened to levels that some analysts saw as alarming.

Analysts said they expected the central bank to return to the markets soon, and with a much more aggressive program of bond buying, to put a ceiling on rates.

Compounding euro zone anxieties was a report Tuesday that gross domestic product for the region barely grew 0.2 percent from July through September, compared with the previous three months. That was the same growth rate as in the previous quarter.

In contrast, the United States economy grew by 0.6 percent in the third quarter from the second, while the Japanese economy grew 1.5 percent.

The data from Eurostat, the statistical office of the European Union, did nothing to alter a consensus among economists that euro area output had already begun to decline since September.

Anxiety about the sovereign debt crisis has led businesses and consumers to cut spending, and government austerity programs have contributed to deep recessions in countries like Greece and Portugal.

Economists define a recession as at least two consecutive quarters of declining output.

The third-quarter figures “have little bearing on the bigger question — namely how is the sovereign debt crisis going to be resolved and at what collateral damage to the real economy?” Jens Sondergaard, senior economist for Europe at Nomura, said in a note to clients.

The huge risk facing Europe is that debt problems and slower growth will create a downward spiral that policy makers may not be able to stop.

If economies slow, then government tax revenue will decline. That, along with higher borrowing costs, would increase fears that countries like Italy may not be able to service their debt. In that cycle, confidence and growth suffer further.

François Cabau, an analyst at Barclays Capital, said in a note Tuesday that if business confidence continued to fall during the rest of 2011, the downturn “could prove to be larger than we currently expect, depressing private domestic demand even further.”

Ample data has pointed to an impending slowdown in the euro area, including reports last week of declines in industrial production and retail sales.

The European Commission, citing painful budget-balancing measures that will weigh on output, cut its growth forecast last week for the 17 euro zone nations, to 0.5 percent in 2012, and predicted that Greece’s recession would deepen.

But even that gloomy forecast is starting to seem too optimistic.

Germany, the largest economy in Europe, has been bucking the downward trend so far. Its economy grew by 0.5 percent in the third quarter, compared with 0.3 percent in the second, according to the data released Tuesday.

French growth continued to hold up in the third quarter, but that is not expected to last, either.

Olli Rehn, the European commissioner for economic and monetary affairs, said last Thursday that the European Union’s economic recovery had “now come to a standstill, and there is a risk of a new recession.”

Article source: http://feeds.nytimes.com/click.phdo?i=71988385c835b7813ce412b5274a3477

Filed Under: Business News Tagged With: financial crisis, prime minister silvio berlusconi, silvio berlusconi

G.A.O. Says New York Fed Failed to Push A.I.G. Concessions

November 1, 2011 by NewsMaker Leave a Comment

The report, by the Government Accountability Office, says that New York Fed officials have offered inconsistent explanations for their decision to pay other financial companies the full amounts they were owed by A.I.G., and that some of the explanations were contradicted by other evidence.

The report also asserts that the decision to pay the full amounts, rather than seeking concessions as the government later did in other cases, disregarded the expectations of senior Fed officials in Washington and the expressed willingness of some of the companies to accept smaller payments.

In one case, when a company offered to accept a smaller amount of money, officials at the New York Fed responded that they had decided to pay the full amount of the debt, the report said.

The agency’s report revisits a controversial chapter in the history of the financial crisis: the government’s decision to sink tens of billions of dollars into A.I.G., the world’s largest insurance company, which was running out of money to cover its vast and losing bets on the health of the housing market. Much of that money was then paid to other companies to honor their outstanding contracts with A.I.G.

The basic conclusion echoes the findings of previous federal investigations. The rescue mission succeeded, but efforts to minimize the costs and risks borne by taxpayers were insufficient. But the new report also raises concerns about the explanations subsequently offered by New York Fed officials.

For example, the G.A.O. says that officials at first told its investigators that they had initiated discussions about possible concessions with most of the 16 companies that stood on the other side of insurance-like contracts, called credit-default swaps, with A.I.G.

Then, according to the report, the officials said they had contacted eight companies before abandoning the effort. Even then, the report said, only four of those companies confirmed that they had been contacted by the Fed.

The New York Fed declined to comment on the specific account of the negotiations. Officials of the bank, including Timothy F. Geithner, then the president of the New York Fed and now the Treasury secretary, have testified that they needed to act quickly to prevent greater damage to the financial system, and that they chose the approach that was most likely to succeed and easiest to enact.

The bank said in a statement Monday that it had “put together an effective lending program that minimized disruption to the economy from A.I.G. while safeguarding the taxpayer interest.”

Representative Elijah E. Cummings, Democrat of Maryland and the ranking member of the House Oversight Committee, said the report highlighted the importance of the financial legislation passed last year.

“This report reinforces the need to implement provisions in Dodd-Frank that will prohibit the use of taxpayer dollars to artificially prop up or benefit one firm,” said Mr. Cummings, who with Representative Spencer Bachus, Republican of Alabama and the chairman of the House Financial Services Committee, requested the report as a final word on the controversy.

The Federal Reserve Board of Governors voted in September 2008 to let the New York Fed lend up to $85 billion to A.I.G. as part of a deal that placed the company under federal control. The bailout was expanded several times, ultimately expanding to more than $180 billion. And roughly a quarter of that money was used to pay 16 companies that had bought credit-default swaps from A.I.G. — a roll call of the most prominent names on Wall Street, including Deutsche Bank and Goldman Sachs.

Federal Reserve officials in Washington expected that the New York Fed would negotiate discounts with those companies since, without the government’s intervention, they might have received far less.

An analysis commissioned by the New York Fed recommended concessions around $1.1 billion to $6.4 billion. But according to the New York Fed, when it asked companies if they were willing to accept voluntary discounts, only one company said yes, conditional on everyone else doing it, too.

New York Fed officials told the G.A.O. that they had little leverage to secure concessions from the companies. Moreover, they concluded that A.I.G.’s inability to secure concessions in earlier negotiations suggested that the banks were unwilling to compromise. And they were constrained by a decision to apply the same repayment terms to all of the counterparties.

The G.A.O. report questions the basis of the Fed’s insistence on equal treatment, noting that there were significant differences in the quality of the assets covered under the insurance agreements, and therefore the potential losses for each company were quite different. An analysis found that under extreme conditions, the losses would vary from 75 percent of the original value down to 1 percent.

The differences, the study concluded, “might have offered an opportunity to lower the amount” that the government sank into the rescue. Fed officials told the G.A.O. that negotiating with each company individually was impossible given the pressure to act.

The report also questions the Fed’s assertion that it could not wrest concessions from French banks — who held some of the largest contracts — because French law banned them from accepting discounts unless A.I.G. had filed for bankruptcy. A French official told the G.A.O. that there was no such prohibition, although such a decision might have raised legal concerns.

The Fed’s actions contrast with the agreement that European governments, led by Chancellor Angela Markel of Germany, secured from some of the same institutions in October to accept discounts of up to 50 percent on their holdings of Greek debt.

Article source: http://feeds.nytimes.com/click.phdo?i=3280afc6c84152606d5afad33802e113

Filed Under: Business News Tagged With: credit default swaps, federal investigations, financial crisis

France to Defend Credit Rating After Moody’s Warning

October 19, 2011 by NewsMaker Leave a Comment

Officials are working on the broad outlines of a three-pronged agreement to keep the debt crisis from spiraling into Europe’s large countries.

They have been giving serious consideration to increasing the size of a new euro zone bailout fund of 440 billion euros to at least 1 trillion to 1.5 trillion euros (about $1.3 trillion to $2.06 trillion), an idea pushed by the United States Treasury secretary, Timothy F. Geithner, who argues that similar action helped stem the financial crisis that started on Wall Street in 2008.

Europeans are also discussing recapitalizing many European banks as insurance in case the crisis worsens; as well as forcing banks to take sizable losses on their holdings of Greek debt to help the country get back on its feet.

The discussions have taken on greater urgency since Moody’s warned late Monday of a possible downgrade to France’s flawless credit rating. French finance officials worry that any such move would make it hard for Paris to negotiate solutions, according to an official who was not authorized to discuss the situation publicly.

The rally in American stock markets was set off by a report late Tuesday on the Web site of The Guardian, a British newspaper, that France and Germany had agreed to increase the size of the rescue fund — the European Financial Stability Facility — to as much as 2 trillion euros to contain the crisis and backstop Europe’s banks. But almost as soon as those hopes soared, European officials quickly brought them back to earth, with denials flooding forth from Brussels, Paris and Berlin.

This latest round of rumors and rebuttals about a European solution was a repeat of earlier situations.. Such episodes have played out several times since the debt crisis intensified this year. Most recently, investors have been pegging hopes on a meeting of Europe’s leaders set for this coming Sunday in Brussels, anticipating that a comprehensive solution to the debt crisis might be unveiled.

Fueling those hopes had been impressions given last weekend in Paris, at a meeting of finance ministers from the Group of 20, that a grand plan was forthcoming. Those conveying such signals included the French finance minister, François Baroin.

Mr. Geithner said at the Paris meeting that he was encouraged by the speed and strategy of the European planning, but said the Europeans still had a lot of work to do on the fine print. “As you know it’s all in the details, and it’s very hard to judge the impact something will have until you see it take shape,” he said.

And on Monday, Chancellor Angela Merkel of Germany quickly brought things back to reality, warning that “dreams” of a package that would immediately resolve the problems were unrealistic.

Eventually, whether this coming weekend or sometime after, European leaders will almost certainly come forward with some form of solution that they hope will convince investors that they have the wherewithal to keep the crisis from infecting Spain and Italy, the third- and fourth-largest economies in the euro monetary union. That is the foremost goal of all their efforts.

But should the leaders fail to devise a convincing enough plan, there is widespread fear the borrowing costs for both of those countries will rise so high that the governments will be shut out of borrowing in international markets — the same way Greece, Ireland and Portugal were before they had to be bailed out. The overriding worry, though, is that there may not be enough money to bail out Italy and Spain, or to keep the contagion from spreading even farther.

Finance officials want to have something in place before their bosses — the presidents and prime ministers of the Group of 20 industrialized nations — gather Nov. 3 and 4 in Cannes, France, to discuss the economic and financial problems that now plague both the European and American economies.

But even if a deal on the bailout fund is agreed to, any stock market rally might not prove to be permanent, as the realization sank in that the costs could weigh heavily on certain countries for some time to come. That was the case in the autumn of 2008, when American officials struggled to contain the fallout from the demise of Lehman Brothers. Back then, a number of market relief rallies were followed by a continuing decline in stocks.

A fresh reminder of the current crisis’s contagion dangers came on Tuesday, when France rushed to defend its AAA credit rating — one of the few top ratings left among major Western economies — after a warning by Moody’s Investors Service that the French government was at risk from the Continent’s widening sovereign debt problems. Mr. Baroin was compelled to go on French television Tuesday to declare the government would “do everything to avoid being downgraded.”

The price that France pays to borrow on international financial markets compared with Germany surged on Tuesday to its highest level since the euro was introduced in 1999. Rising borrowing costs are what pushed weaker countries, including Greece, Ireland and Portugal, to seek bailouts.

More problems in Italy or Spain would stretch the finances of big countries like France and Germany even further.

While France’s accounts are still in better shape than those of many of its neighbors, they could deteriorate if the government provided significant financing to other European countries or to its own banking system in a bid to keep the euro crisis from spiraling. Such moves could give rise to significant new liabilities for the government’s balance sheet, Moody’s warned.

President Nicolas Sarkozy has made it a priority to keep France’s top rating intact, especially headed into a campaign against his Socialist opponent, François Hollande — who, like Mr. Sarkozy, has vowed to cut France’s deficit to 3 percent of gross domestic product by 2013.

Stephen Castle contributed reporting from Brussels, and Louise Story from New York.

Article source: http://feeds.nytimes.com/click.phdo?i=84370cdcc051229515f8da6f8fa88c2c

Filed Under: Business News Tagged With: euro zone, european solution, financial crisis

Volcker Rule to Take Shape This Week

October 11, 2011 by NewsMaker Leave a Comment

The proposed rules would allow firms to do so in areas where regulators believe healthy markets would not exist without Wall Street’s own trading, including the markets for government bonds, commodities and foreign currencies. And some otherwise-forbidden bets would be allowed only if they are used as a hedge, to keep a Wall Street firm from losing money on a transaction made to accommodate a customer’s trading.

But most trades that Wall Street firms now make with their own money — betting on an individual stock or a basket of shares, for example, or trading complex derivatives and swaps — would be prohibited. The rules, part of the Dodd-Frank law, are intended to limit the ability of banks that have government guarantees and Federal Reserve borrowing privileges to take outsize risks.

That principle seemed fairly simple when it was proposed last year by Paul A. Volcker, the former Federal Reserve chairman who was a sharp critic of bank trading practices leading up to the financial crisis.

But as a 205-page draft of the proposed rules demonstrates, it is more difficult to draw up restrictions that rein in risky trading practices on Wall Street without also killing the ability of beneficial financial markets to operate.

People on both sides of the issue have found things to like and dislike. “There are some encouraging signs in the draft,” Bartlett Naylor, a financial policy advocate for Public Citizen, a pro-consumer group, said in an interview. But, he added, “it doesn’t completely eliminate some of the mischief we saw” in the run-up to the financial crisis.

Randy Snook, executive vice president for business policies and practices at the Securities Industry and Financial Markets Association, the Wall Street trade group, says that while the draft contains some common-sense restrictions on trading by banks, “our concern is that the list of permitted activities might be too narrow.”

The draft, which was dated Sept. 30 and published by the American Banker last week, might be significantly different from what is officially released later this month by the four agencies that are working on the rules: the Office of the Comptroller of the Currency, the Federal Reserve, the Securities and Exchange Commission and the Federal Deposit Insurance Corporation. The F.D.I.C. on Tuesday will be the first to release a version of the rules for a 60-day public comment.

The draft document contains hundreds of questions on which the agencies will seek comments — a sign that “suggests disagreement among agencies” on some of the details, according to lawyers at Davis Polk Wardwell, which prepared a memo for clients last week summarizing the rules.

The most fundamental of those disagreements is likely to be where the line should be drawn between bona fide market-making activity, where a bank’s traders offer to buy and sell a security to meet the trading desires of customers, and short-term trading with the bank acting as a principal in transactions solely for its own benefit.

That could be a particular problem in the corporate bond market, analysts say. Companies usually have one class of equity shares outstanding, and at any given time dozens of investment firms might be offering to buy and sell the stock. But the same company could have hundreds of different bonds outstanding, many of which trade infrequently, if at all.

If a bank’s trading desk offers to take the other side of a transaction desired by a firm’s customer, determining whether that is a short-term trade for the bank’s own benefit or real market-making is a judgment call. According to the draft rules, the volume and risk associated with such a trade must be “proportionate to historical customer liquidity and investment needs.”

That would suggest that a firm that has not previously bought and sold a security could not start doing so — a stance that could significantly limit trading in many corporate bonds. And if investors believe it might be difficult in future years to trade a company’s bonds, its ability to raise money to invest in its business could be difficult.

“If the market-making definition is too narrow, that kind of activity will be curtailed,” Mr. Snook, of the securities industry group, said. “That will cause the cost of financing to go up, restrict the ability of companies to get access to capital and therefore to hire and expand.”

Nr. Naylor of Public Citizen says there should be further limits on market-making activity, especially on “the sort of thinly traded, esoteric instruments for which there is not natural demand” — like some of the collateralized debt obligations and other derivatives whose collapse contributed to the financial crisis.

Moody’s said on Monday that if the draft that surfaced last week was not significantly changed before it became final, it would probably “diminish the flexibility and profitability of banks’ valuable market-making operations and place them at a competitive disadvantage to firms not constrained by the rule.”

Specifically, that means offshore banks and investment firms. There are restrictions against American banks moving otherwise-restricted operations offshore. But banks that do not have subsidiaries operating in the United States can continue to trade freely, both for themselves and on behalf of clients.

A lawyer at one large firm that specializes in the financial business, who spoke on the condition of anonymity because she did not want to bring regulators’ attention to her clients, said that that competitive disadvantage could begin to erode New York City’s importance as a financial center and help the fortunes of offshore banks based in London, Dubai, Hong Kong and elsewhere.

Still others note that the proposed rules call for a significant increase in the level of internal compliance and oversight at banks, something that will discourage the casino culture that has long pervaded the proprietary trading operations of large banks. Large firms could be required to provide to regulators as many as 22 separate metrics or gauges of investment activity each month to prove that they are playing by the rules.

The regulatory staff who worked on the rules would not comment until the document is formally released.

Whether the proposed rules will satisfy Mr. Volcker, who called for the end of “essentially speculative activities” by banks, is unclear. He has declined to comment until an official version of the proposed rules is released.

Article source: http://feeds.nytimes.com/click.phdo?i=360efacea097e805cfb38fa08a667ac2

Filed Under: Business News Tagged With: consumer group, financial crisis, trade group

S.E.C. Finds Problems at Credit-Rating Agencies

September 30, 2011 by NewsMaker Leave a Comment

The examinations were mandated in the Dodd-Frank regulatory law passed last year after numerous investigations into the causes of the financial crisis. Several of those inquiries found that the agencies issued inaccurate reports, failed to report or manage conflicts of interest and put generating revenue ahead of rigorous financial analysis.

For the investing public, however, the S.E.C.’s report is likely to be of limited value because the commission declined to name the credit ratings agencies at which it found deficiencies. Instead, it refers to its findings as occurring either at one or more of the three large agencies — Moody’s Investors Service, Standard Poor’s and Fitch — or at one or more of the seven smaller ratings firms.

The report also found that all three of the large agencies and four of the small ones had weak controls or inadequate policies for ownership of securities by employees.

The findings have not resulted in any enforcement actions by the agency, but staff members could refer some or all of its findings to the enforcement division for further investigation.

Inflated credit ratings were the subject of several investigations into the causes of the financial crisis. A report by the Senate permanent subcommittee on investigations issued in April noted that more than 90 percent of the highest, or AAA, ratings given to mortgage-backed securities in 2006 and 2007 “were later downgraded to junk status, defaulted or withdrawn,” causing huge investor losses.

In a conference call with reporters, commission staff members said it was not forbidden by the Dodd-Frank statute or the commission’s own regulations from disclosing the names of the companies whose procedures it found deficient. Carlo Y. di Florio, director of the office of compliance inspections and examinations, said, “We made a decision internally that it was most effective” not to name the companies.

“We didn’t name names because we are separately following up” with each ratings agency about the findings, Mr. di Florio said, a path he said was “more efficient.”

The commission’s report said that each of the three larger ratings agencies “has made changes to improve its operations” since the last periodic examination in 2007-8. But the report also noted that all of the 10 agencies “failed to follow their ratings procedures in some instances.”

The report specifically said that the failure of one of the largest ratings firms to follow its own procedures resulted in ratings of asset-backed securities that were inconsistent with its publicly disclosed standards. “The staff is concerned about the extent to which market share and business considerations may have contributed” to the failure, the report said.

Mr. di Florio declined to disclose the company’s name. A footnote in the report said that the agency itself reported its analysis error as the S.E.C. staff was conducting its examination, which covered the period Dec. 1, 2009, through Aug. 1, 2010.

In August 2010, the S.E.C. released a separate report on its investigation of Moody’s, which found that the company made false statements in its registration as a ratings agency with the S.E.C. and failed to follow its procedures and methodologies for determining credit ratings.

Article source: http://feeds.nytimes.com/click.phdo?i=36dea2c1927fef6f5573f4606a75ecde

Filed Under: Economy News Tagged With: enforcement actions, financial crisis, senate permanent subcommittee on investigations

News Analysis: In European Crisis, Little Hope for a Quick Fix

September 30, 2011 by NewsMaker Leave a Comment

What is going on?

The problem, say close watchers of both the subprime financial crisis in 2008 and the European government debt crisis today, is that many investors think there is a quick and easy fix, if only government officials can agree and act decisively.

In reality, one might not exist. A best case in Europe is a bailout of troubled governments and their banks that keeps the financial system from experiencing a major shock and sending economies worldwide into recession.

The latest rescue package for Europe gained approval from Germany on Thursday, after Chancellor Angela Merkel won a vote in Parliament, throwing the financial weight of the Continent’s biggest economy behind a new deal.

But a bailout doesn’t wipe out the huge debts that have taken years to accumulate — just as bailing out American banks in 2008 didn’t wipe out the huge amount of subprime debt that homeowners had borrowed but couldn’t repay.

The problem — too much debt and not enough growth to ease the burden — could take many years to resolve.

“Everybody has been living beyond their means for nearly the last decade, so it is an adjustment that will be painful and long, and it will test the resilience of societies socially and politically,” said Nicolas Véron, a fellow at Bruegel, a Brussels research group.

This is not to say that the discussions in Europe are moot. If governments can’t agree on how to rescue Greece from its debilitating government debt, some fear the worst could happen — a collapse of the financial system akin to 2008 that would ricochet around the world, dooming Europe but also the United States and emerging countries to a prolonged downturn, or worse.

Just like the United States, Europe built up trillions in debts in past decades. What is different is that more of the United States borrowing was done by consumers and businesses, while in Europe it was mainly governments that piled on the debt, facilitated by banks that lent them money by buying up sovereign bonds.

Now, just as the United States economy is held back by households whose mortgages are still underwater and who won’t begin to spend again until they have run down their debts, Europe can’t begin to grow again until its countries learn to live within their means.

In short, it means years of painful adjustment.

“We have to adjust to lower growth,” said Thomas Mirow, president of the European Bank for Reconstruction and Development, referring to both Europe and America. “It is of course going to be very painful. But leaders have to speak frankly to their populations.”

The uncertainty about Europe’s future has been driving the gyrations of financial markets since the summer. Earlier this week, stocks rallied on euphoria that a new, more powerful bailout was near, but the rally fizzled Wednesday when cracks began to appear among European nations over the terms of money being given to Greece.

On Thursday, markets were mostly up again after the German approval of the 440 billion euro ($600 billion) bailout fund, intended to keep the crisis from spreading beyond Greece and Portugal to other European countries. Several other nations still have to ratify the agreement, but it now looks likely to be in place by the end of October.

Even this fund, however, is already seen as inadequate. Some worry that it still fails to fully address one of Europe’s most pressing needs: fully recapitalizing its banks.

Now there is talk of enhancing the fund’s firepower by allowing the European Central Bank to leverage its assets to buy up troubled government debt from the financial system. That would serve mostly to shift the debt from European banks to taxpayers.

“Clearly something is cooking, but the markets will eventually choke on the taste,” said George Magnus, an economist at UBS in London. “It is about getting banks off the hook, but the darker side is it’s not doing anything real.”

Not everybody shares this view. Some argue that Europe is actually in better shape than the United States. Debt levels are painfully high in European countries like Italy, Ireland and Greece, but overall euro zone debt as a percentage of gross domestic product is 85 percent, less than the 93 percent level in the United States.

Also, European consumers did not go on the same borrowing binge, so their retrenchment need not be so severe.

Joshua Brustein contributed reporting.

This article has been revised to reflect the following correction:

Correction: September 29, 2011

An earlier version of this article used an incorrect unit in converting Europe’s 440 billion euro bailout fund to dollars. It is $600 billion, not $600 million.

Article source: http://feeds.nytimes.com/click.phdo?i=fa35bf29a38b59a2af68ec6b0b2cee32

Filed Under: Business News Tagged With: financial crisis, government debt, new deal

News Analysis: Even if Europe Averts Crisis, Growth May Lag for Years

September 29, 2011 by NewsMaker Leave a Comment

What is going on?

But a bailout doesn’t mean wiping out the huge debts that have taken years to accumulate — just as bailing out American banks in 2008 didn’t mean wiping out the huge amount of subprime debt that homeowners had borrowed but couldn’t repay.

The problem — too much debt — could take many years to ease.

”Everybody has been living beyond their means for nearly the last decade, so it is an adjustment that will be painful and long, and it will test the resilience of societies socially and politically,” said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels.

This isn’t to say that the discussions in Europe are moot. If governments can’t agree on how to rescue Greece from its debilitating government debt, some fear the worst case could happen — a collapse of the financial system akin to 2008 that would ricochet around the world, dooming Europe but also the United States and emerging countries to a prolonged downturn, or worse.

Just like the United States, Europe built up trillions in debts during the past decades. What is different is that while in the United States more of the borrowing was done by consumers and businesses, in Europe it was mainly governments that piled on the debt, facilitated by the banks that lent them money by buying up sovereign bonds.

Now, just as the United States economy is held back by households whose mortgages are still underwater and won’t begin to spend again until they have run down their debts, Europe can’t begin to grow again until its countries learn to live within their means. That means running down their debts during years of austerity and tax increases.

In short, it still means years of painful adjustment.

“We have adjust to lower growth,” said Thomas Mirow, president of the European Bank for Reconstruction and Development, referring to Europe as well as the United States. “It is of course going to be very painful. But leaders have to speak frankly to their populations.”

The uncertainty about Europe’s future has been driving the gyrations of financial markets since the summer. Earlier this week, stocks rallied on euphoria that a new and more powerful bailout was near, but the rally fizzled Wednesday when cracks began to appear among European nations over the terms of money being given to Greece.

On Thursday, markets were mixed after the German Parliament approved the 440 billion euro ($600 billion) bailout fund aimed at keeping the crisis from hurting large European countries.

The trouble is that even this fund, which requires the approval of all 17 nations in the euro currency zone, is already seen as inadequate for the scale of Europe’s woes. Instead, a new idea is to bolster the fund by allowing an institution like the European Central Bank to use it as a guarantee for much greater lending, perhaps up to a couple of trillion euros.

This is the cause of the new optimism in markets, but some worry that even that idea may not fully address one of Europe’s most dangerous problems: fully recapitalizing its banks.

“We’re not seeing any real acknowledgment of the scale of the banking sector problem,” said Simon Tilford, the chief economist at the Center for European Reform in London. And even if the fund were enhanced with a couple of trillion euros of firepower to buy up troubled government debt from the financial system, that would still only shift the debt from European banks to taxpayers and do nothing to pay it off.

Josh Brustein contributed reporting.

This article has been revised to reflect the following correction:

Correction: September 29, 2011

An earlier version of this article used an incorrect unit in converting Europe’s 440 billion euro bailout fund to dollars. It is $600 billion, not $600 million.

Article source: http://www.nytimes.com/2011/09/30/business/global/even-if-europe-averts-crisis-growth-may-lag-for-years.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: bailout, downturn, financial crisis

DealBook: Bank of America Faces a $50 Billion Shareholder Lawsuit

September 28, 2011 by NewsMaker Leave a Comment

Harry Campbell

Bank of America’s potential liability for bad mortgages — in the tens of billions of dollars — is well known. But Bank of America is haunted by other demons from the financial crisis, the most significant one being a lawsuit arising from its troubled Merrill Lynch acquisition.

This lawsuit, brought by Bank of America shareholders, claims that Bank of America and its executives, including its former chief executive, Kenneth D. Lewis, failed to disclose what would be a $15.31 billion loss at Merrill in the days before and after the acquisition. The plaintiffs contend that this staggering loss was hidden to ensure that Bank of America shareholders did not vote against the transaction.

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Bank of America disclosed this loss after Merrill was acquired. At the same time, Bank of America also disclosed a $20 billion bailout by the government. The bank’s stock fell by more than 60 percent in a two-week period, a market value loss of more than $50 billion.

This episode also spawned a lawsuit from the Securities and Exchange Commission that Bank of America, Mr. Lewis and Joseph Price, the former chief financial officer, settled for $150 million. Judge Jed S. Rakoff of the Federal District Court in Manhattan approved the deal but complained that it didn’t sufficiently penalize the individuals involved. The amount was paid by Bank of America with no liability for Mr. Lewis or Mr. Price. Judge Rakoff called the settlement “half-baked justice at best.”

Judge Rakoff may see his wish for greater penalties granted. The New York attorney general’s office has a lawsuit on the matter.

More significantly, a lawsuit seeking about $50 billion was brought by some of the largest class-action law firms and is quietly advancing in the Federal District Court in Manhattan.

The plaintiffs contend that Bank of America engaged in a deliberate effort to deceive the bank’s shareholders.

According to the plaintiffs, who include the Ohio Public Employees Retirement System and a Netherlands pension plan that is the second-largest in Europe, Bank of America’s senior management, including Mr. Lewis and Mr. Price, began to learn of large losses at Merrill Lynch in early November 2008, months before the deal closed.

Mr. Price met with the bank’s general counsel, Timothy J. Mayopoulos, to discuss whether to disclose the loss — at the time about $5 billion — to Bank of America shareholders. Mr. Mayopoulos testified to the New York attorney general’s office that while his initial reaction was that disclosure was warranted, he decided against it. Merrill had been losing $2.1 billion to $9.8 billion a quarter during the financial crisis, and so this loss would be expected by Merrill and Bank of America shareholders.

Plaintiffs in the private action and the New York attorney general’s complaint claim that after this meeting, Mr. Price and other senior executives at Bank of America sought to keep this loss quiet and that Mr. Price in particular misled Mr. Mayopoulos.

Mr. Mayopoulos has testified that on Dec. 3, 2008, Mr. Price told him that the estimated loss would be $7 billion.

Mr. Mayopoulos concluded again that no disclosure was necessary. Plaintiffs contend that Mr. Price misled Mr. Mayopoulos as the forecasted loss at this time had now grown to more than $10 billion.

The Bank of America vote occurred on Dec. 5 without its shareholders knowing about this gigantic looming Merrill loss, which was now about $11 billion.

Mr. Mayopoulos has testified he was surprised at this higher number when he learned of it at a Dec. 9 board meeting. Mr. Mayopoulos sought to meet with Mr. Price about the new loss. The next day, Mr. Mayopoulos was fired and escorted out of the building.

The Merrill acquisition was completed on Jan. 1, 2009.

Two weeks later, Bank of America disclosed for the first time that Merrill had suffered an after-tax net loss of $15.31 billion.

Bank of America has argued in its defense that the exact amount of the loss was uncertain during this time. Moreover, this disclosure was not necessary because Merrill’s losses were within the range of previous losses and included a good will write-off of about $2 billion that was previously disclosed. The total loss was not material.

But if it is true that Mr. Price, with Mr. Lewis’s assent, kept this information from Mr. Mayopoulos in order to avoid disclosure, this is a prima facie case of securities fraud. Would Bank of America shareholders have voted to approve this transaction? If the answer is no, then it is hard to see this as anything other than material information.

Plaintiffs in this private case have the additional benefit that this claim is related to a shareholder vote. It is easier to prove securities fraud related to a shareholder vote than more typical securities fraud claims like accounting fraud. Shareholder vote claims do not require that the plaintiffs prove that the person committing securities fraud did so with awareness that the statement was wrong or otherwise recklessly made. You only need to show that the person should have acted with care.

This case is not only easier to establish, but the potential damages could also be enormous. Damages in a claim like this are calculated by looking at the amount lost as a result of the securities fraud. A court will most likely calculate this by referencing the amount that Bank of America stock dropped after the loss was announced; this is as much as $50 billion. It is a plaintiff’s lawyer’s dream.

Bank of America is facing a huge liability from this claim. It is also facing even more liability for those who bought and sold stock during this period up until Jan. 15. In a ruling on July 29, the judge in this case allowed these claims to proceed against Bank of America, Mr. Price and Mr. Lewis. The judge had already ruled that the disclosure claim related to the proxy vote could proceed.

This case is on a relatively fast track, with an October 2012 trial date.

Given the $50 billion claim looming over it, Bank of America will most likely try to settle this litigation. The settlement value appears to be in the billions. Firing your main witness — Mr. Mayopoulos — and escorting him out the door no doubt only increases the cost.

The case shows how regulators’ actions can be supplemented by private actions. And if the plaintiffs win, this case may be the exceedingly rare event of directors and officers, particularly Mr. Lewis and Mr. Price, actually having to pay money personally to settle a securities fraud claim. If so, the two men would join the relatively few executives from the financial crisis who have been personally penalized.

Whatever the outcome of this case, it appears that Bank of America shareholders were sacrificed in December 2008 so that the Merrill deal could be completed. The bill may now be coming due for Bank of America.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

Article source: http://feeds.nytimes.com/click.phdo?i=24a0f719c712e1b74f9b71ecc8497ba6

Filed Under: Business News Tagged With: federal district court, financial crisis, potential liability