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Economix Blog: Weekend Business Podcast: Too Big to Fail, Global Growth, Robert Frank and a Madoff Update

December 10, 2011 by Leave a Comment

In the recent financial crisis, the federal government spent billions of dollars bailing out institutions that were deemed too big to fail.

In the new Weekend Business podcast, Gretchen Morgenson says that despite the passage of the Dodd-Frank law, some financial institutions have grown even bigger. As she writes in Sunday Business, though, there is still some interest in Congress in changing that, despite lobbying from banks.

European leaders reached an agreement aimed at averting a possible breakup of the euro zone, as I discuss in the news update portion of the podcast. But neither Europe nor the United States is likely to be the fastest-growing region in the world in the decades ahead, in the view of Jim O’Neill, the chairman of Goldman Sachs Asset Management, whom I interview in my column in Sunday Business. He says Brazil, Russia, India and China — plus Indonesia, Mexico, Turkey and South Korea — are likely to be global growth engines in the decades ahead.

In another part of the podcast, Diana Henriques provides an update on the case of Bernard Madoff, who ran the biggest Ponzi scheme in history, and who has continued to correspond with her from his prison cell.

Also on the podcast, Robert Frank of Cornell University says the economy depends on better government, not less government, and cites a personal experience at his local Department of Motor Vehicles office as an example of the benefits that more efficiency can bring.

You can find specific segments of the podcast at these junctures: Gretchen Morgenson on scaling back banks (27:03); news headlines (21:03); Diana Henriques on the Madoff case (17:49); Robert Frank (8:20); the week ahead (1:48).

As articles discussed in the podcast are published during the weekend, links will be added to this post.

You can download the program by subscribing from The New York Times’s podcast page or directly from iTunes.

Article source: http://feeds.nytimes.com/click.phdo?i=617b4f03e9b8ed878ba5522624d60f14

Filed Under: Economy News Tagged With: , ,

More Stimulus Expected From E.C.B., but Will It Be Enough?

December 6, 2011 by Leave a Comment

FRANKFURT — For someone with a reputation for caution, Mario Draghi is off to an audacious start as president of the European Central Bank. Since taking office little more than a month ago, he has presided over an interest rate cut, signaled a greater willingness to deploy E.C.B. resources to fight the European debt crisis, and turned up the pressure on governments to remake the euro zone.

More action is likely Thursday when the bank’s policy council meets. Analysts expect another cut, perhaps a big one, in the bank’s benchmark interest rate, currently at 1.25 percent.

The E.C.B. is also expected to start offering longer-term loans to banks to compensate for a flight from European financial institutions by private lenders. And Mr. Draghi is likely to re-emphasize the tacit bargain he offered political leaders last week: The central bank would temporarily stabilize financial markets if the politicians make concrete progress on fixing the structural flaws in the euro zone.

Mr. Draghi, businesslike and direct in his public statements so far, seems unencumbered by past policy moves and determined to take the initiative before the strains of the crisis exhaust him, as they sometimes seemed to have worn on his predecessor, Jean-Claude Trichet.

While Mr. Trichet remains an esteemed figure in Europe, with a legendary stamina, three years of nearly nonstop crisis management took their toll in his final months in office. For now, at least, Mr. Draghi appears fresh and unafraid of putting his own stamp on policy.

“Draghi can say different things,” said Marie Diron, an economist in London who advises the consulting firm Ernst Young. “People won’t say, This is not what you were saying a few months ago. It makes a change of policy, a bit of U-turn, easier.”

But will it be enough to satisfy the large body of economists and political leaders who contend that the crisis endgame will have to include much more aggressive and controversial action by the E.C.B.?

Guntram B. Wolff, deputy director of Bruegel, a research organization in Brussels, argues that the E.C.B. may have no choice but to become lender of last resort to governments and not just banks, as the only way to prevent market panics that drive up borrowing costs for countries like Italy.

“A lender of last resort needs to be created in order to stop self-fulfilling sovereign crises,” Mr. Wolff wrote Monday. “Interest rates paid on sovereign bonds in a number of countries are clearly the result of self-fulfilling crisis, which will ultimately force default even on a country like Italy, with devastating consequences for the euro area as a whole.”

For all his differences in tone, Mr. Draghi also inherits the tensions that made Mr. Trichet’s tenure so difficult, including a mandate that did not anticipate the kind of crisis now threatening the European and global economies. And he faces, as Mr. Trichet did, determined opposition from Germany to any expansion of the E.C.B.’s writ beyond a single-minded focus on price stability.

Mr. Draghi last week tacitly offered to intervene more aggressively in bond markets to keep interest rates under control in countries like Italy and Spain, if euro zone governments did more to discipline their members. But it is not yet clear what he meant by that.

Would the E.C.B. simply expand its existing bond buying in a modest way? Or would it cross the Rubicon and buy securities on a scale that would amount to significantly enlarging the money supply? He did not say.

In any case, the reaction in Germany to Mr. Draghi’s remarks was swift. Jens Weidmann, the president of the German central bank, said he remained stalwartly opposed to more bond market intervention, which he regards as an illegal transfer of debts from one country to another. Mr. Draghi risks straining the unity of the euro zone if he radically steps up E.C.B. purchases of government bonds over the objections of Germany, the European Union’s largest member.

Jörg Krämer, chief economist at Commerzbank in Frankfurt, expressed a sentiment widely shared in Germany. “Huge purchases of government bonds in the euro zone threaten to shatter the monetary system,” he wrote Monday in a note to clients.

Opponents of E.C.B. bond buying argue that it is actually far riskier than securities purchases made by the U.S. Federal Reserve. The Fed has bought far more paper: $2 trillion versus €207 billion, or about $277 billion, by the E.C.B. But while the Fed’s purchases have included large amounts of U.S. Treasury securities, which remain an international haven, the E.C.B. has bought mostly bonds from troubled countries like Greece and Portugal, becoming what critics say is a storehouse for distressed government debt.

Article source: http://feeds.nytimes.com/click.phdo?i=32cdc07addd4143125730ce724848ade

Filed Under: Economy News Tagged With: , ,

Massachusetts Sues 5 Major Banks Over Foreclosure Practices

December 2, 2011 by Leave a Comment

Citing extensive abuses of troubled borrowers across Massachusetts, the state’s attorney general sued the nation’s five largest mortgage lenders on Thursday, seeking relief for consumers hurt by what she called unfair and deceptive business practices.

In addition to creating a new and significant legal headache for the banks named in the suit — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and GMAC Mortgage — the Massachusetts action diminishes the likelihood of a comprehensive settlement between the banks and federal and state officials to resolve foreclosure improprieties.

Also named as a defendant in the Massachusetts suit was the electronic mortgage registry known as MERS, an entity set up by lenders to speed property transfers by circumventing local land recording officials.

The attorney general, Martha Coakley, and her investigators contend that the banks improperly foreclosed on troubled borrowers by relying on fraudulent legal documentation or by failing to modify loans for homeowners after promising to do so. The suit also contends that the banks’ use of MERS “corrupted” the state’s public land recording system by not registering legal transfers properly.

“There is no question that the deceptive and unlawful conduct by Wall Street and the large banks played a central role in this crisis through predatory lending and securitization of those loans,” Ms. Coakley said at a news conference announcing the lawsuit. “The banks may think they are too big to fail or too big to care about the impact of their actions, but we believe they are not too big to have to obey the law.”

Ms. Coakley has been among the most aggressive state regulators in her pursuit of financial institutions involved in the credit crisis. In addition to her inquiry into foreclosure improprieties in Massachusetts, she has also conducted far-reaching investigations into predatory lending and securitization abuses.

Since 2009, Ms. Coakley has extracted more than $600 million in restitution and penalties from lawsuits against mortgage originators like Option One and Fremont Investment and Loan and Wall Street firms like Goldman Sachs and Morgan Stanley, which bundled loans into mortgage securities.

Officials at all of the banks issued statements saying they would fight the suit. Most of them also indicated dismay that Massachusetts had taken action during negotiations to reach a settlement over the types of practices highlighted in the case.

“We are disappointed that Massachusetts would take this action now,” said Tom Kelly, a Chase spokesman, “when negotiations are ongoing with the attorneys general and the federal government on a broader settlement that could bring immediate relief to Massachusetts borrowers rather than years of contested legal proceedings.”

Lawrence Grayson, a Bank of America spokesman, said: “We continue to believe that collaborative resolution rather than continued litigation will most quickly heal the housing market and help drive economic recovery.”

And Vickee Adams of Wells Fargo said, “Regrettably, the action announced in Massachusetts today will do little to help Massachusetts homeowners or the recovery of the housing economy in the Commonwealth.”

But as Ms. Coakley made clear during the news conference, her office had come to view as unacceptable the negotiating stance taken by the banks in the protracted settlement talks.

“When those negotiations began over a year ago, I was hopeful that we would be able to reach a strong and effective solution,” she said. “It is over a year later and I believe the banks have failed to offer meaningful relief to homeowners.”

Delaware, Nevada and New York have also objected to the direction the settlement negotiations were taking.

Kurt Eggert, a professor at Chapman University School of Law in California who is an expert in mortgages and securitization, said the Massachusetts lawsuit was a significant step because it opened the banks’ practices to far greater scrutiny than they had been subject to.

“So far the servicers have escaped any real review or punishment for their bad practices because federal regulators have by and large given them a pass on whether they followed the law in foreclosures,” Mr. Eggert said. “This lawsuit argues that they haven’t followed the law and that they can’t just fix all their problems after the fact.”

Among the misconduct cited in the Massachusetts complaint were 14 cases of foreclosures by institutions that had not shown proof that they had the legal right to seize the underlying properties when they did so. All the banks also deceived troubled borrowers, the complaint said, about the loan modification process. For example, some banks incorrectly advised borrowers that they would receive priority treatment if they were more than 90 days delinquent on their loans. Other borrowers were misled when told that they must be more than two months’ delinquent to receive a loan modification, it said.

Although Mr. Eggert said that the banks were likely to argue that a state like Massachusetts had no right to bring such a case against federally regulated institutions, he said that the Dodd-Frank legislation restricted the ability of federal authorities to bar states from acting in such cases.

“If the state can go forward and do real discovery, it will be the first time that anyone has really dug into the servicers’ files to see what they have done,” he added. “The feds conducted an investigation where they looked at very few files, and here the state could demand to see a lot.”

 

Article source: http://feeds.nytimes.com/click.phdo?i=1830dae53a466f0bb2a8cb843f5a1df5

Filed Under: Business News Tagged With: , ,

Banks Build Contingencies for Euro Zone Breakup

November 26, 2011 by Leave a Comment

But some banks are no longer so sure, especially as the sovereign debt crisis threatened to ensnare Germany itself this week, when investors began to question the nation’s stature as Europe’s main pillar of stability.

On Friday, Standard Poor’s downgraded Belgium’s credit standing to AA from AA+, saying it might not be able to cut its towering debt load any time soon. Ratings agencies this week cautioned that France could lose its AAA rating if the crisis grew. On Thursday, agencies lowered the ratings of Portugal and Hungary to junk.

While European leaders still say there is no need to draw up a Plan B, some of the world’s biggest banks, and their supervisors, are doing just that.

“We cannot be, and are not, complacent on this front,” Andrew Bailey, a regulator at Britain’s Financial Services Authority, said this week. “We must not ignore the prospect of a disorderly departure of some countries from the euro zone,” he said.

Banks including Merrill Lynch, Barclays Capital and Nomura issued a cascade of reports this week examining the likelihood of a breakup of the euro zone. “The euro zone financial crisis has entered a far more dangerous phase,” analysts at Nomura wrote on Friday. Unless the European Central Bank steps in to help where politicians have failed, “a euro breakup now appears probable rather than possible,” the bank said.

Major British financial institutions, like the Royal Bank of Scotland, are drawing up contingency plans in case the unthinkable veers toward reality, bank supervisors said Thursday. United States regulators have been pushing American banks like Citigroup and others to reduce their exposure to the euro zone. In Asia, authorities in Hong Kong have stepped up their monitoring of the international exposure of foreign and local banks in light of the European crisis.

But banks in big euro zone countries that have only recently been infected by the crisis do not seem to be nearly as flustered.

Banks in France and Italy in particular are not creating backup plans, bankers say, for the simple reason that they have concluded it is impossible for the euro to break up. Although banks like BNP Paribas, Société Générale, UniCredit and others recently dumped tens of billions of euros worth of European sovereign debt, the thinking is that there is little reason to do more.

“While in the United States there is clearly a view that Europe can break up, here, we believe Europe must remain as it is,” said one French banker, summing up the thinking at French banks. “So no one is saying, ‘We need a fallback,’ ” said the banker, who was not authorized to speak publicly.

When Intesa Sanpaolo, Italy’s second-largest bank, evaluated different situations in preparation for its 2011-13 strategic plan last March, none were based on the possible breakup of the euro, and “even though the situation has evolved, we haven’t revised our scenario to take that into consideration,” said Andrea Beltratti, chairman of the bank’s management board.

Mr. Beltratti said that banks would be the first bellwether of trouble in the case of growing jitters about the euro, and that Intesa Sanpaolo had been “very careful” from the point of view of liquidity and capital. In late spring, the bank raised its capital by five billion euros, one of the largest increases in Europe.

Mr. Beltratti said that Italy, like the European Union, could adopt a series of policy measures that could keep the breakup of the euro at bay. “I certainly felt more confident a few months ago, but still feel optimistic,” he said.

European leaders this week said they were more determined than ever to keep the single currency alive — especially with major elections looming in France next year and in Germany in 2013. If anything, Mrs. Merkel said she would redouble her efforts to push the union toward greater fiscal and political unity.

Keith Bradsher contributed reporting from Hong Kong, Julia Werdigier from London, David Jolly from Paris and Elisabetta Povoledo from Rome.

Article source: http://www.nytimes.com/2011/11/26/business/global/banks-fear-breakup-of-the-euro-zone.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

DealBook: Société Générale Profit Falls 31% in Third Quarter

November 9, 2011 by Leave a Comment

The bank Société Générale said it would increase its reserves.Jacques Brinon/Associated PressThe bank Société Générale said it would increase its reserves.

PARIS — Société Générale said on Tuesday that its third-quarter net profit fell by nearly a third, weighed down by the cost of writing down its exposure to Greece.

The French bank said profit in the three months ended Sept. 30 fell 31 percent, to 622 million euros ($856 million), from the period a year earlier. Revenue rose 4 percent, to 6.5 billion euros, bolstered by a gain booked on a decline in the value of the bank’s own debt; excluding that one-time gain, revenue fell 10.6 percent.

The bank, based in Paris, said it was marking down 333 million euros of its Greek sovereign debt holdings on a pretax basis, equivalent to a 60 percent write-down, bringing its treatment of the holdings closer into line with its global peers.

Société Générale also said it had reduced its sovereign risk exposure to Greece, Italy, Ireland, Portugal and Spain to 3.4 billion euros by the end of October.

Financial institutions across Europe are recognizing losses on their holdings of Greek bonds as it becomes obvious that the country will never pay off its debts in full. On Tuesday, Munich Re, a German insurance group, said it had written down the value of its Greek bonds by 933 million euros this year.

Munich Re’s loss on Greek debt coincided with insurance losses related to the March earthquake and tsunami in Japan and Hurricane Irene in the United States, cutting its profit for the third quarter 62 percent, to 290 million euros.

BNP Paribas, the largest French bank, announced last week that it was marking down its Greek exposure by 60 percent and reducing its holdings of European sovereign debt, a move that cut its third-quarter profit 72 percent.

Jon Peace, an analyst with Nomura International in London, noted in a report that most of Société Générale’s reported net profit resulted from the 542 million euros the bank booked on its own debt. Considering that large one-time gain and the bank’s need to reduce leverage, he said, “we suspect the market will retain some caution.”

Société Générale’s shares rose 8.8 percent on Tuesday morning in Paris. For the year, the stock is down 53 percent.

Revenue from its core corporate and investment banking activities dropped almost 37 percent, to 1.2 billion euros, the result of “a challenging environment in the debt markets, with very weak activity in the primary market especially in Europe, and the effects of the European sovereign debt crisis on secondary markets.”

Frederic Oudéa, Société Générale’s chief executive, said in the statement that the third-quarter results “demonstrated the group’s resilience: the profit-generating capacity of the core businesses is robust.”

He also said there would be “a significant decline” in bonus pay this year.

Because of the regulatory requirement that banks strengthen their capital buffers, the bank said it would not pay a dividend for 2011. The third-quarter profit and the retaining of the dividend provision helped the bank to increase its core Tier 1 ratio to 9.5 percent on Sept. 30, from 8.5 percent on Dec. 31, 2010. That leaves it with the need to raise another 2.1 billion euros of capital, a sum the bank said it would cover through its own resources by the end of June 2012.

All the major French banks have said they hope to raise their capital ratios by trimming their balance sheets, rather than by raising additional equity.

Jack Ewing contributed reporting from Frankfurt.

Article source: http://feeds.nytimes.com/click.phdo?i=c22a4e0b249e3908631626f80a79b581

Filed Under: Business News Tagged With: , ,

Aid Plans Emerge for Europe’s Banks

October 12, 2011 by Leave a Comment

With the European Commission scheduled on Wednesday to release proposals to recapitalize Europe’s banks, France announced its own detailed plans aimed at protecting its most vulnerable financial institutions.

Alain Juppé, the French foreign minister, told the National Assembly that several leading French banks like BNP Paribas, Crédit Agricole and Société Générale, which are deeply exposed to the sovereign debt of Greece and other Southern European countries, would move to increase their capital reserves, initially by using their own revenue or through the financial markets. Money from the government would be drawn upon only as “a last resort,” he said, according to Reuters.

But Mr. Juppé said that the move, which was agreed upon with Germany during talks on Sunday, meant the banks’ best buffers against losses — so-called core Tier 1 capital — would increase to 9 percent or higher, from 7 percent, by 2013.

It was unclear whether any of that money might be drawn from the proposed euro zone bailout fund rather than directly from French government funds.

The issue is particularly sensitive in France because of fears that the country could lose its triple-A credit rating if it had to inject billions of euros into its banks. That would be a huge political setback for the French president, Nicolas Sarkozy, who faces election next year.

The French announcement on intervention came as the euro zone entered a critical countdown, with investors in financial markets expecting a European Union summit meeting on Oct. 23 and the leaders of the Group of 20 leading economies Nov. 3 to endorse major decisions to help resolve the European debt crisis.

Meanwhile, lawmakers in Slovakia voted late Tuesday to reject the expansion of the euro rescue fund. The 440 billion euro, or $601 billion, rescue fund, approved by the 16 other members of the euro currency zone, was entwined with the domestic politics of Slovakia, the small former Soviet bloc country. Officials here in Brussels were weighing the possibility of a different way to circumvent the problem if Slovakia failed to pass the measure.

In Brussels, Jean-Claude Trichet, the departing president of the European Central Bank, underlined the urgent task confronting European leaders, who have consistently failed to rise to the challenge.

“Sovereign stress has moved from smaller economies to some of the larger countries,” Mr. Trichet told European lawmakers. “The crisis is systemic and must be tackled decisively.”

The French bank recapitalization plan was expected to complement proposals from the European Commission, whose president, José Manuel Barroso, said that he would offer proposals Wednesday to protect Europe’s banks from potential losses from the sovereign debt that they hold from Greece, Portugal, Italy and Spain.

Like the French-German plan, the European proposals were likely to emphasize that taxpayer money would be used only as a last resort.

Meanwhile in Athens, there was a breakthrough in negotiations over Greece’s efforts to get its public finances under control to qualify for vital international aid. Representatives from the International Monetary Fund, the European Commission and the European Central Bank said that Greece’s next slice of loans, totaling 8 billion euros, would most likely be disbursed in early November after approval from euro zone finance ministers and the I.M.F.

The statement from the representatives of the so-called troika ended weeks of stalemate between the Greek government and its international lenders, and concluded a period of brinkmanship that intensified last week when European finance ministers postponed a decision on whether to approve the loan.

Now, after lengthy negotiations, the declaration Tuesday paved the way for the release of enough money for Athens to pay its bills and postpone any unplanned default or restructuring of its debts.

The troika will have to submit a full report for approval by euro zone finance ministers, who will gather before the Oct. 23 European summit meeting, and by the I.M.F. board, which is expected to meet in early November.

Stephen Castle reported from Brussels and Niki Kitsantonis from Athens.

Article source: http://feeds.nytimes.com/click.phdo?i=a878a6b0a344c5811eaa0ffe5e028561

Filed Under: Business News Tagged With: , ,

Anti-Wall Street Protests Spread to Other Cities

October 3, 2011 by Leave a Comment

On Monday, protesters were camped out in Los Angeles near City Hall, assembled in front of the Federal Reserve Bank building in Chicago and marching through downtown Boston to rally against corporate greed, unemployment and the role that financial institutions have played in pushing the country into its continuing economic malaise.

Though the groups have no central organization and protesters in various cities are encouraged to come up with their own list of reasons for demonstrating, the protests have been organized using Facebook and Twitter to collect money, food and blankets and to enlist more supporters.

The groups have committees responsible for welcoming, security, transportation, art and the news media. Each has its own Google group. The arrests Saturday of more than 700 protesters on the Brooklyn Bridge for blocking the roadway have energized the movement, and on Monday, new protests were planned for other cities, including Memphis, Tenn.; Allentown, Pa.; and Hilo, Hawaii, according to organizers.

Later this week, rallies are scheduled for Detroit; Portland, Ore.; Minneapolis; and Baltimore, as well as in cities that rarely see such civil disobedience — Mason City, Iowa; Mobile, Ala.; Little Rock, Ark.; Santa Fe, N.M.; and McAllen, Tex., according to Occupy Together, an unofficial hub for the protests that lists dozens of demonstrations planned for the next week, including some in Europe and Japan.

In Chicago on Monday morning, about a dozen people outside the Federal Reserve Bank sat on the ground or lay in sleeping bags to shield themselves from the autumn chill. All around them were protest signs and hampers filled with donated food and blankets. A couple of people played instruments. A few passers-by asked if they needed anything.

The demonstrators, who have been in Chicago since Sept. 24, said they had collected so much food that they had started giving the surplus to homeless people.

Micah Philbrook, 33, who said he had been camping outside the bank for more than a week, cited the Wall Street protests, which began Sept. 17, as his motivation.

“It spoke to me so much I had to do something,” Mr. Philbrook said. He acknowledged, however, that “it’s all blurring together.” Each evening at 7 p.m., he said, the number of protesters swells as people come from school or work and the group marches to Michigan Avenue.

As is true with the protests in New York and elsewhere, the participants are demonstrating for a variety of reasons.

“We all have different ideas about what this means, stopping corporate greed,” said Paul Bucklaw, 45. “For me, it’s about the banks.”

Sean Richards, 21, a junior studying environmental health at Illinois State University in Normal, said he had dropped out of college on Friday and had taken a train to Chicago to demonstrate against oil companies.

Mr. Richards said he did not plan to go back to school and would continue sleeping on the street for “as long as it takes.”

“We’re sending corporations a powerful message that we know what they’re doing,” he said. “For people, we’re sending the message that we have to unite as one front.”

Article source: http://feeds.nytimes.com/click.phdo?i=c0c783ad949f544095ea5087b41e3a2a

Filed Under: Economy News Tagged With: , ,

Business Briefing | Trading: Inflation Jump in Europe Complicates Life for E.C.B.

October 1, 2011 by Leave a Comment

Consumer prices in the 17-nation euro area rose 3 percent in September from a year earlier, after a 2.5 percent increase in August, the largest increase since October 2008, according to an initial reading by the European Union’s statistical office, Eurostat. Economists polled by Bloomberg and Reuters had expected a reading closer to 2.5 percent.

Eurostat did not provide a breakdown of the data, but the euro’s recent decline against the dollar and other currencies has made imports, many of which, like oil, are priced in dollars, more expensive in the past few months.

Coming on the heels of reports this past week showing declining consumer confidence in Europe and evidence that much of the regional economy is slowing, the data complicate the monetary policy challenge facing the E.C.B., which has a primary responsibility of maintaining price stability.

In Germany, the largest economy in Europe and its engine of growth for several years, the Federal Statistical Office in Wiesbaden said Friday that retail sales declined 2.9 percent from July, in real, seasonally adjusted terms.

Some analysts had expected the E.C.B. to move as soon as Oct. 6 to ease monetary policy. The combination of stagnant growth and rising prices can create a condition known as stagflation, something fragile banks and anxious consumers are eager to avoid.

And while consumer price rises undermine incomes, many economists say that deflation, or a general decline in price levels, is actually more of a threat at present, considering the deleveraging under way among financial institutions and households.

Ben May, an economist at Capital Economics in London, said investors should expect another move by the E.C.B. by the end of 2011, noting that so-called core inflation, which subtracts energy and food prices because of their volatility, appeared to be well below the central bank’s 2 percent target.

“What’s more, any rise is likely to prove temporary, given the recent signs that the recovery is coming to an end,” Mr. May said.

Clemente De Lucia, an economist at BNP Paribas, noted that a methodological change had increased the volatility of consumer price data, meaning that the data should be taken with a grain of salt. In Italy, for example, consumer prices jumped 3.5 percent in September after a 2.3 percent August rise.

He said euro area inflation would probably come in around 2.8 percent this year and fall below 2 percent in 2012.

The U.S. Federal Reserve, the Bank of England, the Swiss National Bank and the Bank of Japan all have set their main overnight target rates at close to zero. The E.C.B.’s main rate is 1.5 percent.

The report weighed on stock markets, with the Euro Stoxx 50 index, a barometer of euro zone blue chip shares, falling 1.5 percent Friday, while the FTSE 100 in London slid 1.3 percent.

Article source: http://www.nytimes.com/2011/10/01/business/global/inflation-jump-in-europe-complicates-life-for-ecb.html?partner=rss&emc=rss

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DealBook: Banks Increase Holdings in Derivatives

September 24, 2011 by Leave a Comment

Even as federal regulators ratchet up scrutiny of the derivatives market, Wall Street is diving deeper into the $600 trillion industry, a new government report found.

The banking industry in the second quarter raised its stake in derivatives more than 11 percent from the same period a year earlier, according to the report by the Comptroller of the Currency, the federal agency that regulates national banks. Banks now hold nearly $250 trillion of the contracts, primarily futures and swaps, which derive their value from an underlying asset like an interest rate or a bundle of mortgages.

The nation’s four biggest banks — JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs — are the biggest players, holding roughly 95 percent of the industry’s total exposure to derivatives. JPMorgan, which holds the most among commercial banks, carries some $78 trillion worth of derivatives on its books, according to the report. Citi is next on the list, with $56 trillion, up from $54 trillion in the first quarter.

“Derivatives activity in the U.S. banking system continues to be dominated by a small group of large financial institutions,” the report noted. While the number of banks holding derivatives increased modestly to 1,070, 99 percent are held by only 25 banks.

The derivatives industry — which allows banks, hedge funds and corporations to both hedge risk and speculate on market fluctuations – was at the center of the financial crisis. The American International Group became a symbol of the industry’s pitfalls, having sold billions of dollars in credit default swaps as insurance on risky mortgage-backed securities. When the mortgage market crumbled during the crisis, the insurance giant lacked the capital to honor their agreements.

Credit default swaps make up 97 percent of total credit derivatives at banks, though they are a small piece of the overall derivatives pie. Commercial banks primarily use interest rate products, which comprise 82 percent of the total value of derivatives.

The Dodd-Frank financial regulatory law overhauled the industry, forcing many derivatives contracts onto regulated exchanges. Many deals must also go through clearinghouses, which act as a backstop in case one party defaults. Regulators are writing more than 50 new derivatives rules, moving the once murky market onto Washington’s radar screen.

Article source: http://feeds.nytimes.com/click.phdo?i=da2e004b33740b9a818ecdd58856dbff

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Asian Markets Rally on Central Banks’ Actions

September 16, 2011 by Leave a Comment

HONG KONG — Stock markets across the Asia-Pacific region rose on Friday, continuing a rally that had lifted markets in Europe and the United States, as investors took comfort from moves by the world’s leading central banks to increase liquidity in the European banking system.

The European Central Bank and its counterparts in the United States, Britain, Japan and Switzerland essentially opened new lines of credit to European banks, allowing them to borrow U.S. dollars for up to three months — a period that gives them breathing space for the rest of this year.

The move was designed to ease the pressure on European lenders, some of which have found it hard to borrow dollars from American lenders amid mounting concerns about the European banking sector’s exposure to Greece.

Analysts cautioned that the step, while providing welcome relief to beleaguered financial institutions, was no panacea for the underlying problem: the crippling debt levels that threaten to push Greece into default and have set off wider turmoil in global financial markets.

“It’s an important and gratifying but small step in the right direction,” commented Andrew Pease, chief investment strategist for Asia Pacific at Russell Investments, in a conference call with the media on Friday.

But he added that ultimately, more concerted activity was needed toward a more fiscally united Europe.

“Things will likely need to get worse,” he said, before the necessary decisions to “clear the air” would be taken.

Still, investors around the world greeted the announcement with a renewed willingness to buy stocks.

The benchmark indexes in Hong Kong and Japan both climbed 2 percent by early afternoon. The Kospi in South Korea rallied 3.6 percent, the Taiex in Taiwan added 2.9 percent and the benchmark index in Australia rose 1.8 percent.

The Sensex index was 1 percent higher by late morning in India.

The euro was trading at around $1.3869, having firmed markedly against the dollar on Thursday.

On Thursday, the DAX in Germany and the CAC 40 in France had both gained more than 3 percent on Thursday, while in the United States, the Dow Jones industrial average and the Standard Poor’s 500 both closed up 1.7 percent.

Futures on the S. P. 500 were higher in Asia on Friday, signaling that Wall Street could see another firm start.

Meanwhile, a key meeting of European finance ministers and other policy makers in the Polish city of Wroclaw on Friday and Saturday has fanned expectations of potentially more determined action to contain the escalating sovereign debt crisis.

The U.S. Treasury secretary, Timothy F. Geithner, will also be attending, which analysts said is a sign of how strong the sense of urgency surrounding the eurozone debt crisis has become.

Analysts said they expected Mr. Geithner to press European ministers at the meeting to increase the resources available to their bailout fund for the euro zone countries. But even the expansion of the fund to €440 billion, or $611 billion, agreed to in July, has yet to be ratified. There is some worry that countries guaranteeing the bailout fund might themselves face doubts about their own credit.

The Federal Reserve’s meeting next week will also be closely watched, amid expectations that the bank will signal new measures for the lumbering U.S. economy.

“The Fed is under pressure to come up with some sort of additional stimulus. It is also under pressure not to do so,” analysts at DBS said in a research note on Friday, highlighting the complex pressures facing the U.S. central bank and the internal debate about how best to act. “Still, we expect the Fed will do something, mainly because that’s the Fed’s job. You can’t just say ‘we’re out of ideas’ and walk away.”

Jack Ewing contributed reporting from Frankfurt.

Article source: http://www.nytimes.com/2011/09/17/business/global/daily-stock-market-activity.html?partner=rss&emc=rss

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