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Fed’s Transferred $88.9 Billion to Treasury in 2012

January 10, 2013 by NewsMaker Leave a Comment

WASHINGTON — The Federal Reserve said on Thursday that it sent $88.9 billion in profits to the Treasury Department in 2012, a record that reflected the vast expansion of the central bank’s investment portfolio.

The Fed is required by law to hand over a large majority of its profits, a long-standing provision that has become a lot more lucrative in recent years. Because the money is transferred at regular intervals throughout the year, Thursday’s report does not affect the imminent arrival of the debt ceiling.

As part of its campaign to stimulate the economy, the Fed over the last five years has amassed $2.7 trillion in Treasury securities and mortgage-backed securities. And the central bank is still expanding its holdings by $85 billion a month.

The interest payments on those securities are the primary source of the Fed’s profits. The Fed has transferred a total of $335 billion to the Treasury since 2009, compared with $147 billion in the previous five years, adjusted for inflation. The Fed has transferred at least some profit to the Treasury every year since 1934.

Because the Fed mostly holds debt issued by the federal government, its profits — which totaled $91 billion in 2012 — are largely payments from the government. By returning that money to the government, the central bank in effect is letting the government borrow at no cost.

Some conservative politicians say this back-and-forth — and the Fed’s broader efforts to reduce interest rates — are worsening the government’s fiscal problems by making debt seem less onerous and spending cuts seem less necessary.

The Fed’s chairman, Ben S. Bernanke, has acknowledged the benefit, jokingly describing the savings as “interest that the Treasury doesn’t have to pay to the Chinese.” But Mr. Bernanke and other Fed officials note that the purchases have their own purpose, to stimulate the economy, and will not continue indefinitely. They also note that Congress is responsible for its own behavior.

The Fed buys Treasuries and mortgage bonds to make them less profitable, which makes borrowing cheaper and encourages investors to take larger risks on potentially more lucrative, alternative investments. Returns on Treasuries are so low that many investors are losing money after adjusting for inflation. The Fed’s ability to profit nonetheless is a result of its unique business model: it pays for securities by creating money.

But there are risks. Higher interest rates would reduce the value of the Fed’s securities. And the central bank has incurred a new cost in recent years, paying interest on the reserves that private banks keep with the central bank. That has allowed the Fed to buy assets without increasing the amount of money in circulation, but keeping the money in its vaults could require it to pay higher rates as the economy improves.

The Fed spent about $4.9 billion on its own operations last year. It provided another $387 million to finance the Consumer Financial Protection Bureau, the agency created by the Dodd-Frank Act in 2010 to take over the work of protecting consumers after lawmakers decided that the Fed and other federal banking regulators had failed to do so.

Article source: http://www.nytimes.com/2013/01/11/business/economy/feds-2012-profit-was-88-9-billion.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: federal government, imminent arrival, trillion

Consumer Debt Rises on Cars and Education

January 9, 2013 by NewsMaker Leave a Comment

The Federal Reserve said Tuesday that consumers increased their borrowing in November by $16 billion from October to a seasonally adjusted record of $2.77 trillion.

Borrowing that covers autos and student loans increased $15.2 billion. A category that measures credit card debt rose just $817 million.

The sharp difference in the borrowing gains illustrates a broader trend that began after the recession. Four years ago, Americans carried $1.03 trillion in credit card debt, a high. In November, that figure was 16.5 percent lower.

At the same time, student loan debt has increased significantly. The category that includes auto and student loans is 22.8 percent higher than in July 2008. Many Americans who have lost jobs have gone back to school to get training for new careers.

The November increase also reflected further gains in auto sales, which rose 13.4 percent in 2012 to top 14 million units for the first time in five years. The need to replace vehicles lost to Hurricane Sandy may have helped.

Article source: http://www.nytimes.com/2013/01/09/business/economy/consumer-debt-increases-on-car-and-school-loans.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: consumers, student loan debt, trillion

Consumer Debt Rises on Cars And Education

January 8, 2013 by NewsMaker Leave a Comment

The Federal Reserve said Tuesday that consumers increased their borrowing in November by $16 billion from October to a seasonally adjusted record of $2.77 trillion.

Borrowing that covers autos and student loans increased $15.2 billion. A category that measures credit card debt rose just $817 million.

Consumer spending rebounded in November, helped by lower gas prices and job growth that carried over into December. Employers added 155,000 jobs in December and 161,000 in November.

Steady hiring may have encouraged consumers to keep borrowing and spending, despite concerns about the sharp tax increases that were scheduled to occur on Jan. 1, but were averted.

Article source: http://www.nytimes.com/2013/01/09/business/economy/consumer-debt-increases-on-car-and-school-loans.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: recession, student loan debt, trillion

DealBook: British Bankers Group May Give Up Control Over Libor

September 26, 2012 by NewsMaker Leave a Comment

Simon Newman/ReutersMartin Wheatley, managing director of the Financial Services Authority, is expected to outline the findings of a review of Libor on Friday.

LONDON — A British banking group is preparing to give up its control over the interest rate at the center of a recent manipulation scandal, according to a person with direct knowledge of the matter.

The move may pave the way for British authorities to become more directly involved in overseeing the London interbank offered rate, or Libor, a benchmark that underpins more than $360 trillion of financial products worldwide, including mortgages and other loans.

Regulators may also make it a criminal offense to manipulate the rate.

Despite the rate’s central role in many financial transactions, authorities around the world do not regulate Libor. Still, any changes to the rate-setting system are likely to be phased in over several years.

The shift away from the trade group that controls the rate, the British Bankers’ Association — whose members include many of the world’s largest banks — is expected to be announced on Friday, said this person, who spoke on condition of anonymity because he was not authorized to speak publicly. That is when Martin Wheatley, managing director of the Financial Services Authority, the British regulator, will outline the findings of a review of Libor that was ordered by the British government.

Libor Explained

“The existing structure and governance of Libor is no longer fit for purpose, and reform is needed,” Mr. Wheatley said when the Libor review was announced in August. “Trust in a vital part of the financial system has been badly damaged, and timely action is needed to restore it.”

On Tuesday, a spokesman for the Financial Services Authority of Britain declined to comment.

But in a brief statement, the British Bankers’ Association appeared to point to the coming changes, saying that it would work with government authorities.

“If Mr. Wheatley’s recommendations include a change of responsibility for Libor, the B.B.A. will support that,” the organization said. A spokesman for the group declined to comment.

The overhaul of Libor comes after Barclays agreed to pay American and British regulators $450 million in June to settle accusations that some of its traders had manipulated the rate for financial gain.

Senior executives at the bank were also suspected of lowballing the rate to protect Barclays’ reputation during the recent financial crisis.

In the wake of the scandal, the bank’s American chief executive, Robert E. Diamond Jr., who denied asking colleagues to submit artificially low Libor rates, and its chairman, Marcus Agius, resigned.

Some of Barclays’ traders may still face criminal prosecution over their role in the manipulation of Libor. And other banks, including UBS and Citigroup, are under investigation in a number of jurisdictions about the potential manipulation of the rate.

Removing the British Bankers’ Association from its role of setting Libor would be a blow to the organization, which established the rate in 1986. The rate system was created to give its members a uniform global benchmark to price different types of loans. (There are 150 different Libor rates, covering 10 currencies and 15 maturities.) The rise in Libor’s popularity coincided with rapid growth in global money flows and the creation of new financial products — with London as a crucial hub.

Under the group’s current system, some banks are polled each day by the data provider Thomson Reuters about what interest rate they would pay if they had to borrow money from the capital markets. In the case of the United States dollar Libor rate, the four highest and four lowest submissions are thrown out, and Thomson Reuters averages the remaining ones.

Complaints about possible manipulation of Libor date back to at least 2007, according to regulatory filings released in the aftermath of the Barclays settlement.

In 2008, the Federal Reserve Bank of New York and the Bank of England called for changes to the rate-setting process, according to those documents. But authorities balked at taking a more hands-on approach, according to e-mails released this summer by the British central bank.

The report of an expected overhaul of Libor came a day after Gary Gensler, chairman of the Commodity Futures Trading Commission in the United States, suggested that authorities should rework or replace the interest rate.

Speaking to the European Parliament on Monday in remarks relayed from Washington, Mr. Gensler said that Libor was still vulnerable to manipulation. As banks continued not to lend to each other, the lack of real transactions underpinning the rate left it open to tampering, he added.

“It is time for a new or revised benchmark — a healthy benchmark anchored in actual, observable market transactions — to restore the confidence of people around the globe that the rates at which they borrow and lend money and hedge interest rates are set honestly and transparently,” Mr. Gensler said.

Article source: http://dealbook.nytimes.com/2012/09/25/british-bankers-group-seen-losing-control-over-libor/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: anonymity, simon newman, trillion

Manufacturing and Construction Lift Outlook on Economy

January 3, 2012 by NewsMaker Leave a Comment

The Institute for Supply Management, a trade group of purchasing managers, said on Tuesday that its manufacturing index rose to 53.9 in December from 52.7 in November. Readings above 50 indicate expansion.

Also on Tuesday, the Commerce Department reported that spending on construction projects rose 1.2 percent in November, following a revised 0.2 percent drop in October. The increase was the third in four months and the largest since a 2.2 percent rise in August.

The November increase pushed spending to a seasonally adjusted annual rate of $807.1 billion, still barely half the $1.5 trillion that economists consider healthy. Analysts say it could be four years before construction returns to healthy levels.

United States manufacturing has expanded for more than two years. Factories were one of the first areas of the economy to start growing after the recession officially ended in June 2009.

The latest survey from the Institute for Supply Management showed that domestic factories should start the year strongly. Factories hired last month at the fastest pace since June, the survey found. A measure of new orders rose, a good sign for future output. And exports also increased last month, though it was not clear how long that would last. The economy in Europe is faltering as the Continent continues to address its debt crisis.

Consumers are gaining confidence and are spending more. Some economists were forecastiong that car sales increased in December after a strong month of sales in November. That should improve output among automakers and also steel companies, tire makers and others that supply the industry.

Orders for long-lasting manufacturing goods jumped in November, the Commerce Department said last month. Most of that increase reflected a huge rise in commercial aircraft orders, a volatile category.

Still, demand for core capital goods, which are often a proxy for business investment plans, fell for the second straight month. Business spending was a crucial driver of economic growth in 2011. If businesses trim spending, economic growth is likely to slow.

Businesses are less likely to retreat, however, if the economy continues to improve.

For construction in November, strength was seen in housing and government spending. Nonresidential construction fell, reflecting declines in construction of office buildings and shopping centers.

The industry was hit hard by the housing bust and has had trouble recovering. But home construction has begun a gradual rebound and should add to the nation’s economic growth. The chief reason is that apartments are being built almost twice as fast as two years ago. Renting is often the only option for many people who have lost their jobs, their homes or both.

Builders in November broke ground on homes at a seasonally adjusted annual rate of 685,000. That was a 9.3 percent jump from October and the fastest pace since April 2010.

Builders should start at least 600,000 homes this year. That is up from 587,000 last year and 554,000 in 2009 — the worst year on record — but it is half the number that economists expect in a healthy market.

Even so, the recovery appears to be strengthening, if fitfully. Last week, the Conference Board said its consumer confidence index rose in December to the highest level since April. That is important because consumer spending accounts for about 70 percent of the economy.

Article source: http://feeds.nytimes.com/click.phdo?i=5be676a11ab1b46dec75fe3e003bb3a0

Filed Under: Economy News Tagged With: construction projects, economists, trillion

Europe Agrees to Basics of Plan to Resolve Euro Crisis

October 27, 2011 by NewsMaker Leave a Comment

The agreement on Greek debt was crucial to assembling a comprehensive package to protect the euro, which has been keeping jittery markets on edge.

The accord was reached just before 4 a.m. after difficult bargaining. The severe reduction would bring Greek debt down by 2020 to 120 percent of that nation’s gross domestic product, a figure still enormous but more sustainable for an economy driven into recession by austerity measures.

The leaders agreed on Wednesday on a plan to force the Continent’s banks to raise new capital to insulate them from potential sovereign debt defaults. But there was little detail on how the Europeans would enlarge their bailout fund to achieve their goal of $1.4 trillion to better protect Italy and Spain.

After all the buildup to this summit meeting, failure here would have been a disaster. While the plan to require banks to raise new capital was generally approved without difficulty — banks will be forced to raise about $150 billion to protect themselves against losses on loans to shaky countries like Greece and Portugal — the negotiations over the Greek debt were difficult.

“The results will be a source of huge relief to the world at large, which was waiting for a decision,” President Nicolas Sarkozy of France said.

Chancellor Angela Merkel of Germany said: “I believe we were able to live up to expectations, that we did the right thing for the euro zone, and this brings us one step farther along the road to a good and sensible solution.”

In the face of considerable pressure from Europe’s leaders, the banks had been resisting requests that they voluntarily accept a loss of about 50 percent on their Greek loans, far more than the 21 percent agreed to previously. But after months of denying that Greece would have to restructure its large debt, which was trading at 40 percent of face value, European leaders forced the much larger reduction, known as a “haircut,” on the banks, while the International Monetary Fund promised more aid to Greece.

Germany had taken a tougher stance than France with the banks. Mrs. Merkel was willing to think about imposing an involuntary write-down on the private sector, but Mr. Sarkozy remained worried about the consequences on the markets and the banking system.

In a statement, Charles Dallara, managing director of the Institute of International Finance, which represents the major banks, said he welcomed the deal. He called it “a comprehensive package of measures to stabilize Europe, to strengthen the European banking system and to support Greece’s reform effort.”

In a meeting described as crucial for the fate of the euro zone, the leaders had been trying to restore market confidence in the euro and in the creditworthiness of the 17 countries that use it.

In what the leaders saw as an important first step, banks would be required under the recapitalization plan to raise $147 billion by the end of June — enough to increase their holdings of safe assets to 9 percent of their total capital. That percentage is regarded as crucial to assure investors of the banks’ financial health, given their large portfolios of sovereign debt.

German lawmakers voted overwhelmingly on Wednesday to authorize Mrs. Merkel to negotiate an expansion in an emergency bailout fund to $1.4 trillion, more than double its current size of about $610 billion. The vote followed Mrs. Merkel’s plea that the lawmakers overcome their aversion to risk and put Germany, Europe’s strongest economy, firmly behind efforts to combat the crisis, which has unnerved financial markets far beyond the Continent.

“The world is looking at Germany, whether we are strong enough to accept responsibility for the biggest crisis since World War II,” Mrs. Merkel said in an address to Parliament in Berlin. “It would be irresponsible not to assume the risk.”

The $1.4 trillion figure was generally accepted as the likely target for negotiators here, but many questions remained about how the enlarged fund would be financed.

Jack Ewing contributed reporting from Frankfurt, Rachel Donadio from Athens and Elisabetta Povoledo from Rome.

Article source: http://www.nytimes.com/2011/10/27/world/europe/german-vote-backs-bailout-fund-as-rifts-remain-in-talks.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: nicolas sarkozy, president nicolas sarkozy, trillion

Europe Agrees on Plan to Inject New Capital Into Banks

October 26, 2011 by NewsMaker Leave a Comment

In what the leaders described as an important first step, banks would be required to raise about $140 billion by the end of June — enough to increase their holdings of safe assets to 9 percent of their total capital. The percentage is regarded as crucial to assure investors of the banks’ financial health.

The leaders were having more trouble agreeing with the banks on the size of the loss investors will be asked to absorb on Greek debt, which economists agree will have to be written down if the country is to have any chance of restoring growth. Most plans under consideration called for write downs in the range of 50 percent, a leap from the 21 percent previously agreed upon.

Earlier on Wednesday German lawmakers overwhelmingly approved a measure to expand an emergency bailout fund to $1.4 trillion, more than double its current size of about $610 billion. The vote followed Chancellor Angela Merkel’s plea to lawmakers to overcome their aversion to risk and put the might of Germany, Europe’s strongest economy, firmly behind efforts to combat the crisis, which has unnerved financial markets far beyond Europe’s borders.

“The world is looking at Germany, whether we are strong enough to accept responsibility for the biggest crisis since World War II,” Mrs. Merkel said in an address to the Parliament in Berlin. “It would be irresponsible not to assume the risk.”

The $1.4 trillion figure is generally accepted as the likely target for negotiators here, but many questions remained about how the enlarged fund would be financed.

Europe does not face any hard deadline to forge a deal, as it did last month when it had to act to head off a Greek default, but its leaders would like to agree on a definitive plan to address the systemic aspects of the euro crisis rather than issuing vague proclamations as they have so often in the past.

The fear is that at some point, uncertainty surrounding the solvency of struggling countries like Greece and Portugal might infect larger economies like those of Spain and, especially, Italy, in turn raising questions about the solvency of the European banks that lent to them in large quantities. That, in turn, could ignite a panic like the one following the failure of Lehman Brothers, when financial institutions refuse to extend credit to one another for fear their counterparts might be insolvent.

The overall euro deal under discussion is complicated, weaving together the interrelated efforts to restructure Greek debt, inject new capital into Europe’s banks and expand the bailout fund so that it can ward off a financial panic in Italy — the euro zone’s third-largest economy — as well as in the relatively small economies of Greece and Portugal. Attention has focused on Italy because its moribund government seems incapable of responding to the crisis, which has undermined the markets’ faith in Europe’s capacity to solve its problems.

Mrs. Merkel and President Nicolas Sarkozy upbraided Italy’s prime minister, Silvio Berlusconi, on Sunday for failing to following through on his promises of budget cuts and various economic changes, But Mr. Berlusconi, hobbled by an internal power struggle, managed to bring only a “letter of intent” to Brussels outlining plans to implement the kind of economic changes that his counterparts want.

The Europeans also want Mr. Berlusconi to live up to his promises to do more to reduce Italy’s huge accumulated debt — about $2.65 trillion, or 120 percent of gross domestic product, among the highest in the developed world — and to promote economic growth in a largely stagnant economy. While Italy’s annual deficit is modest, the debt overhang means that speculation is driving up the cost of financing that debt, which if unchecked, could tear holes in the budget.

The current crisis has placed Mr. Berlusconi between two irreconcilable forces: his fellow European Union leaders and Umberto Bossi, the leader of the powerful Northern League, who holds the fate of the Berlusconi government in his hands and is bound to Mr. Berlusconi like an inoperable Siamese twin.

For months, Mr. Bossi had refused to back a plan to raise the retirement age to 67, relenting only on Tuesday for everything except seniority pensions, still leaving the government at risk of collapse on the issue. That change had been demanded by the European Union in return for its support.

The European Central Bank demanded various changes as the price for buying up Italian debt at a reasonable, nonmarket price. But as soon as the bank stepped in, Mr. Berlusconi failed to propose a convincing package of measures, let alone put them into effect, infuriating his European counterparts and the bank.

Steven Erlanger reported from Brussels and Rachel Donadio from Athens. Reporting was contributed Stephen Castle from Brussels, Jack Ewing from Frankfurt and Elisabetta Povoledo from Rome.

Article source: http://feeds.nytimes.com/click.phdo?i=ca04d1aecd48c28eea0c67781cc13f9a

Filed Under: Business News Tagged With: aversion, negotiators, trillion

DealBook: Bank of America Loses Title as Biggest in U.S.

October 19, 2011 by NewsMaker Leave a Comment

Jeffrey Camarati/Bloomberg NewsBrian T. Moynihan, Bank of America’s chief executive, is reversing the legacy of Ken Lewis, his empire-building predecessor.

For Bank of America, it is the end of an era.

With the bank shrinking its balance sheet and selling off assets, the company, based in Charlotte, N.C., surrendered its title as the country’s biggest bank Tuesday, another sign of how a money-losing giant assembled over decades is being reshaped into a smaller and, investors hope, more profitable institution.

Bank of America, with $2.22 trillion in assets reported Tuesday in its third-quarter earnings, is now second to JPMorgan Chase, which has $2.29 trillion assets. It also ranks second to JPMorgan Chase in terms of branches and total deposits.

Analysts said it was more evidence of how Bank of America’s chief executive, Brian T. Moynihan, is reversing the legacy of his controversial predecessor, Ken Lewis, an empire builder who craved being the biggest in United States banking and whose creation ultimately needed two federal bailouts to survive the financial crisis.

“There’s been a huge philosophical change in who they want to be,” said Mike Mayo, a veteran bank analyst with Crédit Agricole Securities. “This is a milestone that marks the end of a two-decade-long period during which they aspired and eventually became the largest bank.”

In today’s slow-growth economy, though, bigger is not necessarily better. And the challenges Bank of America still faces were evident in the numbers it released Tuesday.

Buoyed by one-time gains from accounting changes and asset sales, Bank of America reported a $6.23 billion profit for the third quarter, but the headline number camouflaged weak results in many of its businesses. Still, investors cheered the news, pushing the bank’s shares up 10 percent to $6.64 a share.

Although its investment bank, Bank of America Merrill Lynch, has been a crucial source of profit recently as other businesses like mortgage lending hemorrhaged money, the slow trading environment and financial uncertainty in Europe caused trading revenue to drop. The company’s global banking and markets revenue fell to $5.2 billion from $7 billion, and the unit reported a $302 million loss in the third quarter, a sharp contrast to the $1.46 billion gain a year ago.

Mr. Mayo estimated that the bank’s underlying core revenues dropped 17 percent, as other businesses like global commercial banking, card services and consumer real estate services also posted declines from a year ago. One exception was the company’s wealth management business, where revenue and net income both rose.

Still, the story behind the $6.23 billion profit was mostly a tale of one-time gains from accounting changes and asset sales, including $4.5 billion from positive adjustments to the value of its outstanding debt, a $1.7 billion accounting gain on the perceived riskiness of its debt and a pretax gain of $3.6 billion from the sale of half its stake in China Construction Bank.

“It’s not like 2007 or 2008 where there are losses that threaten the bank’s capital’s position,” said Christopher Kotowski, an analyst with Oppenheimer. “But nothing was particularly great and trading was very weak.”

Without the special items, Bank of America would have earned about $2.7 billion, which included pulling back $1.7 billion it had set aside, largely for borrowers who fail to pay their consumer and credit card loans.

Jason Goldberg, an analyst with Barclays Capital, counted 15 special items in the quarter, down from 16 in the second quarter but more than the 12 in the first quarter. “It’s a big company undergoing a transformation.”

The bank reported net income of 56 cents a share, compared with a loss of $7.3 billion or 77 cents a share in the year-earlier period. Analysts had been expecting the bank to earn 28 cents a share in the third quarter. Revenue rose to $28.7 billion from $26.9 billion, although that too was pumped by one-time gains.

For investors, the red ink flowing from Bank of America’s disastrous 2008 acquisition of Countrywide Financial, the subprime mortgage giant, remains the biggest worry. Both the federal government and private investors are seeking compensation for tens of billions of dollars in losses on securities backed by subprime mortgages.

Part of the reason investors breathed a sigh of relief Tuesday was that the red ink from subprime mortgages eased in the last quarter. Provisions for so-called put-backs, in which investors try to force the bank to buy back soured mortgages by arguing they were improperly originated and bundled into securities, fell to $278 million. In the second quarter, these provisions totaled a whopping $14 billion, including an $8 deal billion with investors that include the Federal Reserve Bank of New York. Litigation costs fell to $290 million from $1.5 billion in the second quarter.

In 2006, Bank of America surpassed Citigroup to become the biggest bank by market capitalization, an event that can be seen as a high-water mark of Mr. Lewis’s era. Today, its $67 billion market value lags Wells Fargo, JPMorgan Chase and Citigroup.

Bruce R. Thompson, the company’s chief financial officer, said he expected assets to keep shrinking in the coming months, as some loans come due and are not renewed and the company’s Canadian credit card business is sold in the fourth quarter.

“We’re not focused on the size of the balance sheet, what we’re focused on is getting the balance sheet that’s best for our customers and best for us,” he said.

In fact, while JPMorgan Chase and Citigroup showed slight growth in terms of total loans in the third quarter, Bank of America’s overall loan portfolio declined by about 0.9 percent compared with the second quarter, Mr. Goldberg noted.

The company’s headcount is also set to drop sharply from the 290,509 recorded during the third quarter. Roughly 2,000 employees were told last quarter their jobs were being eliminated, and 30,000 more are set to go over the next three years as part of Project New BAC, an efficiency initiative aimed at cutting $5 billion in expenses in its first phase.

Mr. Moynihan defended Bank of America’s controversial new $5-a-month debit card fee Tuesday, arguing that customers who bring more of their banking business to the company will be able to avoid it.

Article source: http://feeds.nytimes.com/click.phdo?i=3a19738d9d0fb55eedb0d539ee98f87f

Filed Under: Business News Tagged With: asset sales, investment bank, trillion

Bucks Blog: Where Do You Rank Among the 99 (or 1) Percent?

October 19, 2011 by NewsMaker Leave a Comment

Getty ImagesProtesters in Los Angeles.

Updated 12:14 p.m. to switch $846.4 trillion to billion. This is an error of the Kiplinger tool, and we’ve informed them of the miscalculation.

The persistent Occupy Wall Street movement has taken on the debate over rising income inequality, with its notion of 99 percent of the population being exploited by a wealthy 1 percent.

Doesn’t that make you a little bit curious, about where your income — and tax burden — places you, in comparison to the rest of your fellow citizens?

Kiplinger has a calculator feature that lets you enter your adjusted gross income (that’s Line 37 from your Form 1040 tax return, or Line 4 on the 1040EZ), and shows you where you fall.

To find out where you rank, try the tool.

I plugged in a hypothetical income of $50,000, and got this report:

So where do you rank, and were you surprised by the number?

Article source: http://feeds.nytimes.com/click.phdo?i=6c71770e88659ac8ec5ce0310cb2c767

Filed Under: Your Money Tagged With: population, tax burden, trillion

DealBook Column: Volatility, Thy Name Is E.T.F.

October 11, 2011 by NewsMaker Leave a Comment

Douglas A. Kass, founder and president of Seabreeze Partners Management.

Did you watch the markets on Monday? In the last 18 minutes of trading, the Standard Poor’s 500-stock index jumped more than 10 points with no news to account for the rally. If you were left scratching your head, you were not alone.

Almost every day there is an article in the newspaper trying to explain the stock market’s wild swings, or volatility, and often the explanation is inconclusive, involving everything from Europe’s banking problems to new fears of recessions.

Through the summer and into the fall, I, too, have been pondering the gyrations in trading, especially the late-day sell-offs and rallies that seem always timed perfectly to coincide with the closing bell. Rarely do the rallies or sell-offs, which invariably start after 3 p.m., justify 3 to 4 percent moves in the indexes. The swings have a deleterious effect on the markets because they undermine confidence and investors start sitting on the sidelines.

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And then I started talking with investors like Douglas A. Kass, a longtime Wall Street denizen who is the founder and president of Seabreeze Partners Management.

He says he knows the culprit behind the late-day market swings: leveraged exchange-traded funds or E.T.F.’s.

These funds, which allow investors to bet on a certain basket of stocks, commodities or an index, are perhaps the hottest rage in investing, with some $1 trillion invested. E.T.F.’s are particularly attractive to some investors because you can bet long or short — and you can leverage your bet. And you can hop in and out within the trading day to lock in gains, just as with stocks.

If you bet $100 that the ProShares Ultra SP500 would rise by 1 percent on a given day, and it did so, say by 3 p.m., you could settle the bet and receive double the return — in this case 2 percent (excluding fees). Of course, if the market goes in the opposite direction, you could lose 2 percent. There are also what are called inverse leveraged E.T.F.’s that go up when the price of the basket of goods goes down, and vice versa.

To Mr. Kass, these E.T.F.’s are the “new weapons of mass destruction.” (His description is an homage to Warren Buffett’s widely quoted line that derivatives are “weapons of mass destruction.”)

“They’ve have turned the market into a casino on steroids,” Mr. Kass said. “They accentuate the moves in every direction — the upside and the downside.”

Mr. Kass, who has written about this topic for TheStreet.com, may be right: at the end of every day, leveraged E.T.F.’s have to rebalance themselves by buying and selling millions of shares within minutes to remain properly weighted. If the E.T.F. made money that day, to remain balanced it has to reinvest the proceeds and leverage them again. In many cases, leveraged E.T.F.’s use options, swaps and index futures to keep themselves in balance.

You might consider the E.T.F. the new derivative.

“It is these derivatives and not the phenomenon known as high-frequency trading (H.F.T.) — commonly critiqued as contributing to the ‘flash crash’ of May 6, 2010 — that pose serious threats to market stability in the future,” Harold Bradley and Robert E. Litan of the Kauffman Foundation wrote in a controversial white paper last year. “The S.E.C., the Fed and other members of the new Financial Stability Oversight Council, other policy makers, investors and the media should pay far more attention to the proliferation of E.T.F.’s and derivatives of E.T.F.’s.”

Mr. Bradley and Mr. Litan contend that it is the “rebalancing risk” of E.T.F.’s that makes them particularly dangerous.

Back in 2009, Barclays Global’s research department studied the growing leveraged E.T.F. market — before the flash crash — and concluded that the funds created systemic risk because they “amplify the market impact of all flows, irrespective of source.”

The view that leveraged E.T.F.’s are responsible for the market’s volatility has not gone unchallenged.

William J. Trainor Jr., a professor at East Tennessee State University, conducted an extensive study of market volatility at the beginning and the end of the market day and concluded that E.T.F. rebalancing had nothing to do with it.

“Intra-daily volatility in time periods not associated with rebalancing saw the same spikes in volatility as the last 30 minutes did,” he said in his report.

Mr. Kass, who has been trading since the 1970s, scoffs at this notion.

“Ask any hedge fund manager what their gut says,” he protested.

I took an informal poll of a half dozen brand-name fund managers and virtually all of them agreed with Mr. Kass. But some of them said that high-frequency traders, which themselves trade E.T.F.’s, could be magnifying the problem.

“We know E.T.F.’s are the dominant factor in the marketplace,” Mr. Kass said. “In the ’70s and ’80s it was the mutual funds, in early 2000s it was the hedge funds. Now it’s the algorithms running the E.T.F.’s.”

Article source: http://feeds.nytimes.com/click.phdo?i=d61fefbd0c33a589522194f409e5e2f8

Filed Under: Business News Tagged With: sp500, trillion, volatility

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