Finance and Economic

Curbing shady lending practices that contributed to the housing and credit debacles should help revive the badly shaken confidence of the public and investors, a Federal Reserve board member said Thursday.

"Effective consumer protection can help to restore confidence in the mortgage markets and help to preserve the flow of capital to consumers who wish to purchase a home," Federal Reserve Governor Randall Kroszner said in a speech to a conference of Hispanic real-estate executives here.

Under fire from Congress for being too lax in its oversight, the Fed has proposed a sweeping rule to protect homeowners from dubious lending practices. Subprime borrowers - those with tarnished credit histories or low incomes - have been hurt the most, although problems have spread to more credit-worthy borrowers.

The Fed’s proposal is aimed at preventing prospective homebuyers from getting burned in the future when they take out a mortgage.

On this front, the Fed has a proposal that would: restrict lenders from penalizing risky borrowers who pay loans off early; require lenders to make sure these borrowers set aside money to pay for taxes and insurance; and bar lenders from making loans without proof of a borrower’s income.

It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower’s ability to repay a home loan from sources other than the home’s value. The proposal would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.

"Substantial anecdotal evidence indicates that failing to verify [a borrower’s] income invited fraud," said Kroszner, who has been the Fed’s point person on the consumer protection provisions.

If ultimately adopted, the plan would apply to new loans made by thousands of lenders of all types, including banks and brokers. Thus, enforcement of the provisions would depend not only on the Fed but also on other federal and state regulators.

"It is not too early to emphasize that the effectiveness of the final rule will depend critically on effective enforcement," Kroszner said. "The Federal Reserve will do its part." 

Sourse

Clear Channel Communications Inc. and the private equity firms seeking to close a $19.5 billion purchase of the company on Wednesday sued the banks backing the deal.

In lawsuits filed in Texas and New York, Clear Channel (CCU, Fortune 500) and the buyers group, led by Bain Capital and Thomas H. Lee Partners LLC, claimed the six banks that promised to finance the deal were reneging on the agreement to provide long-term financing, looking to offer little more than a short-term bridge loan.

"The lenders agreed to provide long-term financing," said Alex Stanton, a Bain spokesman. "They now have lenders’ remorse because the credit markets have been difficult."

The lenders, which include Citigroup Inc (C, Fortune 500)., Morgan Stanley (MS, Fortune 500), Credit Suisse Group (CS), The Royal Bank of Scotland (RBS), Deutsche Bank AG (DB) and Wachovia Corp (WB, Fortune 500)., signed commitments when the deal was inked 18 months ago saying they would bear all the risk in changes to the debt market.

In that time, it has become more difficult for the banks to resell the loans so — instead of sticking with the minimum six years of financing — the lenders had sought to provide only a short-term loan, the equity firms and Clear Channel complained.

The firms contend the banks are trying to kill the deal by putting unreasonable terms on the loan.

"The behavior of these banks is irresponsible, unprofessional and unjustified. The defendants have made clear that they are determined, by any means possible, to destroy the merger and thus avoid their obligation to fund, as they are required legally to do," said Clear Channel CEO Mark Mays in a statement.

The banks issued a statement denying they failed to make good on their earlier commitment.

"The bank group presented the sponsors with credit agreements fully consistent and compliant with the commitment letter," said the statement issued by Citigroup on behalf of the lending consortium. "We believe the suits are without merit and will contest them vigorously."

Clear Channel shares have been volatile for months. Shares fell $5.64, or more than 17 percent, to $26.92 Wednesday, the day after reports surfaced that the deal was on the brink of collapse. Following the lawsuits, the share price climbed $2.43, or 9 percent, to $29.35 in after-hours trading.

But the share price remains anemic compared with the $39.20 the equity firms agreed to pay for the company. The equity firms say they remain committed to closing the deal. If they don’t, they face an estimated $500 million to $600 million in breakup fees.

The deal was scheduled to close by Monday. Failure to close on time opens the parties up to fees and other potential problems.

SMH Capital analyst David Miller said banks that were gladly loaning money for ever bigger leveraged buyouts just a year ago are now concerned about whether the company can generate enough free cash flow to cover the interest payments in a miserly credit market.

The banks are looking at a $3 billion to $4 billion write-down on the loan, so there’s obvious incentive for lenders to seek a way to renegotiate or pull out.

Clear Channel has had success before in forcing a deal through legal action. The $1.1 billion sale of its television group closed after the company lowered the price by $100 million and sued Providence Equity Partners, which had been having difficulty getting Wachovia to make good on its earlier financing commitment.

Clear Channel is the nation’s largest operator of radio stations, a business that has been stagnant for years as digital music players and satellite radio have siphoned off listeners and advertising dollars.

The company now generates more than half of its revenue from its billboard business, consisting of roughly 800,000 signs worldwide, and that business has been growing as advertisers have shifted spending away from other avenues to billboards, which are harder for consumers to bypass.

Clear Channel Communications Inc. and the private equity firms seeking to close a $19.5 billion buyout of the company have sued their lenders.

The radio and billboard giant filed suit Wednesday in Texas, claiming the five banks who promised to finance the deal are reneging. The private buyers, led by Bain Capital and Thomas H. Lee Partners, also sued.

The banks signed letters backing the deal, but in the 18 months since it was first made, the credit market has gotten much tighter and Clear Channel’s stock is now trading well below the $39.20 that the buyers committed to pay.

The private equity firms face an estimated $500 million to $600 million in breakup fees if the deal does not go through.

Shares of Clear Channel (CCU, Fortune 500) closed down 17% to $26.92 on Wednesday as shareholders grew pessimistic about whether the deal would go through.

The buyout was supposed to be completed by Monday. 

Sourse

Senior Democrats and at least one Republican on Wednesday demanded details on the role the Federal Reserve and the U.S. Treasury Department played in helping JPMorgan Chase & Co’s (JPM.N: Quote, Profile, Research) buyout of Bear Stearns Cos Inc (BSC.N: Quote, Profile, Research).

The Senate Banking Committee set an April 3 hearing to examine the Fed’s role in the transaction brokered by U.S. Treasury Secretary Henry Paulson.

The Fed guaranteed some $29 billion of illiquid Bear Stearns’ assets and allowed JPMorgan to offer $2 a share for what was the fifth-largest U.S. bank. Shareholder protests forced JPMorgan to raise the bid to $10 a share, 93 percent less than its 52-week high of $159.34.

Some lawmakers question why the U.S. government is prepared to help rescue a failing Wall Street bank while refusing to rescue millions of home owners facing foreclosure. Lawmakers return to work Monday from a two-week spring break where they heard from the voters.

“The unprecedented nature of some recent actions by the Federal Reserve, Department of Treasury and others merits a full and public examination by the committee,” Christopher Dodd, chairman of the Senate Banking Committee, said in a statement.

The Connecticut Democrat also expressed concern that JPMorgan’s chairman James Dimon held a Federal Reserve Bank of New York board seat while trying to acquire Bear Stearns.

Dodd invited Dimon and Bear Stearns Chief Executive Alan Schwartz to testify along with Fed Chairman Ben Bernanke and Secretary Paulson.

He also asked U.S. Securities and Exchange Commission Chairman Christopher Cox and Federal Reserve Bank of New York President Timothy Geithner to testify. 

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Gas stations on China’s booming east coast were rationing diesel, pump attendants said on Tuesday, despite Beijing’s insistence that its refiners will ensure supplies at unprofitable state-set prices.

“The line outside our station is at least one kilometer long,” said one station manager in coastal Fujian province, who declined to be named because fuel supplies are a sensitive issue.

Other stations said they had sold out of the day’s supply by noon and did not know if a delivery would arrive on Wednesday.

Down the coast in Guangzhou province, China’s manufacturing hub, diesel was rationed to 300 yuan ($42.56) for cash sales — enough to fill up a family car but just a small portion of a truck tank — and there were queues of up to 20 minutes.

The government said late on Monday that fuel supplies were adequate and that reports of rationing reflected only sporadic problems caused by demand from farmers planting their spring crops and the lingering impact of unusually severe winter weather.

“Supply tightness, even queues and rationing, in southern China was partly due to rising needs in the spring season as well as more demand after the harsh winter weather,” the National Development and Reform Commission said in a statement.

Hoarding in expectation of price rises may have exacerbated shortages, but overall supplies were good as domestic oil product stocks had risen 28 percent from the start of the year, and the country’s oil majors would ensure supplies, the commission added.

But as rationing and queues spread inland and to the country’s financial centre, Shanghai, there were echoes of last October’s supply crisis, China’s worst in four years. 

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Minutes after news hit the tape on March 14 that Bear Stearns Cos. was getting emergency funding from the Federal Reserve, the Wall Street humor mill was hard at work.

"Thank you for calling Buy-a-Bank," said an e-mail from a long-time reader. "Please listen carefully as our menu items have changed.

"For Mandarin, press 1.

"For Arabic, press 2.
"For takeover of Bear Stearns, press 3.

"For Lehman Brothers, press 4.

"For any monoline insurer, press 5.

"To purchase residual assets of defunct hedge funds, please stay on the line and an operator will assist you."

We live in perilous times. Crises are cropping up faster than the Fed can propose solutions to stabilize them.

Fearful that Asian markets would open the week with the fate of Bear Stearns hanging in the balance (it wasn’t, but markets tanked anyway), the Fed took yet another emergency action on the evening of March 16, lowering the discount rate by 25 basis points to 3.25 percent and opening its discount window — previously a bank-only privilege — to primary dealers, the 20 firms with which it deals directly.

Why lower the discount rate two days before a regular policy meeting?

"Unless the Fed cuts an interest rate, most equity managers don’t get it," said Jim Bianco, president of Bianco Research in Chicago. "I doubt 25 basis points would make a difference to primary dealers in need of funding."

The new lending facility came with a new acronym (PDCF, for Primary Dealer Credit Facility) and a broad range of investment-grade collateral eligible for overnight loans.

Less than two weeks ago, the Fed created a Term Securities Lending Facility for the same primary dealers. (Give me your tired, your poor, the wretched refuse of your AAA mortgage-backed securities, and we’ll lend you up to $200 billion of Treasuries for 28 days.)

To seal the deal on JPMorgan Chase & Co.’s purchase of Bear Stearns for the bargain-basement price of $2 a share, the Fed tossed in a $30 billion loan to fund Bear Stearns’s "less-liquid assets," or junk by any other name.

When the central bank said it would provide funding to Bear Stearns via JPMorgan (PDCF wasn’t in place yet; just TAF and TSLF), it had "moral hazard" written all over it. The Fed, in bailing out a major financial institution, was encouraging risky behavior in the future.

Bear Stearns was too big to fail, too weak to continue operations, and too intertwined with counterparties to go down without causing serious collateral damage. It was the judgment of Fed policymakers that the risk to the national economy from a margin spiral was greater than the appearance of bailing out a bank.

In retrospect, it seems that the too-big-to-fail bank served as a sacrificial lamb, held out (or hung-out?) as an example.

"The Fed let JPMorgan steal Bear Stearns because it needed cover for the putative moral hazard in keeping the system afloat," said Paul DeRosa, a partner at Mount Lucas Management Co. "For macro reasons, the Fed had no alternative."

The reception from the markets was not what the Fed hoped for. Asian and European stock markets took a dive, the U.S. dollar crumbled and U.S. stock index futures were in deep negative territory before the opening bell. The Dow Jones industrial average managed a 21-point gain for the day, while the other major U.S. indexes posted losses.

That’s hardly a vote of confidence, especially at a time when the Fed is "running out of bullets," said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago.

Kasriel said the Fed should have done what it’s doing now back in August, instead of cutting its benchmark rate so aggressively.

Fed chief Ben Bernanke is "buying time," Kasriel said. "He’s saying, ‘We’re going to extend you a lifeline, but you’re going to take a hit,’" — you being the shareholders. "But you’re going to have to raise capital."

Banks have watched the value of the assets they hold, especially those that are mortgage-related, decline. At the same time, their liabilities don’t change. That means an erosion in their capital, or assets minus liabilities. When bank capital falls below regulatory minimums relative to assets, financial institutions have to sell assets, which sets in motion the kind of downward spiral the Fed was looking to prevent.

Bear Stearns was the victim of a good old-fashioned bank run, with lenders and customers playing the role of traditional depositors. Now that JPMorgan has guaranteed Bear Stearns’ counterparty risk, "the creditors are safe, and the stockholders vulnerable," DeRosa said.

And that’s how it should be. The 85-year-old Bear Stearns is history; other banks may be ripe for the picking.

"Please enter the first three letters of the bank you are interested in buying," the Buy-a-Bank phone line might say. "Or try again later. Our menu items are changing on a daily basis."

Caroline Baum is a Bloomberg News columnist.

Sourse

The financial crisis is over and investors should take advantage of the "once-in-a-generation opportunity" to buy banking stocks, an analyst said Thursday.

"This comment sounds ridiculous given the conviction on the part of most commentators that the worst is yet to come," Punk, Ziegel & Co. analyst Richard Bove said in a client note. "However, I do, in fact, believe that the crisis is over."

More negative news will come, but it will be "meaningless," and while the financial crisis is over, "problems facing the economy are not," he said.

"An environment has been created that will pump profits into the American banking system," he said. "Investors are so focused on the potential for loan losses and the flawed valuations created by an obscenely invalid accounting rule supported by a soporific Securities and Exchange Commission that they are missing this fact."

The latest phase of the crisis was triggered by the collapse of Bear Stearns (BSC, Fortune 500), and ended up involving everyone from Federal Reserve Chairman Ben Bernanke to President Bush, he said.

"At this point, the only question is whether the solutions being offered have any chance of working," he said.

Recent Fed actions - including cutting the federal funds rate and guaranteeing billions in Bear Stearns illiquid securities - were "brilliant" because they addressed the heart of the matter, he said.

Yet with the federal government now moving aggressively to defuse the crisis, Bove worries that it may not have the necessary resources. The Fed has about $921 billion in assets, about half of Bank of America’s (BAC, Fortune 500) assets and less than half of Citigroup’s (C, Fortune 500), he said.

Help from foreign central banks may be needed to effectively rescue the troubled financial sector, Bove said. Some may be willing to help, especially as the dollar drops and eats into foreign producers’ profits, he said.

Concern that the Fed will cost taxpayers money by swapping out and guaranteeing bad securities is "simply fear overwhelming logic," he said. 

Sourse

BNP Paribas has walked away from a possible bid for smaller rival Societe Generale, which has been seen as a takeover target after suffering a rogue-trading scandal.

“Given the persistent rumors, BNP Paribas clarifies that it has ceased to consider a potential tie-up with Societe Generale,” BNP Paribas, France’s biggest listed bank, said in a statement on Wednesday.

“If a French bank that knows the market doesn’t want it, then it’s unlikely that anyone else will,” said Ion-Marc Valahu, head of trading at Amas Bank in Switzerland.

BNP Paribas shares were up around 5 percent in mid-morning while SocGen fell 7 percent. SocGen has a market capitalization of around 30 billion euros ($47.44 billion) while that of BNP Paribas stands at around 56 billion euros.

“It’s obviously bad news for SocGen shareholders. Nevertheless, it was expected and we had anticipated it since BNP would not have taken that much time if it really wanted to make a bid,” said Iris Finance fund manager Michael Sellam, who holds SocGen shares.

A source close to the matter said BNP Paribas came to its decision because of SocGen’s opposition to any tie-up and as BNP would not make a hostile bid. The announcement means BNP Paribas is prevented from bidding for SocGen for six months.

In January BNP, which narrowly failed to buy SocGen in 1999, said it was looking at its rival. SocGen became vulnerable to a bid after announcing 4.9 billion euros of losses which it said were caused by rogue deals carried out by one of its traders. Jerome Kerviel.

The source said uncertainty in financial markets over the credit crisis and the investigation into Kerviel also contributed to BNP’s decision. 

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Microsoft Corp. met with Yahoo Inc. to discuss the software maker’s unsolicited takeover bid earlier this week, a breakthrough that could be the first step toward a friendly deal between the two rivals.

The meeting occurred Monday near Yahoo’s Sunnyvale headquarters, according to a person familiar with the situation. The person spoke Friday on the condition of not being identified because the preliminary talks haven’t been formally disclosed.

No investments bankers attended Monday’s meeting, nor was there any discussion about whether Microsoft is willing to raise its offer, initially valued at $44.6 billion, or $31 per share. Yahoo’s board already has rejected that bid, arguing the company’s Internet franchise is worth more.

Although it’s unclear whether Microsoft Chief Executive Steve Ballmer and his Yahoo counterpart, Jerry Yang, attended Monday’s meeting, senior management from both companies were on hand.

The gathering, first reported by The Wall Street Journal, gave Microsoft its first chance to sell Yahoo on the rationale for the proposed marriage since the software maker unveiled its plans six weeks ago.

Since then, Yang has been exploring different ways to ward off Microsoft. The alternatives have included possible alliances with Internet search and advertising leader Google Inc. (GOOG, Fortune 500), News Corp.’s (NWS, Fortune 500) MySpace.com and Time Warner Inc.’s (TWC) AOL.

Microsoft has held firm with its bid and warned it’s prepared to pursue a hostile takeover if Yahoo continues to resist.

Most industry analysts believe neither side wants to engage in an acrimonious battle and expect Microsoft to resolve the impasse with a slightly higher bid.

Investors aren’t so sure the stakes will be raised. Yahoo (YHOO, Fortune 500) shares fell 79 cents to $26.71 Friday while Microsoft (MSFT, Fortune 500) shares shed 66 cents to $27.96. At that price, Microsoft’s offer - made partly in Microsoft stock - is worth about $40 billion.

The saga could still take several weeks to play out and may not be resolved until Yahoo releases its first-quarter earnings April 22. With Yahoo mired in a two-year slump, the first-quarter results could sway Microsoft’s next move.

The waiting game works in Google’s favor by distracting two of its biggest rivals while it strives to extend its dominance of the Internet’s lucrative search and advertising market. Google added another layer of muscle this week by completing its $3.1 billion acquisition of online ad service, DoubleClick Inc.

Microsoft believes a combination with Yahoo will pose a more serious threat to Google.

By finally meeting with Microsoft executives, Yahoo could be laying the groundwork for more serious negotiations. Or Yahoo’s board could just be touching base with Microsoft to show shareholders that it heard out its suitor before working out an alternative deal.

Yahoo’s other options have been considered a long shot by most analysts and now there are signs that at least two of its potential partners aren’t interested in getting together.

Rupert Murdoch, the chief executive of News Corp., downplayed his interest in a Yahoo deal at a conference this week. And AOL’s plan to buy online social network Bebo for $850 million in a deal announced Thursday may make a combination of AOL with Yahoo more complicated.

Google has offered to work with Yahoo, but analysts say antitrust regulations will make it difficult, if not impossible, for those two companies to become business partners.

Yahoo still doesn’t appear to be in any rush to resolve the saga, based on how it’s handling a key deadline for nominating candidates to supplant its current board. Microsoft has threatened an attempt to oust Yahoo’s 10 directors if it can’t broker an amicable takeover.

Last week, Yahoo postponed the deadline from Friday to 10 days after the date Yahoo announces its annual meeting.

Yahoo has no plans to disclose the meeting date before April and may not do so until its first-quarter earnings come out, according to a person close to the company. The person wasn’t authorized to be identified publicly. 

Sourse

President George W. Bush plans to meet on Monday with top U.S. financial policymakers, the White House said, at a time of increased strains in credit markets and fears of a recession.

The White House said on Saturday Bush will meet members of the President’s Working Group on Financial Markets, and a spokeswoman said Bush will get a status report on the markets.

The economy has become increasingly important in the U.S. presidential campaign, surpassing the Iraq war as the top concern of voters heading into the November election. A protracted downturn could bode ill for presumptive Republican nominee John McCain, whom Democrats have been trying to taint with allegiance to polices of fellow Republican Bush.

Speaking to reporters on her campaign plane in Pittsburgh as she focused on Pennsylvania ahead of its crucial April 22 primary, Democratic presidential hopeful Hillary Clinton repeated her concerns about the economy.

“It’s ironic that President Bush is in New York talking about how he recognizes there are economic problems in the country at the same time that the Fed is moving to try to stem the continuing erosion in the credits market around the world because of a lot of failed policies and lax oversight and neglect of the Bush administration,” Clinton, a New York Democrat, said.

The working group is led by U.S. Treasury Secretary Henry Paulson and also includes Federal Reserve Chairman Ben Bernanke as well as the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission.

SHARP DOWNTURN

A sharp downturn in the U.S. housing market has led to a full-blown credit crisis that has reverberated throughout the U.S. financial system. 

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IAC/InterActiveCorp (IACI.O: Quote, Profile, Research) chief Barry Diller told a Delaware court on Thursday he had rejected “many, many times” the proposals for an asset swap from IAC’s controlling shareholder, Liberty Media Corp, because they did not offer the proper value to IAC investors.

Diller also said he would be interested in a controlling interest in IAC if he could obtain the necessary amount of shares. He dubbed Liberty Chief Executive Greg Maffei an “irresponsible executive” who would not benefit IAC if he took an operating role.

With his role as IAC Chairman and CEO potentially at stake, Diller’s testimony was a key attempt to refute claims made this week by Liberty at trial in Delaware Chancery Court.

IAC and Liberty (LINTA.O: Quote, Profile, Research) (LCAPA.O: Quote, Profile, Research) are suing each other over Diller’s proposal to spin off four of IAC’s largest businesses in a manner that would dilute Liberty’s voting control over the units.

The spin-off plan followed more than a year of inconclusive talks between the sides over swapping one of IAC’s assets in return for Liberty’s stake in IAC.

“We never accepted one of them because we never got to the value that was appropriate for IAC shareholders,” said Diller, who built up the Internet conglomerate over more than a decade with the backing of his long-time friend, Liberty Chairman John Malone.

Asked by Liberty lawyer Kevin Abrams whether he would be interested in trying to seek control of IAC, Diller said, “Yes, if I could.”

“I don’t know how far I would get,” he said. “I’m not sure the number of shares I would need to acquire I would (actually) obtain,” he told the court. 

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