Finance and Economic

The Obama administration’s new proposal for tackling financial risk in the U.S. economy, unveiled just two days ago, came under attack on Thursday from Congress and regulators, with questions raised about its funding and scope.

U.S. Treasury Secretary Timothy Geithner scrambled in a congressional hearing to defend the plan against critics who said it would give too much power to regulators and enshrine government bailouts for troubled financial firms in law.

Released by the Treasury Department and Democratic Representative Barney Frank on Tuesday, the plan is an bold attempt to make sure the Bush administration’s confused handling of last year’s financial crisis doesn’t happen again.

That episode saw some firms, such as AIG and Citigroup, get multibillion-dollar bailouts. Others, such as Lehman Brothers, were allowed to go into bankruptcy, while still others were forced into government-engineered mergers.

The 253-page Obama plan tries to strike a balance between bailouts and bankruptcy, while insisting that large financial firms, not taxpayers, foot the bill for future interventions.

“Without the ability for the government to step in and manage the failure of a large firm and contain the risk of the fire spreading, we will be consigned to repeat the experience of last fall. It’s a really stark, simple thing,” Geithner said at a hearing of the House of Representatives Financial Services Committee, chaired by Frank and packed with bank lobbyists.

Amid concerns that a few elite financial giants have become “too big to fail,” the administration’s plan would empower regulators to police, restructure, and even shut down large firms that threaten stability payday advance. It resembles the Federal Deposit Insurance Corp’s power to seize and dismantle troubled banks.

Bankruptcy would be remain the dominant tool for handling non-bank financial firm failures, Geithner said.

“But as the collapse of Lehman Brothers showed, the bankruptcy code is not an effective tool for resolving the failure of a global financial services firm in times of severe economic stress,” he said.

The plan is meant to mesh with many other financial regulatory reform proposals being pursued by the administration and congressional Democrats.

HALTING PROGRESS

Ranging from regulation of over-the-counter derivatives and setting up a financial consumer watchdog agency, to curbing bankers’ pay and cracking down on credit rating agencies and hedge funds, the reform push has been making halting progress.

Final action is still months away. Frank’s committee has approved some proposals, but votes by the full House await and the Senate has barely begun handling the matter.

“Congress will be split” over the new systemic risk plan, said financial services policy analyst Brian Gardner at investment firm Keefe Bruyette & Woods.

“Opposition cuts across party lines. We also expect significant opposition to increasing the Fed’s role as a banking regulator in the Senate and we think this bill’s prospects are far from certain,” Gardner said. 

Read more

Some of the nation’s largest companies pushed back against U.S. Democrats’ plans to deliver a government-run insurance option in a healthcare overhaul, decrying it as a step backward that would drive up costs for employers and their workers.

The Business Roundtable, comprised of chief executives at Verizon Communications, JPMorgan, General Electric, Wal-Mart and other companies that together employ more than 12 million people, said the federal government is inefficient and would underpay providers. That would result in providers boosting prices for private insurers and employers, the group said on Wednesday.

“A public plan would neither manage cost nor encourage innovation,” said Antonio Perez, chief executive of Eastman Kodak Co and head of the Business Roundtable’s health initiative. “We believe it is the wrong direction for fixing our health care system.”

On Monday, Senate Majority leader Harry Reid said his bill would include a so-called “public option” as an alternative to those sold by private insurers. Individual states could “opt out” against offering the plan.

President Barack Obama, who has made health reform his top priority this year, has said a government alternative will force private insurers to be more competitive.

The U.S. House of Representatives’ proposals also contain a public insurance option.

Although an earlier congressional analysis found that about 9 million to 10 million people, most uninsured, would opt for the public plan, the Business Roundtable fears that number will jump as people see their private plan premiums climb.

“The costs for all of us in the system will continue to go up and again put pressure on employers to get out of the healthcare system,” John Castellani, president of Business Roundtable, told reporters at a news conference payday advances.

Other business groups also oppose a public insurance option and are pushing for alternative cooperative exchanges. The U.S. Chamber of Commerce launched television ads on national cable stations and in seven states on Wednesday to fight the government option.

‘ORBITZ’ FOR HEALTH PLANS?

The United States is the only developed nation that pays for the bulk of its health care through private employers rather than the government, and studies have shown premiums for workers and their companies continue to rise each year.

Health insurers earlier said they would back some reforms as long as a bill included a strong requirement for people to buy health insurance policies, a move they said would spread risk among a wider pool of people and disperse costs. Insurers also vowed to pass through additional taxes and costs onto purchasers.

While details from the final Senate and House bills have yet to emerge, so far the proposals differ somewhat on what penalties either individuals or companies would face for not buying or providing health insurance.

Companies want to offer employees health care to recruit and retain talented workers, said Bruce Josten, a vice president at the Chamber of Commerce.

The chamber backs an national exchange “with an Orbitz-like website,” Josten told Reuters, referring to a popular travel site that compares deals among various providers. 

Read more

BP Plc beat third-quarter earnings forecasts by a big margin as its cost-cutting program proved more successful than expected, prompting the British oil major to increase its target for savings for the year.

Dealers said they expected the London-based company’s shares to open 3 percent higher on the earnings.

BP said third-quarter replacement cost net profit, which strips out unrealized gains or losses related to changes in the value of fuel inventories, fell 50 percent to $4.98 billion, due to lower oil and gas prices.

Excluding one-offs, the result was $4.67 billion, compared to an average forecast of $3.16 billion from a Reuters poll of 11 analysts.

A lower-than-expected tax rate flattered the result but reductions of over 15 percent in costs in the oil and gas production and refining units was the key driver of the better-than-expected earnings, a spokesman said.

“These results demonstrate real operational momentum across the company. We continue to transform our cost base,” Chief Executive Tony Hayward said in a statement.

The strong progress on squeezing out costs could boost investor optimism about cost-cutting programs at rivals such as Royal Dutch Shell, which reports on Thursday.

The company said oil and gas production averaged 3.917 million barrels of oil equivalent per day, up 7 percent compared to the same period in 2008.

BP said its debt-to-equity or gearing ratio fell in the quarter, against expectations that it would rise.

BP and its rivals had been borrowing this year to meet high dividend payments, or in some cases, cutting their dividends.

Read more

Australian exports of commodities will benefit from China’s commitment to maintain policies that support economic growth, Australian Treasurer Wayne Swan said.

China’s economy expanded 8.9 percent in the third quarter from a year earlier, the fastest pace in a year, as stimulus spending and record lending growth helped the nation lead the world out of recession. China’s cabinet said Oct. 21 that it will continue with monetary and fiscal stimulus measures even after the economy’s expansion exceeded officials’ expectations.

China’s commitment to stimulate growth “will provide further support to Chinese demand for commodity and capital- goods imports, with implications for exports here in Australia,” Swan said in an e-mailed note. “As a resource-rich nation on Asia’s doorstep, Australia is uniquely placed to capitalize on this Asian century.”

Australia’s proximity to Asia is helping it rebound faster than most other developed economies. Trade figures show the nation’s largest export customers this year are China, Japan, South Korea, India and the U.S. Six years ago, the U.S. was ranked second.

Source

Europe’s manufacturing and services industries expanded at the fastest pace in 22 months in October as evidence mounted that the global economy is pulling out of the recession.

A composite index of both industries in the euro-area economy rose to 53 from 51.1 in September, London-based Markit Economics said today. Economists forecast a gain to 51.6, according to the median of 13 estimates in a Bloomberg News survey. A reading above 50 indicates expansion.

European companies are stepping up output to meet reviving orders after governments around the world spent $2 trillion in stimulus measures to fight the worst recession in at least six decades. The International Monetary Fund said on Oct. 1 the global economy will expand at a faster pace than previously expected in 2010. Still, the euro’s ascent against the dollar may curb a European recovery.

“The second half of the year will be relatively strong,” said Juergen Michels, chief euro-area economist at Citigroup in London. “Looking ahead, there are a lot of reasons for momentum to weaken partly because of a stonger euro.”

The world economy will shrink 1.1 percent this year, less than the 1.4 percent projected in July, the Washington-based IMF forecast. In 2010, the economy may expand 3.1 percent instead of a previously projected 2.5 percent, the fund said. In the euro region, the economy probably returned to growth in the third quarter, the European Commission forecast last month.

Global Recovery

Adding to signs of global recovery, confidence in the world economy rose for a third straight month in October, a Bloomberg survey of users on six continents showed earlier this month. In the U.S., the world’s largest economy, industrial output increased more than expected in September and China’s manufacturing expanded at the fastest pace in 17 months.

Wolfsburg, Germany-based Volkswagen AG, the biggest overseas carmaker in China, sold 150,000 cars last month, a monthly record, as sales for the first nine months surged 37 percent. Volkswagen is investing 4 billion euros ($6 billion) to expand capacity in China through 2011.

“China is the steam engine of the world economy,” Volkswagen sales chief Detlef Wittig said in a Sept. 25 interview in Frankfurt. “The lust for mobility there seems almost bottomless. We’re very well positioned there and will keep investing to secure our share of the market.”

Source

Morgan Stanley’s riskier trading operations have stolen the thunder from its growing brokerage — at least for now.

Strong fixed income sales and trading revenue and improved investment banking underwriting results broke a three-quarter losing streak as Morgan Stanley belatedly joined rivals like Goldman Sachs Group Inc in returning to the black after the collapse of the financial sector a year ago.

The New York-based bank reported third quarter net income of $498 million, or 38 cents a share, beating analysts’ average forecast of 27 cents a share, according to Thomson Reuters I/B/E/S.

Morgan Stanley shares were up 7 percent to $34.80 in afternoon trading on the New York Stock Exchange after earlier touching a 13-month high of $35.00.

In the 2008 third quarter the bank earned $7.7 billion, or $7.38 a share, boosted by a one-time accounting gain from declines in the value of its debt.

Scarred by the collapse that claimed competitors like Lehman Brothers, Morgan Stanley has pledged to play a more conservative hand as it develops its brokerage business.

Co-president James Gorman is set to succeed Chief Executive John Mack — credited with keeping the bank alive during the darkest days of the crisis, but criticized for struggling to manage risk — early next year.

Many analysts view Gorman’s appointment as evidence that Morgan Stanley is trying to dial down the riskier trading business in favor of a steadier stream of income from the wealth management business payday loans with no fax.

MAKING UP GROUND

Morgan Stanley Chief Financial Officer Colm Kelleher said in an interview that the third-quarter results were an “affirmation” that the firm’s strategy was bearing fruit.

The third-quarter rebound came largely because of solid results in trading, a riskier area of the business.

“They made up the ground on the trading side,” said Brad Hintz, an analyst with Sanford C. Bernstein in New York and former treasurer at Morgan Stanley. “The issue that Morgan Stanley faced is they cut too deeply in fixed income and markets came back more quickly than they anticipated.”

Kelleher said during a call with analysts that the firm is about halfway through a hiring spree it initiated earlier this year to restock its trading and sales ranks. Kelleher said more than 400 were expected to be hired.

“It is good that they are starting to see some of the early benefits of that,” said Michael Hecht, an analyst with JMP Securities.

The firm’s institutional securities group, which includes the advisory, underwriting and trading units, posted pre-tax income of $1.3 billion in the quarter. 

Read more

Australia’s central bank signaled it’s prepared to keep raising interest rates and tolerate further appreciation in the nation’s currency to help restrain consumer prices as the economy strengthens.

A “very expansionary setting of policy was no longer necessary, and possibly imprudent,” officials said in minutes of an Oct. 6 meeting, released today in Sydney. Gains in the nation’s dollar, the best-performing this month of the 16 most- traded currencies, “may help contain inflation,” they said.

The minutes drove Australia’s currency above 93 U.S. cents, the highest level in 14 months, as investors bet Reserve Bank Governor Glenn Stevens will boost the overnight cash rate target next month. Stevens unexpectedly raised the benchmark a quarter point to 3.25 percent this month, becoming the first Group of 20 central banker to increase borrowing costs.

“The dollar is well and truly on the way to parity” versus the U.S. currency, said Savanth Sebastian, an economist at Commonwealth Bank of Australia in Sydney. “At this early stage, the Reserve Bank isn’t worried about the currency because their concern is to remove stimulus. Once they get back to a neutral setting and the currency is at parity, they’ll start to look at holding interest rates steady.”

The Australian dollar jumped to 93.11 U.S. cents immediately after the minutes were released from 92.76 cents earlier. It traded at 92.86 cents at 5:12 p.m. in Sydney.

Inflation Threat

Holding rates at their current “very low levels” could threaten the bank’s target of keeping inflation between 2 percent and 3 percent, the Reserve Bank said in the minutes.

Annual core inflation, which excludes food and energy costs, was 4.2 percent in the three months through June, a report showed on July 22. Third-quarter figures will be published on Oct. 28.

Barclays Capital, Citigroup Inc. and National Australia Bank have forecast the Australian dollar will reach parity in six to 12 months.

Investors are certain Stevens will raise the benchmark rate by at least another quarter point on Nov. 3, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. Chances of a half-point increase next month were 20 percent, the futures showed at 4:28 p.m., down from 26 percent prior to the minutes.

Government Stimulus

Policy makers noted that there was still a possibility the economy’s recent strength was due to the impact of A$42 billion ($39 billion) in government spending and handouts, which “left open the attendant risk that activity might slow as that stimulus faded.”

“It was also likely that the appreciation of the exchange rate would act as a contractionary influence on activity and help contain inflation,” the minutes said.

Philip Lowe, assistant governor at the Reserve Bank, said in Sydney this week the nation’s currency has gained because Australia has “a high return of capital with a lot of investment.”

“We will have a higher average exchange rate than we’ve had over the past couple of decades,” Lowe said on Oct. 19.

Australia’s currency has averaged 72 U.S. cents since being floated in December 1983, according to data compiled by Bloomberg. It has surged 54 percent since hitting a five-year low on Oct. 27 last year.

Stevens said last week that experience “counsels against” an approach where policy makers who cut rates rapidly in response to a threat become “too timid to lessen that stimulus in a timely way when the threat has passed.”

Woolworths Chief

“It would go against history to think the low rates we have at the moment will continue ad infinitum,” Michael Luscombe, chief executive officer of Woolworths Ltd., Australia’s largest retailer, said in an interview.

The benchmark rate will rise above 5 percent if policy makers “determine the economy is overheating or inflation is getting out of control,” Luscombe added.

Australia’s economy “had for some time been noticeably stronger than had earlier been expected,” today’s minutes said.

Gross domestic product rose 1 percent in the first half of this year as consumers increased spending, spurred by the central bank slashing borrowing costs by a record 4.25 percentage points between September last year and April.

Policy makers noted that a “sizeable gap” had opened up between the performance of Australia and other developed economies. “The board had to be mindful of local conditions in setting policy,” the minutes said.

Such commentary was “extremely bullish on rate hikes and there wasn’t too much discussion about currency concerns,” said Commonwealth Bank’s Sebastian. “In years gone by, you would have seen discussion about the impact of the Australian dollar and how it’ll curtail growth.”

Source

Economy Minister Karl-Theodor zu Guttenberg expressed confidence on Saturday that Germany could address EU concerns about a sale of carmaker Opel to Canada’s Magna, saying they did not put the deal at risk.

The European Commission announced late on Friday that Competition Commissioner Neelie Kroes had written to Guttenberg voicing doubts about Germany’s offer to provide 4.5 billion euros ($6.7 billion) in financial aid for Opel as part of the deal with Magna.

In the letter, Kroes said there were “significant indications” that Germany had made the aid for Opel contingent on Magna being chosen as the winning bidder — a stance that would run counter to EU competition rules.

Speaking to reporters in Berlin on Saturday morning, Guttenberg said the deal was “on track” and voiced confidence that Germany could resolve the questions raised by Kroes.

Asked whether her concerns could doom the sale to Magna, he replied: “No, I don’t believe that.”

Magna, a car parts group whose bid for Opel is backed by Russian investors, had been in competition with private equity investor RHJ International, and before that with Fiat and China’s BAIC, for control of the General Motors unit. RHJ was not immediately available for comment.

But the German government said repeatedly it had a “clear preference” for the Magna bid as it offered Opel the most promising future and would protect German jobs.

It linked its offer of 4.5 billion euros in aid for Opel to a Magna takeover, with Chancellor Angela Merkel promising to intervene, if necessary, to ensure Magna won the bid battle.

Under pressure from Germany, GM chose Magna as its preferred bidder last month. Under a deal that had been expected to be signed this week but was delayed amid EU doubts, GM plans to sell a 55 percent stake in Opel to Magna and Russian state-owned bank Sberbank.

GM would retain a 35 percent stake in Opel under the deal and workers would hold the remaining 10 percent.

ROADBLOCK?

Kroes said GM and the trust set up to keep Opel separate from its U.S. parent’s recent bankruptcy in the United States should be allowed to reconsider the decision to sell to Magna.

“GM and the Opel Trust should be given the opportunity to reconsider the outcome of the bidding process,” Kroes said in the statement.

If GM is forced to reopen the bidding for Opel, or the closing of the deal faces significant delays, Opel could face a cash crunch based on previous projections by the automaker.

“GM is very fragile. An Opel bankruptcy and loss of numerous jobs is a realistic scenario if the sale is stopped,” said Ferdinand Dudenhoeffer, an auto expert at Duisburg-Essen University. 

Read more

Citigroup Inc is expected to be fined $600,000 by the Financial Industry Regulatory Authority over derivatives transactions that helped foreign clients avoid taxes on dividends, the Financial Times reported on its website on Sunday.

The fine against Citigroup Global Markets is expected to be announced on Monday, the paper said payday loan lenders.

A Citigroup representative was not immediately available for comment.

FINRA could not be immediately reached for comment.

(Reporting by Paritosh Bansal; Editing by Jan Paschal)

Read more

Disappointed investors who threatened to abandon venture capital have carried through, sending the number of new funds tumbling and signaling a smaller industry with fewer venture capitalists.

In the first three quarters of this year, only 86 U.S. funds raised money, according to data compiled by the Venture Capital Journal and the National Venture Capital Association

It the trend is maintained, by year’s end there will be somewhere between 104 and 118 new funds.

By comparison, even in the blackest days of the dot-com bust of 2001, investors averaged 234 funds a year.

“You are going to see a reduction in the number of firms, but more important you will see a reduction in the number of venture capital professionals,” Mark Heesen, president of the National Venture Capital Association, said in an interview.

Venture capital firms stay in business by raising funds and investing the money over a period of five to 10 years to start-up companies.

Venture capitalists make money for investors when and if start-ups are sold for a high price or go public. But returns, on average, have been poor for years and investors seem to have finally said “enough no faxing pay day loans.”

Investors “by necessity are dialing back on the money they are putting into all alternative assets,” said Heesen.

LOWERED EXPECTATIONS

Even some of this year’s celebrated successes had trouble along the way.

Khosla Ventures announced in September it had raised more than $1 billion for two funds that will invest in clean tech and information technology.

But Venture Capital Journal reported those efforts took an unusually long time and had been in the works since at least June 2008. In the same month the Westly Group said it had finally hit its goal.

“Our goal was to raise $100 million despite a historically challenging financial market,” said Steve Westly, after working more than a year to raise funds. “We will exceed that goal.”

The fund had told government regulators its initial goal was $130 million, according to VCJ.

Earlier this year the magazine listed 16 other firms that cut their targets, delayed, or gave up fund raising. 

Read more