Articles from July 2009



Banks reform toothless and muddled say MPs

The labour Government’s white paper on financial regulation earlier this month was toothless and failed to address the key weaknesses in the Tripartite system, according to MPs on the Treasury Select Committee.

Issuing its final report on the banking crisis yesterday, the committee said it was still a “muddle” which part of the tripartite — made up of the Bank of England, Financial Services Authority (FSA) and Treasury — was in charge of strategic decisions.

The Treasury’s white paper proposed a new Council for Financial Stability, chaired by the Chancellor, which will oversee the Tripartite. This is just a “cosmetic” change, the Treasury Select Committee said.

The new council will be in addition to the Financial Stability Committee, which sits within the Bank.

The White Paper also gave more power to the Bank to monitor overarching stability — so-called macro-prudential regulation — but did not make it clear how that power would be separate from the responsibilities of the FSA.

“Where before no-one had a formal responsibility for financial stability, now many do — the Bank of England, the FSA, the Treasury, the Council for Financial Stability and the Bank’s Financial Stability Committee. Where responsibility lies for strategic decisions and executive action was, and remains, a muddle” the report said.

John McFall, the committee’s chairman, also said that the Government should not rule out imposing a split between retail and investment banking.

Such a measure, which would echo the restrictions imposed in the 1930s in the US under the Glass-Steagall Act, has been widely criticised among banks which argue that the law is outdated.

But Mr McFall said that banks have been able to “hold the taxpayer to ransom” by growing so large that they present a serious systemic threat, making it impossible for the Government to do anything but bail them out during the downturn.

In order to prevent banks from becoming so large again, the Government should “not rule out drastic action, such as forcibly shrinking the banks or separating out the riskier functions,” Mr McFall said.

Separately, the House of Commons’ Scottish Affairs committee said yesterday that the FSA failed to provide the “necessary level of supervision” over Dunfermline to prevent the downfall of Scotland’s largest building society.

It was the fault of Dunfermline’s board that the mutual embarked on risky lending on commercial property and buying loan books from other lenders, the committee said, but added that the FSA failed to issue “clear and specific warnings”.

The FSA rejected the charge, saying that it had written to Dunfermline in December 2005 soon after a regulatory “Arrow” visit, identifying the growing size of its commercial lending portfolio as a risk.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US banks pay out more in bonuses than profits

Some of the banks which were bailed out by the US taxpayer paid bonuses to executives that were in excess of net income in 2008, according to a scathing report by the office of Andrew Cuomo, the New York Attorney General, released this afternoon.

Mr Cuomo, who has been investigating compensation paid by the banks since last October, said that employee pay “has become unmoored from the banks’ financial performance”.

“There is no clear rhyme or reason to the way banks compensate and reward their employees,” said the report, which chimes with remarks by President Obama’s spokesman earlier this month.

President Obama does not believe that big pay packages are necessary to keep talented staff, the President’s spokesman said.

Mr Cuomo’s report recommends that firms should follow “a more principled” bonus system to make them less susceptible to poaching of their employees by other firms offering higher pay.

The report targeted Goldman Sachs, Morgan Stanley and JPMorgan Chase, saying that bonuses were “substantially greater” than the banks’ net income.

Goldman earned $2.3 billion, paid out $4.8 billion in bonuses and received $10 billion in Troubled Asset Relief Program (TARP) funding, while Morgan Stanley earned $1.7 billion, paid $4.475 billion in bonuses and received $10 billion in TARP funding, and JP Morgan Chase earned $5.6 billion, paid $8.69 billion in bonuses and received $25 billion in TARP funding, according to the report

Since nine banks received a total of $125 billion last October in taxpayer money under TARP to help them survive the financial crisis, Mr Cuomo has pressed them for details on billions of dollars paid to executives amid huge losses.

He said that his office studied historical financial filings and found that at many banks compensation increased in the 2003-2006 bull market years, but stayed at those stratospheric levels as the mortgage crisis and recession hit.

“Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.

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Sterling tops out at 1.65 again against US Dollar

In the last few weeks we have seen a number of attempts to breach 1.65 on GBP/USD and every time the market has failed to hold above this level.

A similar pattern has emerged in USD/JPY which has struggled to hold over 95. In the last four trading days we have seen a tight trading range for GBP/USD which is unusual in the light of the volatility in the last few months.

Today we have a few data snaps in the calendar for the UK which could shake the markets back into life. We have UK mortgage approvals, consumer credit, net lending and M4 money supply out this morning.

Yesterday the USD strengthened against the pound from over 1.65 back to 1.6350 and from 1.4280 down to 1.4108 against the euro. US stock markets fell more than 1% and this helped swing money back into the USD. US economic data supported the trend into risk aversion as consumer confidence fell from 49.3 to 46.6, the lowest level in 3 months.

The S&P;/Case-Shiller home price index fell 17.1% in May- this is the main measure of US house price movements. In addition US corporate earnings were shaky and Bank of America announced that they will be shutting 10% of branches signaling further lay offs.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Australian Dollar the big winner as risk appetite continues

More positives as equities continued their bull run with the FTSE posting another gain yesterday.

The markets were boosted by further signs that the weakness in the US economy was bottoming out. US new home sales rose 11% in June far outstripping expectation- firming and improvement in the housing sector is vital to underpinning recovery.

The housing sector is a leading indicator to downturn/upturn in any economy and the news yesterday was greeted well by the markets- sustainability is still the key going forward in this sector and we are still not out of the woods but closer than ever.

As is the trend this good news led to further weakness in the USD and stocks experiencing their longest rally since 2003. The dollar index dropped to its lowest level this year and the main beneficiaries were higher yielding commodity based currencies such as the New Zealand and Australian dollar.

Other economic data affirmed that Italian July consumer confidence rose to 107.5, up from 105.4 in June, and better than the median forecast of 105.9. It is the highest read since November 2007. Meanwhile, French industry demand fell in the Q-2, but less sharply than in previous two quarters.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FTSE 100 eyes eleventh day of gains

The FTSE 100 headed into its eleventh consecutive day of gains in early trading in Monday.

The benchmark index chalked up its longest winning streak since January 2004 on Friday, after rising for ten straight days.

In early trading on Monday, the index of blue-chip shares was up 16 points, or 0.4pc, remaining just below the 4,600 mark.

Shares in Britain are emulating gains around the world, with the Dow Jones index in the US climbing above 9,000 points for the first time since January last week, and the Nikkei 225 Stock Average recording its best run of gains since 1988.

US companies have reported better-than-expected earnings in recent weeks, surprising investors and triggering more buying. feet.

Some Wall Street banks have also reported bumper profits, boosting confidence in the financial sector which was behind much of last year’s market decline.

Leading the gains on the FTSE were Financial Times publisher Pearson, which was up 7.6pc to 652p after reporting a first-half profit, and mining companies Lonmin, up 4.6pc to 1,300p and Antofagasto up 3.9pc.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

UK GDP weaker than expected

Sterling started strongly in early trading moving towards 1.6550 on the USD, 1.1650 against the Euro and testing 157 on the Yen.

We then had the release of UK second quarter GDP which gave sterling a cold shower dropping a full cent against the USD and slipping against most other currencies.

The GDP number came in at -0.8 against a forecast of -0.3- this brings the year on year fall to -5.6% and is the biggest year on year fall since records commenced in 1955.

The USD strengthened a little yesterday following comments from the Fed that they may not actually need to buy all of the bonds that it previously announced- this is effectively reining in the Feds QE measures.

If we look back as to the level of weakness that the USD experienced on the announcement of the fed printing money- we saw a move from 1.29 to 1.47. Similar hints sprung from the Bank of England as MPC member Andrew Sentence said that the MPC could pause it’s bond-buying program- this added support for sterling.

Other data out today came in positive for Germany as PMI data was stronger than expected at 45.2- up from 40.9 in June in manufacturing and 48.4 from 45.2 for services. French PMI was mixed as manufacturing improved but services dropped.

The main mover in the markets yesterday was the Japanese Yen which retreated against the USD, EUR and GBP. It seems Japanese investors are now looking at overseas assets and yield as confidence in the markets improves. GBP/JPY is up from 148 last week to 156 this morning.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bank of England attacked for gilts sell off

Angry investors blasted the Bank of England on Thursday when it sparked a sell off in the gilts market after one of the biggest government bond offerings of the year.

In an interview published 20 minutes after the £5bn bond deal was finalised, Andrew Sentance, an external member of the Bank’s interest rate setting monetary policy committee, said it was considering whether to put on hold its quantitative easing programme designed to pump money into the economy.

Mr Sentance told Bloomberg that the issue at the committee’s next meeting, due to be held in early August, would be “whether we’re now going to move into a phase where we’re watching and observing what happens in the economy”.

His remarks raised expectations in financial markets that the Bank might be ready for a sustained pause in its injections of cash into the economy through the purchase of government bonds.

This is one of the biggest single gilts transactions of all time, and the Bank jolts the market with significant market-moving information only minutes after the deal has been sealed.

Benchmark 10-year gilt yields, which have an inverse relationship to the price of bonds, jumped 0.12 percentage points to 3.96 per cent on investor nervousness that quantitative easing could be nearing its end.

Investors said that, although yields on the inflation-linked bond sold on Thursday remained steady, Mr Sentance’s remarks spooked the market and could have repercussions for holders of gilts across all maturities.

The confusion overshadowed a successful bond offering by the UK Debt Management Office, which operates at arm’s length from the Treasury.

The inflation-linked gilt maturing in 2042 was the largest ever single transaction for a UK index-linked security.

Although it tries to avoid making statements at high-profile moments such as on Budget day, the Bank is not normally constrained by the operations of other branches of government.

As the chief arbiter of interest rates, the Bank would be concerned not to show any sign of trying to influence the cost of government debt. Any indication of collaboration could drive up the cost of debt if investors lost confidence in the Bank’s independence, analysts said.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Golden era for stock markets is over and there’s no silver lining

The golden era of stock markets is long gone. But it looks like equities have found a silver age.

The MSCI world index rose by 9pc in seven straight up days through Tuesday, to a new high for 2009. That’s impressive, but nothing like the good old days. The index is still 40pc below the all-time peak reached in October 2007.

And the blissful life of that epoch – when corporate credit was readily available and growth around the world was stable and strong– is not coming back anytime soon.

The golden stock market period was succeeded by a brief dark age of crisis: a deep recession and a series of ever-worse financial troubles. But that is over.

GDP is no longer in free-fall and second-quarter earnings reports so far have overall been pleasing: Nokia was disappointing, but Caterpillar, LG and the investment banks have all done better than expected.

Most important for markets, the global government financial complex is working. Central bank funding is readily available at almost no cost, government bond yields are still low, trading houses are raking in profits and investment-grade credit spreads have fallen back to the level before the Lehman Brothers collapse.

Looking forward, equity valuations aren’t scary. World markets are trading at 16 times expected 2009 earnings, according to Société Générale. But the recession is massacring profits this year.

The multiple on expected 2010 earnings is 12.4, cheap by the standards of the last two decades. Even if the forecasts that lie behind that calculation are too optimistic, share prices have room to rise a bit more before they can be considered exuberant.

In retrospect, it’s clear the golden period for stocks was built on weak foundations. The foundations of the silver age aren’t much more solid. The economy is still burdened by the past excesses of finance.

Even if GDP stops falling in the main industrial economies, the next phase is likely to be anaemic growth. A lurch downward is possible. And neither governments nor central banks can offer much more help without compromising their own credibility.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FTSE 100 enjoys longest winning streak in four years

The FTSE 100 has enjoyed its best run in more than four years after a slew of companies around the world delivered results that surprised investors.

The index of blue chip companies ended a seventh day of rises 1pc higher at 4481.17, and is now 8.7pc higher than when it started on its winning streak on July 13. It is the best run for the FTSE 100 since July 2005.

In the UK, supermarket chain Morrisons led the gainers after telling shareholders that results will beat City forecasts as more Britons seek to cut their weekly food bills. The news from Morrisons helped drag rival Sainsbury higher.

Sentiment has also been buoyed by a series of results from US companies that topped the expectations of Wall Street analysts. Caterpillar, the world’s biggest maker of construction equipment, increased its profit forecasts and pointed to a modest upturn in demand.

The FTSE has rallied by 28pc since reaching its low for the year on March 3, but experts remain divided on whether the rally can be sustained for the second half of the year.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

FTSE 100 heads for sixth rise in a row

London shares climbed in early trade on Monday, on course to rise for the sixth straight day, tracking gains in Asia as a last-minute $3bn (£1.8bn) rescue of US CIT Group lifted sentiment.

By 0811 GMT the FTSE 100 rose 36.79 points, or 0.8pc at 4,425.54, after posting its best weekly rise since early January on Friday.

UK stocks were lifted after shares in Asia rose to a 10-month high, the best performance since the collapse of Lehman Brothers, as strong U.S. corporate earnings spurred optimism about the pace of global economic recovery.

Banks were the biggest gainers on the UK index, with Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland rising between 1.2pc and 5.9pc.

The market also drew support from data from property website Rightmove showing that the falls in property prices in England and Wales over the past year may have bottomed out.

Miners were higher as metals prices benefitted from the prospect of a global recovery. Anglo American, BHP Billiton, Eurasian Natural Resources Corp, Kazakhmys, Rio Tinto and Xstrata were up between 0.6pc and 3pc.

Friends Provident gained 1.5pc after financial buyout firm Resolution sweetened its proposed offer for the insurer, including a cash element and a commitment on dividends.

Defensive stocks fell out of favour, with tobacco firms British American Tobacco and Imperial Tobacco down 0.7pc and 0.5pc respectively. Food retailers were also lower, led by a 0.5pc fall in British supermarket Tesco

Global markets were lifted by U.S. lender CIT Group’s tentative deal with bondholders for $3 billion in rescue financing, a move which would prevent the firm becoming the latest casualty in the financial crisis.

Further positive news on the global economy came as a survey released on Monday by a group of economists found that the recession in the US appeared to be easing but had probably not yet ended.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.