Experts Talk Bernanke "Sideshow", FOMC, Obama''s Strategy

Date Jan 26 2010 16:35:55 Source:Bloomberg

Congress has turned Federal Reserve Chairman [Ben] Bernanke''s confirmation into a sideshow in recent weeks. The Fed chief''s four-year term as chairman expires on Jan. 31, and the Senate''s vote looks to come down to the 12th hour. There''s little likelihood that there will be any significant impact from the political maelstrom at this week''s Federal Open Market Committee meeting, with an unchanged rate stance universally expected, and no indication from [Fed officials] of a substantive change in the policy statement.

However, there could be important implications later in the year when it comes time for the FOMC to start taking back stimulus in a more aggressive fashion. There''s been much made of the supposed deal between Bernanke and Senate Majority Leader Harry Reid (D-Nev.), given a statement released by Reid last Friday. We doubt that the chairman made any policy compromises as part of that agreement, but the vindictiveness and warlike attitude toward the Fed from some members of this populist-minded legislature suggests that the Fed will face a hostile response if it commences an exit in advance of the November midterm elections. As such, the FOMC may hesitate to draw fire as long as this populist ire persists, or until some of the current critics face potential voter retribution on Nov. 3 that solves the Fed''s problem for them.

Julia Coronado, BNP Paribas

The brouhaha over Chairman Bernanke''s confirmation appears to have settled down over the weekend. White House spokespeople and Senate Majority Leader Harry Reid declared their support for Chairman Bernanke and indicated that they have the 60 votes needed for confirmation—despite the fact that only 31 senators have come out publicly in favor of confirmation, 17 are against, and 28 remain officially undecided, leaving 24 silent on the issue. It appears there will continue to be noise around the issue all week, particularly with a House hearing on the Fed''s handling of American International Group (AIG) scheduled for Wednesday, but the odds favor confirmation toward the end of the week (Chairman Bernanke''s term expires on the 31st).

The Fed will be meeting Tuesday and Wednesday [Jan. 26 & 27] under this cloud of political uncertainty, although we don''t think it will have any near-term impact on their decisions and continue to expect very little change in tone in the FOMC statement released Wednesday.

Jan Hatzius, Goldman Sachs

This week''s FOMC meeting takes place against the background of a sharp pickup in real gross domestic product growth in the fourth quarter, but much less encouraging [economic data] released over the past few weeks. This is likely to preclude serious consideration of an "exit" from the Fed''s accommodative policy stance or a change to its commitment to keep the funds rate "exceptionally low for an extended period."

In addition, while we expect the Fed''s asset purchases to end on schedule in March, the committee is likely to keep the door open to extend or restart the program should conditions warrant. Meanwhile, we do not expect any changes to the committee''s assessment that inflation expectations are "stable."

Tom Gallucci, Lazard Capital Markets

Over the past few days, it was announced that Obama campaign manager David Plouffe is being brought on as a White House political consultant to strategize ahead of the midterm elections. Since last Tuesday''s election in Massachusetts, health-care investors have been trying to understand how Democratic leaders will move forward on health-care reform.

Plouffe penned an article in The Washington Post yesterday that offers some insight into how the Administration could be looking at various priorities, including health care.

While some have suggested that reform is all but dead, Plouffe listed action on health-care reform as the first thing Democrats can do to strengthen their hand heading into the November elections. Given Plouffe''s influence with Obama, we anticipate that this line of thinking could permeate the White House and think that the Administration is likely to continue fight for health-care reform as a key priority. This suggests that related headlines will persist, and sentiment around the odds of passage is likely to fluctuate over time—possibly driving continued stock volatility.

If Plouffe has any influence over Obama''s State of the Union address, which we suspect he does, expect Obama to come out fighting on the topic of health care Wednesday night. Of course, moderate Democrats (and Republicans, post-Massachusetts) will be the key to accomplishing anything here, so it will be important to monitor if their mindset on the issue is ultimately as steadfast as Plouffe''s.

Joseph Lavorgna, Deutsche Bank

Existing home sales fell 16.7% to 5.45 million units in December, nearly matching the 16% drop in November pending home sales, which tend to lead movements in existing home sales by a couple of months. This is because pending home sales are based on mortgage contract signings, whereas existing home sales are based on mortgage closings, thereby making the latter series a lagging indicator. Consequently, there really is not much new news in [the December] report, although we should highlight further progress in inventory liquidation. The supply of existing homes fell 6.6% to 3.3 million units in November, down 11.1% from November 2008 and down 28.1% from their record high set in July 2008. Median home prices were up 4.9% in the month and 1.5% over the last year.

It is somewhat surprising that inventories fell hard and prices rose with sales so soft. We wonder if any of this is due to the quality of the inventories. As we have written on several occasions, the amount of effective or quality inventory in the marketplace may be less than what many analysts project. In other words, absent much new construction the last couple of years, there may not be that much desirable supply on the market.

China Banks Start Restricting Credit as Regulator Cracks Down

Date Jan 26 2010 16:33:07 Source:Bloomberg

Jan. 26 (Bloomberg) -- Chinese banks have begun taking steps to curtail lending, responding to a push by regulators to contain credit after a surge in new loans in the first half of this month.

Bank of China Ltd. has stopped extending new corporate loans in the Shanghai area, said a person familiar with the matter who declined to be identified. China Construction Bank Corp.’s branch in the city has been told to screen applications for personal loans and mortgages more carefully and to stop new lending once a monthly quota is met, another person said.

China’s benchmark stock index fell to a three-month low today on concern a government clampdown on lending will slow the world’s third-largest economy. Credit Suisse Group AG said in a note today that a countrywide lending halt that started Jan. 19 may trigger a “meaningful” decline in manufacturing.

“This round of quantitative tightening seems to be more serious than we thought after Beijing was shocked by the lending figures in the first two weeks of this year,” Credit Suisse economist Dong Tao wrote in the report. “We would not be surprised if banks imposed a monthly lending quota, as against a quarterly quota in 2008.”

The central bank has also moved to curb credit, unexpectedly ordering banks on Jan. 12 to raise the ratio of deposits they hold in reserve, limiting the amount of cash available for lending. The People’s Bank of China has also instructed lenders including China Citic Bank Corp. to boost their reserve ratios by an additional 0.5 percentage point, Reuters reported last week.

Lending Cap

The China Banking Regulatory Commission last week said lenders that failed to meet any of more than a dozen regulatory requirements have been told to limit lending.

China will cap new credit at 7.5 trillion yuan ($1.1 trillion) this year, down from a record 9.59 trillion yuan last year, according to CBRC Chairman Liu Mingkang.

Chinese banks advanced 1.45 trillion yuan of loans in the first 19 days of this month, the 21st Century Business Herald reported today, without citing anyone. That’s equivalent to 19 percent of the CBRC’s full-year target.

Lenders in the country are under pressure to raise money after last year’s credit surge weakened their capital and the industry regulator imposed tougher guidelines for financial buffers. Bank of China, the nation’s third-largest lender by market value, announced Jan. 22 that it will sell 40 billion yuan of convertible bonds and may raise additional capital by selling new shares.

Bank of China’s new lending in the first 20 days of January was “relatively large,” according to an e-mailed statement from the lender on Jan 20. The company said it will try to balance loans between months and quarters and that it needs to pay more attention to the structure of credits.

Shares in Bank of China slipped 3.2 percent to HK$3.69 in Hong Kong at 2:50 p.m. local time today, the lowest since Aug. 19. Construction Bank slipped 2.3 percent to HK$5.99, the lowest since Sept. 3.

China Construction Bank’s Beijing-based spokesman Yu Baoyue wasn’t immediately available to comment. A Bank of China spokesman declined to comment.

Davos Too Big to Fail as Bankers Recoil in Political Backlash

Date Jan 26 2010 16:31:05 Source:Bloomberg

Jan. 26 (Bloomberg) -- For a sign of how the mood has changed at the World Economic Forum in Davos this week, consider the speakers at an invitation-only client lunch hosted by Paul Calello, who runs Credit Suisse Group AG’s investment bank.

Last year’s panel on “Financial Market Dynamics” featured senior executives from financial companies JPMorgan Chase & Co., Blackstone Group LP, hedge fund Eton Park Capital Management and NYSE Euronext. This year clients will learn about “Leadership, Responsibility and the Recovery of the Financial System” from U.K. and Swiss regulators and Laura D’Andrea Tyson, an economics professor who has served in the U.S. government.

“Regulatory reform and how that plays out at the national and global level will have major impact on the shape of financial services,” Calello, 48, said in an interview. “That is obviously of interest to a broad audience, not just those working in the financial services industry.”

Financiers will cede the spotlight to government officials, regulators and central bankers at this year’s annual showcase of global power brokers as government’s role in markets has gained prominence. More than a year after the high-water mark of the worst financial crisis since the Great Depression, bankers are in retreat on issues ranging from the size of their companies to the size of their paychecks.

‘Bowing and Scraping’

U.S. President Barack Obama, who isn’t scheduled to attend the conference, has denounced “fat-cat bankers” and called for limitations on the size and trading activities of financial institutions. The U.K. government, which is supporting four of the country’s lenders, has imposed a 50 percent tax on bankers’ bonuses for 2009 as a way of recovering some of its costs.

“There will be a lot of bowing and scraping before the central bankers, treasury secretaries and regulators,” said Niall Ferguson, a professor of history at Harvard University in Cambridge, Massachusetts, who will be participating in three sessions at the conference, including a debate on “rebuilding economics.” “They kept the show on the road, and we have to acknowledge the state matters much more these days.”

White House economic adviser Lawrence Summers, U.K. Chancellor of the Exchequer Alistair Darling and French President Nicolas Sarkozy will be among the political elite at the Swiss ski resort this year. Adair Turner, the chairman of the U.K.’s Financial Services Authority, and Barney Frank, chairman of the U.S. House Financial Services Committee, are participating in public panel discussions.

Blankfein, Dimon Absent

Davos will be missing some prominent bankers who appeared in previous years. JPMorgan Chase Chairman and Chief Executive Officer Jamie Dimon dropped out, and Goldman Sachs Group Inc. Chairman and CEO Lloyd Blankfein will be skipping the event for the second year in a row.

While those attending may represent banks that are too big to fail, they are not too big to keep a low profile. Citigroup Inc. CEO Vikram Pandit, Morgan Stanley Chairman John Mack and the chief executives of Credit Suisse and UBS AG won’t be speaking at any sessions listed in the official program. Bank of America Corp. CEO Brian Moynihan and Goldman Sachs President Gary Cohn are each participating on one panel.

None of them will be speaking at a session on “Redesigning Financial Regulation” on Saturday afternoon moderated by Barry Eichengreen, a professor of economics and political science at the University of California at Berkeley. That panel will include European Central Bank President Jean-Claude Trichet, the governor of the central bank of Mexico, the South African finance minister and the CEO of U.K. insurer Prudential Plc.

‘Vigorous Regulation’

“In years past, the good and the great believed that markets and financial institutions could be relied on to self- regulate, so the people on the stage were the self-regulators,” Eichengreen said in an interview. “Now we’ve learned that the official sector needs to apply vigorous regulation. The people who are going to be doing the speaking reflect that new reality.”

Banks are facing escalating calls from politicians, economists, union leaders and media commentators on both sides of the Atlantic for policy changes that could threaten their business.

Obama proposed a levy on banks with liabilities that exceed $50 billion to recoup $117 billion in taxpayer money that helped stabilize the financial system in 2008 and 2009. Mervyn King, governor of the Bank of England, has advocated breaking up banks deemed too big to fail. The G-20 countries have called for new capital and liquidity requirements for the biggest banks.

‘New Boss’

“The pendulum has completely swung to the politicians and bureaucrats,” said Michael Holland, chairman and founder of New York-based Holland & Co., which oversees more than $4 billion of assets. “It’s not for the business people to have any say whatsoever -- the new boss is in town.”

That doesn’t mean bankers will be rolling over in Davos or that they won’t try to influence regulators and policy makers to go easy on them. They may repeat warnings delivered at a conference in Istanbul in October that financial regulations could jeopardize economic growth.

Financial companies continue to play a key role in the World Economic Forum, with more than 25 banks, insurers, exchanges and investment companies serving as sponsors of the annual meeting. They include Bank of America, Citigroup, JPMorgan, Goldman Sachs and Morgan Stanley, as well as the two biggest Swiss banks and HSBC Holdings Plc, Barclays Plc and Standard Chartered Plc from the U.K.

Ackermann’s Visibility

Two of the seven co-chairs of this year’s meeting run banks: Deutsche Bank AG CEO Josef Ackermann and Peter Sands, CEO of London-based Standard Chartered. Ackermann, who chairs the Institute of International Finance trade group, has positioned himself as a spokesman for the industry. He said at a conference in London last week that proposals to split up or limit the size of banks are “misguided.”

Ackermann and Sands will be the most visible bankers in Davos, with each participating in three sessions. On Jan. 30, Ackermann will take the stage as the sole private-sector executive alongside Summers, the finance minister of France, the deputy governor of the People’s Bank of China and Dominique Strauss-Kahn, managing director of the Washington, D.C.-based International Monetary Fund.

Offstage -- in private sessions and dinners -- bankers may wield more clout. Ackermann is one of a group of bank CEOs scheduled to take part in an “informal” Saturday morning gathering on global financial regulatory reform with central bankers and ministers, said Ackermann’s spokesman Stefan Baron.

‘Sovereign Solvency’

“Closer international cooperation among policy makers and business leaders is the top issue we need to address at this year’s annual meeting in Davos,” Ackermann said in a statement. “We have to find the right regulatory responses to the financial crisis and start paying off the fiscal liabilities incurred as a result.”

Indeed, last year’s questions about bank solvency have given way this year to concerns about government debt burdens and central bank plans to withdraw support of financial markets, said the University of California’s Eichengreen.

“We have transformed the banking crisis into kind of a sovereign solvency crisis by buying up a lot of private securities and auto companies and so forth,” he said. “We’ve dealt with the consequences of vaporizing $3 trillion of private demand in the U.S. by providing a lot of public demand.”

For the most part, participants at Davos will use the event to network with people from around the world in as short a time as possible, rather than to pontificate on global issues.

Looking for Goldman

Banks typically reserve hotel suites and conference rooms throughout the Alpine town to hold private meetings with clients and to host cocktail parties and invitation-only dinners. Citigroup, the bank that is 27 percent owned by the U.S. Treasury Department, will be having a cocktail party on Friday. Jon Diat, a spokesman for the bank, declined to provide details.

In a sign of how little of the action at Davos takes place at public events, only two of the seven Goldman Sachs executives attending the forum are participating in discussions on the official schedule.

“This is a client-driven event for us,” said Samuel Robinson, a company spokesman. Goldman Sachs will host “a couple of small, private dinners” that will include “a range of clients.” He declined to comment further.

The bank’s delegation includes four executives from New York, two from London and J. Michael Evans, chairman of the firm’s Asian business, who is based in Hong Kong.

Cohn, Goldman Sachs’s president and the most senior executive attending from the firm, is scheduled to participate in a panel on “Rethinking Risk in the Boardroom” that will be closed to the media. The other Goldman Sachs executive making an appearance is Dina Powell, head of corporate engagement, who will be one of 12 panelists in a discussion on Wednesday.

Her subject: how business can address rural poverty.