The Senate's top banking legislators told the Federal Reserve and Securities and Exchange Commission to hold off on enacting a deal to oversee Wall Street, concerned that regulators are proceeding without consulting Congress.
Democrat Christopher Dodd and Republican Richard Shelby, the Senate Banking Committee's top lawmakers, delivered their warning in a letter yesterday as Bernanke and Cox met to wrap up a memorandum of understanding. The SEC plans to provide information on securities firms' trading positions, capital and leverage, according to two government officials.
“Congress wants to have its say,'' said David Becker, a former SEC general counsel now in private practice at Cleary Gottlieb Steen & Hamilton LLP in Washington. “Reshuffling who has information could have a significant impact on the distribution of regulatory influence.''
Congress is asserting its primacy over how financial markets should be regulated as federal supervisors wrestle with the yearlong credit rout. Regulators are debating how to strengthen oversight of investment banks after the Fed started emergency lending to securities firms in March.
“We ask that no action'' be taken before legislators can decide it's in the economy's “best interests,'' Dodd, the Connecticut senator who chairs the banking panel, and Shelby of Alabama said in the letter. It was addressed to Bernanke, Cox and Treasury Secretary Henry Paulson.
Sharing Data
The Fed will share data with the SEC on repurchase agreements, which are short-term loans provided by commercial banks that clear trades and hold collateral for securities firms, said the officials, who declined to be identified because the agreement isn't final.
Cox offered to brief Dodd and Shelby on the SEC's talks with the Fed. The memorandum is “intended to facilitate our agencies' ongoing, day-to-day cooperation,'' he said in a letter responding to the two. “It is the role of Congress to decide whether, and if so how, to alter the existing regulatory structure.''
Fed officials in March rescued Bear Stearns Cos. from bankruptcy with $30 billion of financing to secure its takeover by JPMorgan Chase & Co. They also introduced the Primary Dealer Credit Facility, giving securities firms access to loans from the central bank at the same rate as commercial banks. It was intended to last “at least six months,'' the Fed said March 16.
Some officials have expressed concern about any perception that the Fed's actions would only spur greater risk taking.
Treasury's Ryan
“We don't want to encourage dependence upon the Federal Reserve as a backstop,'' Assistant U.S. Treasury Secretary Anthony Ryan said in a June 24 interview with Bloomberg Television.
Dodd and Shelby flagged in their letter that Congress hasn't given the Fed permanent authority to lend to securities dealers.
The information sharing between the Fed and SEC will continue even if the central bank stops providing the financing, officials said, citing the draft memorandum. Securities dealers are currently overseen by the SEC. The Fed has introduced its own supervisors at the firms since it started lending to them.
“The only reason for the Fed'' to “have an interest in how investment banks are doing is if it intends to step in and provide access to the discount window in more normal times,'' said Peter Wallison, a former Treasury general counsel. “Once that idea gets established then market discipline essentially disappears.''
Hearings Planned
Congress plans to start hold hearings on financial regulation next month.
“We look forward to continuing to work with Congress on these important issues,'' said Fed spokeswoman Michelle Smith in Washington.
Cox urged his staff June 23 to not “engage in turf wars among federal regulators,'' according to an e-mail the SEC provided to Bloomberg News. He added it's “inconceivable to me'' that under any overhaul approved by the Congress, “the role of the SEC will not be strengthened and expanded.''
Central bankers are debating whether to extend the PDCF beyond September, amid signs of continued stress in financial markets. They may make a decision before their Sept. 16 meeting, when traders anticipate they will announce the first interest- rate increase since 2006.
Concern about rising loan losses has sent the Standard & Poor's 500 Banks Index into a 22 percent dive this month, putting it on course for its worst monthly return in almost a decade.
Fed Vice Chairman Donald Kohn told lawmakers June 19 that policy makers are “studying a range of options'' for the PDCF. Fed governors and district-bank presidents June 25 heard from supervisors working with investment banks.
Clear Rules
Philadelphia Fed President Charles Plosser and Richmond Fed chief Jeffrey Lacker have urged setting clear ground rules for access to central bank funds. They also warned this month that the lending risks provoking future crises by causing moral hazard, or encouraging firms to take on more risk in the anticipation of Fed aid in case their bets go wrong.
“We are in a transitional regime,'' said Laurence Meyer, vice chairman at Macroeconomic Advisers LLC and a former Fed governor. Shelby and Dodd “are saying the situation on the ground has changed, the regulatory framework is already evolving, and we haven't been involved.''
— Dow Chemical Co. announced its second comprehensive price hike in less than a month to offset the "relentless rise" in costs for energy and related raw materials.
The Midland-based chemical company announced Tuesday it will raise prices by as much as 25% next month. That follows price increases of up to 20% that took effect June 1.
Dow (DOW, Fortune 500) makes key ingredients used in paints, textiles, glass, packaging and cars.
Dow said it’s also adding a freight surcharge for North American customers of $300 per shipment by truck and $600 per shipment by rail effective Aug. 1. The company said it will add the surcharges in other regions later this year.
Dow also announced it’s moving ahead with plans to temporarily idle or cut production at a number of manufacturing plants. Cost cuts at Dow’s automotive unit includes its work force and plants in light of a North American sales decline.
Chairman and Chief Executive Andrew Liveris said in a statement that the steps are "extremely unwelcome but entirely unavoidable" as global energy costs surge.
"The price increases we announced May 28 helped, but they were not enough to fully cover the additional costs we are now facing," he said.
"Even since our last announcement, the cost of hydrocarbons has continued to rise, and that trajectory shows no sign of changing. We must restore margins in our businesses, both through price increases and the reduction of operating costs at certain production facilities."
Dow Chemical makes everything from the propylene glycols used in antifreeze, coolants, solvents, cosmetics and pharmaceuticals, to acrylic acid-based products used in detergents, wastewater-treatment and disposable diapers.
Its products are sold in 160 countries.
The company in April reported a 3% drop in quarterly earnings. At the time, Dow said it considered that a strong showing in the face of a 42% jump in feedstock and energy costs.
Shares rose 43 cents to $38.05 in premarket trading.
Saudi King Abdullah confirmed Sunday that his country will increase daily oil production to 9.7 million barrels from 9 million to counter the sharp rise in international oil prices.
The Saudi petroleum minister, Ali I. Al-Naimi, said the country will reach the 9.7 million level by July. The announcement comes after Saudi officials had announced modest increases.
It would be Saudi Arabia’s highest production rate since 1981.
White House Deputy Press Secretary Tony Fratto praised the step. "Any increase in production in today’s oil market is welcome," Fratto. "It is important that we also take steps to increase domestic production and our refining capacity."
Al-Naimi also said the Saudi government will invest in oil projects that would allow Saudi Arabia to have the capacity to produce 12.5 million barrels per day by the end of next year.
King Abdullah’s announcement came at the end of the Jeddah energy summit, where he also called for OPEC to set aside $1 billion for a strategy to ease the oil price crisis. He said $500 million should be given to developing nations to help them get the energy they need.
King Abdullah said there are "many factors that made oil prices high." Along with increased demand, he also cited oil speculators and an increase in taxes in consumer nations.
The pain of escalating oil prices - crude sold for more than $134 a barrel on Friday, double year-ago levels - have cascaded throughout the U.S. economy.
Oil has become a hot-button political issue as the cost of gasoline, diesel and jet fuel have spiked in recent months. Congress has scheduled hearings this week to debate legislation that would attempt to dampen prices.
Bodman: Don’t blame speculators
On Saturday, U.S. Energy Secretary Samuel Bodman, attending the Saudi summit, attributed the record-high oil prices to lagging production.
Bodman said he did not believe speculators are the cause of high oil prices.
Since 2003, he said, global demand for oil has increased because of industry in China, India and the Middle East. But from 2005 to 2007, there was very little increase in supply.
Nations need an additional supply of energy to market, whether that energy is nuclear, coal, fossil fuels, solar or wind power, Bodman said.
"We spent 30 years digging ourselves into this hole," Bodman said. "It won’t be solved soon."
World leaders address supply and demand
British Prime Minister Gordon Brown and Chinese Vice President Xi Jinping both said during speeches at the summit Sunday that their countries need to find ways to bolster production of alternative forms of energy.
"The high price in increases of oil has affected the international economy and has brought tension in the international community," Xi said.
Earlier in the week, President Bush asked Congress to permit drilling for oil in deep water off America’s coasts to combat rising oil and gas prices.
"There is no excuse for delay," the president said Wednesday.
Bush also renewed his request that Congress allow drilling in Alaska’s Arctic National Wildlife Refuge, or ANWR, clear the way for more refineries and encourage efforts to recover oil from shale in areas such as the Green River Basin of Colorado, Utah and Wyoming.
–From CNN’s Wilf Dinnick
World energy powers embarked on a new level of dialogue to try to rein in runaway oil prices at an emergency meeting in this Red Sea city, but were unable to come up with a quick fix.
Host Saudi Arabia vowed to pump still more oil in response to consumer countries’ requests, but said that alone would not be enough to calm a market driven to a record close to $140 a barrel last week by an array of factors.
“In this critical hour, the world community should rise to its responsibility and cooperation should be the cornerstone of any efforts,” Saudi King Abdullah said on Sunday, calling for a global “energy-for-the-poor” initiative.
A barrel of oil has doubled in price over the past year, stoking inflation and triggering protests from Asia to Europe.
Major producers, consumers and top oil company executives gathered in Saudi Arabia’s commercial capital to try to reverse what some see as the world’s third oil shock.
They plan to hold a follow-up meeting in London before the end of the year.
“What I’ve heard so far are basically all good ideas, but it will probably not change the price tomorrow morning,” Royal Dutch Shell CEO Jeroen van der Veer told Reuters.
The final communique, echoing previous consumer-producer statements, emphasized the importance of greater transparency in oil markets and more investment in production.
Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz) President Susan Decker defended the company’s Web search advertising deal with larger rival Google Inc (GOOG.O: Quote, Profile, Research, Stock Buzz), saying some investors and industry participants had yet to understand its advantages.
In an interview with Reuters on Friday, she would not discuss reports of an executive exodus and an impending reorganization of the company’s products division that sent Yahoo shares down more than 3 percent on Friday.
Decker focused comments on concerns that the Google deal eventually would cut into Yahoo’s competitive position against Google, which has steadily grown an already-dominant share in the search market.
Yahoo still aims to build up its position in search and views it as inseparable from bolstering growth in other online ad markets, such as graphical display. Tests the two companies had conducted also showed the deal would not prevent Yahoo’s Panama search advertising system from gaining ground.
The deal would help Yahoo make money off of less-used search terms, for one, she said.
“It is really a back-fill in places where we’re not doing much business,” Decker said. “It’s our choice every day whether and how we might serve ads from Yahoo or Google, or a third party if we opened it up further.”
Shares in Yahoo are down 16 percent since the company ended buyout talks with Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) last week and instead forged a non-exclusive ad deal with Google for up to 10 years.
Investor concerns over Yahoo’s future have also mounted amid daily reports of executives leaving, including Jeff Weiner, executive vice president of its network division, and Qi Lu, the top engineer for Panama.
Mortgage companies, facing criticism that they aren’t doing enough to stem the housing crisis, are pledging to let troubled borrowers know whether they’re approved for help within 45 days of receiving a homeowner’s application.
The promise is expected to be announced Tuesday by the Hope Now alliance, a Bush administration-backed industry group, as part of a new set of guidelines for mortgage companies participating in the effort. The Associated Press obtained a copy of the guidelines.
The agreement is designed to clarify the mortgage assistance process for borrowers and the industry alike, but is not legally binding.
It also tries to alleviate a major stumbling block: the reluctance of companies that hold second mortgages, such as home equity loans, to agree to such modifications. Such requests should be approved, the agreement says, unless the holder of the second mortgage would be put in a worse financial position.
Consumer groups, however, say Hope Now’s efforts will never match the growth in foreclosures around the country, and are pushing for a new $300 billion program to allow the government to back new loans for struggling homeowners.
"There isn’t a serious level of modification going on because the program is voluntary," said John Taylor, president of the National Community Reinvestment Coalition, a consumer group in Washington, who described the newest announcement as "baby steps."
Housing counselors have complained that the process of loan modifications is bureaucratic and difficult to understand, and say it is tough for consumers to get someone on the phone with the authority to help.
The industry has also favored repayment plans, which aim to help borrowers get back on track after missing a few payments, rather than lower interest rates or forgive part of the principle balance.
Consumer advocates have pressed Congress to let bankruptcy judges rewrite the terms of mortgages for strapped borrowers, but that proposal faces intense opposition from the Bush administration and Republican lawmakers and is unlikely to make it through Congress this year.
Statistics released last month by Hope Now showed that nearly 183,000 borrowers received some form of loan workout in April, the highest monthly number since the effort started last summer.
But the group was also criticized last week by a federal bank regulator, who questioned the accuracy of trade groups’ mortgage assistance data. The regulator, Comptroller of the Currency John Dugan called them "responses to surveys that produced aggregate, unverified results from individual firms."
Mortgage industry consultant Howard Glaser, a housing official in the Clinton administration, questioned the significance of the changes Hope Now is announcing, noting that lenders approve a new loan far more quickly than the 45-day period.
"When they are repairing their defective loan product, they take their time," Glaser said.
Foreclosure filings last month were up nearly 50% compared with a year earlier. Nationwide, 261,255 homes received at least one foreclosure-related filing in May, up 48% from 176,137 in the same month last year and up 7% from April, foreclosure listing service RealtyTrac Inc. said Friday.
Members of Hope Now include Bank of America Corp. (BAC, Fortune 500), Citigroup Inc. (C, Fortune 500), Washington Mutual Inc. (WM, Fortune 500) and Wells Fargo & Co (WFC, Fortune 500).
Top hedge fund bosses will debate whether an upturn in distressed investing or profitable macro strategies offer 2008’s blockbuster trade, just as short subprime was in 2007, when they meet in Monaco this week.
GAIM International 2008, held from June 17-19 in the Mediterranean resort for the super-rich, comes as the $2.6 trillion industry faces up to poor returns and investor outflows and searches for a follow-up to betting on falling subprime assets last year.
Such a strategy helped hedge fund manager John Paulson, who will deliver his views on the credit crisis to the conference, earn $3.7 billion in 2007, according to Alpha Magazine.
Global macro funds, which retuned 17.36 percent in 2007 and 5.19 percent in the first four months of 2008, according to Credit Suisse/Tremont, have been a popular choice with investors recently as other strategies have struggled.
However, not everyone is convinced such strategies, which bet on the likes of global equity markets, world currencies, sovereign debt and commodities and typically benefit from increased volatility, will continue to deliver.
“The market is saying go long macro, short event-driven. That was last year’s trade,” Francois Barthelemy, partner and fund manager at F&C Partners.
“Everyone is piling into macro and it’s going to be a disaster. No-one knows where the dollar is going to go, where oil is going to go, where interest rates are going to go.”
He prefers out-of-favor event-driven strategies, which bet on M&A (merger and acquisition) and other corporate activity, as he believes stocks are cheap and companies’ boards are now more open to listening to shareholders.
The global credit crunch is not expected to have an impact on the sale of Rio Tinto’s U.S. coal unit, with heavy interest shown both in the United States and abroad, a company official said.
Rio has already contacted potential bidders for Rio Tinto Energy America, and the sale is still on track to be completed in the third or fourth quarters, Mining Executive Jim Berson of the firm’s Energy and Minerals unit told Reuters.
“We began contacting potential bidders in mid May, and significant interest in acquiring the assets has been expressed by both domestic and multinational players,” he said in an email response to questions late on Thursday.
Energy America, second-largest U.S. coal producer by tonnage, was estimated to be worth about $4 billion by an analyst when the sale of the unit was announced in November.
Since then, coal prices have soared on supply problems, and this week JPMorgan raised its 2009 forecast for internationally traded thermal coal by 50 percent to $150 per tonne., while benchmark U.S. coals have doubled in the past year to more than $100 a ton.
NO CHILLING EFFECT
The global credit crisis that has squeezed availability of funds in some sectors was not expected to have any impact on the sale of Energy America, said U.S.-based Berson, who is leading the process.
“As evidenced in the coal equity markets, we don’t anticipate any chilling effect on the potential transaction from the current credit market conditions.”
WASHINGTON – The U.S. Federal Reserve says the American economy remained "generally weak" heading into summer as rising costs for energy and food pounded consumers and forced some companies to push their own prices higher.
The Fed’s new snapshot of business conditions, released Wednesday in Washington, underscored two big sore spots for the country: listless economic activity coupled with lofty energy and food prices. Those rising prices raise the risks of both spreading inflation and putting another drag on overall economic growth.
Chafing under price hikes, "consumer spending slowed… as incomes were pinched by rising energy and food prices," the Fed said. Manufacturing activity, meanwhile, was "generally soft" and the housing market remained stuck in a rut.
Businesses also were hit by rising costs, especially for energy, metals, plastics, chemicals and food. Such reports were “widespread," the Fed said. To cope, manufacturers in several areas "noted some ability to pass along higher costs to customers" the Fed said. Retailers, however, reported "mixed results with respect to raising final goods prices," the Fed said.
Over the past week, Federal Reserve chairman Ben Bernanke and his Fed colleagues have been sounding an ever-louder alarm against inflation. Given those concerns, Bernanke has signalled the Fed’s rate-cutting campaign, started last September to bolster the weak economy, is probably over for now.
Many economists predict the Fed will leave its key rate at two per cent, a four-year low, when it meets next, on June 24-25.
However, with inflation moving up on the Fed’s list of concerns, Wall Street investors and others are now thinking the Fed might be forced to start boosting rates later this year to curb inflation. Raising rates too soon, though, could deal a set back to the already fragile economy.
It’s a dicey situation for Fed policy-makers.
The housing, credit and financial crises have badly bruised the economy and sharply slowed its growth. Consumers and businesses alike have hunkered down. Employers have cut jobs every month so far this year and the unemployment rate zoomed to 5.5 per cent in May, from five per cent in April – the largest one-month increase since 1986.
Bernanke, in a speech earlier this week, downplayed the big jump in the jobless rates, saying the danger that the economy has fallen into a "substantial downturn" appears to have waned over the past month or so.
The Fed’s powerful doses of interest rate cuts, the government’s US$168-billion stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for U.S. exports should help the economy over the remainder of this year, Bernanke predicted.
At the same time, Bernanke sent a fresh warning that the Fed will be on heightened alert against inflation dangers, especially any signs that investors, consumers and businesses think prices will keep going up and change their behaviour in ways that will aggravate inflation.
The Fed "will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation," the Fed chief said Monday evening.
The U.S. trade deficit widened more than expected in April as the average price for imported oil jumped to a record $96.81 per barrel and U.S. exports and imports also set records, a Commerce Department report showed on Tuesday.
The monthly trade gap grew nearly 7.8 percent to $60.9 billion from a downwardly revised $56.5 billion in March. The gain was the biggest since September 2005.
Wall Street analysts had forecast a smaller rise in the trade gap to $59.9 billion, from the previous March figure of $58.2 billion.
Average prices for imported oil rose $6.96 per barrel in April, the second highest increase on record. Imports from Saudi Arabia, Venezuela and other members of the Organization of Petroleum Exporting Countries totaled a record $20.9 billion.
Overall U.S. imports of goods and services were a record $216.4 billion, and showed their biggest one-month gain since November 2002. Although oil accounted for much of the increase, imports of autos and capital goods bounced back from a drop in March.
U.S. exports also rebounded to a record $155.5 billion in April after retreating slightly in March. The month-to-month rise was the biggest in more than four years.
The weak dollar has helped push U.S. exports higher over the last several years, keeping the U.S. economy afloat during a severe housing market downturn and liquidity crisis.
This week, China’s ambassador to the World Trade Organization said the weak U.S. dollar was hurting developing countries by fueling increases in oil and food prices and he called on Washington to take quick action to stabilize its currency.
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