Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) increased its previously reported second-quarter loss to $9.11 billion to cover costs to settle a probe of auction-rate securities sales, and said it will cut more jobs as the housing market deteriorates.
The fourth-largest U.S. bank is now reporting a loss of $4.31 per share, up from the $8.86 billion, or $4.20 a share, it reported on July 22, according to its quarterly report filed on Monday with the U.S. Securities and Exchange Commission.
Wachovia also now plans to cut 6,950 jobs, 600 more than it had disclosed, with the additional cuts coming from mortgage operations, spokeswoman Christy Phillips-Brown said. The cuts affect about 5.8 percent of Wachovia’s 120,000-person workforce. Wachovia also is also eliminating 4,400 open positions.
Separately, Wachovia said the SEC may recommend civil charges against its main banking unit in connection with municipal derivatives transactions. It also said various state attorneys general have issued subpoenas over that matter. The bank said it was cooperating with the probes. Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) reported receiving its own subpoenas last week.
The quarter marks the second in a row when Charlotte, North Carolina-based Wachovia revised results to increase the size of its reported loss. Wachovia increased its first-quarter loss to $708 million from an original $393 million because of a write-down tied to life insurance policies.
Auction-rate debt has interest rates that reset through periodic auctions, typically held every seven, 28 or 35 days. Once thought safe, much of the market has been frozen since brokerages in February stopped supporting the debt.
Wachovia said it added $500 million to legal reserves to cover a possible settlement. It is in talks with regulators to resolve matters related to auction-rate debt, after regulatory settlements last week by Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz). Missouri is leading the multi-state probe. Wachovia’s brokerage unit, Wachovia Securities, is based in St. Louis.
The bank has been among the lenders hardest hit by the U.S. housing crisis, following its $24.2 billion purchase of California mortgage specialist Golden West Financial Corp in October 2006, just as the mortgage market was peaking.
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.''
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.”
World food production must rise by 50% by 2030 to meet increasing demand, U.N. chief Ban Ki-moon told world leaders Tuesday at a summit grappling with hunger and civil unrest caused by food price hikes.
The secretary-general told the Rome summit that nations must minimize export restrictions and import tariffs during the food price crisis and quickly resolve world trade talks.
"The world needs to produce more food," Ban said.
The Rome-based U.N. Food and Agriculture Organization is hosting the three-day summit to try to solve the short-term emergency of increased hunger caused by soaring prices and to help poor countries grow enough food to feed their own.
In a message read to the delegates, Pope Benedict XVI said "hunger and malnutrition are unacceptable in a world which, in reality, has sufficient production levels, the resources, and the know-how to put an end to these tragedies and their consequences."
The Pope told the world leaders that millions of people at threat in countries with security concerns were looking to them for solutions.
Ban said a U.N. task force he set up to deal with the crisis is recommending the nations "improve vulnerable people’s access to food and take immediate steps to increase food availability in their communities."
That means increasing food aid, supplying small farmers with seed and fertilizer in time for this year’s planting seasons, and reducing trade restrictions to help the free flow of agricultural goods.
"Some countries have taken action by limiting exports or by imposing price controls," Ban said. "They only distort markets and force prices even higher."
The increasing diversion of food and animal feed to produce biofuel, and sharply higher fuel costs have also helped to shoot prices upward, experts say.
The United Nations is encouraging summit participants to start undoing a decades-long legacy of agricultural and trade policies that many blame for the failure of small farmers in poor countries to feed their own people.
Wealthy nations’ subsidizing their own farmers makes it harder for small farmers in poor countries to compete in global markets, critics of such subsidies say. Jim Butler, the FAO’s deputy director-general, said in an interview ahead of the gathering that a draft document that could be the basis for a final summit declaration doesn’t promise to overhaul subsidy policy.
Congress last month passed a five-year farm bill heavy on subsidies, bucking White House objections that such aid in the middle of a global food crisis wasn’t warranted.
The head of the summit’s U.S. delegation, Agriculture Secretary Ed Schafer, insisted on Monday that biofuels will contribute only 2% or 3% to a predicted 43% rise in prices this year.
Figures by other international organizations, including the International Monetary Fund, show that the increased demand for biofuels is contributing by 15% to 30% to food price increases, said Frederic Mousseau, a policy adviser at Oxfam, a British aid group.
"Food stocks are at their lowest in 25 years, so the market is very vulnerable to any policy changes" such as U.S. or European Union subsidizing biofuels or mandating greater use of this energy source, Mousseau said.
Brazil is another large exporter of biofuels, and President Luiz Ignacio Lula da Silva was expected to defend biofuels at the summit.
Several participants won’t even be talking to each other at the summit.
Australia’s foreign minister decried as "obscene" Zimbabwean President Robert Mugabe’s participation in the summit. The longtime African leader has presided over the virtual transformation of his country from former breadbasket to agricultural basket case.
Zimbabweans increasingly are unable to afford food and other essentials with agriculture paralyzed by land reform and the world’s highest rate of inflation.
The Dutch ministry for overseas development pledged to "ignore" Mugabe during the summit.
EU sanctions against Mugabe because of Zimbabwe’s poor human rights record forbid him from setting foot in the bloc’s 27 nations, but those restrictions don’t apply to U.N. forums.
Jewish leaders and some Italian politicians were among those denouncing Iranian President Mahmoud Ahmadinejad’s attendance at the meeting. On Monday, Ahmadinejad repeated his call for the destruction of Israel, which is also participating in the summit.
Ahmadinejad was scheduled to give a summit news conference Tuesday afternoon.
Schafer, asked about the presence of the Zimbabwean and Iranian leaders, told reporters in Rome that the two were welcome to attend the summit, but that U.S. delegates would not be meeting with them.
The U.S. Securities and Exchange Commission on Monday charged eight former executives of AOL Time Warner, now known as Time Warner Inc, in a fraudulent scheme that overstated company advertising revenue by more than $1 billion.
Four of the defendants settled with the SEC and the other four are facing fraud-related charges in federal court in New York.
The former executives participated in a scheme from mid-2000 to mid-2002 to artificially inflate the company’s reported online advertising revenue, the SEC said in a statement. Online advertising revenue was a key measure analysts and investors used to evaluate the company.
The scheme involved fraudulent transactions in which AOL Time Warner effectively funded its own advertising revenue by giving purchasers the money to buy online advertising that they did not want or need, the SEC said.
The SEC settled charges with David Colburn, former head of the company’s business affairs unit; Eric Keller, former senior manager in the business affairs unit; James MacGuidwin, former controller; and Jay Rappaport, former senior manager in the business affairs unit. The four neither admitted nor denied they were guilty of the charges.
As part of their settlements, Colburn agreed to pay almost $4 million, Keller almost $1 million, MacGuidwin $2.4 million, and Rappaport almost $750,000, the SEC said.
Colburn and MacGuidwin were also barred from serving as officers or directors of a public company for 10 years and seven years, respectively.
John Michael Kelly, former chief financial officer of AOL Time Warner; Steven Rindner, former senior executive in the business affairs unit; Joseph Ripp, former chief financial officer of the company’s AOL division; and Mark Wovsaniker, former head of accounting policy, are facing fraud-related charges, the SEC said.
As the fight for votes intensifies, a new poll finds that more Americans say they’ll be swayed by the candidate who can fix the economy and tame inflation, especially at the gas pump.
A national CNN/Opinion Research Corp. poll released Friday found that 49% of respondents think the economy is now the most important factor in deciding how they will vote in the upcoming presidential election. That’s up from 44% in February and 29% in December.
The economy was by far respondents’ largest concern. Of the more than 1,000 American adults surveyed in the poll, conducted April 28-30, only 19% said the Iraq war was the most important factor, and 14% said health care was most crucial.
Inflation worries grow: Nearly half - 47% - of respondents said the most worrisome economic problem is inflation, more than doubling the number who said the housing crisis was the top concern. Only 19% said the housing was their biggest economic concern, and 13% said it was unemployment that worried them the most.
"It’s not surprising consumers are expressing concern, because energy prices have risen quite a bit," said Wachovia economist Mark Vitner. "Just look at how much consumers are spending on necessities."
Americans are dishing out a record 57% of their spending on necessities like food, housing, energy, health care, according to Vitner, leaving only 43% of their remaining spending money on other purchases.
And when it comes to rising prices, soaring energy prices worried Americans the most, with 68% saying it was their top concern. Twenty-three percent said the escalation in food costs was their biggest worry.
That’s because food and energy prices are spiking.
According to a Commerce Department report released Thursday, inflation energy prices have risen 17% since March of 2008, and food prices are up 4.5%. Americans are experiencing pain at the pump, with gas prices reaching record levels. And shoppers have noticed a increase in food prices as well, especially in traded commodities like corn and soybeans.
Many economists blame the Federal Reserve’s months-long rate-cutting campaign for prices spiraling out of control. The central bank cut its key funds rate from to 2% in April from 5.25% in September in an attempt to boost the economy and stave off a recession.
But the cuts are also inflationary, leading investors to pour money into commodity futures as a hedge against the falling dollar.
As a result, many economists believe the Fed signaled an end to the rate cuts for the time being in an effort to stem the tide of inflation. But that doesn’t mean that prices will about-face overnight.
Good news for McCain? The presidential race is still wide open, with no overwhelming front-runner for the Democratic ticket.
But rising inflation could be good news for the presumed Republican nominee John McCain.
"Historically, when consumers are concerned about inflation, they vote Republican, and when they are worried about employment, that’s when they tend to vote Democratic." said Vitner. "But who knows: there are a lot of people are critical of Fed, and the Bush administration, so that may not hold true this year."
Investors fear that Citigroup Inc’s (C.N: Quote, Profile, Research) sale of $4.5 billion of shares, combined with a $6 billion preferred stock sale last week, signal the bank is likely to face more write-downs in the future and may need to raise even more capital.
Citigroup management has shifted from believing it was essentially done raising new capital to signaling it is interested in raising more, analysts say.
That willingness to raise more money is a warning sign to some investors, because companies are typically reluctant to issue equity capital, which can be dilutive and boost dividend obligations.
“It looks like they’re trying to stop the bleeding and they just can’t seem to do it,” said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, Oregon.
Mike Hanretta, a spokesman for Citigroup said: “we are strongly capitalized.”
But some analysts disagree. Meredith Whitney, analyst at Oppenheimer & Co, said the bank needs another $10 billion to $15 billion of capital. Her note came out before Citi’s stock deal was boosted from $3 billion to $4.5 billion.
Whitney also believes Citi may cut its dividend, which costs the bank about $6.5 billion a year, for the second time this year.
The recent bout of preferred and common equity offerings — one of a series by capital-starved financial institutions worldwide — leave Citi with a Tier 1 capital ratio of about 8.6 percent, based on March 31 balance sheet figures. That beats the 7.7 percent level it had before the capital raising, and is above the bank’s target of 7.5 percent.
Federally owned Atomic Energy of Canada Ltd. is no longer pursuing the sale of its next-generation nuclear reactor in the United Kingdom, announcing yesterday it will focus its energy on capturing business at home.
Some industry critics said AECL, which says it has spent "less than $10 million" trying to snag a purchase from the U.K., is trying to soften the blow of a certain loss and how it might be perceived as it bids for contracts in Canada.
"Why let it blow up later when you can back out now and save some face?" said Shawn-Patrick Stensil, who closely follows the nuclear power sector for Greenpeace Canada.
Less than two weeks ago, Mississauga-based AECL announced that its Advanced Candu Reactor made it onto a short list of four reactor designs approved by the U.K. nuclear regulator, which said it found no safety or security shortfalls serious enough to rule out the Canadian design. The short list also included Areva NP, Westinghouse Electric Co. and GE Nuclear – the same companies currently being considered for a new reactor in Ontario.
At the time, the U.K. government said it would whittle the list to three designs sometime in May. Sources say the regulator sent letters to all the U.K. utilities asking them to rank the designs they preferred. Their responses still left AECL on the bottom of the list.
Hugh MacDiarmid, AECL’s president and chief executive officer, told the Toronto Star that a business decision had to be made.
"We’ve been very carefully evaluating our realistic prospects over there. How much money is it going to cost us to go through step three, how much time, and without any commitment at the end of that?" he said. "Our sense was that we were unlikely to get the blue ribbon this time around, because we didn’t have the demonstration project under way here in our home country."
MacDiarmid said the U.K. plans to build several new reactors and that AECL intends to participate in subsequent rounds, once it has proven itself in Canada.
With three opportunities to sell in Canada – in Ontario, New Brunswick and Alberta – the Crown corporation didn’t want to spread itself too thin, he added.
"I’m a real believer in having a core mission in life, and I believe AECL’s core mission is to be the supplier of choice to the Canadian electrical utility market. Everything else has to be secondary to that."
Marc Kealey, an international energy consultant and former general manager at AECL, said the company made the right decision. The Canadian government, ultimately responsible as AECL’s owner, is better off backstopping a new nuclear project on its home turf than taking on huge financial risk in a foreign market, he said.
Even with a contract in Canada, Kealey added that AECL and its Candu technology face an uphill battle in overseas markets, dominated by the pressurized-water reactor technology used by Areva and Westinghouse.
Much of AECL’s efforts are focused on Ontario. The province expects to make a decision on reactor technology, and where the new plant will be built, by year end.
WASHINGTON — A vast reshuffling of U.S. financial regulators pitched by Treasury Secretary Henry Paulson on Monday is not so much about today’s economic crisis as tomorrow’s.
"These long-term ideas require thoughtful discussion and will not be resolved this month or even this year," Paulson acknowledged in a speech detailing his Blueprint for Regulatory Reform.
The proposals would broadly expand the powers of the Federal Reserve, merge the regulation of stock and commodities markets, fold savings and loan institutions under the umbrella of bank regulation and even allow insurance companies to opt out of state regulation in favor of a newly created federal insurance regulator.
Paulson’s plan also would create a new super-regulator whose powers would cut across various financial services with overarching responsibility for protecting investors and consumers.
The plan also would create a new federal entity to oversee the mortgage origination process so that lending standards never again would erode to the point where they sink the national housing market. That proposal has bipartisan support and could win early approval.
However, very little in the plan can be set in motion by executive order or under existing regulatory authority, so it will be up to the next president and Congress to determine how to proceed.
Leading Democrats who now control Congress didn’t rush to embrace the Paulson plan.
"I would call this the
wild pitch. It’s not even close
to the strike zone," said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, which would oversee many of the proposals.
Other Democrats said the plan offers no solutions for people facing foreclosure from rising interest rates, job losses from a slowing economy or enough oversight.
"The administration’s hands-off policies on regulation of securities and commodities markets and its continued pressure for less and less regulation have contributed to the mess that the markets are in," U.S. Sen. Carl Levin, D-Mich., said in a statement. "Reasonable regulation, not just coordination, of those markets is overdue."
Paulson said the economy’s current stumbles had nothing to do with lax regulation.
"I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years," he said.
The Paulson plan offers three time frames for regulatory changes: short-term proposals that could be enacted before the next president takes office in January, intermediate-term plans that could take two to eight years for congressional approval and long-range goals that serve mainly as discussion points.
The biggest change would be authorizing the Federal Reserve to become a supercop, with supervisory powers over any aspect of financial markets that presents danger to the financial system.
It isn’t clear how much Fed staff would have to increase for the agency to be effective at its expanded responsibilities.
"If you only address issues at a higher level of engagement, you may not have the institutional strength that comes from getting into the details," said Vince Reinhart, who was a Fed division director from 2001 to 2007. "The Fed is ’special forces’ that get helicoptered in when things get really serious. … The mission is very big because any entity could potentially have ‘consequences for financial stability.’"
The most immediate thing that Paulson thinks can and should be done this year is creating a Mortgage Origination Commission to provide much-needed federal oversight for the home loan origination process.
"Simply put, that process is broken," Paulson said.
This new commission, which appears to have support from top Democrats, would be composed of a representative from each of the five federal agencies that have some jurisdiction over banking — the Federal Reserve, Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration — and a representative from the association of state banking supervisors.
The president would appoint a director of the commission, which would design professional standards for licensing mortgage brokers and others who originate home loans. The group would establish educational requirements and either provide a registry for complaints or take disciplinary action against individual mortgage brokers, or both.
"This proposal addresses how the registry requirement would be enforced, and establishes an office to oversee individual and state compliance with its rules. We support this aspect of the recommendations," said George Hanzimanolis, the president of the National Association of Mortgage Brokers.
Another part of the plan is to allow national insurance companies to opt out of state regulation if they’re willing to be regulated by a federal insurance regulator, which doesn’t now exist. The Treasury argues that 50 separate state regulatory schemes put insurers at a disadvantage in a global economy.
But Sen. Dodd of Connecticut, where many top insurers are based, suggested that there may be a more middle-ground approach. He said he thought federal regulation of life insurance could be a good idea.
But, Dodd added, states probably would do a better job regulating the property and casualty insurers, who underwrite policies for protection against losses from hurricanes, earthquakes, tornadoes and other disasters.
Kevin G. Hall of McClatchy Newspapers contributed to this report.
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