White House pay czar Kenneth Feinberg, who has clamped down on executive compensation at the nation’s biggest bailout firms, now has a new target: any firm that accepted a government lifeline.
Unveiling a bold new initiative Tuesday, Feinberg said he would examine compensation paid to top executives at 419 companies made between October 2008 until February 2009, a period when the nation’s financial system was teetering on the brink.
The review is part of an effort to shed light on whether any firms that accepted money under the Troubled Asset Relief Program, or TARP, paid employees any excessive bonuses or awards during that tumultuous period before Congress stepped in and required greater oversight on pay practices at bailed-out firms.
Feinberg is asking each company to provide information on bonuses, retention awards and all other compensation for their senior executives and next 20 most highly-paid employees within 30 days.
Much of his focus though will be on executives earning more than $500,000, Feinberg said during a press briefing, sparing the hundreds of community and regional banks that also took TARP funds.
His review however, could subject paychecks of hundreds of financial executives, who have otherwise been free from leering eyes, to intense government and public oversight.
Among those likely to endure the greatest scrutiny would be employees at Goldman Sachs (GS, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Morgan Stanley (MS, Fortune 500). All three Wall Street firms are known for paying multi-million bonuses to top performers as well as senior executives in any given year.
And while investors have closely examined pay packages of their top executives, the trio avoided any federal scrutiny after paying back the billions of dollars received under TARP last year.
Morgan Stanley and JPMorgan Chase declined to comment. Goldman Sachs was not immediately available.
To date, Feinberg’s efforts have been focused on the seven firms that required an "exceptional" amount of government assistance. Two of those firms — Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) — have since repaid all of their bailout funds to the government though.
On Tuesday, Feinberg set 2010 compensation for executives at the remaining firms under his authority — AIG (AIG, Fortune 500), General Motors, its former finance arm GMAC, Chrysler and Chrysler Financial faxless cash advance..
Total pay for those executives would decline by 15% this year, with a larger portion of their compensation coming in the form of stock, according to Feinberg.
GMAC CEO Michael Carpenter, for example, who was appointed to lead the firm last November, will only be paid in the form of company shares.
Feinberg also said Tuesday that executives from AIG’s notorious financial products unit, which brought the firm to its knees, had repaid the entire $45 million in bonuses they originally pledged to return.
No Wall Street brain drain
There have been some questions about whether attempts to cap compensation at bailed-out firms would prompt top employees to seek work elsewhere.
But according to Feinberg’s latest ruling, more than 80% of the executives that submitted to Feinberg’s review in 2009 were still with the same firm earlier this year.
Feinberg’s forthcoming review of all firms that accepted TARP funds is expected to be made public by late spring or early summer.
The pay czar said Tuesday he will attempt to negotiate with those companies and employees that were awarded payments that were "contrary to the public interest."
One likely target could be bonuses paid to bank employees for fiscal year 2008.
An analysis of the original nine banks that received money under TARP published last July by New York Attorney General Andrew Cuomo revealed that those banks still paid out billions of dollars in bonuses in 2008, even as the firms suffered severe losses.
Citigroup, for example, paid an estimated $5.33 billion in bonuses in early 2009, despite suffering more than $27 billion in losses in 2008.
Goldman Sachs, which continues to face criticism over its pay practices, paid out some $4.8 billion in bonuses despite earning just $2.3 billion, according to the report.
It is unclear though, whether those firms may put up a fight. Others have questioned whether Feinberg will have the legal authority to renegotiate some of these employee payments.
–CNN’s Lisa Sylvester contributed to this report
Australian business profits rose for the first time in five quarters as earnings at wholesalers, hotels and restaurants gained.
Gross operating profits advanced 2.2 percent in the three months through December from the previous quarter, when they declined a revised 1.4 percent, the Bureau of Statistics said in Sydney today. The median estimate of 15 economists surveyed by Bloomberg News was for a 3 percent gain.
Today’s report adds to evidence of an economic rebound that may prompt the central bank to raise the benchmark interest rate tomorrow for the fourth time in five meetings. Australia’s economy probably grew the most in 1 1/2 years in the fourth quarter, a separate analysts’ survey ahead of a report on March 3 shows, boosted by A$22 billion ($20 billion) in spending by Prime Minister Kevin Rudd on roads, ports and schools.
Income from companies “looks OK, and they should improve further” in 2010, said Stephen Roberts, a senior economist at Normura Australia Ltd. in Sydney. “They’ve cut back a bit on costs and by this time next year we should have a big positive annual gain” in earnings.
Profits declined 11.2 percent in the fourth quarter from a year earlier, today’s report showed.
The Australian dollar fell to 89.84 U.S. cents at 12:03 p.m. in Sydney from 89.89 cents just before the report was released. The two-year government bond yield dropped 1 basis point to 4.58 percent. A basis point is 0.01 percentage point.
Supermarkets
Woolworths Ltd., Australia’s biggest retailer, said last week that first-half net income rose 11 percent to A$1.1 billion on increasing profitability at its supermarkets.
Goodman Fielder Ltd., the nation’s largest baker, said on Feb. 25 that first-half profit increased 25 percent after it cut manufacturing expenses and added new bread brands.
While some economists say concerns about sovereign debt in Europe and financial-markets turmoil may prompt central bank Governor Glenn Stevens to wait another month to increase borrowing costs tomorrow, 14 of 19 analysts surveyed by Bloomberg predict he will boost the benchmark rate by a quarter percentage point to 4 percent.
Boosting the benchmark rate tomorrow would make Stevens the first central banker from a Group of 20 economy to raise borrowing costs this year quick payday loans. He was also the first in the world to increase rates three times last quarter, when he raised the key rate in three quarter-point steps to 3.75 percent from a half- century low of 3 percent.
Business Investment
Profits at construction companies declined 2.7 percent in the fourth quarter and manufactures advanced 8.1 percent, today’s report said. Wholesale traders jumped 29 percent and hotels and restaurants gained 28.5 percent.
A report published last week showed business investment jumped in the fourth quarter at almost three times the pace predicted by analysts as companies raised their forecasts for investment plans to the highest level in five years.
BHP Billiton Ltd., the world’s largest mining company, said last month it will increase capital spending on iron-ore mines and oil fields by 63 percent next year to $20.8 billion from $12.8 billion this year.
Rising Chinese demand for Australian iron ore and coal is stoking a record boom in mining investment that may last more than a decade, central bank Deputy Governor Ric Battellino said on Feb. 23. Investment in new mines, ports and infrastructure may reach 6 percent of gross domestic product, more than double the amount spent during the last resources boom in the late 1970s, he said.
Faster Growth
GDP probably rose 0.9 percent in the fourth quarter from the previous three months, when it gained 0.2 percent, according to the median estimate of 18 economists surveyed by Bloomberg News. The economy probably expanded 2.4 percent from a year earlier, they said. The figures will be released at 11:30 a.m. on March 3.
Inventories held by companies gained 0.2 percent in the fourth quarter from the previous three months, today’s report showed. Economists forecast a 0.5 percent increase.
Retail sales rose 0.5 percent in January after falling in December for the first time in five months and building approvals gained for a third straight month, according to Bloomberg surveys of analysts ahead of reports to be released tomorrow.
Gross operating profit measures earnings before tax, interest, depreciation and amortization. It excludes asset sales and foreign-exchange gains or losses.
As Toyota’s mass recall threatens the leading automaker’s reputation, several rivals are rolling out incentives to reel in Toyota customers looking to get rid of their cars.
General Motors is offering incentives of $1,000 and low financing rates specifically for Toyota customers worried about their recalled vehicles.
"We decided to make this offer after receiving many e-mails and calls from our dealers, who have been approached by Toyota customers asking for help," GM said in a statement. The offers will run through the end of February.
Starting Wednesday, GM started offering $1,000 rebates or up to $1,000 to help pay off current leases on Toyota products. The automaker is also offering 0% financing on most models for Toyota customers. The offers apply to 2009 and 2010 model year cars.
Hyundai said it is offering a $1,000 rebate for anyone who trades in a Toyota from Thursday to February 1. Customers who trade in their Toyotas with the trade incentive can purchase one of three models only: a Hyundai Sonata, Elantra or Elantra Touring.
Ford is offering $1,000 to customers trading in Toyota Motor Co. products. The offer began Wednesday but a Ford spokeswoman said the offers are not targeted at Toyota’s recall problems. Customers are also being offered the same $1,000 on Honda products.
Chrysler is offering an additional $1,000 to customers who trade in their Toyota Tundra, Tacoma or Sienna and purchase or lease a new Chrysler, Jeep, Dodge car or Ram truck. It is also offering $1,000 in bonus cash to drivers who want to turn in a leased Toyota to buy or lease a Chrysler product.
Such "conquest incentives" — incentives targeted at owners of other manufacturers’ vehicles — are common in the industry, GM spokesman Tom Henderson said.
However, some of the incentives are designed to take advantage of Toyota owners’ worries at a time when they’re concerned about the safety and quality of their cars.
Toyota announced last week that it was recalling 2.3 million cars, SUVs and trucks for a problem with a potentially sticky gas pedal. This was after the company recalled 4.2 million vehicles — many of them the same as last week’s recall — for a problem in which the gas pedal could become stuck on the floormat.
Toyota recently announced that will temporarily stop selling models affected by the most recent recall, including some of their most popular products like the Camry sedan and the Rav4 small SUV.
For its part, Honda said the recall "has no impact whatsoever on Honda or Acura customers" and that it "will not undertake any sales activities that expressly target Toyota customers."
The problem plays to GM’s current strengths, said James Bell, an analyst with Kelley Blue Book’s KBB.com. Some of GM’s strongest products, like the Chevrolet Malibu sedan and Chevrolet Equinox SUV, are strong competitors to products Toyota is now not selling.
"The Equinox is the obvious buy over a Rav4," he said.
If the Chevrolet dealers were still selling last year’s Equinox, before the new, completely redesigned model was introduced, GM’s position wouldn’t have been as strong, he said.
BAGHDAD–Iraq gave final approval Sunday to a deal by a Shell-led consortium to develop one of its largest oilfields, marking a crucial step toward the nation’s postwar rebuilding by boosting the production of its most lucrative resource.
Royal Dutch Shell PLC and its partner, Malaysia’s state-run Petronas, won the right to develop the 12.5 billion barrel Majnoon field last month during Iraq’s second postwar bidding round. As part of the deal, Shell and Petronas will pay the Iraqi government a $150 million (U.S.) signing bonus.
At a Baghdad signing ceremony, Oil Minister Hussain al-Shahristani hailed the deal as a "major step that will transform the region from an area of misery and deprivation into a prosperous one."
Shell chief executive Peter Voser refused to say how much money will be spent on the project.
The oil deal for Majnoon, located in Basra province near the Iranian border, was one of seven the Iraqi government awarded last month.
The 20-year contract calls for the companies to be paid $1.39 per barrel produced above current output levels. The firms have said they hope to raise production from the current 45,900 barrels per day to 1.8 million barrels per day by 2020.
The Majnoon field was discovered in 1976 and was partially developed until the Iran-Iraq war halted work. Oil production resumed in 2002.
For Iraq, the oil deals mark a crucial step forward in the country’s so-far faltering bid to raise oil output. Although it sits atop the world’s third-largest proven reserves of conventional crude oil, Iraq produces a comparatively modest 2.5 million barrels per day, of which about 1.9 million barrels a day are exported.
Of the seven deals awarded in December, Iraq’s Cabinet has approved four, including Majnoon, and has asked for changes to proposals for the remaining three – awarded to consortiums led by Russia’s private oil giant Lukoil, China’s CNPC and Russia’s Gazprom – before signing off on them as expected by the end of January.
Money is overrated: In fact, pay has little, if anything at all, to do with motivation in the workplace. That’s the controversial argument put forth by best-selling author Daniel Pink in his new book, Drive: The Surprising Truth About What Motivates Us (Riverhead Books). "Pay for performance has to be exposed as folklore," he says.
Pink contends that, provided employees receive a baseline level of compensation, three other factors matter more than moola: a sense of autonomy, of mastery over one’s labor, and of serving a purpose larger than oneself.
One case in point: the results-only work environment at Best Buy’s Richfield, Minn., corporate offices. Beginning in 2008, salaried workers there were allowed to shape their work day, putting in only as many hours as they felt necessary to get their jobs done. Productivity increased by 35% and turnover fell sharply, according to The Harvard Business Review.
Hmmm. There may be something in all this — but the executives at Goldman Sachs (GS, Fortune 500) aren’t exactly busting a gut to adjust. Like others on Wall Street, the banking giant, which is expected to earn $6 per share in the fourth quarter, argues that fat bonuses are crucial to making its numbers.
Responds Pink, in a now common refrain: That’s precisely the attitude that led to the recent financial meltdown, as traders and mortgage brokers focused on short-term rewards that encouraged "cheating, shortcuts, and unethical behavior."
Moreover, the 45-year-old author and former Al Gore speechwriter cites social-science experiments and experiences at such workplaces as Google (GOOG, Fortune 500), JetBlue (JBLU), 3M (MMM, Fortune 500), online shoe retailer Zappos, and software companies Meddius and Atlassian.
In one 2005 experiment he describes, economists working for the Federal Reserve Bank of Boston tested the power of incentives by offering monetary rewards to those who did well in games that included recalling a string of numbers and tossing tennis balls at a target. The researchers’ finding: Over and over, higher incentives led to worse performance — and those given the highest incentives fared worst of all.
From this and other cases, Pink deduces that monetary inducements remove the element of play and creativity, transforming "an interesting task into a drudge." It’s even possible, he elaborates, for outsized rewards to have dangerous side effects, like those of a drug dependency in which a recipient requires ever larger doses. He cites neuroscientific testing that shows the promise of cash rewards activates a chemical surge in the brain similar to that brought on by cocaine or nicotine.
Pink says his approach isn’t just for knowledge workers — it can motivate even those doing less creative work. He points to Zappos, where call-center employees are not given scripts and are instead instructed to handle relations with customers in whatever way they think best. Turnover, ordinarily high at call centers, is minimal at Zappos.
Pink is aware that his company examples — no GE, no IBM, no Microsoft — hardly represent the commanding heights of the economy. But he thinks his approach will catch on, even in the biggest outfits. "Executives tend to be pragmatic, and in time they will respond," he says.
Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. economy will probably expand at “a reasonable pace” this year on growth in spending by households and businesses.
“Housing should continue to recover from a very depressed state, consumers should gradually expand spending, business investment should make something of a comeback,” Lacker said today in remarks to the Maryland Bankers Association in Linthicum, Maryland. Even with a resumption in growth, “the level of economic activity will disappoint many people for quite some time,” he added.
Fed Chairman Ben S. Bernanke and his fellow policy makers have left the benchmark lending rate in a range of zero to 0.25 percent since December 2008 to revive lending and end the worst recession since the Great Depression.
Policy makers will need to “choose carefully when and how rapidly” to remove monetary stimulus, Lacker said without indicating his own views on the timing.
The risk of a “pronounced” reduction in inflation has diminished, Lacker said.
“During the recovery period ahead we may face an increasing risk of inflation edging upward, which has sometimes occurred during past recoveries,” he said. “While that risk appears to be minimal at this point, we will have to be careful as the recovery unfolds to keep inflation and inflation expectations from drifting around.”
Not Strong Enough
Growth hasn’t been strong enough to reduce the unemployment rate. The U.S. lost 85,000 jobs in December after revisions showed payrolls increased the prior month for the first time in almost two years, a report today from the Labor Department showed. The jobless rate held at 10 percent.
The U.S. Congress has mandated that the Fed pursue low inflation and full employment. The 7.2 million drop in payrolls over the past two years has been the biggest decline as a percentage of total jobs since the end of World War II.
“The labor market could conceivably recover more slowly than many expect, which would restrain consumer spending and dampen growth,” Lacker said. “But household incomes and household confidence could conceivably rebound more vigorously than many expect, in which case consumer spending could expand more briskly.”
Services Expanded
Service industries expanded in December, with the Institute of Supply Management’s index of non-manufacturing businesses rising to 50.1 percent from 48.7 percent in November. Manufacturing last month expanded at the fastest pace in more than three years, the ISM said in a separate report.
The economy probably expanded at a 4 percent annual rate in the fourth quarter, according to a Bloomberg News survey.
Federal Open Market Committee members maintained an outlook for “moderate growth and subdued inflation” in 2010, minutes of their Dec easy online payday loans. 15-16 meeting showed. “A moderate pace of expansion would imply slow improvement in the labor market next year, with unemployment declining only gradually,” the minutes said.
The U.S. central bank’s efforts to restore liquidity and credit have resulted in the expansion of its balance sheet to $2.24 trillion in total assets, up from $858 billion at the start of 2007. As a result of the Fed’s direct purchases of $1.7 trillion in mortgage-backed, federal agency, and Treasury bonds, banks now hold more than $1 trillion in reserves in excess of what they are required to hold against deposits.
No ‘Huge’ Increase
Lacker said he doesn’t expect the conclusion of Fed purchases of mortgage-backed securities scheduled for the end of March to lead to a “huge” increase in mortgage rates.
Central bankers are now discussing how they will eventually exit their low-rate policy and drain excess cash in the banking system to head off inflation. The timing of such moves depends on economic performance, the minutes showed.
“A few members” suggested “it might become desirable” to expand the scale of asset purchases and continue them beyond the first quarter if the outlook for growth weakened or mortgage markets deteriorated, the minutes said. One member thought the purchases could be scaled back, and said it “might become appropriate” to begin selling assets if the recovery “gains strength over time,” the minutes said.
Banks haven’t started to circulate their reserves into expanding credit. Loans and leases of commercial banks in the U.S. declined to $6.8 trillion in November from $7.2 trillion a year earlier, according to Fed data.
Criticism of Policy
Proposed congressional audits of monetary policy would lead to criticism of decisions to increase the benchmark interest rate, Lacker said to reporters. The House voted last month to approve a proposal by Representative Ron Paul, a Republican from Texas, to end a ban on audits of monetary policy over Bernanke’s warnings the measure threatens to compromise Fed independence.
“The kind of audits of recent monetary policy decisions that the Paul amendment would allow are almost certainly going to result in criticism of interest rate increases,” Lacker said. “They are going to be biased in one way.”
The central bank hasn’t “settled on an approach” on how its various tools will be used with the federal funds rate, he said. “One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that.”
U.K. consumer confidence fell for a second month in December, complicating Prime Minister Gordon Brown’s efforts to revive his popularity before next year’s election, market researcher GfK NOP said.
An index of consumer sentiment dropped to minus 19 from minus 17 the previous month, GfK NOP said in an e-mailed statement today in London. A gauge of expectations for the economy over the next year fell nine points to minus six.
“This must be concerning for the government,” Nick Moon, an analyst at GfK, said in the statement. “What will be particularly worrying for Gordon Brown is that the index for the state of the economy, which had crept into positive territory, has fallen by a substantial nine points.”
Brown, who must call an election by June, is struggling to claw back the support lost to the opposition Conservatives during the financial crisis. Bank of England policy maker Kate Barker said Dec. 15 an economic recovery will be “bumpy,” and data released yesterday showed British retail sales unexpectedly fell in November for the first time in six months.
Retail sales growth will “fizzle out” next month, and trading conditions across the industry are likely to “remain challenging” in 2010, the Confederation of British Industry said yesterday instant personal loans guaranteed.
A gauge of the economy’s performance over the past year slipped two points to minus 61. A measure of consumers’ willingness to buy big items such as refrigerators and furniture rose three points to minus 16, GfK said.
Housing Recovery?
British consumers are still adapting to a recession that sparked the country’s worst housing slump since the early 1990s and has led to 600,000 job losses, pushing the unemployment rate to 7.8 percent. Barker said she would be “surprised” if the recent pick up in property prices were sustained next year as unemployment threatens household finances.
The market researcher surveyed 2,004 people between Dec. 4 and Dec. 12 on behalf of the European Commission. The margin of error is estimated at two percentage points, the report said.
There’s something different about the Masters’ Select Funds. Though it’s not unusual for a team of professionals to manage mutual funds, these offerings put a fresh spin on it.
Rather than bulk up with an in-house team of analysts and portfolio managers to establish the Masters’ Select Funds, Litman/Gregory Fund Advisors chose to play overseer. It hired highly regarded money managers as subadvisers — each responsible for a portion of one of its funds.
"Each manager has a very concentrated mandate to own only eight to 15 of their best ideas," says Chief Investment Officer Jeremy DeGroot. The funds are diversified from the different styles in investment philosophies of each manager, so there’s a broader mix of industries and stocks.
The largest fund is top-rated Master’s Select International Fund, with $1.4 billion in assets and a return of just more than 39 percent this year. Its five-year annualized return of 7.6 percent still places it among the top in Morningstar’s foreign large blend fund category.
DeGroot recently offered insight on his market perspective:
What’s your take on the market rally we’ve seen this year, and what do you expect lies ahead?
I want to be clear that Litman/Gregory’s view doesn’t impact how the Masters Funds are invested since those funds are built stock by stock by the managers. The reason I’m saying that is because Litman/Gregory is not that optimistic about stock returns looking out three to five years from now.
We think the consumers’ need to increase savings and rebuild their balance sheets is going to lead to slower growth in consumption.
That among other factors will lead to reduced earnings growth for companies. So in terms of outlook, we’re kind of in the subpar economic recovery group. We’re not in the V-shaped economic recovery group.
What’s guiding that outlook?
The market is expecting a stronger earnings recovery than we think is likely.
We think the baseline case scenario is for subpar recovery coming out of this recession. That’s because of the overhang of debt in our economy — because of all the government spending, the huge deficit that’s likely to lead to higher interest rates down the road, probably higher taxes on individuals. Those are not going to be positive for economic growth.
After taking a hit, don’t consumers usually return to being fat and happy — shaking off what ails them?
This time is different from most typical economic cycles in that this recession is more of a balance sheet recession. It wasn’t caused by the Federal Reserve worrying about inflation and an overheating economy and raising rates — leading to a contraction in consumer credit and a reduction in spending and business inventories getting cut. That did happen, but that’s not really what triggered the recession. We’re building debt upon debt, and we’re overspending our income for a number of decades.
Historically there have been some studies that have looked at the after-effects of balance sheet recessions, and they take much longer for economies to rebound. Unemployment usually stays significantly higher than it does in a normal recession. You know the Fed can’t lower rates any more. They’re doing other things to increase liquidity. We’re always hesitant, as everyone in the investment business is, to say it’s different this time. But it’s different from the typical cycle in our view.
Are there any factors that would trigger you to adopt the more positive scenario?
We think there has to be a significant reduction in household debt levels. We think it’s going to happen, hopefully fairly gradually, but when that happens, that is a headwind to growth. But we also think there are some worst-case scenarios for subpar growth where there could be a significant decline in the dollar. We expect a modest sustained gradual decline because it’s in no one’s interest to have the dollar crash.
With all the turmoil in the market over the last few years, has your firm’s team approach been tested?
We talk to managers about their mistakes a lot. And we think you really learn about the person, the team and their mind-set. If they’re willing to admit their mistakes and learn from them or if their ego is too big to really even acknowledge it.
The bottom line is that we removed one manager in the fall of last year, not based on short-term performance. It had been a process of reassessing over a couple of years, but with the other mangers we reconfirmed our confidence in their ability to perform well.
European Central Bank President Jean- Claude Trichet is withdrawing stimulus measures faster than economists anticipated, clearing obstacles to higher interest rates next year.
The ECB’s decision yesterday to end long-term emergency loans and tighten the terms of its final 12-month tender will give greater traction to any rate increases in 2010 should policy makers deem them necessary.
“The ECB chose a quicker exit path,” said Laurent Bilke, a former ECB economist now at Nomura International Plc in London. “It’s very difficult not to think it’s the beginning of a tightening process.”
The move to tie the rate on the 12-month loans to the ECB’s key rate rather than setting a fixed rate of 1 percent means any increase in the benchmark will also affect banks’ funding costs. While Trichet said the move doesn’t signal the ECB intends to raise rates, some officials are concerned that leaving borrowing costs at a record low for too long will fuel asset bubbles and faster inflation.
Trichet spoke as Federal Reserve Chairman Ben S. Bernanke promised a “smooth” withdrawal of stimulus in the U.S. as the world’s two biggest economies pull out of recession.
Yesterday’s announcements “put the ECB in a position where it can choose to raise rates if it wants to further down the line,” said David Page, an economist at Investec Securities in London. “We’re penciling in a rate rise in the second half of next year.”
Economic Recovery
The risk for the ECB is that any indication it could raise rates sooner than the Fed may fuel further gains in the euro and undermine the region’s economic recovery.
Economists had expected the ECB to leave the rate on its 12-month tender fixed at 1 percent, according to a Bloomberg News survey. That would have made any increase in the benchmark rate next year less effective because banks would have had money at 1 percent through the end of 2010.
By setting the rate on the loans to the average of the benchmark rate over the year, “the ECB has made sure that future movements in interest rates will be reflected in banks’ funding costs,” said Colin Ellis, an economist at Daiwa Securities SMBC Ltd. in London.
Some members of the ECB’s Governing Council were against indexing the rate, fearing it would fuel market expectations of policy tightening, people familiar with the discussions told Bloomberg last week. Trichet said today the decision was not unanimous, rather reached “by consensus.”
‘Strong’ Dollar
The euro traded at $1.5081 at 7:30 p.m. in Frankfurt last night, down from $1.5123 before Trichet spoke. It fell to $1.5061 after Trichet said it’s “very important” for Europe that the U.S. has a “strong” dollar.
The euro has gained 20 percent against the greenback since mid-February, threatening to slow the region’s recovery by hurting exports same day payday loans. Daimler AG, the world’s second-largest maker of luxury cars, said yesterday it will shift some production to Alabama from Germany as it seeks to benefit from the cheaper dollar.
While the ECB raised its economic outlook, forecasting growth of 0.8 percent next year and 1.2 percent in 2011, it said price pressures remain “subdued.” Inflation is expected to average 1.3 percent next year and 1.4 percent in 2011, below the bank’s medium-term goal of just less than 2 percent.
‘No Compelling Argument’
“The new staff growth and inflation forecasts confirm that there is still no compelling argument for hiking rates,” said Marco Annunziata, an economist at UniCredit Group in London. “Trichet was emphatic in noting that the decisions on liquidity simply reflect improving market conditions and in no way signal a prospective hardening of the monetary policy stance.”
Still, the ECB is withdrawing its non-standard operations “at a somewhat quicker pace than we had expected,” said Julian Callow, an economist at Barclays Capital in London. “In our view, today’s decisions are on the hawkish side.”
ECB council member Axel Weber said yesterday it’s a “balancing act” for central banks to withdraw stimulus measures without threatening their economic recoveries.
“We’ve made it clear that we’ll gradually withdraw unconventional measures in the future,” Weber, who is also head of Germany’s Bundesbank, told ARD television. “But that doesn’t mean that we won’t use the necessary caution. There’s no need to send a signal on interest rates at the moment.”
Normal Refinancing
The changes announced by the ECB nevertheless pave the way for a return to normal refinancing operations, in which the interest rate on its loans is determined by market demand. After the collapse of Lehman Brothers Holdings Inc. in September last year made banks reluctant to lend to each other, the ECB said it would lend them as much cash as they wanted at its benchmark rate.
Money-market rates have dropped, suggesting banks have become less wary of lending to each other. The Eonia overnight rate, the rate European banks charge each other for overnight loans, has declined to 0.34 percent from 2.2 percent at the start of the year.
“Once liquidity conditions normalize in the third quarter of next year, the Eonia rate is likely to move back to the refinancing rate,” said Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam.
“This would pave the way for conventional monetary tightening from the autumn of next year, and we expect 50 basis points of rate hikes by the end of 2010.”
LONDON–In a move that could help improve relations between Google Inc. and the media industry, the Internet search company is offering publishers a way to build more solid "pay walls" around their online stories while still appearing in search results.
In an official blog post Tuesday, Google said it will let publishers limit the number of restricted articles that readers can get for free through its search engine.
The change could remove one significant hurdle publishers face as they contemplate charging readers online. Many newspapers are considering such fees because online advertising on free sites hasn't offset the precipitous decline in print ad revenue that has come with the recession and competition from the Web.
The Wall Street Journal is perhaps the best example of how the new tool could help.
The newspaper charges for access to most articles on its Web site, but its pay wall is "leaky." Readers can grab the first sentence from a preview of the story, punch it in to Google and access the full story in the search results.
The Journal could simply block Google from indexing its stories, but that would cut traffic to its site significantly. Less traffic means less ad revenue.
The problem has infuriated executives at News Corp., which owns the Journal.
News Corp. Chairman Rupert Murdoch told a conference organized by the U.S. Federal Trade Commission on Tuesday that media companies should charge for content and stop news aggregators such as Google from "feeding off the hard-earned efforts and investments of others.''
The change to Google's "First Click Free" program would allow publishers to limit the number of paid articles a reader could access through its search engine to five per day.
That could assuage the anger of media titans like Murdoch, allowing news outlets to stay relevant by appearing in search results while still trying to wring fees from readers.
A News Corp. spokesman declined comment Wednesday.
In Google's blog post, Josh Cohen, senior business product manager, stressed that publishers and Google could coexist.
"After all, whether you're offering your content for free or selling it, it's crucial that people find it." he said. "Google can help with that.''
Cohen said that Google will also begin indexing and treating as “free" any preview pages – usually the headline and first few paragraphs of a story – from subscription Web sites. People using Google would then see the same content that would be shown free to a user of the media site. The stories would be labeled as “subscription" in Google News.
"The ranking of these articles will be subject to the same criteria as all sites in Google, whether paid or free," Cohen said. "Paid content may not do as well as free options, but that is not a decision we make based on whether or not it's free. It's simply based on the popularity of the content with users and other sites that link to it.''
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