(Reuters) - New U.S. rules for the trading of derivatives could drive market enemies into each other's arms, as dealers and exchanges look to strike more partnerships to yield shared profits from the revamped landscape.
The Obama administration's proposals, announced last week, favor exchange and clearinghouse operators because they require "standardized trades" to move onto exchanges, and require all over-the-counter derivatives to be cleared by regulated central counterparties.
That would effectively transfer a very lucrative business from derivatives dealers, blamed by many for the financial crisis, to exchanges and clearinghouses, which have touted their durability since markets plunged last year.
They have long waged a tug-a-war for control over where derivatives trade, with the dealers' private OTC market mostly dominant. The new regulations may force the dealers and exchanges to work more closely together.
"There were already initiatives underway to have exchanges partner with dealers, and this helps accelerate what was already underway," Matthew Lavicka, managing director of cash equities at Goldman Sachs & Co, which is among the top U.S. derivatives dealers, told Reuters on Wednesday.
Goldman and several other big banks own a 50-percent equity stake in IntercontinentalExchange's clearinghouse for credit default swaps. Dealer backing pushed ICE to the fore of clearinghouses looking to clear U.S. CDS, default-insurance products blamed for worsening the crisis.
The world's biggest exchanges, including CME Group Inc, NYSE Euronext and Nasdaq OMX, have sought partnerships with dealers and other big OTC players who would drive business to their derivative clearinghouses and exchanges.
"You can't just build it and have them come," said Larry Leibowitz, head of U.S. markets and global technology at New York Stock Exchange parent NYSE Euronext. "We've been launched in Europe for a while and people aren't really using it," he said of the company's five month-old European CDS clearer.
OTC MARKET DOMINANT -- FOR NOW
Broker-dealers earn money from trading or facilitating the trade of derivatives, instruments that derive their value from other assets. Because the $194 trillion U.S. OTC market eclipses the $7 trillion exchange-traded market, exchanges have salivated at the prospect of grabbing a bigger slice.
But they have had little success because derivatives are tailored specifically for those who trade them, and exchanges typically trade standardized products for wider consumption.
The Obama administration's plans, meant to avoid a repeat of the financial meltdown that sparked a global recession, could change the equation.
"A lot of what was signaled there was that the administration was trying to get the regulators, the sellside, the buyside and the exchanges all to work together," said Rick Redding, CME Group's managing director of products and services.
"I think directionally, it was telling the market participants they need to work in a more collaborative way to come up with solutions," he said on Wednesday in an interview on the sidelines of a conference hosted by Fox-Pitt Kelton here.
An OTC derivatives trade is a private agreement between two parties. Regulators want to install a clearinghouse between those trades to act as a central counterparty that would guarantee the obligations if any participant defaults.
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Wednesday, 20 May 2009
Lehman Brothers questioned over securities sales
(Reuters) - Regulators have questioned former Lehman Brothers Holdings (LEHMQ.PK) executives over their marketing of auction-rate securities, the Wall Street Journal reported, citing people with knowledge of the matter.
Prosecutors from the U.S. attorney's office in Brooklyn and Securities and Exchange Commission lawyers have interviewed several former Lehman employees about the securities, to try to determine whether these people defrauded customers, the newspaper said.
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Prosecutors from the U.S. attorney's office in Brooklyn and Securities and Exchange Commission lawyers have interviewed several former Lehman employees about the securities, to try to determine whether these people defrauded customers, the newspaper said.
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Fed mulled increasing debt purchases in April
(Reuters) - The Federal Reserve said on Wednesday it saw modest improvements in the U.S. economy last month, but it still saw big risks and left open the possibility of increasing its purchases of mortgage-related and government debt to keep credit flowing and spur recovery.
Despite a pickup in household and business confidence that Fed officials saw helping to steady spending when they met in late April, they viewed the evidence as too tentative to erase risks facing the recession-mired economy.
The policy-makers cut their forecasts for economic growth over the next three years and debated whether they should further ramp up planned purchases of mortgage agency and government securities, minutes of their April 28-29 meeting said.
The Fed in recent months has turned to asset purchases as a means to keep credit flowing since running out of scope to further lower benchmark interest rates after bringing them down to close to zero percent last year.
"Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery," the minutes of the Federal Open Market Committee's meeting said.
"All members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train before deciding whether to adjust the size or timing of asset purchases," they added.
In fresh quarterly forecasts, the Fed projected the U.S. economy would contract by between 1.3 percent and 2.0 percent this year, with the unemployment rate rising to between 9.2 percent and 9.6 percent.
In January, the Fed had forecast a milder contraction of between 0.5 percent and 1.3 percent, with the jobless rate rising to between 8.5 percent and 8.8 percent.
U.S. stocks fell on the gloomier economic forecast, while debt prices rallied on the prospect the Fed could boost its securities purchases.
"The tone of the minutes is a little more optimistic, and the forecasts are a little more pessimistic," said Christopher Low, chief economist for FTN Financial in New York.
The minutes showed the Fed staff last month had offered a sunnier forecast than the policy-makers, with the staff revising up their outlook for economic activity. They anticipated that growth would expand at a rate well above its potential in 2011 and that the unemployment rate would decline significantly.
"Key factors expected to drive the acceleration in economic activity were the boost to spending from fiscal stimulus, the bottoming out of the housing market, a turn in the inventory cycle from liquidation to modest accumulation, and ongoing gradual recovery of financial markets," the minutes said.
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Despite a pickup in household and business confidence that Fed officials saw helping to steady spending when they met in late April, they viewed the evidence as too tentative to erase risks facing the recession-mired economy.
The policy-makers cut their forecasts for economic growth over the next three years and debated whether they should further ramp up planned purchases of mortgage agency and government securities, minutes of their April 28-29 meeting said.
The Fed in recent months has turned to asset purchases as a means to keep credit flowing since running out of scope to further lower benchmark interest rates after bringing them down to close to zero percent last year.
"Some members noted that a further increase in the total amount of purchases might well be warranted at some point to spur a more rapid pace of recovery," the minutes of the Federal Open Market Committee's meeting said.
"All members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train before deciding whether to adjust the size or timing of asset purchases," they added.
In fresh quarterly forecasts, the Fed projected the U.S. economy would contract by between 1.3 percent and 2.0 percent this year, with the unemployment rate rising to between 9.2 percent and 9.6 percent.
In January, the Fed had forecast a milder contraction of between 0.5 percent and 1.3 percent, with the jobless rate rising to between 8.5 percent and 8.8 percent.
U.S. stocks fell on the gloomier economic forecast, while debt prices rallied on the prospect the Fed could boost its securities purchases.
"The tone of the minutes is a little more optimistic, and the forecasts are a little more pessimistic," said Christopher Low, chief economist for FTN Financial in New York.
The minutes showed the Fed staff last month had offered a sunnier forecast than the policy-makers, with the staff revising up their outlook for economic activity. They anticipated that growth would expand at a rate well above its potential in 2011 and that the unemployment rate would decline significantly.
"Key factors expected to drive the acceleration in economic activity were the boost to spending from fiscal stimulus, the bottoming out of the housing market, a turn in the inventory cycle from liquidation to modest accumulation, and ongoing gradual recovery of financial markets," the minutes said.
Read more here
Tuesday, 19 May 2009
GM bankruptcy plan eyes quick sale to government
(Reuters) - If General Motors Corp files for bankruptcy, as widely expected, its healthy assets will be quickly sold to a new company owned by the U.S. government, a source familiar with the situation said on Tuesday.
The source, who was not cleared to speak with the media and would not be identified, said the U.S. government would pay for the assets by assuming the automaker's $6 billion of secured debt and forgiving the bulk of the $15.4 billion of emergency loans that the U.S. Treasury has provided to GM.
The government is negotiating the terms on which it will assume GM's secured debt and might make an the offer to holders of the debt that is far superior to the one made to Chrysler LLC's secured lenders, the source said.
Chrysler filed for bankruptcy in April and has proposed paying its secured lenders about 28 cents on the dollar.
The new GM is likely to distribute stock in the company to GM's unions in return for concessions on wages and benefits, the source said.
The percentage of stock given to the unions, bondholders and other creditors whose debt is not repaid by new GM has not been determined, the source said.
In addition, the government would extend a credit line to the new company, the source said.
The remaining assets of GM would stay in bankruptcy protection to satisfy other outstanding claims.
The government has given GM until June 1 to restructure its operations to lower its debt burden and employee costs as sales have plummeted in recent years.
DELPHI, HENDERSON
GM will likely take on some of the operations of its bankrupt supplier Delphi Corp to make sure it gets needed auto parts throughout its reorganization, according to the source. The company is currently negotiating terms with Delphi's estate, the source said.
Delphi, a former unit of GM, has been operating in bankruptcy since 2005.
The board of the new company would be established with the tacit approval of the government. Fritz Henderson, who took the helm of GM earlier this year after the government pushed out Rick Wagoner, will head the new company, the source said.
Setting up a new company to buy the healthy assets is aimed bringing operations out of bankruptcy as quickly as possible. GM is concerned that consumers might not be willing to make a major purchase from a bankrupt company, fearing it would not honor warranties or provide service.
Chrysler is employing a similar strategy in its bankruptcy. The smaller automaker is selling its operations to a group that will be managed by Italian automaker Fiat and wants to have the strongest operations out of bankruptcy in 60 days.
Read more here
The source, who was not cleared to speak with the media and would not be identified, said the U.S. government would pay for the assets by assuming the automaker's $6 billion of secured debt and forgiving the bulk of the $15.4 billion of emergency loans that the U.S. Treasury has provided to GM.
The government is negotiating the terms on which it will assume GM's secured debt and might make an the offer to holders of the debt that is far superior to the one made to Chrysler LLC's secured lenders, the source said.
Chrysler filed for bankruptcy in April and has proposed paying its secured lenders about 28 cents on the dollar.
The new GM is likely to distribute stock in the company to GM's unions in return for concessions on wages and benefits, the source said.
The percentage of stock given to the unions, bondholders and other creditors whose debt is not repaid by new GM has not been determined, the source said.
In addition, the government would extend a credit line to the new company, the source said.
The remaining assets of GM would stay in bankruptcy protection to satisfy other outstanding claims.
The government has given GM until June 1 to restructure its operations to lower its debt burden and employee costs as sales have plummeted in recent years.
DELPHI, HENDERSON
GM will likely take on some of the operations of its bankrupt supplier Delphi Corp to make sure it gets needed auto parts throughout its reorganization, according to the source. The company is currently negotiating terms with Delphi's estate, the source said.
Delphi, a former unit of GM, has been operating in bankruptcy since 2005.
The board of the new company would be established with the tacit approval of the government. Fritz Henderson, who took the helm of GM earlier this year after the government pushed out Rick Wagoner, will head the new company, the source said.
Setting up a new company to buy the healthy assets is aimed bringing operations out of bankruptcy as quickly as possible. GM is concerned that consumers might not be willing to make a major purchase from a bankrupt company, fearing it would not honor warranties or provide service.
Chrysler is employing a similar strategy in its bankruptcy. The smaller automaker is selling its operations to a group that will be managed by Italian automaker Fiat and wants to have the strongest operations out of bankruptcy in 60 days.
Read more here
Fiat expansion stirs resentment in Italy's south
(Reuters) - Staring at the locked gates of a Fiat car factory, Mimmo Vacchiano says many families in this poor corner of southern Italy face a stark choice unless its turnstiles reopen.
"If they close this plant, there's nothing else here, only unemployment or the mafia," said Vacchiano, a 48-year-old father of two. "Here, it's not like northern Italy, where you can find another job. We're living in panic."
Pomigliano d'Arco, a town of 40,000 people in the shadow of Mount Vesuvius, relies on Fiat for its lifeblood. In recent decades, industry in the nearby port of Naples has closed, tightening the grip of the ruthless Camorra crime gang on the economy of one of Europe's most depressed regions.
Residents now fear they may pay the price for cash-strapped Fiat's high-stakes strategy to survive the global recession by expanding to become the world's second largest car maker.
Unemployment in Pomigliano already runs at nearly 20 percent and Fiat's temporary closure of the plant -- in a bid to slash costs like other major car makers -- has brought the town to its knees. Fiat employs 5,000 people directly here but the plant provides jobs for 20,000 if suppliers are taken into account.
Fiat agreed last month to take 20 percent of bankrupt No. 3 U.S. auto maker Chrysler and wants to buy the international operations of struggling General Motors, including Germany's Opel. This has raised fears of job cuts in Italy, especially in Pomigliano and at Fiat's Termini Imerese plant in Sicily.
Workers in Pomigliano, among the most militant in Italy, have already clashed with police despite pledges from Fiat and the government that the plant may be downsized but not closed.
"Shutting this plant would cause a revolt," said Vacchiano, standing with angry unionists who say Fiat has refused to talk to them. "If they buy Opel, they'll be doing it with money made off our backs!"
Fiat CEO Sergio Marchionne has said he will only meet unions once he has a clearer idea of the Opel deal. But with Fiat idling the plant for weeks at a time, workers say monthly welfare payments of about 700 euros ($950) are not enough.
On the winding main street, some stores have shut down and in the square men sit idly on park benches. Rubbish litters doorways and washing dries on lines outside apartments where three generations of families live.
In his office in the dilapidated municipal building, Mayor Antonio Dellaratta says Prime Minister Silvio Berlusconi's center-right government has a duty to step in.
"This could bring the local economy to its knees. High unemployment and insecurity would bring this town to collapse," he said. "We're in favor of this Opel merger but production must stay here. We must insist on that because Fiat is Italian."
RISKY MOVE
Founded in 1899 in the industrial town of Turin, Fiat quickly grew to become the country's largest industrial group, transforming the Agnelli family that controls it into the closest thing Italy now has to royalty.
Fiat has factories from Brazil to Poland, luxury brands such as Maserati and Ferrari, and interests in insurance, technology, advertising and publishing, including La Stampa newspaper.
Read more here
"If they close this plant, there's nothing else here, only unemployment or the mafia," said Vacchiano, a 48-year-old father of two. "Here, it's not like northern Italy, where you can find another job. We're living in panic."
Pomigliano d'Arco, a town of 40,000 people in the shadow of Mount Vesuvius, relies on Fiat for its lifeblood. In recent decades, industry in the nearby port of Naples has closed, tightening the grip of the ruthless Camorra crime gang on the economy of one of Europe's most depressed regions.
Residents now fear they may pay the price for cash-strapped Fiat's high-stakes strategy to survive the global recession by expanding to become the world's second largest car maker.
Unemployment in Pomigliano already runs at nearly 20 percent and Fiat's temporary closure of the plant -- in a bid to slash costs like other major car makers -- has brought the town to its knees. Fiat employs 5,000 people directly here but the plant provides jobs for 20,000 if suppliers are taken into account.
Fiat agreed last month to take 20 percent of bankrupt No. 3 U.S. auto maker Chrysler and wants to buy the international operations of struggling General Motors, including Germany's Opel. This has raised fears of job cuts in Italy, especially in Pomigliano and at Fiat's Termini Imerese plant in Sicily.
Workers in Pomigliano, among the most militant in Italy, have already clashed with police despite pledges from Fiat and the government that the plant may be downsized but not closed.
"Shutting this plant would cause a revolt," said Vacchiano, standing with angry unionists who say Fiat has refused to talk to them. "If they buy Opel, they'll be doing it with money made off our backs!"
Fiat CEO Sergio Marchionne has said he will only meet unions once he has a clearer idea of the Opel deal. But with Fiat idling the plant for weeks at a time, workers say monthly welfare payments of about 700 euros ($950) are not enough.
On the winding main street, some stores have shut down and in the square men sit idly on park benches. Rubbish litters doorways and washing dries on lines outside apartments where three generations of families live.
In his office in the dilapidated municipal building, Mayor Antonio Dellaratta says Prime Minister Silvio Berlusconi's center-right government has a duty to step in.
"This could bring the local economy to its knees. High unemployment and insecurity would bring this town to collapse," he said. "We're in favor of this Opel merger but production must stay here. We must insist on that because Fiat is Italian."
RISKY MOVE
Founded in 1899 in the industrial town of Turin, Fiat quickly grew to become the country's largest industrial group, transforming the Agnelli family that controls it into the closest thing Italy now has to royalty.
Fiat has factories from Brazil to Poland, luxury brands such as Maserati and Ferrari, and interests in insurance, technology, advertising and publishing, including La Stampa newspaper.
Read more here
Bank of America raises $13.47 billion in share sale
(Reuters) - Bank of America Corp raised $13.47 billion through a share sale, marking a major step toward meeting the U.S. government's requirements for capital-raising following the recent "stress testing" of the bank.
Including proceeds from the sale of part of its stake in China Construction Bank Corp for $7.3 billion, the bank is now more than half-way toward plugging a $33.9 billion capital shortfall identified by the government.
The bank has issued 1.25 billion shares at an average price of $10.77 each since last Friday, it said in a statement late on Tuesday. Earlier in the day, a source familiar with the transaction said the bank had sold 800 million shares at $10 each on Tuesday alone.
The average price of $10.77 is 4.3 percent below Tuesday's closing price of $11.25. Bank of America shares rose two cents in after-hours trade to $11.27.
The offering by Bank of America comes on the heels of smaller share issuances by other banks ordered to raise capital. This includes offerings of $8.6 billion by Wells Fargo & Co and $4 billion by Morgan Stanley.
As part of Bank of America's stock sale, which brought in gross proceeds of about $13.47 billion, the bank sold 800 million shares at $10 each on Tuesday alone, a person familiar with the transaction earlier told Reuters.
The person was not authorized to speak because terms of the sale are not public.
Read more here
Including proceeds from the sale of part of its stake in China Construction Bank Corp for $7.3 billion, the bank is now more than half-way toward plugging a $33.9 billion capital shortfall identified by the government.
The bank has issued 1.25 billion shares at an average price of $10.77 each since last Friday, it said in a statement late on Tuesday. Earlier in the day, a source familiar with the transaction said the bank had sold 800 million shares at $10 each on Tuesday alone.
The average price of $10.77 is 4.3 percent below Tuesday's closing price of $11.25. Bank of America shares rose two cents in after-hours trade to $11.27.
The offering by Bank of America comes on the heels of smaller share issuances by other banks ordered to raise capital. This includes offerings of $8.6 billion by Wells Fargo & Co and $4 billion by Morgan Stanley.
As part of Bank of America's stock sale, which brought in gross proceeds of about $13.47 billion, the bank sold 800 million shares at $10 each on Tuesday alone, a person familiar with the transaction earlier told Reuters.
The person was not authorized to speak because terms of the sale are not public.
Read more here
Sunday, 17 May 2009
UBS ups wages to stem loss of investment bankers
(Reuters) - UBS, has hiked the salaries of some investment bankers to guard against staff poaching by competitors, Switzerland's largest bank said on Sunday.
"There have been off-cycle salary increases at UBS Investment Bank to retain employees in critical positions," UBS spokesman Andreas Kern said, adding it was usual to adjust compensation to the market environment.
Earlier on Sunday Swiss paper Sonntag reported that hundreds of UBS managing directors at the investment bank, with salaries of around 270,000 Swiss francs ($243,200) on average, were receiving 50 percent higher wages to compensate for the loss of usual bonuses.
UBS, the world's largest wealth manager in terms of assets, declined to comment on the details of the article.
The bank is losing key staff in important areas to competitors and had to react, chairman Kaspar Villiger was reported as saying on Saturday.
Facing public anger over what many regarded as excessive bonuses, UBS undertook a radical overhaul of its executive pay system last year after its bet on risky U.S. assets backfired.
Read more here
"There have been off-cycle salary increases at UBS Investment Bank to retain employees in critical positions," UBS spokesman Andreas Kern said, adding it was usual to adjust compensation to the market environment.
Earlier on Sunday Swiss paper Sonntag reported that hundreds of UBS managing directors at the investment bank, with salaries of around 270,000 Swiss francs ($243,200) on average, were receiving 50 percent higher wages to compensate for the loss of usual bonuses.
UBS, the world's largest wealth manager in terms of assets, declined to comment on the details of the article.
The bank is losing key staff in important areas to competitors and had to react, chairman Kaspar Villiger was reported as saying on Saturday.
Facing public anger over what many regarded as excessive bonuses, UBS undertook a radical overhaul of its executive pay system last year after its bet on risky U.S. assets backfired.
Read more here
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