Bloomberg:
- U.S. regulators should intervene quickly with large financial institutions under stress by requiring more capital and taking ownership stakes with debt convertible to common shares, Federal Reserve Bank of Philadelphia President Charles Plosser said.“ Convertible debt could play an important role in financial firm resolutions by providing a quick, transparent method for recapitalization,” Plosser said in a speech in New York. “The potential for conversion, which would dilute shareholder and creditor claims, should improve market discipline.”
- Myron Scholes, the Nobel prize-winning economist who helped invent a model for pricing options, said regulators need to “blow up or burn” over-the-counter derivative trading markets to help solve the financial crisis. The markets have stopped functioning and are failing to provide pricing signals, Scholes, 67, said today. Participants need a way to exit transactions and get a “fresh start,” he said. The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said, referring to credit-default swaps and other complex securities that are traded off exchanges. “One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.” Scholes also recommended moving the trading of credit-default swaps, asset-backed securities and mortgage-backed securities to exchanges to allow for “a correct re-pricing” of the assets. A total of $531 trillion in outstanding derivatives contracts traded over-the-counter as of June, according to the Intl. Swaps and Derivatives Assoc.
- Emerging-market borrowing costs rose, heading for the biggest weekly increase in three months, as a jump in the U.S. unemployment rate to the highest in more than a quarter century signaled a deepening recession. The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries widened 3 basis points, or 0.03 percentage point, to 6.96 percentage points at 10:57 a.m. New York time, according to JPMorgan Chase & Co.’s EMBI+ Index. That brings the weekly increase to 47 basis points, the most since December. Argentina paced losses, with the country’s spread swelling 47 basis points to 18.74 percentage points.
- Warren Buffett and Jeffrey Immelt are among a handful of chief executive officers whose companies are rated AAA. Yet Buffett’s Berkshire Hathaway Inc. and Immelt’s General Electric Co. are being treated like junk in the market for credit-default swaps. Contracts that protect investors against a default on bonds of Omaha, Nebraska-based Berkshire, which has $25.5 billion in cash, cost as much as those of KB Home, the homebuilder that lost money for seven consecutive quarters. Credit-default swaps on the finance arm of GE, which holds $45 billion of cash, are about as expensive as those for building materials-maker Louisiana-Pacific Corp., which posted nine straight quarterly losses.
- The benchmark Markit iTraxx Financial index of credit- default swaps linked to the senior debt of 25 banks and insurers jumped 7 basis points to a record 202, according to JPMorgan Chase & Co. prices. The subordinated index surged 20 basis points to an all-time high 385.
- Ireland may lose its AAA debt rating because of a slump in government tax revenue, Fitch Ratings said. The country’s top credit classification was put on “watch negative,” Fitch said in a statement from London today. Ireland received the top rating from Fitch in 1998.
- Baosteel Group Corp., China’s largest steelmaker, said prices are close to its production costs, indicating that the country hasn’t had a “real” demand recovery. Baosteel is “cautious” about the demand outlook, Wang Jing, the company’s general manager for international trading, said in an interview in Beijing, while attending the National People’s Congress. “Demand hasn’t had a substantial recovery, but output rose faster because of higher prices,” Wang said. “Our prices are on the verge of production costs.” Chinese steelmakers may have to cut output by 20 percent, Shougang Corp., the eighth-largest mill, said yesterday. More than 60 percent of the mills in China are making losses, the China Iron and Steel Association said last month. “If we gave our prices a one-time cut to match the market levels, we’re afraid that would hurt the market confidence,” Wang said.
- China’s stock rally may falter as earnings miss expectations and the nation’s growth is held back by the weakening global economy, DBS Asset Management Ltd. said. Investors should lower forecasts for China’s expansion as stimulus spending will take time to work, Teo Chon Kiat, manager of the Greater China fund at DBS Asset Management, said today. “Earnings estimates are still too high, so there’s a risk the market will come off as earnings disappoint,” Teo said by phone. “Weakness in the external economy continues to be a major risk for China.”
- General Electric Co.(GE) and Siemens AG, the biggest makers of medical imaging machines, say President Barack Obama’s plan to slash spending on the use of MRIs and X- rays threatens patients, and they’ll lobby Congress to block it. As employers, Fairfield, Connecticut-based GE and Siemens, of Munich, say they back Obama’s efforts to cut health costs. Still, in separate interviews, the companies pledged to fight a plan, proposed in the president’s budget last week, to require approvals from a private “benefit manager” before Medicare will pay for imaging.
- The U.S. Treasury has failed to take “decisive” action to address the bank crisis, pursuing an ad- hoc approach that leaves management in place and avoids necessary asset writedowns, a veteran Federal Reserve official said. “We have been slow to face up to the fundamental problems in our financial system and reluctant to take decisive action with respect to failing institutions,” Kansas City Fed President Thomas Hoenig said in prepared remarks in Omaha, Nebraska. He called for a resolution process for firms deemed too big to fail, allowing their break-up if their complexity makes them unmanageable. Hoenig’s comments are the most detailed criticism of the Treasury’s actions by a Fed official since the financial crisis began.
- The U.S. Senate put off a final vote on a $410 billion spending package until next week after Republicans demanded time to offer more amendments. Senate Majority Leader Harry Reid, a Nevada Democrat, said he was “probably a vote short” of the 60 needed to cut off debate late yesterday and bring the bill to a final vote. “We’re going to have to continue work on this bill,” he said.
Wall Street Journal:
- A large participant has emerged in the oil market in recent months, controlling nearly a fifth of the most-active oil-futures contracts, and roiling trading in the market. The exchange-traded fund U.S. Oil Fund LP has expanded from a $7 million ETF just three years ago to $3.8 billion, drawing the attention of regulators and making it harder for the fund to keep up with oil prices. U.S. Oil's size has prevented it from tracking the price of oil. While crude has lost 2.2% in 2009, the fund has declined 20%.
- Citadel Investment Group, smarting from losses in its flagship hedge funds, plans to roll out several new funds, including one it is marketing now with lower fees that will aim to make money on currencies, interest rates and other trades based on broad economic trends. The Chicago firm hopes to raise $2 billion in coming months and is saying it ultimately could raise $5 billion for its new Citadel Global Macro Fund Ltd., overseen by former Moore Capital Management trader Kaveh Alamouti, according to marketing documents reviewed by The Wall Street Journal.
- What is most astounding about President Barack Obama's radical economic recovery program isn't its breadth, but its continuation of the most destructive policies of the Bush administration. These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama's hero. The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or "fair value" accounting for banks, insurance companies and other financial institutions.
- Barnes & Noble(BKS) Inc. acquired Fictionwise, a leading retailer of electronic books, and said it will launch a new e-bookstore this year, as the e-book market heats up. The purchase, for $15.7 million, comes only a few days after Amazon.com Inc., the country's largest online bookseller, said it is making its Kindle e-books available for reading on Apple Inc.'s iPhone and iPod Touch devices.
- Hedge Fund Gandhara Capital will shut down and return about $2.3 billion to investors.
LA Times :
- The Obama administration's plan to stave off foreclosures could fall flat in California, where nearly one-third of mortgage holders are underwater on their loans -- many of them by amounts that would disqualify them for government-sponsored refinancing.
Boersen-Zeitung:
- Hans-Werner Sinn, president of the German Ifo Institute, said Japanese-style deflation with surging government debt is the “true danger” the world is facing and inflation fears due to central banks’ liquidity provisions are unfounded.
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