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Accounting tricks boost bank profits - (news.yahoo.com/s/ap) There's nothing like a little magical math to make banks' financial woes go away. Bank stocks have surged in recent weeks, a sign that investors are betting the worst of the financial crisis is over. But in reaching this conclusion, the market has chosen to ignore some creative accounting banks are using to bolster their finances. Lots of fuzzy math was trotted out during the just-ending earnings season to goose profits or narrow losses, and it will show up again as banks look to shore up their capital to meet requirements under the government's "stress tests." The tactics are perfectly legal, but they make the banks look healthier than they really are."Investors who have been pleasantly surprised by the recent results could find themselves equally bothered later on when they discover plenty of unpleasant things," said Martin Weiss, who runs the investment firm Weiss Research Inc. After a year and a half of frightful declines, the Standard & Poor's Financials Index of 80 banks, insurers and investment firms bottomed in early March and has since more than doubled from a 17-year low, according to S&P. Momentum behind the rally grew in April as large banks began reporting mostly better-than-expected first-quarter results. Earnings for the companies in the S&P Financial Index have come in nearly 11 percent ahead of analysts' estimates……. But the recent strength seen in bank earnings didn't come from significant improvements in their core businesses. Instead, accounting maneuvers helped bolster bottom lines. Some banks reduced the amount of money they set aside to cover loan losses, which some analysts say conflicts with the reality of deteriorating loan portfolios. That means if the economy doesn't recover and troubled assets continue to rise, in coming quarters banks might have to boost loss reserves again — which could hurt future earnings. Wells Fargo saw its non-performing assets as a percentage of total assets jump by 40 percent over the previous quarter, yet it only increased its reserves by 5 percent. So even though more of its loans are past due or face foreclosure, it isn't setting aside significantly more cash to deal with potential losses. Earnings at several banks also benefited, counterintuitively, because the value of the banks' own debt was reduced to reflect a decline in the market value of that debt. In accounting-speak, a "credit-value adjustment" allows the banks to book a gain. The logic is that they could buy back the debt for less cash than they received when they issued the debt, so they get to claim a benefit, which many analysts say is illusory. Say a bank had issued debt at 100 cents on the dollar, and it now trades at 60 cents on the dollar. The bank can mark down the value of the debt on their books to 60 cents on the dollar, and take a gain on the 40-cent difference. For Citigroup, that debt adjustment totaled $2.5 billion, which helped narrow its losses for the quarter. The New York-based bank posted a first-quarter loss of $966 million, smaller than analysts expected. "It's not the kind of stuff you'd point to in earnings and say, "now that's sustainable income," said Jack Ciesielski, who writes the newsletter The Analyst's Accounting Observer. "You would want to exclude it from earnings in evaluating how well a company performed." A separate accounting rule change for valuing banks' assets that are available for sale also helped boost bank earnings. Until recently, they were "marked-to-market," meaning they were adjusted to reflect current market prices. But that has become increasingly difficult during the current financial crisis since there has been no trading of the most troubled assets.
Creditors May Have Pushed For Chrysler Bankruptcy To Rake In Bailout Cash - (www.huffingtonpost.com) The White House, auto executives and union representatives were all able to come to an agreement last week to keep Chrysler out of bankruptcy. But the car company's creditors -- Wall Street banks and hedge funds -- refused repeated compromises and drove the company under. The refusal doomed a major American auto company to bankruptcy, but it may have been a smart business move for the lenders. Many of the Wall Street firms holding Chrysler bonds may also own credit default swaps that they bought to hedge their bets. These swaps, which are essentially like an insurance policy on the bonds should Chrysler default, were likely mostly issued by AIG. AIG, thanks to the government bailout, has paid off swaps in the past at 100 cents on the dollar. Under the deal they would have had to accept with Chrysler, the bondholders would have received as little as 30 cents on the dollar, for example. Why take 30 or 35 cents on the dollar from Chrysler when you can get the whole buck from the American taxpayer? "The basic story is very simple," says economist Dean Baker of the liberal-leaning Center for Economic and Policy Research. "If they hold credit default swaps on the bonds, they're totally happy with them defaulting." In what would rank as one of the great scams of this financial crisis, government bailouts may be colliding. Wall Street may be raking in taxpayer dollars through AIG and returning the favor by driving the auto industry into bankruptcy. Are they? Rep. Elijah Cummings (D-Md.), who has been closely tracking the AIG bailout, wants to find out.
Fannie Loses $23 Billion, Prompting Even Bigger Bailout - (www.washingtonpost.com) Fannie Mae reported yesterday that it lost $23.2 billion in the first three months of the year as mortgage defaults increasingly spread from risky loans to the far-larger portfolio of loans to borrowers who have been considered safe. View Only Top Items in This StoryThe massive loss prompts a $19 billion investment from the government to keep the firm solvent, on top of a $15 billion investment of taxpayer money earlier this year. The sobering earnings report was a reminder of the far-reaching implications of the government's takeover in September of Fannie Mae and the smaller Freddie Mac. Losses have proved unrelenting; the firms' appetite for tens of billions of dollars in taxpayer aid hasn't subsided; and taxpayer money invested in the companies, analysts said, is probably lost forever because the prospects for repayment are slim. But the government remains committed to keeping the companies afloat, because it is relying on them to help reverse the continuing slide in the housing market and keep mortgage rates low. Even as the government bailout of banks appears to be leveling off, the federal rescue of Fannie and Freddie is rapidly growing more expensive. Fannie Mae said that the losses will continue through at least much of the year and that it "therefore will be required to obtain additional funding from the Treasury." Analysts are estimating that the company could need at least $110 billion.
Hicks' loan default casts shadow on Rangers, Stars - (news.yahoo.com/s/ap) Tom Hicks owns the Texas Rangers and the Dallas Stars because he's been a pro at turning borrowed money into handsome profits. Few could match the tall Texan's ability in the world of leveraged corporate buyouts, and he used that wealth to become a force in the world of professional sports. He's not just the owner of both Major League Baseball and NHL franchises in a big U.S. market, but also half-owner of the top-tier English soccer club Liverpool. Now, though, Hicks' borrowing has clouded his future with the Rangers and the Stars, after he defaulted last month on $525 million in loans tied to the teams. Liverpool isn't caught in the same mess, but the club's indebtedness has drawn the ire of British lawmakers, who said major teams' borrowing amounted to "financial doping." Hicks has said he defaulted on loans behind the Rangers and Stars to force lenders to renegotiate terms of the deals, calling it a "nonevent" for coaches, players, fans and the rest of the operations. Financial analysts aren't so sure about that. "The notion that this is a modest hiccup, where all he's really trying to do is buy himself a few weeks before he makes payments so that he can properly run his franchises ... I don't find that part compelling," said Andrew Zimbalist, a Smith College economics professor who specializes in sports business. "I think he's trying to put a relatively good face on it. But it's not a good situation for him." The 63-year-old Hicks, who wouldn't comment for this story, and his partners bought and resold countless companies while building his fortune in the 1970s and '80s. Perhaps most notable among those were the separate purchases of Dr Pepper and 7UP for a total of $646 million. The combined companies were later sold for a reported $2.53 billion.
Free Fall’s Over, but Where Are We Landing? - (www.nytimes.com) BACK in September, when financial reality was still merely horrible but not yet catastrophic, a local software start-up called Balihoo was poised to expand. It already sported the outward trappings of tech world success: an airy space in an old brick warehouse downtown, renovated with recycled wood and glass; a roomful of 20-somethings in fleece pullovers, their mountain bikes hanging from wall-mounted racks; and a hot new product. All that Balihoo needed was more money, and it was about to get some. Three venture capital firms beckoned with offers to invest a fresh $3 million in the young company. Then Lehman Brothers collapsed, beginning a string of spectacular Wall Street failures. As primal fear seized the financial system, money suddenly became as difficult to secure as true love on a reality dating show. The venture capitalists changed their minds. “All that interest disappeared,” says Balihoo’s chief executive, Peter Gombert. “It was nuclear winter.” In October, Balihoo laid off 10 people in Boise and braced for more painful days. But in the last several weeks, the venture capitalists have returned, enticed by Balihoo’s strong sales, and also by something infinitely more valuable: glimmers of renewed faith in parts of American commerce. “Risk” no longer seems like a radioactive word. “The spigot turned back on,” says Mr. Gombert, who now expects to raise as much as $5 million. Some of that money will allow him to hire four or five people who will help Balihoo continue to make software that enables national brands to customize local advertising campaigns.
AP sources: Obama wants Fed to be finance supercop - (news.yahoo.com/s/ap) The Federal Reserve could become the supercop for "too big to fail" companies capable of causing another financial meltdown under a proposal being seriously considered by the White House. The Obama administration told industry officials on Friday that it was leaning toward making such a recommendation, according to officials who attended a private one-hour meeting between President Barack Obama's economic advisers and representatives from about a dozen banks, hedge funds and other financial groups. Treasury Secretary Timothy Geithner and other officials made it clear they were not inclined to divide the job among various regulators as has been suggested by industry and some federal regulators. Geithner told the group that one organization needs to be held responsible for monitoring systemwide risk. "Committees don't make decisions," said Geithner, according to one participant. Officials from the Treasury Department and National Economic Council, which hosted the meeting, told participants that the Fed was considered the most likely candidate for the job, according to several officials who attended or were briefed on the discussions.
Boomers Going Bust - (www.washingtonpost.com) People have accused the baby boomers of being whiners almost since we were born. But just wait until we get to retirement age and discover that we don't have nearly enough money to take care of our "golden years." That's going to be the ultimate generational bummer. I've been gathering some data about what I'll call, with the usual boomer understatement, the "retirement crisis." My mentors have been Eugene Ludwig, the head of the consulting firm Promontory Financial Group, and his colleague Michael Foot. The numbers show a genuinely frightening gap between what people have saved for retirement and what they will need. And many of these studies don't take into account last year's stock market crash, which will make the problem worse. Let's start with the basic fact that only about half of Americans have any employer-sponsored retirement plan at all. The other folks will have to depend on Social Security. For a typical boomer worker, that would mean a monthly benefit of about $2,400 at a retirement age of 66 in 2020. On that, you won't be able to afford many Starbucks lattes. But let's assume that our average worker is one of the lucky ones with an employer-sponsored pension. Not so long ago, that usually would have meant a "defined benefit" pension at retirement. About 80 percent of employees in medium-size and large companies had such plans in 1985, according to the Labor Department. By 2000, defined-benefit recipients totaled just 36 percent. What's happened is that employees have taken on the investment and actuarial risks as their employers shifted to "defined contribution" formulas. Employers now contribute to 401(k) plans that are managed by the employees. Unfortunately, workers often don't do a good job as investors. They underestimate what they will need in retirement, and they underfund their 401(k) plans. And as for shifting out of stocks before the market tanks, well, let's just forget about that. . . . How bad are baby boomers at financial planning? Extremely bad, according to Annamaria Lusardi and Olivia Mitchell of the National Bureau of Economic Research. They found that more than one-quarter of boomer households thought "hardly at all" about retirement and that financial literacy among boomers was "alarmingly low." Half could not do a simple math calculation (divide $2 million by five) and fewer than 20 percent could calculate compound interest. The NBER researchers also found that, as of 2004, the typical boomer household was holding nearly half its wealth in the form of housing equity. Uh-oh.
OTHER STORIES:
Another Cheney Coverup - (www.motherjones.com)
Dems Say No Seniority for Specter the Defecter - (www.dailykos.com)
No Change: More than 100 Die in US Led Air Strike in Afghanistan - (www.theaustralian.news.com.au)
Economic Casualties Pile Into Tent Cities - (www.usatoday.com)
McDonalds Commits $100 Million to Coffee War - (www.msnbc.msn.com)
Market Insider: Wall Street's Bull Is Tired but Not Out - (www.cnbc.com)
SEC "Railroaded" Stanford, Attorneys Say - (www.cnbc.com)
Obama: Send Me Credit Card Law This Month - (www.cnbc.com)
Fed Cut Size of Banks' Deficits After Haggling: Report - (www.cnbc.com)
Why Big US Banks May Be Headed for Extinction - (www.cnbc.com)
New York and London: Twins in Finance and Folly - (www.nytimes.com)
Bank stock relief helps sector raise $12 bln in capital - (www.marketwatch.com)
Congress Considers O’Connor, Volcker, Levitt for Crisis Probe - (www.bloomberg.com)
Middle East Growth to Fall by 50% This Year, IMF Says - (www.bloomberg.com)
Shift to Saving May Be Downturn’s Lasting Impact - (www.nytimes.com)
US stamps costing 2 cents more Monday - (finance.yahoo.com)
US regulators shut down 33rd bank this year - (finance.yahoo.com)
Fannie Mae needs $19 billion more in bailout funds after huge loss - (www.latimes.com)
US banks claim line softened on $74bn - (www.ft.com)
Berkshire Hathaway Posts Its First Loss Since 2001 - (www.nytimes.com)
Stress Tests Are Over. The Stress Isn’t. - (www.nytimes.com)
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