Bernanke Says Fed to Boost Loans to Banks as Needed (Update2)
By Craig Torres and Steve Matthews
May 13 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed.
While markets have improved, they remain ``far from normal,'' Bernanke said today in a speech to an Atlanta Fed conference at Sea Island, Georgia. ``We stand ready to increase the size of the auctions if further warranted by financial developments.''
Bernanke's comments contrast with those by Treasury Secretary Henry Paulson and Wall Street leaders including Vikram Pandit, chief executive officer of Citigroup Inc., who say the worst of the credit crisis is over. The Fed chief said it will take ``some time'' for financial firms to resolve the crisis by raising new capital and strengthening their management of risk.
The flight from risk since August has made financial institutions reluctant to lend to each other, driving up banks' borrowing costs. The central bank has made its own balance sheet available to both banks and bond dealers through three new lending tools, and an expansion of existing programs.
Bernanke said the Fed's efforts have yielded ``some improvement,'' while also noting that the steps raise questions regarding moral hazard, or protecting those who take on risk.
The central bank's extension of the federal safety net also opened a debate about whether the government should now use taxpayer money to stem mortgage foreclosures, the primary cause of market distress.
Foreclosure Prevention
The U.S. House of Representatives last week approved a Democratic foreclosure-prevention package over Republican objections and a White House veto threat. The legislation would create a program at the Federal Housing Administration to insure up to $300 billion in refinanced mortgages after loan holders agree to cut principal to make payments affordable.
``A central bank that is too quick to act as a liquidity provider of last resort risks inducing moral hazard,'' Bernanke said. The belief that the Fed is always standing by would give ``financial institutions and their creditors less incentive to pursue suitable strategies for managing liquidity risk and more incentive to take such risks.''
Bernanke didn't discuss the path of interest rates or the outlook for the economy. The Federal Open Market Committee last month cut its benchmark rate by a quarter point to 2 percent and signaled it's ready for a pause after seven reductions.
`Key Risk'
Cleveland Fed President Sandra Pianalto said in a speech in Paris today that consumer prices are rising faster than she'd like and that inflation is a ``key risk'' to the economic outlook. Pianalto is a voter on the FOMC this year.
Kansas City Fed President Thomas Hoenig, San Francisco Fed chief Janet Yellen, Richard Fisher of the Dallas Fed and Charles Evans from Chicago are also scheduled to speak today. Bernanke spoke via satellite.
The Fed chairman said federal banking agencies are trying to address moral hazard through a review of ``policies and guidance regarding liquidity risk management to determine what improvements can be made.''
``Future liquidity planning will have to take into account the possibility of a sudden loss of substantial amounts of secured financing,'' Bernanke said. ``Ultimately, market participants themselves must address the fundamental sources of financial strains -- through deleveraging, raising new capital and improving risk management.''
That process will take time, he added, noting that ``once financial conditions become more normal, the extraordinary provision by the Federal Reserve will no longer be needed.''
Third Increase
The Fed announced May 2 that it would boost the Term Auction Facility, or TAF, to $150 billion per month from $100 billion, the third increase since the program began in December.
``They are certainly providing a buffer until things can return to normal,'' said Drew Matus, senior economist at Lehman Brothers Holdings Inc. in New York. The TAF works as a ``substitute for securitization,'' providing financing for banks that are still making loans, he said.
Premiums in term dollar funding markets still ``remain abnormally high,'' Bernanke said. ``Funding pressures have also been evident in the strong participation at recent TAF auctions even after the recent expansion in auction sizes.''
The gap between three-month Treasury bill yields and three- month dollar-denominated loans in London narrowed to 89 basis points yesterday, the least since Feb. 20. A basis point is 0.01 percentage point.
Helping Dealers
On March 11, the Fed announced the Term Securities Lending Facility, which allows primary dealers to swap up to $200 billion of AAA rated commercial and residential mortgage-backed securities and other collateral for the Fed's holding of Treasury securities for up to 28 days. The facility was aimed at helping dealers finance mortgage bonds.
The FOMC expanded the facility May 2 to include AAA-rated asset-backed securities. The decision followed two separate requests by groups of Senate and House members that the Fed accept debt backed by student loans under the program.
``The Federal Reserve has had to innovate in large part to achieve what other central banks have been able to effect through existing tools,'' Bernanke said.
Bernanke also repeated his defense of the Fed's rescue of Bear Stearns Cos. in March. The central bank invoked emergency authority on March 16 to start direct lending to government bond dealers, and arranged $30 billion in financing to facilitate the Bear Stearns takeover by JPMorgan Chase & Co.
`Sustained Losses'
``A bankruptcy filing would have forced Bear's secured creditors and counterparties to liquidate the underlying collateral,'' Bernanke said in his speech. ``Given the illiquidity of markets, those creditors and counterparties might have sustained losses.''
The Bear Stearns loan has been criticized by some former officials and Fed watchers, who said the central bank shouldn't substitute its own loans for fleeing creditors when institutions become insolvent.
Vincent Reinhart, former director of the Fed Board's Division of Monetary Affairs, called the Bear rescue the ``worst policy decision in a generation.''
Creditors also now perceive a wide safety net under investment banks, which the Fed doesn't supervise.
The cost of default protection on Merrill Lynch & Co. debt fell to 1.58 percentage point yesterday from 3.3 percentage points March 14, CMA Datavision's credit-default swap prices show.
Hoenig said May 6 the central bank's decisions are ``likely to weaken market discipline.''
U.S. Stocks Fall, Led by Banks; JPMorgan, Hewlett-Packard Drop
By Michael Patterson
May 13 (Bloomberg) -- U.S. stocks fell, led by banks, after Federal Reserve Chairman Ben S. Bernanke said financial companies may need to raise more capital, a report showed home prices tumbled and the outlook for securities firms' profits worsened.
JPMorgan Chase & Co. and Citigroup Inc. led 28 of 30 banks and brokerages in the Standard & Poor's 500 Index lower after Bernanke also said markets remain ``far from normal.'' Bank of America Corp. slipped on a forecast for home-equity loan losses that was wider than its prediction last month. Hewlett-Packard Co. tumbled the most since 2004 on its $13.9 billion purchase of Electronic Data Systems Corp.
The S&P 500 lost 4.37 points, or 0.3 percent, 1,399.21 at 11:28 a.m. in New York. The Dow Jones Industrial Average decreased 72.06 points, or 0.6 percent, to 12,804.25. The Nasdaq Composite Index slipped 12.25, or 0.5 percent, to 2,476.24. Eight stocks dropped for every five that rose on the New York Stock Exchange.
``We don't know what the future of earnings looks like'' for financial companies, said John Carey, who helps oversee about $13 billion as a portfolio manager at Pioneer Investment Management in Boston. ``The earnings outlook is very sketchy. We just don't know how the companies are going to rebuild earnings power, assuming they're not going to be doing subprime lending, M&A and the things on which they were making so much money.''
Shares fell to their lows of the day after the National Association of Realtors said housing prices dropped in two-thirds of U.S. cities in the first three months of the year. A government report showing better-than-forecast retail sales excluding cars in April helped limit the market's decline.
Whitney's Forecast
Financial shares also retreated after Oppenheimer & Co. analyst Meredith Whitney reduced earnings estimates for Wall Street's biggest securities firms.
JPMorgan, the third-biggest U.S. bank by assets, slid $1.12 to $46.12. Citigroup lost 32 cents to $23.32.
Bank of America dropped 55 cents to $36.89. The second- biggest U.S. lender expects losses to top 2.5 percent of its $118 billion in loans linked to home values, Liam McGee, president of the company's consumer and small business division, said at a conference in New York sponsored by UBS AG. The bank previously projected a loss rate of between 2 percent and 2.5 percent.
Morgan Stanley, the second-biggest U.S. securities firm, lost 46 cents to $47.19. Lehman, the largest U.S. underwriter of mortgage bonds, retreated 69 cents to $43.86, while Goldman Sachs Group Inc. fell 61 cents to $191.47.
Oppenheimer's Whitney reduced her second-quarter profit projections by 41 percent on average and by 48 percent for the full year for the four biggest U.S. securities firms.
`Far From Normal'
Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed.
While market conditions have improved, they remain ``far from normal,'' Bernanke said today in the text of a speech to an Atlanta Fed conference at Sea Island, Georgia. ``We stand ready to increase the size of the auctions if further warranted by financial developments.''
Wal-Mart Stores Inc., the world's largest retailer, declined as Chief Executive Officer H. Lee Scott said there are ``uncertainties'' about the rest of the year. The Bentonville, Arkansas-based company said second-quarter profit may be 78 cents to 81 cents a share. Analysts predicted 81 cents, according to the average of estimates compiled by Bloomberg. Wal-Mart said it's ``difficult to quantify'' the impact of tax-rebates being paid to U.S. consumers. The shares lost $1 to $57.02.
Hewlett-Packard dropped $2.83, or 6 percent, to $44. The purchase is the company's largest since the $18.9 billion takeover of Compaq Computer Corp. and will more than double its sales from computer services.
Electronic Data Systems added 35 cents to $24.43. The shares surged 28 percent yesterday after the Wall Street Journal reported that the two companies were in advanced merger discussions and Hewlett-Packard later confirmed the talks.
The Chicago Board Options Exchange Volatility Index, the benchmark for U.S. options prices, increased 2.3 percent to 18.20. The so-called VIX gauges the cost of insuring against declines in the S&P 500.
China and Tibet
A lama in sheep's clothing?
Revered by Tibetans, reviled by China
The devil China knowsNOT long after calling him a “devil” with a human face and the heart of a beast, Chinese officials are talking again to representatives of the Dalai Lama. But in the Indian hill town of Dharamsala, the seat of Tibet's government-in-exile, few believe China's own heart has changed. “The basis of their attitude towards Tibet is...distrust and fear,” the Dalai Lama told The Economist a day after a meeting on May 4th in the southern Chinese city of Shenzhen between two of his envoys and two senior Communist Party officials. It was the first contact between the two sides since unrest broke out in Tibet and other ethnic Tibetan regions of China in March.
Both sides are anxious not to appear to be closing the door. Lodi Gyari, one of the Dalai Lama's representatives at the talks, described them as a “step in the right direction” and said more would be held, though no date has been announced. China said there could be further contact as long as the Dalai Lama showed “sincerity”. China's surprising decision to offer renewed talks seemed aimed at deflecting foreign criticism of its handling of Tibet ahead of the Beijing Olympics in August. But officials in Dharamsala are wary. They deny the Shenzhen meeting was a continuation of six rounds of confidence-building discussions held between 2002 and July 2007. Rather, it was an “emergency conversation” about the present crisis. Mr Gyari said only the next round of talks would count as the resumption of a formal dialogue.
The Tibetans had several demands: an end to the clampdown in Tibet, including the withdrawal of security forces from monasteries; no more “patriotic education” requiring monks to denounce the Dalai Lama; an investigation by an international body into the causes of the unrest; the release of political detainees; and fair trials for those accused of rioting.
None of this will be heard sympathetically by China. The state-controlled press is still vilifying the Dalai Lama and the authorities have maintained a tight grip on Tibetan regions. Visits by foreign journalists remain largely banned and foreign tourists are barred. Late last month, at secret trials in Lhasa, 30 people were sentenced to prison terms of between three years and life for their role in rioting in March. Human Rights Watch, a monitoring organisation in New York, said lawyers in Beijing who offered to represent them were warned by the Ministry of Justice that their licences might be revoked.
The Dalai Lama tries to sound conciliatory. Tibetans, he says, should be proud that China is hosting the Olympics (though, with a characteristic chuckle, he says he does not know whether they will be happy when the Olympic torch is paraded in Lhasa in June). He says he fully supports a “one-China policy”, but that the future of Taiwan should be decided by its own people—which is anathema to China. The Dalai Lama says he is not so concerned about redrawing Tibet's political boundaries to include all ethnic Tibetan areas adjoining it (an idea he once backed strongly, to China's horror). The priority, he says, is to protect the culture and environment of Tibetans. But China will want a stronger retraction than this. It believes the Dalai Lama is still intent on carving out a single Tibetan territory covering a quarter of China's land area.
According to the Dalai Lama, Chinese officials accepted in 2006 during the fifth round of talks that he was sincere in his insistence that Tibet should be part of China. But by the sixth round last year their attitude had hardened. Some of the Dalai Lama's officials say China took fright at signs of his continuing sway over Tibetans in China and his readiness to use it—for example, to persuade them to stop wearing the skins of endangered animals and worshipping Dorje Shugden, a cultic deity.
China's crackdown on the recent unrest in Tibet may limit the Dalai Lama's flexibility in dealing with China. The streets of Dharamsala in the Himalayan foothills are full of Tibetan flags flown in sympathy with Tibetans in China. Ubiquitous gruesome pictures show Tibetans shot by Chinese security forces. The Dalai Lama says there has been “a lot of criticism” of his conciliatory negotiating stand with China. He says he remains fully committed to his approach in spite of recent events. So too, however, does China.
The presidential election
The next stage
Barack Obama turns his attention to the Republican, John McCain
BARACK OBAMA has not yet declared victory over Hillary Clinton, but, almost as telling, in his speeches these days he hardly mentions her name. Even though Mrs Clinton is most likely to win the primary election in West Virginia on Tuesday May 13th, and although she may win two more of the last five primaries, Mr Obama looks all but assured of the Democratic nomination. He is now turning his attention to the race against the Republican presumptive nominee, John McCain.
Mrs Clinton retains the ability to make some mischief. Mr Obama needs party-insider superdelegates to give him enough votes to win the nomination. Mrs Clinton continues trying to convince them she is the stronger candidate against Mr McCain. Party leaders are saying that they do not mind if she continues to make a case for herself. But if she attacks Mr Obama and his voters—as when she suggested last week that “hard-working Americans, white Americans” had voted for her—she could do damage. She was trying to say “working-class whites”, an important group for her. But even supporters distanced themselves from the comment. So undecided superdelegates have started, formally, lining up with Mr Obama, hoping to hasten the end. He overtook her in superdelegate endorsements for the first time a few days after North Carolina and Indiana, and leads in the popular vote and every measurable category.
The fight between Mr Obama and Mr McCain will, in part, be over their respective appeal to independent voters. Mr McCain has bucked his party on taxes, campaign finance, immigration and other shibboleth issues, so much so that he was a hate-figure in certain Republican circles during the primaries. Mr Obama, by contrast, has a fairly orthodox Democratic voting record. But he has co-sponsored laws with many Republicans, and his oratory has always shown respect to conservatives, religious voters and the like, persuading more of them to give the young Democrat a hearing.
So Mr McCain’s attacks on Obama are coalescing around another theme: that he is young and naïve. The freshman senator has said that in principle, America should be willing to talk even to its most intractable enemies, such as Iran. This has become heresy in the Republican Party that once saw Richard Nixon go to China and Ronald Reagan talk of détente with the Soviet Union, but now sees talking to enemies as an undeserved reward.
Mr Obama has not been helped by a political adviser to Hamas, a Palestinian Islamist party and terror group, who said in an interview that his fellows would welcome an Obama presidency. Although the Hamas adviser called Mr Obama “a man of principle”, the comment is too easily caricatured as welcoming an American president who will be weak on terrorism. Mr McCain thundered in reply that he would be Hamas’s “worst nightmare”.
For the Democrats an equally clear line of attack is emerging: that a McCain presidency would represent George Bush’s third term. They stretch to show that the Arizonan is no different from the current president especially on two issues, Iraq and economic policy. Mr McCain strongly supports the “surge” strategy in Iraq. And although he opposed George Bush’s 2001 tax cuts on principle (saying they gave too much away to the rich), he now says he would not vote to rescind them. His comment that America’s economy had made “great progress” in the Bush years will be frequently repeated by Mr Obama in a campaign season marked by uneasiness over the high cost of energy, the collapse of house prices and general fears of a recession. An opinion poll by USA Today/Gallup, released on Monday, suggests that Mr McCain's association with Mr Bush is seen as unfavourably as Mr Obama's with his former pastor, Jeremiah Wright.
The Republicans may also be worried by the gains Democrats are making in congressional special elections in turf that has hitherto been the deepest of red hues. This year the Democrats have picked up a long-held Republican seat in Illinois and won a district in Baton Rouge that had been Republican for more than 30 years. The Republicans have even been forced on the defensive in north Mississippi, where an election on Tuesday to fill a vacant seat has produced an unexpectedly tight race (Dick Cheney was airlifted in to stump for the Republican candidate). In these two Louisiana and Mississippi races the Republicans have been testing a strategy that links the Democratic candidate to Mr Obama, which they presume will scare the local electorate.
Despite the attack lines, Mr McCain and Mr Obama are unusual politicians, each said to have a personal distaste for negative campaigning. Intriguingly, both campaigns have said they would consider side-by-side appearances, unmoderated debates where they would, together, address voters and debate. Whether this would come about is anybody’s guess.
DAILY ECONOMIC DATA
Retail Sales declined 0.2% in April
Retail sales declined 0.2% in April, matching consensus expectations. Retail sales excluding autos increased 0.5%, beating the 0.2% consensus expected gain. Sales in March were revised upward.
Monday, May 12, 2008
Keep America Open to Trade
As immigrants, we're proud of America and the strength it derives from being uniquely open to trade, to investment, and to ideas and people. Recently, prominent voices in punditry and politics have questioned the benefits of America's openness and called for an isolationist U-turn that would choke off our innovation and prosperity.
In every state of the union, such a retreat would be disastrous for jobs, economic growth and consumer choice. Nowhere is this more clear than here in Torrance, Calif., where today we are visiting a Hitachi plant that remanufactures auto parts. This "foreign" company employs 16,000 Americans -- 8,000 in California alone -- and is just one of hundreds of overseas firms that invest directly in the U.S. From where we're standing, what America needs is more openness here and abroad -- not less.
"But what about American manufacturing?" one might ask. "What about American exports?" Even at a time when our economy has slowed, U.S. exports are booming. In 2007, we saw a record $1.6 trillion in exports, up 12.6% from the prior year. And exports are growing even faster in 2008. In the first quarter of this year, export growth is up nearly 18% from the same period last year. Nearly a third of all U.S. agricultural products and more than 20% of the goods we manufacture were exported last year. Indeed, exports have been a kind of silent stimulus over the past year, helping even a slowing economy stay in the black.
Here in California, exports are crucial to the economy. Since 2003, California's gross domestic product arising from exports has grown by more than 25%. With one in seven jobs related to trade, California leads the nation in trade-related jobs. Over 50,000 California companies export their goods, and more than 40% of U.S. goods are shipped through California's ports.
Opening markets and lowering barriers for U.S. exports creates jobs, spurs innovation, and gives our economy a competitive edge. Consumers also see the benefits -- they get a greater variety of higher-quality goods at lower prices. Free-trade agreements (FTAs) -- including those now pending before Congress with Colombia, Panama and South Korea -- solidify our relationships with key allies and level the trade playing field by lowering export barriers to American businesses, workers and farmers. Congress should approve these FTAs this year.
Most Americans aren't aware that the South Korea agreement is the most economically significant FTA outside of North America in U.S. history. Korea is California's fifth-largest export market. The Los Angeles metropolitan area alone exported $2.6 billion in chemicals, computers, machinery and other products to South Korea in 2006.
Unfortunately, Congress has scuttled a vote on the first of the three FTAs, the Colombia agreement. Who gets hurt by this? American workers. Why? Because open trade provides more markets for the products they make, and because Congress has already given Colombian exporters duty-free access to the American market for more than 16 years. In the 538 days since the agreement was finalized, American exports have faced more than $1 billion in Colombian tariffs. All the FTA with Colombia does is provide American goods the same access Congress already gives Colombia.
Yet in the global trading system, America isn't just a buyer and seller, we're a huge investment magnet. That giant cash register sound you're hearing is the nearly $200 billion pumped into U.S. businesses from abroad in 2006 alone. Foreign-owned companies operating in the U.S. employ more than five million Americans, and a third of foreign direct investment is in the manufacturing sector. For the 8,000 Hitachi employees here in California, some of whom we will visit today, and the other 8,000 spread across the U.S., foreign investment is a no-brainer.
California, like every state, wants to attract foreign direct investment that supports American jobs. Last week was "Invest in America" week, a federal effort to promote U.S. markets, our extraordinary workforce, and our innovation and business climate for foreign investors.
Yet for all the openness to trade and investment, it is America's openness to people that is the indispensable factor in our growth. Each of us knows that well. While we need secure borders, we also need to develop a sensible, comprehensive immigration policy that is humane, practical and consistent with the spirit of openness that is our nation's strength.
America is a launching pad for courageous creativity, with bold entrepreneurs churning out innovation after invention after idea. We're one of the wealthiest nations on earth because our society fosters companies like Intel -- co-founded by Andy Grove, an immigrant -- whose business model is driven by access to global markets.
It's true, we're currently facing economic headwinds. While the bipartisan, $152-billion economic stimulus package will help, families are feeling pinched between energy costs, the housing crisis and rising food prices. These are complex issues without easy fixes. But there's an apt saying that will be on our minds as we talk to workers in Torrance today: "Fix the right problem." Because we're immigrants, we have seen firsthand what works here, and what does not work overseas. To us, it is clear that stifling foreign investment, taking a trade "time-out" that hurts U.S. exports, or turning away from the ideas and energy of immigrants, won't help America grow and prosper.
Mr. Gutierrez is U.S. secretary of commerce. Mr. Schwarzenegger is governor of California
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