9:47pm UK, Friday July 15, 2011
Tadhg Enright, business reporter
Eight European banks have failed a so-called stress test designed to show their ability to cope with economic shocks such as a sharp drop in economic growth or a decline on the stock markets.
The tests, which have been applied to Europe's 91 biggest banks, are designed to win back the confidence of investors and markets from which they borrow.
The four UK banks subjected to the tests - Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland - were shown to have passed the threshold of having reserves worth more than 5% of the value of their liabilities.
A further 16 banks were shown to have barely passed - having reserves worth between 5% and 6% of their liabilities - and have been encouraged to raise their capital ratios to more healthy levels.
Five of the failing banks are in Spain where the solvency of local savings banks, known as Cajas, have been in doubt throughout the financial crisis.
Two banks failed in Greece, where the bailed-out economy remains in recession as it struggles to escape from a mountain of debt.
One Austrian bank failed the test while a German bank withdrew from the process when it learned that it would also fail.
Like all testing processes, there need to be enough failures to make the success of others appear suitably difficult to achieve.
Tadhg Enright
The London based European Banking Authority (EBA) estimates that the failing banks need to raise a total of 2.5bn euros to meet capital requirements.
Bank officials will spend the weekend devising fundraising plans to win back the confidence of the markets before trading resumes on Monday.
Among their options are sell-offs of non-core assets, issuing new shares to raise money from private investors or negotiating government bailouts.
Banks that cannot raise new funds could lose the confidence of their customers, have their shares dumped by investors and be refused credit from debt markets, leading to their eventual collapse.
It is the second time that European banks have been subjected to the stress test and the EBA has applied tougher criteria after last year's test was seen by many as having been too lenient.
This year, banks were asked to demonstrate their ability to cope with a 0.5% drop in economic growth in the Eurozone and a 15% drop in stockmarkets.
They have also been asked to reveal how much debt they hold in troubled eurozone countries, such as Greece and Ireland.
Critics have argued that the criteria should have included a bank's ability to withstand a default by Greece on its debts, which many believe is an inevitable outcome to its financial crisis.
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===
Reuters
Europe's banks could cope with a Greek haircut
(Refiles to replace repeated "Italian" with "Irish" in third paragraph)
(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)
Banks could cope with a Greek haircut
By George Hay and Peter Thal Larsen
LONDON, July 18 (Reuters Breakingviews) - Europe's banks can mostly deal with a fat haircut on their holdings of Greek sovereign debt. That's the conclusion of a Breakingviews analysis of data disclosed by lenders under the European Union's latest stress tests.
Officially, just eight banks failed this year's stress tests, with a capital shortfall of 2.5 billion euros. But the exam had a major flaw: it did not require banks to apply a haircut to the majority of their holdings of euro zone peripheral debt. That's at odds with reality: any revised bailout package for Greece is likely to force banks to recognise at least some losses on their debt.
The Breakingviews test shows what would happen under such a scenario. It takes the banks' holdings of sovereign debt in their banking books and applies a haircut to Greek, Portuguese, Italian, Spanish and Irish bonds based on where the countries' 5-year bonds were trading last Friday. The value of Greek bonds, for example, is slashed in half.
As a result, the Breakingviews test shows 27 banks failing the test, with an overall capital hole of around 25 billion euros -- 10 times the official number.
That sounds scary. But the biggest problem is in Greece itself, where the resulting capital hole is 13.6 billion euros. This is not much more than the 10 billion euros that Greece has already set aside to recapitalise failing banks.
There's also a knotty problem for Cyprus. The two Cypriot banks covered by the test would face a capital hole of 2 billion euros. Although that's 11 percent of GDP, the government's own debt is 61 percent of GDP so it could stump up the cash if it had to.
Portugal and Spain also take a hit under the Breakingviews test, with capital shortfalls of 3.3 billion euros and 6 billion euros respectively. But in the context of those countries' economies, that is not a huge amount.
Investors may quibble with some of Breakingviews' assumptions. In particular, some may feel the pass mark core Tier 1 ratio of 5 percent is too low. Raise it to 6 percent, and the number of failing banks jumps to 38, and the capital hole goes up to 45 billion euros.
The tests do not mean that euro zone leaders can just merrily let Greece default. They need to recapitalise their banks sufficiently to deal with such an event -- not merely to deal with the stresses envisaged in the official tests. And they need to put in other firewalls to deal with the second-order impact of a default.
But if they do that, a Greek default need not be a disaster.
CONTEXT NEWS
-- Twenty-seven European banks would have to raise 25.7 billion euros of fresh capital according to a Breakingviews stress test of the sector's sovereign debt exposures.
-- Results of the official stress tests revealed by the European Banking Authority on July 15 found that eight lenders had failed to maintain a core Tier 1 capital ratio of 5 percent under a stressed scenario. The capital shortfall was 2.5 billion euros. An additional bank from Germany, Helaba, pulled out of the tests last week and is thought to have also failed.
-- The EBA test subjected banks' exposures of sovereign debt held in their trading books to a haircut based on a market shock. However, most banks hold government bonds in their banking books, which are not marked to market. Instead, the EBA required banks to set aside some provisions for lowly-rated sovereign debt in their banking books.
-- The Breakingviews test applied a haircut to banking book exposures for banks' holdings of Greek, Portuguese, Irish, Italian and Spanish sovereign debt. The haircut is based on the market price of 5-year bonds on July 15.
-- Greek debt is therefore haircut by 52.8 percent, Portuguese debt by 33.3 percent and Irish debt by 38.5 percent. Italian and Spanish bonds are haircut by 5.7 percent and 8.6 percent, respectively.
-- The aggregate haircut was then deducted from the banks' stressed Core Tier 1 capital ratio, after adding back provisions banks had set aside to cover potential sovereign losses. The calculation does not factor in any tax benefits from greater losses.
-- Under the Breakingviews scenario, all six Greek banks fall short of a 5 percent core Tier 1 capital ratio, with a capital requirement of 13.6 billion euros. Marfin and Bank of Cyprus would also fail and need 2 billion euros of extra capital.
-- Thirteen Spanish lenders fail the Breakingviews tests, up from 5 in the official exam, with a combined capital shortfall of almost 6 billion euros. Portugal's four lenders would require a total capital injection of3.3 billion euros.
-- EBA results: http://stress-test.eba.europa.eu/
((george.hay@thomsonreuters.com; peter.thal.larsen@thomsonreuters.com))
(Editing by Hugo Dixon and David Evans)
===
Reuters
EU banks' stress test hangovers aren't equally bad
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, July 20 (Reuters Breakingviews) - Europe's banks have had their exam results, and they were hardly prize winning. Although only eight of the 90 banks that sat the European bank stress tests failed even to muster 5 percent core Tier 1 ratios, a further 16 did not get above 6 percent. The good news is that over half of the candidates tested can point to actions they are taking to recapitalise. The bad news is that some of these plans are more credible than others.
The teacher's pets are, for the most part, the Spanish banks. Although 5 of the country's 25 lenders participating in the test failed, they have an excuse. The European Banking Authority, which set the test rules, did not allow them to include generic provisions -- cash they have set aside to cover non-specific future losses -- towards capital. That looks harsh.
Adding back these provisions does wonders for Spanish banks' capital strength. Banca Civica came close to failing the test with a core Tier 1 capital ratio of 5.6 percent under stress. Include generic provisions and the ratio leaps to 9.4 percent. Mandatory contingent convertible notes issued by the Cypriot lenders, Bank of Cyprus and Marfin, are in a similar category. Though they did not meet the EBA's strict criteria, they boost each bank's capital ratio by over 3 percentage points.
HSH Nordbank's plans don't look nearly as robust. The German landesbank's 5.5 percent capital ratio under the test is improved by a 3.6 percent uplift from mitigating factors. But this comes from so-called "disinvestments and restructuring measures". Achieving these depends on HSH selling assets at the right price. National Bank of Greece's planned 2 percent uplift similarly hinges on disposals.
Shaky mitigation schemes are bad enough. But if euro zone peripheral government bonds had been marked to market prices, 27 of the 90 banks tested would fall below 5 percent, according to Reuters Breakingviews' own stress test. The problem may then be then not just be that banks' contingency plans aren't very robust, but that some of the lenders in trouble do not have any such plans at all.
-- Graphic: Effect of mitigating measures: http://r.reuters.com/tad72s
-- Breakingviews euro zone bank stress tests calculator: http://r.reuters.com/jyw62s
CONTEXT NEWS
-- Just over half the banks stress-tested by the European Banking Authority on July 15 announced measures to increase their capital strength by the end of 2012.
-- The EBA's disclosure for each of the 90 banks tested shows that 47 assume that their capital position after a macro and sovereign shock would be augmented by various measures. These include generic provisions already booked, convertible bonds, and disposal programmes that have not yet been completed.
-- ATE Bank of Greece assumes the highest uplift from these mitigating factors, with a 6.8 percent benefit from provisions and equity-raisings. Oesterreichische Volksbank assumes a 5.3 percent increase, while Spain's Banca March envisages a 4.3 percent uplift.
((george.hay@thomsonreuters.com))
(Editing by Peter Thal Larsen and David Evans)
===
No bank tax in Franco-German deal on Greece
Options on the table to address euro zone crisis
3:45am EDT
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By Gernot Heller and Luke Baker
BERLIN/BRUSSELS | Thu Jul 21, 2011 4:44am EDT
(Reuters) - Germany and France have ruled out a bank tax after reaching a common position on a second bailout of Greece to prevent the country's debt crisis spreading through Europe, EU sources said on Thursday.
The accord came after seven hours of talks late into Wednesday night between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Berlin, sources in both governments said.
European Central Bank President Jean-Claude Trichet joined Merkel and Sarkozy for part of their talks and one source said their agreement, kept secret to avoid offending other euro group leaders at a summit on Thursday, had his blessing.
"You should assume that there will not be a banking tax," the source told Reuters.
Another source involved in preparatory talks for the emergency summit of the 17-nation currency area confirmed that the banking tax proposal, raised last week, had been dropped.
While few details of the Franco-German deal emerged, the sources said it would include private sector involvement that should not cause either a default or selective default of Greek debt, a red line for the ECB.
The risk premium investors demand to hold peripheral euro zone government bonds rather than benchmark German Bunds fell on Thursday on news of the Franco-German agreement.
"There are huge expectations something will be done... the big disappointment could come from how quickly they can implement things. They can agree principles but implementation will take a long while," said Peter Schaffrik, a strategist at RBC Capital Markets.
The 115 billion euro second Greek rescue package would involve both more official funding from the euro zone rescue fund and the IMF and a contribution by private sector bondholders on which two senior bankers will make a presentation to leaders on Thursday, the sources said.
Baudoin Prot of BNP Paribas, the French bank with the biggest exposure to Greek debt, and Deutsche Bank chief executive Josef Ackermann, chairman of the International Institute of Finance, a banking lobby that has led talks among bankers, will attend, banking sources said.
The leaders are due to meet at 1100 GMT but the start could well be delayed as euro zone sherpas work to thrash out details of an agreement, officials said.
The aim is to make Greece's debt more sustainable and prevent fears of a disorderly default from poisoning access to the bond market for bigger states such as Italy and Spain.
SUPPLEMENT
The new bailout would supplement a 110 billion euro ($156 billion) rescue plan for Greece launched in May last year. Ireland and Portugal have since received similar rescues and Italian and Spanish debt has come under attack this month, spreading the crisis to countries that are too big to save with the EU's current fire-fighting instruments.
Worried about the impact on financial markets and wary of angering their own taxpayers, euro zone governments have struggled for several weeks to agree on major aspects of the plan, especially a contribution by private sector investors.
The euro rose moderately against the dollar in response to the Franco-German announcement. Providing fresh money to Greece and arranging for commercial banks to participate could face legal and technical obstacles.
The head of the European Commission, Jose Manuel Barroso, warned on Wednesday that the global economy would suffer if Europe could not summon the political will to act decisively on Greece.
"Nobody should be under any illusion: the situation is very serious. It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond," Barroso told a news conference.
Britain's finance minister George Osborne, in an interview with the Financial Times published on Thursday, said failure could produce an economic crisis as serious as the recession which followed the global credit crash of 2008.
NOT CLEAR
Barroso said a solution to Greece's problems must include steps to ensure the sustainability of Greek public finances, private sector involvement in funding for Athens, more flexible use of the euro zone's bailout fund, repair of the region's banking system, and liquidity to keep the Greek economy going.
It was not clear how many of these steps were included in the Franco-German accord.
Four competing proposals have been circulating for private sector involvement: a rollover of Greek government bonds as they mature, a swap of bonds for debt with longer maturities, a buy-back of Greek debt at a discount to its face value, and a tax on European banks.
Germany and France had been at odds on these proposals, with Berlin promoting a bond swap and France suggesting a rollover or a tax. The ECB had complicated the argument by opposing any step that might cause credit rating agencies to declare Greek debt in default.
The IMF, whose new head Christine Lagarde will also attend, has told euro zone leaders they should put more money into their bailout fund, the 440 billion euro European Financial Stability Facility, and let it buy government bonds of weak states on the secondary market. Investors also hope it will be permitted to extend precautionary credit lines to countries at risk.
Germany has previously blocked allowing the EFSF to buy bonds, which would require changes in the fund's rules that would have to be ratified by national parliaments, and could fall foul of critics in Germany, the Netherlands and Finland.
Regardless of the details of the Franco-German accord, Thursday's summit is very unlikely to mark a complete resolution of the crisis, as Merkel herself acknowledged earlier this week.
A second bailout may simply keep Greece afloat for a number of months before a tougher decision has to be made on writing off more of its debt.
In any case, many economists believe the only way out of the euro zone's debt crisis in the long run may be closer integration of national fiscal policies -- for example, a joint euro zone guarantee for countries' bonds, or issuance of a joint euro zone bond to finance all countries.
Germany has firmly ruled out such steps, but Osborne said the second Greek bailout would only be a step toward a necessary fiscal union in the euro zone.
(additional reporting by Emmanuel Jarry in Berlin, Philipp Halstrick in Frankfurt, Emilia Sithole-Matarise in London; writing by Andrew Torchia and Paul Taylor, editing by Janet McBrde)
==============================
EU bank stress-test winners still short of capital Most European banks passed the exam, at least on a headline level. But the accompanying disclosures make them look less robust up close. Investors can use the new clarity to push for extra capital buffers. These would help lenders cope with the risks of euro zone deflation.
Italy’s bank debacle could be useful for Renzi Italian banks’ poor showing in Europe’s stress test has sparked protest from the Bank of Italy. But for reforming Prime Minister Matteo Renzi, shocks to the system aren’t unhelpful. He can use the mess to reform ailing lenders so they can support the shaky economy.
Breakingviews TV: Stressed out?
Dominic Elliott and George Hay say Europe’s bank review has done just enough to avoid looking like a whitewash.
Watch the view
Europe's bank stress test warrants a narrow pass The analysis has enough nasties to avoid appearing a whitewash. And it has a big loser: Monte dei Paschi is a massive 2 bln euros short, amid other predicted failures. But while the bigger lenders passed and the air has been cleared, it may yet fail to spur credit supply.
World's oldest bank faces radical treatment Monte dei Paschi will struggle to plug its 2 bln euro stress-test hole and stay independent. Investors in the last cash call got burned. The clean solution would be a takeover. But with buyers in short supply, a breakup may be required. It’s a big setback for the Bank of Italy.
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===============================
ECB fails 25 banks in health check but problems largely solved
Sun, Oct 26 16:18 PM EDT
image
1 of 2
By Laura Noonan and Eva Taylor
FRANKFURT (Reuters) - Roughly one in five of the euro zone's top lenders failed landmark health checks at the end of last year but most have since repaired their finances, the European Central Bank said on Sunday.
Painting a brighter picture than had been expected, the ECB found the biggest problems in Italy, Cyprus and Greece but concluded that banks' capital holes had since chiefly been plugged, leaving only a modest 10 billion euros ($12.7 billion) to be raised.
Italy faces the biggest challenge with nine of its banks falling short and two still needing to raise funds.
The test, designed to mark a clean start before the ECB takes on supervision of the banks next month, said Monte dei Paschi (BMPS.MI) had the largest capital hole to fill at 2.1 billion euros.
The exercise provides the clearest picture yet of the health of the euro zone's banks more than seven years after the eruption of a financial crisis that almost bankrupted a handful of countries and threatened to fracture the currency bloc.
While 25 of the euro zone's 130 biggest banks failed the health check at the end of last year with a total capital shortfall of 25 billion euros, a dozen have already raised 15 billion euros this year to make repairs.
A recent investor survey by Goldman Sachs found they believed the ECB ought to ask lenders to raise an additional 51 billion euros of capital for the tests to be credible.
Although investors may take heart, it remains to be seen whether the exercise can spur banks to lend more as the region's economic growth stutters to a virtual halt. (Spur: A short or stunted branch of a tree.1. To ride quickly by spurring a horse.
2. To proceed in haste.)
European Central Bank Vice President Vitor Constancio said the results could encourage banks to lend.
"There is some pick up (in demand), but it is still slight," Constancio told Reuters. "All this now can really start to change the environment and we hope it will also change the reality."
Alongside Italy, regulators said three Greek banks, three Cypriots, two from both Belgium and Slovenia, and one each from France, Germany, Austria, Ireland and Portugal had also missed the grade as of end-2013.
Analysts generally gave the results a cautious welcome, saying they marked the beginning rather than the end of a banking clean-up in Europe.
"I consider the stress test as an important partial success, which will help reduce uncertainty," said Marcel Fratzscher, president of Germany's DIW economic institute.
"However, important challenges remain unsolved. The stress test alone will not end the credit crunch for small and mid-sized companies in Southern Europe."
Some were more critical. "This seems as if it has been pretty unstressful," said Karl Whelan, an economist with University College Dublin.
"The real issue is the size of the capital shortfall and that is very, very small. I don't feel a whole lot more reassured about the health of the banking system today than last week."
The exercise nonetheless provided a snapshot of banks' vital statistics and forced them, for example, to revise the amount of risky loans - which have not been serviced in 90 days - upwards by 136 billion euros to 879 billion.
CLEAN-UP AHEAD
The exercise, which saw officials trawl through more than 40 million individual bank figures, had two parts – a strict review by the ECB of assets such as loans, followed by a wider test of how banks would cope with a new economic crash.
It is the fourth attempt by Europe to clean the stables of its financial sector and has been billed as much the most rigorous.
Previous efforts failed to spot problems, giving lenders in Ireland a clean bill of health shortly before a banking crash drove the country to the brink of financial collapse.
"It is credible," said Nicolas Veron of Brussels think tank Bruegel. "But it is only the start of a longer sequence of cleanup that will extend well into 2015."
The ECB's passmark was for banks to have high-quality capital of at least 8 percent of their risk-weighted assets, a measure of the riskiness of a banks' loans and other assets, if the economy grows as expected over the next three years, and capital of at least 5.5 percent if it slides into recession.
Banks with a capital shortfall will have to say within two weeks how they intend to close the gap. They will then be given up to nine months to do so.
UNBLOCKING LENDING
The ECB staked its reputation on delivering a thorough assessment in an attempt to draw a line under years of financial and economic strife in the bloc.
For many banks, the biggest impact of the tests was not in identifying capital holes but in finding that their assets, such as loans, had been overvalued.
In total, the ECB said banks had been valuing their loans and assets at 48 billion euros more than they are really worth. This was because they had not recognised 136 billion euros of bad loans.
That accounted for 11 billion of the 25 billion euros banks were collectively short of at the end of last year. It also eroded 37 billion euros of capital amongst the banks that passed.
Among the major listed banks, the biggest hits were to Greece's Piraeus bank, whose core capital fell by 3.7 percentage points after the ECB adjusted the bank's capital to reflect the new asset valuations.
Monte dei Paschi's capital was reduced by almost a third. There was also a big impact on Austria's Erste Bank.
The adjustments put many banks in an uncomfortable position. Thirty-one had core capital below the 10 percent mark viewed by investors as a safety threshold, while a further 28 were had ratios just 1 percentage point above.
The ECB will not immediately force lenders with overvalued assets to take remedial action but they will have to hold more capital eventually, leaving less room to expand, lend or pay dividends.
For overall lending, the more fundamental question is whether the demand for credit is there in a moribund euro zone economy. (Moribund: 1. Approaching death; about to die.
2. On the verge of becoming obsolete: moribund customs; a moribund way of life.)
(Additional reporting by John O'Donnell and Paul Carrel in Frankfurt, Huw Jones, Steve Slater and Clare Hutchison in London, Carmel Crimmins in Dublin and Michelle Martin in Berlin. Writing by Mike Peacock and John O'Donnell, editing by Alexander Smith and David Evans)
======================================
Showing posts with label emergency bailout fund. Show all posts
Showing posts with label emergency bailout fund. Show all posts
Saturday, July 16, 2011
Tuesday, March 24, 2009
UK bank shares leap after Obama's £680bn pledge to set banks free from 'toxic assets'
So What's A Toxic Asset?
A Closer Look At The Financial Black Holes That Are Clogging Up The Nation's Credit Flow
Comments Comments 16
March 23, 2009
'Toxic-Bank' Details Released
Public and private money will buy up bad assets in an effort to jumpstart the economy, reports Bill Plante. Harry Smith talks to Dr. Christina Romer, a White House adviser, on the economic strategy. | Share/Embed
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Q&A: Mortgage Help
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New plan to allow lenders to alter delinquent loans more quickly.
Stopgap Measures
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A look at the series of government moves to try and stem the financial meltdown.
Stories
* White House Embarks On Toxic Asset Purge
* Stocks Surge On Bank Plan, Housing News
Answers.com
(CBS) The Obama administration rolled out a plan Monday that could facilitate the purchase of up to $1 trillion worth of toxic assets from struggling banks in an effort to clean up their balance sheets and get them to start lending again.
So what exactly are these toxic assets, which have caused such huge problems in our financial system?
Every time you see foreclosure signs littering neighborhoods, you're probably looking at the makings of a toxic asset, reports CBS News correspondent Bianca Solorzano.
"Toxic assets are the ones that nobody wants to touch because they're just considered too dangerous," Doug Rediker, of New America Foundation, told CBS News.
Normally banks can sell their healthy assets, such as a borrower's timely paid mortgage, to other banks. This allows Bank A to get money quickly and Bank B to profit from the interest that the homeowner is paying.
But if you go into foreclosure and the price of your home drops below the value of the loan itself, then that asset, namely the mortgage, is losing money. It becomes toxic and sits on the banks' balance sheets like a black hole.
Since the banks can't tell how large the black holes are on other banks' balance sheets, they have no confidence to lend money to each other and they stop making new loans, clogging up the nation's financial system.
And although the Treasury Department's plan makes allowances for up to $1 trillion worth of these toxic assets, some economists think the toxic clog could be more than twice that size.
Timothy Geithner unveils $1 trillion toxic asset scheme
The treasury intends to use between $75bn and $100bn from its emergency bailout fund to generate co-investment from hedge funds, private equity funds and other private-sector investors
* Andrew Clark in New York
* guardian.co.uk, Monday 23 March 2009 14.56 GMT
* Article history
Timothy Geithner
US treasury secretary Timothy Geithner. Photograph: AFP/Getty
The Obama administration has kicked off an effort to clean up America's troubled banks through a programme matching private sector money with treasury funds to buy up to $1 trillion (£684bn) of toxic assets from the sagging balance sheets of failing institutions.
In an initiative greeted enthusiastically with a surge in stocks on Wall Street this morning, the US treasury secretary, Timothy Geithner, sought to shake off criticism of vagueness and inertia which followed initial outlines of his approach towards the troubled banking industry last month.
The treasury intends to use between $75bn and $100bn from its emergency bailout fund to generate co-investment from hedge funds, private equity funds and other private-sector investors willing to participate in buying derivatives, mortgage-backed securities and other troubled financial instruments.
To help raise money, the Federal Deposit Insurance Corporation, which insures US bank accounts, will provide a guarantee for any debt financing issued by public-private entities to pay for their toxic purchases.
Geithner said that doing nothing was not an option, citing Japan's 1990s banking crisis: "Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience," he said today.
Financiers agree that until banks find a way to dispose of troubled assets on their books, the flow of loans and credit to re-invigorate economic activity will be blocked. But one of the key stumbling blocks over the last year has been disagreement over how to price these assets which have plunged in value due to a collapse in the US mortgage market.
Geithner said that the involvement of private investors would help generate fair prices: "If the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases - along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets."
Within minutes of the opening bell on Wall Street, the blue-chip Dow Jones industrial average was up by 156 points to 7435. In a clear indication of confidence in the administration's plan, shares in struggling banks leapt sharply higher. Citigroup's stock surged by 16%, Bank of America was up by 17% and Morgan Stanley rose 9%.
One of the biggest credit funds in the US, Pimco, declared that it would participate in the programme. Pimco's co-chief investment officer, Bill Gross, said: "This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate and do our part to serve clients as well as promote economic recovery."
Treasury officials are hopeful that a relatively modest sum of seed money from government funds will be sufficient to generate an initial $500bn in purchasing power, rising to $1 trillion over time.
The government's $75bn to $100bn will be matched on a broadly dollar-for-dollar basis by private investors to form the equity component of investment vehicles. But with the help of the FDIC's guarantee, the Treasury expects these vehicles to be able to leverage their funding by borrowing on an up to six-to-one debt to equity basis.
Initial indications suggested that financiers see the proposals as credible - a reaction which will come as a relief to the White House after a tepid response to broad outlines set out by Geithner in early February. At the time, stocks plunged and Geithner was savaged in Congress over fudged details and a lack of specificity in his remarks.
But still, not everybody is convinced that Geithner's approach will work. The recent furore surrounding bonuses at insurer AIG has provoked wariness among Wall Street institutions about getting involved in government programmes for fear that their finances will be subject to scrutiny by lawmakers and to popular attack from the public.
David Trone, a banking analyst at Fox-Pitt Kelton, said he believed "hysteria" over AIG had created deep distrust among potential investors, with doubts arising over future restrictions over issues such as compensation and dividends.
"Credit and asset-backed securities investors do not like uncertainty, and rely very heavily on contracts' terms, since they can make or break the risk/reward equation," said Trone.
Economic commentators in the US have noted a few glimmers of hope of stability beginning to return - including a 30% rise in the number of people refinancing mortgages over the last month.
But in a television interview over the weekend, president Barack Obama made it clear that he still sees danger in the weakness of financial institutions.
"I think that systemic risks are still out there," Obama told CBS's 60 Minutes. "There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them. And if all those financial institutions fail at the same time, then you could see an even more destructive recession and, potentially, depression."
----------
By David Gardner
Last updated at 9:24 AM on 24th March 2009
British bank shares climbed this morning after Barack Obama's $1trillion buy-out of toxic bank assets prompted massive gains on global markets overnight.
Royal Bank of Scotland was up more than nine per cent, Lloyds Banking Group up six per cent and Barclays four per cent on the back of the U.S. Treasury's latest plan.
However, the FTSE-100, which rose 2.9 per cent yesterday after the measures to free up the frozen credit markets were announced, failed to build on earlier gains.
It appeared to keep hold of the rise in early trading, but by 9am had slid back into the red despite Asian markets soaring overnight.
President Barack Obama stands with Treasury Secretary Timothy Geithner as he makes remarks about AIG and his economic recovery last week
President Barack Obama stands with Treasury Secretary Timothy Geithner as he makes remarks about AIG and plans for the economy
Japan's Nikkei index closed up 3.3 per cent, while in Hong Kong the Hang Seng finished with a gain of 3.4 per cent - a 10-week high.
The Dow Jones in New York enjoyed its fifth largest ponits gain in its history as it ended the day up 497 points or 6.84 per cent at 7,775.
More...
* Obama's 'spend, spend, spend' budget will bankrupt America, warns man President wanted in his Cabinet
Mr Obama said there were 'glimmers of hope' in the housing market after February sales of previously owned U.S. homes rose at their fastest pace in nearly six years.
The global economic crisis started after U.S. banks sold too many mortgages and loans to high-risk customers with a negligible income or poor credit rating.
These 'toxic assets' have lost so much value that lenders have been unable to sell or even realistically value them.
Banks have become so burdened with debt that they cannot free up enough cash for new loans and mortgages - which is how the credit crunch got its name.
Mr Obama has now promised to remove as many bad assets as possible from the banks' balance sheets.
He will encourage private investors to take part in the scheme with lowinterest loans offering the possibility of big profits when the economy recovers and those assets hopefully rise in value.
'Are you punch drunk?': Barack Obama is interviewed by CBS' Steve Kroft for '60 Minutes'
Some analysts say the move is the last in a series of measures that have failed to work, but last night Mr Obama hailed it as a vital step to revitalise the U.S. economy.
'The good news is that we have one more critical element in our recovery,' he said.
But he downplayed expectations of a quick fix, adding: 'We've still got a long way to go. It's not going to happen overnight. But we think we are moving in the right direction.'
In Britain, the Treasury has taken a different approach, using taxpayer money to insure Royal Bank of Scotland and Lloyds against future losses on £600billion of poor loans and investments.
The U.S. Treasury dismissed that policy in a statement yesterday, saying its own strategy was more likely to bear fruit.
Treasury secretary Timothy Geithner said low-interest loans of up to £70billion will initially be offered to private investors from the bail-out fund approved by Congress, to entice private-sector investors to buy an estimated $ 500billion worth of toxic assets.
The administration said this effort could grow to cover $1trillion in toxic debts, and that it expected participation from a wide range of private sources, from pension funds to insurance companies and other long-term investors.
If investors sell toxic assets such as mortgages at a higher price later when the economy recovers, the investor pays back the treasury and pockets the profit.
But if the prices fail to improve, the loan is still guaranteed against any losses by the treasury and the investor only stands to lose a minimal initial investment.
The treasury chief said the plan was needed because the U.S. financial system as a whole was 'still working against recovery' and 'many banks, still burdened by bad lending decisions, are holding back on providing credit'.
He said encouraging the private sector to take part would be better for the taxpayer as the risks of purchasing toxic assets would be shared.
How the German economy is falling
Germany's economy is set to plunge as its traditionally strong export industries reveal emptying order books, analysts warned last night.
Commerzbank, the country's second largest lender, said gross domestic output in Europe's biggest economy would fall by up to 7 per cent this year - almost double the previous estimate.
Chief economist Joerg Kraemer said: 'January order intake and production data plunged at a dramatic pace that has no precedent in Germany's post-war history.
'This has pulled the rug from under our previous forecast. The global economy is in a state of shock brought about by uncertainty.'
----------
By David Gardner
Last updated at 8:15 AM on 23rd March 2009
* Comments (26)
* Add to My Stories
A top Republican who snubbed Barack Obama’s offer of a Cabinet post has dealt another damaging blow to the president by claiming his economic policies would bankrupt America.
Judd Gregg warned Mr Obama’s 'spend, spend, spend' budget plans would leave the U.S. trillions of pounds in debt.
‘This clearly creates a scenario where the country’s going to go bankrupt. It’s that simple,’ said the senator who changed his mind after initially accepting the Commerce Secretary job.
He spoke out as Mr Obama was preparing to address the nation in yet another attempt to sell his financial recovery plan to a sceptical public on Tuesday.
Judd Gregg
U.S. President Barack Obama
Bankruptcy road: Judd Gregg (left) has told Obama his budget plans would leave the country in massive debt
One of the president’s top financial aides, Christina Romer, head of the White House Council of Economic Advisors, went on Fox News Sunday to try to ease the gloom by declaring that the administration is ‘incredibly confident’ the economy will rebound within a year.
‘We will be seeing signs the economy is turning around,’ she said.
Mr Obama is desperate to regain the initiative after appearing to be blindsided and wrong-footed in his response to the bonus scandal at bailed-out insurance giant AIG.
The fury over the bonus payouts boiled over so dangerously that AIG executives have been flooded with death threats and they have employed security guards and been warned not to go out alone.
More...
* Iran rejects Barack Obama's olive branch, claiming his policies do not represent change
* 'Don't wear anything that says AIG on it': Insurer gives employees security tips as fury over bonuses grows
At the weekend, a bus company was even organising tours around the multi-million pound homes of AIG bosses in upmarket suburbs in Connecticut.
One tour stop was a mansion owned by Douglas Poling, a senior executive at the embattled insurer, who says he is giving back the biggest single AIG bonus of £4million, which he received a week ago.
But the debacle shows no sign of fading away.
Last night, Vice President Joe Biden’s economic advisor admitted a plan to impose a 90 per cent tax to reclaim the £100million paid out in AIG bonuses may have gone ‘too far.’
Christina Romer
Stay positive: Christina Romer has been on TV telling the public the economy will rebound
Jared Bernstein said a bill passed last week by the House of Representatives may face legal problems by using the tax code to ‘surgically punish a small group.’
Mr Obama was expected to announce a plan on Tuesday to help thaw America’s still frozen credit system that has compounded the recession by denying loans to businesses and consumers.
Billions of taxpayer enticements will be shelled out to private investors to persuade them to buy the bad debts and hold on to them until the economy recovers.
In response to the AIG debacle, there is also likely to be much tighter regulation of executive pay at banks and financial institutions.
The president will follow up the announcement with a nationally broadcast news conference aimed at promoting his budget plans to create jobs by revamping US healthcare, education, energy and tax policies.
‘I realise there are those who say these plans are too ambitious to enact,’ the president said in his weekend radio address.
‘To that I say that the challenges we face are too large to ignore. I didn’t come here to pass our problems to the next president or the next generation – I came here to solve them,’ he added.
Appearing on CNN, Senator Gregg, a senior member of the Senate Budget Committee, said he had no regrets in withdrawing his nomination to join Mr Obama’s Cabinet.
He said the scale of the administration’s spending plan in the midst of a prolonged recession would leave the next generation with a country too expensive to afford.
The non-partisan Congressional Budget Office said that the president’s policies would raise government spending to an all-time high.
The watchdog group said the huge deficits would mean the US would have to borrow nearly £6.5trillion over the next decade – £1.6trillion more than Mr Obama predicted when he first unveiled his budget last month.
The tour of AIG executive homes was dubbed ‘Lifestyles of the Rich and Infamous’ by activist organizers, Connecticut Working Families, a small liberal political party.
But some of the recipients of the biggest cheques have already announced they are giving the money back.
Security guards met visitors at a mansion belonging to Douglas Poling, the AIG vice president for energy and infrastructure investments who got the biggest (pounds) 4 million payment.
A spokesman said Mr Poling was returning the money ‘because he thought it was the correct thing to do.’
==========
UPDATE 6-
AIG to sell $6 bln in AIA stock to repay US bailout
Mon, Mar 05 15:14 PM EST
* Selling via placement to institutional investors
* Selling at HK$27.15 to HK$27.50 a share - term sheet
* AIA stock trading suspended in Hong Kong
* Goldman, Deutsche 'active' bookrunners - sources
By Denny Thomas and Clare Baldwin
HONG KONG, March 5 (Reuters) - American International Group is selling part of its stake in AIA Group to raise about $6 billion, which will help the U.S. insurer repay part of its government bailout.
Markets reacted favorably, with AIG shares rising to their highest levels in 10 months on the news.
AIG is looking to sell about 1.7 billion AIA shares at HK$27.15 to HK$27.50 each, according to a term sheet Reuters saw on Monday. That would be a discount of up to 7 percent to Friday's closing price.
The shares will go to institutional investors. AIG expects to use the net proceeds to reduce the balance of the U.S. Treasury Department's preferred interest in a special-purpose vehicle that holds the AIA shares. As of last month, those preferred interests were worth about $8.4 billion.
The Treasury also owns 77 percent of AIG's common stock following a massive $182 billion bailout in the wake of the 2008 global financial crisis.
At Friday's close, AIG's one-third stake in AIA was worth $14.9 billion. Following the share sale, the U.S. company will hold about 19 percent of AIA.
Institutions are expected to buy into the offering because of AIA's strong performance since the company's $20.5 billion Hong Kong IPO in 2010 -- Asia's third-largest public listing. But a big run-up in the stock price may have some feeling that the current offer is expensive.
With such a large sale and AIA's free float increasing, though, the company's weighting on benchmark indexes should rise, making the stock a target for fund managers tracking the Hang Seng and the Hang Seng Finance Index.
"The issue of getting the deal through shouldn't be a problem, plus there should be some index buying," said the head of a large U.S.-based asset manager in Hong Kong who was not authorized to speak publicly on the AIA sale.
Kenneth Yue, a Hong Kong-based analyst at CCB International Securities, said the sale looked well timed.
"If you look at AIA's new business growth last year, it went up 40 percent," he said. "I believe they've gone to the peak already -- it would be very challenging for them to increase their new business value going forward by 40 percent every year."
Pricing of the AIA share sale will occur no later than Tuesday, AIG said.
BANK CREDIT
Deutsche Bank and Goldman Sachs are the "active" joint global coordinators, according to two sources with direct knowledge of the process. Both requested anonymity because they are not authorized to speak publicly on the matter.
Deutsche and Goldman were among the four banks that led AIA's IPO, along with Citigroup and Morgan Stanley. The sources said Citi and Morgan Stanley were taking "passive" roles in the current AIG sell-down.
The distinction is important, not just for the fees that such a large offering brings, but also in the league table credit that can help a bank's external marketing. For the AIA sell-down, the banks will get equal league table credit, but Deutsche and Goldman will take home the fatter fees, according to one of the sources.
The deal should be "well distributed" among different investors, instead of large chunks going to just a handful, the source noted.
Shares of AIA, headed by former Prudential Plc executive Mark Tucker, have risen 47 percent since early October and touched a seven-month high last week. The stock closed at HK$29.20 on Friday.= 3.76124 USD
AIG has been on a similar run, gaining 46 percent over the same period. Its shares rose 1.2 percent to $30.16 in afternoon trading, their highest level since last May. Fitch Ratings said on Tuesday that the sale would improve AIG's focus on its core operations and would help its credit rating profile.
CROWN JEWEL
AIA was founded in Shanghai in 1919 by U.S. entrepreneur C.V. Starr. Twenty years later, Starr temporarily relocated to the United States to avoid political instability in Asia and, following World War II, decided to run his U.S. businesses from New York. They came to be known as AIG, whose shares began trading in New York in 1984.
Now Asia's third-largest insurer, AIA has built a sprawling and successful business across the region, with an army of hundreds of thousands of agents.
AIG was forced to spin off AIA, widely considered its crown jewel, and other assets following the bailout by the U.S. government.
AIG Chief Executive Robert Benmosche has said little about his plans for the AIA stake. As recently as Feb. 24, AIG said it had not decided what to do with the stake and had earlier hinted it may even increase its holding.
But the company appears to have opted instead to start paying the government back and focus on other parts of its business.
============
A Closer Look At The Financial Black Holes That Are Clogging Up The Nation's Credit Flow
Comments Comments 16
March 23, 2009
'Toxic-Bank' Details Released
Public and private money will buy up bad assets in an effort to jumpstart the economy, reports Bill Plante. Harry Smith talks to Dr. Christina Romer, a White House adviser, on the economic strategy. | Share/Embed
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Q&A: Mortgage Help
In-Depth
Q&A: Mortgage Help
New plan to allow lenders to alter delinquent loans more quickly.
Stopgap Measures
Timeline
Stopgap Measures
A look at the series of government moves to try and stem the financial meltdown.
Stories
* White House Embarks On Toxic Asset Purge
* Stocks Surge On Bank Plan, Housing News
Answers.com
(CBS) The Obama administration rolled out a plan Monday that could facilitate the purchase of up to $1 trillion worth of toxic assets from struggling banks in an effort to clean up their balance sheets and get them to start lending again.
So what exactly are these toxic assets, which have caused such huge problems in our financial system?
Every time you see foreclosure signs littering neighborhoods, you're probably looking at the makings of a toxic asset, reports CBS News correspondent Bianca Solorzano.
"Toxic assets are the ones that nobody wants to touch because they're just considered too dangerous," Doug Rediker, of New America Foundation, told CBS News.
Normally banks can sell their healthy assets, such as a borrower's timely paid mortgage, to other banks. This allows Bank A to get money quickly and Bank B to profit from the interest that the homeowner is paying.
But if you go into foreclosure and the price of your home drops below the value of the loan itself, then that asset, namely the mortgage, is losing money. It becomes toxic and sits on the banks' balance sheets like a black hole.
Since the banks can't tell how large the black holes are on other banks' balance sheets, they have no confidence to lend money to each other and they stop making new loans, clogging up the nation's financial system.
And although the Treasury Department's plan makes allowances for up to $1 trillion worth of these toxic assets, some economists think the toxic clog could be more than twice that size.
Timothy Geithner unveils $1 trillion toxic asset scheme
The treasury intends to use between $75bn and $100bn from its emergency bailout fund to generate co-investment from hedge funds, private equity funds and other private-sector investors
* Andrew Clark in New York
* guardian.co.uk, Monday 23 March 2009 14.56 GMT
* Article history
Timothy Geithner
US treasury secretary Timothy Geithner. Photograph: AFP/Getty
The Obama administration has kicked off an effort to clean up America's troubled banks through a programme matching private sector money with treasury funds to buy up to $1 trillion (£684bn) of toxic assets from the sagging balance sheets of failing institutions.
In an initiative greeted enthusiastically with a surge in stocks on Wall Street this morning, the US treasury secretary, Timothy Geithner, sought to shake off criticism of vagueness and inertia which followed initial outlines of his approach towards the troubled banking industry last month.
The treasury intends to use between $75bn and $100bn from its emergency bailout fund to generate co-investment from hedge funds, private equity funds and other private-sector investors willing to participate in buying derivatives, mortgage-backed securities and other troubled financial instruments.
To help raise money, the Federal Deposit Insurance Corporation, which insures US bank accounts, will provide a guarantee for any debt financing issued by public-private entities to pay for their toxic purchases.
Geithner said that doing nothing was not an option, citing Japan's 1990s banking crisis: "Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience," he said today.
Financiers agree that until banks find a way to dispose of troubled assets on their books, the flow of loans and credit to re-invigorate economic activity will be blocked. But one of the key stumbling blocks over the last year has been disagreement over how to price these assets which have plunged in value due to a collapse in the US mortgage market.
Geithner said that the involvement of private investors would help generate fair prices: "If the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases - along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets."
Within minutes of the opening bell on Wall Street, the blue-chip Dow Jones industrial average was up by 156 points to 7435. In a clear indication of confidence in the administration's plan, shares in struggling banks leapt sharply higher. Citigroup's stock surged by 16%, Bank of America was up by 17% and Morgan Stanley rose 9%.
One of the biggest credit funds in the US, Pimco, declared that it would participate in the programme. Pimco's co-chief investment officer, Bill Gross, said: "This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate and do our part to serve clients as well as promote economic recovery."
Treasury officials are hopeful that a relatively modest sum of seed money from government funds will be sufficient to generate an initial $500bn in purchasing power, rising to $1 trillion over time.
The government's $75bn to $100bn will be matched on a broadly dollar-for-dollar basis by private investors to form the equity component of investment vehicles. But with the help of the FDIC's guarantee, the Treasury expects these vehicles to be able to leverage their funding by borrowing on an up to six-to-one debt to equity basis.
Initial indications suggested that financiers see the proposals as credible - a reaction which will come as a relief to the White House after a tepid response to broad outlines set out by Geithner in early February. At the time, stocks plunged and Geithner was savaged in Congress over fudged details and a lack of specificity in his remarks.
But still, not everybody is convinced that Geithner's approach will work. The recent furore surrounding bonuses at insurer AIG has provoked wariness among Wall Street institutions about getting involved in government programmes for fear that their finances will be subject to scrutiny by lawmakers and to popular attack from the public.
David Trone, a banking analyst at Fox-Pitt Kelton, said he believed "hysteria" over AIG had created deep distrust among potential investors, with doubts arising over future restrictions over issues such as compensation and dividends.
"Credit and asset-backed securities investors do not like uncertainty, and rely very heavily on contracts' terms, since they can make or break the risk/reward equation," said Trone.
Economic commentators in the US have noted a few glimmers of hope of stability beginning to return - including a 30% rise in the number of people refinancing mortgages over the last month.
But in a television interview over the weekend, president Barack Obama made it clear that he still sees danger in the weakness of financial institutions.
"I think that systemic risks are still out there," Obama told CBS's 60 Minutes. "There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them. And if all those financial institutions fail at the same time, then you could see an even more destructive recession and, potentially, depression."
----------
By David Gardner
Last updated at 9:24 AM on 24th March 2009
British bank shares climbed this morning after Barack Obama's $1trillion buy-out of toxic bank assets prompted massive gains on global markets overnight.
Royal Bank of Scotland was up more than nine per cent, Lloyds Banking Group up six per cent and Barclays four per cent on the back of the U.S. Treasury's latest plan.
However, the FTSE-100, which rose 2.9 per cent yesterday after the measures to free up the frozen credit markets were announced, failed to build on earlier gains.
It appeared to keep hold of the rise in early trading, but by 9am had slid back into the red despite Asian markets soaring overnight.
President Barack Obama stands with Treasury Secretary Timothy Geithner as he makes remarks about AIG and his economic recovery last week
President Barack Obama stands with Treasury Secretary Timothy Geithner as he makes remarks about AIG and plans for the economy
Japan's Nikkei index closed up 3.3 per cent, while in Hong Kong the Hang Seng finished with a gain of 3.4 per cent - a 10-week high.
The Dow Jones in New York enjoyed its fifth largest ponits gain in its history as it ended the day up 497 points or 6.84 per cent at 7,775.
More...
* Obama's 'spend, spend, spend' budget will bankrupt America, warns man President wanted in his Cabinet
Mr Obama said there were 'glimmers of hope' in the housing market after February sales of previously owned U.S. homes rose at their fastest pace in nearly six years.
The global economic crisis started after U.S. banks sold too many mortgages and loans to high-risk customers with a negligible income or poor credit rating.
These 'toxic assets' have lost so much value that lenders have been unable to sell or even realistically value them.
Banks have become so burdened with debt that they cannot free up enough cash for new loans and mortgages - which is how the credit crunch got its name.
Mr Obama has now promised to remove as many bad assets as possible from the banks' balance sheets.
He will encourage private investors to take part in the scheme with lowinterest loans offering the possibility of big profits when the economy recovers and those assets hopefully rise in value.
'Are you punch drunk?': Barack Obama is interviewed by CBS' Steve Kroft for '60 Minutes'
Some analysts say the move is the last in a series of measures that have failed to work, but last night Mr Obama hailed it as a vital step to revitalise the U.S. economy.
'The good news is that we have one more critical element in our recovery,' he said.
But he downplayed expectations of a quick fix, adding: 'We've still got a long way to go. It's not going to happen overnight. But we think we are moving in the right direction.'
In Britain, the Treasury has taken a different approach, using taxpayer money to insure Royal Bank of Scotland and Lloyds against future losses on £600billion of poor loans and investments.
The U.S. Treasury dismissed that policy in a statement yesterday, saying its own strategy was more likely to bear fruit.
Treasury secretary Timothy Geithner said low-interest loans of up to £70billion will initially be offered to private investors from the bail-out fund approved by Congress, to entice private-sector investors to buy an estimated $ 500billion worth of toxic assets.
The administration said this effort could grow to cover $1trillion in toxic debts, and that it expected participation from a wide range of private sources, from pension funds to insurance companies and other long-term investors.
If investors sell toxic assets such as mortgages at a higher price later when the economy recovers, the investor pays back the treasury and pockets the profit.
But if the prices fail to improve, the loan is still guaranteed against any losses by the treasury and the investor only stands to lose a minimal initial investment.
The treasury chief said the plan was needed because the U.S. financial system as a whole was 'still working against recovery' and 'many banks, still burdened by bad lending decisions, are holding back on providing credit'.
He said encouraging the private sector to take part would be better for the taxpayer as the risks of purchasing toxic assets would be shared.
How the German economy is falling
Germany's economy is set to plunge as its traditionally strong export industries reveal emptying order books, analysts warned last night.
Commerzbank, the country's second largest lender, said gross domestic output in Europe's biggest economy would fall by up to 7 per cent this year - almost double the previous estimate.
Chief economist Joerg Kraemer said: 'January order intake and production data plunged at a dramatic pace that has no precedent in Germany's post-war history.
'This has pulled the rug from under our previous forecast. The global economy is in a state of shock brought about by uncertainty.'
----------
Obama's 'spend, spend, spend' budget will bankrupt America, warns top Republican
By David Gardner
Last updated at 8:15 AM on 23rd March 2009
* Comments (26)
* Add to My Stories
A top Republican who snubbed Barack Obama’s offer of a Cabinet post has dealt another damaging blow to the president by claiming his economic policies would bankrupt America.
Judd Gregg warned Mr Obama’s 'spend, spend, spend' budget plans would leave the U.S. trillions of pounds in debt.
‘This clearly creates a scenario where the country’s going to go bankrupt. It’s that simple,’ said the senator who changed his mind after initially accepting the Commerce Secretary job.
He spoke out as Mr Obama was preparing to address the nation in yet another attempt to sell his financial recovery plan to a sceptical public on Tuesday.
Judd Gregg
U.S. President Barack Obama
Bankruptcy road: Judd Gregg (left) has told Obama his budget plans would leave the country in massive debt
One of the president’s top financial aides, Christina Romer, head of the White House Council of Economic Advisors, went on Fox News Sunday to try to ease the gloom by declaring that the administration is ‘incredibly confident’ the economy will rebound within a year.
‘We will be seeing signs the economy is turning around,’ she said.
Mr Obama is desperate to regain the initiative after appearing to be blindsided and wrong-footed in his response to the bonus scandal at bailed-out insurance giant AIG.
The fury over the bonus payouts boiled over so dangerously that AIG executives have been flooded with death threats and they have employed security guards and been warned not to go out alone.
More...
* Iran rejects Barack Obama's olive branch, claiming his policies do not represent change
* 'Don't wear anything that says AIG on it': Insurer gives employees security tips as fury over bonuses grows
At the weekend, a bus company was even organising tours around the multi-million pound homes of AIG bosses in upmarket suburbs in Connecticut.
One tour stop was a mansion owned by Douglas Poling, a senior executive at the embattled insurer, who says he is giving back the biggest single AIG bonus of £4million, which he received a week ago.
But the debacle shows no sign of fading away.
Last night, Vice President Joe Biden’s economic advisor admitted a plan to impose a 90 per cent tax to reclaim the £100million paid out in AIG bonuses may have gone ‘too far.’
Christina Romer
Stay positive: Christina Romer has been on TV telling the public the economy will rebound
Jared Bernstein said a bill passed last week by the House of Representatives may face legal problems by using the tax code to ‘surgically punish a small group.’
Mr Obama was expected to announce a plan on Tuesday to help thaw America’s still frozen credit system that has compounded the recession by denying loans to businesses and consumers.
The Treasury Department hopes to take as much as £700billion in so-called toxic assets off the books of endangered banks.
Billions of taxpayer enticements will be shelled out to private investors to persuade them to buy the bad debts and hold on to them until the economy recovers.
In response to the AIG debacle, there is also likely to be much tighter regulation of executive pay at banks and financial institutions.
The president will follow up the announcement with a nationally broadcast news conference aimed at promoting his budget plans to create jobs by revamping US healthcare, education, energy and tax policies.
‘I realise there are those who say these plans are too ambitious to enact,’ the president said in his weekend radio address.
‘To that I say that the challenges we face are too large to ignore. I didn’t come here to pass our problems to the next president or the next generation – I came here to solve them,’ he added.
Appearing on CNN, Senator Gregg, a senior member of the Senate Budget Committee, said he had no regrets in withdrawing his nomination to join Mr Obama’s Cabinet.
He said the scale of the administration’s spending plan in the midst of a prolonged recession would leave the next generation with a country too expensive to afford.
The non-partisan Congressional Budget Office said that the president’s policies would raise government spending to an all-time high.
The watchdog group said the huge deficits would mean the US would have to borrow nearly £6.5trillion over the next decade – £1.6trillion more than Mr Obama predicted when he first unveiled his budget last month.
The tour of AIG executive homes was dubbed ‘Lifestyles of the Rich and Infamous’ by activist organizers, Connecticut Working Families, a small liberal political party.
But some of the recipients of the biggest cheques have already announced they are giving the money back.
Security guards met visitors at a mansion belonging to Douglas Poling, the AIG vice president for energy and infrastructure investments who got the biggest (pounds) 4 million payment.
A spokesman said Mr Poling was returning the money ‘because he thought it was the correct thing to do.’
==========
UPDATE 6-
AIG to sell $6 bln in AIA stock to repay US bailout
Mon, Mar 05 15:14 PM EST
* Selling via placement to institutional investors
* Selling at HK$27.15 to HK$27.50 a share - term sheet
* AIA stock trading suspended in Hong Kong
* Goldman, Deutsche 'active' bookrunners - sources
By Denny Thomas and Clare Baldwin
HONG KONG, March 5 (Reuters) - American International Group is selling part of its stake in AIA Group to raise about $6 billion, which will help the U.S. insurer repay part of its government bailout.
Markets reacted favorably, with AIG shares rising to their highest levels in 10 months on the news.
AIG is looking to sell about 1.7 billion AIA shares at HK$27.15 to HK$27.50 each, according to a term sheet Reuters saw on Monday. That would be a discount of up to 7 percent to Friday's closing price.
The shares will go to institutional investors. AIG expects to use the net proceeds to reduce the balance of the U.S. Treasury Department's preferred interest in a special-purpose vehicle that holds the AIA shares. As of last month, those preferred interests were worth about $8.4 billion.
The Treasury also owns 77 percent of AIG's common stock following a massive $182 billion bailout in the wake of the 2008 global financial crisis.
At Friday's close, AIG's one-third stake in AIA was worth $14.9 billion. Following the share sale, the U.S. company will hold about 19 percent of AIA.
Institutions are expected to buy into the offering because of AIA's strong performance since the company's $20.5 billion Hong Kong IPO in 2010 -- Asia's third-largest public listing. But a big run-up in the stock price may have some feeling that the current offer is expensive.
With such a large sale and AIA's free float increasing, though, the company's weighting on benchmark indexes should rise, making the stock a target for fund managers tracking the Hang Seng and the Hang Seng Finance Index.
"The issue of getting the deal through shouldn't be a problem, plus there should be some index buying," said the head of a large U.S.-based asset manager in Hong Kong who was not authorized to speak publicly on the AIA sale.
Kenneth Yue, a Hong Kong-based analyst at CCB International Securities, said the sale looked well timed.
"If you look at AIA's new business growth last year, it went up 40 percent," he said. "I believe they've gone to the peak already -- it would be very challenging for them to increase their new business value going forward by 40 percent every year."
Pricing of the AIA share sale will occur no later than Tuesday, AIG said.
BANK CREDIT
Deutsche Bank and Goldman Sachs are the "active" joint global coordinators, according to two sources with direct knowledge of the process. Both requested anonymity because they are not authorized to speak publicly on the matter.
Deutsche and Goldman were among the four banks that led AIA's IPO, along with Citigroup and Morgan Stanley. The sources said Citi and Morgan Stanley were taking "passive" roles in the current AIG sell-down.
The distinction is important, not just for the fees that such a large offering brings, but also in the league table credit that can help a bank's external marketing. For the AIA sell-down, the banks will get equal league table credit, but Deutsche and Goldman will take home the fatter fees, according to one of the sources.
The deal should be "well distributed" among different investors, instead of large chunks going to just a handful, the source noted.
Shares of AIA, headed by former Prudential Plc executive Mark Tucker, have risen 47 percent since early October and touched a seven-month high last week. The stock closed at HK$29.20 on Friday.= 3.76124 USD
AIG has been on a similar run, gaining 46 percent over the same period. Its shares rose 1.2 percent to $30.16 in afternoon trading, their highest level since last May. Fitch Ratings said on Tuesday that the sale would improve AIG's focus on its core operations and would help its credit rating profile.
CROWN JEWEL
AIA was founded in Shanghai in 1919 by U.S. entrepreneur C.V. Starr. Twenty years later, Starr temporarily relocated to the United States to avoid political instability in Asia and, following World War II, decided to run his U.S. businesses from New York. They came to be known as AIG, whose shares began trading in New York in 1984.
Now Asia's third-largest insurer, AIA has built a sprawling and successful business across the region, with an army of hundreds of thousands of agents.
AIG was forced to spin off AIA, widely considered its crown jewel, and other assets following the bailout by the U.S. government.
AIG Chief Executive Robert Benmosche has said little about his plans for the AIA stake. As recently as Feb. 24, AIG said it had not decided what to do with the stake and had earlier hinted it may even increase its holding.
But the company appears to have opted instead to start paying the government back and focus on other parts of its business.
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