financial regulations
Q+A-What’s at stake for swap-execution facilities?
Sep 7th
By Roberta Rampton
WASHINGTON, Sept 7 (Reuters) – The fight over who gets to be a swaps execution facility, or SEF, is shaping up to be one of the most contentious aspects for implementing the swaps portion of the new Wall Street reform law.
Here are some of the issues:
WHAT EXACTLY IS A SEF?
Lawmakers insisted on transparent trading for swaps as part of the effort to decrease systemic financial risks. But because it can be hard to trade swaps on exchanges, they invented a new category of regulated market called a swap execution facility.
The law calls it “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce.”
“If the word ’swaps’ was replaced with ‘goods’ this could be a description of eBay,” wrote Kevin McPartland, an analyst with TABB Group, in an article submitted to regulators last month.
What type of business models meet the broad description given by Congress will be determined by detailed regulations from the Commodity Futures and Exchange Commission and Securities and Exchange Commission under tight timelines.
“Until the CFTC actually issues its proposed rules, no one really knows what a SEF is and what its functionality is going to be,” said Michael Philipp, partner with Winston & Strawn in Chicago.
WHO IS WEIGHING IN ON SEFS?
Companies that traditionally have been big players in the business of trading, facilitating, brokering, dealing and clearing in the $615 trillion over-the-counter swaps market today are jostling to ensure they stay in the game.
A large group of dealers including Barclays, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley and others had a conference call with CFTC and SEC regulatory staff last month focused on key SEF issues.
Some players that have already said they will apply to regulators to become SEF, including IntercontinentalExchange Inc, BGC Partners, GFI Group, ICAP, Tradition, Tullett Prebon, MarketAxess Holdings, and MarkitServ, owned by Depository Trust & Clearing Corp (DTCC) and Markit.
Dealers are expected to try to turn private networks into SEFs, and new players also are expected to emerge.
WHAT TYPES OF SWAPS WILL TRADE ON SEFS?
Regulators will define that, too. The new law will require many types of swaps to be cleared through central clearinghouses to make the trades less leveraged, lessening risk. Any swap that clears must trade on an exchange or a SEF.
WHAT’S THE DIFFERENCE BETWEEN AN EXCHANGE AND A SEF?
Exchanges have algorithmic systems for matching up bids and offers, and open order books. It’s possible some swaps might trade on exchanges, but many require some element of customization or negotiation on terms, or are too specialized to trade on exchanges.
The law’s wording may allow for a broader range of models. “You may still be able to keep in place some notion of bilateral consummation of a trade, as opposed to an automated consummation,” said Joel Telpner, partner with Jones Day in New York.
HOW WILL SEFS CONNECT TO CLEARINGHOUSES?
The law says clearinghouses can’t discriminate against swaps executed at unrelated SEFs or exchanges. Some would-be SEFs are worried clearinghouses affiliated with SEFs or exchanges will find ways around this “open access” principle through membership requirements or by preferential fees that encourage customers to trade and clear in-house.
But clearinghouses have argued that they need to be careful not to take on too much risk.
“It all sounds very good on paper to say, ‘Let a thousand flowers bloom. We’ll have hundreds of SEFs. They’ll all hooked to a clearinghouse and everything will be great,’” said Johnathan Short, a senior vice president of ICE, at a discussion held by regulators last month.
“I think we need to go into this very carefully, and I think we need to consider how all of this actually bolts together in the real world and allows the markets to be properly regulated,” Short said.
WHEN WILL REGULATORS ISSUE PROPOSALS?
Rules for SEFs are to be finalized by next July. To meet that deadline, regulators have said they hope to propose draft rules for a host of issues, including SEFs, by mid-December.
But they have a six-month deadline for final rules to prevent conflicts of interest at SEFs, clearinghouses and exchanges, such as ownership and voting limits, governance rules, and access requirements.
(Editing by Lisa Shumaker) ((roberta.rampton@thomsonreuters.com; +202 898 8376; Reuters Messaging: roberta.rampton.reuters.com@reuters.net) )
ANALYSIS-India’s economic reforms in limbo as state polls near
Aug 30th
By Sugita Katyal
NEW DELHI, Aug 30 (Reuters) – Will India’s government succeed in passing key pro-market bills that have been in limbo for years? Not in the near future, say analysts.
With state elections around the corner, the Congress-led government may have lost a political window to push through crucial economic reforms because of fears of a backlash to sensitive decisions from voters already reeling from high prices.
But while reforms may take longer to enact, the government is committed to making them happen, and investors, for now, are putting up with the slow pace to reap the dividends from a vast consumer market in Asia’s third-biggest economy.
So far, the government’s boldest pro-market move has been to ease state controls on fuel prices, but it has made little headway in opening up pension and insurance, or liberalising the retail and financial sectors because of opposition protests.
“The general consensus is that there is a lack of momentum on passing any of these bills except for nuclear liability … because Congress party is not very clear on direction,” Pratap Bhanu Mehta, president of the Centre for Policy Research, said.
A victory last year freed Prime Minister Manmohan Singh from his communist allies and raised hopes for reforms. But progress has been patchy as the government stumbled from crisis to crisis.
But even with this sluggish progress, India attracted nearly $35 billion in foreign direct investment in 2009, equivalent to 2.7 percent of its $1.29 trillion GDP.
China’s FDI totalled $95 billion in that year, or 1.9 percent of its $4.9 trillion GDP.
As the current session of parliament nears its end on Aug. 31, the government has only pushed through legislation on opening up the $150-billion nuclear power market crucial for the entry of firms such as U.S.-based General Electric and Westinghouse Electric, a subsidiary of Japan’s Toshiba Corp.
A bill to simplify archaic direct tax laws, a key piece of reform aimed at widening the tax net and increasing state revenues, may also be approved by parliament in this session.
But several other reform bills are unlikely to make it through with most of the session lost in the government defending itself against opposition attacks over issues like high prices.
High prices were blamed for the ruling party’s poor showing in local elections in the left bastion state of West Bengal. While inflation has since eased, food prices are still high, and party leaders will be wary of backing any measure that may further antagonise supporters.
LACK OF POLITICAL CONSENSUS
Among the moves that may be delayed due to a lack of consensus are India’s most ambitious indirect tax reform, the proposed nationwide GST, and a proposed food security bill.
The GST proposal has been opposed by the Hindu-nationalist BJP and some states, who worry about the loss of their fiscal powers, and some analysts say this could delay the implementation of the reform beyond the targeted April 1, 2011.
Some reforms do not need legislation and can be pushed through an executive order, such as opening up the retail sector which is on hold because of opposition pressure.
The thorny issue of land acquisition for industrial purposes will also be on the backburner until the polls to avoid antagonising farmers protesting over low compensation.
The Congress-led government has a slim majority in the lower house, but not in the upper house. The coalition is also composed of several small parties often suspicious of reforms, making the passage of bills subject to torturous negotiations.
If not passed, the bills can be taken up in the winter session, around November, but the pending state polls from the end of the year could narrow the political window.
State elections begin around November in eastern Bihar state followed by polls in the states of West Bengal and Kerala where the Congress party is trying to dislodge communist governments. There are six state elections over the next year.
SOME HEADWAY
The government, nonetheless, has made headway in some areas: it has pledged to sell stakes in some 60 state-run firms and formed an experts panel to ease foreign investment in the financial sector.
Despite setbacks and halting pace of reforms, accelerating growth, an expanding domestic consumer base and hopes for eventual liberalisation will keep foreign funds flowing in.
Asia’s third-largest economy clocks the second-fastest rate of economic expansion among the major economies in the world and growth is set to accelerate.
But the government still needs to speed up the pace of reforms to deal with two of its biggest economic headaches: stubbornly high inflation and a massive fiscal deficit.
Headline inflation has been in double digits for several months though in July it eased to just below the 10 percent mark. The fiscal deficit was 6.9 percent of GDP in the last financial year and the government is aiming at 5.5 percent this year.
“The Indian National Congress-led governing coalition has a strong political mandate and appears to have enough dexterity to ensure the passage of key reforms,” Moody’s said in its latest credit analysis report on India.
“Parliamentary debate, state elections, and local issues may slow policy and reform implementation, but are unlikely to derail it,” the investment analysts added. (Additional reporting by Krittivas Mukherjee; Editing by Alistair Scrutton and Miral Fahmy) ((sugita.katyal@thomsonreuters.com; +91 11 4178 1000; Reuters Messaging: sugita.katyal.reuters.com@reuters.net))
((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))
ANALYSIS-Big banks winners from new contingent capital move
Aug 27th
By Jane Merriman
LONDON, Aug 27 (Reuters) – Plans to make hybrid bond investors share the pain when banks run into trouble could polarise the financial sector into big firms that can afford to pay up for capital and smaller players that cannot.
Financial regulators want to ensure that taxpayers are not the only ones on the hook when banks fail by proposing that bonds that count towards a bank’s capital should be written down or converted to equity if it is close to collapse.
This form of contingent capital would mean bond investors as well as shareholders would take a hit if a bank had to be rescued.
But these plans from the Basel Committee on Banking Supervision could reinforce a pattern emerging in the aftermath of the crisis — a two-tier banking market with international banks that investors favour over smaller banks seen as riskier.
“It could polarise the market further in terms of issuer access and could shut out some smaller institutions and give larger firms a competitive advantage,” said one debt capital markets banker at a major international banking group.
During the crisis, some banks that had to be bailed out — such as the UK’s Northern Rock — continued to pay coupons on bonds that count towards capital known as Tier 2 because they were legally required to do so.
Tier 2 bonds typically have mandatory coupons, if the bank skipped a coupon it would trigger a technical default.
So bond investors not only benefited from a bank being bailed out but also continued to receive coupon payments. Shareholders, on the other hand, were wiped out and taxpayers footed the bill.
The Basel Committee has proposed a solution to this that requires banks’ Tier 2 bonds to be written down in a crisis and converted to equity.
POLARISED MARKET
“The latest proposals suggest that a bank’s capital base will be made up of expensive instruments because investors will look at the downside and want to be paid well for the risk,” said a credit analyst from a UK asset manager.
Bankers also think that the proposal will increase the costs for the sector as a whole, with one official at a U.S. firm saying that the additional spread investors will require could be between 200 and 300 basis points.
Investors have mixed views on contingent capital. They would have problems with more issues along the lines of bonds sold by British bank Lloyds, which are designed to convert to equity in the early stages of a bank running into difficulties.
“We don’t think there is a large market for them, certainly among institutional bond investors,” said Roger Doig, credit analyst at Schroders. Analysts say that such issues are difficult for credit rating agencies to evaluate and many institutional credit investors are not mandated to hold equity.
The Basel proposals have been unveiled as European banks face substantial hybrid debt redemptions in the coming years which they have to replace or shrink their balance sheets.
According to JP Morgan, nearly $29 billion is due in the final three months of this year and a further $85 billion matures in 2011.
Regulators are due next month to finalise what form new-style capital should take and how much more capital banks have to hold, with the new rules due to be implemented from the end of 2012. [ID:nLDE6440SN]
But Doig said he did not expect the latest Basel proposal on contingent capital to change investor appetite for Tier 2 bonds.
“What it may change at the margin, is the number of banks that can issue this sort of debt, as the proposed change in “going concern” threshold from breach of regulatory capital ratios to “non-viability” as determined by a regulator, slightly raises the bar,” he said.
The Basel proposal states that it could help even out differences between big and small banks.
But market participants say a possible side-effect of the proposals could work against regulatory efforts to tackle the problem of banks that are deemed too big to fail.
Daniel Bell, director of product development at Bank of America Merrill Lynch, said regulators would have to apply these provisions across the board.
“If not, investors might not be willing to look at non-systemically important banks because of concerns they will simply be allowed to fail.”
(Editing by Sitaraman Shankar)
((jane.merriman@thomsonreuters.com; +44 207 542 3121; Reuters Messaging:jane.merriman.reuters.com@reut ers.net))
ANALYSIS-Mining rights issue tarnishes S.Africa’s image
Aug 24th
By Agnieszka Flak and Julie Crust
JOHANNESBURG/LONDON, Aug 24 (Reuters) – South Africa’s handling of two disputed mine right awards has damaged the resource-rich country’s reputation and raised investor concerns over transparency and governance.
Kumba Iron Ore, a unit of Anglo American, and Lonmin have said the government deprived them of mining rights when it awarded prospecting licences, some to people linked to high-ranking officials, over areas where the two mining giants operated.
“The issuing of mineral and prospecting rights by the South African government is a process so fraught with danger that it is impossible to trust the authority not to steal, or be in league with those who wish to steal, your assets,” said Nic Borain, an independent political analyst.
The biggest worry for the industry is that mining rights they have exploited for years could come under government review and they could lose a part of their businesses to companies with deep political ties and little experience in mining.
South Africa is the world’s biggest producer of platinum and ferrochrome and the fourth-largest gold miner.
The mining sector’s influence on the economy may have declined, but it is still one of the country’s top employers, and accounted for 5.2 percent of the country’s gross domestic product in the first quarter.
Disputes over mineral rights have erupted as miners in the country struggle with power shortages, rising electricity and wage costs, a strong rand and stricter safety measures following a string of deaths.
Mining companies were required to convert their mining rights by a set date or lose them altogether after a new mining act took effect in 2004. The new legislation sought to avoid discrimination in the system and to better distribute assets among historically disadvantaged groups.
The mining ministry last week admitted there were “gaps and inconsistencies” in the mining act and promised a major overhaul of the legislation, but also said that rights already awarded were unlikely to be revoked. It imposed a six-month halt on new prospecting bids until the ambiguities are addressed.
“They certainly need to deal with the perception that there is a less-than-transparent process for being granted mineral rights … and create confidence in investors,” said Alison Turner, analyst at Panmure Gordon.
Mining Minister Susan Shabangu also dismissed allegations of corruption in her department, but said some officials had been suspended pending unspecified investigations.
“The events surrounding Kumba and Lonmin of late have evidenced a very worrying trend, but we certainly welcome the minister’s move to bring certainty back to the market,” said a spokesperson for a miner with operations in South Africa.
However, some in the mining sector are sceptical about the ministry’s ability to resolve the issue and are worried about the perceived lack of leadership from President Jacob Zuma.
The mining right deals have triggered a volley of criticism directed at Zuma’s government, alleging that it suffers from a leadership vacuum where cronyism thrives, just over a year into the new administration.
Investors in the mining sector are already concerned about repeated calls for nationalisation of mines by Julius Malema, the outspoken youth leader of the ruling ANC.
POLITICAL ALLIES
The two prospecting rights were awarded to parties linked to either Zuma or other high-ranking officials, leading to analysts, business and organised labour criticising the government for favouring a few over the interests of the state.
The Kumba decision, in particular, alarmed many of the world’s largest miners operating in South Africa, analysts said.
“The big boys have got to be concerned by that and I should imagine they have got their legal departments to crawl all over their current new order mining licences,” said Peter Davey, an analyst at Ambrian Capital.
The criticism also pointed at mining deals struck under the umbrella of black economic empowerment, meant to spread the wealth among previously disadvantaged groups, but benefiting a narrow group of business elites.
In a move to regain mining rights it failed to convert, ArcelorMittal’s South African unit said it would transfer 26 percent of its shares to employees and a group of black investors — including an investment group led by Zuma’s son.
“I call it ‘cadre-care’… regardless of the true intention, the perception and image is there of looking like the ANC is looking after its own,” said Peter Attard Montalto, emerging markets economist at Nomura in London.
South Africa’s business leaders have blamed the mining rights controversy for damaging the nation’s reputation, just weeks after the country hosted a successful soccer World Cup, and for causing harm beyond the mining sector.
“People are more wary,” said Panmure’s Turner, but she noted that the mining companies had few options.
South Africa accounted for around 77 percent of the world’s platinum production in 2009 with output elsewhere mainly coming as a by-product from base metal or palladium mining.
“The problem with mining all over the world is that the minerals sit where they sit. If you want to mine platinum then you have got to be in South Africa to do that,” said Turner.
(Additional reporting by Shapi Shacinda and Olivia Kumwenda, Editing by Sitaraman Shankar)
((agnieszka.flak@reuters.com; +27 11 775 3154; Reuters Messaging: agnieszka.flak.reuters.com@reuters.net)) (For more Africa cover visit: http://af.reuters.com — To comment on this story email: SouthAfrica.Newsroom@reuters.com)
Keywords: SAFRICA MINING/
FACTBOX-What is the status of India’s economic reform proposals?
Aug 24th
NEW DELHI, Aug 23 (Reuters) – With India’s main opposition party continuing to object to bills on tax reform and opening up the $150 billion nuclear power market, several reforms proposed by the coalition government may be delayed.
The Congress Party-led coalition government has a slim majority in the lower house of parliament, but not in the upper house. The coalition is also composed of several small and fickle parties who are often suspicious of reforms, making the passage of bills in parliament subject to torturous negotiations.
If not passed, the bills can be taken up in the winter session, around November, but pending state elections from the end of the year could narrow the political window to push any controversial policies.
Here are some of the proposals on the government’s wish list and their status:
NUCLEAR LIABILITY BILL
The bill is crucial for the entry of firms like U.S.-based General Electric and Westinghouse Electric, a subsidiary of Japan’s Toshiba Corp, who are reluctant to step in without clarity on accident compensation.
The main opposition Bhartiya Janta Party (BJP) has reneged on a promise to support the bill, saying it makes it difficult to claim compensation from suppliers in case of a nuclear accident.
The bill has the personal backing of Prime Minister Manmohan Singh, and government officials have said they are hopeful it will be passed in the current session.
Chance of being passed: HIGH – Probably just a matter of some hard behind-the-scenes bargaining.
GOODS AND SERVICES TAX (GST)
India’s most ambitious indirect tax reform, the proposed nationwide GST, will give the economy a boost by cutting business costs and enhancing government revenue. Given the bill is a constitutional amendment, it needs support of half of all Indian states and two thirds of parliament.
But the proposal has been opposed by the BJP and some states, who worry about the loss of their fiscal powers, and some analysts say this could delay the implementation of the reform beyond the targeted April 1, 2011.
Finance Minister Pranab Mukherjee is in negotiations with political parties and state finance ministers to evolve a consensus, but the political wrangling makes it unlikely the legislation will come in before the next session in the winter.
Chances of bill be passed: UNLIKELY – This bill really needs wide consensus given its a constitutional amendment.
DIRECT TAXES CODE The code will simplify India’s archaic tax laws, helping improve compliance and remove a deterrent for foreign investors to do business in India. The government plans to implement it from April 1, 2011.
The code intends to cut tax rates to bring in more people and companies under the tax net, phase out profit-linked exemptions for companies and replace them with investment-linked incentives.
Despite there being little opposition to the proposal, the government has so far not indicated it will introduce the bill in the current session, making the chances of ratification low.
Chances of bill being passed: LOW – There’s a chance, but it may lose out due to shortage of time the government has in parliament.
FOOD SECURITY BILL
The government plans to expand welfare schemes to give poor households greater quantities of cheap food, which in a country of hundreds of millions of poor is seen as boosting Congress’s chances in elections. [ID:nSGE66I0C0]
But the extra spending will also raise questions if India can keep its fiscal deficit in check and stick to a roadmap of cutting it to 4.1 percent of GDP by 2012/13 from the projected 5.5 percent this year.
The government got back to the drawing board after powerful Congress party chief Sonia Gandhi’s unhappiness over the original proposal. With the drafting proposal still on, it is unlikely the bill will be presented to parliament in the current session.
Chances of bill being passed: LOW – Despite the backing of the powerful Gandhi, an ongoing debate on its fiscal impact will probably delay it.
(Compiled by C.J. Kuncheria; Editing by Alistair Scrutton and Miral Fahmy)
((kuncheria.jacob@thomsonreuters.com; +91 11 4178 1007; Reuters Messaging: kuncheria.jacob.reuters.com@reuters.net) ) ((If you have a query or comment on this story, send an email to news.feedback.asia@thomsonreuters.com))
ANALYSIS-New Jersey case puts U.S. muni issuers on alert
Aug 20th
By Lisa Lambert and Joan Gralla
WASHINGTON/NEW YORK, Aug 19 (Reuters) – Municipal bond issuers are on high alert after the Securities and Exchange Commission charged the state of New Jersey with fraud for failing to disclose to bond buyers it had underfunded the state’s pensions.
The SEC move on Wednesday was groundbreaking for several reasons. It was the first time the SEC charged a state for violating federal securities laws. New Jersey agreed to settle the case.
It also highlighted the increasing attention the federal government is paying to those who sell municipal bonds, the tax-exempt debt that pay for roads, bridges, schools and hospitals.
“Issuers of municipal bonds must be held accountable when they seek to borrow the public’s money using offering documents containing false and misleading information,” said Elaine Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, in announcing the charges.
A 1975 securities law known as the Tower Amendment has long been considered a shield for muni issuers against federal intervention because it bars the U.S. government from requiring issuers to file municipal securities documents with the SEC before the securities are sold.
A self-regulatory organization, the Municipal Securities Rulemaking Board, drafts the rules governing broker and dealer operations that the SEC enforces. Since Tower was passed, muni issuers have used the spirit of the amendment to oppose any further regulation.
“Our view … is that this is sort of the beginning,” said Jon Teall of New York’s Teall & Associates, a financial communications firm.
“The SEC can’t require issuers to produce documents” said Teall, who has worked at The Bond Market Association, Standard & Poor’s and Lipper Analytical Securities. Broker-dealers “have to get a promise from issuers that they will disclose.”
“It seems like New Jersey did something unusual here, to say the least, and what our guys will do and other issuers will do is be very careful,” he said. “But we can’t compel. All we can do is get the promise.
The SEC, under Chairman Mary Schapiro, has begun investigating ways to work around the Tower Amendment. One member, Elisse Walter, has called outright for its repeal.
The commission has increased the number of staff dedicated to investigating possible fraud to meet Schapiro’s aim of increasing investor protections and demanding better disclosure in the municipal bond market.
“New Jersey only feeds into that,” said Mike Nicholas, chief executive officer of the Regional Bond Dealers Association in Washington, about how the charges support the SEC’s argument on the need for better disclosure.
The senior vice president of government relations for the group, William Daly, said the New Jersey case “is an outlier but it is an indication” of how much more interested the federal government has become in municipal bonds.
This past winter, the National Association of State Treasurers discussed compromises and ways to work with the MSRB and SEC in changing federal regulation of munis.
The financial regulatory overhaul recently signed into law has drawn issuers more into the process of setting rules for the market by requiring they have heavier representation at the MSRB. It also calls for a study of the Tower Amendment.
Since 2007, the MSRB and SEC have rallied to increase disclosure in the municipal bond market, emphasizing timeliness and accuracy in documents.
Recently, the SEC has begun requiring broker-dealers to disclose more about how they define “retail order periods,” a fairly flexible time when individual investors can buy new bonds before they are sold to institutional investors.
“This is going to be an increased area of focus,” said bond lawyer Teri Guarnaccia of Ballard Spahr, LLP, on Wednesday after learning about the New Jersey charges.
“They’ve been very public about increased scrutiny of the municipal market and wanting to be clear about what states are doing in the marketplace.” ((Reporting by Lisa Lambert and Joan Gralla; Editing by Gary Crosse)) ((lisa.lambert@thomsonreuters.com; +1-202-898-8328; Reuters Messaging: lisa.lambert.reuters.com@reuters.net))
ANALYSIS – U.S. TARP program less costly, but not less controversial
Aug 20th
By Dave Clarke
WASHINGTON, Aug 19 (Reuters) – The government’s $700 billion bailout of the financial system may still be politically toxic, but for those who voted for the program, there is some good news: the taxpayer bill continues to drop.
On Thursday, congressional scorekeepers projected the overall deficit impact of the Troubled Asset Relief Program — or TARP — will be about $66 billion.
That’s a big drop from the $109 billion estimate the Congressional Budget Office made earlier in the year, and a precipitous drop from the initial projection of $350 billion.
The shrinking bill could dilute the previously potent political attack that lawmakers who voted for the bailout were rewarding Wall Street greed while putting taxpayers at risk.
Three-term Republican Senator Bob Bennett of Utah, for example, who was defeated in a May primary contest, attributed part of the defeat to his vote in favor of the bailout.
David Kendall, an analyst at the centrist Washington think-tank Third Way, said the revised numbers could blunt some of the TARP criticism, but he warned that other political undercurrents will keep lawmakers’ TARP votes controversial.
“This doesn’t change the larger dynamic of this election that people are angry about the economy and want it to get better,” Kendall said.
TARP was enacted in the waning days of the Bush administration as the financial crisis exploded in 2008; it gave the government the authority to use $700 billion to prevent the collapse of the financial industry.
The Treasury Department used it to pump money into banks to unfreeze credit, and the Obama administration later used it to prop up U.S. automakers.
FINANCIAL REFORM, REPAYMENTS LOWER COST ESTIMATE
The Congressional Budget Office attributed its new, lower cost estimate in part to a provision in the Dodd-Frank financial regulatory overhaul law that prevents future spending out of the program, as well as to better returns on the money lent out to financial institutions and a revision to its estimate on how much the money given to automakers will cost the government.
The number could be revised even lower as more banks repay bailout money and as automakers continue to payback their loans.
The revised number did not include the eventual impact of General Motors’ planned initial public offering, which it announced on Wednesday, as part of its effort to free itself from the government and repay the roughly $50 billion it owes.
It has been largely expected that the any losses from TARP would mostly come from the bailouts of insurer AIG and the automakers, not necessarily from banks, many of which have already repaid taxpayer money.
The Treasury has not yet updated its $105 billion estimate for the TARP bill, but welcomed the CBO’s downward revision.
“While our estimates are more conservative, the trend is quite clear,” Treasury Assistant Secretary Herb Allison said in a statement. “The ultimate costs of TARP will be a fraction of what critics feared and the benefits to the economy were substantial.”
BANKS CHEER REVISED ESTIMATE
The rapidly dropping figure could also be a little boost for banks, many of which have noted that taxpayers are profiting as banks repay their TARP funds.
“The fact that the taxpayers are getting every penny back with interest shows that the program worked,” said Scott Talbott, chief of government affairs for the Financial Services Roundtable, an industry group for financial companies.
The dwindling cost estimate could also slow an effort to tax the industry to recoup TARP costs.
Earlier this year the Obama administration proposed a bank tax that would raise $90 billion to repay the cost of TARP but the proposal has gone nowhere in Congress in the face of stiff industry opposition.
Despite the waning momentum, there are still some strong advocates for the tax.
TARP’s deficit impact should not be the sole factor in whether banks get taxed, said Dean Baker, co-director of the left-leaning Center for Economic and Policy Research.
He argued the value of TARP to banks was far more than the dollar value of what was lent out by the government because the program prevented more turmoil in financial markets.
“It’s like saying we gave you water when you were in the desert and you paid us back when it was raining,” he said. (Additional reporting by David Lawder; Editing by Leslie Adler)
((david.c.clarke@thomsonreuters.com; +1 202 898-8324))
ANALYSIS-Social agenda true hurdle to US housing finance reform
Aug 18th
By Al Yoon
NEW YORK, Aug 18 (Reuters) – In March of 2000, American homeowners got a scare.
Gary Gensler, a U.S. Treasury undersecretary, threw his support behind legislation whose impact could have jacked mortgage rates up to levels that would fly in the face of what lawmakers say is good for the nation: expanding homeownership.
He wanted Treasury to cut ties with Fannie Mae and Freddie Mac — companies whose federal charters make them the key vehicles for Washington’s housing policy and mortgage market intervention.
It was a test of the companies’ political backing, and the companies won. Lobbyists killed the effort amid a housing boom cheered by homebuyers and their political representatives, underscoring the power of the American dream of home ownership and its ability to drive the political and financial agenda.
One decade and a wrenching financial crisis later, social agendas remain the stumbling block for the “fundamental change” demanded on Tuesday by the Obama administration as it tries to fix a housing finance system central to a crisis rivaled only by the Great Depression.
Treasury Secretary Timothy Geithner, addressing major lenders and investors, advocated a government role in reforms needed to cushion the economy and raised the question of whether the private sector could provide a home financing regime with enough safeguards to avoid another crisis.
The challenge would be to price a guarantee in a way that protects taxpayers, he said.
“Secretary Geithner is absolutely right in pointing to the race to the bottom in credit standards,” said Alfred DelliBovi, president of the Federal Home Loan Bank of New York. “What he forgot to say was this race was dictated by the political forces who were more interested in their future election campaigns than any housing programs.”
“We’ll get a redesigned model that will involve the government and the private sector, and I predict it will work very well until someone comes along and pushes it further than it was designed to go,” he added.
The conference on Tuesday, including input from lenders and others which could compete with Fannie Mae and Freddie Mac in providing credit, was billed as a “listening session” to help the administration develop a firmer plan by January. It would be the latest starting point in the debate over how to recreate a housing finance system that has been deeply embedded in the American psyche since World War II.
Middle-class American voters have more of their wealth tied up in their homes than in any other asset class, making housing policy a political third rail many lawmakers will not approach.
From the tax deduction for mortgage interest payments to subsidized loans for first-time buyers, the federal government is deeply involved in supporting home ownership.
MISSION CREEP
Congress has attempted to rewrite rules concerning Fannie and Freddie at least three times in the past decade. Each time, the companies’ lobbyists were able to squash the effort.
The issue is so divisive and dicey for politicians, especially in an election year, that congressional leaders never seriously considered attaching housing reform to the massive overhaul of Wall Street rules passed this year.
Much of the debate about reforming the two government-sponsored enterprises (GSEs) stalls when discussion turns to their “mission,” which to Fannie Mae is “to provide liquidity, stability and affordability to the U.S. housing and mortgage markets.”
The U.S. homeownership rate edged higher as Congress allowed the GSEs to expand their “missions.” By 2004, it had topped 69 percent, up from about 64 percent 10 years earlier.
As a backdrop for the debate on how to fix the two U.S. housing finance giants, the main housing regulator in February proposed to overhaul rules on how the companies aid low-income homeowners. While the regulator wants to prevent expansion in credit to riskier loans that doomed the companies, the proposed goals preserved its affordable housing mission.
REAL WRECKAGE AS BACKDROP
Attempted reform of the GSEs also comes amid signs of a faltering recovery in the housing market, which could weigh on voters at the polls in November.
Where previous reform efforts have failed, the new push has traction as the companies reel from a two-year wreckage that has cost taxpayers some $150 billion.
At question should be the government’s role, rather than just the limits of the government’s role, one analyst said.
One may ask “why is the government in it at all,” said Thomas Lawler, a former Fannie Mae executive and founder of Lawler Economic & Housing Consulting in Leesburg, Virginia. “Is it: if there is a private market failure, or if there are social goals the private market doesn’t address?”
Assuming the government retains a role, the trickier part will be pricing credit risk, which for Fannie Mae and Freddie Mac is currently lower than what the private markets would allow, Lawler said. What’s more, the government has injected itself into the foreclosure crisis, raising regulatory uncertainties for the private market, he added.
Whatever the outcome, it is unlikely to be realized soon, with Americans almost fully dependent on government support.
More than two years after the credit crisis erupted, the recovery of the private home finance market is lagging even subprime auto loans. Efforts to restart the market have been stymied, in part due to GSE competition, analysts said.
“The transition issue is one that is going to bog down all the proposals for years,” said Tom Deutsch, executive director of the American Securitization Forum, an industry group representing lenders, bond issuers and investors.
“You can’t do any massive changes overnight, or even in 12 or 24 months,” he said. “At the same time, you have to make the commitments for the private markets to come back.”
(Editing by Kristin Roberts and Todd Eastham)
((albert.yoon@thomsonreuters.com; +1 646-223-6347; Reuters Messaging: albert.yoon.reuters.com@reuters.net))
ANALYSIS-Nod for Australia’s Labor likely boost for CO2 laws
Sep 7th
Posted by PostMan in financial regulations
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By David Fogarty, Climate Change Correspondent, Asia
SINGAPORE, Sept 7 (Reuters) – Australia is now much more likely to introduce a price on planet-warming carbon pollution after support by independents and Greens returned the Labor Party to office on Tuesday.
Independents Rob Oakeshott and Tony Windsor backed Labor on Tuesday, with climate change among their top issues, ending a 17-day wait after an inconclusive Aug. 21 election left neither major party with a majority in the lower house of parliament.
Analysts and industry say a weakened Labor, which held a majority previously and had tried to pass carbon trading laws, will be under pressure from the Greens to revive carbon trading legislation that sectors such as power generators are demanding.
“At the core of Australia’s policy framework must be a price on carbon,” Carl McCamish, executive general manager of sustainability for major power generator and retailer Origin Energy.
Voters punished Labor in part because of the government’s decision in April to shelve emissions trading laws, a step that angered a large number of Australians who wanted stronger action on climate change and industries demanding policy certainty.
“Ongoing uncertainty risks delaying both the investment necessary to meet Australia’s long-term baseload electricity needs and the investment in lower-carbon technology required to gradually reduce Australia’s emissions,” McCamish said in emailed comments to Reuters.
Australia is among the developed world’s most polluting nations on a per-capita basis, with coal used to generate more than 80 percent of electricity.
The previous Labor government won support for laws mandating 20 percent renewable energy generation by 2020. But the laws aren’t enough to cut the nations’ rising carbon emissions.
CLAMOUR FOR CARBON
Last week 19 Australian energy companies, including generator and retailer AGL, TRUenergy and unlisted Pacific Hydro, wrote an open letter in support of a price on carbon to drive a shift to cleaner gas and new-generation renewables, such as geothermal.
“Investors have been looking for some clear political direction on climate change and it appears we may get it,” said Nathan Fabian, chief executive of the Investor Group on Climate Change, which represents institutional investors with total funds under management of about $600 billion.
“A carbon price is sorely needed just for pure certainty for business so we can get on planning the energy transformation that we need,” Lane Crockett, general manager, Australia, Pacific Hydro, a global clean energy investor, told Reuters on Tuesday.
The Greens, whose support is crucial to Prime Minister Julia Gillard’s government, have backed an interim price on carbon, a massive boost in renewable energy investment and in the past have called for a tough carbon cut target for 2020.
The Greens will hold the balance of power in the upper house Senate from July next year, further adding pressure on Gillard to bring in some form of carbon pricing, either through an interim tax or to push through reworked emissions trading laws.
“There’s no doubt we’ll get a price on carbon,” said Martijn Wilder, global head of Baker & McKenzie’s climate change practice.
“In my view you don’t want an interim process, you want to go straight into having an effective means of controlling carbon,” he told Reuters.
A revived emissions trading scheme looked likely, some analysts said, but hinged on the Greens, which previously demanded a 40 percent cut in emissions by 2020 compared with Labor’s unconditional cut of 5 percent by 2020 from 2000 levels.
“Without a majority in either chamber of parliament, the government is likely to revise the emissions trading scheme it proposed under Prime Minister Rudd in order to win legislative support,” said Tim Jordan, a Deutsche Bank analyst for environmental, social and governance, in Sydney.
Reaction from the power trading market was muted on Tuesday, an analyst said, with the feeling it would be some time before the government could move on a carbon price.
“It’s very difficult for (power) pricing to go beyond 2012,” the analyst said. (Additional reporting by Bruce Hextall in Sydney; Editing by Michael Urquhart) ((david.fogarty@thomsonreuters.com; +65 6403 5662; Reuters Messaging: david.fogarty.reuters.com@reuters.net))