Frank Stronach, who once made parts and then delivered them in his own car to General Motors in Oshawa, and a Russian partner have gained control of the auto maker’s giant European subsidiary.
The 76-year-old founder and controlling shareholder of Aurora-based Magna International Inc. and Russian lender Sberbank reached the framework of a deal yesterday that will put them in the driver’s seat at Opel AG, GM’s main operating unit in Europe.
Top Magna officials, including Stronach, hammered out terms with the German government and teetering GM on an unidentified investment to save Opel, a well-known European brand that could boost the Canadian company’s international fortunes dramatically.
Under the deal, Magna will take a 20 per cent stake in Opel and the Russian-owned Sberbank will take a 35 per cent stake, giving their consortium a majority. GM will retain a 35 per cent holding, while the remaining 10 per cent will go to Opel employees.
The investment caps a brilliant business career for the hard-driving Stronach, an Austrian immigrant who opened a tiny tool and die shop in the Dufferin-Dupont Street area in 1957 and dared to dream big.
Over the years, many observers have acknowledged his talents in building an auto parts powerhouse. But few predicted Stronach would ever actually own a major international vehicle manufacturer.
"Without knowing all the details, this has got to be a big coup for Frank, for Magna and for Canada," said Ed Lumley, a former federal industry minister and company director. "He is one of our country’s great success stories."
"It keeps Canada on the map in the global auto industry," added Richard Cooper, vice-president of J.D. Power and Associates.
"I think Magna has picked up a strong brand and should do well."
It marks the first time that a Canadian company has held a significant stake in a major international auto maker.
"I can’t think there would have been anyone else," said auto historian Walter McCall, of Windsor.
The brash and sometimes flamboyant Stronach holds only a small percentage of equity in Magna but controls the company through the magic of multiple voting shares.
As a budding entrepreneur he worked alongside his small staff in stamping out sun visor brackets at his shop instant payday loan. Sometimes, they worked around the clock.
Stronach’s fledgling shop quickly gained traction and steadily won more contracts.
He formed Magna in the early 1960s and the company took off with a combination of skilled trades people and an entrepreneurial culture that always emphasized "a better part at a better price."
Annual revenues hit $100 million in 1978 and topped $1 billion in 1987. Magna had become a job creating machine with thousands of workers and scores of plants in the Toronto region.
But Magna hit a big bump in the early 1990s because of over expansion, a heavy debt load and an industry downturn.
The company recovered and embarked on phenomenal growth in Canada and abroad. Sales reached a stunning $26 billion (U.S.) in 2007 before slipping to $23.7 billion last year. The company employs more than 70,000 workers in 25 countries.
After its brush with bankruptcy in the early 1990s, Stronach vowed he would never expose Magna to a significant debt burden again and that has turned into a huge advantage.
Magna currently has $1.7 billion in cash on hand to weather the industry’s storm and bid for ailing companies such as Opel.
During the last decade, Magna has pushed its prowess in auto parts to assembling entire vehicles on contract for companies ranging from BMW to Chrysler.
The company bid on Chrysler two years ago but lost to U.S.-based Cerberus Capital Management.
Chrysler is now relying on U.S. and Canadian government aid to stay alive and is restructuring under court protection from creditors.
Under the latest deal, Magna would provide undisclosed short-term financing to become the preferred negotiating partner for Opel.
The German government would invest $2.34 billion in a bridge loan and make Opel an independent company.
That would shield it from creditors in looming bankruptcy court proceedings involving parent GM Corp. in the U.S.
Dennis DesRosiers, a veteran industry watcher, said the investment represents an "unprecedented opportunity" for Magna with high risk.
"It’s a pure risk-reward situation. If it works, then Magna will win big. If Magna loses, it loses big."
The Obama administration is weighing a plan that would put the Federal Reserve in charge of monitoring systemic risk and give the Federal Deposit Insurance Corp. authority to unwind insolvent bank holding companies, sources familiar with the proposal said on Wednesday.
The idea, which is being circulated to U.S. lawmakers as they embark upon an overhaul of financial regulation, could be announced soon after June 8, the two sources said. They spoke on condition of anonymity because the plan has not been widely shared and cautioned that the plan is not final.
Treasury Secretary Tim Geithner has said the administration will come out with a comprehensive proposal in mid-June. June 8 is the Monday after President Barack Obama returns from a trip to Saudi Arabia, Egypt, Germany and France.
White House spokeswoman Jen Psaki said no final decision had been made about the shape of the regulatory proposal.
"Officials at the White House and the Treasury department are continuing work with Congress on the final phases of a proposal, but there is no final proposal in place and any announcement will not be for a couple of weeks," she said.
The sources said the administration is mulling a consumer protection agency to supervise financial products, such as credit cards and mortgage-related products. Securities would not fall under the consumer supervisor’s jurisdiction.
The revamp could also create an agency in charge of investor protection and market integrity, which would likely be a merged Securities and Exchange Commission and Commodity Futures Trading Commission.
Such a move would stop short of trying to eliminate either the SEC, which regulates securities, or the CFTC, which oversees commodity futures, one of the sources said. The new investor protection agency would oversee all investment products, the source said.
The administration will also try to stop banks from shopping for their regulator by creating a new, single government agency to be the hands-on regulator for most banks and insurers, the sources said easy cash advance.
Many financial institutions can currently choose between four bank regulators, creating the opportunity for regulatory arbitrage. The plan being considered would have the new agency be the primary supervisor of state and federally chartered depository institutions, bank holding companies and insurers, according to the sources.
It was not immediately clear what such a plan would mean for the current primary regulators of banks.
Some policymakers have suggested merging the Office of the Comptroller of the Currency, which regulates the nation’s largest banks, and the Office of Thrift Supervision, which regulates many mortgage-related financial firms.
The administration is also considering a financial regulatory advisory council, which would include the heads of major financial regulators. This would be similar to the President’s Working Group on Financial Markets, which is chaired by the Treasury secretary and composed of the chairmen of agencies like the SEC, the Fed and the CFTC.
"It is important to modernize the system to prevent the financial crisis from happening again," said Scott Talbott, a senior vice president with the Financial Services Roundtable, which represents the largest financial services companies.
The Obama administration has said it wants financial regulatory reform legislation passed by the end of the year. But any overhaul faces difficult turf battles among the agencies who could be stripped of responsibilities and among the congressional committees that oversee the agencies.
Financials helped send the Toronto stock market sharply higher today after four of the big Canadian banks handed in quarterly earnings reports that beat expectations.
New York markets were also higher on relief from the government's latest bond auction and durable goods data.
Toronto's S&P/TSX composite index charged ahead 250.21 points or 2.5 per cent to 10,392.37 with key support also coming from energy stocks as signs of higher oil demand pushed crude prices higher.
The TSX Venture Exchange was up 12.17 points to 1,105.16 while the Canadian dollar advanced 0.37 of a cent to 89.7 cents US.
The Dow Jones industrial average was up 103.78 points to 8,403.8.
The Nasdaq composite index added 20.71 points to 1,751.79 while the S&P 500 index rose 13.77 points to 906.83.
The TSX financial sector was 2.75 per cent higher.
"The main driver in the financial sector is the earnings from the banks and their numbers were pretty much across the board above expectations – although there were some hiccups with underlying issues with CIBC," said Jennifer Dowty, portfolio manager at MFC Global Investment Management.
TD Bank Financial Group (TSX: TD) said profits declined 27 per cent from a year ago to $618 million. Its shares were up $3.41 to $53.69 as the bank reported that provisions for credit losses rose to $656 million from $232 million a year ago.
National Bank (TSX: NA) shares ran up $1.80 to $51.30 after it said the relative strength of the Quebec economy helped offset charges related to asset-backed commercial paper in the second quarter, leading to a 46 per cent jump in profit to $241 million.
The Bank of Nova Scotia reported quarterly net income of $872 million, down 11 per cent from a year-ago although revenue grew 12 per cent to a record high.
Scotiabank's provision for credit losses ran up to $489 million, compared with $153 million in the second quarter of last year and its shares gained 15 cents to $37.90.
CIBC (TSX: CM) lost $51 million during the second quarter, down sharply from a $1.1 billion loss the bank handed in a year ago.
But its shares declined $2.56 to $54.47 as CIBC said the recent quarter's loss was partly attributable to a $324-million loss on structured credit activities.
Royal Bank (TSX: RY) reports results on Friday and its shares bounded ahead $1.50 to $45.50.
In the U.S., indexes lifted after solid demand at a Treasury auction eased fears that the appetite for U car insurance quote.S. debt would dry up and force the government to pay higher interest rates to entice buyers. That in turn could endanger an economic recovery by driving borrowing rates higher.
The Commerce Department reported that U.S. home sales rose 0.3 per cent in April to a seasonally adjusted annual rate of 352,000, which was lower than expectations.
The median sales price fell to US$209,700, a 14.9 per cent drop from a year earlier. Sales were down 34 per cent from April 2008.
The Commerce Department also said orders for durable goods rose by 1.9 per cent in April, more than four times the 0.4 per cent increase that had been expected.
But the government revised down its estimate for new orders in March to show a drop of 2.1 per cent, a much bigger fall than the 0.8 per cent decline previously reported.
The TSX energy sector was up 3.5 per cent as the July crude contract on the New York Mercantile Exchange rose $1.63 cents to US$65.08 a barrel as U.S. government data showed a surprise drop in last week's crude inventories.
Also, OPEC decided to maintain current production levels unchanged at the end of the cartel's meeting in Vienna.
"They said they are already seeing an increase in demand, that's very encouraging," added Dowty.
"And some of the economic numbers lends to itself that crude over the long period is going to go higher."
Canadian Natural Resources (TSX: CNQ) gained $2.77 to C$64.52 while Suncor Inc. (TSX: SU) moved up $1.65 to $38.76.
The gold sector rose four per cent as the August bullion contract moved up $5.80 to US$963.20 an ounce. Goldcorp Inc. (TSX: G) improved $1.11 to $43.17.
General Motors Corp. said today a committee of bondholders has agreed to a sweetened deal proposed by the U.S. government to erase the automaker's unsecured debt in exchange for company stock.
In addition to the 10 per cent of the stock in a newly formed GM that was originally rejected by bondholders, the new offer would give them warrants to acquire an additional 15 per cent stake at a deep discount. That would come only if they agree to support selling the company's assets to a new company under bankruptcy court protection. But it's still expected GM will seek creditor protection Monday.
GM shares were three cents lower to US$1.12.
The dollar rose against the euro on Wednesday after data suggesting a slowdown in housing markets has yet to bottom gave support to the U.S. currency as a safe haven.
U.S. blue chips stocks fell after the housing data, which showed the inventory of unsold homes in the U.S. rose last month, while prices fell.
The dollar had sold off recently in part on growing optimism about the outlook for the U.S. economy.
"This is a mixed bag of data," said Omer Esiner, senior market analyst at Travelex Global Business Payments in Washington. "More likely the dollar will probably firm on the fact that inventories are rising and prices are falling."
The pace of sales of existing homes in the United States climbed 2.9% in April, according to an industry survey. However, the National Association of Realtors said the inventory of existing homes for sale rose 8.8% and the median national home price fell 15.4%.
"Things are still not that great out there, so we are a little skeptical of the ‘green shoots’ optimism on the economic side," said Robert Blake, senior currency strategist, at State Street Global Markets, in Boston. "It’s going to be a long, slow recovery and we will have more bad news to come."
In midday New York trading, the euro was 0.5% lower at $1.3924 , after hitting a session low of $1.3872. The dollar was 0.2% higher against a basket of six major currencies at 80 low fee payday loans.286. It hit a five-month low on Friday just below 80.00.
Comments by a European Central Bank policymaker suggesting further interest rate cuts could not be ruled out also weighed on the single currency.
ECB Governing Council member Erkki Liikanen said on Wednesday that the bank’s current key interest rate of 1% isn’t necessarily the lowest it can go.
Pound hits 7-month high
But the dollar fell against the British pound, which traded above $1.60 for the first time in almost seven months.
The pound was propelled by rising optimism about the U.K. economy and financial sector. It was last up 0.8 % at $1.6059 , having traded as high as $1.6075, according to Reuters data.
Gains in the British pound also pushed the euro below a 200-day moving average. The euro was last down 1.2% against the pound at 86.73 pence, trading below a 200-day moving average at 86.77 pence, according to Reuters data.
Investors will focus now on a U.S. Treasury auction later on Wednesday, in which the government will sell $35 billion of five-year debt.
Moody’s Investors Service on Wednesday affirmed the AAA credit rating of the United States, assuaging fears about U.S. creditworthiness that have been creeping up in financial markets and weighing on the dollar.
Top office products retailer Staples Inc reported slightly higher-than-expected quarterly earnings on Wednesday, bolstered by its Corporate Express unit.
Staples, which bought Corporate Express in July, said it still expected to save up to $300 million in costs from the acquisition of its Dutch rival.
Net earnings fell to $147.0 million, or 20 cents a share, in the first quarter that ended May 2 from $212.2 million, or 30 cents a share, a year earlier.
Excluding integration and restructuring expenses of $19 million, Staples earned 22 cents a share, a penny ahead of the average Wall Street forecast, according to Reuters Estimates.
Sales rose 19 percent to $5.82 billion.
Staples said it was on track with its Corporate Express integration efforts, including pricing negotiations with vendors and reducing the percentage of small orders.
North American retail sales fell 9 percent to $2 same day cash loans.2 billion as sales at existing stores fell 8 percent, reflecting declines in average order size and weakness in durable goods such as business machines and furniture.
The U.S. recession has hit office supplies sellers hard as consumers and small businesses cut back on buying big-ticket items like furniture and computers.
Last month, rivals OfficeMax Inc and Office Depot reported better-than-expected results after cost cuts helped them offset a sharp decline in sales.
Staples has reduced headcount, frozen senior manager salaries, eliminated corporate-staff bonuses and curtailed store-opening plans to try to cut costs.
The company’s shares were up 1 cent at $20.40 in trading before the market opened.
(Reporting by Dhanya Skariachan; Editing by Lisa Von Ahn and Derek Caney)
Boeing Co. leaders say that the U.S. military’s airlift needs are growing and that a Pentagon proposal to halt future orders for the C-17 Globemaster III cargo plane is premature.
Boeing, whose defense unit is headquartered in St. Louis, is trying to rally support for the C-17 on multiple fronts — arguing that ceasing production would erode the U.S. industrial base, costing thousands of jobs at Boeing plants and those of its main suppliers. But Boeing officials also emphasize the plane’s strategic value.
"Right now, since 9/11, the airplane has been flying at about a 15 percent higher rate than was anticipated," said Donald A. Anderson, Boeing’s C-17 program manager in St. Louis. "In addition, they’re talking about rebasing troops in the United States. They’re talking about an increase in the size of the Marines Corps and the Army.
"So it seems like the airlift requirements are growing. And you need airlifters to meet those needs."
Starting with Secretary of Defense Robert Gates’ announcement in early April and continuing through last week, the Pentagon has said it can get by with the 205 C-17s that are either in service or on order. The Air Force also uses the Lockheed Martin C-5 Galaxy to transport weapon systems, cargo and personnel to overseas locations.
Republican Sen. Christopher "Kit" Bond and Democratic Sen. Claire McCaskill, both of Missouri, have written letters supporting more orders of the C-17, and Machinists Union officials have traveled to Washington to show their support for a program that supports 900 jobs in St. Louis.
"This is high political theater," said analyst Richard Aboulafia of The Teal Group in Fairfax, Va. "The bottom line is I don’t think the line is threatened. But it is up to everybody from Department of Defense to Congress to Boeing to the unions to make it look as though it were."
The Defense Department has not sought funding for the C-17 in the last three years. But Congress has stepped in to add funding for more of the $202 million planes through supplemental defense appropriations bills.
Bond and Boeing officials have asked why Gates would halt C-17 orders while there is a study under way into the military’s future air-mobility needs. The results are expected this fall.
"But yet we’re making that decision now to stop the airplane," Anderson said. "So it seems somewhat premature cash advance payday loan."
Bond said shutting down production of the C-17 is a "dangerous gamble" and warned that the U.S. can’t afford to "lose the capability to transport safely our troops and equipment to anywhere in the world."
In a letter to President Barack Obama, McCaskill said the U.S. is "literally flying the wings off these planes," and added "this is not the time to end its production, especially in light of projected global mission sets for the U.S. military."
Both legislators also have gone to bat for Boeing’s St. Louis-built F/A-18 Super Hornet, whose future was placed in limbo under the latest Pentagon spending plan.
The C-17 is assembled at a plant in Long Beach, Calif. But the cargo door, cargo ramp, landing-gear pods, nose and engine pylons are built in St. Louis.
A November 2008 report by the Government Accountability Office recommended "careful planning to avoid shutting down the C-17 line prematurely." Both Boeing and the Air Force believe shutting down and restarting production "would not be feasible or cost effective," the report found.
The GAO cited the high costs of hiring and training a new work force, reinstalling equipment to proper working condition and re-establishing a supplier base.
Boeing has delivered the C-17 to other countries, including Australia, Canada and the United Kingdom. The United Arab Emirates has announced its intent to buy four of the planes, and Qatar has ordered two and exercised an option on two additional C-17s.
But Anderson said international sales alone are not enough to sustain the C-17 line. Boeing officials say maintaining C-17 sales to the U.S. Air Force is necessary to keep the price of the planes competitive in the international market.
Defense analyst Loren Thompson of the Lexington Institute in Arlington, Va., said the C-17 is the best strategic airlifter ever built and "a very cogent case" can be made that terminating production at 205 planes would be too early. At the moment, he said, its future will be dictated by Congress.
"Here’s the bottom line to C-17," Thompson said. "If Congress doesn’t add money, there won’t be any more."
Boeing Co. leaders say that the U.S. military’s airlift needs are growing and that a Pentagon proposal to halt future orders for the C-17 Globemaster III cargo plane is premature.
Boeing, whose defense unit is headquartered in St. Louis, is trying to rally support for the C-17 on multiple fronts — arguing that ceasing production would erode the U.S. industrial base, costing thousands of jobs at Boeing plants and those of its main suppliers. But Boeing officials also emphasize the plane’s strategic value.
"Right now, since 9/11, the airplane has been flying at about a 15 percent higher rate than was anticipated," said Donald A. Anderson, Boeing’s C-17 program manager in St. Louis. "In addition, they’re talking about rebasing troops in the United States. They’re talking about an increase in the size of the Marines Corps and the Army.
"So it seems like the airlift requirements are growing. And you need airlifters to meet those needs."
Starting with Secretary of Defense Robert Gates’ announcement in early April and continuing through last week, the Pentagon has said it can get by with the 205 C-17s that are either in service or on order. The Air Force also uses the Lockheed Martin C-5 Galaxy to transport weapon systems, cargo and personnel to overseas locations.
Republican Sen. Christopher "Kit" Bond and Democratic Sen. Claire McCaskill, both of Missouri, have written letters supporting more orders of the C-17, and Machinists Union officials have traveled to Washington to show their support for a program that supports 900 jobs in St. Louis.
"This is high political theater," said analyst Richard Aboulafia of The Teal Group in Fairfax, Va. "The bottom line is I don’t think the line is threatened. But it is up to everybody from Department of Defense to Congress to Boeing to the unions to make it look as though it were."
The Defense Department has not sought funding for the C-17 in the last three years. But Congress has stepped in to add funding for more of the $202 million planes through supplemental defense appropriations bills.
Bond and Boeing officials have asked why Gates would halt C-17 orders while there is a study under way into the military’s future air-mobility needs. The results are expected this fall.
"But yet we’re making that decision now to stop the airplane," Anderson said. "So it seems somewhat premature good credit score."
Bond said shutting down production of the C-17 is a "dangerous gamble" and warned that the U.S. can’t afford to "lose the capability to transport safely our troops and equipment to anywhere in the world."
In a letter to President Barack Obama, McCaskill said the U.S. is "literally flying the wings off these planes," and added "this is not the time to end its production, especially in light of projected global mission sets for the U.S. military."
Both legislators also have gone to bat for Boeing’s St. Louis-built F/A-18 Super Hornet, whose future was placed in limbo under the latest Pentagon spending plan.
The C-17 is assembled at a plant in Long Beach, Calif. But the cargo door, cargo ramp, landing-gear pods, nose and engine pylons are built in St. Louis.
A November 2008 report by the Government Accountability Office recommended "careful planning to avoid shutting down the C-17 line prematurely." Both Boeing and the Air Force believe shutting down and restarting production "would not be feasible or cost effective," the report found.
The GAO cited the high costs of hiring and training a new work force, reinstalling equipment to proper working condition and re-establishing a supplier base.
Boeing has delivered the C-17 to other countries, including Australia, Canada and the United Kingdom. The United Arab Emirates has announced its intent to buy four of the planes, and Qatar has ordered two and exercised an option on two additional C-17s.
But Anderson said international sales alone are not enough to sustain the C-17 line. Boeing officials say maintaining C-17 sales to the U.S. Air Force is necessary to keep the price of the planes competitive in the international market.
Defense analyst Loren Thompson of the Lexington Institute in Arlington, Va., said the C-17 is the best strategic airlifter ever built and "a very cogent case" can be made that terminating production at 205 planes would be too early. At the moment, he said, its future will be dictated by Congress.
"Here’s the bottom line to C-17," Thompson said. "If Congress doesn’t add money, there won’t be any more."
Ecuador’s President Rafael Correa said on Saturday that key sectors of the economy, including oil and mines, must be in government hands.
During his first two years in office Correa has taken a tough stand with mining and oil companies, pushing for new contracts more favorable to the state, but has so far shied away from nationalizing any firms.
“We will fulfill the goal of having strategic sectors in government hands,” Correa said.
The U.S.-educated economist has recently said he will not nationalize foreign oil companies, but will push for more state control in the key industry via new contracts.
During a joint news conference with his Ecuadorean counterpart, Venezuelan President Hugo Chavez said his drive to nationalize strategic sectors of his own country’s economy would continue.
Many sectors of Venezuela’s economy, including energy and telecommunications, have passed into state hands since Chavez took office 10 years ago electronic check payday advance. In recent weeks he has nationalized oil service companies and iron producers.
Chavez also said that Venezuela and Brazil were in talks to create a joint fund worth billions of dollars. It is likely it would be for infrastructure investment.
“One of the subjects we will discuss is the creation of a joint strategic fund … worth billions of dollars,” said Chavez, adding the fund will have funds from the Brazilian Development Bank, BNDES. He said he will meet with Brazilian President Luiz Inacio Lula da Silva next week.
He said earlier his country and Ecuador had signed a deal for a joint fund for investment in energy projects.
(Reporting by Alonso Soto; Writing by Frank Jack Daniel; Editing by Eric Walsh)
Oil prices sank Thursday, retreating from six-month highs reached in the previous session, as all three major U.S. stock indexes fell hard and the U.S. dollar gained ground.
Light sweet crude for July delivery fell 99 cents, or 1.6%, to settle at $61.05 a barrel Thursday. Wednesday, oil settled at $62.04 a barrel, marking the the highest since settlement since Nov. 10.
Crude oil prices have been closely tracking stocks in recent months. The stock market serves as a measure of the overall health of the economy, and a more robust economy drives up the price of oil because it demands more energy.
Stocks fell Thursday as investors reassessed the health of the economy and the speed with which it could recover. A report from the Labor Department showed that even while initial filings for unemployment benefits dipped slightly in the most recent week, the number of people continuing to receive unemployment benefits hit a record high for the 16th straight week.
An updated outlook on the economy from the Federal Reserve released Wednesday afternoon continued to plague investor sentiment as well.
As part of the minutes from its April meeting, the central bank said it expects unemployment to rise to between 9.2% and 9.6% this year. It also predicted gross domestic product, the broadest measure of the nation’s economic activity, to fall between 1.3% and 2% this year.
A stronger greenback also weighed on oil prices. With crude oil traded in dollars around the globe, a stronger greenback makes oil more expensive in other currencies health insurance quotes. The dollar was getting a strong flight-to-safety bid Thursday, as did Treasurys.
A report from the ratings agency Standard & Poor’s lowered its outlook on Britain to negative, indicating that the nation’s debt could near 100% of GDP.
"That report gave strength to the dollar overnight and temporarily brought oil back down overnight," said Phil Flynn, senior market analyst at Alaron Trading, in a daily research note.
While a report from the government Wednesday posted a dip in stockpiles of both crude oil and gasoline, the recession has cut into demand so drastically that a glut of oil nonetheless remains. The supply glut and shrinking demand has pulled the price of oil down from $147 a barrel last summer to a low just shy of $34 a barrel in December.
As oil has climbed back to $60 a barrel, the pain at the pump has followed suit. On Thursday, a gallon of regular unleaded gasoline jumped almost 3 cents to $2.362 a gallon, according to a daily survey by motorist group AAA.
The jump marked the 23rd consecutive daily increase in gas prices. During that run up, the average price of gas has increased 31.4 cents, or 15.3%. The average price of a gallon of gas is down $1.75 or 42.5% from the record high price of $4.114 that AAA reported on July 17, 2008.
Big banks aren’t the only ones with powerful lobbyists that know how to pull strings in Washington.
A possible change in how banks pay for the federal deposit insurance fund shows that policymakers haven’t forgotten about the 8,000 or so smaller financial institutions that dot the nation.
Indeed, it appears that for the first time, regulators are poised to make institutions deemed too big to fail start paying for that privilege.
The Federal Deposit Insurance Corp.’s board may vote Friday on a proposal that would change how much banks pay for deposit insurance, according to published reports. Under the proposed changes, the FDIC would assess insurance premiums based on a bank’s assets, rather than on its domestic deposits, as is the case now.
The change would save millions of dollars for small banks, which depend on deposits to fund their lending. More important, it would mean big and small banks "are paying based on the risks they pose to the insurance fund," said James MacPhee, CEO of Michigan’s Kalamazoo County State Bank.
The small bankers’ lobbying group, the Independent Community Bankers Association, has been calling for such a shift for some time, arguing that too-big-to-fail institutions such as Citigroup (C, Fortune 500) aren’t paying for the risk they pose to the stability of the system.
"The current deposit insurance premium assessment system places a disproportionate burden on community bank liquidity," the group said last December in a memo to President Obama’s transition team.
The ICBA pointed out that some big banks have foreign deposits or other funding sources they can tap for lending in the U.S. - but that don’t count against them in current insurance calculations.
If the FDIC decides to start calculating assessments based on broader asset bases, that could be a blow for big multinational banks like JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500). BofA declined to comment, and JPMorgan didn’t respond to a request for comment.
The proposal comes as regulators juggle the competing demands of big and small banks, and as the industry struggles with surging loan losses and a depleted deposit insurance fund.
The FDIC’s board is scheduled to meet Friday afternoon as part of a meeting that will decide how much banks will have to pay this year to support the fund. The agency didn’t respond to a request for comment.
The fund’s balance dropped 64% last year to $19 billion, as 25 banks failed, including the costly collapse of California mortgage lender IndyMac. This year, with unemployment soaring and real estate prices in free fall, 33 more banks have failed.
But banks got good news on the assessment front Tuesday. Congress passed a bill that would more than triple the size of the FDIC’s credit line with Treasury payday advance lender.
FDIC chief Sheila Bair has said passage of that legislation would allow the agency to cut the size of a special assessment it proposed in February in response to the steep decline of the deposit insurance fund balance.
At the time, the FDIC proposed socking banks with a one-time fee equivalent to 20 cents on every $100 of deposits. But banks rebelled, with smaller institutions saying the industry was being tarred by association with the big banks that got tens of billions of dollars in taxpayer funds last fall in the Troubled Asset Relief Program.
"We have been the common sense lenders, we have paid FDIC premiums for our deposits, and we have used solid underwriting practices," MacPhee wrote in a March 2 email to Bair that was posted on the FDIC’s Web site. "For us to be asked to continue to pay for the sins of the TBTF banks is outrageous, and we request that you cancel this increased premium."
MacPhee said Wednesday that if the FDIC imposed the 20-basis-point premium as initially planned, it would wipe out half his bank’s earnings for the year. Many smaller banks also faced the possibility of being further punished as they drew in new deposits from consumers seeking the security of a well-run bank.
The smallest banks aren’t the only ones upset about the impact of higher FDIC fees. Iberiabank (IBKC), a Lafayette, La., lender that operates 150 branches and earlier this year was the first bank to repay its TARP borrowings, spelled out just how painful the increased fees would be during its first-quarter earnings conference call last month.
"As a point of reference, each one basis point increase in our assessment costs us about $400,000 on a pretax basis," Iberiabank vice president John Davis said. "While we may consider this a painful stomach virus, for some financial institutions it may potentially be a terminal illness."
Of course, the bigger banks will benefit from lower one-time assessments. JPMorgan Chase said this month in its first-quarter report with regulators that the one-time fee could set it back as much as $1.5 billion. That number stands to be lower once the special assessment is pared back.
Still, with bailout rage percolating, the small banks’ argument seems to have hit home with policymakers who want to show their priority is supporting lending on Main Street.
"There’s a pattern here of the larger institutions’ failure imposing costs on the smaller," House Financial Services Chairman Barney Frank, D-Mass., said Tuesday. "It’s our job to prevent that from happening."
Powered by WordPress -- XHTML 1.0