A plan by Japan to raise the limit on sales of bills used for currency intervention and accounting for earnings on foreign reserves in yen may offer additional funds for a budget hit by dwindling tax revenues.
The borrowing ceiling for the so-called foreign-exchange special account will be lifted by 5 trillion yen ($56 billion) to 145 trillion yen for the next fiscal year should the parliament approve the proposed 2010 budget. A Finance Ministry official speaking on condition of anonymity said the increase reflects rising earnings on Japan’s $1 trillion of reserves.
Prime Minister Yukio Hatoyama’s administration is struggling to reduce a record debt burden and fulfill pledges to boost spending on childcare and education. The Finance Ministry has already tapped some special accounts that are excluded from the budget to help restrain the fiscal deficit.
“The move probably reflects the government’s aim to increase the transparency and flexibility of using excess money in special accounts” to help find funding sources for the budget, said Susumu Kato, chief Japan economist at Credit Agricole Securities Asia in Tokyo.
Speculation emerged this week that the increase in the ceiling on the bill sales was aimed at increasing the power of the Finance Ministry to intervene in the currency market. While Japan hasn’t stepped into the foreign-exchange market since March 2004, Finance Minister Naoto Kan took office in January saying he was prepared to do so in “emergency situations.”
No Intervention Link
“The increase in the limit has nothing to do with intervention,” said Tohru Sasaki, chief currency strategist at JPMorgan Chase & Co. in Tokyo. Sasaki, who used to work in the foreign-exchange division of the Bank of Japan, said the likelihood of intervention is “extremely low” at a time when the Group of Seven nations is urging China to make its yuan more flexible.
The yen traded at 89.38 per dollar at 4:39 p.m. in Tokyo from 89.02 late yesterday in New York. Japan’s currency reached a 14-year high of 84.83 last November.
The ministry issues short-term bills denominated in yen to finance currency intervention. It also sells the bills to account for profits on foreign reserves in yen. It saves the funds in the special account for addressing currency fluctuations and transfers some of the proceeds to the budget.
Earnings on Reserves
Rising earnings on Japan’s foreign reserves meant that the limit on sales of the securities needed to be lifted, the Finance Ministry official said.
Japan’s reserves, the world’s largest after China’s, have more than tripled in the past decade as the ministry bought U.S. Treasuries and other securities to contain gains in the yen that would hurt exporters. The country’s monetary authorities last stepped into the foreign-exchange market in the first three months of 2004, when they sold 14.8 trillion yen.
The increase in the ceiling is the first since the government raised it by 40 trillion yen for the fiscal 2004 budget, around the time Japanese authorities were last intervening in the currency market.
Instant payday loan. In a few quick and easy steps we will help you get up to $1500 the same business day.
Brazil created a record number of jobs for the month of January, increasing the odds that policy makers may start raising the benchmark interest rate as early as next month to keep inflation in check.
Latin America’s biggest economy created 181,419 jobs last month, led by manufacturers, compared with a loss of 101,748 jobs a year earlier, the Labor Ministry said in a report today in Rio de Janeiro.
Yields on interest rate future contracts due January 2011, the most traded on Sao Paulo’s BM&F exchange, rose 1 basis point, or 0.01 percentage point, to 10.25 percent. Traders bet the central bank will raise rates by at least a quarter point next month, according to Bloomberg estimates based on rate futures.
“This figure clearly reinforces the view that the economy is expanding at a strong pace,” Pedro Tuesta, senior economist for Latin America at 4Cast Inc., said in a phone interview from Washington. “It increases the odds that the central bank may start raising rates in March.”
According to the median forecast in a central bank survey of about 100 analysts published yesterday, faster economic growth, fueled by domestic demand, will prompt policy makers to raise the benchmark interest rate in April from a record low 8.75 percent for the first time since September 2008 to keep inflation in check.
“Brazil is on track to reach an all-time high in job creation in 2010,” Labor Minister Carlos Lupi told reporters. “If there is an interest rate increase this year, it will be very small,” Lupi said.
Brazilian companies will continue to hire more workers throughout the year, driven by forecasts that the country will post “strong” growth in 2010, Aurelio Bicalho, an economist at Itau Unibanco, Brazil’s biggest non-state bank, said in an e- mailed comment.
Gross domestic product will expand 5.8 percent this year, after growing 0.2 percent last year, according to central bank estimates.
The government-registered job creation number is a balance of posts created minus job dismissals. Registered jobs, or so- called formal work, assure employees a range of benefits such as unemployment insurance, bonuses and retirement payments by the government.
OneUnited Bank, which has skipped dividend payments on $12 million in government TARP funds, reported a 25 percent decline in deposits during 2009 as lending activity dropped off at one of the largest black-owned banks in the country.
OneUnited, which is based in downtown Boston but with major operations in Los Angeles, had $291.8 million in deposits at the end of 2009, according to a filing with the Federal Deposit Insurance Corp. That was down from $388.1 million at the end of 2008.
The bank’s net loans were $324 million at the end of 2009, down about 12 percent from the previous year. OneUnited has total assets of $540.6 million and primarily lends in city neighborhoods in Boston, Los Angeles and Miami.
The bank was not immediately available to comment for this story.
On the plus side, OneUnited turned in a full-year net profit of $3.17 million in 2009, compared with a year-ago net loss of $29.8 million when it had investment losses of nearly $60 million.
The past year has been a rough one for the bank after federal and Massachusetts bank regulators hit OneUnited with a cease and desist order. In December 2008, the regulators accused the management of OneUnited Bank of running an unsound lending operation and ordered a top-to-bottom review of executive perks that included a 2008 Porsche and a housing allowance for a beach-front home in California.
As directed by the FDIC, the bank has since sold the Porsche used by OneUnited Chief Executive Kevin Cohee.
The bank received more criticism after it received $12 million in federal bailout money, and had U.S. Rep. Barney Frank of Massachusetts, chairman of the powerful House Financial Services Committee, championing its cause. OneUnited needed the capital after investments in a poorly diversified portfolio were wiped out, leaving the bank with no capital in the third quarter of 2008.
Health care stocks rallied Tuesday in anticipation of a Republican victory in the Massachusetts Senate race. Well, now it’s official. Scott Brown has defeated Martha Coakley.
So what’s next for health care stocks? Is the Obama reform plan dead? And if so, can health care shares continue to gain ground?
Most health care stocks took a breather Wednesday. But they didn’t fall as much as the broader market did. So this looks more your classic case of buying on speculation and selling on the actual news.
Managed care companies such as Humana (HUM, Fortune 500), UnitedHealth (UNH, Fortune 500) and WellPoint (WLP, Fortune 500) would appear to have the most to gain if Brown’s victory means little change to the nation’s health care system.
These stocks performed poorly in the early part of last year — even as the broader market started to recover — due to fears about the impact a so-called public option or other plans to overhaul how Americans get health insurance would have on profits at the big HMOs.
Major pharmaceutical firms like Pfizer (PFE, Fortune 500) and Merck (MRK, Fortune 500), as well as medical device manufacturers like Medtronic (MDT, Fortune 500), also stand to benefit if gridlock reigns supreme in the nation’s capital. Investors were worried last year that reform might have led to lower drug prices and a hefty tax on medical equipment makers.
But health care stocks have been on a tear for the past few months as it became increasingly clear that Congress would probably not pass a bill that led to a drastic overhaul of the nation’s health care system. So for health care bulls, Brown’s victory is just icing on the cake.
"The Massachusetts election results confirm our view that health care reform will either be watered down or not passed at all. Generally, that’s favorable for the sector," said David Song, a health care stock analyst with Rockefeller & Co., a wealth management firm in New York.
The Health Care Select SPDR (XLV), an exchange-traded fund that owns most of the big drug, biotech, medical device and health insurance stocks, is up nearly 20% since the start of November. The S&P 500, by way of comparison, is up about 10%.
In fact, this Health Care ETF was up 4% in just the past week, a period when the overall market was flat.
Winners and losers
Charles Fernandez, president of Fairholme Capital Management, a Miami-based investment firm that runs the Fairholme fund, said that he thinks that health insurers and drug companies still have room to run. The fund owns shares of insurers Humana and WellPoint, as well as pharmaceutical firms Pfizer and Forest Laboratories (FRX).
Fernandez said that even if health care reform isn’t completely dead, that shouldn’t be a significant concern to investors.
It’s possible that the House of Representatives could try and pass the Senate version of the heath care reform bill before Brown is sworn in, he said. But that $871 billion bill, passed on Christmas Eve, does not include the controversial public option.
So he argues that health insurers wouldn’t be hurt if this became law. What’s more, the Senate bill calls for an expansion of Medicaid, which should mean more people would have access to medication us fast cash.
"The big pharma firms would be winners because more people will be insured. As more are insured, more prescriptions would be issued," Fernandez said.
Song said biotechs are another group that stand to gain if there is little or no reform from Washington. There have been some calls to include rules allowing more competition for so-called biologic drugs from generic makers. That, in theory, would lead to lower prices.
The Senate bill includes a provision giving biotechs a 12-year period of exclusivity before generics are made available. The Obama administration had been pushing for a shorter window of protection for biotechs.
Still, not all health care investors have reason to cheer Brown’s victory. Both Song and Fernandez said that a broader health care reform bill would have been a big boost to companies that operate hospitals.
That’s because hospitals would have fewer bad debt expenses if health insurance was available to a wider swath of the population. Now, hospitals are either faced with the status quo, or at best, an increase in lower-paying Medicaid patients.
With that in mind, shares of Tenet Healthcare (THC, Fortune 500), the nation’s second largest operator, fell 3.5% Tuesday and were down another 3.5% Wednesday afternoon. Other hospital operators were hit even harder Wednesday: Community Health Systems (CYH, Fortune 500) fell 5% while Universal Health Services (UHS, Fortune 500) fell nearly 7%.
Forget politics. Focus on profits.
To be sure, Brown’s victory does not mean that health care issues will no longer be discussed on Capitol Hill. But Wall Street’s attention may turn more to growth prospects over the next few years as opposed to day-to-day moves based on political headlines. That means opportunity for long-term investors.
"The noise isn’t gone. Assuming reform is dead, it’s not dead forever. We still have an uninsured population that’s not going away," said Sabrina Carollo, a research analyst with Ariel Investments in Chicago.
"But there are companies which would have limited exposure to negative aspects of potential reform. Now the focus should be on the availability of healthcare increasing globally due to favorable demographics, " she added.
In addition to an aging population that will require more medical care, Carollo points out that emerging markets such as China are becoming wealthier. That should lead to lucrative new markets opening up for health care companies.
Carollo said she is looking more for diversified health care companies that can take advantage of these trends. Health care giant Johnson & Johnson (JNJ, Fortune 500) is one such company her firm owns. Another is Baxter (BAX, Fortune 500), a firm that is involved in both the biotech and medical supplies businesses.
Will those stocks really be the best bets over the long-term? That remains to be seen. But it’s refreshing that investors should soon be able to finally have a health care debate about fundamentals instead of politics.
There’s always a coffee war brewing somewhere. The latest one has small, neighbourhood espresso shops kicking grinds in the face of Starbucks, the grande operator of the indie coffee business.
Apparently, independent designer coffee shops – 25 new ones opened in Toronto this year – are stealing coffee drinkers from Starbucks faster than you can say "fratta-latte," so the Seattle-based corporation is fighting back. And it’s using the independents’ playbook as its guide.
Earlier this year, Starbucks opened up a shop in the Capitol Hill neighbourhood of Seattle. However, the new Starbucks wasn’t called Starbucks. The sign outside read: "15th Avenue Coffee and Tea" and in much smaller letters below were the words: "Inspired by Starbucks."
Now it appears more "Inspired by Starbucks" shops may pop up in neighbourhoods across the United States – not Canada, for the time being, though, according to Starbucks – as the coffee giant hopes to perk up enthusiasm among what could well be described as the anti-Starbucks crowd.
According to independent shop owner Stuart Ross, Starbucks has no one to blame but itself for the competition.
Without the corporate coffee giant, the owner of Bull Dog Coffee at Granby and Church streets says a majority of coffee drinkers would likely never have been turned on to espresso-based drinks in the first place.
"They (Starbucks) are the ones who told us, `Now is the time to drink Americanos, macchiatos,’" Ross says.
"What they’re good at is marketing, which paved the road for places like mine."
Starbucks Coffee Canada calls the company’s new cafés "a celebration of each community’s personality and culture," and "learning labs for us to incubate ideas and evaluate various concepts."
Starbucks says the new locations have been received with community enthusiasm, but a number of Seattle’s independent café owners weren’t so sanguine.
A week before the opening of 15th Avenue Coffee and Tea, the Seattle Times reported that owners of at least two independent shops, Seattle Coffee Works and Victrola Coffee Roasters, spotted Starbucks’ employees on research trips lingering in their stores.
"They spent the last 12 months in our store up on 15th (Ave.) with these obnoxious folders that said, `Observation’ written on them," said one independent owner.
Federal Reserve Chairman Ben S. Bernanke and his colleagues may indicate the U.S. recovery is gaining strength while repeating a pledge to keep the benchmark interest rate almost at zero for an “extended period.”
The Federal Open Market Committee gathers as growth in the final quarter of 2009 accelerates to more than 4 percent, the fastest pace in almost four years, according to analysts’ forecasts. The FOMC will probably discuss how to eventually withdraw unprecedented programs to revive credit, including purchases of $1.43 trillion in housing debt, economists said.
Fed officials in a statement today may try to head off any investor expectations the improving economy will prompt them to raise interest rates early next year. While acknowledging that job losses are easing after last month’s drop in the unemployment rate, the FOMC may reaffirm that tight credit and weak income growth are among the risks to the recovery.
“The last thing they want is for people to expect that tightening is closer,” said Laurence Meyer, vice chairman of Macroeconomic Advisers LLC in Washington and a former Fed governor. “They are going to increase their confidence about the sustainability of the expansion, but not become materially more optimistic about growth next year.”
The FOMC is scheduled to issue its statement at around 2:15 p.m. after the end of its two-day meeting.
“Assuming they don’t drop ‘extended period,’ market reaction will probably be limited,” said James O’Sullivan, chief economist at MF Global Ltd. in New York.
Changed Forecasts
Macroeconomic Advisers raised its forecast for fourth- quarter growth last week to a 4.2 percent annual pace from 3.1 percent, while Credit Suisse and JPMorgan Chase & Co. increased its estimate by 1 percentage point to 4.5 percent. Retail sales in November climbed twice as much as economists expected, while exports rose to the highest level in 11 months, government figures showed.
“The Fed has to fight two battles: supporting economic growth and showing the market it is concerned about potential inflation later on,” said Sung Won Sohn, former chief economist at Wells Fargo & Co. and now an economics professor at California State University-Channel Islands in Camarillo, California. “Balancing inflation and economic growth and the communications related to that will be their most difficult challenge.”
Fed funds futures on the Chicago Board of Trade indicated yesterday a 53 percent chance that the FOMC will raise its main lending rate by at least a quarter-percentage point by its June meeting, compared with 35 percent odds a month ago.
Fulfill Mandate
Any expectation by investors that monetary policy tightening will occur sooner would complicate efforts by policy makers to reduce the 10 percent unemployment rate, said former Atlanta Fed research director Robert Eisenbeis, now chief monetary economist at Cumberland Advisors Inc saving account payday loan. in Vineland, New Jersey.
“They have a huge problem, and the risk is real,” he said. “It will take extraordinary growth for three years to significantly eat into the unemployed who have lost their jobs.”
U.S. payrolls have fallen by 7.2 million since the start of the recession in December 2007, and a growing population means more jobs must be created to restore full employment. The FOMC projects the unemployment rate will be between 9.3 percent and 9.7 percent in the fourth quarter of 2010, according to forecasts released after its November meeting.
Policy makers will probably also continue to debate the usefulness of selling assets as part of the so-called exit strategy from the unprecedented expansion of credit, Fed watchers said. Central bank officials have tested the use of reverse repurchase agreements to drain some of the cash the Fed has pumped into the economy.
Main Lending Rate
The Fed has kept the benchmark lending rate at a range from zero to 0.25 percent during the past 12 months and has adopted asset purchases as its main policy tool. Since March, the FOMC has said “exceptionally low” rates are likely warranted for “an extended period.”
Bernanke and New York Fed President William Dudley, who serves as vice chairman of the FOMC, signaled in speeches last week that they favored keeping the language.
The U.S. economy faces “formidable headwinds,” including a weak labor market and tight credit, that will probably generate a “moderate” pace of expansion, Bernanke said.
Growth will probably decline next year from the 3 percent to 3.5 percent pace likely in the last six months of this year, “mostly because some of the current sources of strength are temporary,” Dudley said.
‘Pretty Fragile’
“The economy is still pretty fragile,” said Dean Croushore, a former Philadelphia Fed economist who is now chair of the economics department at the University of Richmond in Virginia. “Because inflation has remained low and growth is positive, but not overly strong, the Fed has time to think about how to reduce the excess amount of liquidity in the market.”
The central bank will probably continue to describe inflation as “subdued” and inflation expectations as “stable,” economists said. The Fed’s preferred price measure, which excludes food and fuel, climbed 1.4 percent in October from a year earlier.
Prime Minister Gordon Brown’s ruling Labour government is increasingly being blamed by voters for Britain’s “economic quagmire” even as the recession shows signs of easing, ComRes Ltd. pollster Greig Baker said.
“There is a high level of personal animosity towards Gordon Brown and regardless of the economic figures, that’s going to be very, very difficult for Labour to get past,” Baker, research director at the U.K. polling company, told Bloomberg Television today. “The voting public is increasingly blaming the government for the economic quagmire we’re in.”
Data today showed the British economy shrank 0.3 percent in the third quarter, less than previously estimated, in the nation’s longest recession on record. Brown is fighting to rebuild support in time for an election due by June. Labour narrowed Conservative Leader David Cameron’s lead to six points in an Ipsos Mori poll published Nov. 22.
“If the government can claim that they steered the economy through recession, that will become their overbearing election theme,” Baker said. “It may change the political narrative of the time but I don’t think that will be enough to overcome the personal animosity that exists towards Gordon Brown. People simply don’t like him.”
Cameron pledged to work “night and day” to win a majority in Parliament at the next U no checking account payday advance.K. election after the Ipsos Mori poll in the Observer newspaper showed the Conservatives with the narrowest lead this year. That suggests he may fail to clinch enough lawmaker seats to control the House of Commons.
‘Anybody But Gordon’
“Looking at the poll over the weekend, it was slightly out of kilter with some of the others we’ve seen recently,” Baker said. “What it does suggest is that there’s not a huge affinity amongst the voting public with David Cameron. Basically, it’s an ‘Anybody but Gordon vote.’”
ComRes’s most recent poll, finished on Nov. 12, showed the Conservatives with a 14-point lead. Cameron needs a lead of about 10 percentage points to win a clear majority, according to Anthony Wells of pollsters YouGov Plc. A minority government, known as a ‘hung parliament,’ may face greater difficulty in tackling Britain’s record budget deficit.
The U.K. economy’s contraction was revised from a 0.4 percent drop, the Office for National Statistics said today in London. The Bank of England forecasts Britain will exit the recession in the fourth quarter. The economy will expand 2.2 percent in 2010 and 4.1 percent in 2011, according to policy makers’ projections published on Nov. 11.
The world’s top cellphone maker Nokia surprised investors by taking a major writedown at its struggling networks unit and revealing a fall in its smartphone sales from the previous quarter.
Nokia, battling aggressively with competitors Apple (APPL) and RIM (RIMM) , said its smartphones market share fell to 35% in July-September from 41% the previous quarter.
"Consumer demand may be showing early signs of improvement but these results show sustained pressure on smartphone margins. Apple’s iPhone is defying gravity in the high tier," said CCS Insight analyst Geoff Blaber.
Nokia booked a $1.35 billion hit from its networks unit, citing challenging market conditions, and dragging the reported group result to a loss per share of 0.15 euros compared with expectations of a 0.09 euros per share profit Nokia’s key handset unit performed slightly better than expected in the July-September quarter as consumer demand for mobile devices started to improve in many markets.
Shares in Nokia (NOK) were down 11% to $14.30 in pre-market trading.
Last year Andrew Hall, the head of Citigroup’s energy trading unit, made over $100 million, making him one of the highest paid people on Wall Street.
Meanwhile, Corey Carter, resident of an Alabama county where consumers’ gas price burden is greatest, spent more than 25% of his $240 weekly pay on gas.
Some experts argue that the experiences of people like Hall and Carter are linked by the economics of oil trading. They say it’s not a coincidence that Americans are paying more at the pump in an era when Wall Street has taken a greater interest in energy trading.
Even the government is reassessing its opinion of speculation’s impact on oil prices. In what could be a significant reversal, the United States may tighten the rules on energy trading.
"Using an essential commodity as [an investment tool] is crazy," said Judy Dugan, research director at Consumer Watchdog. "If you want a double dip recession, let’s just get $100 oil again."
Dugan is part of a growing chorus of people calling for greater government oversight of the commodities markets, where oil contracts are traded. The government agency that regulates those markets, the Commodity Futures Trading Commission, is starting to listen.
Last month, the agency held hearings about what it could do to restrict speculator activity. Possible measures include setting stricter limits on the amount of contracts people are allowed to trade, increasing the amount of money investors have to put up to buy contracts, or simply better reporting on who is buying what.
On Wednesday CFTC said it will begin listing speculative money in more detail in its weekly energy market reports starting this Friday, while additional hearings on broader market regulation continued Wednesday and Thursday.
The fact that the CFTC is even considering changing the rules is a big departure from its stance under the Bush administration. Last year the CFTC was adamant that speculators were not driving up the price of oil, with its then-director testifying as much before Congress several times. Now, under President Obama, the agency has a new head and that position may change.
It was reported last month that CFTC would soon reverse itself and say speculators were at least partially to blame for the $147-a-barrel prices seen last summer. Then the agency said those reports were not true. Now they will only say they will be "putting out additional elements of information."
Most analysts think additional restrictions will be placed on speculators, probably sometime this fall.
"Oil prices can’t triple and then fall by 85% within two years without a political response," Kevin Book, managing director at the research firm ClearView Energy Partners, wrote in a recent research note.
Big users of oil — as opposed to non-users like banks, hedge funds and others who are generally lumped into the "speculator" category — welcome any moves that might limit speculator interest.
"One day [last year] oil prices went up by $11 a barrel," said David Castelveter, a spokesman for Stop Oil Speculation Now, a lobby group made up mostly of airlines and trucking companies. "That’s not supply and demand."
Castelveter isn’t sure if tightening rules on oil trading will result in lower prices and less volatility, but he thinks it’s at least worth a shot business card.
The effect on prices
But what types of restrictions the government might enact and what that might do to prices is an open question.
Ken Medlock, an energy economist at the James A. Baker III Institute for Public Policy, thinks restrictions will bring down prices.
Medlock authored a recent paper looking at investment money influence on the oil market, and said it’s hard to see how it’s not pushing prices higher.
There’s just too much of a correlation between stock prices, the dollar and oil prices to think big investment money - as opposed to supply and demand - is not driving the price.
Specifically, he notes how "non-commercial" players — i.e., banks, pension funds and the like — now hold 50% of the contracts on the U.S. oil futures market. That’s up from 20% in 2002.
He blames a large part of investor interest in oil futures on a 2000 law now known as the "Enron loophole." That rule exempted banks, funds and other non-users of oil from reporting their positions on electronic markets. At the same time, proliferation of electronic exchanges took off, and is now where most oil trading takes place.
"That’s when there appears to be a fundamental shift in the market," said Medlock. "The technology has moved faster than the policy."
The lack of information brought about by the reporting exemption is what makes it so hard to figure out if speculators are unduly influencing oil prices.
Others have made projections.
Last week it was reported that Germany’s Commerzbank thinks oil prices will fall 30% if regulations that rein in speculators are passed.
But there are plenty of people who feel speculators are not behind the runup in oil prices, starting with the Bush-era CFTC and their counterparts in London.
Plenty of people point to the razor-thin margins between what the world was using and what it could produce last year when prices hit $147, and note that as soon as the economy collapsed, oil prices did too. They also say that OPEC and other big oil producers have a role in influencing prices.
The Citigroup energy trading unit did not return calls seeking comment. But others have said increasing market regulation in an attempt to lower prices may be futile.
Deutsche Bank, which engages in energy trading, noted in a recent report that during the recent commodity boom, items that increased most in price were mostly rare metals not traded on an exchange, and thus not subject to speculator influence. And even items like rice and steel, also not traded on an exchange, saw a big runup in prices.
The report noted how the U.S. government has been attempting to regulate speculators for that last 100 years in other commodities markets in an effort to bring down prices, often with little success.
"Alongside speculators we believe fundamental factors should not be forgotten in terms of the rapid rise in commodity prices," the report said, highlighting strong demand and OPEC influence. "Perversely focusing on regulation to curb speculative activity may possibly increase the pricing power of OPEC over time at a time when the U.S. government is attempting to do the exact opposite."
Even though financial stocks have rallied nearly 70 percent since the end of March, the Federal Deposit Insurance Corp. issued another grim quarterly report Thursday on the health of the nation’s banks.
The agency reported that the banking industry lost $3.7 billion in the second quarter amid a surge in bad loans made to home builders, commercial real estate developers and small and midsize businesses. Its deposit insurance fund dropped 20 percent, to $10.4 billion, its lowest level in nearly 16 years. And the number of "problem banks" increased to 416, from 305 in the first quarter, and is expected to remain high.
Indeed, federal officials warned that while the economy and financial markets were showing signs of improvement, the banking sector was unlikely to rebound soon.
"These credit problems will at least outlast the recession by a couple of quarters," said Sheila Bair, the FDIC chairwoman. "Cleaning up balance sheets is a painful process that does take time, but it is absolutely necessary to the industry’s sustained profitability."
The dismal report shows how the industry’s problems have spread. A handful of the biggest banks were among the first to suffer big losses nearly two years ago from complex mortgage assets and other securities, but have posted strong profits from trading over the last two quarters.
Still most of the nation’s 8,195 banks primarily make their money from lending to consumers and businesses. They are now facing increased pressure from soaring loan losses and higher deposit insurance costs as the FDIC seeks to shore up the industry fund. Analysts say a recovery will not be in sight until the job market and broader economy stabilize.
So far, 81 banks have failed this year, including 45 in the second quarter. That, in turn, has put enormous stress on the government’s deposit insurance fund, which is supported by fees charged to the banks regulated by the FDIC. Its second-quarter reserve of $10.4 billion compares with $45.2 billion a year earlier.
The bulk of the decline comes from additional money that the agency has set aside to cover the cost of bank failures, and Bair said the fund had ample resources to make sure insured depositors would not lose money. But the levels are so low that FDIC officials said Thursday that they would consider imposing a special assessment on the banks, on top of elevated insurance fees, toward the end of the third quarter.
Through similar actions, it added about $9.1 billion to the fund in the second quarter.
Bair said she did not anticipate having to immediately tap an emergency credit line run by the Treasury Department, although she did not rule it out. "I never say never," she said. The FDIC quarterly report came after a similar release by the Office of Thrift Supervision on Wednesday that showed savings and loan associations eked out a $4 million profit, the first time the sector posted positive results since the fall of 2007. Still, the number of "problem thrifts" rose to 40, up from 17 a year earlier.
The savings and loan industry "is not out of the woods yet," said John Bowman, the acting director of the Office of Thrift Supervision. "Despite some encouraging signs, the industry’s performance remained uneven."
Federal banking regulators are bracing for hundreds of small and medium-size banks to collapse in the coming months even though the economy has shown early signs of a recovery. Banks are burdened with billions of dollars of bad loans made over the last few years and are continuing to set aside more money to cover losses. In fact, credit loss rates reached a record high in the second quarter.
Powered by WordPress -- XHTML 1.0