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.
The Arizona Cardinals well get some high-profile home games next season — including contests against the Dallas Cowboys, Denver Broncos and Oakland Raiders.
The Cardinals’ 2010 regular season schedule lineup is set in terms of teams but dates and times and what kind of national games the Cards will be play will be determined later this year. The Cardinals will also host the New Orleans Saints, Tampa Bay Buccaneers and games against NFC West foes (San Francisco 49ers, St. Louis Rams and Seattle Seahawks).
High-profile teams such as the Cowboys, Broncos and Raiders all have strong followings in the Phoenix sports market, which should insure quick sellouts for those games and push up ticket prices next year free business cards.
The Cardinals have sold out all their home games since moving from Tempe to Glendale’s University of Phoenix Stadium in 2006.
The Cards' road games include visits to San Diego, Minnesota, Atlanta, Kansas City, Carolina and the NFC West rivals.
The NFL playoffs start this weekend and include a 2:30 p.m. Sunday game between the Cardinals and Green Bay Packers that will be televised by Fox.
Consumer outrage about AT&T’s 3G service for iPhones is boiling over, but the dropped calls and spotty service reflect a greater lack of foresight in the wireless industry.
Analysts say AT&T’s problems would have happened on any network that carried Apple’s (AAPL, Fortune 500) iPhone because of the overwhelming amount of data downloaded by iPhone users. Over the past three years, AT&T’s data traffic increased 5,000% because of the iPhone.
"The challenges that AT&T has are being faced by a lot of operators around the world: Very rapidly growing usage coupled with dense populations," said Daniel Hays, wireless expert and partner at consultancy PRTM. "Would it have been different on Verizon? Probably not."
AT&T accurately states that it has the nation’s fastest 3G network but it "probably bit off more than it could chew," said Doug Helmreich, program director at consultancy CFI Group. "Now some of their customers are paying the price."
IPhone users in New York and San Francisco in particular have been up in arms about frequent service interruptions. Earlier this month, AT&T’s head of mobility, Ralph de la Vega, admitted at an investors’ conference that the company’s service in those two cities was "below our standards."
It’s not just New York and San Francisco iPhone users who are grumbling. An annual Consumer Reports study recently rated AT&T (T, Fortune 500) the worst in customer satisfaction in 19 cities across the country. (Rival Verizon Wireless rated No. 1 in the study.)
In nearly three-quarters of the surveyed areas, AT&T was rated lowest for availability of service, frequency of dropped calls and quality of voice service.
Verizon vs. AT&T
Verizon (VZ, Fortune 500) has had a field day at AT&T’s expense.
"There’s a map for that" commercials have poked fun at AT&T’s smaller 3G footprint. And that has helped Verizon take market share, according to Piper Jaffray.
But studies show that AT&T’s network is actually faster than Verizon’s, and Verizon’s ad campaign may be a bit misleading.
Four recent independent studies from wireless industry analysis firms Global Wireless Solutions and Root Wireless, investment bank Piper Jaffray and tech blog Gizmodo all concluded that AT&T’s 3G network was the fastest in the United States.
"We drove millions of miles across the country, and our data support AT&T’s claim that it has the fastest 3G data network," said Global Wireless CEO Paul Carter.
The map that Verizon shows in its ads is correct, but AT&T’s 3G network still covers nearly 80% of the U.S. population, said Carter. And AT&T’s non-3G coverage is also broader than its 3G network.
With that kind of pedigree, analysts say AT&T was likely the best-equipped network to handle the iPhone.
"For Verizon … we still wonder if the network has the capacity and backhaul to support a device with an adoption curve of the iPhone," said Piper Jaffray analyst Chris Larsen in a client note.
Perception vs. reality
AT&T admits that it has had problems keeping up with the data demands of iPhone users, which has prompted the company to accelerate scheduled improvements in its network.
"There’s more work to be done and a sense of urgency to do it, but we feel like we’re on the right track with our investments," said Fletcher Cook, spokesman for AT&T.
In the next few years, AT&T said it would double its network speed, and Cook said AT&T has already improved overall network quality by 25%. The company has also deployed more than 20,000 Wi-Fi hotspots across the country, which it says may help alleviate stress on its 3G network.
PRTM’s Hays applauded the Wi-Fi solution and AT&T’s dedication to improving its network, calling them "critical levers in addressing AT&T’s network performance issues." He expects AT&T to go even further, perhaps by integrating tiered data plans that would force iPhone users to pay for the data they download.
Still, perception has hurt AT&T.
AT&T’s network is the No. 1 hangup for people who are in the market for an iPhone, according to a CFI Group study. The company’s woes have even become the butt of jokes on late-night TV.
"It was reported this week that Google would soon launch its own cell phone as a challenge to the iPhone," said "Saturday Night Live’s" Seth Meyers on Dec. 19. "Also a challenge to the iPhone? Making phone calls."
The building frustrations led some angry consumers to take matters into their own hands. "Operation Chokehold," which took place on Dec. 18, was an attempt to overload AT&T’s network by running data-intensive apps to try and send a message that consumers "are sick of their substandard network." The ploy failed.
"Unfortunately for AT&T, when it comes to network quality, perception is reality and right now Verizon has a more positive public perception," said Larsen. "If AT&T can continue to show improvement in network throughput, it may blunt some of the impact."
The U.S. dollar’s gains may end in the middle of 2010 as central banks shy away from adding greenbacks to their reserves and the Federal Reserve raises rates at a slower pace than investors expect, Barclays Plc said.
Long-term demand for dollars is set to weaken after the currency’s share of global reserves added in the third quarter slid to less than 30 percent, a decline “unprecedented in a period of U.S. dollar weakness,” Barclays said in a note to clients. The dollar stemmed 11 months of declines versus the 16 most-traded currencies in December, gaining against all but two, after investors increased bets the Fed will remove monetary stimulus next year as the economy recovers.
“We see the dollar strengthening in the first six to nine months of 2010 when the focus is on liquidity withdrawal and tightening of rates,” said Steven Englander, chief U.S. currency strategist at Barclays in New York, in a telephone interview. “Once the market gets past this initial fear of tightening, the reality will be that the Fed isn’t going to be tightening very fast and we’ll see dollar selling again.”
The Dollar Index — which measures the currency against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona — has dropped 4.2 percent this year. It has climbed 4.1 percent in December and traded at 77.928 as of 9:28 a.m. in Tokyo. The U.S. dollar has registered its biggest declines against the Brazilian real, Australian dollar and South African rand dropping by more than 25 percent this year against each.
Global Reserves
Global reserves probably gained by about $180 billion in the third quarter with U.S. dollar-denominated reserves accounting for about $50 billion or less than 30 percent, Barclays estimated, using data from the International Monetary Fund and U.S. official reports.
The bank adjusted for changes in the value of currencies over that period to capture “actual buying and selling, rather than passive gains and losses” Englander wrote in the note.
The dollar declined against all but the yen among the 16 most-active currencies this year. That prompted China and Russia, holders of the world’s biggest and third-biggest currency reserves, to express concern about their U payday loans with no faxing.S.- denominated investments.
“Emerging market central banks are selling their local currencies and buying U.S. dollars to prevent appreciation of their currencies,” Englander said. “They’re avoiding having a bigger concentration of U.S. dollars in their portfolio by turning around and selling dollars against the euro and other currencies.”
Canadian Dollars
Canada’s Finance Minister Jim Flaherty said this week that China, may be poised to buy Canadian dollars as it seeks to shield its $2.3 trillion worth of reserves against the U.S. dollar’s decline. Russia’s central bank said last month it will add Canadian dollars to its reserves and may include more currencies to reduce its dependence on the U.S. dollar.
Declines in the greenback mostly stalled this month as traders bet on a 48 percent chance that Fed Chairman Ben S. Bernanke will increase the target rate for overnight lending between banks by June. Policy makers will end most emergency lending programs and debt purchases by March because of “improvements in the functioning of financial markets” and stabilizing labor markets, the Federal Open Market Committee said on Dec. 16.
Unemployment, Retail
Reports this month showed the U.S.’s jobless rate unexpectedly fell, retail sales beat forecasts and purchases of existing homes rose to the highest level in almost three years in November. Benchmark rates are as low as zero percent in the U.S. compared with 8.75 percent in Brazil and 3.75 percent in Australia. They are 0.1 percent in Japan and 1 percent in the Euro region.
Barclays forecasts that the Federal Reserve will begin raising rates at the end of the third quarter of next year, while the European Central Bank’s tightening cycle will begin at the start of 2011. The Fed’s target rate will reach 2 percent by the end of 2011, Englander said.
Barclays on Dec. 10 forecast the euro will fall to $1.40 in six months before rallying to $1.45 by the end of 2010. The euro traded at $1.4333 today.
WASHINGTON–The U.S. economy grew at a 2.2 per cent pace in the third quarter as the recovery got off to a weaker start than previously thought. But all signs suggest the economy will end the year on a stronger footing.
The commerce department’s new reading on gross domestic product for the July-to-September quarter was slower than the 2.8 per cent growth rate estimated a month ago. Economists had predicted this figure would remain the same in the final estimate of the quarter’s GDP – the value of all goods and services produced in the United States.
The main factors behind the downgrade were that consumers didn’t spend as much, commercial construction was weaker, business investment in equipment and software was softer and companies cut back more on their stockpiles of goods.
Even so, the economy managed to return to growth during the quarter, after a record four straight quarters of decline. That signalled that the deepest and longest recession since the 1930s had ended and the economy had entered a new fragile phase of recovery.
Despite the lower GDP reading, many analysts still think the economy is on track for a better finish in the current quarter.
Tuesday’s report showed consumer spending grew at a 2.8 per cent pace, slightly weaker than the 2.9 per cent rate previously estimated and one of the factors behind the lower overall reading.
Retail sales, though, showed momentum in October and November. That raised hopes that holiday sales would fare better than last year’s season, the worst in nearly four decades.
The economy is probably growing at nearly 4 per cent in the October-to-December quarter, analysts say. A few peg it closer to 5 per cent. If they’re right, that would mark the strongest showing since 5.4 per cent growth in the first quarter of 2006 – well before the recession began. The government will release its first estimate of fourth-quarter economic activity on Jan. 29.
Question: How do REITs work? And is it prudent to have them in a diversified retirement portfolio? –M. C., Indianapolis, Indiana
Answer: After going from rock stars of the investing world during the real estate boom to candidates for a VH1"Where Are They Now" episode the last two years, REITs are generating some interest again.
Gee. Could it have anything to do with the fact that, after slumping badly in 2007 (-17.8%) and 2008 (-37.3%), REITs have been on a bit of a roll again with a year-to-date return of more than 25% through mid-December?
Well, whatever has spurred your interest, the answer to your first question is that REITs, or real estate investment trusts, are essentially companies that own and operate income-producing properties that could range from office buildings to hotels to malls to apartment buildings or a combination of these or other facilities.
Since you can buy many REITs just like stocks, investing in them allows you to gain exposure to the real estate market without the hassle of having to buy, manage and sell actual bricks and mortar. And because for tax reasons REITs must distribute 90% or more of their taxable income to shareholders annually as dividends, many investors looking for steady income from their investments also gravitate toward REITs.
As for whether it’s prudent to include REITs in a diversified retirement portfolio, I’d say the answer depends on why you’re buying them.
If you’re considering REITs now because you think their recent gains might be a prelude to another real estate feeding frenzy, I would urge extreme caution. Much of the REIT rebound this year is what you might call a "relief" rally. Things were looking so bad both in terms of property values and availability of financing in the commercial real estate market earlier this year that many REITs were knocked down to Armageddon prices. As investors came to believe that maybe conditions weren’t quite so horrendous and that the correction in REIT values had perhaps been overdone, REITs enjoyed a nice little pop.
But the residential and commercial real estate markets still face daunting challenges. That’s not to say that REITs don’t have the potential to deliver decent returns from here. Indeed, some have been able to raise capital that may allow them to pick up properties at bargain-basement prices. I think it would be foolish, though, to buy into REITs expecting them to retrace their recent trajectory.
But if you want to invest a portion of your retirement savings in REITs as part of a long-term strategy to improve your portfolio’s performance by enhancing its diversification, then I’d say yes, it could be prudent to find a place for them quick guaranteed personal loans. That’s because research shows that adding a small helping of REITs to an already diversified portfolio may be able to slightly boost returns without increasing volatility.
Be aware, however, that this approach assumes you’ll invest a modest portion of your assets in REITs and that you’ll hold them during good and bad periods. And to get the full benefit of the additional diversification they offer, you must be willing to rebalance periodically so REITs continue to account for the same percentage of your portfolio that you set originally.
That means you’ll probably be selling off part of your REIT stake after years in which they’ve soared (like 2003 and 2004), and adding to it after lousy years (like 2007 and 2008). If you don’t have the discipline, or the stomach, to do this, then adding REITs probably isn’t such a hot idea.
Keep in mind too that while REITs’ dividends can be a plus for investors looking to draw income from their retirement portfolio, those dividends can be cut in hard times. Some REITs did exactly that during the financial crisis. What’s more, a December 2008 "revenue procedure" from the IRS gave REITs the option of paying out up to 90% of their dividends in stock rather than cash this year. I think it’s fair to say most income investors would prefer hard currency to more shares of stock. It’s unclear whether, one way or another, REITs will have access to that option again in the coming year.
You should also know that, unlike payouts from most companies, REIT dividends do not generally qualify for the 15% maximum tax rate for qualified dividends. So if you do opt for REITs, you may want to hold them in a tax-advantaged retirement account such as an IRA or 401(k).
All things considered, though, I think REITs can still play a role in a well-rounded retirement portfolio. But unless you know how to analyze the prospects for individual REITs, I’d recommend investing in them through a mutual fund or ETF that owns a diversified portfolio of REITs. You can find both on our Money 70 list of recommended funds.
Bottom line: If you want to make REITs part of your long-term investing strategy for your retirement savings, go ahead. Just be sure to take a prudent approach, as I’ve outlined.
Jamie Naessens thought so. She used her credit card to get a free sample of a tooth whitener advertised as cheaper than visiting a dentist.
"A friend of mine on Facebook posted about a product she was happy with that she got for free," she says. "Her account was hacked, but I didn’t know until later."
She went to the website, www.premiumwhitepro.com, and agreed to pay $1.95 (U.S.) to cover shipping costs. But a confirmation email showed $11.90 charged to her credit card.
"We charge an extra $9.50 for international orders," she was told after calling the Colorado-based company for a live chat on the night she did the transaction.
Only when she asked to cancel did she find out that accepting the trial order could have trapped her in a monthly shipping program.
"If you don’t cancel, you will be billed $87.62 for the product and you’ll then become a PremiumWhite Celebrity Member," the website says.
Naessens cancelled the trial order, but the company insisted the $11.90 shipping charge was non-refundable. Luckily, she had a screen shot of her live chat and sent it to her credit card issuer, President’s Choice Financial.
She also cancelled her credit card and asked for a new one to be issued with a new number.
Erin Gray, a President’s Choice spokeswoman, said customers have to take precautions against online scams.
"Ms. Naessens was reimbursed for the charge she incurred from the company," Gray said. "By taking the extra step of closing her card and opening a new one, she should avoid further charges related to the online offer.
"Should the company proceed with charging the card again, we will certainly work with Ms. Naessens to find a resolution (including adjusting the charge)."
Complaints about recurring charges by merchants often have the same result No teletrack payday loans. Customers have to call their credit card issuer every month and file a dispute.
This happens despite guarantees by Visa and MasterCard against unauthorized purchases made in a store, over the phone or online.
Naessens feels a little foolish, but a lot wiser, about how credit card companies operate.
"I have always considered myself a fairly smart consumer. However, I’ve been humbled recently.
"I feel that credit card issuers are not committed to changing the system to protect consumers.
"It is true that the issuer has promised to work with me in the future. However, that is not the same as making a promise to reverse any future charges, even though I did everything I could possibly do, given the situation.
"The very fact that suspect merchants can resubmit the charges is unacceptable — and once again, the consumer is victimized."
Naessens had one more surprise. She joined a security group at Facebook to share her experience.
But she couldn’t comment online without verifying her Facebook account. This meant having to provide her cellphone number, so she could be sent a text message with a security code.
"I’d already compromised my credit card number. I wasn’t going to do that with my cellphone number," she says.
Internet user beware. A free sample is a common come-on for monthly shipments of vitamins or cosmetics. And if you complain, the company will say you agreed to the terms and conditions before placing your order.
Next week, we’ll wrap up this Sunday series on fraud before tackling something new in the new year.
eroseman@thestar.ca
WASHINGTON – House Democrats headed into the final stretch on a long-awaited Wall Street regulation bill Friday after fending off an effort to kill a proposed U.S. consumer agency that is a central feature of the legislation.
The sweeping regulatory overhaul aims to address the myriad conditions that led to last year's financial crisis.
Test votes during two days of debate indicate that Democratic support for the underlying legislation will hold in final passage.
Before the final vote Friday, House members rejected by a vote 223-208 an amendment that would have killed a proposed Consumer Financial Protection Agency. The agency would consolidate consumer lending regulations and enforcement that is now split among several banking regulators.
A bipartisan coalition had proposed keeping the consumer powers within each regulator and creating an oversight council. The U.S. Chamber of Commerce lobbied heavily to kill the agency and ran national television ads against it. Consumer groups said it was essential to the overall regulatory package.
In a separate vote Friday, Democratic leaders failed to revive legislation that would let bankruptcy judges rewrite mortgages to lower homeowners' monthly payments. The measure was rejected by a 241-188 .
The House previously passed bankruptcy-mortgage legislation, but it failed in the Senate.
Democrats hoped that by inserting the provision in the regulatory legislation they would have had another opportunity to make it law. Aiding homeowners through bankruptcy had been a key feature of President Barack Obama's foreclosure fighting proposal, but the president did not push for it.
Banks and credit unions have lobbied against the bankruptcy measure. They say it would force a flood of bankruptcy filings and ultimately drive up mortgage rates paperless payday loans.
Late Thursday, scores of Democrats voted with Republicans on amendments that eroded the reach of proposed regulations on complex derivatives trades.
Democratic attempts to toughen the legislation failed.
Though not major setbacks, the votes illustrated the difficulties facing House Financial Services Chairman Barney Frank and the Obama administration as they seek to pass the most ambitious rewrite of financial regulations since the New Deal of the 1930s.
The Chamber has been an aggressive opponent of the legislation, running television ads against the proposed consumer agency and pressuring lawmakers to vote to eliminate it and to ease the derivatives regulations.
The legislation still imposes restrictions on derivatives, aiming to prevent manipulation and bring transparency to a $600 trillion global market. An amendment by New York Democrat Scott Murphy, adopted 304-124 Thursday night, exempted businesses that trade in derivatives, not as financial speculators, but to hedge against market fluctuations such as currency rates or gasoline prices. The amendment also provided an exception for businesses that are considered too small to be a risk to the financial system.
A Democratic effort to make more companies subject to derivatives regulation failed 279-150.
For Democrats, the votes split along turf lines. All but a few of the Democrats on the House Agriculture Committee voted for the broader exception. The Agriculture Committee oversees commodities trading and had recommended less restrictive derivatives rules, but the final bill did not include them.
CARACAS–A senior minister and close confidant of Venezuelan President Hugo Chavez resigned Sunday in a growing banking scandal that has triggered a purge of businessmen with ties to the government.
In a move likely to win him support, Chavez said he had accepted the resignation of Science and Technology Minister Jesse Chacon, whose brother was arrested Saturday following the closure of the bank he headed.
"Yesterday Jesse Chacon asked if the best thing for the government would be that he offered his resignation and I said I believe so. He will have to leave the government," Chavez said in his weekly television show where other ministers were among the audience.
Chacon took part in a 1992 coup that sought to bring Chavez to power and both men were jailed for their actions. He has held numerous posts under Chavez.
Police have also arrested Giuzel Mileira, the director of the Banco Real, bringing to eight the number of bankers in custody.
Another banker with government ties fled to Miami, Chavez said.
Those detained include a businessman who made more than one billion dollars partly by selling corn to government-subsidized supermarkets.
Venezuela last week closed the seven small banks for regulatory breaches including capitalization problems and unexplained funds, causing market turmoil as Chavez threatened to nationalize the financial system.
Most analysts agree that Chavez is unlikely to risk instability through a widespread nationalization of the country’s best-capitalized and profitable banks.
The rise of a new mega-rich elite during his decade in office has been a liability for Chavez, who wants to build a socialist society in Venezuela and took office in 1999 promising to end corruption.
The arrest of executives widely considered to be corrupt is likely to be popular with Chavez’s supporters before legislative elections in September.
More detentions are expected because authorities have issued 27 warrants including nine requests to Interpol for international arrests.
Reuters News Agency
Federal Reserve Chairman Ben S. Bernanke said removing the central bank from bank supervision and tampering with its political independence would “seriously impair” economic stability in the U.S.
“A number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions,” the Fed Chairman said in a commentary released yesterday on the Web site of the Washington Post. The measures “would seriously impair the prospects for economic and financial stability in the U.S..”
Bernanke has presided over the most expansive use of Fed powers since the Great Depression. While the 55-year-old Fed chairman has said he averted a financial meltdown, lawmakers have voiced concern about taxpayer-sponsored bailouts and proposed the most sweeping dismantlement of Fed authority since the creation of the institution in 1913.
Bernanke’s commentary is his first comprehensive answer to proposals in the House and Senate that would limit the Fed’s supervisory powers and exert more political oversight in the setting of interest rates. The issues are likely to be discussed when he faces the Senate Banking Committee on Dec. 3 for a hearing on his nomination to a second term as chairman.
“Congress has a lot of public support for an attack on the Fed,” Allan Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh, said in an interview Nov. 23. “They bailed out everybody in sight.”
Lax Supervision
Senate Banking Committee Christopher Dodd, a Democrat from Connecticut, has criticized the central bank for lax supervision and introduced legislation this month that would strip bank oversight from the Fed and create a single bank regulator. Dodd would also limit the central bank’s ability to loan to individual companies.
“There is a strong case for a continued role for the Federal Reserve in bank supervision,” Bernanke said. “Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks.”
The Fed chairman pointed to capital adequacy tests the Fed performed in May which helped restore confidence in the banking system. The Standard and Poor’s 500 Financials Index has increased 34 percent since May 1, outperforming the S&P 500 by about 10 percentage points.
Dodd and Representative Barney Frank, chairman of the House Financial Services Committee, want to take away the Fed’s rule- writing power on consumer financial products and give it to a new Consumer Financial Protection Agency.
‘Excessive Risk-taking’
“The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis,” Bernanke said. The Fed has reviewed its performance and “moved aggressively to fix the problems,” he added.
As the subprime mortgage crisis began to trigger losses in bank portfolios, Bernanke used emergency authority last year to purchase securities from Bear Stearns Cos. and facilitate its merger with JPMorgan Chase & Co.
The Fed chairman said that the government’s actions, while in some instances “distasteful and unfair,” were necessary to prevent “a global economic catastrophe that could have rivaled the Great Depression in length and severity.”
Bernanke pushed the Fed’s backstop lending beyond banks, setting up programs to support the commercial paper and asset- backed securities markets easy payday loan. The Fed Board approved the bank holding company applications of Goldman Sachs Group Inc. and Morgan Stanley, giving them access to the Fed’s loan window.
Propped Up Markets
The former Princeton University economist and Great Depression scholar has more than doubled the Fed’s assets to $2.21 trillion and become the lender of last resort to government bond dealers, banks, Wall Street firms and U.S. corporations. The central bank has also propped up markets for mortgage-backed and asset-backed securities that support credit to consumers, small businesses and commercial real estate.
A financial regulatory reform bill proposed by Frank, a Democrat from Massachusetts, would limit Fed emergency lending to broadly available credit programs.
The Frank bill preserves the Obama administration’s proposal to make the Fed the lead regulator of risk across the financial system.
The central bank’s independence is also under fire from both chambers of Congress. Frank’s committee advanced a proposal this month to remove a three-decade ban on congressional audits of Fed interest-rate decisions. The proposal was offered by Representative Ron Paul, a Republican from Texas, and based on a bill with more than 300 co-sponsors.
Less Independent
Bernanke said studies show that central banks independent of political influence tend to keep inflation and interest rates lower than their less independent counterparts.
“The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation,” Bernanke said.
Under the proposal by Dodd, commercial banks would lose their power to appoint directors of the 12 regional Fed banks. Instead, directors would be chosen by the Fed’s Senate-confirmed governors, and each board chairman would be appointed by the president of the United States and subject to Senate approval.
The proposal would increase political oversight of the Fed bank presidents, who are among the most vocal proponents on the Federal Open Market Committee for keeping inflation low.
‘Financial Stability’
“Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation,” Bernanke said.
Policy makers cut the benchmark lending rate to a range of zero to 0.25 percent almost a year ago and this month reiterated a pledge to keep the policy rate low for “an extended period.”
While the economy expanded at a 2.8 percent annual pace in the third quarter, unemployment jumped to 10.2 percent in October. The Fed’s challenge is to support growth without unleashing expectations of higher inflation prompted by aggressive monetary stimulus.
“The ultimate goal of all our efforts is to restore and sustain economic prosperity,” Bernanke said. “Our ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures.”
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