Posts Tagged ‘banking’

Volcker Rule Is Giving Big Banks Headaches

Wednesday, August 25th, 2010

Volcker Rule implementation is scaring the big banks.  Curiosity is growing about which Wall Street banks will be the first to get out of proprietary trading or the private equity business as they restructure to come into compliance with new financial regulatory reform legislation. The Volcker Rule – named for former Federal Reserve chairman Paul Volcker – limits banks from these practices and sets new levels on the size of private equity or hedge fund investments.  In other words, the banks are not allowed to hold more than three percent of their Tier 1 capital – a measure of their financial strength — in private equity or hedge fund investments.

Bank of America is almost in compliance, though Goldman Sachs must act more aggressively and is reported to be weighing several options to comply with the increased regulation.  The good news for the Wall Street banks is that they have several years in which they can reduce their holdings.  “They have time to adjust,” said Mark Nuccio, partner at Boston-based Ropes & Gray.  “I don’t think there’s any intention on behalf of the regulators to create economic dislocation at financial institutions.”

The new rules are driving certain banks to rethink their business, while others see the new law as a welcome excuse to distance themselves from unwanted hedge or private-equity funds.  “If you were leaning toward a strategic change anyway then now is a good time to re-evaluate the business because you have a regulator saying you shouldn’t be in this business anyway,” said Thomas Whelan, chief executive of Greenwich Alternative Investments.  This is particularly true for banks that quickly acquired hedge fund operations during the boom years.  At that time, having a hedge fund was essential to the strategic mix.  Since 2008, however, when hedge funds posted their worst-ever returns and clients tried to cash in assets, the math changed for many banks.

Global Financial Meltdown? Not in Norway

Tuesday, August 4th, 2009

One European nation has escaped the worldwide financial meltdown and recession.  It’s Norway, which saved its money – rather than spent – through the boom years. As a result of frugal financial management, Norwegian housing prices and consumption are on the upswing and interest rates are affordable.  Norway’s fiscal responsibility of its income from enormous oil and gas reserves has allowed the Scandinavian nation to build one of the globe’s largest investment funds.

norwayAfter large deposits of gas and oil were discovered in the mid-1970s, Norway didn’t go on a spending spree, and channeled its revenues into a state investment fund.  The government – with very few exceptions – can spend only four percent of those revenues annually.  “By the end of this year, I guess we are approaching $400 billion U.S.,” according to Amund Utne, a director general of Norway’s Finance Ministry.  Do the math, and that adds up to $400 billion in a nation whose population is 4.5 million.

Beyond its oil and gas revenues, strict banking regulations – tightened after a banking crisis in the early 1990s – shielded Norway from the credit crisis.  Norwegian banks made loans wisely and stayed away from exotic investments and financial products over the past decade.  “They (the United States) got all the bright guys to make all kinds of fantastic products.  Very creative.  And it turned out it was maybe not the best solution in the end,” Utne said, with typical Norwegian understatement.  “I think Norwegian banks are not as creative.  In this situation, it may be good to be somewhat boring.”

Norway also was immune from the housing bubble.  According to Bjorn Erik Orskaug of DnB NOR, Norway’s largest bank, “Housing prices are back up.  Consumption is up.  Banks are lending normally to the household sector and interest rates are staying low.”

There’s Method in Warren Buffett’s Madness

Wednesday, May 20th, 2009

Warren Buffett’s loyal followers are wondering what got into the Oracle of Omaha6a00d834a6138369e200e54f0aa7a68833-500wi when he told CNBC  that this is “a great time to be in banking“, praised Wells Fargo’s massive earning power, and said that the government doesn’t need to provide capital to or nationalize banks.

Although some critics dismissed Buffett’s statements as biased because he owns large stakes in Wells Fargo and U.S. Bancorp, he may be dead right.

Buffett was talking about lending, and it’s the “spread” that counts – the difference between the interest rates banks charge for the loans they make and the rate they pay to borrow that money.  When the Federal Reserve makes deep interest rate cuts, spreads widen and loans become more profitable.  The Fed funds rate is so low right now that Wells Fargo is borrowing cheaply and profiting handsomely on the loans it makes.

Although banks do need to recapitalize, they currently are saving money by cutting dividends paid to investors.  Every dollar they make goes into recapitalization.  With stricter government oversight, banks are required to operate more efficiently.  The irony is that these conditions are almost identical to what helped the nation recover from its last banking crisis during the 1990 – 1991 recession.  In fact, the banks 19 years ago were in worse shape than they are today; yet they were not nationalized or put into receivership.  Once the Fed cut interest rates, banks’ lending policies became more conservative, and they eventually recovered.  The same scenario could play out this time around.

Deep Freeze of an Unregulated Economy

Thursday, March 5th, 2009

Iceland’s economic collapse, the result of a reckless government and a lack of financial regulation, is an object lesson to Americans who fear increased — but necessary – markets oversight.

Icelandic debt is 10 times the country’s GDP!  In the United States, our debt would have to be close to $100 trillion to put us in the same position.  Icelandic banks were deregulated during the mid-1990s, after which the economy was run like a giant hedge fund; following the economic collapse, citizens lost most of their savings and are saddled with debt and mortgages they can’t afford.  Inflation and unemployment are skyrocketing.  Is it any surprise that the neo-liberal government whose policies put Iceland into a financial vise fell following protests by infuriated citizens?deep-freeze1

So vast is their debt, Iceland’s insolvent banks may be forced to declare bankruptcy a second time.  When their own economic crises left the United States, Britain and the European Central Bank unable to bail out Iceland, the country turned to Russia and the International Monetary Fund in hopes of a financial rescue…maybe a miracle.

The interim government, a coalition of the Left-Green Party and Social Democrats, wants to rewrite Iceland’s constitution.  The goal is to “enshrine national ownership of the country’s natural resources” and to “open a new chapter in public participation in shaping the structure of the government”.  This marks a 180-degree change from the free-wheeling policies of the past where market regulation was non-existent.

Ever since American credit markets froze last fall, it’s become clear that a well-regulated economy equals a healthier one.