Federal Reserve Bank of New York President William Dudley said the U.S. government will supply as much capital as needed to ensure the viability of major banks, which have been reluctant to dilute their shareholders’ stakes.
The U.S. must also start an “intensive reconstruction” of the financial system, including an “explicit quid pro quo” of regulations for banks that are “too big to fail,” Dudley said. It is his first major speech since succeeding Timothy Geithner, now Treasury secretary, in January as chief of the regional Fed bank that handles all market operations of the central bank.
The Fed, Treasury and other regulators are starting so- called stress tests on the 19 biggest U.S. banks to identify how much extra capital each will need after $1.2 trillion in worldwide credit losses and writedowns from the financial crisis that began in 2007. Officials are aiming to “break this dynamic” of tighter credit deepening the recession, Dudley said.
“The point of the stress assessment is not to pick winners or losers, but instead to ensure that the banking system and all the major banks have sufficient capital to withstand a very adverse environment,” Dudley said at a conference at the Council on Foreign Relations.
Even with pressure from regulators to raise capital, banks have been reluctant to do so, in part because of “the fact that bank executives often do not want to dilute the existing shareholders which, of course, include themselves,” Dudley said.
Present Time
Policy makers have decided for the present time not to expand the range of securities purchased by the central bank into longer-term Treasuries, Dudley said after the speech in response to an audience question.
“At this point in time the Fed has judged that buying long- term Treasuries is not the most efficient means of easing financial conditions,” he said.
The New York Fed chief said there’s no “magical number” that would signal the central bank’s balance sheet is too big. “When market conditions improve” emergency credit “programs will tend to diminish in size” and the balance sheet will shrink, he said.
Dudley said there’s been a “complete breakdown in trust across markets” and that investors have yet to finish unwinding their bets, with hedge-fund assets possibly falling more than half from their peak of $2 trillion once all is said and done. “The deleveraging process is still far from complete,” he said.
Market Losses
Hedge-fund industry assets fell to $1.2 trillion at the end of 2008 from a peak of $1.9 trillion in June, estimates Huw van Steenis, a Morgan Stanley hedge-fund analyst in London. He estimates that another $450 billion may disappear as a result of market losses and redemptions in 2009.
The deleveraging created a “vicious feedback loop” that has frozen securitization, pressured bank balance sheets and all but eliminated credit from the economy, Dudley said.
“The feedback loop he described is important,” said Roger Kubarych, chief U.S. economist at UniCredit Global Research. “What the Fed’s done has been supportive, but now we turn to how quickly the macro policies work free copy of my credit report. It’s basically about whether fiscal policy works to stop the recession, how quickly that happens.”
Dudley, 56, is one of the main architects of the emergency credit programs the central bank has introduced since December 2007. One program to backstop the market for commercial paper has worked “extremely well,” while lending facilities for commercial banks and bond dealers appear “sufficiently sized,” he said.
Whatever It Takes
The central bank will do “whatever it takes” within its legal authority to revive credit and keep financial markets working, Dudley said today. The Fed has reduced the benchmark interest rate to as low as zero and more than doubled its balance sheet to $1.9 trillion in the past year in unprecedented policies aimed at unfreezing credit and rekindling economic growth.
“If they were not there, the world would look very different,” said Torsten Slok, an economist at Deutsche Bank Securities in New York who attended the speech.
The New York Fed is running most of the programs, including the Term Asset-Backed Securities Loan Facility aimed at jumpstarting consumer and business lending by subsidizing investor purchases of securities tied to the loans.
The $200 billion program, which uses some funds from the Treasury’s Troubled Asset Relief Program, starts making loans March 25 and will later expand to $1 trillion and include other types of debt such as commercial mortgages.
‘Scaled Up’
“Once it is up and running it can be scaled up and out in many different dimensions,” Dudley said of the TALF. “In principle, it could be applied to other distressed asset classes, it could move down the credit spectrum to lower-rated tranches, and it could be used to fund older-vintage assets.”
Dudley said the central bank will oppose any pressure for protectionism. “It’s a real danger,” he said. “We’re going to articulate our views very firmly in the direction of not being protectionist.”
Dudley worked for more than two decades at Goldman Sachs Group Inc., where he rose to chief U.S. economist. As New York Fed chief, Dudley is vice chairman of the Fed’s policy-setting Open Market Committee and the only one of the 12 regional Fed presidents to have a permanent vote on the panel.
Recent U.S. employment data indicate that “the economy has considerable momentum to the downside,” Dudley said. He didn’t specifically mention today’s Labor Department report showing that the U.S. jobless rate jumped in February to 8.1 percent, the highest level in more than a quarter century, as employers eliminated 651,000 jobs.
Besides new restrictions for big financial companies, Dudley recommended six other broad regulatory fixes, including more transparency for securities, an agency to oversee risk across the financial system and “more robust” rules on bank-capital reserves.
Dudley gave a speech on Feb. 10 focusing on inflation-linked bonds, saying the government may need to adjust the issuance of the securities to boost trading volumes.
Bank of England Governor Mervyn King will take the unprecedented step of printing money to buy assets after reducing the benchmark interest rate by a half point to almost zero.
The bank said it will pump cash into the economy by purchasing as much as 150 billion pounds ($211 billion) in government and corporate bonds, sparking a rally across the debt market. It also cut its key rate to a record low of 0.5 percent. Separately, the European Central Bank reduced its own benchmark to 1.5 percent and signaled it may cut further in coming months.
Europe’s major central banks are adopting different speeds as they seek to reverse deepening recessions at the same time as they increasingly run out of room to trim rates. ECB President Jean-Claude Trichet said today that he isn’t yet prepared to expand his arsenal to include unorthodox policy tools even as King follows the Federal Reserve in doing so.
“We’re moving into a new world in the U.K. from interest- rate adjustment to quantitative easing,” said Charles Goodhart, a former member of the central bank’s Monetary Policy Committee. “It’s a great deal more uncertain how things will be done. This month what the MPC says is going to be much more important than what they do.”
Market Reaction
U.K. 10-year government bonds rose, pushing the yield down by as much as 40 basis points to 3.24 percent, the most since Bloomberg began collecting intraday data in 1992. Company bonds denominated in pounds rose by the most in more than a decade, according to the Markit iBoxx Sterling Corporate bond index.
“It is very unlikely interest rates will go any lower,” King said in an interview on Sky News. “What we’re trying to do now is push the supply of money up.”
In a statement accompanying its decision, the Bank of England said it may take up to three months to carry out the asset purchases. Most securities will be U.K. government bonds known as gilts.
“It is necessary for us to take a range of measures to help people, help businesses get through this recession,” Chancellor of the Exchequer Alistair Darling told broadcasters. “America has been doing something like this for several months. You will see countries all over the world taking action to make sure there is enough money in the economy.”
Rates Reduced
The Bank of England has now reduced the key rate 4.5 percentage points since October, while the ECB has lopped its benchmark by 2.75 percentage points. The U.S. Federal Reserve kept its rate at a range of zero to 0.25 percent last month and has been buying assets. The Bank of Japan yesterday bought corporate bonds from lenders for the first time.
Credit markets in the U.K. are still frozen in spite of the Bank of England’s actions. Net lending to consumers rose at the slowest pace since at least 1993 in January. The difference between three-month London interbank offered rates and the central bank’s benchmark was 102 basis points yesterday, compared with an average of 21 basis points in 2006.
Trichet indicated policy makers in the 16-nation euro area will lower their main rate again after today’s half-point shift. The Frankfurt-based central bank today downgraded its outlook for the economy and its president said it expects inflation to stay “well below” its 2 percent ceiling this year and next.
ECB Decision
The ECB has been reluctant to be as aggressive as other central banks for fear it would sow the seeds of future crises. Trichet said today that while the ECB is researching unconventional policies such as buying securities, it hasn’t yet decided to use them credit reports free.
“We have absolutely no pre-commitment,” Trichet said.
The ECB cut its forecast to show its economy contracting about 2.7 percent this year, down from December’s expectation for a 0.5 percent decline. New data today showed consumer spending and investment contracted by the most in at least 13 years in the fourth quarter when the economy shrank 1.5 percent.
The Bank of England has already begun buying commercial paper through its 50 billion-pound asset purchase facility, financed with Treasury bill sales. Plans to start purchasing commercial bonds have drawn criticism from analysts in London because it won’t help borrowers that are already shut out of debt markets.
Policy makers unanimously decided last month that King should seek authority from Chancellor of the Exchequer Alistair Darling for quantitative easing by buying government bonds and other securities without funding through debt sales, to raise the money supply.
‘Leap in the Dark’
“It’s a leap in the dark,” George Osborne, the finance spokesman for the opposition Conservatives, told BBC Radio 4. “It’s effectively printing money, but because all the other government policies haven’t worked, I don’t think the Bank of England was left with any options.”
Along with the central bank’s measures, Brown’s government has pledged billion of pounds to shore up Britain’s banking system. Last week he promised 325 billion pounds of support for Royal Bank of Scotland Group Plc’s investments, while Lloyds Banking Group Plc is also in talks on a government asset insurance program.
Brown is counting on government bailout money and the bank’s action to prop up the economy before the middle of 2010, the deadline for the next election. He will seek support from leaders of the Group of 20 nations in April for another boost in fiscal spending after a 20 billion-pound infusion of tax cuts and investment in infrastructure last year.
Economy in Recession
The U.K. economy contracted 1.5 percent in the fourth quarter, the most since 1980, as consumers curtailed spending. Former central bank Deputy Governor John Gieve said Feb. 20 the nation faces a “serious risk” of a decade-long depression as the credit squeeze hampers growth.
“The committee judged that this reduction in bank rate would by itself still leave a substantial risk of undershooting the 2 percent CPI inflation target in the medium term,” the bank said in a statement. “Accordingly, the committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending.”
Michael Page International Plc, the U.K.’s second-largest recruitment company, said today that full-year profit dropped 4.3 percent as it was hurt by the global recession. IMI Plc, the world’s biggest maker of pneumatic controls, said yesterday it has cut its global workforce by 10 percent and plans further reductions in coming weeks to weather falling demand.
Central bank forecasts published last month show economic growth will resume in the second quarter of next year while inflation will slow to 0.3 percent in early 2011, below the bank’s 2 percent goal.
“The bank’s forecasts on the speed of the recovery seem to be extremely optimistic,” said Jonathan Loynes, an economist at Capital Economics Ltd. in London. “It’s going to be some time before growth returns.”
U.K. Treasury minister Yvette Cooper pledged public funds to rescue 13 billion pounds ($18.2 billion) of construction work at risk of collapse because of a lack of bank finance.
The lifeline, which may cost the Treasury as much as 2 billion pounds, is aimed at safeguarding projects including motorway widening, new schools and incinerators planned under the Private Finance Initiative, where companies pay for government projects in exchange for a share of the income they produce.
About 110 projects struggling to raise debt finance will be eligible for the money. The Treasury will lend alongside commercial lenders and the European Investment Bank, and where necessary provide the full amount of senior debt required. The plan aims to unblock infrastructure contracts and help lift the economy out of its worst recession in at least three decades.
“This action will ensure that crucial and valuable public investment will not be disrupted by problems in the financial markets,” Cooper said in a statement to Parliament. The projects will “help prepare the country for future recovery.”
The U.K. will use the money to support 3.1 billion pounds of transport projects, 3.5 billion pounds of waste treatment and environmental projects and 2.4 billion pounds of school building.
“Equity investors will continue to bear the primary risk in these projects and, where available, private sector debt will continue to be provided,” Cooper said.
Public Investment
PFI projects account for about 10 percent of public capital investment, and the government plans to write contracts worth more than 21 billion pounds in the coming years. The program allowed Prime Minister Gordon Brown to increase investment in public services without significantly adding to government debt. Projects worth almost 59 billion pounds have been signed since the Labour Party took office in 1997.
The projects benefit construction companies including Balfour Beatty Plc, Carillion Plc, John Laing Plc, WS Atkins Plc and Costain Group Plc. Service companies including Serco Group Plc and Jarvis Plc also benefit by operating PFI projects for the government.
The Conservative Party invented PFI finance under Prime Minister John Major, and Brown expanded the program during his decade as finance minister until June 1997. Liberal Democrats say the program should be scrapped so the Treasury can fund the projects directly, making clear the total cost to taxpayers used auto loans.
‘Dishonest System’
“This was a dishonest system of accounting, designed to hide taxpayers’ liabilities,” said Vince Cable, a Liberal Democrat lawmaker who speaks on finance. “If the private sector cannot now come up with the money, and is unwilling to take the risks, we need to move to a simpler, more honest system of public investment for public projects.”
In all, the program may cost the Treasury between 1 billion pounds and 2 billion pounds in the next year. Chancellor of the Exchequer Alistair Darling may provide more solid cost estimates in his annual budget statement on April 22.
“Taxpayers are fed up seeing their money used to bail out failures in the private sector with no return,” Dave Prentis, general secretary of the Unison union, said in an e-mail. “Why doesn’t the government see sense by building and running major public works itself for the benefit of the public, not to line the pockets of big business?”
About 3.1 billion pounds of transportation projects including widening of the M-25 motorway circling London have been delayed by a lack of funds. They will benefit from the Treasury financing along with school building projects worth 2.4 billion pounds and 3.5 billion pounds for waste management and the environment.
‘Excellent Track Record’
“Getting PFI deals moving will help public service improvements continue and protect jobs in the construction and services industries,” John Cridland, deputy director general of the Confederation of British Industry, said in an e-mail. “The private sector has an excellent track record in delivering infrastructure projects on time and to budget, and it would be deeply regrettable if this expertise were lost because of the credit crunch.”
The program is the latest aimed at reviving the economy and bank lending after Brown offered 37 billion pounds to recapitalize Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. He has also promised hundreds of billion pounds of loan guarantees for toxic assets on bank balance sheets.
The best CEO of a major automaker in North America has been on the job for less than three years. His name is in the headlines far less frequently than his struggling peers at General Motors Corp. and Chrysler LLC.
Alan Mulally isn’t even a "car guy," in the parlance of Detroit industry veterans. Passed over for the top post at Boeing Co., Mulally was overseeing that company’s answer to rival Airbus S.A.S.’s superjumbo A380, the 787 "Dreamliner," intended to be the fastest large-scale people-mover in the air.
Mulally isn’t in the spotlight because, unlike his counterparts at GM and Chrysler, he’s not seeking a taxpayer-funded bailout to stave off bankruptcy at his Ford Motor Co. Which, when you think about it, is why more attention should be paid to Mulally’s Ford tenure.
Ford, to be sure, is hardly the picture of health. It lost $14.6 billion (U.S.) last year. (GM lost $31 billion U.S., and the much smaller Chrysler spilled $8 billion in red ink.) Ford boasts the strongest balance sheet of the Detroit automakers, with $13.4 billion (U.S.) in its treasury. But it also carries $26 billion (U.S.) of debt.
Ford’s domestic rivals may have pretty much depleted their cash reserves altogether. But Ford’s $13.4 billion (U.S.) in cash reserves won’t get the company through the next two years without a significant reversal of 2008’s calamitous downturn in vehicle sales. In last year’s fourth quarter alone, Ford burned through $5.5 billion (U.S.) in losses, causing it to exhaust the last of its lines of credit.
All that said, Mulally has a knack for seeing around corners. He lost no time since his September 2006 arrival at Ford’s Dearborn, Mich. headquarters in forcing what is now Detroit’s strongest automaker to get religion about the basics of 21st-century automaking.
Outsider turnaround CEOs are over-rated. The now-bankrupt Nortel Networks Corp. is a sad example of that.
But Mulally’s remove from Detroit’s notoriously insular culture has perhaps saved Ford, at a time when at least one U.S. credit-rating agency says there is a 70 per cent chance that either or both of GM and Chrysler succumb to bankruptcy.
Ford was in parlous condition when Mulally signed on. The 105-year-old firm had reported the largest annual loss in its history. Morale was abysmal due to fractious labour relations, an incoherent growth strategy, and continued market-share losses.
Mulally, 63, blessed with a deceptively soft-spoken persona, was audacious in taking on all of Ford’s most critical problems at once. The result is the healthiest cash position of any domestic automaker, a firm committed to just one brand, the "greenest" line-up of Detroit offerings, and the one domestic U.S. automaker that has actually been gaining market share.
A prescient Mulally soon after his arrival bolstered Ford’s treasury with a stunning $23.4 billion (U.S.) in fresh borrowings and lines of credit in late 2006. The move was questioned at the time because Ford was required to put in hock just about all of its assets, even its hallowed "Blue Oval" trademark.
Against Mulally’s recent joke that he had merely sought a "home improvement loan" to finance a thorough restructuring of Ford - and indeed, that is what he began using the money for, along with the costly development of better-built cars with more showroom appeal - that fact is he was bracing for a prolonged industry downturn.
And Mulally was right. First came the spectacular jump in fuel prices that cut heavily into sales of Detroit’s chief source of profits, its truck-based SUVs. Then came the current recession, and the gut-wrenching 18 per cent plunge in 2008 vehicle sales. Mulally and other experts, who keep ratcheting down expectations for this year, now forecast North American sales volume as low as 10 million vehicle sales this year, down from the lofty 16 million or so units sold annually earlier this decade.
And that, says Mulally, is close to the new normal. "We will not return to the peaks of production that we’ve seen in the past," the Ford CEO told the U.K. Financial Times last month. Long before that, as part of the "home improvement," Mulally began to drastically shrink Ford to the changed circumstances he saw ahead instant payday loans. Plants were closed, thousands of employees laid off, model lines discontinued.
It seemed to Mulally, as it has to many industry experts for a long time, that Detroit diluted its finance, R&D and marketing efforts by supporting too many brands. As he had done in raising $23.4 billion just before the global credit market dried up, Mulally unloaded Ford’s niche brands - Jaguar, Land Rover and Aston Martin - while there were still buyers. "We had a strategy of mini-brands," Mulally said recently, "and what we’re doing now is focusing mainly on Ford."
It has lately occurred to GM, for instance, that Toyota Motor Corp., which has eclipsed GM in size, gets by with two brands, Toyota and Lexus; and Honda Motor Co. makes do with just Honda and Acura. As a condition of its bailout proposal, GM is pledging to shed four of its eight brands. But there are no buyers. GM’s Hummer already has been on the auction block for months, with no takers. Its forlorn Saab brand, which even the Swedish government has shown reluctance in assisting, abruptly filed for bankruptcy last week.
With Ford’s engineering, design stylists and marketers focused on one brand, the company, alone among the U.S. domestics, has at last arrested Ford’s market-share decline. Indeed, in last year’s fourth quarter, Ford, Toyota and Honda were alone among the top six automakers in increasing their market share. In Canada, Ford took back 1.8 points of market share in January, while GM and Chrysler continued to lose share. And in the past three months, Ford has outsold Toyota in Canada.
Automakers talk of their "conquest rate," the portion of their new-car sales in which a buyer’s trade-in is from another manufacturer. In January, 45 per cent of Ford buyers were converts, up from 38 per cent in August.
The quality improvements Mulally sought have paid off. Consumer Reports noted this month that of the eight new Detroit vehicles it recommends, six are Fords. The latest hybrid version of the Ford Fusion sedan is noteworthy, not just because it beats the Toyota Camry in fuel efficiency by seven miles per gallon and the Chev Malibu by 15.
Hybrid sales have dived along with fuel prices. What matters is the excited showroom and blogosphere chatter about a hybrid Ford Fusion, which is casting an eco-friendly "halo" on Ford’s entire line-up. GM’s Hummer, obviously, contributes to the wrong image for the times.
Yet Ford needs to do much better. Its North American sales dropped 40 per cent last month, part of the continued industry downturn. Ford in January slashed another 10 per cent of its U.S. white-collar staff. And this week, Mulally and executive chairman Bill Ford Jr. took 30 per cent salary cuts for 2009 and 2010, while scrapping bonuses for all Ford senior executives and salaried employees worldwide.
In the search for cost cuts since Mulally’s arrival, the CEO recently signalled that "non-core" assets such as unused land and buildings may go on the block. Ford also is talking with potential buyers for its Volvo brand its 33-per-cent stake in Mazda Motor Corp. Even in a buyers’ market, those brands have more value than the likes of the GM Saturn division now bearing a For Sale sign.
Ford’s immediate worry is that North American consumers still lump it in with its troubled Detroit rivals. When asked about GM, Ford and Chrysler products, U.S. survey respondents vow to stay clear of them all, given the precarious state of the latter two firms. When asked about Ford alone, the perceptions improve considerably.
So, in one of several moves to break from the Detroit pack, Ford this spring will roll out a marketing campaign that takes on its foreign rather than domestic competition, and emphasizes the firm’s longevity, financial soundness, product quality and new-feature enhancements.
Ford and Detroit go together like salt and pepper. Separating them in the public mind might be the toughest challenge Mulally has faced. But for at least the next year, it will be Job 1 in Dearborn.
Saturday night at the CPA’s annual awards program at the Brown Palace Hotel, DenverBusinessJournal.com and its editor, Business Journal Managing Editor L. Wayne Hicks, won five awards, including first-place honors for best content, best interactivity and best advertising. The website also won second place for best design and third place for best online community.
DenverBusinessJournal.com was competing with other websites operated by Colorado weekly newspapers in the contest sponsored by CPA, a trade group of Colorado newspaper publishers.
The Denver Business Journal staff won first place from CPA for best special section for the “Outstanding Women in Business” section in the newspaper’s Aug. 8-14 edition. The section was edited by Journal Associate Editor Boots Gifford and contained articles by staff reporters Greg Avery, Mark Harden, Renée McGaw, Bob Mook and Cathy Proctor and contributors Amy Bryer, Laurie DiBattista, Doug McPherson, Ryan Peacock, Daliah Singer and Stephanie Thompson, as well as photographs by Kathleen Lavine.
Gifford also won first place from CPA in the best sports story category for a profile of Colorado Mammoth lacrosse announcer Stephen “Willie B.” Meade. Harden took third place in the category.
A second-place award for sustained coverage went to Journal staffers for numerous articles in 2007 and 2008 on the then-upcoming Democratic National Convention. Writers in the entry included Avery, Harden, Noelle Leavitt, McGaw, Mook, Paula Moore and Proctor.
Other second-place awards from CPA: Gifford, feature page design; Harden, education story; Lavine, feature photo; Mook, business story; and Mary Ann Talbot, informational graphic instant personal loans guaranteed.
And Gifford won third place for feature page design.
The Journal’s print entries competed against other large-circulation weekly papers. The CPA contest covered material published from late 2007 through late 2008.
On Thursday, the Journal staff received several awards at the annual “Top of the Rockies” program by the Society of Professional Journalists at the Denver Newspaper Agency Building. The competition included papers from Colorado, Wyoming, Utah and New Mexico.
SPJ’s first-place award for general business reporting went to Bob Mook for a piece on confusing hospital bills. Mark Harden took second place in the category and Greg Avery received an honorable mention.
Paula Moore won first place in the category of business investigative/enterprise reporting for her work on condominium developer Erik Osborn.
Kathleen Lavine won both first and second place awards for news photography.
Mook took first place for political reporting for a story entitled, “Legislators Target Insurers.” Noelle Leavitt won second place.
Avery received first-place honors in the legal-affairs reporting category for a report on a lawsuit against Jeppesen. Harden took second place.
Karl Wimer won a first-place prize for cartoons for a selection of his work.
Other SPJ awards for the Journal: Journal Editor Neil Westergaard, second place, business columns; Avery, second place, business feature writing; and Mook, third place; business feature writing.
Click here for the full list of winners in the CPA contest.
Click here for the full list of winners in the SPJ contest.
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