Paul Weiss on the SEC’s short sale price restrictions (via @alacra1)
New round of foreclosures threatens US housing market (Washington Post)
S&P warns over America’s top-tier debt rating (via @FTAlphaville)
Local Merchants More Optimistic on Revenues, Hiring Than they Were in November (MerchantCircle confidence index)
Where The ‘Top 50 US Venture-Backed Companies’ Reside: two thirds in CA (via DJ)
European REIT Rollout Seems at Hand, led by German property group Hamborner (via WSJ)
Paris is now 50% more expensive than New York and is the priciest city in the world (The Economist)
Technorati Tags: foreclosures, REIT, short-selling, Twitter, venture-capital
NERA Economic Consulting’s Thomas Porter says fair-value accounting rules cannot be blamed for causing the credit crisis, mainly because they did not require any new fair-value measurements.
Prior to the recent credit crisis and market meltdown, there had been little complaint about the use of fair value in financial reporting. However, critics now claim that the requirements of SFAS 157 — which most companies were required to adopt right after the markets began to collapse — contributed to the credit crisis and have called for its rescission. Their argument is that heightened liquidity needs could only be satisfied by fire sales at depressed prices, which then led to a further spiraling down of prices, all of which could have been avoided if SFAS 157 had never been issued.
In an article in Complinet’s Informer magazine, Porter argues that SFAS 157 cannot be blamed for causing the credit crisis, mainly because it did not require any new fair-value measurements. One of its main contributions to Generally Accepted Accounting Principles, Dr. Porter notes, is the expanded and standardized disclosure requirements about fair value.
Unfortunately, the uproar caused by the critics was so distracting that users of financial information failed to appreciate that SFAS 157 gave them exactly what they had long been clamoring for- heightened transparency.
Further, because SFAS 157 and its subsequent interpretations accommodate the possibility of imperfect markets, the timing of its release (as the markets were collapsing) was almost perfect. Dr. Porter contends that, as a result of the structured and expanded disclosure requirements of SFAS 157, users now have more and better information about when firms depart from “mark-to-market” accounting when fair value measurements are required.
Technorati Tags: accounting, credit-crisis, fair value accounting, FASB, financial crisis, gaap, mark-to-market
Audit Analytics has prepared a research brief tracking director departures, including reason for departure, over five years. The research examined the entire filing population while focusing on accelerated filers and includes an industry specific breakdown of banking entities. We are pleased to offer a complimentary download.
Some points of interest in the briefing include:
- In 2007 the percentage of accelerated filers with a director departure was 37.5% as opposed to 33.8% for all filers.
- The percentage of departures among directors of banking entities increased by 7% between 2005 and 2008.
Banking entities experienced a sustained increasing trend in director departures starting in 2006 whereas director departures for all filers peaked in 2007.
The full report Director Departures – Five-Year Overview is available free of charge to Research Recap users for 30 days by special arrangement with Audit Analytics, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $49.00).
Audit Analytics also has released Financial Restatements – A Nine-Year Comparison ($149.00), which indicates that the impact of the Sarbanes-Oxley Act on Internal Controls over Financial Reporting (ICFRs) has been beneficial. Some highlights of the report are:
- For the third year in a row, the total number of restatements in 2009 declined, falling by 27% from 2008.
- For the third year in a row Audit Analytics found an equivalence or reduction in the severity of the restatements:
- The restatements with the largest negative impact on net income dropped from $605 million in 2008 to $357 million in 2009.
- The average cumulative impact on net income per restatement dropped from $7.1 million in 2008 to $4.6 million in 2009.
- The average number of days restated dropped from 510 in 2008 to 476 in 2009.
- The average number of issues per restatement dropped from 1.67 in 2008 to 1.48 in 2009
For additional free research reports from the Alacra Store click here
Technorati Tags: complimentary research, corporate directors, corporate-governance, restatements, SOX, U.S. banks
The implementation of capital controls on short-term and especially risky capital inflows is rising and likely to continue to do so as the current recovery gathers pace.
Guest Post by Oxford Analytica
Prior to the 2008-09 financial crisis, it had become widely accepted among international financial institutions and many leading national policymakers that the benefits of liberalizing capital flows outweighed those of capital controls, which anyway might prove ineffective in achieving their objectives. Yet the crisis jolted this consensus:
- Bubble caution. The crisis created a step change in awareness among policymakers about the need to try to avoid the formation of asset price bubbles and ensuing financial market instability. As a result, increased regulation of financial activity and capital markets has become more widely sought, and capital controls are a potential element of this.
- Perception check. At the height of the financial crisis, sudden flight of short-term capital away from emerging markets illustrated lingering risk perception associated with developing countries. The financial instability in some emerging markets generated by these sudden outflows raised the attractiveness of capital controls as a way to mitigate future volatility.
- Recovery pressures. Perhaps most important of all, the rapid return of capital to emerging markets in the current recovery has generated pressure in favour of capital controls.
The dynamics of the global recovery are generating interrelated reasons for developing country governments to consider implementing capital controls:
- Exchange rate. Many floating developing country currencies have risen dramatically since March 2009, undermining export competitiveness.
- Liquidity. The large amount of liquidity in the global economy as a result of monetary and fiscal stimulus efforts worldwide aggravates the risk of economic dislocation through sudden inflows or outflows of short-term capital.
- Inflation. Inflationary pressures so far are only of major concern in some asset classes within certain countries. Some countries, such as China, are attempting to stem inflationary pressure by taking further domestic measures, including constraining bank credit growth.
As a result of these pressures, several countries over the last year have moved to constrain foreign capital inflows, including Brazil, Taiwan, Indonesia and South Korea.
There are three main categories of capital controls:
- Price-based. These include taxes on investments; taxes on interest paid in local currency; and taxes on foreign debt issuance by domestic residents. A key benefit of price-based controls is that they can be variable according to maturity, which means they can be used to promote longer-term investment.
- Quantitative. These usually consist of limits on the amount of foreign funds that can be invested in local currency. Such limits are often used in countries that do not have floating exchange rates, such as China.
- Regulatory. These require the depositing of part of the value of an investment in a specified local currency instrument, indirectly reducing the investor’s total yield.
While controls may only be effective temporarily, they can still be useful in constraining local currency appreciation and diminishing financial market volatility.
While the choice of capital control depends on each country’s specific circumstances, there are general reasons why most controls have limited impact:
- Evasion. The effectiveness of capital controls on short-term capital inflows is usually temporary, as investors tend to find ways to evade them. However, this does not mean that they are not useful as a temporary and/or partial brake on inflows.
- FDI strength. Debt and portfolio capital inflows may be dwarfed by foreign direct investment (FDI) inflows, particularly if a recipient country enjoys political stability and a supportive business environment. Governments are usually far more reluctant to deter FDI than short-term debt, as FDI is directly associated with increasing productive capacity.
- Foreign dependence. Countries that are particularly reliant on foreign capital remain unlikely to impose capital controls despite the changing global sentiment towards their adoption.
Technorati Tags: capital controls, capital-inflows, emerging-markets, FDI, foreign-direct-investment
European governments’ commercial medium- to long-term (MLT) borrowing will likely reach a historical peak at €1,446 billion in 2010, according to Standard & Poor’s Ratings Services seventh pan-European sovereign issuance survey. This is up €52 billion from the previous peak of €1,394 billion in 2009, according to the survey, which consolidates estimates of borrowing activity of all 46 rated European sovereigns in 2010.
Excerpts from S&P European Sovereign Issuance Survey Predicts Record Borrowing Of €1,446 Billion In 2010 On Large Budget Deficits (Premium)
Among the five largest European sovereign borrowers, we expect the U.K. to borrow an estimated €38 billion less than in 2009, after very high gross MLT borrowing of €257 billion in 2009. Our estimates of gross borrowing are higher by €41 billion in Germany, and by €26 billion in France, reflecting our expectation that there will be a deterioration in their public finances in 2010. We also estimate large absolute increases in MLT borrowing in Spain (€21 billion), Russia (€20
billion), Turkey (€19 billion), and The Netherlands (€13 billion).
We also believe it is likely that net MLT commercial borrowing (that is, gross debt net of maturing debt) will reach another peak in 2010 at €762 billion, up €82 billion from its 2009 level, and almost six times the level of 2007. We believe falling amortizations are the main reason for the even stronger increase in net borrowing. Short-term debt levels also remain high at 10.9%, well above their share of about 7% before the economic and financial downturn, but slightly down from 11.7% in 2009.
In our view, debt-related sovereign vulnerabilities have increased, particularly in the Eurozone, where we expect deficits and government borrowing will likely rise further to new peaks.
Changes in sovereign risk characteristics, as well as in risk perception by investors can lead to significant changes in financing costs, as experienced by a number of sovereigns over the past 18 months, Greece being the most recent example. Furthermore, because central banks are set to phase out liquidity support to the financial sector, as well as quantitative easing measures over 2010, the ensuing drop in demand for government debt could lead to rising benchmark yields. The resulting fiscal pressure from a sustained increase in financing cost could be significant in our view. We estimate that a sustained 300 basis points (bps) shift in the yield curve would by 2015 amount to extra annual interest payments of 3.9% of 2010 GDP for Greece, 2.6% for Portugal, and 2.5% for Italy and the U.K.
Technorati Tags: Europe, France, Germany, Italy, Netherlands, Portugal, Russia, sovereign-debt, Spain, turkey, UK
Guest Post by James A. Kaplan, Chairman and CEO, Audit Integrity
Getting older has its comforts. One of them is that you get to experience a number of historic events and can gain perspective on consequences that result from those events.
It’s been well over a decade since the Japanese economy imploded. That implosion was based on a speculative frenzy that drove values to the extreme, where it was discovered the effects of gravity could not be overcome.
The Japanese government’s response to this dramatic situation was to slash interest rates and rapidly increase government spending. (Note: they did not substantially increase their money supply.) The government claimed to be making substantial efforts to correct the impact of the shrinking private economic sector. The private economic sector, while paying lip service to growth opportunities, continued to stagnate as the banking/industrial complex refused to take risks. The national economy floundered between underwater loans and lack of demand. To this day, over a decade after the implosion, Japan is still struggling with lackluster economic growth.
That sounds a lot like déjà vu, doesn’t it? Of course, in the “good old U.S. of A.,” we are different – or so we say. As best I can tell, our response to date looks much like Japan’s response of a decade ago. The Fed has lowered the cost of short-term borrowing to nearly Zero (a rate that discourages long-term savings) and increased government spending to the point where the credit of the United States is in jeopardy. Financial institutions continue to stagger under the weight of non-performing loans. Industry is reluctant to invest without evidence of a pick-up in demand, while consumers’ wealth and savings have dropped so precipitously they are reluctant — or unable — to spend.
One can only hope that the rapid increase in money supply, both domestically and globally, will result in a different outcome than that suffered by the Japanese. I would not like to see the U.S. endure a protracted economic struggle. However, if we look specifically at the actions of our commercial banking system, we find little comfort.
Commercial banks hold over $1.7 trillion of commercial real estate, and are reluctant to write down their holdings. In fact, FASB has changed its interpretation of FAS 115-2 and FAS 124-2, making it extremely easy to avoid recognizing loss in value.
According to the Congressional Oversight Panel, over 2,988 commercial banks are classified as having a high commercial real estate concentration. The FDIC currently has 702 publicly-held banks on its watch list.
Much like Japan, we have turned a blind eye to a major potential implosion, and in fact, are working hard to cover it up. Of course the banks are taking FASB’s lead and not writing down assets. Remember, unwillingness to fairly reflect values was a criticism placed on Japanese banks one decade ago. .
Bank charge-offs of the 4th Quarter of 2009 totaled $59 billion, an increase of 47.7% year over year. The bulk of these charge-offs related to single-family home loans – not to distressed commercial real estate. I believe the real charge-off rate should be three to four times higher than the banks are willing to admit.
A charge-off rate that more accurately reflects commercial real estate values would drive banks into a substantial negative earnings position. That’s a position no one likes to be in, but denying it does not change the fact that a bank in that kind of financial distress represents a substantial risk to stakeholders, taxpayers, and the economy overall. We’ve seen the impact “Extend and Pretend” has had historically, and the results are not pretty.
Below is a select list of mid-sized commercial banks that I believe are representative, to a greater or lesser degree, of the problems the industry faces. They are all talking a good game. I certainly endorse the power of positive thinking – but not when it is used to distract investors from the truth.
Technorati Tags: commercial-real-estate, regional-banks, U.S. banks
Big banks, except those in emerging markets, will probably destroy value over the next four years (McKinsey)
MGI: New sectors such as cleantech are too small to make a difference to economy-wide job growth.
Excellent microcosm in 7 minutes of how American homeowners got overleveraged (podcast by NPR’s Tamara Keith)
Audit Integrity Updates Investor Watchlist for Western Europe
Credit Suisse scorecard of OECD countries most likely to face government debt funding problems (via @FTAlphaville)
Social spending is up to 24% of GDP in OECD countries, driven by healthcare and elderly costs (OECD)
Technorati Tags: big banks, home-equity-loans, social spending, sovereign-debt, unemployment, western europe
The use of foreign exchange (FX) swaps as a source of funding and as a hedging tool may increase the risk of financial and economic instability during periods of turmoil, according to a new Working Paper published by the International Monetary Fund (not official IMF policy).
Selected Excerpts from FX Swaps: Implications for Financial and Economic Stability (free pdf) Prepared by Bergljot B. Barkbu and Li Lian Ong1
The spillover of the liquidity crunch in international money markets into the FX swap market during the recent financial crisis has placed a spotlight on the latter’s potential impact on macro-financial stability. The increasing reliance on FX swaps for FX funding by some market participants and the sharp increase in cross-border transactions in this instrument gave rise to significant concerns when the market faltered during this tumultuous period. Specifically, the role of banks as key dealers and users of FX instruments—and their central importance for financial stability and economic activity—raised worrying questions in some countries about the possible impact of FX swaps on the health of the banking system and real economy.
Capital adequacy requirements under the Basel Accords hold implications for the application of capital charges when these instruments are held by banks, either for speculation purposes, to finance their FX needs and/or to hedge their open FX positions. FX swaps held by banks could also impact their liquidity positions, through margin calls by counterparties, even though they may be fully hedged for FX movements. Encouragingly, the accounting requirements under IFRS are aimed at improving the transparency of reporting by users of these instruments, by bringing them onto the balance sheets of the reporting entities.
During the recent crisis, central banks used FX swap facilities extensively to facilitate the rollover of FX swaps by the private sector during the crisis, in some cases, supported by swap lines with other central banks.
We conclude that the application of FX swaps is not infallible, despite their usefulness. That said, this paper is not intended as a critique of FX swaps, but rather, to examine the channels through which FX swaps could affect financial and economic stability, given their increasing popularity leading up to the crisis.
As recent events have shown, the use of this instrument could actually exacerbate risks to financial and economic stability during periods of turmoil. Thus, central banks, which typically use FX swaps as a monetary policy tool, and banks, which transact in this instrument for funding, hedging or speculative purposes, need to ensure that they have the necessary measures in place to address the stability problems that could arise from its use.
Technorati Tags: banking-system, central-banks, financial-regulation, FX swaps, money markets
Major developing countries will continue to outpace advanced economies’ performance in the second quarter, according to Oxford Analytica. We are pleased to offer a complimentary download of OxAn’s latest quarterly global economic outlook.
Selected Highlights.
The global recovery will continue, underpinned by the performance of major emerging markets. Exports to China in particular will contribute to growth in a number of developing and developed countries. Trade as a whole will continue to rebound, and energy prices are unlikely to change significantly. Nonetheless, US unemployment will persist, and European economies remain weak, amid concerns about sovereign debt.
- The United States will have a better quarter than most other developed countries, despite uncertainties about the sustainability of its recovery. As concerns about public debt and fiscal deficit mount, especially in Europe, governments are likely to phase out stimulus measures.
- Emerging markets remain the most dynamic part of the global economy
- The United States will perform better than most other developed economies.
- Pressure will mount on European governments to phase out stimulus measures.
- Inflation will remain subdued in advanced economies, where monetary policy will remain loose.
- Interest rates are likely to be increased in major developing countries.
- Trade will continue gradually to recover from its recession-induced slump.
Problems in OECD countries will weigh on the global picture, but not enough to compromise recovery. Inflation will remain subdued in advanced economies, and monetary policy unprecedentedly loose. In major developing countries, authorities probably will tighten monetary policy to avoid substantial price increases amid solid economic expansion.
Emerging markets will continue to be the most dynamic part of the world economy during the second quarter. However, the period will see divergence among developed countries, with:
- The United States growing, supported by government stimulus;
- Japan continuing to experience tepid recovery; and
- European performance faltering amid increasing concern over many countries’ fiscal and debt positions.
PROSPECTS 2010 Q2: Global economy has been made available free of charge to ResearchRecap users for 30 days by special arrangement with Oxford Analytica, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $150.
Regional and country PROSPECTS 2010 Q2 reports are available here.
For additional free research reports from the Alacra Store click here
Technorati Tags: complimentary research, economic-forecast, emerging-markets, global-economy, interest-rates, japan, stimulus, US
Petroleum price subsidies are on the rise, adding to greenhouse gas emissions, according to a new “staff position note” from the International Monetary Fund (not official policy).
The paper notes that in 2003, global consumer subsidies for petroleum products totaled nearly $60 billion. They are projected to reach almost $250 billion in 2010. Tax-inclusive subsidies, reflecting suboptimal taxation, are estimated to be much larger—$740 billion in 2010, or 1 percent of global GDP. G-20 countries account for over 70 percent of tax-inclusive subsidies, with emerging G-20 countries accounting for a sizable share.
Halving tax-inclusive subsidies could reduce projected fiscal deficits by one-sixth in subsidizing countries and could reduce greenhouse emissions by around 15 percent over the long run.
The paper urges reform of subsidies, but recommends including measures to mitigate the impact of higher prices on the poorest groups.
Fore details, see Petroleum Product Subsidies: Costly, Inequitable, and Rising
Technorati Tags: emissions, energy-prices, greenhouse-gases, petroleum, subsidies
