The Federal Reserve said Sunday it had granted a request by the country's last two major investment banks - Goldman Sachs and Morgan Stanley (MS) - to change their status to bank holding companies.
The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.
The change continued the biggest restructuring on Wall Street since the Great Depression.
The request for the change to bank holding companies was granted by a unanimous vote of the Fed's board of governors during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Federal Reserve, which regulates the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
The decision by the two giants of finance to get approval from the Fed to change their own status represented another dramatic development in one of the most turbulent periods in Wall Street history.
In the surprise announcement late Sunday, the central bank said that to provide increase funding support to the two institutions during the transition period, they would be allowed to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The Fed said its action would take final effect after a five-day waiting period required under law.
The decision means that the Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.
But as commercial banks, Goldman Sachs and Morgan Stanley will have permanent access to emergency loans from the Fed, the same privilege that other commercial banks enjoy.
The action by the Fed's board of governors in Washington came on a day when the Bush administration continued to campaign for quick congressional approval of its request for authority to use $700 billion to purchase a mountain of bad mortgage debt held by financial companies. The effort represented the boldest action yet aimed at stabilizing chaotic financial markets.
Democrats in Congress said they would demand provisions in the bailout measure to protect people in danger of losing their homes as well as seeking to cap executive compensation at firms who get to unload their bad mortgages debt onto the government. But the proposal was expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it was being delayed.
Showing posts with label Banks. Show all posts
Showing posts with label Banks. Show all posts
2008-09-21
2008-09-19
Govt trading ban could have unintended results
The government's unprecedented move Friday to ban people from betting against financial stocks might be a salve for the market's turmoil but could also carry serious unintended consequences.
In a bid to shore up investor confidence in the face of the spiraling market crisis, the Securities and Exchange Commission temporarily banned all short-selling in the shares of 799 financial companies. Short selling is a time-honored method for profiting when a stock drops.
The ban took effect immediately Friday and extends through Oct. 2. The SEC said it might extend the ban - so that it would last for as many as 30 calendar days in total - if it deems that necessary.
That window could be enough time to calm the roiling financial markets, with the Bush administration's massive new programs to buy up Wall Street's toxic debt possibly starting to have a salutary effect by then.
The short-selling ban is "kind of a time-out," said John Coffee, a professor of securities law at Columbia University. "In a time of crisis, the dangers of doing too little are far greater than the dangers of doing too much."
But on Wall Street, professional short-sellers said they were being unfairly targeted by the SEC's prohibition. And some analysts warned of possible negative consequences, maintaining that banning short-selling could actually distort - not stabilize - edgy markets.
Indeed, hours after the new ban was announced, some of its details appeared to be a work in progress. The SEC said its staff was recommending exemptions from the ban for trades market professionals make to hedge their investments in stock options or futures.
"I don't think it's going to accomplish what they're after," said Jeff Tjornehoj, senior analyst at fund research firm Lipper Inc. Without short sellers, he said, investors will have a harder time gauging the true value of a stock.
"Most people want to be in a stock for the long run and want to see prices go up. Short sellers are useful for throwing water in their face and saying, 'Oh yeah? Think about this,'" Tjornehoj said. As a result, restricting the practice could inflate the value of some stocks, opening the door for a big downward correction later.
"Without offering a flip-side to the price-discovery mechanism, I think there's a pressure built up in stock prices that only gets relieved in a great cataclysm," he said.
Short selling involves borrowing a company's shares, selling them, and then buying them to return them to the lender later, when the stock falls. The short-seller pockets the difference in price.
Although the practice can make markets more efficient and bring in more capital, the government argues that it has widened the scope of the recent financial crisis and contributed to the collapsing values of investment and commercial bank stocks in particular.
Government officials on both sides of the Atlantic have been denouncing hedge funds and other short sellers they say have swarmed over the limp bodies of venerable investment banks and other big companies. New York Attorney General Andrew Cuomo likened them to "looters after a hurricane," and his office is investigating a possible conspiracy among short-sellers to spread negative rumors to pound down companies' stock prices.
The turmoil in recent weeks has swallowed some of the most storied names on Wall Street. Three of its five major investment banks - Bear Stearns, Lehman Brothers and Merrill Lynch - have either gone out of business or been driven into the arms of another bank. Many contend that short-selling played a key role in forcing the collapse of these institutions.
SEC Chairman Christopher Cox, who with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke had met with lawmakers at the Capitol Thursday night, acknowledged that such extraordinary measures would not be necessary in a well-functioning market and said they are only temporary.
Cox said Friday his agency "is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets." He said the temporary ban "will restore equilibrium to markets."
The SEC also imposed a new requirement, also temporary, for investment managers to publicly report their new short sales of stocks. And the agency eased restrictions on the ability of companies to buy back their own shares, also through Oct. 2, another move aimed at helping restore liquidity to the distressed and volatile market.
Over the summer, the SEC imposed a 30-day emergency ban on "naked" short selling - where sellers don't actually borrow the shares they sell - in the stocks of mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE) and 17 large investment banks. But Friday's ban expanded to all short selling, not just the more aggressive naked variety, and to a much wider universe of companies.
The 799 companies covered by the SEC ban are an A-to-Z of the nation's financial institutions, including the powerhouse investment banks such as Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) and commercial banks running the gamut from Bank of America Corp. (BAC) to Cape Fear Bank Corp. (CAPE) SLM Corp. (SLM), which is known as Sallie Mae and is the biggest U.S. student lender is on the list, as are Charles Schwab Corp. (SCHW), Berkshire Hathaway Inc. (BRKA) and Principal Financial Group Inc. (PFG)
Washington Mutual Inc., the nation's largest thrift, which has lost billions from subprime mortgage exposure and seen its shares plunge in recent weeks, also is on the SEC list. So is the NYSE Euronext, the biggest stock exchange, and foreign financial companies whose stock is traded on U.S. exchanges, such as Lloyds TSB Group PLC of Britain and China Life Insurance Co. Ltd.
However, investors still have ways to place bearish bets: by trading in options that turn profitable when a stock drops.
Jim Chanos, a prominent short seller and president of a $7 billion hedge fund, Kynikos Associates, called short-selling a "vital investment strategy" and said banning the practice "will not enhance long-term market integrity."
He argued that investment banks' bad bets on risky assets - not predatory short-sellers - were the true cause of the steep declines in the stock price of financial firms.
"Far from being the cause of the crisis, many short sellers were warning months and years ago about problems in this area," Chanos said in a statement.
The new SEC ban also touched smaller investors. Two popular funds that specialize in short selling and are traded on stock exchanges - ProShares' Short Financials and UltraShort Financials - were temporarily halted Friday due to the ban. Trading resumed later in the day, but ProShares said it has suspended creating new shares in the funds until further notice.
ProShares Chairman Michael Sapir called the ban "extraordinary" and said it remains to be seen whether it has the intended effect of calming the markets.
"I don't think anyone sees the action today as a long-term solution," Sapir said. "It's a way to calm things down, but it isn't consistent with a free and open market."
The SEC's ban came in concert with Britain's Financial Services Authority, which announced a similar ban there Thursday. Some British politicians had claimed that short-selling was partly responsible for HBOS PLC's abrupt takeover by banking rival Lloyds TSB PLC on Thursday. The ban there was met with a similar reaction as the SEC move - a mix of relief and skepticism.
"Banning short selling is just a part of a solution," said Nic Clarke, banking analyst at Charles Stanley Stockbrokers. "We view this as a side issue. It doesn't stop the underlying reason for the credit crunch and it doesn't get to the heart of the problem."
In a bid to shore up investor confidence in the face of the spiraling market crisis, the Securities and Exchange Commission temporarily banned all short-selling in the shares of 799 financial companies. Short selling is a time-honored method for profiting when a stock drops.
The ban took effect immediately Friday and extends through Oct. 2. The SEC said it might extend the ban - so that it would last for as many as 30 calendar days in total - if it deems that necessary.
That window could be enough time to calm the roiling financial markets, with the Bush administration's massive new programs to buy up Wall Street's toxic debt possibly starting to have a salutary effect by then.
The short-selling ban is "kind of a time-out," said John Coffee, a professor of securities law at Columbia University. "In a time of crisis, the dangers of doing too little are far greater than the dangers of doing too much."
But on Wall Street, professional short-sellers said they were being unfairly targeted by the SEC's prohibition. And some analysts warned of possible negative consequences, maintaining that banning short-selling could actually distort - not stabilize - edgy markets.
Indeed, hours after the new ban was announced, some of its details appeared to be a work in progress. The SEC said its staff was recommending exemptions from the ban for trades market professionals make to hedge their investments in stock options or futures.
"I don't think it's going to accomplish what they're after," said Jeff Tjornehoj, senior analyst at fund research firm Lipper Inc. Without short sellers, he said, investors will have a harder time gauging the true value of a stock.
"Most people want to be in a stock for the long run and want to see prices go up. Short sellers are useful for throwing water in their face and saying, 'Oh yeah? Think about this,'" Tjornehoj said. As a result, restricting the practice could inflate the value of some stocks, opening the door for a big downward correction later.
"Without offering a flip-side to the price-discovery mechanism, I think there's a pressure built up in stock prices that only gets relieved in a great cataclysm," he said.
Short selling involves borrowing a company's shares, selling them, and then buying them to return them to the lender later, when the stock falls. The short-seller pockets the difference in price.
Although the practice can make markets more efficient and bring in more capital, the government argues that it has widened the scope of the recent financial crisis and contributed to the collapsing values of investment and commercial bank stocks in particular.
Government officials on both sides of the Atlantic have been denouncing hedge funds and other short sellers they say have swarmed over the limp bodies of venerable investment banks and other big companies. New York Attorney General Andrew Cuomo likened them to "looters after a hurricane," and his office is investigating a possible conspiracy among short-sellers to spread negative rumors to pound down companies' stock prices.
The turmoil in recent weeks has swallowed some of the most storied names on Wall Street. Three of its five major investment banks - Bear Stearns, Lehman Brothers and Merrill Lynch - have either gone out of business or been driven into the arms of another bank. Many contend that short-selling played a key role in forcing the collapse of these institutions.
SEC Chairman Christopher Cox, who with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke had met with lawmakers at the Capitol Thursday night, acknowledged that such extraordinary measures would not be necessary in a well-functioning market and said they are only temporary.
Cox said Friday his agency "is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets." He said the temporary ban "will restore equilibrium to markets."
The SEC also imposed a new requirement, also temporary, for investment managers to publicly report their new short sales of stocks. And the agency eased restrictions on the ability of companies to buy back their own shares, also through Oct. 2, another move aimed at helping restore liquidity to the distressed and volatile market.
Over the summer, the SEC imposed a 30-day emergency ban on "naked" short selling - where sellers don't actually borrow the shares they sell - in the stocks of mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE) and 17 large investment banks. But Friday's ban expanded to all short selling, not just the more aggressive naked variety, and to a much wider universe of companies.
The 799 companies covered by the SEC ban are an A-to-Z of the nation's financial institutions, including the powerhouse investment banks such as Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) and commercial banks running the gamut from Bank of America Corp. (BAC) to Cape Fear Bank Corp. (CAPE) SLM Corp. (SLM), which is known as Sallie Mae and is the biggest U.S. student lender is on the list, as are Charles Schwab Corp. (SCHW), Berkshire Hathaway Inc. (BRKA) and Principal Financial Group Inc. (PFG)
Washington Mutual Inc., the nation's largest thrift, which has lost billions from subprime mortgage exposure and seen its shares plunge in recent weeks, also is on the SEC list. So is the NYSE Euronext, the biggest stock exchange, and foreign financial companies whose stock is traded on U.S. exchanges, such as Lloyds TSB Group PLC of Britain and China Life Insurance Co. Ltd.
However, investors still have ways to place bearish bets: by trading in options that turn profitable when a stock drops.
Jim Chanos, a prominent short seller and president of a $7 billion hedge fund, Kynikos Associates, called short-selling a "vital investment strategy" and said banning the practice "will not enhance long-term market integrity."
He argued that investment banks' bad bets on risky assets - not predatory short-sellers - were the true cause of the steep declines in the stock price of financial firms.
"Far from being the cause of the crisis, many short sellers were warning months and years ago about problems in this area," Chanos said in a statement.
The new SEC ban also touched smaller investors. Two popular funds that specialize in short selling and are traded on stock exchanges - ProShares' Short Financials and UltraShort Financials - were temporarily halted Friday due to the ban. Trading resumed later in the day, but ProShares said it has suspended creating new shares in the funds until further notice.
ProShares Chairman Michael Sapir called the ban "extraordinary" and said it remains to be seen whether it has the intended effect of calming the markets.
"I don't think anyone sees the action today as a long-term solution," Sapir said. "It's a way to calm things down, but it isn't consistent with a free and open market."
The SEC's ban came in concert with Britain's Financial Services Authority, which announced a similar ban there Thursday. Some British politicians had claimed that short-selling was partly responsible for HBOS PLC's abrupt takeover by banking rival Lloyds TSB PLC on Thursday. The ban there was met with a similar reaction as the SEC move - a mix of relief and skepticism.
"Banning short selling is just a part of a solution," said Nic Clarke, banking analyst at Charles Stanley Stockbrokers. "We view this as a side issue. It doesn't stop the underlying reason for the credit crunch and it doesn't get to the heart of the problem."
Soaring bank shares reverse slide
Spectacular gains for banking stocks left London's leading share index near to reversing the 10% slide seen in this week's financial turmoil.
The improvement came after news of a huge US rescue plan to relieve banks of their "toxic" assets and a temporary City ban on short-selling.
The FTSE 100 Index rocketed more than 8% at one point to leave it on course for its biggest one-day gain since being established more than 24 years ago.
Royal Bank of Scotland topped the list of shares, up 40%. Lloyds TSB, which fell sharply on fears over its financial strength, lifted 35%, or 83p, to 320.5p.
European stock markets were also soaring, with Paris's CAC 40 7% up and Frankfurt's Dax 5% higher.
Gordon Brown also moved to calm nerves, saying: "We are now working with our international partners about broader intervention we are in a position to take."
US Treasury Secretary Hank Paulson provided the main market boost after revealing he was hatching a plan to rescue banks from their billions of dollars worth of "distressed" mortgage-backed assets and which have led to the global banking crisis.
"We're coming together to work for an expeditious solution which is aimed right at the heart of this problem," Mr Paulson said.
New York's main share index responded by posting its biggest gain for nearly six years on Thursday - up 410 points or nearly 4% - while Hong Kong's Hang Seng leapt nearly 10%.
The turnaround in London also came after the Financial Services Authority issued its temporary ban on the "short selling" of listed financial firm stocks - in which traders look to profit from falling share prices - in a bid to quell the market turmoil.
The improvement came after news of a huge US rescue plan to relieve banks of their "toxic" assets and a temporary City ban on short-selling.
The FTSE 100 Index rocketed more than 8% at one point to leave it on course for its biggest one-day gain since being established more than 24 years ago.
Royal Bank of Scotland topped the list of shares, up 40%. Lloyds TSB, which fell sharply on fears over its financial strength, lifted 35%, or 83p, to 320.5p.
European stock markets were also soaring, with Paris's CAC 40 7% up and Frankfurt's Dax 5% higher.
Gordon Brown also moved to calm nerves, saying: "We are now working with our international partners about broader intervention we are in a position to take."
US Treasury Secretary Hank Paulson provided the main market boost after revealing he was hatching a plan to rescue banks from their billions of dollars worth of "distressed" mortgage-backed assets and which have led to the global banking crisis.
"We're coming together to work for an expeditious solution which is aimed right at the heart of this problem," Mr Paulson said.
New York's main share index responded by posting its biggest gain for nearly six years on Thursday - up 410 points or nearly 4% - while Hong Kong's Hang Seng leapt nearly 10%.
The turnaround in London also came after the Financial Services Authority issued its temporary ban on the "short selling" of listed financial firm stocks - in which traders look to profit from falling share prices - in a bid to quell the market turmoil.
2008-09-18
Banks' demand huge in ECB's first 1-day dollar auction
FRANKFURT, Sept 18 (Reuters) - Euro zone banks showed huge demand in the European Central Bank's first-ever tender of overnight U.S. dollar funds on Thursday, part of global central bank efforts to ease money market tensions.
Some 61 banks bid for $101.68 billion in funds, compared to the $40 billion that the ECB had said it intended to allot.
The ECB allotted the funds at a single rate of 4.00 percent, the highest rate at which it could find takers for the full $40 billion, after it invited banks to submit bids in a Dutch auction procedure.
The U.S. Federal Reserve's key interest rate is 2 percent, and overnight funds were being offered in Europe at an indicative bid/ask spread of 2-3 percent according to Reuters data before the auction.
The world's top central banks said on Thursday they will pump more than $180 billion in extra dollar funds into global money markets in a coordinated effort to ease a funding squeeze triggered by the upheaval on Wall Street.
Demand for dollars at the ECB's auction was far stronger than that at one held by the Bank of England earlier on Thursday, when the BoE could find takers for little more than a third of the $40 billion it could have lent.
The BoE allotted funds at rates of 1.9 percent and above for a weighted average rate of 3.802 percent.
Some 61 banks bid for $101.68 billion in funds, compared to the $40 billion that the ECB had said it intended to allot.
The ECB allotted the funds at a single rate of 4.00 percent, the highest rate at which it could find takers for the full $40 billion, after it invited banks to submit bids in a Dutch auction procedure.
The U.S. Federal Reserve's key interest rate is 2 percent, and overnight funds were being offered in Europe at an indicative bid/ask spread of 2-3 percent according to Reuters data before the auction.
The world's top central banks said on Thursday they will pump more than $180 billion in extra dollar funds into global money markets in a coordinated effort to ease a funding squeeze triggered by the upheaval on Wall Street.
Demand for dollars at the ECB's auction was far stronger than that at one held by the Bank of England earlier on Thursday, when the BoE could find takers for little more than a third of the $40 billion it could have lent.
The BoE allotted funds at rates of 1.9 percent and above for a weighted average rate of 3.802 percent.
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