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Jon Stewart Takes On Obama’s Chief Economic Advisor

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Views, commentaries and opinions on 26.10.10 at 21:39

Once again Jon Stewart takes on a task that primary should have been performed by the top news media. You know, like Financial Times, Wall Street Journal, CNBC and the other major opinion makers, simply by asking US President Barack Obama’s chief economic advisor what he’s actually advising the president to do about the economic mess.

Austan Dean Goolsbee (born 1969) is an American economist, currently serving under President Barack Obama as the Chair of the Council of Economic Advisers.

Goolsbee is on leave from the University of Chicago where he is the Robert P. Gwinn Professor of Economics at the Booth School of Business.

Okay, here it is; Jon Stewart’s exclusive interview with Austan Dean Goolsbee.

Enjoy !

Vodpod videos no longer available.

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No News Is Good News

In Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Technology, Views, commentaries and opinions on 26.10.10 at 00:33

The credit markets opened the week on a high note, as the all-important date of November 3 draws closer. The Federal Reserve‘s FOMC committee is scheduled to announce its decision on monetary policy, and expected to confirm the markets current assumption of further QE. Risk appetite has risen in recent weeks in anticipation of more liquidity entering the system.

“Next week we should receive confirmation, though it obviously isn’t certain.”

Gavan Nolan


“One of the main issues that has the potential to depress growth – competitive devaluations – was in the news over the weekend. Leaders from the G20 agreed a framework that will address global imbalances, though it fell short of any specific proposals. The absence of any damaging rhetoric was welcomed by investors and helped spreads tighten today,” vice president at Markit Credit Research writes in his Daily Alert.

The rally was more apparent in credit than equity, the latter market putting in a lacklustre showing.

Short covering, as well as the reasons outlined above, contributed to the outperformance.

Better than expected US existing homes sales were also a factor. Sales rose by 10% in September, the second increase in a row and significantly better than the 5.3% consensus estimate.

“However, it should be borne in mind that sales are down 19% from the same period a year ago, highlighting the uphill struggle that the US housing market is facing,” Gavan Nolan points out.

Toll Brothers closed on a $885 million loan to finance the buying of land and building of new homes, a potentially positive sign of recovery in the sector.

“However, a significant supply overhang continues to exist and prices remain depressed in many areas of the country,” vice president Otis Casey at Markit says in a comment.

Sovereigns were tighter today but lagged the broader market, with the peripherals making modest gains amid relatively light flows.

Belgium, a sovereign that trades somewhere between the peripheral and core euro zone countries, was among the day’s strongest performers following a solid government bond auction.

The EUR2.727 billion sold was near the top of the EUR1.8 to EUR2.8 billion range. The bid-to-cover ratios were close to the previous auctions in August and September, though the yields were slightly higher, according to Markit Financial Information.

Like the Markit iTraxx Europe and Markit iTraxx Crossover indices, the Markit CDX IG tightened to a level not seen since the beginning of May.

The positive start to earnings season continued, with Office Depot and RadioShack the latest firms to beat expectations.

Even a shareholder-friendly action from Lockheed Martin didn’t lead to spread widening; the defence company said its board had approved a $3 billion share buyback.

“Investors interpreted this as a sign of confidence, with Lockheed‘s status as one of the strongest US credits no doubt helping its cause,” Nolan notes.

Here’s some of Monday’s key credit numbers:

  • Markit iTraxx Europe 96bp (-3.5), Markit iTraxx Crossover 448bp (-11)
  • Markit iTraxx SovX Western Europe 140bp (-2.5)
  • Markit iTraxx Senior Financials 120bp (-4.5)
  • Markit CDX IG 93bp (-3)
  • Sovereigns – Greece 665bp (-10), Spain 200bp (-3), Portugal 340bp (-8), Italy 170bp (-2), Ireland 425bp (-7), Belgium 112bp (-8)
  • Office Depot 475bp (-25), Radioshack 195bp (-4)

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The Fight Against Currency War

In Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 25.10.10 at 15:34

G20 pledges to avoid weakening currencies to boost exports and to let markets increasingly set foreign exchange values, after the weekend summit. The risk of a of currency war seems to have abated somewhat, and the USD is now at a 15-year low.

“The terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.”

Camilla Viland


As expected, currencies were discussed at the G20 meeting over the weekend. The finance ministers of the group now pledges to avoid further weakening of currencies, to boost exports and to let markets increasingly set foreign exchange values. This could be interesting…

First of all; there was no decision on the US proposal for current account targets, and this debate will be continued at next months G20 meeting in Seoul.

And second; the terms on currency policy are relatively vague and may be interpreted differently by each country. It remains to be seen whether actual practises will be changed.

“However, it is very positive that they have come up with a joint statement on currencies,” analyst Camilla Viland at DnB NOR Markets writes in Monday’s Morning Report.

Previously this has been avoided in fear of alienating China, she points out.

USD At 15-Year Low

The USD weakened after the G20 meeting, as the risk of tensions in the currency market has abated, according to DnB NOR Markets.

Camilla Viland

“The dollar has, among others, weakened versus Asian currencies on the prospect nations in the region will refrain from intervening in foreign exchange markets,” Ms. Viland  writes.

Expectations of the Federal Reserve announcing another round of quantitative easing next week also helps in bringing the dollar down.

Another currency which has weakened over the weekend is the Swiss franc.

“The currency is normally seen as a safe haven in the currency market and the weakening may be a result of lower risk of a currency war,” the Norwegian analyst says.

 

Biggest Strauss Kahn Statement – Ever?

Dominique Strauss Kahn

The G20 financial leaders also decided that Europe will surrender two seats in the IMF’s executive board to emerging nations, like China, India and Brazil with the intent to give these countries more power.

IMF-chief Dominique Strauss Kahn said that this was the “biggest IMF reform ever.”

Yeah, right!

Mr. Strauss Kahn is about to get a reputation for distributing pompous – and not very well founded – statements.

See also: In The Brigh Minds Of IMF

 

German Economy Still Flying

The German IFO index rose from 106.8 in September to 107.6 in October.

German Economy Recover

This is the highest outcome since May 2007, and better than consensus’ estimate of 106.5 and the outcome signals solid growth for the locomotive of European economy.

However, it is worth noting that this month’s improvement was not only due to better current conditions, but also due to a rise in business expectations.

“The latest developments in the German economy have been positive. However, we do not expect this to last. Due to sluggish international growth and a strong euro, growth will abate going forward. Fiscal tightening will also weigh on German growth,” Camilla Viland at DnB NOR Markets writes.

And Now; The US Housing Market

From the US, figures for existing home sales in September will be released Monday.

The Pending home sales index, which is an indicator for actual home sales, has risen over the last two months.

Mr. Housing Market

And we may see a rise in existing home sales this month, too. (Consensus expects 4.3 million houses to have been sold in September, up from 4.1 million sales in August.)

“Such an outcome is positive. Nevertheless, the levels of monthly house sales are very low seen in a historical context,” Camilla Viland notes.

And yet to come; the impact of the foreclosure scandal…

Scandic Updates

Here in Scandinavia several important events are on the agenda this week.

In the Norwegian, Norges Bank‘s interest rate meeting and the release of a new monetary policy report, will probably get most attention.

“Both we and consensus expect the interest rate to be left on hold at this meeting,” Ms. Viland writes.

In fact, a survey by the financial news agency, TDN Finans, shows that out of 17 participating analysts, no one expects the Norwegian Central Bank to rise its key rate.

(But wouldn’t it be fun if governor Svein Gjedrem pulled one last stunt before he retires in December?)

Anyway – the central banks new interest rate path (a prediction of the key rate level going forward) will probably be the most interesting thing for Mr. Gjedrem & Co.

The interest path rate has been lowered a few times already this year, and the interest rate is currently set to be raised around New Year.

“Given the latest developments we do not see this as likely. Foreign swap rates have fallen markedly since the previous report was released in June and inflation has been lower than anticipated. This indicates that the interest rate path will be lowered,” DnB NOR Markets says.

Adding: “We expect that the new interest rate path will indicate that the next rate hike will not be until March or May 2011.”

Also the Swedish Riksbank meets this week, holding their monetary policy meeting on Tuesday.

“The Swedish economy has performed strongly lately and this is one reason why the Riksbank has raises rates by 50 bps since the bottom. The Riksbank has signalled that more is to come and both we and consensus expect them to raise the interest rate by 25 basis points, to 1.00%, at tomorrows meeting,” the Norwegian money market specialist says.

More from DnB NOR Markets:

OSE Share recommendations. 25 – 29 October 2010.

Weekly FX Update.

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Niall Ferguson: US Economy Is Leaking

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Philosophy, Uncategorized, Views, commentaries and opinions on 25.10.10 at 02:50

Top analyst Niall Ferguson makes a powerful attack on the extreme Keynesian economic policy that’s ruling the world at the moment, and explains why quantitative easing doesn’t work.

“Remember what Keynes wrote in the 1930s about stimulus and the way in which government could get an economic going again really applied to a post-globalization world in which trade and capital flows had largely broken down, and most economies were quite isolated units. That’s something that Keynes made clear in the German edition of the General Theory when he said the theory applies better in a closed totalitarian economy.”

Niall Ferguson


“Globalization has not broken down. In fact the US economy is more open than it has ever been. That means that stimulus, both monetary and fiscal if very prone to what is called leakage. We’ve had an enormous of stimulus in the US, it’s the biggest fiscal stimulus in the world, and huge unprecedented monetary stimulus. What’s been stimulated? Not jobs in Michigan. What’s been stimulated has been commodity markets and emerging markets. Because the liquidity just leaks out, and that’s why another round of stimulus would not stimulate in the promised way. It would stimulate the wrong things. And those things, commodity markets and emerging markets, are already overstimulated to the point of being nearly bubbles.”


 

 

 

These Companies Stands To Benefit The Most From BP’s Misfortune

In Financial Markets, Health and Environment, International Econnomic Politics, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 25.10.10 at 01:17

Markit Research have made an analysis of which companies they belive will provide the most significant payouts in the absence of BP’s dividend. BP’s dividend suspension in June meant that investors would forego an estimated £7.8 billion in dividends this year. However, there are significant income opportunities from other stocks, according to the report. Markit expects that dividends from just five companies in the FTSE 100 will constitute over 60% of all those paid between now and BP’s next anticipated dividend in February 2011.

“The fact that recent market rumours suggesting BP might bring forward its planned resumption of dividend payments have received so much media attention is emblematic of its importance to investors and highlights the perceived scarcity of major dividend paying stock alternatives.”

Markit Dividend Research


“Markit is forecasting a yield of over 4% on the FTSE 100 over the forthcoming year. So despite the latest CPI annual inflation figures for August remaining stubbornly high at 3.1% and interest rates not looking likely to increase any time soon, real returns from income stocks appear achievable,” the two analysts Thomas Matheson and Arjun Venu writes in the latest edition of Markit Dividend Research.

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BP’s dividend suspension in June meant that investors would forego an estimated £7.8 billion in dividends this year. In the absence of this payout, however, there are significant income opportunities from other stocks, according to the report.

“In fact, Markit is forecasting a yield of over 4% on the FTSE 100 over the forthcoming year. So despite the latest CPI annual inflation figures for August remaining stubbornly high at 3.1% and interest rates not looking likely to increase any time soon, real returns from income stocks appear achievable,” Matheson and Venu says:

“Markit expects that dividends from just five companies in the FTSE 100 will constitute over 60% of all those paid between now and BP’s next anticipated dividend in February 2011. This report briefly reviews Markit’s forecasts for each of these companies. For three of these stocks we are expecting dividends to continue to grow, while for the remaining two we expect dividends to remain flat.”

And here they are; the five companies whose shareholders will benefit the most from BP’s misfortune:

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* Royal Dutch Shell
“The biggest contribution is expected from Royal Dutch Shell, whose payouts will represent just over a quarter of all dividends paid by FTSE 100 companies between now and February. So far in 2010 Shell has managed to maintain its dividend at the 2009 level of $0.42 per quarter and Markit fully expects this to continue for the rest of the year. In addition to cutting costs, Shell has seen positive trends in oil and gas volumes help to improve earnings and cash flow.

* AstraZeneca Plc
“Markit forecasts AstraZeneca’s 2nd interim payment to grow 6.4% to $1.82, which will constitute 12.7% of all dividends on the index. The healthcare behemoth reported strong first half results and raised its full year earnings forecast for the third consecutive time this year. The company also received backing from the FDA advisory panel for potential “blockbuster” drug Brilinta which has boosted the potential future pipeline and eased worries over numerous upcoming patent expires.”

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* Vodafone Plc

“Vodafone has committed to increasing its dividend by 7% per annum over the next two years and its FY11 interim dividend is expected to amount to a payout of almost £1.7 billion. Markit is forecasting an interim dividend of 2.85 pence per share, which will make up 11.2% of all FTSE 100 dividends between now and February.”

* HSBC Plc
“Despite being cut 39% last year, HSBC’s dividend remains substantial. HSBC’s capital position comfortably exceeds the requirements of Basel III and the company has given guidance that it intends to pay a Q3 dividend of $0.08 in line with its existing policy, amounting to 6.8% of dividends on the index.”

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* GlaxoSmithKline Plc
“The largest healthcare company in the UK, GlaxoSmithKline has delivered sustained dividend growth throughout the last decade. Markit is forecasting for this to continue with a Q3 dividend of 16.0 pence, up 6.7% from last year. This payment would make up 6.3% of all FTSE 100 dividends. The first half of the year saw sales grow 7% to £14.4 billion and net operating cash flows jump 21% in sterling terms to £4.2 billion, supporting this growth.”

Here’s a short-version of the report.

Gold And Silver Hit By Correction

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 24.10.10 at 15:35

This week China raised its key interest rate and speculation about US quantitative easing and the wider implication left the front page, at least for a little while. The move initially stopped the dollar from weakening further with some commodities suffering setbacks as a consequence.

“It is during a correction phase that the underlying strength of a market will be tested and this is the situation we now have.”

Ole S. Hansen


Gold made its first proper weekly loss in almost three months while the energy sector continues to trade sideways to slightly lower, analyst Ole S. Hansen at Saxo Bank points out in his weekly summary of the commodity markets activity.

The Reuters Jefferies CRB index which tracks 19 leading commodities was flat on the week with big discrepancies between markets.

The whole agricultural space is still caught up in the weather related storm that has swept around the globe these past few months.

This has caused widespread disruption to production which in turn has seen agricultural commodities perform very strongly.

How strong can be seen on the below sector split from the Dow Jones UBS commodity index. The overall performance of the DJ-UBS index is showing a year to date increase of four percent which is primarily due to the weak performance of the index heavy energy sector which count for more than 30 percent of the total index.

We have seen the correlation between strong gold and weak dollar increase recently.

With the dollar finding some strength ahead of the G20 meeting in South Korea this weekend gold has come under some pressure resulting in the first weekly loss in 3 months.

It is during a correction phase that the underlying strength of a market will be tested and this is the situation we now have.

“The next couple of weeks could almost decide whether the 2010 high have been seen already or whether this correction will attract new buyers who have been holding back waiting for such an opportunity.”

As usual silver has underperforming during the correction just like it has been outperforming during the recent rally.

Support can be found down towards 22.18 and 21.34 which are Fibonacci retracement levels of the recent rally.

The equivalent retracement levels for gold can be found at 1300 and 1272 with trend line support at 1,311 also worth watching.

A move back above 1,350 could signal a resumption of the uptrend with the next major target being 1,400.

WTI crude oil continues to find itself entrenched in a relatively tight range between 80 and 85 dollars.

The Chinese rate hike during the week scuppered another attempt at breaking higher as dollar strength sent it looking for support.

The speculative long position held by money managers such as hedge funds rose to near record levels last week and this would be a cause for concern.

“A break below 80 dollars could trigger some long liquidation resulting in a deeper correction.”

A break below 80 dollars could trigger some long liquidation resulting in a deeper correction.

A failure however to reach a deal to quell the global currency unrest at the G20 meeting in South Korea could be seen as being supportive for oil and other commodities as the dollar risk resuming its recent decline.

Natural gas slumped another four percent this week as the weekly storage data from the US showed inventories continuing to rise at a faster pace than expected.

“With the pickup in winter demand not expecting to outweigh supply for another few week’s inventories could reach the record levels seen last year adding.”

This is adding to the oversupply worries that have kept prices under pressure for months and have led to the forty percent price drop year to date.

The long crude short natural gas ratio spread (WTI crude oil divided by natural gas) is a favoured value trade by many hedge funds and only a significant change in direction of this spread, which has seen crude outperform natural gas by 70 percent since June, could bring some support back to the beleaguered market.

Turning to the agricultural sector we saw strong performances from coffee with the price of Arabica coffee beans rising above 2 dollars per pound for the first time in 13 years.

This comes amid fears that adverse weather across key growing regions in South America will lead to further supply downgrades. Columbia, the second largest producer of Arabica, have already said that a fungus is damaging plants and may reduce the output for 2011.

Columbia had been expected to produce 10.5 million bags during the 2010/11 season but recent revisions have seen that reduced by ten percent.

Combined with reduced output from Brazil, the world’s largest grower, demand could outstrip demand over the next twelve months by 1.3 million bags according to analysts.

Having rallied strongly since June the two dollar level reached this week could provide some near term resistance but demand from roasters will probably keep it supported on a potential setback.

The price of rice has also continued to rally increasing the focus on this grain which is the stable diet for more than three billion people across Asia.

“The main harvest in Thailand may drop by 20 percent after the worst floods in four years hit the growing regions.”

This has resulted in the Thai export price, which is the benchmark for the Asian market, having rallied ten percent from the July low and could rally another ten percent before year end as rice importing nations steps in to meet their needs.

A food crisis like the one in 2008 is luckily still very unlikely with the Thai benchmark trading at half the level seen back then.

“Continued weather developments have to be watched carefully as actual supply worries more than speculative interest have been driven these markets recently.”

Ole S. Hansen

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The January rough rice futures contract traded in Chicago reached 14.59 dollar per hundredweight this week and with seasonal demand picking up some analysts forecasting additional price rises towards the sixteen dollar level seen last year in December.

Analysis by futures and fixed income manager, Ole S. Hansen, at Saxo Bank.

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Credits: The Price of Accountability

In Financial Engeneering, Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Views, commentaries and opinions on 24.10.10 at 00:21

Remember President Barack Obama’s pompous “BP-Will-Be-Held-Accountable”-speech? The president’s remarks on the oil spill dragged BP’s  share price right to the bottom and pushed the CDS’ straight through the roof. However, when The White House this week announced that US banks will be held accountable for any foreclosure violations, there was hardly any reaction in the financial markets at all.

“Whether investors chalked it up to part of mid-term election campaigning or simply could not discern the market impact is debatable.”

Otis Casey


Earlier this week, market price action seemed to suggest that investors were struggling to properly define the extent and impact of the potential foreclosure violations case. By the end of the week, however, I think they’ve started to see a more clear – not pretty – picture.

Bank of America, who had halted foreclosures in all 50 states, signalled on Tuesday that is was time to resume the foreclosure process. As for their process, CEO Brian Moynihan simply said; “Without question we’re doing it right.”

The day before Citigroup stated that their process was “sound”.

“While no one expected that the uncertainty in litigation risk could just disappear overnight, it at least appeared to be moderating a bit,” credit analyst Otis Casey writes in the weekly credit wrap from Markit Financial Information.

“There seemed to be a perception that the majority of the headlines would be read in the rear-view mirror – at least,” Otis Casey writes, but point out: “That sentiment was short-lived.”

WILL BE HELD ACCOUNTABLE?

Reminiscent of President Barack Obama’s “BP Will Be Held Accountable” speech, the White House announced this week that banks would be held accountable for any foreclosure violations.

This was not surprising, considering that a key part of the President’s communication strategy has been to side with “Main Street” against “Wall Street.”

“Whether investors chalked it up to part of mid-term election campaigning or simply could not discern the market impact is debatable, in any case the announcement did not have anywhere near the same market moving impact on CDS spreads the way that the BP speech did last spring on BP’s CDS spreads,” Casey notes.

YOU BUY – WE PAY

“Then some of the biggest investors in the world decided to react like it was “Wall Street vs Wall Street” (nevermind
that PIMCO headquarters is in Newport Beach),” Casey goes on.

Reports surfaced that indicated PIMCO, BlackRock and the Federal Reserve Bank of New York are looking for a way to force  Bank of America to repurchase bad mortgages that is a part of some $47 billion in bonds, packaged by its Countrywide Financial unit.

Other investors are expected to join this group.

“Furthermore, the tactic is expected to be repeated in other cases where investors believe that the quality of mortgages may have been misrepresented,” Casey adds.

CDS spreads on the major mortgage lending banks widened significantly on the news and set a negative tone for the corporate credit markets generally.

However, by the week’s end, the CDS spreads for the major US banks were tighter than where they were a week ago.

Wells Fargo reported record earnings despite lower revenues.

While Bank of America reported a third quarter loss, adjusted results beat analysts’ estimates.

Earnings results in general have given support in the last two sessions, which has helped improve sentiment and again shifted focus away from the foreclosure issues – at least in the news headlines.

MONEY CAN BE VERY EXPENSIVE

On the European side,  a bit more clarity emerged on the subordinated debt of Anglo Irish Bank.

The bank announced on Thursday that it was offering to exchange up to approximately 1.6 billion euro principal amount outstanding subordinated debt for new euro-denominated floating rate notes, due 2011, at an effective price of 20% of face value.

A separate offer for 300 million GBP, callable, subordinated notes at 5% of face value was also made.

“The exchange offers are “voluntary” but if holders choose not to participate, they could receive as little as 0.01 euro per 1,000 euro of principal amount,” Otis Casey writes.

The latest quotes are 10 points and 68 points upfront, for senior and subordinated protection, respectively.

Related by The Swapper:

Fitch Place Most US Banks On Negative Rating Watch

In Financial Engeneering, Financial Markets, International Econnomic Politics, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 23.10.10 at 18:24

Fitch Ratings issued Friday a number of separate press releases placing most US banks most US bank, and bank holding companies that are sovereign-support dependent, on Rating Watch Negative. A new proposal, that’s a part of the Dodd-Frank Act, will govern the way the FDIC implements the resolution of financial institutions, and may have adverse credit implications for US financial institutions, according to Fitch.

“The proposed rule is likely to mean that should intervention be necessary some creditors, namely senior debt, subordinated debt, and preferred and common shareholders will incur losses consistent with their treatment as if the entity filed a Chapter 7 (liquidation) bankruptcy petition.”

Fitch Ratings


The financial institutions that stand to be most impacted are Bank of America and Citigroup due to support they have received from the US government. The rating action is a direct result of the recently released Notice of Public Rulemaking, on implementing of the Dodd-Frank Wall Street Reform and the Consumer Protection Act, the agensy says.

The two companies – Bank of America Corporation and Citigroup –  mostly impacted by this announcement

This is due to the fact that both entities’, and their related subsidiaries’, Issuer Default Ratings (IDRs) and their respective senior debt obligations have benefited from support provided by the US government, according to Fitch.

“At the present time, Fitch’s long-term ‘A+’ IDR ratings for Citigroup and Bank of America incorporate a three-notch uplift for the long-term rating and a two-notch uplift for the ‘F1+’ short-term ratings. If Fitch determines on a go forward basis that support from the sovereign state can no longer be relied upon it is not certain that Fitch would immediately lower the IDRs of Bank of America or Citigroup to their unsupported rating levels,” the rating agency says in a press release.

Over the near to intermediate term, Fitch’s fundamental credit assessment of Bank of America and Citigroup will continue to consider existing support already received, such as debt still outstanding issued under the Federal Deposit Insurance Corp. (FDIC’s) Temporary Liquidity Guaranty Program (TLGP), in its ratings of those institutions.

As a result, the IDRs will continue to incorporate support received during the crisis, as well as improvements in intrinsic financial profiles and expectations for continued improvement, Fitch says.

“Each of these companies has maintained a ‘1’ Support Rating, translating into a Support Rating Floor of ‘A+’, since the depths of the recent financial crisis after each firm received and benefited from extraordinary direct support from the US government.”

Fitch’s rating criteria calls for the assignment of the “higher-of either the companies” Support Rating Floor of ‘A+’ or its perceived fundamental stand-alone IDR rating (excluding support), which is currently ‘BBB+/F2’ for both affected companies.

Since Fitch is placing on Rating Watch Negative all US bank and bank holding companies’ Support Ratings and Support Rating Floors, the IDRs of Bank of America and Citigroup and their respective sovereign support dependent ratings are also placed on Rating Watch Negative.

The IDR and issue-level ratings for all other banking companies, except for Bank of America and Citigroup and certain related affiliates, are unaffected by Friday’s actions since the current IDR ratings are all above their current Support Rating Floors.

“The rating actions follow Fitch’s interpretation of the recently released Notice of Public Rulemaking ‘Implementing Certain Orderly Liquidation Authority Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act‘ (proposed rule or NPR), which was issued by the FDIC on Oct. 12, 2010,” Fitch writes in the statement.

The proposed rule will govern the way the FDIC implements the resolution of financial institutions, such as bank and insurance holding companies or other non-bank financial institutions deemed to be systemically important, an authority granted to the agency by Dodd-Frank.

The NPR reiterates that under no circumstances should taxpayers ever be called upon to bail out systemically important financial institutions in the future, nor be exposed to loss in the resolution of these companies.

While the NPR also reiterates the FDIC’s mission of resolving institutions in a manner that ‘maximizes the value of the company’s assets, minimizes losses, mitigates [systemic] risk and minimizes moral hazard,’ it nevertheless makes clear that creditors, including senior bondholders, should bear their proportion of the loss in an orderly resolution.

This more stringent mandate to impose losses on senior unsecured creditors calls into question the very core of Fitch’s Support rating framework, the likelihood of full and timely payment in the event that the rated institution faces serious financial deterioration in the future.

Resolution of the Rating Watches will be based in part on language from the final rule once formally adopted as well as Fitch’s view on how the final rule will impact its view of support.

The FDIC’s proposed rule is likely to mean that should intervention be necessary some creditors, namely senior debt, subordinated debt, and preferred and common shareholders will incur losses consistent with their treatment as if the entity filed a Chapter 7 (liquidation) bankruptcy petition, Fitch explains.

“Importantly, Fitch has not imputed sovereign support in its ratings for bank holding company creditors, i.e. most U.S. bank holding companies carry a ‘5’ Support rating.”

“Fitch believes that the NPR is one of many across numerous jurisdictions globally to govern how policy makers and regulators may address failing or failed institutions in the future.”

Recently introduced resolution regimes in some countries in Europe have so far provided similar wide-ranging powers to the banking authorities to impose losses on bank creditors but have, nevertheless, left open the possibility of taxpayer support.

The proposed NPR appears to divide senior creditors’ claims by maturity and stated purpose and introduces a number of considerations for Fitch’s ratings of these systemically important institutions.

Fitch alsp notes that some obligations, including short-term senior debt and certain other creditors such as ‘commercial lenders or other providers of financing who have made lines of credit available to the covered financial company that are essential for its continued operation and orderly liquidation’ are specifically differentiated from senior bondholders in the NPR.

“Should this carve out provision remain as part of the final rules, Fitch would need to consider how best it would rate the segregated obligations,” Fitch writes.

Adding: “The proposed rule, as required by U.S. law, is subject to a public comment period of at least 30 days from publication in the Federal Register so it is important to note that material changes to the proposal could occur before enactment.”

Once implemented, Fitch believes that the proposed rule will serve as the road map by which the FDIC implements its expanded authority in the resolution of a systemically important failed institution.

In the past, systemically important institutions that became troubled typically received some form of federal support and/or regulatory forbearance that allowed them to continue operating through a rehabilitation period, with creditors and shareholders often becoming significant beneficiaries.

The FDIC has used a “least cost [to the deposit insurance fund] resolution” approach in carrying out its resolution activities since the Financial Institutions Regulation, Reform and Improvement Act (FIRREA) of 1989.

This approach is preserved in the NPR and is consistent with the Dodd-Frank mandate of maximizing the value of assets and minimizing losses.

The proposed rule additionally preserves many tools for the FDIC to use to further incorporate the requirements of Dodd-Frank that resolutions mitigate systemic risk and minimize moral hazard.

“Fitch has long recognized through its Support Ratings the role that support plays in global banking. In most developed markets, governments have historically taken a dual approach to assuring the stability of their financial infrastructure including strong regulatory oversight on the front end and backstopping critical components of the system in times of duress.”

The proposed rule for implementing Dodd-Frank preserves a wide array of tools for the FDIC to resolve systemically important institutions while also mitigating systemic risk and financial contagion.

Under the proposed resolution approach, select creditors may benefit from some forms of support under certain circumstances and where, in the judgment of the FDIC, the alternatives would ultimately put the system at greater risk.

“That said, whereas bondholders, both senior and subordinated, and even shareholders, have benefited from support in the past, direct support for these creditors is effectively prohibited under Dodd-Frank,” Fitch Ratings concludes.

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