Fed Stress Test Results May Show 10 U.S. Banks Need Capital

Fed Stress Test Results May Show 10 U.S. Banks Need Capital

May 5 (Bloomberg) -- The Federal Reserve plans to deliver results of stress tests on U.S. banks to executives today that may show about 10 companies need additional capital to weather a deeper recession, people familiar with the matter said.

Banks are formulating plans for filling their capital requirements, much of which would likely come from conversions of preferred shares, the people said. Many of the 19 lenders under review and the government are set to discuss publicly the examinations after markets close May 7, the people said.
Financial shares jumped the most in almost a month yesterday on optimism about the tests. The Treasury and regulators have presented different options for the banks to shore up their books without taking taxpayer money, including selling assets, seeking private capital and converting previous government investments from preferred to common shares.
“Maybe the capital that’s required from these tests is going to be smaller than the market had been anticipating,” said Blake Howells, an analyst at Becker Capital Management, which oversees $1.7 billion in Portland, Oregon, and owns shares of U.S. Bancorp and KeyCorp, referring to the stock rally.

Still, “for the stress test to have any sort of legitimacy, some of the banks are going to have to raise capital,” he said.

Fed Meeting
Fed spokeswoman Michelle Smith declined to comment. The Fed’s Board of Governors met late on May 3rd to discuss the stress tests, according to a posting on the central bank’s Web site, the second Sunday evening meeting on the matter in three weeks.
Last week, the Fed delayed the release of the tests, originally scheduled for yesterday, as banks challenged some of the conclusions. Citigroup Inc. and Bank of America Corp. were among the banks found to need additional capital, people familiar with the matter have said. Read Article...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aiw0TbO.lTsM&refer=home

From Bubble to Depression?

From Bubble to Depression?
(Source Wall Sreet Journal)
Bubbles have been frequent in economic history, and they occur in the laboratories of experimental economics under conditions which -- when first studied in the 1980s -- were considered so transparent that bubbles would not be observed.
We economists were wrong: Even when traders in an asset market know the value of the asset, bubbles form dependably. Bubbles can arise when some agents buy not on fundamental value, but on price trend or momentum. If momentum traders have more liquidity, they can sustain a bubble longer.
But what sparks bubbles? Why does one large asset bubble -- like our dot-com bubble -- do no damage to the financial system while another one leads to its collapse? Key characteristics of housing markets -- momentum trading, liquidity, price-tier movements, and high-margin purchases -- combine to provide a fairly complete, simple description of the housing bubble collapse, and how it engulfed the financial system and then the wider economy.
Read article and analysis...

http://online.wsj.com/article/SB123897612802791281.html

The Chairman, Ben Bernanke Part 1 and 2 CBS Video

The Chairman Part 1

If you think your job is tough, consider Ben Bernanke`s. As Chairman of the Federal Reserve, the task of reviving the U.S. economy falls largely on his shoulders. Scott Pelley has the interview.



The Chairman Part 2

Federal Reserve Chairman Ben Bernanke candidly speaks to Scott Pelley about his personal life, as both visit his old high school and how the current financial crisis is affecting Main Street America.

Bernanke May Need to Ramp Up Fed’s Asset Purchases
March 17 (Bloomberg) -- Chairman Ben S. Bernanke and Federal Reserve policy makers may have to ramp up their purchases of mortgage securities and other assets after the economy and job market deteriorated further since they last met.
The Federal Open Market Committee, gathering today and tomorrow in Washington, needs to redouble its efforts after the central bank’s balance sheet shrank 17 percent from a $2.3 trillion December peak, Fed watchers said. The retreat came even as Bernanke acknowledged the chance that the unemployment rate will exceed 10 percent for the first time in a quarter century.
“It takes massive balance-sheet expansion to generate significant easing in financial conditions,” said Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York who used to work at the Treasury. “More needs to be done.”
This week’s FOMC meeting could mark a shift toward more aggressive monetary expansion to fight deflation after demand waned for many of the Fed’s existing programs. One top consideration is an increase in the pace and size of a $600 billion program to buy bonds issued and backed by U.S. housing agencies such as Fannie Mae, analysts said.

Fed downgrades economic forecast for this year

Fed downgrades economic forecast for this year, warns of long road to recovery

WASHINGTON (AP) -- The Federal Reserve on Wednesday sharply downgraded its projections for the country's economic performance this year, predicting the economy will actually shrink and unemployment will rise higher.
Under the new projections, the unemployment rate will rise to between 8.5 and 8.8 percent this year. The old forecasts, issued in mid-November, predicted the jobless rate would rise to between 7.1 and 7.6 percent.
The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent.
The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country had suffered through a severe recession.
The bleaker outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. All of those negative forces have plunged the nation into a recession, now in its second year.
"Given the strength of the forces currently weighing on the economy," Fed officials "generally expected that the recovery would be unusually gradual and prolonged," according to documents on the Fed's updated economic outlook.
Against that backdrop, unemployment -- now at 7.6 percent, the highest in more than 16 years -- will keep climbing and stay elevated for quite some time, the Fed predicted.

For now, Fed officials are more worried about falling prices, than rising ones.
The Fed didn't use the word "deflation," which is a dangerous bout of falling prices, but officials noted "some risk of a protracted period of excessively low inflation."
Falling prices sound like a gift at first -- at least to consumers. But a widespread and prolonged decline can wreak more havoc on the economy, dragging down Americans' wages, and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investments and lay off workers.
America's last serious case of deflation was during the Great Depression in the 1930s. Japan was gripped with a period of deflation during the 1990s, and it took a decade for that country to overcome those problems. More on Finance/Yahoo

The danger of keeping rates at zero

The danger of keeping rates at zero
The Fed seems to think inflation is no longer a problem. But inflation may just be in hibernation and low rates for a long period of time could awaken the beast.


NEW YORK (CNNMoney.com) -- This is obviously a terrible time for the economy. For that reason, it made sense for the Federal Reserve to slash interest rates near zero last month.
But I'm starting to worry a bit that the Federal Reserve is willing to leave rates this low for too long and that this could spark inflation down the road.
In a speech in London Tuesday morning, Federal Reserve chairman Ben Bernanke defended the Fed's series of rate cuts since September 2007, saying that inflation was no longer a major concern. The Fed usually raises interest rates when it is worried about inflation.
"At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term; indeed, we expect inflation to continue to moderate," he said. Read article...

Fed Cuts Key Rate (16 Dec)

Fed, acknowledges that the recession is more severe than officials previously thought.

The Consumer Price Index (CPI) in October fell to 1.7 percent. There is a higher risk from Deflation than from Inflation. The interest rates are on a record low now due to the Fed's latest rate cut.
The dollar dropped sharply against the euro and other major currencies, a sign that currency markets were nervous about a flood of newly printed dollars. UK Pound falls sharply against Euro, after signs of more rate cuts.
With all the new printed (created) money the currency markets are getting uneasy.

Fed Cuts Key Rate to a Record Low (Permalink NYT)
By EDMUND L. ANDREWS and JACKIE CALMES
Published: December 17, 2008
Having reduced its key rate to a record low, the Fed said that it would use “all available tools” to fight the recession and downward pressure on prices.

The Markets today (Dec 15 , 07.00 CET)

Asian Markets substantially higher this morning, European calls point to higher openings.
The Madoff case still trickling through, Investment banks in far East and Europe hit, (Japan, Spain, France, Switzerland). The situation is still opaque but the full effects of this scandal are expected to pop up in the beginning of next year. A few thousand of small and large investors are exposed.

The FED is lowering rates this week by a mere one quarter or one half of a percent.
ECB Chairman Trichet is warning about 'overspending' on the crisis, so do not wait for more ECB cuts for a while.
On the OPEC Meeting in Algeria (Dec 17th) substantial output cuts are expected to be announced. Crude Oil futures are up.
The White House will finally unveil the auto-industry's meager bailout package and emergency loans in the coming days.
Pre-market indicators for the U.S. point to modestly higher openings.
No trading in Fortis shares today after the decision of the Belgian Court late Friday.

The overall sentiment is, that investors do not seem to be deeply shocked by all the bad news or get depressed with the bad news on the horizon. You can't win 'em all. Cheer up! The champaign is bubbling. But don't drink and drive.

Interest rate cuts expected before year end

November 3. The current interest rates.
This week the ECB and the Bank of England could cut rates. We expect each of them to cut rates by 50 basis points, ½%, it's a more or less symbolic gesture. It depends very much on the graveness of current economic citcumstances or how central bankers judge the situation, when they do a 1% or more rate cut it means trouble ahead.
FED's chairman Bernanke last week already said, he does not expect very much of further rate cuts, and he has to reckon with the new Obama team. If the economic and financial situation deteriorates further between now and the 16th of December we can expect an other 25 basis points cut from the FED.

Download PDF Beige Book December 3 (Summary of Commentary on Current Economic Conditions by Federal Reserve District)

Fed plans another rate cut before Christmas, probably 0.5 %

Due to the deteriorating retail sales and rising unemployment, Bernake hints at another rate cut before Christmas.
European Central Bank President Jean-Claude Trichet calls the current measures a work in porogress. The Bank of England and the ECB have some room for a 50% basis points rate cut before Christmas. But Bernanke is a a bit running out of steam to manœver, and a 0,25% base rate cut won't help very much.
Are we going to see a repeat of the Bank of Japan scenario, a deflation?

Bernanke leaves door open to another rate cut, warns markets remain under 'severe strain'