Also, This Monday: GS reporting blockbuster profits free from Treasury pain..Consumer Indice ( Univ of Michigan) continue to report below average customer satisfaction from healthcare..Will the Electronic Health records ever becoma a significant reality? How much time will it take?..Healthcare payers have successfully battled physician and treatment costs with dial in help for new and existing stress ailments and ordinary diseases.
(PTI – NDTV.Com)
The wealth of world’s rich people dropped nearly 20 per cent to $32.8 trillion, while India saw the second largest decline in the number of High Net Worth Individuals at the end of 2008, says a report.
The population of HNWIs shrank by about 15 per cent to 8.6 million and in India, the numbers came down by 31.6 per cent to 84,000, says the World Wealth Report from Merrill Lynch and Capgemini.
HNWIs are referred to those who have at least $one million in investable assets, excluding primary residence, collectibles, consumables, and consumer durables.
“At the end of 2008, the worlds population of HNWIs was down 14.9 per cent from the year before to 8.6 million, and their wealth had dropped 19.5 per cent to $32.8 trillion.
The declines were unprecedented, and wiped out two robust years of growth in 2006 and 2007,” the report said.
Interestingly, the wealth of such individuals grew about 7.2 per cent from 2005 to 2007 while their wealth rose 10.4 per cent during the same period.
“India’s HNWI population shrank 31.6 per cent to 84,000, the second largest decline in the world, after posting the fastest rate of growth (up 22.7 per cent) in 2007.
“India, still an emerging economy, suffered declining global demand for its goods and services and a hefty drop in market capitalisation (64.1 per cent) in 2008,” the report said.
By Goldilocks ;) I presume
The stock market has erased almost all its losses for the year, yields on long-term government debt have returned to something like normal, and commodity prices have been surging — all evidence that the worst of the economic crisis may have passed.
But the road to recovery is far from smooth, or even assured. As investors ponder their next moves in this unusually unpredictable cycle, they are confronted with a confounding array of potential risks.
via Recovery Scenarios: Will It Be Too Hot, Too Cold or Just Right? – Real Time Economics – WSJ.
President Obama unveiled a $275 billion plan yesterday to help as many as 9 million homeowners avoid foreclosure and keep mortgage rates low in the most aggressive effort yet to stabilize the US housing market.
Warning that doing nothing would cost all Americans, Obama presented a three-part plan that contains $75 billion to help modify loans for as many as 4 million struggling homeowners, a change in mortgage rules to help as many as 5 million homeowners refinance into lower-cost loans, and a pledge of $200 billion to bolster mortgage giants Fannie Mae and Freddie Mac.
Housing advocates praised the plan as ambitious, with cash incentives to lenders and borrowers to help stop the bleeding that has left nearly 10 percent of US homeowners either in foreclosure or behind on their mortgages. The plan, which uses federal money that was previously authorized, incorporates many proposals suggested over the past six months as the housing crisis has worsened.
“It’s bold, and the amounts of money they set aside are large and important,” said Barry Zigas, director of Housing Policy for the national advocacy group the Consumer Federation of America. “I hope . . . that it will have a significant impact on the market.”
Obama said the so-called Homeowner Affordability and Stability Plan aims to “arrest the downward spiral” in the housing market that has crippled the US economy and spurred a credit crunch. He said the plan aims to rescue families who have played by the rules but are struggling to save their homes either because their property values plunged or because they bought unmanageable subprime loans.
“In the end, all of us are paying a price for this home mortgage crisis,” Obama said at a high school in the Phoenix suburb of Mesa. “And all of us will pay an even steeper price if we allow this crisis to deepen – a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, then every American will benefit.”
Rough week for stock, good week for business
To my teammates:
Public debate on the subject of potentially nationalizing some banks continues to put great pressure on our stock. And yet, our company continues to be profitable. I see no reason why a company that is profitable, with capital and liquidity levels that are very strong, and that continues to lend actively, should be considered for nationalization. Speculation about nationalization is based on a lack of understanding of our bank’s financial position as well as a lack of appreciation for the adverse ramifications for our customers and the economy.
Bank of America does not need any further assistance today, and I am confident we will not need any further assistance in the future. I believe our company has more than enough capital, liquidity and earnings power to make it through this downturn on our own from here on out.
There is no question that the recession is continuing to worsen and that rising credit costs will continue to put great pressure on our ability to generate earnings. But here’s the good news: Your hard work is producing results in businesses all across the company.
While I can’t divulge any specific financial results mid-quarter, I can tell you that activity in our trading business continues to be vastly improved over last quarter. The corporate debt markets are showing some signs of thawing in both high yield and high grade, and we’re already seeing some benefits in the market of our combination with Merrill Lynch, in terms of winning mandates to raise capital for new and existing clients. And Merrill Lynch Financial Advisors posted nearly a half billion dollars in CD sales in the first four weeks these products were available to their clients.
On the retail side, our customer satisfaction scores are up at a time when others are down. Our brand, which took a beating in January, strengthened in early February, as customers gave us high marks for trustworthiness and perception that money is safe with us. In the first week of February, our Go America, Save! promotion boosted CD sales 18% and IRA sales 10% over the prior week. We extended our industry record this week for number of active mobile banking customers, surpassing the 2 million mark. And this week, a consortium of banks, including Bank of America, launched the Help With My Credit campaign to raise awareness of the different ways credit card issuers can assist customers in managing their financial obligations.
I am really encouraged by what we’re seeing in our home lending business. The mortgage boom is so intense we actually pulled down some advertising for a brief period to give our teams a chance to catch up to the volume, but they are running at full tilt now and processing record volumes. Our decision to acquire Countrywide has put us in a great position to capitalize on the surge in this business. This is a very positive story as we lead up to the launch of our new Bank of America Home Loans brand in April.
Yesterday, I met with a group of about a hundred of our top leaders to discuss what’s going on in the businesses and listen to their thoughts and concerns. We talked about the great challenges we’re all facing in the marketplace. But we also talked about how encouraging it is to work with such strong teammates, to have the trust and support of our customers and clients, and to have the position in our markets that we do.
As we concluded the meeting, I told them that we have a clear challenge in front of us: to prove the cynics and the critics wrong. I know we can do that – in fact, I think we’re doing it now, in the work each of you is doing every day, and the business results you’re putting up on the board.
Thank you for that. Let’s keep the momentum going.
Isn’t the process of restructuring under way in households and at corporations?
They are cutting costs to service the debt. But they haven’t yet done much restructuring. Last year, 2008, was the year of price declines; 2009 and 2010 will be the years of bankruptcies and restructurings. Loans will be written down and assets will be sold. It will be a very difficult time. It is going to surprise a lot of people because many people figure it is bad but still expect, as in all past post-World War II periods, we will come out of it OK. A lot of difficult questions will be asked of policy makers. The government decision-making mechanism is going to be tested, because different people will have different points of view about what should be done.
What are you suggesting?
An example is the Federal Reserve, which has always been an autonomous institution with the freedom to act as it sees fit. Rep. Barney Frank [a Massachusetts Democrat and chairman of the House Financial Services Committee] is talking about examining the authority of the Federal Reserve, and that raises the specter of the government and Congress trying to run the Federal Reserve. Everybody will be second-guessing everybody else.
So where do things stand in the process of restructuring?
What the Federal Reserve has done and what the Treasury has done, by and large, is to take an existing debt and say they will own it or lend against it. But they haven’t said they are going to write down the debt and cut debt payments each month. There has been little in the way of debt relief yet. Very, very few actual mortgages have been restructured. Very little corporate debt has been restructured.
The Federal Reserve, in particular, has done a number of successful things. The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.
However, the reason it hasn’t actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece — banks and investment banks and whatever is left of the financial sector — that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.
Is a restructuring of the banks a starting point?
If you think that restructuring the banks is going to get lending going again and you don’t restructure the other pieces — the mortgage piece, the corporate piece, the real-estate piece — you are wrong, because they need financially sound entities to lend to, and that won’t happen until there are restructurings.
On the issue of the banks, ultimately we need banks because to produce credit we have to have banks. A lot of the banks aren’t going to have money, and yet we can’t just let them go to nothing; we have got to do something.
But the future of banking is going to be very, very different. The regulators have to decide how banks will operate. That means they will have to nationalize some in some form, but they are going to also have to decide who they protect: the bondholders or the depositors?
Nationalization is the most likely outcome?
There will be substantial nationalization of banks. It is going on now and it will continue. But the same question will be asked even after nationalization: What will happen to the pile of bad stuff?
Let’s say we are going to end up with the good-bank/bad-bank concept. The government is going to put a lot of money in — say $100 billion — and going to get all the garbage at a leverage of, let’s say, 10 to 1. They will have a trillion dollars, but a trillion dollars’ worth of garbage. They still aren’t marking it down. Does this give you comfort?
Then we have the remaining banks, many of which will be broke. The government will have to recapitalize them. The government will try to seek private money to go in with them, but I don’t think they are going to come up with a lot of private money, not nearly the amount needed.
To the extent we are going to have nationalized banks, we will still have the question of how those banks behave. Does Congress say what they should do? Does Congress demand they lend to bad borrowers? There is a reason they aren’t lending. So whose money is it, and who is protecting that money?
The biggest issue is that if you look at the borrowers, you don’t want to lend to them. The basic problem is that the borrowers had too much debt when their incomes were higher and their asset values were higher. Now net worths have gone down.
Morgan Stanley is likely to pay Citigroup between $2 billion to $3 billion for a 51 percent stake in the brokerage Smith Barney, a person close to the negotiations said. (Read TIME’s “Bailout Report Card”)
Morgan Stanley would then have the option to buy Smith Barney over the next three to five years, the person said. The person spoke on condition of anonymity because he was not authorized to speak about the ongoing talks.
If negotiations proceed through the weekend as they have been, an announcement could come as early as Monday, the person said.
Word of the negotiations came as investors digested news Friday that Robert Rubin, a senior adviser to Citi who has drawn heavy criticism, would resign and would not seek another term on the board.
A combination of the brokerage units would help Citigroup get more much-needed cash and cut costs, said Aite Group analyst Alois Pirker. The benefit for Morgan Stanley, Pirker said, would be a bigger staff to compete with other growing brokerages — particularly Merrill Lynch, which recently was acquired by Bank of America Corp.
The deal may also lead to a full-fledged merger between the two banks, he speculated.
“The ultimate goal could be to merge the two entities fully,” Pirker said. “Morgan Stanley needs deposits, theres no doubt about that. They wont get that by telling brokers to get deposits from their clients.”
Morgan Stanley applied to become a bank holding company last fall to get loans from the government and collect deposits — one of the few reliable sources of funding these days with the credit markets still squeezed.
The government is not driving the negotiations between Citigroup and Morgan Stanley, people with knowledge of the situation said. They also spoke on condition of anonymity because they were not authorized to speak about the matter.
There were no talks scheduled for this weekend between the Treasury Department and Citigroup officials.
The worst financial crisis in more than a half century is going to get even worse, putting further pressure on U.S. home prices and driving the unemployment rate above 11 percent, according to two prominent academic economists.
Carmen Reinhart, from the University of Maryland, and Kenneth Rogoff, of Harvard, suggested housing might not bottom until 2010, which bodes poorly for struggling banks that still hold trillions in mortgages.
“Financial crisis are protracted affairs,” Reinhart and Rogoff wrote in a paper presented at this weekends annual meeting of the American Economic Association, in San Francisco.
Now comes the murkier part: Many assets — particularly those that unregulated hedge funds can trade — are not as liquid as stocks, and so they do not always have a definite price on the market. Since a fund reports unrealized gains, it could easily get away with inflating profits. More specifically, the fund could use the most optimistic models to price its illiquid assets, which include mortgage-backed securities and other swaps. After all, economists disagree about how to value these assets, so the fund is not necessarily dishonest in its assessment.
Madoff never even came close to realizing the gains he reported and paid out to some investors. Yet even funds with fairly accurate estimates of unrealized gains are guilty of engaging in similar Ponzi practices in the short term. Heres why:
Suppose some investors decide to withdraw their money from a hedge fund. The fund must liquidate the appropriate amount of its assets to pay these investors. Say the fund holds large positions in illiquid assets. The fund cannot immediately sell these assets, except at a fatal loss, so it would sell its more liquid assets. Given that the fund is more likely to inflate its estimation of the illiquid assets, it would seem that investors who withdraw early get the better returns over that time period. Sounds a bit like a Ponzi scheme, right?
Even in the most vanilla of trading, liquidation can impact the market price. With lightly traded securities, this can be magnified. For example, a fund might corner some asset by buying and buying and buying, and then report a huge unrealized gain. But the moment the fund tries to sell and realize the gain perhaps to pay off its last few investors, demand disappears, and the asset crashes.