Wall Street Breakfast: Must-Know News
- Geithner lays out toxic asset plan. As anticipated, the Treasury is launching its plan to rid banks of toxic assets with $75B-100B from existing financial rescue funds. To spur participation, Geithner said private investors will not face executive pay restrictions. Part of the plan aimed at private securities will have the Fed broaden TALF. Another component, focused on bad loans, will see the Treasury provide up to 80% of the initial capital while the FDIC will offer debt financing for up to six times the combined public-private capital pool. Lawrence Summers hopes to see the first loans within 60 days or less. Markets soared following Geithner's statements, though economists were mixed about the plan's viability (see below). (Read the Treasury's press release and white paper (.pdf))
- Markets cheer Geithner plan, economists mixed. U.S. stocks rallied strongly, capping the market's steepest two-week gain since 1938 (Dow +6.8%, S&P +7.1%, Nasdaq +6.8%). BlackRock, th e largest publicly traded U.S. asset manager, threw its support behind the toxic-asset program and will participate in the plan. Pimco, the world's largest bond fund, will also participate in the plan, and manager Bill Gross said "this is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically." Economists were less enthused. Paul Krugman said he's in 'despair' over a program that is sure to fail, while Michael Spence thinks the plan has a good chance of working. Paul Kedrosky argued a fool with a plan might be better than no plan at all. Matthew Yglesias is worried the plan take s us back to where we started, with "banks that are so large that they’re too politically powerful to regulate effective and too systemically important to be allowed to fail," while Felix Salmon mused the plan could actually make things worse.
- Preventing an AIG repeat. An administration official says Geithner is expected to call for expanded government powers and regulatory reform to deal with failing non-bank financial institutions like AIG (AIG). While testifying in Congress later today, Geithner will likely focus on the need for new tools and new authority to enable the Treasury, in collaboration with the Fed, regulators and the pre sident, to step in and combat problems at systemically important institutions, and to wind down failing companies. The expanded powers to help monitor and respond to risk, and potentially limit the ability of big firms to take risks, would require Congressional approval.
- Goldman mulls partial sale of ICBC stake. Goldman Sachs (GS) is reportedly considering selling part of its 4.9% stake in Chinese bank ICBC, a move that could raise more than $1B and potentially pay down its TARP loans. Any sale would have to wait until late April when a lockup on half the stake expires. Other sources say ICBC is preparing to announce that Goldman has no immediate plans to reduce its stake. Goldman's shares in ICBC are valued at around $7.5B.
- AIG bonus clawbacks. New York Attorney General Andrew Cuomo re ported fifteen of the top twenty bonus recipients at AIG (AIG) agreed to return the money they received and as much as half of the $165M paid out may ultimately be recovered. Cuomo and AIG applauded the voluntary returns. The Senate may delay considering a tax increase on employees bonuses after Obama signaled reservations and Republican opposition hardened. Separately, the IRS is challenging some of the tax deals structured by AIG Financial Products Corp., the unit which received the contentious $165M in bonuses.
- GE rises as credit rating falls. Moody's downgraded General Electric (GE) and its GE Capital Corp. two notches to AA2 from AAA, following a one-notch downgrade by S&P earlier this month. Moody's cited concerns with increased losses and delinquencies for GE Capital's roughly $600B in assets. After the downgrade, Moody's placed a stable outlook on both ratings. The downgrade was widely expected and investors were largely unfazed. Shares closed up 9.3%.
- BoA investor tries to oust Lewis. Longtime Bank of America (BAC) investor Jerry Finger launched a formal campaign to oust CEO Ken Lewis from his position as chairman, saying the bank took on too much risk with its Merrill Lynch acquisition. Finger is urging shareholders not to reelect Lewis and two directors during the bank's April 29 annual meeting. Separately, two l arge U.S. pension funds are looking to bring a class-action lawsuit against BoA over its Merrill acquisition.
- Uptick update in the works. SEC officials are working on an updated version of the uptick rule, according to people familiar with the situation. Two sources said the SEC was considering at least two different types of price test options, along with a range of questions that could lead to yet another type of price test proposal. The SEC is scheduled to meet April 8 to consider short sale price test proposals. The SEC's considerations are in preliminary stages and could change before the meeting.
- Obama nominates for Treasury jobs. The Treasury, which has been short-staffed while dealing with the financial crisis, may soon have three more posts filled. Obama moved to fill three top jobs, including nom inating Neil Wolin to be deputy treasury secretary. Wolin must be confirmed by the Senate. The other two announcements were Lael Brainard as the Treasury's top official for international affairs, and Stuart Levey, who will stay on as the top counterterrorism official at the department.
- Auto output crumbles along with demand. Toyota (TM), which is expecting its first loss in 59 years, said its global production fell the most in at least 23 years on tumbling demand in North America and Europe. Toyota's output dropped 53% in February from the year before. Honda's (HMC) output dropped 43%. Nissan (NSANY) saw output fall 51%.
- China calls for dollar replacement. Concerned about the role of a shaky U.S. in the global economy, China is calling for the creation of a new currency to replace the dollar as the world's standard. The proposal is unlikely to change the dollar's role in the short term because of enormous technical and political hurdles, but it underscores the increasingly assertive approach China is taking in shaping the global response to the financial crisis. Russia made a similar proposal earlier this month.
- Chicago Fed Index still weak. The Chicago Fed's National Activity Index edged up to -2.83 in February from -3.74 in January, bringing the three-month average up to -3.48. Despite the small improvement, employment, production, consumption and housing all made negative contributions to the index.
- Home sales rise. Existing home sales rose 5.1% to 4.72M/year in February, but were down 4.6% from a year ago. NAR's Lawrence Yun said first-time buyers accounted for half of home sales last month as distressed sales pulled down median prices (-15.5% Y/Y).
JOIN THE DEBATE!
At 2:30 p.m. EDT today on Seeking Alpha: A live discussion on the Treasury's recently-announced bank recovery plan. Panelists: Felix Salmon of Portfolio.com, James Kwak of The Baseline Scenario, and UC Berkeley professor Brad DeLong.
Earnings: Tuesday Before Open
Earnings: Monday After Close
Today's Markets
- Asia markets hit a two-month high Tuesday following Monday's massive Wall Street rally, largely attributed to initial enthusiasm over the Treasury's latest plan to detoxify banks. Nikkei +3.32% to 8,488. Hang Seng 3.44% to 13,910. Shanghai +0.56% to 2,338. BSE +0.5% to 9,471.
- Europe stocks gapped up in deference to yesterday's U.S. strength, but quickly retreated. At midday, London -1.1%. Paris flat. Frankfurt +0.1%.
- Stock futu res drifted lower overnight, but losses aren't big. Dow -0.8% at 7652. S&P -0.9% at 810. Nasdaq -0.6%. Crude -1% to $53.24. Gold -2.4% to $930. While impressive, skeptics wonder whether ad-hoc rescue plans can power sustainable rallies.
- Treasurys are lower, continuing Monday's trend. 30-year futures -0.77%. 10-year -0.28%. 5-year -0.12%. 2-year -0.04%.
Tuesday's Economic Calendar
- 6:00 Fed's Evans discusses central banking in times of crisis
7:45 ICSC Retail Store Sales
8:55 Redbook
10:00 State Street Investor Confidence Index
10:00 Bernanke, Geithner testify on AIG
10:00 Richmond Fed's Manufacturing Index
10:00 Ofheo House Price Index
5:00 PM ABC Consumer Confidence Index - Notable earnings before Tuesday's open: CCL, CMC, WSM
- Notable earnings after Tuesday's close: JBL
Seeking Alpha editor Eli Hoffmann contributed to this post.
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