Manhattan-New York

In Case You Missed It: Business News Roundup

Beth 005The Glass Hammer is pleased to bring back the Monday Business News Roundup, contributed by Beth Collinge of CTG – a division of ILX Group plc.

US Fed Chairman Bernanke predicted a “moderate economic recovery” would unfold in the US during the next several quarters. For Britain, the Ernst & Young Item Club forecast weak 1% growth this year, giving way to 2.7% next year and 3.4% in 2012. The Securities and Exchange Commission (SEC) took action against Goldman Sachs, claiming the company misstated and omitted key facts about a collateralized debt obligation.

Economic Backdrop

  • After a buoyant start to the week, stocks fell sharply on Friday when the US securities regulator charged Goldman Sachs with fraud relating to its dealing in subprime related products. The S&P 500 dropped 2 per cent. The Vix index, a measure of market volatility, jumped 21 per cent to nearly 20, a sharp return from the recent near-record lows of 15.
  • In the currency markets, the euro lost earlier gains to fall back to $1.3508, following a warning from Jean-Claude Trichet, European Central bank president, that conditions for Greek banks could deteriorate. Sterling also lost ground on Friday after the first ever televised leaders’ debate in the UK highlighted the possibility that no party would win overall control in the coming general election. Some analysts believe no clear majority for one party would hamper the future government’s ability to tackle the budget deficit.

  • US 10-year notes enjoyed haven appeal following the Goldman news, the yield falling 6 basis points to 3.77 per cent. Gold, which hit an all-time high of $1,226 in December 2009, ended the week at $1,137.
  • The main interest rate for the US economy has climbed toward the upper end of the range established by the Federal Reserve during the financial crisis. The central bank in December 2008 set a target range of zero to 0.25 per cent for its overnight Fed funds rate. This policy was an unprecedented step for the Fed and underscored the severity of the crisis.
  • Ben Bernanke chairman of the Federal Reserve predicted on April 15 that a “moderate economic recovery” would unfold in the US during the next several quarters on the back of stronger spending by businesses and consumers.
  • The latest Ernst & Young Item Club forecast for Britain predicts weak 1% growth this year, giving way to 2.7% next year and 3.4% in 2012 — close to Treasury forecasts that have been widely dismissed as unrealistically optimistic.
  • Industrial production in the eurozone also rose faster than expected in February, boosting hopes that Europe’s economic recovery is gaining momentum. Compared with February 2009, production was up 4.1 per cent – the most in two years.

Mergers and Acquisitions

  • British Home Retail Group, which owns Argos and Homebase, was higher on rumours of takeover by Asda, itself owned by US food giant Wal-Mart. It was also announced on 13 April that Asda chief, Andy Bond, will be stepping down.
  • Deutsche Bahn Europe’s biggest railway operator is poised to offer about £1.6 billion for Arriva, Britain’s third-largest transport company. Deutsche Bahn, which was created in 1994 and employs 239,000 people, is expected to list on the German stock exchange next year.

Financial Institutions

  • April 16. Goldman Sachs sank by 16 percent after the Securities and Exchange Commission (SEC) took action against the company and one of its vice presidents for misstating and omitting key facts about a collateralized debt obligation.
  • The SEC claims that Goldman Sachs created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them. The charges themselves rest on very specific points concerning Goldman’s disclosure of information, both to ACA, the bond insurer that put its name to the already infamous Abacus 2007-AC1 securitisation, and to its end investors.
  • Goldman, which vehemently denies the fraud allegations, claims the SEC’s complaint is “unfounded in law and fact”.
  • Investigators from the Financial Services Authority (FSA) in the UK are liaising with their American counterparts at the SEC. It is understood that the FSA is examining similar trades.
  • Royal Bank of Scotland was the biggest victim of the alleged fraud, losing $840m. On Friday, Holland’s Rabobank filed a claim against Merrill Lynch making similar allegations.
  • The allegations against Goldman come ahead of bumper first-quarter results that will be revealed on Tuesday. The bank is expected to set aside $5.5 billion in pay and bonuses for its staff.
  • Having bought Lehman’s US business in September 2008, Barclays Capital is now looking to cement its place as a global top three player in the next five years. The bank will spend an estimated $20m attracting City talent for its Equity Capital Markets division in London.
  • A US judge on Thursday approved a plan by the Lehman Brothers estate to form an asset management company that would represent a new beginning for the defunct investment bank whose collapse fueled the financial meltdown in 2008. The company, called Lamco, will indefinitely manage Lehman’s remaining derivative contracts and real estate and private equity investments.

Credit

  • April 17. Eurozone finance ministers inched closer to finalising a rescue package for Greece but insisted the country had yet to make a formal application for funds to stave off a sovereign default.
  • European Union finance ministers said Greece does not have an immediate plan to trigger the recently agreed rescue package. Greek 10-year yields increased to 7.255 percent, approaching the rate before the 45 billion-euro ($61 billion) rescue package was unveiled on April 11.
  • Greece needs to raise 11.6 billion euro by the end of May and has pledged further budget cuts of about 6 percentage points of GDP to bring the shortfall back within the EU’s 3 percent limit in 2012.

Other

  • Tower 42, the tallest occupied skyscraper in the City, will be put up for sale as London’s commercial property market shows signs of recovering. The 600ft former NatWest tower near the Bank of England is expected to fetch more than £300m ($461m) when its owners, Hermes Real Estate and BlackRock’s UK property fund, put it on the market this week. Tower 42 was built in 1980 for NatWest and was regarded as the first true skyscraper in the UK. It is now occupied by a number of tenants, producing a rental income of about £20m a year.
  • Airline stocks tumbled on Friday 16 April, prompting concern about the financial effects of the cloud of volcanic ash that has turned large parts of northern Europe into a no-fly zone. Every day of zero flying takes on average about 0.25 per cent off an airline’s annual sales although seasonality skews this considerably.
  • April 17. European finance ministers, who met in Madrid this weekend, failed to reach an agreement on ways to ensure tougher banking supervision, and a bank levy to pay for banks that collapse in the future. This has raised concerns that disagreements between European nations could lead to a delay on a global banking deal. In recent weeks, pressure has grown on politicians to agree a way to tax banks before a meeting of leaders from the Group of 20 developed and emerging economies in June.
  • This week, the International Monetary Fund will present its own ideas on a levy to G20 finance ministers in Washington.
  • The annual fees charged by the Financial Services Authority (FSA) on regulated firms have more than doubled for some businesses in the past year, prompting complaints that the cost of regulation has risen too high.

Note: The details contained in this article have been drawn from a daily review of the Financial Times and The Economist.

/by