In Case You Missed It: Business News Round-Up

Contributed by Beth Collinge of CTG – a division of ILX Group plc.

The US this week passed a sweeping overhaul of bank regulation, while the EU is in the process of finalising similar legislation. Goldman Sachs settled its lawsuit with the SEC, paying the largest-ever penalty by a Wall Street firm to the Commission. BP’s shares are up, after reporting that it has successfully capped the damaged Gulf well.

Economic Backdrop

Markets in the US weakened during last week, as a series of disappointing data on retail sales and consumer confidence coincided with the release of the minutes of the Federal Reserve’s July policy meeting, at which it lowered growth forecasts and hinted at concerns that the threat of deflation might be rising. The DJIA ended over 100 points lower. The yield on the US 10-year Treasury sank back below 3 per cent on Friday.
In the currency markets, the dollar dropped to a 10-week low against the euro, as the single currency went above $1.30 for the first time in two months: the euro also advanced against the pound.

Mergers and Acquisitions

In the latest of a series of takeovers in the management consulting industry Aon agreed to pay $4.9 billion to buy Hewitt Associates, a personnel specialist.

Financial Institutions

Santander of Spain, the eurozone’s largest bank by market capitalisation, last Monday said it had agreed to buy the German retail bank business of Skandinaviska Enskilda Banken for €555m ($698m). Santander Consumer Bank AG is already a leading provider of auto finance and consumer loans in Germany, with 6m customers. The deal to buy SEB’s 173 German branches, which is expected to be completed next year following regulatory approvals, will nearly double the size of Santander’s German branch network. Elsewhere in Europe, Santander is also expected to win the auction for a network of UK retail branches being sold by Royal Bank of Scotland.
Aside from Europe, the bank has focused on the US and Latin America in recent months. Brazil is already a big contributor to the group’s global profits. Last month, Santander paid $2.5bn to buy Bank of America’s minority stake in its Mexican operations and so take back full control of the business.
Citigroup reported a second consecutive quarter in the black as a large reduction in the provision for consumer losses helped offset sluggish growth in its investment bank. The US banking group, which had to be rescued by the government during the crisis, recorded net income of $2.7bn in the second quarter, down 37 per cent from a year ago and 39 per cent from the first three months of the year. Last year’s results were boosted by a $6.7bn one-off gain from the sale of a majority stake in Citi’s brokerage unit to Morgan Stanley.
The results were slightly ahead of analysts’ expectations and confirmed the trend highlighted by JPMorgan Chase and Bank of America whose consumer and commercial banks did better than the securities units.
Goldman Sachs has agreed to pay $550m (£356m) to settle civil fraud charges over how it marketed a subprime mortgage product. The investment bank has now paid the largest-ever penalty by a Wall Street firm to the Securities and Exchange Commission (SEC). The SEC accused Goldman of creating and marketing a debt product linked to subprime mortgages without telling investors that a hedge fund helped choose the underlying securities and was betting against them. Goldman acknowledged as part of the settlement that its marketing materials were incomplete, but it did not admit or deny the allegations.

Credit

The European Central Bank’s purchases of government bonds in response to the eurozone crisis have slowed sharply. Underlining that the ECB believes market conditions are improving, the Bank purchased €1bn of eurozone bonds last week, compared with purchases of €13.9bn of bonds during the first weeks of the programme in May to try to improve liquidity.
Moody’s Investor Service cut Portugal’s debt rating by two notches yesterday, saying its growth prospects were weak and it might need new austerity measures next year to hit tough fiscal targets. S&P cut Portugal by two notches in April and put a negative outlook on its rating.

Other

The US Senate passed a landmark financial reform bill by a 60 to 39 vote, allowing the broadest overhaul of rules governing America’s largest financial institutions since the 1930s. The bill, which ushers in a raft of restrictions on banks, is intended to avert a repeat of the 2008 crisis that brought the world economy to the brink of collapse. The bill will be called the Dodd-Frank Act after its main leaders, senate banking committee chairman Chris Dodd, a Democrat, and Republican Barney Frank. It will now be sent to President Barack Obama to sign into law next week.
The main points of the bill concern the following two areas:
1. LARGE BANKS – Large financial firms will be prohibited from proprietary trading and only be allowed to make minimum investments in hedge funds and private equity funds.
They will also face tougher standards in what qualifies for the capital they are required to set aside to protect against potential losses.
Banks such as Goldman Sachs and JPMorgan Chase will be forced to spin off some of their profitable derivatives business or risk losing access to the Federal Reserve’s emergency funds.
The firms’ financial products such as mortgages and credit cards will be subjected to new rules from a newly created bureau designed to protect customers from risky products.
Most derivatives trade will be forced onto exchanges or handled through clearing houses, in an attempt to limit the effect that large, risky trades can have on the economy – potentially curbing banks profits.
Little will change for smaller banks.
2. CREDIT RATING AGENCIES – Rating agencies, such as Moody’s, Standard & Poor’s and Fitch could be sued if they “recklessly” fail to review key information in developing a rating.
Similarly, the European Commission is finalising its version of new rules to clamp down on the OTC derivatives markets, parts of which were blamed for exacerbating the 2008 financial crisis. They would force more OTC derivatives to be traded on exchanges and electronic trading platforms, and push them through clearing houses to safeguard the financial system. Companies that use OTC derivatives to manage routine business risks – such as exposure to changes in currency moves and interest rates – successfully lobbied in the US against being forced to use cleared OTC derivatives, arguing that they use such instruments for hedging purposes not speculation.
Last week EU finance ministers decided to seat a new European banking watchdog in the City of London. Germany had hoped to locate the agency next to the European Central Bank (ECB), but a meeting of the Ecofin (Economic and Financial affairs) council decided the new body, one of three “super-watchdogs”, should be headed up in London. The location of the other two remains unclear but it is likely they will be based in Frankfurt and Paris.
Ecofin also diluted the Eurozone’s ability to dominate the watchdog by allowing the General Council of the ECB, which includes heads of all 27 national central banks, to vote for who gets the top job, instead of the ECB chief getting it by default.
The eurozone’s €440bn sovereign rescue fund will be operational by the end of the month and expects to be awarded a coveted triple A credit rating in August, its new head, Klaus Regling, has said. In an interview with the Financial Times, Mr Regling said the fund was a temporary crisis mechanism but could be extended beyond its intended three-year lifespan if any loans to eurozone governments were outstanding. Governments will be able to borrow from the facility if they agree to adopt reform programmes designed by the International Monetary Fund, European Commission and European Central Bank.
In the UK, details of the proposed levy on banks’ balance sheets have been revealed, as the government seeks to raise £2.5bn a year to help stave off the costs of any future financial crises. The government will first introduce a 0.04 per cent levy on balance sheets in 2011, rising to 0.07 per cent in 2012. The levy will apply to three areas of banking and only to entities which have relevant liabilities of £20bn or more. Smaller institutions will not be affected.
George Osborne, chancellor, on Thursday sought to restore the tarnished reputation of the Office for Budget Responsibility by offering MPs the right to veto his choice of who should lead it. Mr Osborne said that he wanted the Commons treasury committee to have the right to veto his choice of chairman, who will serve a five-year term – renewable once – and earn £142,000 a year.
BP’s shares have bounced back 38 per cent from their low point on June 25, as investors sensed that the company can survive the disaster in the Gulf of Mexico. After the news that the flow of oil had been capped, BP shares closed at 407.15p.

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