Canada did not follow the U.S. example of financial deregulation that began there in the early 1980s. Ottawa did permit the brokerage and trust sectors to be absorbed by the banks. But the feds maintained strict supervision so Canada is the only major economy in the current crisis in which government has not had to bail out its banks.
By contrast, the United States, epicentre of the latest global crisis, began to dismantle its most critically important regulatory safeguards in 1980. There soon followed the epic savings and loan crisis of that decade.
In the late 1990s, bank lobbyists succeeded in achieving revocation of the FDR-era Glass-Steagall Act, which separated commercial from investment banking. They did this with lavish campaign contributions to key Democrats and Republicans in Congress – assuring lawmakers that they were now more safely spreading risk, when the bankers actually were preparing to accumulate unsustainable amounts of it.
In 2004, George W. Bush’s Securities and Exchange Commission (another FDR creation) decided investment banks, henceforth, should be permitted to regulate themselves. Also, under the so-called Basel II rules that came into effect a few years ago, global banks granted themselves permission to be the sole arbiters of what constituted undue risk.
So, the bomb had been built.
The timer was activated by the "innovation" of derivatives, subprime (junk) mortgages, credit default swaps, collateralized debt obligations and other high-risk instruments. Off-balance sheet repositories for a bank’s dubious assets were such that no additional capital was required as a provision against their going sour. The lax regulatory regime, dating from the Reagan era, neither understood nor tried to regulate the new tricks banks and brokerages were up to.
When the record U.S. housing bubble earlier this decade finally burst in 2006-07, the subprime mortgages and other "toxic waste" on bank balance sheets suddenly had to be written off in the billions of dollars – $41 billion (U.S.) in the case of Swiss banking giant UBS AG alone.
So, Uncle Sam has been obliged to commit an almost unimaginable $9 trillion (U.S.) in taxpayer funds to stabilize America’s troubled major banks. Last fall’s global credit freeze following collapse of brokerage giant Lehman Brothers Holdings Inc. accelerated a U.S. recession that began in December 2007. So far, it has cost about 7.3 million North Americans their jobs.
In financial capitals worldwide, the talk now is how to prevent another crisis, almost certainly more devastating than the last. Now that the largest surviving banks know their institutions are "too big to fail," they have even greater incentive to carelessness – a phenomenon known as "moral hazard."
There is talk of breaking up the biggest banks. After all the forced mergers of weakened banks in the past year, America’s four largest banks now control about 40 per cent of total industry assets, double the portion of 2000.
There is talk of reinstating the separation of commercial and investment banking. Of capping excessive banker pay and "clawing back" bonuses from traders and dealmakers whose investments later go bad.
There is a wish among some for greater "harmonization" of regulatory standards among nations, presumably so that there is no repeat of the contagion of U.S. subprime defaults spreading to Europe and Asia pay day loans.
The Canadian experience suggests those measures are unnecessary. The concentration of Canadian financial assets in a handful of institutions makes the Canadian system easier to supervise, the one saving grace of an oligopoly. Commercial and investment banking happily coexist in Canadian banks, as they do in Europe.
Harmonization would be useful in this era of globalization, giving errant bankers no place to hide, but overcoming differing national sentiments puts that goal out of reach for some years yet. Canadian provinces still resist a national securities regulator.
The essential feature of banking in Canada is that strictly enforced regulation, dating from the creation of the Inspector General of Banks in 1924, remains intact.
Initially, it was welcomed in those uncertain times to reassure depositors and to create a "level playing field" in which hyperaggressive bankers could not force prudent ones into a reckless race for assets. Nothing about that regime has changed since.
America enjoyed a golden age of banking lasting about 50 years from the time of Franklin Roosevelt’s mid-1930s imposition of sweeping bank regulations and their vigorous enforcement. The next five decades were marked by no more financial "panics."
None.
As David Ross writes in proposing means of preventing future financial crises in the current Harvard Magazine, "Private financial markets and institutions have always had trouble managing risk – and especially systemic risk – on their own. The long series of financial crises that punctuated American history up through 1933 testifies to this fact, as does the current crisis, which exploded not coincidentally during a period of aggressive financial innovation and deregulation."
FDR was the best thing to happen to U.S. banking. Those 50 golden-age years were marked by lucrative business in credit cards, 401(k)s (RSPs), mutual funds, adjustable-rate mortgages and ATMs. There were no system-wide panics, whereas the failure of one brokerage, Lehman Brothers Holdings Inc., last September froze credit among banks around the world.
It’s not clear what shape financial reform will take. But what’s needed seems clear, starting with a return to more vigilant government oversight of America’s banks and other financial institutions.
U.S. banks should have to double their cash reserves against losses, to 8 per cent of capital. Their leverage ratios should look more like those of Canadian banks, which lend or invest about $20 for every $1 they have in capital. In the U.S., the ratio is closer to $30 and, in Europe, $40 is not uncommon.
Ace business columnist Joe Nocera of The New York Times last week imagined what Obama ideally would say on genuine reform: "If a bank wants to be so large that it is too big to fail, it can do so – but it will have to put up much more capital than a smaller competitor. If a bank wants to dabble in derivatives, it will have to pay a price in higher capital requirements. If a bank wants to invest in risky assets – ditto.
"Banks hate higher capital requirements because they depress profits. So they’ll have to make a choice: risky assets or lower capital requirements. They won’t be able to do both."
There’s really no alternative to watching bankers like a hawk. It’s our only hope of returning to those uneventful years before the safeguards came tumbling down, and bankers assumed a new role as agents of wealth destruction without historical equal.
dolive@thestar.ca
The number of first-time filers for unemployment insurance jumped last week, according to a government report issued Thursday, with the increase exceeding economists’ forecasts.
There were 551,000 initial jobless claims filed in the week ended Sept. 26, up 17,000 from an upwardly revised 534,000 the previous week, the Labor Department said in a weekly report.
A consensus estimate of economists surveyed by Briefing.com expected 535,000 new claims.
"We’ve been holding in a similar pattern the past few weeks, and this could dash some hopes of a quicker recovery," said Adam York, analyst at Wells Fargo.
Ian Shepherdson of High Frequency Economics wrote in a research note that "a correction was overdue" after three consecutive declines in initial claims.
"Progress is slow," Shepherdson said. "There is still no sign of a near-term stabilization in employment."
The 4-week moving average of initial claims was 548,000, down 6,250 from the previous week’s revised average of 554,250.
Continuing claims: The government said 6,090,000 people filed continuing claims in the week ended Sept. 19, the most recent data available. That was down 70,000 from the preceding week’s ongoing claims.
The 4-week moving average for ongoing claims fell by 39,250 to 6,154,500 from the prior week’s revised average of 6,193,750.
The initial claims number identifies those filing for their first week of unemployment benefits. Continuing claims reflect people filing each week after their initial claim until the end of their standard benefits, which usually last 26 weeks.
The figures do not include those who have moved to state or federal extensions, nor people whose benefits have expired.
State-by-state data: Two states reported a decline in initial claims of more than 1,000 for the week ended Sept payday loans. 19, the most recent data available. Claims in Kansas fell by 1,545, while Wisconsin’s fell by 1,258.
A total of 12 states said that claims increased by more than 1,000. California reported the most new claims at 5,112.
Fewer layoffs: A separate report from outplacement firm Challenger, Gray & Christmas said its data showed stabilization in the job market.
Monthly layoff announcements fell in September to 66,404 job cuts, down 13% from August. That’s the lowest level since March 2008, and the September figure was 30% lower than the same month a year ago, when employers announced 95,094 job cuts.
It was the fourth consecutive month in which job cuts declined from the year-ago level.
Outlook: Thursday’s government report "shows we still have job losses to come this year," said Wells Fargo’s York.
The rest of 2009’s job losses won’t come near the levels seen during mass layoffs in January and February, York said, and initial claims could fall below the 500,000 mark by year’s end.
High Frequency Economics’ Shepherdson wrote that better economic data in the third quarter should boost the job market.
"It would be very surprising not to see claims falling now," he said.
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The cacophony of the health care debate, already loud, is likely to become deafening as autumn progresses.
The fate of the various reform proposals is anybody’s guess. But if a bill does pass this year, several measures stand out as most likely to make the final cut.
And many could have a direct bearing on you.
CNNMoney.com consulted a cross-section of leading health care experts to get their take on just what those measures might be.
Their consensus view if a bill passes: Insurers are likely to face new rules about who they have to cover and limits on how much they can charge. Consumers will be able to buy coverage on a new "insurance supermarket." And coverage will be expanded and made more affordable for many.
Here’s a breakdown of some of the specifics.
Putting a tighter leash on insurers
Most of the heart-wrenching stories about the U.S. health care system involve people who need insurance the most but are denied coverage, run out of benefits or simply can’t afford it.
Reform, if it takes place, will attempt to fix that.
"The least controversial part [of the reform debate] and the part that helps everyone are the insurance reforms," said Drew Altman, president of the Kaiser Family Foundation, a health policy think tank.
Insurers would no longer be able to deny coverage to those with pre-existing conditions or charge them more because of those conditions.
Insurers may also be denied the right to cancel, or rescind, a policy when a policyholder has kept up with his premiums.
Reform is also likely to prohibit insurers from charging women, particularly of child-bearing age, higher premiums than men, and from setting a cap on annual or lifetime benefits.
And insurers would also be limited in how much more they can charge older policyholders relative to younger ones. Currently "it’s a wide, wide difference," Altman said, noting that a 62-year-old with a family of four and a household income of $89,000 pays an estimated $20,000 a year — or more than 20% of his gross income — for family coverage. The average for family coverage is just north of $13,000.
But should such a reform go through, it is likely that premiums for younger, healthier workers — who typically cost insurers the least — might go up a little, Altman said.
Creating a new insurance marketplace
Today if you end up buying insurance on your own — that is, not through your employer — you have to do all the heavy lifting yourself. You have to comparison shop for the best price and figure out the extent of coverage different policies offer.
Reform would lift some of that burden by creating an insurance exchange, where you could shop for plans in one place online and insurers could compete for your business directly.
Stuart Butler, vice president of domestic and economic policy studies at the conservative Heritage Foundation, characterized the exchange as a kind of "Travelocity" for health insurance.
Any plan on the exchange would have to meet a set of standards in terms of a minimum level of coverage and a minimum level of services covered. And there would be tiers of coverage available above the minimum.
"Who can participate in the exchange differs somewhat among the bills … but likely at least small business and people without access to employer-based coverage or Medicaid," said Karen Davis, president of the Commonwealth Fund, an independent health care research foundation.
Besides providing better consumer protections for individuals and small businesses that buy policies independently, an exchange could help reduce premiums since it would create a broader pool of customers for insurers, and that can reduce their marketing and administration costs, Davis said.
Expanding coverage, making it more affordable
The experts CNNMoney.com consulted were unanimous that reform would include a set of financial subsides for low- and at least some middle-income families buying plans on the exchange.
"They’re absolutely going to have subsidies. The debate is how big they are and how high up the income ladder they go. The fine-tuning is a very big issue," Altman said.
Broadly speaking, such subsidies will be determined on a sliding scale based on an individual’s income. Also, the amount of the premium owed by people who get subsidies will be capped. That cap will be determined by a formula that defines what percentage of that person’s income may be used to pay for premiums.
In addition, reform is expected to expand and standardize eligibility for Medicaid across states.
Altman, Davis and Edwin Park, senior fellow in health policy at the liberal Center on Budget and Policy Priorities, feel confident that there will be a mandate on individuals to buy insurance. But Butler is not so sure.
If there isn’t one, that could change how affordable health insurance is since the cost-effectiveness of various reform measures is based on a mandate being in place.
Currently, the three leading bills under consideration propose an individual mandate. But even its supporters don’t yet agree on what type of insurance a person should be mandated to get, what the penalty should be if he doesn’t, and who should be exempt from the requirement, Park said.
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Regulators closed subsidiaries of Irwin Financial Corporation in Kentucky and Indiana Friday, bringing the total number of bank failures this year to 94, according to the Federal Deposit Insurance Corp.
Customers of the bank, however, are protected. The FDIC, which has insured bank deposits since the Great Depression, currently covers customer accounts up to $250,000.
Irwin Union Bank and Trust Company and Irwin Union Bank, F.S.B. operated a combined 27 branches in nine U.S. states. Both banks were run by Columbus, Ind.-based Irwin Financial Corp.
First Financial Bank, NA, which is based in Hamilton, Ohio, will assume all of the deposits of the two banks.
"Since all deposits are being assumed by First Financial Bank, there will be no losses to any depositor," Claude Davis, president and chief executive officer of First Financial, said in a statement.
Irwin Union B&T, of Columbus, Ind., had total assets of $2.7 billion and total deposits of approximately $2.1 billion. Irwin Union, F.S.B., of Louisville, Ky., had total assets of $493 million and total deposits of approximately $441 million.
On Thursday the banks’ parent company, Irwin Financial Corp., said in a regulatory filing that it had "no realistic prospect of achieving the required capital levels," required by its regulators.
The FDIC said customers of the failed banks will be able to access their money over the weekend by writing checks or using ATM or debit cards. Checks will continue to be processed, and borrowers should make their payments as usual.
A total of 94 banks have failed so far this year, with an average of about 10 per month. That’s nearly four times the number of banks that failed in 2008, and it’s the highest tally since 1992, when 181 banks failed.
This year’s failures have reduced the FDIC’s insurance fund to $10.4 billion from $45 billion a year ago. However, the agency has said it has $42 billion available for bank rescues over the next 12 months.
The cost of Friday’s closures to the FDIC is an estimated $850 million.
Earlier Friday, FDIC chairman Sheila Bair said bank regulators will meet at the end of the month to discuss ways to replenish the agency’s funds, including the possibility of borrowing from the U.S. Treasury.
Bair also said the FDIC could use some lesser-known methods to raise money, such as requiring banks to prepay assessments or issuing a note.
The Nasdaq hit its highest point in almost a year Tuesday and the Dow and S&P 500 also climbed as commodity shares rallied, and General Electric was upgraded.
Bond prices sank, raising the corresponding yields, while the dollar fell to its lowest point in almost a year. Commodity prices surged.
The Dow Jones industrial average (INDU) gained 56 points, or 0.6%, ending close to 10-month highs. The S&P 500 (SPX) index added 9 points, or 0.9%, ending close to 11-month highs. The Nasdaq composite (COMP) advanced 19 points, or 0.9% and ended at the highest point since Oct. 1, 2008.
Last week, Wall Street ended a choppy week lower as investors hunkered down after a strong August and ahead of the long holiday weekend. All financial markets were closed Monday for Labor Day.
But Wall Streeters returned in better spirits Monday, scooping up a variety of stocks, led by the commodities sector.
A more than 4% spike in oil prices and gold prices that briefly topped $1,000 gave a lift to the influential commodities sector. Dow stocks Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500) were the biggest gainers on the blue-chip average. A rally in metals stocks lifted the Gold Bugs (HUI) index by 1%.
Tempering the advance was a selloff in some of the financial shares that rallied late in the summer, including Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500), Citigroup (C, Fortune 500) and AIG (AIG, Fortune 500). Dow component Travelers (TRV, Fortune 500) also retreated.
"We’ve had an amazingly strong summer," said Ben Halliburton, chief investment officer at Tradition Capital Management. "As the rate of decline has slowed in profits and revenues, stocks have improved."
All three major markets rose between 11% and 13% over the summer. But after such a run, "it’s show-me-the-money time for the economy and profits in the third quarter," Halliburton said. "The improvements have to start or people are going to doubt the rally and back out."
September is typically a tough month for Wall Street as market pros return from their summer vacations with a cleaning-house mentality. It is the worst month on Wall Street in terms of percentage losses for the Dow, S&P 500 and Nasdaq composite, according to Stock Trader’s Almanac.
Over the last few weeks, the S&P 500 seesawed across 1000, a key psychological level that traders watch. That seesawing may continue for the next few weeks, said Todd Salamone, director of trading at Schaeffer’s Investment Research.
"We expect the S&P 500 to battle between around 980 and 1060," Salamone said. "There’s no big commitment to accumulate stocks at this point."
He said that stocks may not move much in one way or the other until at least the middle of October, when the third-quarter profit reports start to pour in free credit score online.
Company news: Hopes that a period of dealmaking could resume helped nudge the advance along Tuesday.
Kraft Foods (KFT, Fortune 500) shares slumped almost 6% after British candy maker Cadbury (CBY) spurned its $16.7 billion takeover offer. However, the company, a Dow component, said it would continue to pursue a merger. Cadbury shares jumped 38%.
General Electric (GE, Fortune 500) shares rallied 4.5% after JPMorgan upgraded the stock to "overweight" from "neutral."
Among other movers, Opexa Therapeutics (OPXA) surged 270% after a mid-stage study showed that at least 83% of patients taking its multiple sclerosis drug had not relapsed one year later.
Economy: Leaders from the world’s 20 biggest economies, meeting over the weekend, agreed to continue to provide stimulus to support the global recovery.
Consumers cut their borrowing in July by $21.6 billion, the most on records dating back to 1943. Economists thought credit would fall by $4 billion. Credit fell by a revised $15.5 billion in June.
World markets: Global markets gained after gold topped $1,000 an ounce. In Europe, London’s FTSE 100, France’s CAC 40 and the German DAX all gained modestly.
In Asia, the Japanese Nikkei gained 0.7% and the Hong Kong Hang Seng added 2.1%.
Oil and gold: U.S. light crude oil for October delivery rose $3.08 to settle at $71.10 a barrel on the New York Mercantile Exchange.
COMEX gold for December delivery rose $3.10 to settle at $999.80 an ounce after surpassing $1,000 earlier in the session.
Bonds and currency: Treasury prices fell, raising the yield on the benchmark 10-year note to 3.46%, from 3.44% late Friday. Treasury prices and yields move in opposite directions.
In currency trading, the dollar fell versus the euro and the Japanese yen.
Market breadth was positive. On the New York Stock Exchange, winners topped losers three to one on volume of 1.32 billion shares. On the Nasdaq, advancers beat decliners eight to five on volume of 2.04 billion shares.
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More Americans signed sales contracts to buy homes in July than in June, marking the longest streak of monthly increases on record, said a report released Tuesday.
The pending home sales index from the National Association of Realtors rose 3.2% in July after rising by 3.6% in June. That’s 12% higher than July 2008, and it marks the sixth straight increase since record-keeping began in 2001.
The reading far exceeded forecasts of economists surveyed by Briefing.com, who predicted a 1.5% increase.
Signed real estate contracts often take many weeks or months to complete, so they are considered a forward-looking indicator.
A new direction
Momentum in the housing market has clearly turned for the better, said NAR chief economist Lawrence Yun, in a written statement.
"The recovery is broad-based across many parts of the country," Yun said. "Housing affordability has been at record highs this year with the added stimulus of a first-time buyer tax credit."
The first-time home buyers tax credit, passed earlier this year as part of the economic stimulus package, is worth 10% of the home purchase price up to $8,000. People who have not owned a home in the previous three years are eligible for the credit.
However, the tax credit expires on Nov. 30 and it usually takes about 90 days to close on a house after a contract is signed. As of Sept. 1, there were only 90 days left before the credit ends.
Housing affordability has also improved, the NAR said.
The average middle-income family can now spend less than 25% of monthly income to buy a median-priced home, Yun said, adding that housing payments as a percentage of income in 2009 are at a record low.
"As long as home buyers stay within their budget, mortgage payments will be very manageable," Yun said.
Regional sales
The pending home sales index is broken down by regions. The West soared above the rest, jumping 12.1% in July, while the South saw pending home sales activity rise 3.1% for the month.
In the Northeast, activity fell 3%, and in the Midwest saw a decline of 2%.
A cluster of regional reports Monday showed business activity picking up steam in August, suggesting the U.S. economy is breaking free of its deep recession.
One report showed a nearly year-long plunge in economic activity in the Midwest came to a halt last month as new orders and production rose sharply, potentially a harbinger for the national economy.
Still, a top Federal Reserve policy-maker warned that the U.S. economy remains fragile and unemployment high.
The Institute for Supply Management-Chicago’s business barometer rose to 50.0 in August, the dividing line between growth and contraction, from 43.4 in July. Wall Street economists had expected a rise to only 48.0.
"The Chicago PMI report is a further indication that the U.S. economy is starting to improve," said Shaun Osborne, chief currency strategist at TD Securities in Toronto.
Many strategists tied the jump in new orders to the government’s "Cash for Clunkers" program, which got auto plants humming to meet demand for new vehicles to replace gas-guzzlers.
"We think the success of the clunker program is now lifting the index," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
The auto sector plays a larger role in the Chicago region economy than it does nationally, although the Chicago area index, which covers both the service and manufacturing sectors, is often viewed as a bellwether of national trends.
"There was a strong increase in new orders, which is critical," said Pierre Ellis, senior economist at Decision Economics in New York.
A similar index covering the heavily industrialized Milwaukee region rose to 56 in August from 45 in July, while the Dallas Federal Reserve Bank said factory activity in Texas declined at a slower pace.
Meanwhile, business activity in New York City, which tends to be driven by trends in the financial sector, expanded in August for the first time in three months, thanks to increased purchases and a slowdown in layoffs.
The National Association of Purchasing Management-New York’s index of business conditions rose to 55.3 in August from 48.3 in July. Improvements in purchasing volume and employment conditions signaled the worst of the city’s downturn might be ending, the group said.
The slew of regional data failed to lift the U.S. stock market, which was bogged down by weakness in financial shares and a soft tone in overseas markets. The Dow Jones industrial average was down nearly 1% in late morning.
Jobless recovery
The regional surveys showed employment remained soft despite the brighter outlook, consistent with fears the United States could be in for a "jobless recovery." The ISM-Chicago’s employment index contracted for a 21st consecutive month.
Increased hiring is seen as critical to getting a consumer-led recovery under way. The U.S. unemployment rate was 9.4% in July. Economists expect a report on Friday to show it rose to 9.5% in August.
Still, the Conference Board said online job vacancies advertised in August rose by 169,000, or 5%, offering a glimmer of hope for job seekers.
"The August increase is good news, showing what we hope will be a continued improvement in job demand this fall," said Gad Levanon, senior economist at the industry group.
Dudley: Economy still fragile
A panel of business economists suggested factory output would help lead the economy out of recession.
After a large-scale package of tax cuts and spending to boost the economy, the government should now turn its focus to cutting spending, said respondents to a biannual survey conducted by the National Association of Business Economics.
The economists were split on whether the policies pursued by the Federal Reserve, which has cut interest rates to near zero and flooded financial markets with cash, would ultimately trigger higher inflation.
New York Federal Reserve Bank President William Dudley told CNBC television that it was too early to talk about curtailing the Fed’s long-term security purchases while the economic recovery is still so fragile.
"I think it’s a little premature … the economy still isn’t growing very fast and we do have a very high unemployment rate," he said.
Facing mounting bank failures, regulators are putting a new twist on a familiar idea: splitting a bank’s good assets from the bad ones.
The Federal Deposit Insurance Corp. said last month it would consider splitting the toxic assets of a failed bank from its more valuable parts, such as deposits and loans that aren’t going sour.
The goal is to help the FDIC, facing the biggest wave of bank failures in almost two decades, find new buyers for the remains of failed banks while limiting losses on its depleted insurance fund.
"This helps us widen the net in marketing bank assets," said FDIC spokesman David Barr. "When you have the inventory we have, you look for different ways to try to sell it."
Thanks to the ill effects of the housing bubble, the FDIC certainly has the inventory. Barr said the FDIC had $26.5 billion in assets in liquidation at the end of July, with two-thirds of that in mortgages and real estate-backed securities.
Though the FDIC says it’s having success in finding buyers for much of these assets, it is also trying to find ways to move inventory at better prices. In one program, the agency will provide financing to acquirers of troubled loans.
"There has been little activity in sales of whole loans," said Hal Reichwald, a lawyer at Manatt Phelps & Phillips in Los Angeles who represents investors. "The danger is you could end up with a bottleneck in the distressed asset markets."
Wave of failures
When a bank is on the verge of collapse, the FDIC typically tries to find buyers for the entire bank at once, often with the help of deals in which the agency shares losses on the failed bank’s bad loans.
Friday’s failure of Alabama’s Colonial BancGroup is one such deal: buyer BB&T (BBT, Fortune 500) took on most of Colonial’s $25 billion in assets, with it and the FDIC sharing losses on two-thirds of that pool. Some $3 billion of assets will remain with the FDIC for later disposition, the agency said in a statement Friday.
But with banks failing at a clip not seen since the late stages of the savings and loan crisis in the early 1990s, finding a buyer for the whole bank isn’t always possible.
So far in 2009, 77 banks have failed — more than triple the 2008 toll. The FDIC has taken on some assets in many of those deals, and it has failed to find takers of any kind for six banks — including the giant correspondent bank Silverton, which went under in April with $4.1 billion in assets.
In a more recent case, the FDIC couldn’t find a buyer for a small bank in Georgia, even after contacting 300 potential buyers.
The wave of failures and resulting soft demand have left the FDIC weighing the benefits of attracting new capital to shore up failed banks against the risks of allowing private equity investors, which typically use a lot of debt to finance deals, to become more active buyers compare car insurance prices.
Last November, the FDIC issued rules expanding the field of bidders for troubled bank assets. But last month it proposed holding private investors to higher capital standards and imposing a waiting period that would keep buyout firms from "flipping" banks.
"The question is real equity vs. borrowed equity," said James Angel, a finance professor at Georgetown University. "The temptation is to lever yourself up to your eyeballs, and that’s something the FDIC has to be on guard against."
How the agency decides to treat private equity buyers could go a long way toward deciding whether the bad-bank plan succeeds.
That said, the FDIC’s approach marks the first time during the financial crisis that the bad-bank concept has been considered as something other than a Hail Mary pass.
Lehman Brothers proposed a split last September to rid itself of its troubled commercial real estate assets, in a desperate bid to restore market confidence. Investors rejected the plan as unworkable and the firm filed for bankruptcy just days later.
Since then, the government has toyed with variations on good-bank/bad-bank plans for healthy institutions at least twice. The first was former Treasury Secretary Hank Paulson’s original plan for the Troubled Asset Relief Program. Then there was discussion of a so-called aggregator bank by the Obama administration.
But those plans foundered due to questions of how the bad assets would be valued and how the already capital-constrained banks getting rid of those assets would make up for the resulting losses.
That isn’t a problem for the FDIC. As the receiver of failed banks, it takes possession of the assets itself.
Still, bankers expect to continue struggling with the issue of how much to pay for bad assets for some time — even though a robust bank stock rally over the past five months suggests investors are less worried about toxic assets than they once were.
"There are a ton of toxic assets out there right now," said Norman Skalicky, CEO of Stearns Bank, a St. Cloud, Minn.-based lender that has bought several banks and a $730 million loan portfolio from the FDIC over the past year. "But then, they say there are no toxic assets — just toxic prices."
Johnson & Johnson’s second-quarter earnings fell almost 5%, but profit and revenue beat analyst forecasts helped by surprisingly resilient pharmaceutical and consumer product sales.
Sales took a hit from patent expirations on its drugs for schizophrenia and epilepsy, but sales of its arthritis drug Remicade were better than expected.
"They went through a cost-cutting exercise about a year and a half ago, and it’s definitely helping them with their earnings to date," said Jan Wald, an analyst with Noble Financial Group. "The surprise is more on the revenue side … and that bodes well."
The diversified health care company, whose products range from Band-Aids to arthritis treatment Remicade, earned $3.21 billion, or $1.15 per share. That compared with $3.37 billion, or $1.18 per share, in the year-earlier period.
Analysts on average expected $1.11 per share, according to Reuters Estimates.
J&J’s (JNJ, Fortune 500) quarterly revenue fell 7.4% to $15.24 billion, but was $190 million higher than the Reuters Estimates forecast.
Sales would have been 6 percentage points higher if not for the stronger dollar, which hurts the value of overseas sales.
The company reaffirmed its full-year profit forecast of $4.45 to $4.55 per share, which excludes special items.
Sales of prescription drugs fell 13.3% to $5.5 billion, as patients opted for cheaper generic forms of J&J’s Risperdal schizophrenia treatment and Topamax, an epilepsy pill that lost U individual health insurance.S. patent protection in recent months.
Topamax sales plunged 73% to $182 million, while Risperdal fell 66% to $239 million.
Even so, analysts said they had been girding for an even bigger decline in the pharmaceuticals business, amid the erosion of Risperdal and Topamax sales.
"The pharmaceutical business looked especially strong to us," Noble’s Wald said. He pointed to arthritis drug Remicade, whose quarterly sales jumped 24% to $1.1 billion. Declines for Procrit and Eprex — anemia drugs strapped with safety concerns, were not as bad as feared, he said.
Global sales of consumer products fell 4.5% to $3.85 billion, while sales of medical devices and diagnostics slipped 3.1% to $5.89 billion. Growing demand for the company’s surgical products and orthopedics products was partly offset by lower sales of stents, tiny devices used to prop open coronary arteries that have been cleared of plaque.
"Consumer sales were strong as well, which is promising because that’s the closest thing to the general public that Johnson & Johnson has so that might say something about the economy," Wald said.
J&J shares rose 63 cents to $58.35 in premarket trading, but slipped 6 cents to $57.66 at the start of trading.
The European Central Bank left its main refinancing interest rate unchanged at a record low of 1% Thursday, as expected by analysts.
Markets are now turning their attention to President Jean-Claude Trichet’s news conference at 8:30 a.m. ET, when he will explain the decision and may fill in some of the missing details of the bank’s plan to buy €60 billion ($84 billion) worth of covered bonds.
The ECB also kept its overnight deposit rate, which is acting as a floor for money markets, at 0.25%, and left its marginal lending rate at 1.7 %.
All but one of the 82 economists polled by Reuters had expected the ECB to leave rates on hold. One said it would cut them by 0 online cash advance.25 percentage point.
The ECB has lowered its interest rates from 4.25% since October after the financial crisis intensified and inflation risks weakened.
Euro zone consumer prices fell for the first time in June and the economy is shrinking fast, although some data has shown signs of improvement.
Markets are also keen to see whether Trichet gives any signals that the ECB plans to keep rates low for a lengthy period, or alternatively, whether they could be reduced further.
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