Remedies to help underwater homeowners not enough, PUSH panel says

BY MAUDLYNE IHEJIRIKA Staff Reporter mihejirika@suntimes.com February 25, 2012 8:36PM

Updated: February 25, 2012 9:42PM
Only strident remedies — such as a national moratorium on foreclosures and offering financial aid to “underwater” homeowners — can help stem a crisis sending severe reverberations through poor and minority communities, members of an Operation PUSH panel said Saturday.
Those communities will have to demand action through voting power and protest, seeking redress through legislative and legal means, because the recent settlement between the nation’s largest lenders and 49 state attorneys general shows they can’t count on government solutions, said the Rev. Jesse Jackson and other members of the panel.
“In the 1960s, we fought against restrictive covenants, then redlining, then for the Community Reinvestment Act. We finally get a rise in black and brown home ownership. Now this,” said Jackson, pointing to research showing the largest segment of “underwater” homes — where the amount owed exceeds the value of the home — are found in poor and minority communities.
“Much of this is race-based driven exploitation,” Jackson said. “We must now fight to recover our lost assets stolen from us and not protected by the government. We must connect our votes with our remedy.”
About 11 million households nationally are underwater.
The government bailout of banks that was supposed to help many of those households stave off foreclosure “have not helped nearly as much as it needs to,” asserted Woodstock Institute Vice President Spencer Cowan.
Nor, Cowan said, will the landmark $25 billion settlement reached last month with five top mortgage lenders, which helps only 1 million households.
“The $25 billion settlement is only a small aspect and doesn’t address the myriad other problems that led us to this point,” he said. “Nor does it address the two largest holders of mortgages, Fannie Mae and Freddie Mac.”
Others noted the crisis has pushed more of the middle-class into poverty.
“The only investment most middle-class people have is their home. Now these same people have no credit. If they can’t get a loan, their kids can’t go to college. You have a whole generation of people moving from middle-class to poverty,” said the Rev. Janette Wilson, PUSH Education Director.
The panel advocated criminal action against lenders who participated in the predatory and deceptive lending practices, issuing loans destined to fail.
“Find the people who robo-signed these loans, and start going after them. The $25 billion settlement doesn’t rule out criminal investigation of the banks for some of these other problems,” said Cowan.
Research by his group found in the six-county Chicago metropolitan region, the average underwater homeowner owes $50,000 more than their home’s value.
The number of homes hit with foreclosures in the region rose 13.9 percent in January from December — to 13,750 homes, or one in every 276 homes.http://tourism9.com/    http://vkins.com/

Tangled in diplomacy, EU struggles to frame new financial rules

BRUSSELS (Reuters) – When it takes six hours to draft a single sentence in a 100-page document, you know things are moving slowly.
In meeting rooms of embassies across Brussels, diplomats are haggling over the finer details of dozens of reforms more than four years after the financial crisis that devastated European banks and triggered the euro zone’s struggle with debt.
While the United States agreed in 2010 an initial framework to prevent financiers taking the kind of risks that sparked the deepest global recession since the 1930s, the European Union‘s response is often tangled in backroom diplomacy.
“Bailout is a naughty word these days but we haven’t created a system to deal with failing banks without one,” said a diplomat from a northern European country who is working on around 15 different EU dossiers to regulate finance. “We are still spending hours arguing over the wording of a sentence.”
The crisis revealed how regulators and even top bank executives on both sides of the Atlantic failed to grasp the risks in the complex financial architecture they helped build.
But agreeing new laws among the bloc’s 27 member countries and the European Parliament is becoming so burdensome that diplomats worry Europe‘s defenses will not be in place should a new crisis hit.
German lender IKB was the first casualty of the financial crash in mid-2007, imploding after pursuing what one banker described as an “all you can eat” strategy, snapping up U.S. subprime mortgage debt.
By the time the worst of the crisis was over in Europe, more than 50 lenders had to be rescued by their governments.
The EU responded with rules governing hedge funds and banker pay. But it has yet to outline a framework law for dealing with banks threatened with collapse, a reform many analysts believe is central in ensuring that bank bondholders – and not the taxpayer – pay to rescue banks in future.
The delicate state of Europe’s banks, which have been faced with the possibility of a chaotic Greek debt default, is partly to blame.
Banks still have trillions of euros of risky loans on their books, and it has taken the near-unlimited offer of funds from the European Central Bank to prevent another credit freeze.
LEEWAY OR LIMIT?
Michel Barnier, the former French foreign minister given the task of leading an overhaul of EU financial regulation two years ago, is due to present his bank salvage plan sometime this year.
But even when he does, the proposed legislation could take three years to become law.
“We can’t afford any more delays,” Olle Schmidt, a liberal who is leading financial reform efforts in the European parliament. “If Europe is to be able to react swiftly to another crisis, these defenses must be in place.”
Diplomats have also clashed over proposed rules governing the amount of capital banks must keep in reserve to cover the risks of lending. This is crucial in preventing another credit boom of the kind that led to the financial crash.
Britain wants more leeway to impose stricter standards on capital than the EU, while France wants the limit capped, reflecting the different way the crisis affected the two neighboring countries.
“The French banking system did OK, albeit with public support, whereas British banks took some serious hits,” said Sony Kapoor, founder of think tank Re-Define.
Overhauling banking is just one of the dossiers keeping diplomats up late at night in the glass and steel buildings of Brussels’s European quarter – working in tandem with colleagues in their home capitals.
While EU leaders have held 17 summits over the past two years to resolve the sovereign debt debacle, diplomats are sifting their way through proposals for regulating derivatives, trading, insider dealing, credit rating agencies and banker pay.
And with most working groups held in English, non-native speakers often struggle to grasp the highly technical issues.
One official recalled an embarrassing misunderstanding, when an ambassador appeared to describe a discussion on hedge funds as being “like a short shit in a long bath.” Participants later concluded he meant “a short sheet on a long bed.”
“Sometimes you understand the words but you don’t understand the meaning,” said one eastern European diplomat.
The final legal text is often as mystifying as the process that created it. “They are unreadable,” said Eddy Wymeersch, a former regulator, commenting on hedge fund rules. “It is just page after page of legalese.”
Bruce Stokes, an analyst with think tank the German Marshall Fund, believes Washington works faster because directly elected members of Congress and not bureaucrats draft legislation. “Brussels is not that accountable,” he said.
Washington drew up the Dodd-Frank act in 2010, a framework for financial reform that includes sweeping changes including bans on banks trading on their own account.
Fleshing out the full detail of these rules will, however, require further work and the European Commission points to its success in moving earlier on banker pay and bank capital.
In Europe, much of the responsibility for rewriting the rulebook for finance falls to the Commission, proposing and writing the first draft of laws that are then sent to European countries and the bloc’s parliament for approval.
“The European legislative system is designed far more for incremental adjustment than for major reform,” said Nicolas Veron, an expert in financial policy who works in both Washington and Brussels. “It’s more bureaucratically driven, but that doesn’t mean that the outcome is not political.”
With things moving so slowly, those working on the dossiers say the new regulations are in danger of being overtaken by events.
“I’ll be retired by the time all of this is done,” said one banker, whose job it is to predict the direction of legislation. “It’s not the kind of work I’d recommend.”
(Writing by Robin Emmott; additional reporting by Claire Davenport, editing by Mike Peacock)

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Geithner says 2010 law made financial system 'stronger and safer'

Reporting from Washington—
Treasury Secretary Timothy F. Geithner has a message for voters as they listen to Republican presidential candidates call for repeal of the 2010 Dodd-Frank financial overhaul law: Remember the pain.
“I would say remember 2008 and 2009,” Geithner told reporters Thursday during a news conference touting the benefits of the overhaul. “Remember the fact that the reason why we’re living with very high unemployment with millions of Americans that have lost their homes, terrible damage to the basic economics of America is because of the failures that caused this crisis in the financial system.”
“And if you want to go back to that,” he said, “if you want to choose that future, then you should be in favor of the repeal of the law.”
Republican presidential candidates have hammered away at the sweeping rewrite of financial regulations.
At a debate in Florida last month, GOP frontrunner Mitt Romney said the law was “just killing the residential home market and it’s got to be replaced.”
Newt Gingrich was more blunt. Asked what could be done to help struggling homeowners, he said, “I think, first of all, if you could repeal Dodd-Frank tomorrow morning, you would see the economy start to improve overnight.”
In the face of such criticism on the campaign trail and from Republicans in Congress, Geithner defended the law.
He said it already had helped the financial system become “stronger and safer” even as some key provisions, such as the Volcker Rule restriction on banks trading with their own money, are still being implemented by regulators.
Speaking as the head of the Financial Stability Oversight Council, a panel of regulators created by the law to monitor the financial system for signs of problems, Geithner said the law had helped the economy recover.
Regulators this year would designate the large financial firms outside the banking system that will receive tougher oversight because their failure would pose a risk to the financial system, he said.
And the Obama administration would release more details about its plans to overhaul the housing finance system and replace Fannie Mae and Freddie Mac, which the government seized in 2008.
Republicans and business groups have criticized the hundreds of regulations required by the new law and tough new oversight, including the creation of the Consumer Financial Protection Bureau.
They have said that the uncertainty about pending regulations has made businesses hesitant to hire, and that tough new rules on banks, such as requiring them to hold more reserves, was limiting the banks’ ability to make loans to boost the recovery.
But Geithner said the new rules were badly needed to prevent a repeat of the crisis, and he criticized opponents who were trying to drag out implementation of the Volcker rule and other provisions. Slowing those changes would only increase uncertainty, he said.
“No financial system is invulnerable to crisis. We have a lot of challenges ahead. We still have a lot of unfinished business on the path of reform,” Geithner said. “But the American financial system now is much less vulnerable than it was and is now able to help finance a growing economy, rather than being a drag on overall economic growth.”
RELATED:
Timothy Geithner says a second stint at Treasury is unlikely
Financial regulatory overhaul faces new criticism on first birthday
Consumer agency chief’s appointment is invalid, GOP senators say

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UnitedHealth Group Provides $15 Million to Help Fund Connections Housing Residential Community in San Diego

SAN DIEGO–(BUSINESS WIRE)– UnitedHealth Group (NYSE:UNH – News) announced $15 million in financing to help build Connections Housing, an integrated service and residential community in San Diego that will provide permanent supportive housing to homeless people in the region.
The investment is part of UnitedHealth Group’s partnership with Enterprise Community Investment, Inc. (Enterprise), a national leader in the affordable-housing and community-development industry, to provide up to $50 million to finance affordable-housing projects in targeted communities throughout the United States.
The Connections Housing community development project includes acquiring, rehabilitating and converting the historic World Trade Center in Downtown San Diego to create a permanent year-round shelter, housing and an array of services for homeless people. Affirmed Housing Group (AHG) and PATH Ventures are the co-developers and general partners for the project, with Family Health Centers of San Diego and People Assisting the Homeless (PATH) as community partners.
The multi-use project will serve as a one-stop service center and housing for homeless people. The residential portion will consist of 73 studio units of permanent supportive housing, 16 “transitional” housing units and 134 additional transitional housing beds. The project will also provide resources a person needs to break the cycle of homelessness. This includes a primary health care clinic, a multiservice homeless center, a large commercial kitchen, related dining facilities and administrative offices, among other amenities.
“UnitedHealth Group is grateful for the opportunity to work with Enterprise and the many state and local organizations to give hope and new beginnings to San Diegans in need,” said Steven Henry, director for community investment management, UnitedHealth Group. “The UnitedHealth Group Affordable Housing Investment Program is just one example of how the private and public sectors work together to build stronger communities and make a difference in the lives of people most vulnerable.”
The UnitedHealth Group Affordable Housing Investment Program invests in projects that qualify for federal Low Income Housing Tax Credits (Housing Credit) or Historic Rehabilitation Tax Credits. Through Enterprise, the program provides critical equity for the development of affordable rental housing developments to which housing tax credits have been allocated. UnitedHealth Group’s $50 million commitment supports efforts to strengthen local community-based organizations that create affordable housing with a focus on serving low-income families, households with special needs and the growing population of aging adults.
“Enterprise is proud to partner with UnitedHealth Group to provide much-needed Housing Credits for the development of an important resource for homeless people in San Diego,” said Raoul Moore, senior vice president of Syndication at Enterprise Community Investment. “Connections Housing is a national model for reversing homelessness, and Enterprise is pleased to be a part of the development team.”
UnitedHealth Group’s UnitedHealthcare business offers health benefits, including commercial and Medicare health plans, to more than 2.3 million Californians and partners with about 50,000 physicians across the state. OptumHealth provides behavioral health administrative services for Medicaid members in San Diego County and operates the county’s Access and Crisis line.
Enterprise helps communities build and preserve affordable housing and has a history of financing good-quality homes and apartment buildings that are specifically intended to be affordable to low- and modest-income people and families.
The UnitedHealth Group Affordable Housing Investment Program is one of several company initiatives that provide millions of dollars each year to help fund local infrastructure projects to improve the quality of life for residents in communities where UnitedHealth Group conducts business. For example, the California Health Care Investment Program has provided more than $200 million in total capital to 29 health care organizations statewide that serve low-income, underserved and underinsured communities and populations.
About Enterprise Community Investment, Inc.
Enterprise is a leading provider of the development capital and expertise it takes to create decent, affordable homes and rebuild communities. For 30 years, Enterprise has introduced neighborhood solutions through public-private partnerships with financial institutions, governments, community organizations and others that share our vision. Enterprise has raised and invested more than $11 billion in equity, grants and loans to help build or preserve nearly 300,000 affordable rental and for-sale homes to create vital communities. Visit www.EnterpriseCommunity.org and www.EnterpriseCommunity.com to learn more about Enterprise’s efforts to build communities and opportunity.
About UnitedHealth Group
UnitedHealth Group (NYSE: UNH – News) is a diversified health and well-being company dedicated to helping people live healthier lives and making health care work better. With headquarters in Minnetonka, Minn., UnitedHealth Group offers a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides information and technology-enabled health services. Through its businesses, UnitedHealth Group serves more than 75 million people worldwide. Visit UnitedHealth Group at www.unitedhealthgroup.com for more information.
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Analysis – China has multiple choices to avoid hard landing risk

BEIJING (Reuters) – China faces what could be its worst year of growth in a decade with policy firepower that developed nations can only dream of.
A record-breaking tax take expected to top 10 trillion yuan ($1.6 trillion) in 2011 gives Beijing fiscal scope to support growth and financial system liquidity, while monetary policy is perfectly poised for easing after a near two-year tightening cycle.
Contrast that with deep deficits across Europe and the United States and the orthodox policies forced upon central banks on both continents in a desperate bid to avoid a slide into economic depression.
It adds up to China having every chance to steer its economy safely from its slowest quarter of growth in 2- years, and still avoid a hard landing that would reverberate globally.
“There are caveats, but compared to its counterparts, China has plenty of policy flexibility,” Tim Condon, head of Asian economic research at ING in Singapore, told Reuters.
The release of some 1.2 trillion yuan of fiscal deposits in December signals how roomy China’s policy pockets are.
That injection was the single biggest factor behind a jump in money supply and bank credit in December, according to analysts at China International Capital Corp, China’s biggest investment bank.
Chinese banks extended 640.5 billion yuan in new loans in December, up from 562.2 billion yuan in November, while M2 accelerated to 13.6 percent from November’s 12.7 percent.
CICC reckons the odds of a January cut in the ratio of deposits that commercial banks are required to hold as reserves (RRR) have been dramatically reduced as a consequence.
SYSTEMIC LIQUIDITY
The implications of China’s fiscal strength are crucial for money markets. An outflow of government deposits from the balance sheet of the People’s Bank of China (PBOC) can boost systemic liquidity far in excess of an RRR cut.
“It’s getting increasingly important as the size is getting bigger,” Xu Hong, an analyst with Daton Securities in northern Chinese city of Dalian told Reuters.
Government deposits fell 891 billion yuan in the last month of 2010, 954 billion yuan in December 2009, and 1,045 billion yuan in 2008, whereas a mere 350 billion yuan was estimated to have been injected into the system by the 50 basis point cut in RRR to 21 percent announced on Nov 30, 2011.
Economists polled recently by Reuters forecast a further 200 bps of RRR cuts to come in 2012, but the impact of that would far less than the 1.7 trillion yuan of injections implied if the government has turned an estimated 800 billion yuan surplus in 2011 into the 900 billion yuan deficit originally budgeted.
Released fiscal funds are a key factor underlying accommodative liquidity in the interbank market, according to Zhou Binglin, an analyst with Guosen Securities.
“That’s possibly why fund supply is not too tight despite capital outflows for two consecutive months and the absence of central bank liquidity injection,” he wrote in a client note.
China’s foreign exchange reserves, the world’s largest, fell $20.6 billion in the fourth quarter to $3.18 trillion as the trade surplus shrank and capital flows reversed.
That fall reinforced the views of many analysts and investors that a PBOC policy move was imminent, but a closer reading of fiscal deposit data would have been a better guide.
“It’s a key fact to pay attention to, particularly at the end of a year, and it’s role is becoming more visible,” a bond trader in the interbank market, who declined to be identified, said.
CHANGING DYNAMICS
China’s surging tax flows are also changing credit dynamics at the local government level, with regional banks being cajoled into providing loans to pet projects in return for the promise of a share of soaring fiscal deposits.
A notice on the website of the Rugao government in China’s eastern Jiangsu province said that the allocation of fiscal deposits would be linked to the credit offered by banks.
“Many small banks are in desperate need of deposits, and fiscal deposits are too big to miss, for which they have to make concessions,” a regional banker in Zhejiang province said.
Banks need the deposits because monetary policy settings were tightened so sharply over the last two years to fight the inflationary side-effects of massive stimulus that Beijing launched in 2008 to cushion the economy from the impact of the global economic crisis.
Twin bubbles in real estate and local government debt are still being battled by Beijing, and are arguably the only — if significant — policy constraint faced as the world’s second-biggest economy faces another economic slowdown.
It’s certainly a factor preventing the government using well-stocked fiscal coffers for outright economic pump-priming, or allowing explosive growth in still elevated leverage levels.
But relatively speaking, China has plenty of room to move.
“Every country has constraints. China was almost as unconstrained as it could have hoped for in 2008 when the crisis hit. The response to that has reduced the flexibility they have now, but they have far more than their counterparts in the West have,” ING’s Condon said.
(Editing by Kim Coghill)
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GE ordered to defend lawsuit tied to 2008 crisis

(Reuters) – A federal judge refused on Thursday to throw out a lawsuit accusing General Electric Co and its chief executive of misleading investors about the conglomerate’s financial health and exposure to risky debt during the 2008 financial crisis.
The decision by District Judge Richard Holwell in Manhattan keeps alive litigation seeking to hold the company responsible for investor losses during a six-month period when its stock price fell to about $10 from about $26, causing its market value to tumble by more than $150 billion.
Investors claimed that GE withheld information regarding its health and the health of its GE Capital finance arm, including exposures to subprime and other low-quality loans. They also said GE misleadingly touted itself as being safer than rivals, despite the effects of the financial crisis.
Holwell also let stand some claims accusing bank underwriters of omitting statements from offering documents for a $12.2 billion GE stock offering in October 2008. He dismissed several other claims, and did not rule on the case’s merits.
A GE spokesman and lawyers for the investors did not immediately respond to requests for comment. Antonio Yanez, a lawyer for the banks, declined to comment.
Holwell said investors led by the State Universities Retirement System of Illinois adequately alleged that GE made material misrepresentations during the crisis about its access to commercial paper and ability to maintain its dividend.
He also let the investors pursue claims alleging that company officers, including Chief Executive Jeffrey Immelt and Chief Financial Officer Keith Sherin, misled them and had sufficient intent, known as “scienter,” to mislead.
CATEGORICAL STATEMENTS
“Immelt’s categorical statements that investors could ‘count on’ a dividend and that GE was having ‘no difficulties’ issuing commercial paper are not the sort of cautious statements one would expect of a CEO attempting to come to grips with the effects of the economic crisis on his company,” Holwell wrote in a 53-page decision.
“A CEO is allowed to convince the public to invest in his company, but not at the expense of providing it with accurate information about the company’s financial health,” Holwell continued. “Taking the factual allegations in the (complaint) as true, the inference that Immelt acted with scienter is at least as compelling as the inference that he did not.”
Among the banks that were sued were Bank of America Corp, Citigroup Inc, Deutsche Bank AG Goldman Sachs Group Inc, JPMorgan Chase & Co, and Morgan Stanley, court records show.
The lawsuit covered investors who owned GE stock from September 25, 2008 to March 19, 2009.
During that period the Fairfield, Connecticut-based company cut its dividend and lost its “triple-A” credit rating. It also received a $3 billion infusion from Warren Buffett’s Berkshire Hathaway Inc.
GE’s many products include jet engines, turbines and light bulbs. It also owns part of NBC Universal, in which Comcast Corp holds a majority stake.
The case is In re: General Electric Co Securities Litigation, U.S. District Court, Southern District of New York, No. 09-01951.
(Reporting by Jonathan Stempel in New York; editing by Andre Grenon, Phil Berlowitz)

For euro zone, the heat is on again

BERLIN (Reuters) – The euro zone crisis seemed to vanish from the headlines for a brief moment as 2011 ticked over into 2012, but it is about to return with a vengeance.
The coming months will be decisive in determining whether European leaders can hold their increasingly fragile currency bloc together or will stumble in the face of a daunting set of political, economic and financial obstacles lined up in their path at the start of the new year.
In Greece, where the crisis started over two years ago, the government is in a race against time to agree a bond-swap deal with banks that is crucial to a new 130 billion euro bailout package from European partners and the International Monetary Fund (IMF).
Without that package, Athens faces the threat of a debt default in March.
But talks with the banks and investment funds that are being asked to accept 50 percent losses on their Greek bonds to help pay for the bailout have dragged on for weeks, sowing doubts about whether Athens can really deliver.
“The risk of a disorderly Greek default is once again on the rise, with the threat of contagion to Italy and others,” economists at Barclays Capital said last week.
Compounding the challenge, both Greece and France face elections within months that could complicate decision-making at the national level in two key states and thwart the broader bloc’s ability to act swiftly at a time when pressure is high to bed down agreements sealed at an EU summit last month.
A key element of the summit package was a deal to funnel 200 billion euros to the IMF, money that could be used to offer precautionary credit programmes to Italy and possibly Spain.
But the euro zone is struggling to get the 50 billion euros it needs from nations outside the currency bloc to meet its goal. A senior German official told Reuters on condition of anonymity that securing the participation of Britain, which has shown no inclination to contribute, was absolutely crucial.
Even if those funds are secured, neither Italy nor Spain have shown any willingness to accept aid — and the stigma and greater fiscal oversight that would come with it.
Italian 10-year bond yields have pushed back above the 7 percent mark over the past week, approaching record euro-era highs, and both Rome and Madrid must sell bonds this week in the first major market tests of 2012 for the euro zone’s third and fourth biggest economies.
END OF MERKOZY
The Greek election, expected by the end of March, seems unlikely to produce an outright winner, meaning coalition talks could drag out and prolong uncertainty.
In France, polls suggest there is a good chance President Nicolas Sarkozy, who has steered Europe‘s crisis response along with German Chancellor Angela Merkel, could be pushed out of office by his Socialist challenger Francois Hollande.
While Merkel and Sarkozy have polar-opposite temperaments and clashed frequently when the Frenchman first took power in 2007, they are both conservatives, born just half a year apart, and have developed an effective, even close, partnership after years of high-pressure crisis summits.
And after years of frustration with the French president’s shoot-from-the-hip style, government officials in Berlin say they are now worried about the end of “Merkozy”, the most important relationship in Europe, in the middle of the crisis.
A cut in France’s triple-A credit rating in the weeks ahead could also upset the delicate Franco-German balance, although some economists believe it could force the French to accept more far-reaching fiscal reforms, regardless of who wins the two-round election in April and May.
“It won’t be Merkozy anymore. It will be Angela Merkel and (IMF chief) Christine Lagarde dictating policy in Europe,” said French economist Jacques Delpla.
“The next French president, whether its Hollande or Sarkozy, won’t have many options. The deficit will need to be cut, taxes increased and spending cut.”
RECESSION RISK
Fittingly, Merkel and Sarkozy kick off 2012 with a Monday meeting in Berlin to prepare an EU summit scheduled for January 30 that is expected to focus on efforts to boost growth.
That is perhaps the biggest challenge of all for the bloc. After several years of fiscal consolidation to push down debts and deficits swollen by the global financial crisis of 2008/09, the euro zone is headed for recession — a factor that has pushed the euro down to 16-month lows against the dollar.
Even the bloc’s economic powerhouse Germany is at risk of recession. Greece is entering its fifth straight year of contraction, with no hope of paying down its massive debt.
But restoring market confidence in the finances of struggling euro area countries and getting their economies working again seem like contradictory goals at this point.
“In the current market environment there is no room for using a Keynesian-type expansionary fiscal policy to boost demand in countries with low growth – the markets will simply not accept such a strategy,” Deutsche Bank said in a confidential note on the crisis prepared for the German government late last year.
One bright spot is the European Central Bank (ECB), which is showing greater flexibility under its new President Mario Draghi, euro zone officials say.
The ECB’s decision last month to provide cheap long-term loans to banks has helped assuage fears about the financial sector and could support sovereign debt sales going forward.
“We’re already seeing that Draghi is more flexible than Trichet,” the senior German official said, referring to the Italian’s French predecessor Jean-Claude Trichet. “He won’t put a bazooka in the window for everyone to see but he’ll do what it takes.”
The big question is whether this buys Europe’s leaders the time they need to overcome the formidable challenges they face in the new year.
(Reporting by Noah Barkin; Editing by Rosalind Russell)


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Banking on Market Share

Sterling Financial Corp.

Parent of Sterling Savings Bank.
• FOUNDING: 1983.
• HEADQUARTERS: Spokane.
• ASSETS (as of 9/30/11): $9.18 billion.
• EARNINGS, 3RD QUARTER 2011: $11.3 million.
• BRANCHES: 177 in Washington, Oregon, Idaho, Montana and California; one each in Clark and Skamania counties.
• EMPLOYEES: 2,500.
• INFORMATION:Sterling Financial Corporation.

First Independent Financial Group

Parent of First Independent Bank.
• FOUNDING: 1910 (as Ridgefield State Bank) .
• HEADQUARTERS: Vancouver.
• ASSETS (as of 9/30/11): $792 million.
• EARNINGS, 3RD QUARTER 2011: $2.2 million.
• BRANCHES: 14 in Clark and Skamania counties; two offices in Oregon.
• EMPLOYEES: 245.
• INFORMATION: First Independent.

In the waning summer days of 2010, Sterling Financial Corp. was fighting for its very survival. The corporate parent of Sterling Savings Bank, based in Spokane and operating in five states, had lost $1 billion in the previous 18 months, and almost 14 percent of its loans were in trouble. Its stock had steadily declined since early 2008 and was hovering at around 65 cents per share. In those dark days for the nation’s financial institutions, Sterling stood a good chance of joining Washington Mutual and the Bank of Clark County on the industry’s trash heap.
The bank had been propped up by a $303 million infusion of federal bailout money in December 2008, but government regulators demanded that it raise another $725 million from private investors.
“They were on the verge of destruction,” said Tom Hayes, a principal in investment banking firm D.A. Davidson & Co. based in Great Falls, Mont.
Less than 18 months later, Sterling’s deal to purchase the banking assets of Vancouver-based First Independent Bank signaled its return as an aggressive player in the banking industry’s fight for market share. The deal, announced in November and expected to close before April 1, will put an end to one of the nation’s last family-owned banks. It will make Sterling, which now has a small local presence with just one Clark County branch, into one of Southwest Washington’s largest banks and signal its larger role in the Portland metropolitan area market.
The Firstenburg family, owners of 101-year-old First Independent and major philanthropists for community charities, will not disappear from the local scene. First Independent President Jeanne Firstenburg will become Sterling’s Southwest Washington market president. The Firstenburg family will hold on to some of their bank’s assets, through a private company managing a portfolio of loans not included in the deal, as well as the First Independent headquarters building in downtown Vancouver. Sterling says it will keep all of First Independent’s branches and move forward on First Independent’s project of opening a downtown Portland branch.
Hayes, who keeps tabs on Northwest banks for financial services firm D.A. Davidson, admitted to some surprise that Sterling moved into expansion mode so soon after its close brush with disaster. “Not only did they come back, but now they are able to go on the offensive,” Hayes says. “I don’t think anybody thought they would be able to do this so quickly.”

Back from the abyss

By the end of 2010, Sterling had pulled itself back from the abyss by drawing in big-name private equity investors and aggressively whacking away at a mountain of bad real estate loans. But its survival came at a cost to taxpayers who had pitched in the $303 million through the Troubled Assets Relief Program, or TARP. It found major investors willing to buy stock at 20 cents a share, then orchestrated what is called
a reverse stock split to drive up its per-share price so its stock could remain listed on the New York stock exchange.
When the dust settled, the U.S. Treasury, which owns about 10 percent of the bank’s stock, was among the investors suffering large losses. The government-owned stock is valued at around $90 million, said Greg Seibly, Sterling Financial Corp. president and chief financial officer. Seibly doesn’t know when the Treasury will cash out its shares, but acknowledged that the government is unlikely to get a full return on its investment in Sterling.
“The goal of (Sterling’s) management and board was to salvage the organization,” said Seibly, noting that he was not involved in the bank’s decision to seek government funding. “Had Sterling failed, the cost would have been far greater.”
Sterling’s survival strategy stands in contrast to First Independent’s playbook during the financial crisis. First Independent reported nearly $32 million in losses in 2009. The bleeding would have continued had not the Firstenburg family purchased some loans to manage through a family-owned company, reducing ongoing losses and allowing the bank to shrink the size of its troubled loan portfolio. The family also contributed some $28 million in cash and real estate to get their bank through the crisis. First Independent took no TARP funding.
Under the deal, still subject to state and federal regulatory approval, Sterling will initially pay $8 million. It will make an additional $17 million payment after eight months, based on the bank’s financial performance and its ability to retain customers. The Firstenburg family keeps $49 million of existing loans and $34 million of real estate and other assets.
Sterling’s acquisition of First Independent also gives it the legal authority in Washington to administer trust accounts, a service that will help it attract customers with high net worth. First Independent has $450 million in assets under management in its trust and wealth management business.
Sterling officials say they’re on track to meet with First Independent employees this month about their professional futures. Seibly said last week that no decisions have been made about staffing needs once Sterling takes control, although executive and back-office employees are likely to be most affected by the change in ownership. Staff reductions will create vacancies in the Firstenburg-owned First Independent Plaza at a time when downtown Vancouver’s office market is glutted with empty space.

Not a big surprise

The November announcement that Sterling would purchase the core pieces of First Independent wasn’t entirely a surprise to business community leaders or observers of the Firstenburg family. Although Scott and Jeff Firstenburg, grandsons of the bank’s founder, worked for First Independent, there were no signs that they were being groomed to run the bank. Jeanne Firstenburg, daughter-in-law of bank founder E.W. “Ed” Firstenburg and stepmother to Scott and Jeff, had been tossing broad public hints that a sale was one of the options being considered by the family. A business broker had been putting out feelers to other banks about their possible interest in First Independent.
Those close to the family say the sale would have been unimaginable during E.W. Firstenburg’s lifetime. He purchased the Ridgefield State Bank in 1936 and turned in into First Independent, and didn’t finally retire until 69 years later, in 2005. His died in 2010 at age 97.
First Independent’s sale raises questions about its purchaser’s philanthropic role. Sterling enjoys a strong reputation in Spokane for public involvement and civic contributions, and Clark County’s charities are hoping the bank will continue the strong traditions of First Independent and the Firstenburg family.
“We’re obviously in kind of wait-and-see mode,” said Richard Melching, president of the Community Foundation of Southwest Washington, an organization that the late E.W. Firstenburg, the family scion, helped launch in 1984. “Any time you change the status quo, it’s bound to raise some questions. All the right things have been said.”
Certainly, Sterling’s decision to retain Jeanne Firstenburg in a top position was in part a recognition of the strong bonds between the family and Clark County’s civic leadership.
Bank officials say the job description is still under discussion, but Sterling took a similar approach when it purchased Sonoma Bank in Northern California in 2007 and hired its president to serve as a market president for that region. Said Seibly: “We will be very active and engaged in Vancouver.”
Both Seibly and Jeanne Firstenburg say that the two banks share a community-oriented focus that should appeal to First Independent customers. But Sterling is vastly larger, with $9.18 billion in assets and 177 depository branches in five states, to First Independent’s $792 million in assets and 14 branches in Oregon and Washington. In Clark County, where First Independent is second in deposits only to JP Morgan Chase, Sterling will move immediately to a dominant market position — if it holds onto most of its customers.
Riverview Community Bank, the county’s last locally owned bank, is marketing aggressively for First Independent customers, as are newly resurgent credit unions feeding off anti-Wall Street sentiment.
Kim Capeloto, Riverview’s executive vice president for marketing and operations, said Riverview welcomes the competition from Sterling.
“Having said that, we are headquartered and located in Vancouver, Washington, and as a result, money deposited by our clients stays local,” he said. “Your money stays local, helping your neighbors.”
Seibly defines “local” more broadly. “Vancouver and Spokane are located in the same state,” he said. “This isn’t as if an institution from New York is coming in.
“What Vancouver needs is strong financial institutions. Washington needs strong financial institutions.”
Just a few years back, “strong” was not a word many would have associated with Sterling. Seibly, who joined Sterling in 2007, became CEO of Sterling Financial Corporation during an October 2009 management shake-up. Sterling had accepted the government’s TARP money in December 2008, but it was still bleeding cash. It’s losses for 2009 reached $855 million, with most of that coming in the year’s last two quarters.
The bank missed a December 2009 deadline set by federal and state regulators to raise $300 million in new capital. But then the pieces started falling into place. By the following August, Sterling had secured the required $725 million in private financing, including $171 million each from the Thomas H. Lee Partners and Warburg Pincus Private Equity X investment firms. Those investments took the form of stock purchased at 20 cents per share, well below the sale price at that time. With those stock investments, each firm secured 22.6 percent ownership in the bank.
Before long, Sterling faced another critical deadline. If its stock didn’t climb to more than $1 per share by Dec. 7, 2010, it would be de-listed on Wall Street. For investors, the 1-for-66 reverse stock split Nov. 18, 2010, drove up the value of a single share while drastically reducing the number of shares an investor owned. Sterling’s shares have climbed steadily since the split. The two equity firms each now own 24.9 percent of stock, the maximum allowed without additional regulatory hurdles.
Hayes, of D.A. Davidson, said Sterling is positioning itself well for competing against both regional and national banks once the economy finally improves.
“When the market turns, there are going to be a lot of people competing for the same acquisitions and same customers, he said. “They’ll tell you they’re competing against the big banks, but as they get larger they’ll be competing against each other as well.”
Ashley Swanson provided research for this story.

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Tatas’ unlikely golden goose

When Tata Motors acquired Jaguar Land Rover, it was pilloried for poor judgement. Now, JLR is a roaring success.

Alongside his warning last week that Tata Group expansion plans would have to be tempered by the troubled global environment, Mr Ratan Tata noted that in its drive to take heed of risks, it shouldn’t lose out on good opportunities.
Four years ago, the “good” opportunity that the company didn’t pass up provoked much tut-tutting. When Tata Motors first took Jaguar Land Rover off Ford’s hands for $2.3 billion in 2008, many asked: how could a company known for commercial vehicles and cheap cars, and for whom there were no obvious synergies in the acquisition, do any better than a gargantuan of the global auto world, which had pumped billions into the iconic brand?
Those that didn’t tut then, certainly did a few months later, when the financial crisis struck and sales at JLR plunged. Even worse, Tata Motors had taken out a $3-billion bridge loan to finance the acquisition, and struggled to refinance its debts, which remained firmly high. Attempts to secure financial support from the British government failed, forcing the Tata Group to pump its own funds into the company.
In March 2009, Tata Motors posted a Rs 25.1 billion loss for the year. “Troublesome trophy” declared the Financial Times, adding that it “raised questions about the wisdom of fast-growing companies from emerging markets acquiring their developed-world counterparts in struggling sectors.”
Those “questions” have now been turned on their head: far from being a trophy, JLR survived the crisis to become the biggest earnings contributor to Tata Motors, something that has continued — and is expected to continue — through this second round of the crisis.
For the year ending March, Umesh Karne at BRICS Securities expects JLR to make a net profit of Rs 71 billion, against a group profit of Rs 79.5 billion, with sales up 14 per cent, and a further rise of 8 per cent the following year.

Turnaround factors

JLR seems to be preparing itself for such an upbeat scenario. The threatened closure of one of its British plants never happened; the company has since announced plans to expand the workforce at its Solihull plant, and build an engine factory near the city of Wolverhampton, a move that will gradually reduce its dependence on Ford engines. It’s in talks over a joint venture in China.
It’s easy to look for one reason for this remarkable turnaround, but there are a number of answers. Firstly, Tata Motors wasn’t afraid to seek external assistance, bringing in KPMG and Roland Berger Strategy Consultants to design a turnaround for the immediate, medium and short term. In 2009, the company unveiled a business plan, which involved aggressive cost cutting (reducing employee numbers, more efficient IT systems and marketing spend), changes to cash flow management, and a multi-year plan for product launches.
Luckily, there was lots of room for improvement. Ian Fletcher, an automotive analyst at IHS Global Insight, who worked for JLR under Ford, argues that the American firm had a “feast and famine” approach, lavishing cash on JLR at points, while starving it of investment at others. Cash was often directed in unhelpful ways, such as a Jaguar F1 programme.
“If you want to make a profit don’t put millions into racing it round a car track,” Mr Fletcher says. “You need to build a car that people want and charge what you can get away with.”

Restoring ‘Cool’

Building a coveted car also proved challenging in the Ford years: its launch of the X-Type — which was known to some in the industry as a “Ford Mondeo with a pretty frock” — was just one example, while others such as the “S” type were seen as overly retro, and unappealing to audiences below the age of 50. (By contrast BMW and Mercedes were able to attract mid to late 30s buyers too).
Under Tata, the XF and XJ updates did much to restore the company’s “cool” reputation while the launch of the Discovery in 2009 proved timely for the recovery. Tata Motors’ pledge to pump 1.5 billion pounds a year up until 2014, into a total of 40 new product actions — including new vehicles, and updates — has added to that credibility and created a buzz (rumours that it was considering expanding its Halewood plant had observers asking whether it could mean a new compact Jaguar was on the cards).
Part of the problem in the past was too much interference from Ford: something that Tata Motors has reversed. Tata brought in (and retained from Ford days) senior engineers and management, with many years of experience, particularly in the German industry, pretty much leaving them to their own devices, but with the assurance of having the sizable resources and support of the Tata Group behind them.
The CX-16 concept car that wowed audiences at the Frankfurt auto show last year was a case in point. “10 years ago, something with such cutting-edge technology would have been left on the drawing board,” says Mr Fletcher.

Niche focus

The trouble with Ford’s approach was that it understood and applied volume manufacturing, but not the global niche marketing and product that JLR needed to be successful, and which Tata Motors embraced through its hands-off approach, says Professor Peter Cooke, Professor of Automotive Management at Buckingham University.
“Fundamentally, Jaguar and Land Rover have to be global niche products,” he says. Now each product is targeted at specific niche audiences, such as the high-spending city dweller in the case of the Range Rover Evoque, the petit SUV, 15,000 of which have been sold since its launch in September.
As a result, Tata seems to be pushing demand in all the right directions: China is now JLR’s third largest and fastest growing market, accounting for around 16 per cent of sales, while demand in Russia, Brazil and India continues to grow.
Overall, with the investment from Tata Motors, JLR was able to position itself in the right space, just in time for the upswing that came in 2009. It is not the only luxury branded car to be doing well: Bentley saw sales rise 37 per cent in 2011, again driven by China, and is preparing for further growth with plans to expand its range.
There are, of course, challenges: currency movements, which have in the past worked well for JLR’s profitability, have hurt it in recent months, with the appreciation of the pound against the dollar. As a result, JLR profits for the quarter ending in September fell 2.1 per cent. Moreover, the financial climate will make the quality and timing of its 40 product actions all the more important.
The success of JLR doesn’t make or break the case for acquisitions of distressed foreign companies (There is only so much a company can do in the face of unremittingly weakened demand, as has been the case with Tata Steel’s European operations). But it does go to show, bad timing is often overrated. After all, had it waited a few months more, Tata Motors would never have secured the financing to acquire the company that has turned out to be its golden goose.
blfeedback@thehindu.co.in
(This article was published on January 8, 2012)

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Credit Agricole to cut 2,350 jobs: union source

PARIS (Reuters) – Credit Agricole is to cut 2,350 jobs, primarily in investment banking, a union source told Reuters Wednesday, as the French bank slashes costs and ploughs ahead with a back-to-basics strategy sped up by the eurozone debt crisis.
The job losses include 1,750 at Credit Agricole‘s corporate and investment bank, which employs 13,000 people, the source said, and 600 job at its factoring and consumer finance arms.
The source added 500 of the corporate and investment banking jobs would be shed in France.
A second trade union source confirmed the 1,750 figure.
A Credit Agricole spokeswoman declined to comment.
Banking sources have said the bank may exit up to 20 of the 50 countries where its corporate and investment bank is present.
The bank is following in the footsteps of larger domestic rivals BNP Paribas and Societe Generale , which have announced job cuts primarily in investment banking as they seek to cut debt and wean themselves off funding markets frozen by the economic slump.
Shares of Credit Agricole were down 1.7 percent, at 4.45 euros, at 1126 GMT, underperforming a 0.94 percent drop in the STOXX Europe bank index <.sx7p>. Its stock price has fallen 52.4 percent year to date, against a 34.2 percent drop in the sector.
More than six months of intense market turmoil sparked by the euro zone debt crisis is pummeling investment banks globally, denting their bond and stock trading income and sparking a wave of layoffs in Asia, the U.S. and Europe.
Citigroup was last week among the latest to press ahead with job cuts, while banks in some of the crisis hotspots — such as Italy’s UniCredit and Intesa Sanpaolo — are also laying off thousands of people.
More than 120,000 job losses have been announced this year, and many in the industry fear the tally will be greater than at the height of the financial crisis in 2008, as redundancies continue into 2012.
Like its French rivals, Credit Agricole is primarily pulling back in certain financing businesses, such as those in dollars, which have become harder for it to access, and will cut staff accordingly.
It also has a European equity broker, Chevreux, and a majority stake in Asian brokerage CLSA. But the bulk of cuts are likely to fall in fixed-income, which houses its rates and credit divisions, analysts said.
Credit trading in particular has come under pressure at all banks this year as wary investors shy away from the market and new regulation bites.
Credit Agricole’s strategy under new Chief Executive Jean-Paul Chifflet, who has espoused a back-to-basics focus on retail banking in France and Europe, is a retreat from previous management ambitions of being a global player in financial markets.
The bank is deeply sensitive to ongoing turmoil in the eurozone economy, not just because it holds a substantial amount of Italian government debt but also because it owns local bank subsidiaries in crisis-wracked Greece and Italy.
Chifflet’s team is mulling various ways of bolstering the bank’s balance sheet, banking sources say, even though Credit Agricole’s robust parent network of regional banks has provided a cushion that has made raising additional capital unnecessary.
This may include more deal-making. The bank is close to announcing the sale of its private-equity activities, while it has also struck a $374 million deal to sell minority stakes in its CLSA and Cheuvreux brokerage brands to Chinese brokerage Citic Securities .
While Credit Agricole would be open to letting Citic increase its stake in the ventures — now at 19.9 percent — it aims to at least keep majority control, according to a person familiar with the bank’s thinking.
(Additional reporting by Sarah White in London; Editing by Jodie Ginsberg and David Hulmes)

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