Obama May Produce $1 Trillion Deficit, Gross Says (Update3)
By Candice Zachariahs

June 30 (Bloomberg) — Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said a Barack Obama administration may have no other choice than to produce the first $1 trillion U.S. budget deficit.

“You have inherited a mess,” Gross, co-chief investment officer of Pimco, said in an open letter to Obama, the likely Democratic presidential nominee, published on the Newport Beach, California-based company’s Web site today. “What do I think you should do as the new president to rectify this mess? All I know is that any solution will come with a high price tag.”

Higher taxes for hedge-fund managers and oil companies will not cover the $500 billion stimulus the economy needs, including the anticipated Obama tax cuts for the poor and middle-class, universal health care and aid to the depressed residential real estate market, said Gross, a long-time Republican. The likely expenditures and increased borrowing suggest that “intermediate and long-term yields on government bonds have already bottomed and will gradually rise” through the next four years and possibly beyond, Gross said.

Gross domestic investment in machines, houses and inventories has fallen by $200 billion since its 2006 peak, Gross said. Domestic consumption will soon be $300 billion short of what’s needed for an economic rejuvenation, he said. With the deficit already pushing $500 billion even before the next president is sworn in, Gross anticipates it will reach $1 trillion deficit by 2011.

Republicans “will blame you for years and label you `Trillion-Dollar Obama,”’ said Gross, in his analysis that assumes Obama will defeat his presumptive Republican adversary, John McCain. . “There is, in fact, not much that you or any other President can do.”

Obama Proposals

Mark Porterfield, a Pimco spokesman, said Gross wasn’t available for additional comment.

“Bill Gross is correct that higher taxes for hedge-fund managers and oil companies will not cover Barack Obama’s agenda,” Jason Furman, Obama’s economic policy director said in an e-mail response. “Which is why Obama has proposed an ambitious program of spending restraint.”

Obama’s proposals include ending the war in Iraq, cutting subsidies for private Medicare plans and student lenders, eliminating no-bid contracts, and reforming the process known as earmarks where direct funding is allocated to specific projects in legislation, Furman wrote.

Japanese Comparison

Gross draws a comparison with Japan’s efforts to recharge its economy after a 1980s real estate bubble fizzled. Over seven years, expansionary fiscal spending grew the deficit from 2 percent of GDP to 10 percent at its peak, he says. “Our trillion-dollar level in 2011 would equate to something like 6 percent of GDP, a mere pittance by Japanese standards,” Gross said.

Gross expects housing prices to fall a further 10 percent by January, by then a “Japanese-style deflation will be in full stride.” Home prices in 20 metropolitan areas fell the most on record in April, from a year earlier, according to an S&P/Case- Shiller home-price index released on June 24.

A decision on a $300-billion Senate bill to reduce home foreclosures was delayed until next month after lawmakers failed to settle a dispute on adding energy tax cuts to the measure. The Senate plan would allow an estimated 400,000 homeowners to avoid foreclosure by refinancing their mortgages into fixed- rate, 30-year loans backed by the government.

`Firm Background’

Global growth led by developing countries and rising commodity prices will provide a “firm background for stimulative U.S. monetary and fiscal policies” and save the U.S. from Japan’s experience of deflation and near 0 percent interest rates, Gross said.

Pimco, a unit of Munich-based insurer Allianz SE, manages about $800 billion. The Pimco Total Return Fund has about $129 billion in assets under management.

U.S. government bond investors have lost 2.2 percent on average from March through June 27, including reinvested interest, according to Merrill Lynch & Co.’s Treasury Master Index. That’s the worst performance since the second quarter of 2004, when they tumbled 3.1 percent.

To contact the reporter on this story: Candice Zachariahs in New York at Czachariahs1@bloomberg.net

Last Updated: June 30, 2008 16:46 EDT

http://www.bloomberg.com/apps/news?pid=20601103&sid=aIwN.hFTsofo&refer=news

 http://www.nytimes.com/2008/06/29/business/29suits.html?ref=business

US legal eagles fly in for Moscow case

By Neil Buckley in Moscow and Joanna Chung in New York

Published: June 29 2008 22:53 | Last updated: June 29 2008 22:53

Titans of the US legal system will argue before a Moscow judge on Monday over a multi-billion-dollar lawsuit being brought under American law that is highly unusual – even by the standards of Russian justice.

At issue is a $22.5bn damages claim against Bank of New York Mellon by the Russian Federal Customs Service with potentially far-reaching implications. It relates to a decade-old money laundering case that had been thought resolved.

Bank of New York reached a $14m settlement with US federal prosecutors in 2005 after two Russian émigrés, one a bank vice-president, admitted helping to launder $7bn of Russian money in the late 1990s. Now Russia is demanding billions in unpaid taxes on the money.

Russian customs has brought in Alan Dershowitz, the Harvard law professor who advised on the defence of OJ Simpson, as an expert witness. They are also fielding Robert Blakey, an author of the US racketeer-influenced and corrupt organisations (Rico) statute – which they are trying to use in the Moscow Arbitration Court. Bank of New York’s lawyers are fielding Dick Thornburgh, a former attorney-general and Pennsylvania governor.

The case is an important test of whether Rico can be applied outside the US. It will put a spotlight on President Dmitry Medvedev’s pledges to strengthen the Russian judiciary’s independence.

Background

Alan Dershowitz is the Felix Frankfurter Professor of Law at the Harvard Law School. As well as his legal work, he is known for his commentary on the Arab-Israeli conflict.

As a criminal appellate lawyer, Mr Dershowitz successfully argued to overturn the conviction of Claus von Bulow for the attempted murder of his wife. He also served as the appellate adviser in the trial of O.J. Simpson, the former American football player and actor.

Mr Dershowitz was made a full professor of law in 1967, aged 28, becoming, at that time, Harvard’s youngest full law professor.

As Mr Medvedev has admitted, Russian courts frequently become tools of state authorities or wealthy businessmen. Some Moscow observers suggest the BNY case could not have got this far without support from a high-level “sponsor” in government, the security services, or business – or one well-connected in all three areas.

Podhurst Orseck, the Miami-based lawyers representing Russian customs in association with a Moscow firm, are demanding $22.5bn damages, based on claimed direct and indirect losses to the Russian budget of $7.5bn. Rico allows damages to be trebled on a punitive basis.

BNY and its lawyers, Boies, Schiller & Flexner, insist the case is frivolous. They argue Rico claims cannot be brought outside the US, and a public, criminal law cannot be adjudicated on by a private commercial court.

“To be in the Moscow [Arbitration] Court trying to bring a US public law case such as Rico is barred by Russian and US law,” says Jonathan Schiller, co-founder of Boies, Schiller & Flexner and lead counsel on the BNY case. Mr Thornburgh backs that argument.

Mr Schiller also says the case lacks the two “predicate” crimes required for a Rico case. Bank of New York was never charged with or admitted to money-laundering, he says; it admitted only to monitoring failures. Lucy Edwards, the employee involved, and her husband Peter Berlin also admitted only to conspiracy to launder and violating reporting laws, not money-laundering itself.

But Mr Dershowitz and Mr Blakey argue Rico can be applied outside the US. That question, not the case’s merits, is the focus of Monday’s’s hearing, with BNY attempting to dismiss the case. “There is nothing in the Rico statute or legislative history that precludes the Russian court from applying Rico,” says Mr Dershowitz, who adds it is “very important” for Rico laws to be applied extra-territorially.

He points out Rico is both a criminal and a civil law, and the Russians are seeking to apply only the civil part. “We have to prove that money laundering occurred, but that will not be hard to do. The burden of proof is much lighter in a civil case than in a criminal case.”

This is raising questions about whether BNY should establish a reserve against a possible loss. Ken Thomas, an independent expert retained by the Russian side’s lawyers, wrote this month to Ben Bernanke, Federal Reserve chairman, warning an adverse ruling could not just damage the 12-largest US bank but pose potential systemic risks.

Mr Schiller says the bank has few assets that could be pursued in Russia, and a damages ruling could not be enforced in the US or many other countries where the bank has significant assets thanks to the “revenue rule” barring authorities from collecting foreign tax claims.

“The US will not permit, and has not for 200 years, the application of a foreign government’s tax laws in the United States,” he says. “Just as Russia would not expect the US to collect its taxes over there.”

BNY says US accounting rules require a reserve only if losses are “probable and reasonably estimable”.

Copyright The Financial Times Limited 2008

http://www.ft.com/cms/s/0/c9c7be70-460b-11dd-9009-0000779fd2ac.html

Covered bonds raise banks’ hopes

By John Murray Brown

Published: June 29 2008 20:00 | Last updated: June 29 2008 20:00

Predicting the end of the credit crunch is for the foolhardy. However, when the markets do eventually stabilise, Roy Parker, partner at McCann FitzGerald solicitors in Dublin, believes Ireland has just the product to help banks fund their balance sheets.

The Irish covered bond – branded as an “asset covered security” or ACS – is a bond underpinned by Irish legislation and backed by a ring-fenced pool of assets on the issuer’s balance sheet.

It is essentially a secured debt instrument that enjoys special status under the European Union’s rules – specifically the directive for undertakings for collective investments in transferable securities, known as Ucits, introduced in 1988.

Mr Parker says that although covered bonds were not mentioned in the Basel II rules on banks’ capital adequacy, they are favourably treated in the risk-weighting guidelines under the EU’s capital requirements directive, which took effect at the end of 2006.

“The challenge for most financial institutions over the past 15 years has been that deposit-taking has not kept pace with spending in society generally.

“People have borrowed more than they have put back into the bank as deposits,” says Mr Parker.

The legal underpinning of the Irish covered bond means that unlike the rival “structured” covered bond, which uses securitisation techniques, the bondholder or investor is protected in the event of a bankruptcy and a liquidator being appointed to the issuing bank.

Today, more than 25 countries have legislative covered bond programmes. But Ireland was the first common law jurisdiction to do so. The UK only made such a move in March this year, while the US has no such legislation.

Mr Parker says it is a well-established funding tool in continental Europe, particularly in Germany where initially it was used to finance public sector loans but later evolved as a means to refinance residential mortgages, as well as for ship financing. The German Pfandbrief bond was the model for the Irish ACS.

Mr Parker, who was a member of the team that drafted the Irish legislation, says there was no English translation of the German code. “It was very difficult to find out how the code actually worked because for many people it was almost an act of faith,” he says.

In the seven years since the legislation was passed, total Irish issuance of ACSs stands at more than €74bn (£58.4bn).

Two Irish banks – Allied Irish Banks and Bank of Ireland – have so far launched legislative covered bond programmes to fund their residential mortgage books.

Last year, the legislation was amended to allow specialist commercial mortgage lenders to issue covered bonds. However, the legislation limits the amount of the asset pool that can be covered by commercial mortgages to 10 per cent. To get round this, Anglo Irish Banks issued a structured covered bond in the UK, backed purely by commercial loans.

The bulk of Irish issuance to date – Mr Parker estimates about €50bn – has been for public-sector lending, typically on a cross-border basis, where a bank or public authority uses Dublin to issue a bond to international investors to finance a road or other infrastructure project.

Depfa, the German public sector lender, moved its global headquarters to Dublin in 2003 to avail itself of the Irish legislation and the low 12.5 per cent corporation tax.

WestLB, another German bank, followed shortly afterwards, setting up an Irish subsidiary to issue covered bonds under the legislation.

With securitisation having such a bad name, Mr Parker believes the covered bond’s time has come. “Certainly in Ireland, in the UK market, in just about every market in Europe, everybody will be looking to covered bonds in the next few years.”

Copyright The Financial Times Limited 2008

Andre Vargie selling bread in Le Pain de Jadis, with a sign that reads, “We accept francs here.” (John McConnico for The New York Times)

In the French heartland, the franc lives on

By Steven Erlanger

Published: June 29, 2008

COLLOBRIÈRES, France: Christine Amrane says it is mostly about profit, not just protest and nostalgia. This isolated village has decided to accept the French franc in everyday commerce, along with the euro, and the colorful old bills adorned with French heroes and writers have got people thinking.

Not too radically, of course. Collobrières, after all, is deep in Provence, a picturesque little place of 1,600 people, with a perfect, tiled village square, commanded by city hall and a café with a table of old men playing cards and drinking pastis, all shaded by huge plane trees from the hot southern sun.

“We lost something with the franc,” said Amrane, the mayor since 2001. “We lost an identity. We moved very quickly into Europe, maybe too quickly.”

Along with mostly visa-free travel, the introduction of the euro in 2002 was heralded as a great step in the building of a united Europe. But printed with images of imaginary bridges and buildings, and with no portraits of anyone, living or dead, euro bills are as faceless as the Eurocrats who run the institutions of the new Europe.

While Europeans value the ease of travel that the euro has encouraged, they also think that the new currency created inflation by allowing merchants to round up costs. And of course the European Central Bank means that countries can no longer adjust their interest rates and exchange rates to suit their particular economic circumstances.

Today in Europe

In the French heartland, the franc lives on

Serbian coalition chooses a prime minister

Polish lawmaker says Warsaw and Washington agree on missile shield

Nathalie Lepeltier, a 39-year-old baker who launched the idea of accepting the old franc, says that “the euro has made life more expensive - prices are much higher.” Whether the euro is at fault or not, people certainly believe that it is.

“People have lost the concept of the value of money with the euro, because of the euro,” Lepeltier said. People remember the price in francs, and they’re shocked now when they use francs at how much more everything costs.”

Amrane’s husband retired and started getting his pension in 2001, before the euro. “He was paid in francs and now in euros, and it’s not at all the same,” she said. “There’s a general malaise.”

The autumn chestnut festival is on the minds of the people here more than political protest. Paris is 860 kilometers, or 535 miles, away, and Brussels even farther.

But the European Union is a source of confusion and annoyance, both abstract and distant. The French were not allowed to vote in a referendum on the complicated Lisbon Treaty to reorganize the workings of the enlarged union of 27 nations. France, like most countries, thought it safer to ratify the treaty in Parliament, where the government holds a majority.

But the Irish voted, and voted no. And there’s a lot of sympathy for them here.

France is thought to be the beating heart of the European vision, but the last time the French voted on an earlier version of Lisbon, in 2005, they voted no - and polls say they would reject it in its current form.

The Irish vote brought both criticism and handwringing about the “democratic deficit” of bureaucratic European institutions with few connections to European voters. But the Irish are not alone in having their doubts about how to make a Europe grown to 27 countries, with more on the way, function both efficiently and democratically.

The Irish no has also been a major blow to France, which takes over the six-month presidency of the European Union on Tuesday.

President Nicolas Sarkozy has been full of ideas on how to push Europe along, as another way to restore some of his lost credibility here. But the Irish rejection means that France will spend much of its time - really 4.5 months, with the long European summer vacation - trying to manage Europe’s internal crisis.

“I’m a convinced European, but I have some problems with it,” Amrane said, displaying an EU form she has to fill out. “There are no real bearings - no real identity as Europeans. We need more time.”

But enough about Europe, she said. “I want to talk about Collobrières, the most beautiful village in the world!”

Lepeltier, the baker, runs the local association of merchants and artisans, and she had the idea of taking francs after hearing about the experience of another small town, Le Blanc.

Here, too, people who had saved franc bills or found stacks of them in old drawers or the traditional French “woolen stocking” - the French still don’t really trust banks - took them out to spend.

First considered a joke, the franc exchange increased profits. The village has taken in 120,000 francs, or about €18,300 at the legally fixed rate of exchange.

(Page 2 of 2)

One man came here after finding 20,000 francs in an old jacket and 40,000 francs more in the back of a drawer.

“He spent it all!” Lepeltier said. “It was a great festival. He said he preferred to spend it than exchange it” - probably, she conceded, to avoid questions from the taxman.

The Bank of France will take the last franc bills issued in each denomination for exchange until Feb. 17, 2012. But all franc coins and older bills are now worthless, so everyone accepts only those francs they can exchange. “We’re merchants, not a charity!” Lepeltier said.

Jean-Louis Nonque, who sells regional products like chestnut honey, chestnut cream and candied chestnuts at his shop near the 12th-century bridge, says he was skeptical.

But he took in 2,120 francs in the last 10 days. Asked if he had kept any francs as souvenirs, he laughed and said: “Just the coins. The bills are worth too much.”

Asked about the Lisbon Treaty, he said carefully: “I understand the Irish.”

In the central square - called the Place de la Libération, of course - customers at the Bar de la Mairie, across from the city hall, were less angry about Europe than confused.

Aurélien Autran, 29, does not care about the franc. “The old ones, maybe,” he said, describing how his grandmother thinks in old francs, then converts them to new francs and then, slowly, to the euro.

He likes the euro so he can go to Spain and buy cheap cigarettes and alcohol.

As for the Irish, he said: “They don’t even know what’s in the treaty, so of course they voted no.”

Were they right? Autran looked puzzled, then country-shrewd.

“Well, I don’t know what’s in the treaty either, so I can’t say.”

From a nearby table, a young man said, “What’s Lisbon?” Another said, “Oh, that’s this trick of Sarkozy, this Union of the Mediterranean.”

When he was told Lisbon was something different, he scratched his head.

“Maastricht?” he asked, naming an earlier European treaty.

The owner of the bar, Frédéric de Kersauson, 42, stopped taking francs in May and says that he is sick of the whole subject.

“People came in here with 500 francs and ordered a coffee,” he said. “It wasn’t worth it. The franc is dead!”

http://www.iht.com/articles/2008/06/29/europe/france.php?page=2

June 27, 2008

Op-Ed Contributor

Your Brain Lies to You

By SAM WANG and SANDRA AAMODT

FALSE beliefs are everywhere. Eighteen percent of Americans think the sun revolves around the earth, one poll has found. Thus it seems slightly less egregious that, according to another poll, 10 percent of us think that Senator Barack Obama, a Christian, is instead a Muslim. The Obama campaign has created a Web site to dispel misinformation. But this effort may be more difficult than it seems, thanks to the quirky way in which our brains store memories — and mislead us along the way.

The brain does not simply gather and stockpile information as a computer’s hard drive does. Facts are stored first in the hippocampus, a structure deep in the brain about the size and shape of a fat man’s curled pinkie finger. But the information does not rest there. Every time we recall it, our brain writes it down again, and during this re-storage, it is also reprocessed. In time, the fact is gradually transferred to the cerebral cortex and is separated from the context in which it was originally learned. For example, you know that the capital of California is Sacramento, but you probably don’t remember how you learned it.

This phenomenon, known as source amnesia, can also lead people to forget whether a statement is true. Even when a lie is presented with a disclaimer, people often later remember it as true.

With time, this misremembering only gets worse. A false statement from a noncredible source that is at first not believed can gain credibility during the months it takes to reprocess memories from short-term hippocampal storage to longer-term cortical storage. As the source is forgotten, the message and its implications gain strength. This could explain why, during the 2004 presidential campaign, it took some weeks for the Swift Boat Veterans for Truth campaign against Senator John Kerry to have an effect on his standing in the polls.

Even if they do not understand the neuroscience behind source amnesia, campaign strategists can exploit it to spread misinformation. They know that if their message is initially memorable, its impression will persist long after it is debunked. In repeating a falsehood, someone may back it up with an opening line like “I think I read somewhere” or even with a reference to a specific source.

In one study, a group of Stanford students was exposed repeatedly to an unsubstantiated claim taken from a Web site that Coca-Cola is an effective paint thinner. Students who read the statement five times were nearly one-third more likely than those who read it only twice to attribute it to Consumer Reports (rather than The National Enquirer, their other choice), giving it a gloss of credibility.

Adding to this innate tendency to mold information we recall is the way our brains fit facts into established mental frameworks. We tend to remember news that accords with our worldview, and discount statements that contradict it.

In another Stanford study, 48 students, half of whom said they favored capital punishment and half of whom said they opposed it, were presented with two pieces of evidence, one supporting and one contradicting the claim that capital punishment deters crime. Both groups were more convinced by the evidence that supported their initial position.

Psychologists have suggested that legends propagate by striking an emotional chord. In the same way, ideas can spread by emotional selection, rather than by their factual merits, encouraging the persistence of falsehoods about Coke — or about a presidential candidate.

Journalists and campaign workers may think they are acting to counter misinformation by pointing out that it is not true. But by repeating a false rumor, they may inadvertently make it stronger. In its concerted effort to “stop the smears,” the Obama campaign may want to keep this in mind. Rather than emphasize that Mr. Obama is not a Muslim, for instance, it may be more effective to stress that he embraced Christianity as a young man.

Consumers of news, for their part, are prone to selectively accept and remember statements that reinforce beliefs they already hold. In a replication of the study of students’ impressions of evidence about the death penalty, researchers found that even when subjects were given a specific instruction to be objective, they were still inclined to reject evidence that disagreed with their beliefs.

In the same study, however, when subjects were asked to imagine their reaction if the evidence had pointed to the opposite conclusion, they were more open-minded to information that contradicted their beliefs. Apparently, it pays for consumers of controversial news to take a moment and consider that the opposite interpretation may be true.

In 1919, Justice Oliver Wendell Holmes of the Supreme Court wrote that “the best test of truth is the power of the thought to get itself accepted in the competition of the market.” Holmes erroneously assumed that ideas are more likely to spread if they are honest. Our brains do not naturally obey this admirable dictum, but by better understanding the mechanisms of memory perhaps we can move closer to Holmes’s ideal.

Sam Wang, an associate professor of molecular biology and neuroscience at Princeton, and Sandra Aamodt, a former editor in chief of Nature Neuroscience, are the authors of “Welcome to Your Brain: Why You Lose Your Car Keys but Never Forget How to Drive and Other Puzzles of Everyday Life.”

http://www.nytimes.com/2008/06/27/opinion/27aamodt.html?ei=5087&em=&en

=07a0cd373fc51d40&ex=1214712000&pagewanted=print

Investors Hide as Banks Come Knocking

Financial Firms Struggle to Get Capital
From Big Players Burned Once Already

By ROBIN SIDEL
June 23, 2008

Once bitten, twice shy.

As banks rack up billions of dollars in losses from bad loans and blundered investments, large investors are becoming skittish about pumping more money into them.

In the past several weeks, bank executives have encountered unexpected resistance from investors, who have expressed reluctance to participate in the capital-raising transactions sweeping through the industry, according to people familiar with the situation. Already bruised by big losses and fearing that bank shares haven’t yet hit bottom, some of these investors are choosing to tighten their purse strings.

“The window for capital-raising is closing,” says Brad Evans, a portfolio manager for Heartland Advisors Inc., a money-management firm in Milwaukee that invests in small, regional banks. “Investing in a bank right now means investing in a large portfolio of loans that are essentially a black box.”

The change in sentiment could have sweeping implications for financial institutions that are trying to shore up their balance sheets by issuing stock and other securities to their investors. Some may be forced to lure investors with sweeter terms, further raising the costs of doing these deals.

Before announcing plans earlier this month to raise $1.5 billion, KeyCorp, of Cleveland, quietly reached out to more than a dozen of its largest institutional shareholders to gauge their interest in participating in a transaction, according to people familiar with the matter. A number of those investors rebuffed the offer, expressing concern about their existing exposure to the poor banking environment, these people said. KeyCorp’s stock price fell 24% when it announced the capital-raising deal. It is down 3.8% since then.

A KeyCorp spokeswoman declined to comment.

Dozens of Wall Street firms and commercial banks have raised capital, and many more financial institutions are expected to follow the same path in coming months, particularly as regulators clamp down on these institutions to ensure they have adequate capital levels to withstand the credit crunch.

That is particularly the case for small, regional banks and mom-and-pop lenders just starting to be hit hard by losses in their real-estate and construction-loan portfolios. With so many banks already having gone hat in hand to shareholders, these financial institutions ultimately may be forced to deal with a limited pool of investors who still would be willing to pump in money.

Investors have good reason to be skittish. Most of the banks that issued new securities in recent months have continued to see their share prices slide, some by 40% or more. That means investors who bought into those transactions are far underwater. And existing investors who didn’t bite have had their holdings diluted by the issuance of piles of new shares.

“Investors are tired of trying to catch a falling knife,” says one investment banker who specializes in the financial-services industry.

Even the smart money isn’t looking so smart. In April, private-equity firm TPG and other investors agreed to pump $7 billion into Washington Mutual Inc. in a transaction that valued their investment at $8.75 a share. The deal represented a discount to the bank’s share price of about $13 at the time.

Not anymore. WaMu’s stock closed Friday at $6.38 on the New York Stock Exchange.

“Obviously, the investors who jumped in early are down materially, but I don’t feel by any measure that the market is closed or dead,” says John Duffy, chief executive and chairman of KBW Inc., a boutique investment firm in New York that is advising a number of financial institutions on the prospects of raising additional capital. Mr. Duffy attributes much of the recent decline in stock values to “the sentiment that the banks didn’t raise enough capital and will be back to the market at even lower prices.”

When Joseph Fenech went on the road with the management of Sterling Financial Corp. of Spokane, Wash., recently, the banking analyst at Sandler O’Neill & Partners LP in New York was surprised to hear a number of investors discourage Sterling executives from raising capital “on the basis that the marketplace does not seem to be rewarding the additional capital cushion.”

A spokeswoman for Sterling declined to comment, citing the pending release of the bank’s earnings next month.

In a report last week, Mr. Fenech attributed the slides in the share prices of banks that recently raised capital partly to skepticism as “investors began to assess the possibility that many companies would soon be back to the well for additional capital and/or began to more fully digest the massive dilution associated with these actions.”

The latest test of investor fortitude: BankUnited Financial Corp., a Coral Gables, Fla., bank announced late Wednesday a $400 million public offering. Terms of the deal weren’t disclosed, but BankUnited’s stock-market value is less than $100 million.

BankUnited shares plunged 19%, or 45 cents, to $1.90, in 4 p.m. Nasdaq Stock Market composite trading Thursday. Friday the stock fell an additional 12%.

Growing queasiness could force some banks to downsize their capital-raising ambitions. That is how some analysts and investors interpreted the actions of Fifth Third Bancorp, which on Tuesday said it would raise $1 billion through an offering of convertible preferred stock and sell $1 billion in assets. The Cincinnati bank also cut its dividend for the first time in three decades.

“The decision we made speaks for itself,” a Fifth Third spokesman said.

Write to Robin Sidel at robin.sidel@wsj.com

http://online.wsj.com/article/SB121417644960795349.html?mod=hps_us_whats_news

Toward a Transparent Financial System

By VIKRAM PANDIT
June 27, 2008; Page A11

If there is any consolation in the latest credit crisis it is the vigorous global debate now unfolding on regulatory reform. Regulators and market participants see an opportunity to reassess, and to get organized around guiding principles that can help financial institutions and financial markets handle the mounting complexities of global trends in business, markets and the economy.

In my view, three principles in particular – transparency, a level playing field and systemic oversight – are the essential elements we need to consider as we look at how best to frame these reform discussions. The goal of the debate should be to advance global coordination among central banks, regulators and financial institutions in ways that increase our understanding and ability to manage systemic risk.

Markets cannot clear without transparency. We all know that and yet we’re seeing again the consequences of a lack of full transparency. Fixed income and credit markets currently are among the most opaque markets. Transparency concerns can lead to illiquidity.

Yet transparency is difficult to achieve. It requires continual vigilance to standardize products when appropriate, introducing them to exchanges, creating counterparty clearinghouses and settlement systems and, finally, amassing accurate data on prices and transaction volumes. Transparency must also include public disclosures to investors about pertinent risk and financial information that give the market a chance to make informed judgments.

Moreover, transparency means that systemically significant institutions – essentially any institution whose uncontrolled failure would impact the financial system in a significantly adverse way – should meet robust information requirements set by the overseeing regulatory agency.

The next principle is a level playing field, which includes two distinct issues: standards and capital requirements. Rating agencies, independent monitoring entities and risk bureaus are all important if accredited correctly. Global coherence and consistency on accounting standards can also help, including clear guidelines regarding off-balance-sheet instruments.

In recent dysfunctional markets, we have seen different accounting standards applied that were based on an institution’s form and regulatory jurisdiction. Accounting based on a mark-to-model has been severely tested by unobservable inputs intended to estimate the market. This has fed into difficult, far-reaching decisions that impacted capital and other factors as one misinformed trade set off a chain of similar trades. This raises an important question: Are there alternative accounting approaches we should apply, particularly in dysfunctional markets?

We also need consistent capital requirements for systemically significant institutions. As we consider how to define a level playing field, we ought to ask what now constitutes a “financial institution.” When judging which institutions should be allowed access to the playing field, focusing on function, rather than form, seems a sensible answer. Financial services and parallel banking activities in many ways are becoming ubiquitous, and to some extent interchangeable.

The third suggested principle is a need for oversight for systemically significant institutions. We cannot and should not legislate away an institution’s ability to lose shareholders’ money. But none should have the right to impose externalities on the rest of the financial system. Does an institution warehouse risk? Does it borrow short and lend long? Does it leverage its investments? Once a company gets large enough to impact the financial system, shouldn’t it operate under the same systemic risk umbrella in terms of capital, liquidity and transparency?

In the U.S., we recently saw the unprecedented opening of the Federal Reserve discount window to nonbanks. By definition, unprecedented events set a precedent. And regardless of whether that window is officially opened or closed, the market now assumes that it will be open if necessary on an ad hoc basis.

Capital and liquidity speak for themselves. Systemically significant institutions need to be as transparent to regulators as regulated institutions are. Without this level playing field, regulators charged with safeguarding the world’s financial systems simply won’t have enough information to mitigate systemic risk.

An uneven application of regulations and accounting standards in an environment where capital and talent are mobile and where traditional classifications are being redefined has the potential to increase systemic risk. Applying rules partially is not the second best option to applying them consistently.

In order to realize all the possibilities in the global trends reshaping our world and our financial systems, we welcome a more robust regulatory architecture that embraces standards broad and clear enough to apply to all participants, but is flexible enough to be adaptable to unforeseeable changes in a dynamic market.

Mr. Pandit is CEO of Citigroup.

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Fed, SEC Near Accord
To Redraw Wall Street Regulation

Shared Information,
Closer Cooperation
Fill Oversight Gaps

By KARA SCANNELL , DEBORAH SOLOMON and SUDEEP REDDY
June 23, 2008

WASHINGTON — The Federal Reserve and Securities and Exchange Commission are finalizing a formal agreement that will start the process of redrawing how Wall Street is regulated in the wake of Bear Stearns Cos.’ near collapse.

The agreement, which could be announced as soon as this week, aims to fill gaps in regulatory oversight and will increase cooperation and information-sharing between the central bank and SEC.

The type of information to be shared includes data regarding settlements, trade and positions. The SEC will also get information from the Fed on short-term financing from the banks that clear trades and hold collateral for the securities firms. It is possible that could have been useful in identifying problems at Bear.

Under the agreement, the Fed will be able to see an investment bank’s trading positions, its leverage and its capital requirements, among other things.

The change will expand the Fed’s oversight of the financial system to include investment banks. Currently, the SEC has oversight of brokerage firms while the Fed has oversight of bank holding companies and commercial banks. Treasury Secretary Henry Paulson has proposed expanding the Fed’s role even further, giving it responsibility for oversight of risk throughout the financial system.

The increased information-sharing has been in the offing since March, when the central bank initiated an unprecedented program, at the height of the financial crisis, to lend money to Wall Street firms. The agreement would remain even if the Fed ended that temporary move later this year.

Leaders of both the SEC and the Treasury Department have recently pushed for faster action to deal with the changes brought about by the Fed’s decision to lend money to investment banks.

The Treasury Department has proposed a sweeping proposal to revamp the financial regulatory structure, but that will require congressional action, which is unlikely to be forthcoming this year.

The information-sharing accord, negotiated among the two agencies and the Treasury Department, would enact some changes sought in the Treasury proposal and fill some regulatory gaps immediately. It “is designed to facilitate our joint efforts to fulfill our respective regulatory functions in a post-Bear environment,” said SEC Chairman Christopher Cox, who said the negotiations could be completed within days. He described a “post-Bear” world as one in which the SEC has responsibility for overseeing investment banks and the Fed “has an interest in monitoring systemic risk generally and in protecting its funding commitment.”

The agreement will include guidelines for sharing relevant market information and oversight, said Erik Sirri, head of the SEC division that has oversight of brokerage firms.

“We each have an obligation to be [at the brokerage firms] for our own reasons,” he said. “It lays the groundwork so we’re not bumping into each other and so we’re not overly intrusive to the firms.”

Since mid-March, the Fed has placed staff inside the four largest investment banks to assess their risk by looking at liquidity, capital requirements and banks’ ability to test their own systems, areas the SEC examines.

Its on-site presence has dwindled to one or two examiners from as many as six, people familiar with the matter say, while the SEC conducts its supervision over the phone and with periodic visits.

The Fed has wanted on-site access so that it can better understand the risk that a bank may pose to the entire financial system.

Treasury has also taken the position that the Fed must maintain some presence at the investment banks if it continues to lend money to those institutions.

The agreement was initiated by Mr. Cox in February and has been a focus of Treasury Secretary Henry Paulson, who has been in close contact with Mr. Cox and Fed Chairman Ben Bernanke.

Mr. Paulson, who came to the Treasury from the investment bank Goldman Sachs Group Inc., wanted the Fed and the SEC to hammer out a written agreement, given the recent turmoil and the Fed’s new role, according to people familiar with the matter.

Write to Kara Scannell at kara.scannell@wsj.com, Deborah Solomon at deborah.solomon@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com

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