While you were sleeping: Obama's financial reforms, bank credit ratings

Thursday 18th June 2009

President Barack Obama unveiled sweeping proposals to overhaul supervision of US financial markets, creating an agency to monitor consumer financial products, increasing scrutiny of hedge funds and buyout firms and giving the Federal Reserve oversight of companies deemed too big to fail.

Obama said lack of oversight had worsened the nation’s economic and financial crisis. “An absence of oversight engendered systematic and systemic abuse,” he said at a meeting of regulatory officials in Washington.

The proposals need to win approval of the Congress, where Republicans are likely to battle what they see as increased government control over the economy. The proposals eliminate the Office of Thrift Supervision, the primary regulator for thrift institutions including savings banks and savings and loan associations.

Stocks on Wall Street swung between gains and losses as plans to expand the health-care system lifted drugmakers and banks slipped after Standard & Poor’s lowered its credit ratings on 18 lenders.

The Dow Jones Industrial Average fell 0.1% to 8497.18 and Standard & Poor’s 500 dropped 0.1% to 910.71. The Nasdaq Composite rose 0.7% to 1808.06 after Cisco Systems chief executive John Chambers said in a CNBC interview that business had leveled out in recent months.

Pfizer Inc. climbed 3% to US$14.58, leading gainers on the Dow as lawmakers prepared changes that may force more Americans to gain medical insurance. Merck rose 1.4% to 24.77 and Johnson & Johnson climbed 1.1% to US$55.20. Intel climbed 1.8% to US$16.14, leading tech shares higher.

Wells Fargo dropped 5.4% to US$2309 after S&P cut its credit rating and said operating conditions for lenders will worsen.

S&P cut credit rating on banks including Capital One Financial and Keycorp, with lenders lowered to junk including Huntingon Bancshares and Whitney Holding Corp.

Banks are adjusting their funding profiles and strategies “for the marketplace’s new reality,” S&P analyst Rodrigo Quintanilla said. The transition “justifies lower ratings as industry players implement changes.”

The KBW Bank Index shed 3.3% and has tumbled 18% so far this year.

General Electric dropped 4.2% to US$12.25, the biggest decline on the Dow, after vice chairman John Rice told Bloomberg the company’s aircraft engine and medical imaging equipment units face more difficult months.

“I’m just not one of the green-shoot guys yet,” Rice said in the interview.

US consumer prices picked up in May, though from a year earlier they tumbled by the most since 1950, soothing concerns that inflation is set to accelerate as the world’s biggest economy climbs out of recession.

The Consumer Price Index rose a smaller-than-expected 0.1% in May from April, according to the Labor Department. Prices fell 1.3% from a year earlier, the biggest slump in about 60 years.

Standard & Poor's said it is unlikely to lower America’s AAA credit rating any time soon despite widening fiscal deficits.

"We still believe that the US government's credit strengths continue to outweigh its weaknesses," said S&P analyst Nikola Swann.

Federal Reserve officials may use next week’s monetary policy statement to hose down speculation of interest rate hikes as soon as this year, Bloomberg reported, citing a person familiar with the matter.

Economists expect the Fed to keep its benchmark interest rate target unchanged at zero to 0.25%. The central bank is also expected to discuss any changes to its commitment to purchase as much as $300 billion of Treasuries and $1.45 trillion of housing debt, Bloomberg said.

The US dollar slipped against the yen as the inflation data doused speculation on an early increase in interest rates by the Fed. The yen also strengthened amid speculation Japanese investors are selling overseas assets to invest at home.

The dollar fell to 95.59 yen from 96.38 yesterday and slipped to $1.3943 per euro from $1.3837. The euro traded at 133.35, little changed from 133.38 the previous day.

The Fed has a 46% chance of raising its key rate this year to at least 0.5%, down from a 64% chance predicted last week, based on interest rate futures tracked by Bloomberg.

Crude oil advanced for the first time in four days after US Energy Department figures showed stockpiles fell 3.87 million barrels to 357.7 million last week while fuel consumption picked up.

Crude oil for July delivery edged up 0.8% to US$71.02 a barrel on the New York Mercantile Exchange.

Gold futures for August delivery rose 0.4% to US$936 an ounce in New York.

Copper declined for a fourth day amid doubts about the pace of global economic recovery.

Copper futures for July delivery fell 0.6% to US$2.252 a pound on the New York Mercantile Exchange.

The UK’s FTSE 100 Index slipped 1.2% to 4278.46 after Bank of England Governor Mervyn King said the nation’s lenders may need to raise more capital.

“It may take further additions to equity capital before the banking system will be able to supply credit at a price and on a scale to finance a sustained recovery,” King said in a speech in London.

The Dow Jones Stoxx 600 Index fell 2% to 204.63 as some investors deemed its rally so far this year had pushed prices ahead of valuations.

Sandvik AB, the world’s biggest manufacturer of cutting tools for metal, dropped 8.5% after predicting an operating loss. Spanish utility Iberdrola fell 6.1% after raising 1.3 billion euros by selling new shares. UK supermaket chain Sainsbury fell 5.7% on plans to raise 445 million pounds in a share sale and an issue of convertible bonds.

France’s CAC 40 fell 1.6% to 3161.14 and Germany’s DAX 30 declined 1.9% to 4799.98.

Businesswire.co.nz

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