HOW LIC USED TO PROP UP STOCK PRICES:
Oct, 2008 Sucheta Dalal
For the past few weeks, as stock prices have collapsed, the government has been quietly using public sector insurance companies to shore up stock prices. These companies, led by Life Insurance Corporation of India (LIC), have invested tens of thousand crore rupees in a futile attempt to hold up stock prices. It is not clear how badly this will affect their finances in the short term. (Even in the long term, buying low-priced shares could turn into a bonanza only if the portfolio is managed transparently and LIC does not sell blocks of shares at small gains).
Consider how this quiet rescue has been working. Foreign Institutional Investors (FIIs), trading through non-transparent Participatory Notes (PNs) have been making money in a falling market by short-selling Indian stocks, which the SEBI (Securities and Exchange Board of India) has refused to stop. Instead, LIC and other institutions have been asked to shore up stock prices to stem every bout of panic. The insurance behemoth is understood to be making staggering purchases in the region of Rs 2,000 crore daily during the worst panic phase of September and October. The insurance regulator, which has just started collecting information on Unit Linked Insurance Plans (ULIP), has not even woken up to LIC’s market operations. SEBI also does not ask ULIPs to make the same disclosures as mutual funds.
On 21st April, SEBI Chairman, C B Bhave, asked institutional investors to start paying margins on their transactions. But it is clearly not working as intended. LIC’s daily transactions are often in excess of its own custodian's networth. Stock Holding Corporation of India (SHCIL), India’s largest custodial agency, ends up taking an intraday bridge overdraft in excess of its entire networth to make the daily pay-in. Bankers say that this situation arose because LIC did not want to leave overnight float funds with SHCIL; consequently the risk was pushed on to Corporation Bank which is unwilling to shoulder the burden alone. Sources say that SHCIL's basic networth is a mere Rs 300 crore. Even if one includes the value of the National Stock Exchange stake (7% equity valued at around Rs 1100 crore), SHCIL's networth would not cross Rs 1400 crore.
GDP, consumer spending contract as US plunges into recession
By Patrick O’Connor 31 October 2008
Gross domestic product (GDP) figures released yesterday by the Commerce Department show that the US economy shrank by 0.3 percent on an annualised basis in the three months from July to September. With economists expecting even poorer GDP figures for the fourth quarter, the latest data confirms that the economy has now entered into severe recession.
Negative GDP growth for the third quarter was driven by a 3.1 percent decline in consumer spending, the first such contraction since 1991 and the largest fall recorded since 1980.
Consumer spending, partly fuelled by personal debt, has accounted for more than two-thirds of all economic activity in the last period. But mounting layoffs, home foreclosures, credit card defaults, the rising cost of living and the declining value of retirement savings have had a devastating impact on broad layers of the population. The Commerce Department reported an extraordinary 8.7 percent third quarter decline in disposable personal income—that is, income after taxes and adjusted for inflation. This is the largest fall ever recorded since figures were first kept in 1947.
Disposable income in the second quarter had increased by 11.9 percent on an annualised basis due to tax rebates from the Bush administration's emergency economic stimulus package.
Unsurprisingly, spending has declined together with incomes. In the three months up to October, purchases of non-durable goods—smaller purchases such as food and clothing items—plunged by 6.4 percent, the biggest decline since 1950. Spending on durable goods, such as cars and furniture, declined by 14.1 percent.
Housing investment plunged 19.1 percent on an annualised basis. Also recorded in the GDP data was a decline of 1 percent in "real non-residential fixed investment," that is, business investment in capital items including machinery, vehicles, and computers. The New York Times described this as "a worrying sign of a new, potentially pernicious phase of the downturn."
The third quarter 0.3 percent GDP decline was not as severe as had been anticipated. Stock markets lifted marginally yesterday, with the Dow Jones closing 2.1 percent higher. Goldman Sachs economists, however, warned their clients that the GDP report was "weaker than implied by the initial market reaction."
The data would have been significantly worse had it not been for a narrower trade deficit caused by continuing export growth to Europe and Asia. This growth has since ceased and exports are in decline as the world economy follows the American into steep recession. Also preventing a sharper drop in third quarter GDP was federal government spending and investment, which was up 13.8 percent on an annualised basis, largely due to an 18.1 percent rise in military expenditure.
The Wall Street Journal noted that the latest data indicated that the economy probably entered into recession "before the mid-September credit freeze," and that fourth quarter GDP growth could be as low as negative 4 percent.
"The economy has taken a turn for the worse, big time," Allen Sinai, chief global economist for Decision Economics, told the New York Times. "Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters. The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere."
Paul Ashworth, of London-based Capital Economics Ltd, told Reuters he expects the US economy to shrink by 1.5 percent in 2009 and remain stagnant in 2010. "Overall, we expect the level of GDP to shrink by a total of 2.5 percent, which would make this one of the worst recessions since the Great Depression," he said.
Labor Department data showed 479,000 new jobless claims in the week ending October 25, steady from the week before. Economists generally regard a figure above 400,000 as an indicator of recession. Reuters added: "Analysts estimated so-called continued claims would be 3.74 million. It was the 27th straight week that claims were above three million in a sign that the ailing economy is making it harder for US workers to find employment."
An estimated 760,000 jobs have been slashed this year, and the rate of layoffs is accelerating.
Yesterday saw the following job cuts and corporate earnings announcements:
* Credit card giant American Express is to lay off nearly 10 percent of its workforce, or 7,000 workers, as part of a restructuring plan aimed at reducing costs by $1.8 billion by the end of 2009.
* Electronics and phone company Motorola reported a $397 million loss for the third quarter, largely due to falling mobile phone sales. It plans to sack an additional 3,000 staff.
* Computer gaming company Electronic Arts will cut 6 percent of its workforce amid falling retail sales that delivered a net loss of $310 million for the quarter.
* Photographics company Eastman Kodak released lower than expected quarterly profit figures and said it would eliminate an unspecified number of jobs in coming months.
* Broadcaster CBS recorded a $12.6 billion quarterly loss after it wrote down the value of its media assets by $14 billion.
* Paper and packaging company International Paper reported a 31 percent quarterly profit decline compared to 2007. The company laid off workers and closed plants earlier this year in Georgia, California, Ohio and Oregon, but warned that falling demand "could mean more capacity cuts."
Job losses continue to mount in the devastated auto industry. Three Michigan-based auto suppliers made layoff announcements yesterday:
* Visteon Corp., a Ford auto-parts spin-off, said yesterday it suffered a $188 million net quarterly loss. The company cut about 2,000 hourly and salaried jobs in the last three months, and plans to cut its salaried workforce by a further 800.
* TRW Automotive Holdings Corp. posted a third-quarter loss of $54 million. CEO John Plant said the company would continue to "right size" its workforce. About 1,000 salaried positions are being cut, with the majority to take effect by the end of this week.
* Citing "recessionary conditions in North America and increasing weakness in Europe," Lear Corp. reported a $98 million quarterly loss. The company said it aims to save $150 million over the next year through layoffs, but has not yet announced the number of jobs to be cut.
Layoffs in the auto sector are set to massively escalate in the aftermath of a potential government-funded merger between General Motors and Chrysler.
Kimberly Rodriguez of the accounting firm Grant Thornton LLP told the Wall Street Journal she expects such a merger to result in between 30,000 to 40,000 Chrysler job losses, with another 50,000 auto suppliers' jobs affected. The auto analyst predicted that 7 of Chrysler's 14 auto assembly plants would close and 19 of the company's 26 car models would be eliminated.
If the merger deal failed to go through, Rodriguez said, Chrysler could collapse, in turn leading to bankruptcies of auto suppliers upon which GM and Ford also depend. "What you would have is a shutdown of the auto industry," she concluded.
Rescue plan helping PNC take over once-proud bank
November 1, 2008
After a 17-year run in Indianapolis, National City’s trademark green signs are set to be replaced with the blue of Pittsburgh-based PNC Financial.
The $5.6 billion deal—hurriedly arranged at the government’s urging—likely won’t mean big changes for customers and employees of the bank in Indianapolis. But it does raise questions about the government’s growing involvement in banking and marks the end of an era for National City Corp.—a bank founded in 1845 that survived the Great Depression and is credited with writing the first mortgage in the United States.
“It’s just sad,” said Randy Wilson, a retired banking attorney who helped orchestrate the sale of locally based Merchants National Bank to National City in 1991. “It’s sad a proud bank like National City ended up in the situation they’re in.”
The Cleveland-based bank was a gold standard for years, but fell into the trap of subprime mortgages. On Oct. 21, just three days before National City revealed the deal with PNC, it reported a $789 million quarterly loss—the bank’s fifth in a row—and announced plans to lay off more than 4,000 employees.
Many banking observers are uncomfortable with the way the U.S. government determined the fate of National City. It excluded the bank from its $750 billion rescue plan while offering large cash infusions to competitors, including money to finance PNC’s acquisition of National City. The government kicked in $7.7 billion to PNC, helping to create what will be the nation’s fifth-largest bank by deposits and fourth-largest by number of branches.
The bailout was never sold to the public as a means to pay for one bank to acquire another on the cheap, said John Jay, a senior analyst at Boston-based research firm Aite Group. Rather, the government was pitched as an infusion of capital to help banks restart lending. The deal values National City at just $2.33 per share, a 19-percent discount to the previous day’s closing price.
“They’re just making a bigger, stronger bank more so,” Jay said. “A bank without government help basically has a target on their back. It definitely can be viewed as a strong-arm tactic.” Wilson, the former Merchant’s executive, also has concerns.
“This is a whole new world of slippery slopes,” he said. “My Libertarian instincts tell me it’s awful; however, it could be a whole lot more awful to let the whole thing go down.” Wilson figured National City would survive after it raised $7 billion to shore up its balance sheet back in April, before credit markets seized up. But even a few years ago, when banks were lending like crazy, it didn’t take an expert to see that rapidly rising home prices wouldn’t be sustainable. “It’s hard to even have an idea what’s going on because there’s such uncertainty in the credit portfolio of all of these banks,” Wilson said. “My sense is there’s some overreaction going on.” The program designed to buy distressed assets instead is making strong banks stronger, helping them take out weaker competitors, said Bob Jones, CEO of Evansville-based Old National Bancorp.
Jones is happy his bank made the government’s roster of strong banks. Old National is expecting $100 million to $160 million from the program.
The bank will consider acquisitions, but ultimately feels a responsibility to lend more in its markets and help drive economic development.
“As taxpayers, you’d expect us to redeploy that money,” Jones said.
Despite the controversy, the deal makes some sense for customers and employees of National City in Indiana, said Bart Narter, senior vice president of the banking group at San Francisco-based consulting firm Celent.
There is virtually zero branch overlap, since National City has 178 branches in the state, and PNC has only eight, in southern Indiana. National City has the second-most Indianapolis-area branches with 77, behind J.P. Morgan Chase’s 91. The bank has 1,400 employees locally. And National City customers get a more stable lender with a broader reach, without the lingering questions about the bank’s viability. Depositors pulled $1.3 billion out of accounts at National City during the most recent quarter.
In Pennsylvania and Ohio, the proposed merger looks more grim for bank employees. In Pittsburgh, PNC and National City are No. 1 and No. 2 in size, together making up more than 50 percent of the market’s deposits. That likely will mean branch closings or spinoffs and more layoffs. Many of the job cuts will be in the headquarters cities—Cleveland and Pittsburgh, Narter said. Despite speculation that another bank still might swoop in and offer more for National City, Narter doubts such a move. And other analysts, including those at Standard & Poor’s, agree that complications that could derail the deal are unlikely.
“Banks are not dying to get into the hot growth markets of Pennsylvania, Ohio and Indiana,” Narter said, sarcastically. “The world isn’t beating the door down to establish branch networks in the Rust Belt.” •
26th Conference of
All India Bank Employees’ Association
Inaugural Public Session and
Massive Procession by 10,000 bank employees
from Rajghat to Parvana Nagar, Ramlila Grounds
At 3-00 pm on 15th November, 2008