Week of December 22, 2008
Whenever available, links to the full article are provided at the end of each abstract. In some cases, content may not be available online, or may require an individual subscription to access.
Risk News Archive
Credit Risk
Developers Ask U.S. for Bailout as Massive Debt Looms
Companies Seeking Loan Amendments Up Sharply This Year
Discount Window Lending Falls 11 Percent
Market for Commercial Paper Shuffles Along
Debate: Is Credit Frozen or Flowing?
Businesses Tapping Credit Lines, But New Bank Loans Drying Up
Construction Braces for Painful 2009
Obama Works to Overhaul TARP
Business Bankruptcies Surge by 61 Percent
Reassessing Risk
Fitch Has Dim View on Commercial Property Sector
Banks Sending Out SOS on Impairment, Says Cox
Further Deterioration of U.S. Finance Companies Expected—S&P
Mortgage Troubles Are Moving Downtown
Market Risk
Economic Indicators Drop the Most Since '91
Fed Sees Some Success in 0 Percent Ploy
Federal Reserve Lowers Federal Funds Rate
As Rates Near Zero, The Fed Turns to Unproven Methods
The Fed Still Has Plenty of Ammunition
Operational Risk
Web and Branch Sign-Ups Give Small Banks Lift
Merger Guide for the Perplexed
A Rewrite for Writedowns?
Rethinking Capital
Why Organic Is Better
Enterprise Risk
ID Fraud Resolution? Yes. But Banks Need to Prevent It.
Outsmarting Data Thieves
IT Spend Will Be Slow and Spotty in '09
Securities Lending
Dinallo: Securities Lending Needs Attention
Consumer Lending
Bair Disputes OCC's Redefault Data on Mods
Pelosi Pushing Mortgage Relief
Home Buyers Turn to USDA for Mortgages
U.S. Aims to Rein in Credit-Card Rates
Concerns About Housing's Rising Star
More Seniors Consider Reverse Mortgages to Finance Retirement
Credit Risk
Developers Ask U.S. for Bailout as Massive Debt Looms
Wall Street Journal (12/22/08) P. A1; Wei, Lingling; Hilsenrath, Jon
With a record amount of commercial real estate debt coming due, the nation's largest property developers are warning Capitol Hill lawmakers that thousands of office buildings, shopping malls, hotels and other commercial buildings are destined for default, foreclosure, and bankruptcy. Foresight Analytics LCC calculates that some $530 billion of commercial loans will be coming due for refinancing in the next three years—at a time when credit has dried up and cash flows from commercial space are waning. As a result, building owners have joined together and are lobbying policymakers to be included in a new $200 billion loan program initially created by the government to preserve the market for car loans, student loans, and credit card debt. If commercial property is included, they contend, banks might have an incentive to make more loans to developers since they would be able to repackage and sell them more easily to investors with the assurance of government backing. Also, commercial realty industry representatives continue to urge legislators to explore the idea of establishing a separate program aimed at boosting lending to commercial properties exclusively.
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Companies Seeking Loan Amendments Up Sharply This Year
Financial Week (12/19/08); Monks, Matthew
A report from Standard & Poor's Leveraged Commentary & Data (LCD) News finds that the number of companies seeking amendments to their loan agreements surged from 39 in 2007 to 142 so far in 2008, and 56 amendment seekers pursued relief from Oct. 1 to Dec. 19, when the momentum of the credit crisis increased. Troubled companies have been forced to ask bankers to relax loan terms to avoid defaulting, and many firms have come up against, or are in danger of coming up against, restrictions that prohibit their maximum amount of debt in relation to earnings, and amount of cash on hand for covering interest payments. Lenders, meanwhile, have exploited the amendment wave to raise interest rates and petition for higher fees, says LCD News. The average amendment seeker paid a fee of 200 basis points to relax loan agreements, while the average price of amended loans increased to Libor plus 486 basis points in 2008, up from Libor plus 286 basis points at the beginning of the fourth quarter. A disclosure of weak Christmas sales by merchants and other businesses is expected to compel borrowers to request even more amendments in the first quarter of next year.
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Discount Window Lending Falls 11 Percent
American Banker (12/19/08) P. 20; Sloan, Steven
Total lending through the Federal Reserve Board's discount window slipped 11.4 percent from a week earlier to $233.1 billion in a continuance of its decline. A 0.3 percent increase in traditional borrowing by commercial banks was recorded, for a total of $90.2 billion on Dec. 17. Loans by investment banks came to $47.3 billion, representing an 8.3 percent decline. The central bank reported that it had extended $41.6 billion by Dec. 17 through the discount window in support of American International Group (AIG), while another $19.5 billion was loaned to AIG via a limited liability corporation set up by the Fed through the Federal Reserve Bank of New York. Lending against asset-backed commercial paper held by money market mutual funds plunged 20.3 percent to $27.4 billion, and no secondary credit loans to distressed institutions or seasonal credit loans to banks in rural or resort areas were made.
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Market for Commercial Paper Shuffles Along
CFO (12/08); Taub, Stephen
Federal Reserve data indicates that total commercial paper rose by 8.3 billion to $1.709 trillion for the week ended Dec. 17, which was its smallest weekly increase in more than a month. Financial issuers recorded virtually all the gains, rising by over $15 billion, which was still less than 50 percent of the total increase of the prior week. The financial sector currently accounts for over 44 percent of the total outstanding commercial paper issues, while outstanding paper issued by nonfinancial companies declined by 7.3 billion and asset-backed paper remained unchanged. The total commercial paper market is still down from $1.82 billion in September and the $2.2 trillion peak from the summer of 2007. An improvement in the market for lower rated paper is being observed, with average daily income of A2/P2 nonfinancial paper having risen by upwards of 40 percent since the end of November.
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Debate: Is Credit Frozen or Flowing?
American Banker (12/17/08) P. 1; Dobbs, Kevin
The availability of credit is a matter of debate, as reports from different institutions support conflicting conclusions. A recent Celent report indicates that lending in the interbank market has grown, while bank loans to companies and consumers rose this year, according to data from the Federal Reserve. JPMorgan Chase CEO James Dimon also asserted that his firm boosted interbank and company/consumer lending in recent months. Other experts are anticipating a decline in credit availability in the current quarter and early 2009. "In nooks and crannies loans are growing ... but there has been a tremendous slowing in the growth of credit and a tremendous increase in the spreads when they are being forced to borrow," stated Comerica Inc. chief economist Dana Johnson in a recent interview. In another interview, Robert B. Albertson with Sandler O'Neill & Partners said that many banks' balance sheets still contain bad assets in spite of the possible increase in lending. "Banks' ability to sell anything into the secondary market—that's the real problem," he noted. Albertson argued that the Treasury should have purchased hard-to-move mortgage-backed assets through its $700 billion Troubled Assets Relief Program, as it had originally intended. "Banks have really tightened underwriting standards, and access to credit is not what it was," reported Stifel, Nicolaus & Co. analyst Anthony Davis. "And the growth in loans, while up for the year, is clearly weakening in November."
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Businesses Tapping Credit Lines, But New Bank Loans Drying Up
Investor's Business Daily (12/16/08) P. A1; Alster, Norm
Hoping to get the nation's banks to start lending again, the federal government called on taxpayers to foot a rescue bill worth hundreds of billions of dollars earlier this fall. Although commercial and industrial (C&I) loans on the books of major banks did increase in September and October, newer research shows lending to such customers is back on the decline. The spike in loans was primarily due to increased drawdowns of existing credit lines and offered further proof that firms are being shut off from typical financing, a pair of Harvard Business School professors concluded in a recent working paper. Mark Kiesel, an executive and portfolio manager at bond fund giant Pimco, added, "The drawdowns are one factor that is keeping the banks from recirculating the money from the government back into the real economy."
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Construction Braces for Painful 2009
Washington Post (12/17/08) P. D1; Shin, Annys
With the nation's economy mired in recession and building loans increasingly elusive, the pipeline for new nonresidential projects is quickly emptying and could put as many as 400,000 additional U.S. workers out of a job in 2009. Since the credit squeeze hit hard in September, investors have been fleeing from any debt backed by loans to office buildings, industrial facilities, or apartment communities, freezing financing for new projects. Morningstar senior equity analyst Joel Bloomer laments, "The only spending we will see in nonresidential [next year] is what has already started." Bloomer's dire prediction is in tune with research conducted by the American Institute of Architects, whose Architecture Billings Index—which attempts to project nonresidential construction spending nine to 12 months down the line—likely reached an all-time low in November for a second consecutive month.
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Obama Works to Overhaul TARP
Wall Street Journal (12/17/08) P. A3; Solomon, Deborah
While U.S. Treasury Secretary Henry Paulson has concentrated on equity investments to remedy the financial crisis, sources say the Obama administration is formulating a broad plan with numerous strategies. Though the plan will not be unveiled until Obama officially becomes president, it likely will include additional capital infusions for banks, a new market for illiquid assets, and programs to help struggling homeowners. Stephanie Cutter, a spokesperson for Obama, says, "We are looking at a number of initiatives that will allow us to move aggressively and responsibly to address the economic and financial crisis both on Wall Street and Main Street, including programs to provide targeted foreclosure relief."
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Business Bankruptcies Surge by 61 Percent
CFO (12/08); Taub, Stephen
U.S. business bankruptcies rose 61 percent in the third quarter for a year-over-year increase from 7,167 to 11,504. Between the third quarter of 2007 and the third quarter of 2008, Chapter 11 business filings surged 76 percent from 1,410 to 2,485, while Chapter 7 business filings increased 65 percent from 4,816 to 7,927. The American Bankruptcy Institute (ABI) reports that the 29,960 business bankruptcies filed in the first nine months of 2008 surpassed the total for all of last year. "The dramatic spike in both personal and business bankruptcies reflects an economy in distress, with worried consumers over extended and unable to supply the spending typically needed to keep the national economy going," stated ABI executive director Samuel J. Gerdano. Business filings for the trailing 12 months ended Sept. 30 came to 38,651, a 49 percent increase from the 25,925 bankruptcy petitions in the prior trailing 12 months. The latest trailing 12 months saw more than 1 million bankruptcy filings, an over 30 percent climb from the same period last year.
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Reassessing Risk
Time (11/17/08) Vol. 172, No. 20, P. GB1; Kiviat, Barbara
Modern technology allowed financial engineers to develop new ways to quantify, package, and sell risk. However, an analysis of the ongoing global financial crisis shows that risk was mismanaged. Risk Management Association CEO Kevin Blakely said the root of the problem was that the industry relied too much on financial tools at the expense of human judgment. Many financial firms relied almost exclusively on outside ratings agencies, and the ratings agencies models failed because they did not include outside events like declining home prices. Although some managers recognized the housing market was in an asset bubble, their concerns were often ignored because companies were successful during a boom market. Companies that did remove their investments from risky structured products were criticized for losing out on profit. Executives are now promising that the financial crisis will lead to long-lasting change in risk management practices. CEOs have vowed to personally involve themselves in corporate risk management and develop a corporate culture of risk awareness. For companies taking part in the U.S. Treasury Department's recapitalization program, executive compensation packages must not encourage unnecessary and excessive risk taking.
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Fitch Has Dim View on Commercial Property Sector
Associated Press (12/10/08)
Fitch Ratings lowered its industrywide outlook for commercial property owners on Dec. 10, citing tight credit markets and a worsening economic outlook. The rating agency downgraded its outlook for the REIT sector from "stable" to "negative." The report specifically applies to equity REITs that invest in everything from shopping centers to office complexes. Fitch analyst Steven Marks writes that such companies "are situated at the nexus of a recessionary economy, weakening property fundamentals, near-frozen debt capital markets, and stock prices that are, on average, approximately 60 percent below their peak level." Analysts expect the recession likely will only make matters worse, especially for office buildings that will feel the effect of job cuts and retailers that will bear the brunt of falling consumer spending. Apartment and health-care property investors have a better outlook, the Fitch report finds. Specifically, apartment operators still have financing from Fannie Mae and Freddie Mac, while health-care companies will continue to be in demand as a result of the aging baby boomer population.
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Banks Sending Out SOS on Impairment, Says Cox
Financial Week (12/08/08); Cole, Marine
Speaking at an annual conference on developments at the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board, SEC Chairman Christopher Cox said on Dec. 8 that banks may need additional guidance for assessing nontemporary impairment. He also advocated the independence of accounting standard setters. The commission is performing a congressionally requested study on the role mark-to-market accounting plays in bank failures, and Cox disclosed some early findings at the conference. He pointed out, for example, that investments held by banks that are typically marked to market comprise a small portion of banks' total investment portfolios. Cox said that most institutions hold loans that do not usually have to be accounted for at fair value unless they are subject to nontemporary impairment. He observed that the SEC study found that institutions are encountering problems in evaluating nontemporary impairment, and said that additional guidance may be necessary, while more general additional guidance on fair value could also be helpful to market participants. In reference to the Financial Accounting Standards Board, Cox reported that while the current economic turmoil is challenging the role of accounting standards and accounting professionals, "we must continue to protect the independence of the accounting standard-setting process."
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Further Deterioration of U.S. Finance Companies Expected—S&P
Seeking Alpha (12/09/08)
Sixteen out of 31 U.S. finance companies rated by Standard & Poor's (S&P) Ratings Services have been downgraded over the past two months while four have applied to become bank holding companies, and the ratings agency anticipates further deterioration. S&P notes, however, that the outlook might brighten to the extent that finance companies can leverage government stabilization actions. CIT Group and GMAC have applied to become bank holding companies so they can avail themselves of less expensive funding and government debt guarantees. S&P projects that losses by commercial lenders will gain momentum, particularly in commercial real estate. The ratings agency also observes that businesses' reliance on banks is growing as asset-backed securities and commercial paper markets remain virtually frozen; some business development companies may have difficulty fulfilling minimum net-worth agreements after taking large writedowns on their investment portfolios; and finance companies involved in residential mortgage, credit cards, and auto loans continue to be bogged down by asset quality.
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Mortgage Troubles Are Moving Downtown
New York Times (12/10/08) P. B6; Pristin, Terry
To date, Realpoint reports that the delinquency rate for loans that were packaged and sold to investors as commercial mortgage-backed securities and that are at least 30 days behind is only 0.63 percent. Analysts say the low default rate is deceptive, as most of the loans written between 2005 and 2007 were interest-only so monthly payments were artificially low for the first few years. The unpaid balance of delinquent loans—$5.3 billion as of October—has soared by 70 percent since the first of the year. Delinquencies are expected to increase in 2009—with many more delinquencies and defaults expected the following year, when five-year interest-only loans issued in '05 start to mature and borrowers are unable to refinance due to tight credit conditions.
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Market Risk
Economic Indicators Drop the Most Since '91
New York Times (12/19/08)
On Dec. 18, The Conference Board revealed its index of leading economic indicators dipped 0.4 percent in November 2008, which is slightly less than the forecasted 0.5 percent drop. The decline markets the second month in which economic weakening continued. The leading indicators examined by the group include stock prices, building permits, and unemployment claims. Unemployment benefit applications rose, while share prices and building permits fell last month. Consumers and businesses can expect up to six months of rough economic times, according to the report. Meanwhile, economists say that the report could have been worse if federal bailouts did not increase the money supply.
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Fed Sees Some Success in 0 Percent Ploy
Wall Street Journal (12/18/08); Rappaport, Liz; Varghese, Romy; Simon, Ruth
The U.S. Federal Reserve has slashed interest rates to near 0 percent, and the move has spurred some fixed-income investors to place bets on riskier assets among high-quality issues, which pay 6.5 percentage points more over Treasury bonds. Additionally, experts say mortgage rates and yields on corporate debt are falling. Even junk bonds showed improvement after the Fed announcement, though some investors remain cautious about default increases for 2009. Rates on 30-year fixed mortgages dipped another 0.25 percent to 5.06 percent. Although a number of investors continue to purchase Treasury bonds even with their low yields, experts note that a modicum of confidence has returned to the market. Other markets showing signs of improvement include the credit-default-swaps index and debts issued by financial firms.
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Federal Reserve Lowers Federal Funds Rate
Federal Reserve (12/16/08)
The Federal Open Market Committee decided Dec. 16 to lower the federal funds rate to between 0 percent and 0.25 percent. Reasons for the move include a further weakening of the economy and labor market. Although inflationary pressures have diminished significantly, declines in prices of energy and other commodities suggest that inflation will moderate in the coming fiscal quarters. The Federal Reserve will continue to employ all tools at its disposal to stabilize the economy, stimulating it through open market operations and other measures that maintain the Fed balance sheet at a high level.
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As Rates Near Zero, The Fed Turns to Unproven Methods
New York Times (12/15/08) P. B6; Andrews, Edmund L.
The Federal Reserve is poised to enter a new era of cheap money, with policymakers expected to lower their target for the overnight federal funds rate to an all-time low of 0.5 percent. Because it cannot reduce its benchmark interest rate below zero, the Fed will have to adopt an approach called "quantitative easing"—which it has virtually no experience with—that involves injecting money into the economy instead of aiming at an interest rate. Morgan Stanley Chief Economist Richard Berner notes, "You don't have a whole lot of historical precedent for knowing how this is going to work and what the unintended consequences could be." These risks include yet another speculative bubble or higher inflation.
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The Fed Still Has Plenty of Ammunition
Wall Street Journal (12/15/08); Mishkin, Frederic S.
Columbia University Graduate School of Business Professor of Economics and Finance Frederic Mishkin says that despite arguments that tighter monetary policy has done little, if anything, to stave off economic crisis, the economic fallout would have been much worse had the Federal Reserve not taken action to lower interest rates. In this opinion piece, he says, "If the Fed had not aggressively cut rates, the result would have been both higher interest rates on Treasury securities and a substantial increase in credit risk on other assets. Interest rates relevant to household and business spending decisions would then have been much higher than what we see currently." However, he warns that monetary policy cannot be the only tool used by the government to correct the economic crisis. Even the capital infusions offered by the Fed have not been enough, which is why Mishkin suggests the passage of a fiscal stimulus package. Any fiscal stimulus package must have short term impact without long term, unsustainable tax burdens, he says. Mishkin also warns the Fed runs the risk of spurring hikes in inflation if it fails to warn businesses and markets that interest rates could increase when financial markets begin to recover; without this warning, markets could "destabilize inflation expectations," he says.
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Operational Risk
Web and Branch Sign-Ups Give Small Banks Lift
American Banker (12/22/08) P. 11; Berry, Kate
In an attempt to boost market share and leverage branch networks, small and midsize banks and credit unions are implementing technology to handle online mortgage applications. Such technology allows them to expand their reach without increasing their payroll, and some are eliminating high-commission loan officers and instead offering lower commissions to staff who assist customers with applications at branch locations. "We wanted to capture the person at the point of inquiry, not have them take the application home, because they might go to another bank," notes Brian Hedge of Hartford, Conn.-based Liberty Bank. Credit unions' share of the mortgage market rose to 4.5 percent from 2 percent over the past five years, according to Mark Wilburn, chief lending officer at Bartlesville, Okla.-based 66 Federal Credit Union.
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Merger Guide for the Perplexed
CFO (12/08); Leone, Marie
The Financial Accounting Standards Board (FASB) proposes to amend FAS 141(R), which governs mergers and requires companies to estimate and recognize the fair value of contingent liabilities in most scenarios. The proposed revisions would grant companies more latitude in determining whether those losses could be measured using fair value accounting. The correction was proposed because the rule presented two key impediments for acquirers: classifying contingent liabilities as contractual or noncontractual and coaxing lawyers to disclose proprietary information related to lawsuits in order to estimate the liability. The FASB's proposed fix makes it unnecessary for companies to ascertain whether a contingent liability is contractual or noncontractual. Furthermore, an acquiring company still has to recognize the fair value of a potential liability on the acquisition date, but only if it is possible to reasonably determine the contingent loss.
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A Rewrite for Writedowns?
American Banker (12/16/08) P. 1; Adler, Joe
Securities and Exchange Commission (SEC) Chairman Christopher Cox rejected a reversal of mark-to-market accounting rules, leaving the door open to a refinement of the rules' application, which some say would still be an improvement. While Cox noted in a recent speech that fair-value accounting was "a meaningful and transparent measure of an investment," he added that additional clarity in the standard's application "in inactive or illiquid markets" was necessary. In mid-October the SEC urged the Federal Accounting Standards Board (FASB) to loosen the rules for what classifies an "other than temporary impairment" in certain securities, and Cox stated that "it is critical that FASB complete its analysis of the SEC's request for expeditious improvement in the impairment model." Industry representatives have also been urging greater flexibility in how banks value securities when there is no existing market for them, and institutions' preference is the use of internal models to determine a security's resale value instead of employing the price of other similar assets. The Shadow Financial Regulatory Committee stated last week that FASB should mandate that banks supply more information about their models, which could assuage worries many auditors have about being sued if they diverge from strict mark-to-market accounting. Observers reported that the headache of fair-value accounting could also be eased by having banking regulators be more flexible in their assessment of an institution's capital ratios. However, mark-to-market accounting's most fervent advocates caution that fair value could be weakened by significant amendments. Professor Darrell Duffie at Stanford University's Graduate School of Business said investors require undiluted data about volatility in the market to make their own informed decisions. "Advocates for moving away from mark-to-market accounting suggest that it would be difficult for investors to deal with that information," he explained. "Investors would be much better off knowing from what benchmark they need to adjust."
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Rethinking Capital
CFO (11/08) Vol. 24, No. 10, P. 81; Ryan, Vincent
The ongoing financial crisis is forcing financial leaders to rethink their companies' capital structures. Banks are hesitant to lend money to anyone, and the commercial paper market is frozen. One expert said that CFOs will have to unlearn everything they learned over the past 10 years because of the previously overheated market and begin thinking like they did more than five decades ago. Several companies have opted to draw on revolvers, even though they subject themselves to interest-rate risk. Renewals are expensive and higher default rates on receivables has forced some companies to make an upfront cash payment to make up for inadequate collateral. Companies interested in long-term capital access must seek out channels other than bank debt. For example, McCormick and Co. has managed to maintain an investment-grade rating and decided to pay down debt instead of sitting on cash. Companies that continue to record strong sales figures can rely on equity to solve situational financing problems. However, experts say that few companies will be willing to issue new equity due to unfavorable terms for convertibles. Selling marginal assets that are worth more to a buyer than to the company is another option for firms in need of capital.
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Why Organic Is Better
Business Finance (12/08) Vol. 14, No. 12, P. 12; Cummings, John
The financial downturn and credit crunch have reduced the number and size and merger and acquisition (M&A) deals, leaving companies to rely on organic growth. This could be beneficial, as evidence shows that M&A deals actually diminish shareholder value. A recent analysis of 175 mergers showed that sales growth decreased by an average of 6 percent and shareholder value creation dropped by 2.5 percent. In most cases, the acquirers also saw their risk profiles and cost of capital rise. Although organic growth has a reputation of being reliant on a charismatic leadership style and a corporate culture of innovation, a recent Brilliont study links organic growth efficiency with the creation of shareholder value. The study reviewed the financial performance of all S&P 500 companies between 2002 and 2007, removing revenue growth attributed to growth in a specific industry and revenue gained through acquisitions. Analysts were left with a figure for organic revenue, which was then divided by the amount of discretionary expenses to yield the company's organic growth multiplier. Companies with a consistently high organic growth efficiency were more likely to record higher shareholder returns. Although major companies have more cash to invest in organic growth efforts, smaller organizations can be competitive by spending their money efficiently. Over a few years, companies can improve their organic growth efficiency by 10 percent, possibly resulting in millions of dollars in extra revenue.
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Enterprise Risk
ID Fraud Resolution? Yes. But Banks Need to Prevent It.
Bank Technology News (12/01/08); Sraeel, Holly
Risk management practices that focus on prevention, awareness, and resolution of customer ID fraud have paid off for financial institutions in recent years, according to the Banking Identity Safety Scorecard issued by Javelin Strategy & Research. Resolving an ID fraud case costs a bank approximately $5,574 per affected customer and takes little more than one full day to resolve, an improvement over the past two years. Moreover, the top 50 percent of U.S. banks that accept deposits have collectively improved nine percentage points in their strategies for spotting and resolving ID fraud cases, according to the scorecard. One reason for the significant improvements in resolution service that banks have experienced recently is the ability of consumers to play a larger role in protecting and monitoring their assets through mobile and online banking. The banks and financial institutions surveyed all require several points of authenitification for online banking, though only a low number of banks that offer mobile and telephone banking—28 percent—offer multi-factor authenitification.
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Outsmarting Data Thieves
Green Sheet (12/09/08)
Hackers have adjusted their intrusion methods to access more carefully shielded information, despite the fact that a recent Trustwave survey found that businesses have improved their protection of customer data. The survey found that nearly 87 percent of processors in North America no longer store card verification value or card identification number data. However, cybercriminals have shifted their focus from stealing cardholder data in storage to stealing it while it is in transit. Trustwave recently uncovered instances of data stolen from computers' RAM, which they say is problematic because merchants can use applications that meet the Payment Application Data Security Standard and still end up compromised. The security firm considers payment applications to be the most vulnerable aspect of merchant payment systems, and many victims of breaches employ legacy systems or have not securely configured their systems.
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IT Spend Will Be Slow and Spotty in '09
Bank Technology News (12/01/08)
Analysts are offering a variety of predictions for IT spending in the banking industry next year. For instance, TowerGroup is predicting that IT spending by banks will grow just 0.1 percent, down from a 0.6 percent increase in 2006. Meanwhile, Deloitte Consulting is expecting IT spending by banks to be driven by investments in risk management, deposit gathering, and regulatory compliance. Finally, Financial Insights is predicting that IT spending by banks will fall 4 percent next year and will continue to decline for the next five years.
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Securities Lending
Dinallo: Securities Lending Needs Attention
National Underwriter (Life and Health Financial Services Edition) (12/10/08); Connolly, Jim
New York Insurance Superintendent Eric Dinallo is recommending that regulators investigate securities lending programs. Speaking before the winter meeting of the National Association of Insurance Commissioners, Dinallo said operating securities lending programs can be a "wonderfully smart use of assets but also [can leave companies] vulnerable to extreme stress." American International Group Inc. used much of the cash it received through securities lending to invest in mortgage-backed securities, which took a hit when the real estate market faltered. Dinallo said the regulatory accounting system for insurance companies' securities lending programs is not sufficient. "The regulator sees the assets; which the company still owns; but does not get to see what happens to the cash. One could have a reasonable discussion over whether insurers should be involved in this activity," Dinallo stated. He concluded that if regulators are trying to build a "regulatory moat" around insurance companies, then securities lending programs can be likened to a "drawbridge" that connects insurers to other financial services area. Tom Hampton, District of Columbia Insurance Commissioner, said he understands the concerns about the programs but recommended that regulators proceed with caution. "We want to be careful," Hampton said. "We don't want to disadvantage insurance companies in the financial marketplace."
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Consumer Lending
Bair Disputes OCC's Redefault Data on Mods
American Banker (12/18/08) P. 3; Adler, Joe
In a speech to the New America Foundation, Federal Deposit Insurance Corp. Chair Sheila Bair took issue with a report from Comptroller of the Currency John Dugan claiming that over 50 percent of loans modified in the second quarter redefaulted within six months. Bair said the report calls any loan with a change in contract terms a modification and fails to include mortgages restructured by Fannie Mae and Freddie Mac. She also pointed out that delinquent generally means 60 days past due; but the report looks primarily at 30-day delinquencies, which often become current again. Bair noted that the OCC recorded a much lower 60-day delinquency rate, at 35 percent.
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Pelosi Pushing Mortgage Relief
Washington Post (12/16/08) P. D1; Montgomery, Lori; Cho, David
House Democrats are considering legislation that would force the Bush administration to meet the homeownership assistance goals of the $700 billion financial rescue package. House Speaker Nancy Pelosi (D-Calif.) wants Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to draft legislation that "insists that the provisions of the law be honored before we release any more funds." The companion bill could lower the fees of the Hope for Homeowners program as a way to get more lenders to forgive borrowers' debt in exchange for government insurance against default. Frank also wants to fund a version of the Federal Deposit Insurance Co.'s plan to modify mortgages.
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Home Buyers Turn to USDA for Mortgages
Wall Street Journal (12/16/08) P. D1; Timiraos, Nick
The U.S. Department of Agriculture Rural Development Guaranteed Loan program has become more popular with borrowers who want to obtain a home with no money down during the credit crunch. Volume for the obscure financing program has nearly doubled as $7 billion in loans was insured during the 2008 fiscal year ended Sept. 30—up from $3.6 billion the previous year—and $1.7 billion in loans has been insured in October and November alone. USDA loans are not as risky as subprime loans, as 11.35 percent of the department's loans were delinquent in 2008 and 1.4 percent went into foreclosure. According to the Mortgage Bankers Association, prime loans have a 4.3-percent delinquency rate and a 1.6-percent foreclosure rate, and subprime loans have a 20-percent delinquency rate and a 12.9-percent foreclosure rate.
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U.S. Aims to Rein in Credit-Card Rates
Wall Street Journal (12/15/08) P. A3; Paletta, Damian
After decades of loose regulation that gave credit card issuers free reign to inflate borrowing costs for millions of existing customers, federal watchdogs are gearing up for a crackdown on the industry. Stringent new standards slated for release on Dec. 18 coincide with a powerful economic recession that has closed off access to credit for students, businesses, and homeowners alike. Credit cards have long been considered the easiest kind of short-term loan for consumers to secure from banks, but they also have been the source of thousands of complaints each year—usually tied to late fees and interest-rate hikes. In fact, most of the 60,000-plus comments—a record for any regulatory proposal ever—that the Federal Reserve received for its plan came from consumers complaining about their credit cards. The new rules, drafted in cooperation with the Office of Thrift Supervision and the National Credit Union Administration, will address these issues by barring banks from boosting interest rates on existing balances as long as the cardholder does not fall more than 30 days behind on payments and by requiring banks to give customers a "reasonable" amount of time to make payments, among other provisions. As a result of the new regulation, which is expected to be in place by mid-2010, banks may balk at offering cards with teaser rates that could be more difficult to adjust later; or they could try to increase rates for many new customers to make up for lost income.
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Concerns About Housing's Rising Star
New York Times (12/10/08) P. B1; Meier, Barry