Financial thoughts

The Commodity Futures Trading Commission looks eager to move quickly to implement trading limits on commodity and energy futures, leaving opponents little time to argue that the agency is going too far, too fast.

In response to gyrating oil and commodity prices, the CFTC announced this week it was planning to clamp down on big market players by implementing position limits on all commodity futures contracts of limited supply, focusing especially on energy.

The CFTC said it would hold hearings in the next few weeks to get broad public input before embarking on the reforms. Some analysts had suggested the process could be slow and it would be months before anything new was implemented.

But Bart Chilton, a CFTC commissioner, signaled otherwise.

"We’re looking at a pretty fast timeline," Chilton told Reuters in an interview.

"We’re going to use our authority to the fullest extent possible. That doesn’t mean we’re going to be draconian or go too far," he vowed.

Chilton is only one of five commissioners and cannot predict what the agency will ultimately do. But he would like new proposals for reform to be issued in September and then implemented by late October or November after a period of public comment.

Some industry groups are worried the CFTC won’t be able to fully study the impact position limits could have on the market. They fear limits could actually increase volatility by choking liquidity, while also driving traders overseas.

"I think they feel pretty strongly that they’ve already got this thing sort of teed up and they … know the direction they want to go," Craig Pirrong, a finance professor at the University of Houston, said of the CFTC.

William Black, an economics and law professor at the University of Missouri-Kansas City, said the agency should adopt "a period of experimentation precisely because they haven’t tried" this in the past.

Black noted that while the CFTC appears eager to roll-out some type of reform on position limits, the agency should consider "a number of smaller steps" that begin by collecting data and launching investigations as to whether there is manipulation going on in the marketplace.

Chilton said the CFTC was not overreacting. He said open, public meeting was the right thing to do. He said the CFTC has tentatively scheduled hearings during the last week of July and first week of August.

"As long as we strike a reasonable balance with whatever sort of position that we end up instituting I don’t think we’ll drive folks from the market," he said cash advance online.

Trading firms fearful of losing revenue could mount a fierce opposition to the CFTC’s proposal, which comes on the heels of an Obama administration proposal to Congress to tighten U.S. financial regulation.

Some experts say CFTC Chairman Gary Gensler, dogged by his prior opposition to regulate financial instruments, could use position limits to show Congress he is serious about getting tough on oversight.

"This initiative is an important one for him to keep Congress on his side," said Pirrong.

Greg Mocek, a former chief of law enforcement at the CFTC and now a partner at Washington law firm McDermott Will and Emery, said Gensler’s comments indicate the agency is poised to do as much reform using its current power in hopes of avoiding the legislative process.

"I’m sure they’ve done the research," said Mocek. "Position limits could be implemented without the legislative process. Will they do that remains to be seen."

Currently, the CFTC does not set position limits on oil and other energy contracts, although futures exchanges do. CFTC has position limits on some agricultural contracts.

During the interview, Chilton said he strongly supported looking into position limits for metals, particularly gold and silver.

While some in industry balk at reforms, the CFTC should find broad support in Congress and among farm groups and food companies who complained their traditional hedging practices were upset by big players tossing so much money into futures.

A raft of anti-speculation bills are pending in Congress and the CFTC’s actions have been praised by some lawmakers, especially among Democrats.

"You might see them move before legislation gets done, which I would be for," said Rep. Collin Peterson, House Agriculture Committee chairman. "I think they have the jurisdiction."

But Chilton and others cautioned that position limits are just one piece of the puzzle. Unless over-the-counter trading can be made more transparent, which has been proposed in Congress, those seeking to participate in excessive speculation could flock to these markets. 

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Financial difficulties at commercial lender CIT Group Inc could hurt small businesses that depend on credit to fund their growth and operations, though many of CIT’s units serve an important function and are unlikely to disappear if the company restructures in bankruptcy court.

The company, which lends to small- and medium-sized businesses, is scrambling to devise a plan to assure clients and investors it can work its way out of a deepening liquidity crunch, the Wall Street Journal reported on Sunday.

On Saturday, the paper reported that CIT was preparing for a possible bankruptcy filing.

A CIT spokesman declined to comment on Sunday.

CIT said on Friday it is in active talks with the U.S. government to gain access to a key lending program, but there is no guarantee the Federal Deposit Insurance Corp FDIC will allow CIT to join the Temporary Liquidity Guarantee Program.

The government has made it clear that a possible bankruptcy by CIT is not seen as a systemic risk to the financial system, the Wall Street Journal reported, since other lenders including JPMorgan Chase & Co or Deutsche Bank AG can take on many of the same loans in which CIT specializes.

“I don’t think it (a possible bankruptcy) would have a wide impact. We’re not talking about a systemic issue,” said on Sunday a restructuring adviser with extensive experience working with companies in the financing sector. The adviser declined to be named due to the sensitivity of the topic.

A U.S. Treasury Department spokesman declined to comment on Saturday when asked if the administration might consider coming to CIT’s aid.

If the company does restructure its operations in bankruptcy court, some clients could suffer, though its most important units will survive payday loans with no fax.

“CIT has been an important provider of credit to not only retailers and retail suppliers, but a vast array of businesses for over 100 years,” said Scott Avila, a partner for corporate restructuring adviser CRG Partners, which is not doing business with CIT. “So whatever restructuring they go through, I expect CIT or some portion of CIT to continue in the future.”

In particular, CIT’s factoring business is vital to the retail industry and unlikely to disappear.

Factors buy the right to collect on the invoice of a retailer or other company at a discount to the value of the invoice. Then the factor assumes the risk that the invoice will not be paid.

Still, there could be some pain to the company’s smallest clients in the retail industry.

“It’s a difficult lending environment, and those small retailers that have seen sales slow to a minimum already may have a hard time securing lending sources until spending picks up,” said Melinda Crump, a spokeswoman for Sageworks Inc, which tracks and collates the financials of thousands of privately held U.S. companies, in an email.

Businesses that require substantial working capital depend on credit. Changes in financing options could force small businesses into tough choices such as having to fund a portion of their growth from cash flow until other sources of lending were to become available, she said. 

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WASHINGTON — The Treasury Department is selling its financial stakes in bailed-out banks for one-third less than they’re worth, potentially shorting taxpayers up to $2.7 billion, a bipartisan congressional watchdog said Friday.

The shortfall estimated by the Congressional Oversight Panel concerns warrants, financial instruments that allow Treasury to buy shares of the firms at a set price in 10 years. If the stock prices of the banks go up, as they are expected to do, taxpayers could reap a healthy profit.

Treasury obtained the warrants when it began injecting billions into the nation’s largest financial institutions in October. They were considered a "deal-sweetener" — a way to help taxpayers benefit from the upside of a financial recovery that depended on billions of federal dollars.

But some banks have started to repay the Treasury Department and been allowed to repurchase the warrants, as well.

Twenty-two smaller banks have repaid their bailout money, and 11 of those have repurchased their warrants business card. If the warrants for those firms "had been sold for their true market values, taxpayers would have recovered $10 million more," according to a report Friday from the Congressional Oversight Panel, which was created by Congress to oversee the $700 billion bailout fund.

If warrants in the more than 600 banks participating in the bailout were sold at such a discount, that would mean taxpayers received $2.7 billion less than the panel estimates the warrants are worth.

The Treasury Department, however, said banks, including JPMorgan Chase & Co., think the department’s asking prices for the warrants are too high.

Unable to agree on a price, some institutions are letting the department sell the warrants in public auctions, the department said.

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Failure would be welcome. It’s too bad that the leaders of western powers convening in Italy will do their utmost to pretend to avoid it.

But a G8 summit that ended in an avowed flop would be a forceful incentive for participants to draw the conclusion they should have come to long ago: Scrap the summits.

In the thirty-odd years of the event’s history, the annual meetings have produced no serious decisions or major breakthroughs. What started in the mid-seventies as an informal, pool-side meeting between the leaders of the U.S., U.K., Germany and France has degenerated into a solemn and empty diplomatic celebration of banalities and good intentions. Thousands of reporters waste their days while hundreds of bureaucrats haggle over every comma of every paragraph of the usually watered-down final statement.

The composition of the G8 is a telling sign of its irrelevance. The laws of political niceties and diplomatic balance led to the inclusion of Italy and Canada — but not Spain, for example, probably because it never bothered to ask.

Much worse, it doesn’t include the real economic powers of tomorrow: China, India and Brazil auto car loan. They are participating in another summit, along with Mexico and South Africa, at the same time in the same place.

It’s not that all summits are useless. The London G20 meeting held earlier this year to tackle the financial crisis produced some potentially significant results. Summits can make sense: world leaders should talk with each other face-to-face, informally whenever possible. But the meetings should be seriously pared down, held on an ad hoc basis with a strictly focused agenda.

Unfortunately, inertia prevails. No one seems to be willing to go first in suggesting an end to the annual extravaganzas. Ideally, Silvio Berlusconi’s somewhat farcical handling of the summit’s preparation would serve as the long-awaited trigger. But the odds are that it will take a real disaster before the G8 decides to undo itself. 

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Thanks to a bankruptcy court decision issued late Sunday night, General Motors is close to making a quick trip through bankruptcy. But that doesn’t mean that its reorganization is almost done.

U.S. Bankruptcy Judge Robert Gerber approved plans laid out by GM and the Obama administration for a sale of GM’s more valuable assets to a "new GM," which will retain both the company’s name and its more profitable brands such as Chevrolet and Cadillac.

Many of its liabilities, including contracts with thousands of dealerships and more than $27 billion in debt to bondholders, will remain part of a continuing bankruptcy proceeding for the old GM.

Now renamed Motors Liquidation Co., the old GM will spend at least two to three years disposing of all those liabilities and finishing up the bankruptcy case.

In short, many steps remain before GM has any chance of becoming a competitive, money-making automaker.

Some issues are outside of its control. Tight credit and a poor economy has sent industrywide U.S. auto sales to levels not seen in decades. A recovery in auto sales is crucial for GM (GMGMQ) and Chrysler Group, which recently exited from bankruptcy itself with financing from the government, to return to the black.

No automaker — not Ford Motor (F, Fortune 500), the only U.S. automaker to avoid bankruptcy, not deep-pocketed Toyota Motor (TM) — can make a profit at current U.S. sales levels. In the first six months, Americans have bought only 4.8 million vehicles.

Here’s what’s next for GM as it tries to put its bankruptcy behind it.

Near term

The first step is the creation of the new GM. But that will likely have to wait a bit because Gerber, as expected, put his order on hold for four days. That will give time for the 850 parties to the case that objected to the Obama plan to try to get another federal court to stop it from taking effect.

The same kind of stay was in place when a similar sale was approved in the Chrysler bankruptcy case in June. While the Supreme Court temporarily held up the Chrysler case, it eventually allowed the sale to go through without comment.

Many experts expect that the GM sale will close quickly, even if not in exactly four days.

"There might be a lot of people unhappy, but no one wants to go through the time and expense of fighting it," said Jeffrey Manning, managing director at investment banking firm Trenwith Securities LLP, and an expert in bankruptcy and restructuring.

Once the new GM emerges from bankruptcy, it will be owned 60.8% by Treasury, 17.5% by a union controlled health care trust fund, 11.7% by the Canadian and Ontario governments, and 10% expected to go to the old GM’s bondholders.

Current GM shareholders will be left with no ownership in the new company.

Later this this year

GM intends to shed half of its U.S. brands as it moves forward. Pontiac will be discontinued. Saturn, Saab and Hummer will be sold. The sales were announced since the June 1 bankruptcy filing, but none have yet closed. All three deals are due to close before the end of this year.

The last Pontiac is due to be made in September.

Most GM facilities are now idle because of a regularly scheduled two-week summer shutdown cash advance payday loans. But this year that shutdown was started as early as May for some plants.

By next week, 6 of 15 U.S. assembly lines are due to restart operations, and 11 are set to be back in operation by the week of July 20.

During the bankruptcy, GM identified 16 plants and other facilities that will be closed in the coming years. They were left behind in bankruptcy with Motors Liquidation Co. But most of those plants will continue to make GM cars and products in the near term. Some will not be closed until 2012. The new GM will lease those facilities from Motors Liquidation for as long as they stay open.

The closing of those plants is expected to trim 20,000 workers from GM’s current workforce of about 88,000. Those employees, even those at the plants targeted for closure, will work for the new GM, not Motors Liquidation. Some will be offered jobs that open up at other facilities. But many are expected to leave the company as their plants are closed. Other jobs will be cut through plans to trim salaried staff and through retirements at plants that will stay in operations. By the end of the year, GM U.S. employment is expected to be 68,500.

Before the bankruptcy, GM had received $19.4 billion in federal help. As part of its bankruptcy case, Treasury agreed to pour in an additional $30 billion.

So far, the automaker has received $10 billion to $11 billion of that $30 billion. The rest will be doled out as-needed the rest of the year, Steve Rattner, Treasury’s key auto adviser, told reporters Monday.

2010 and beyond

GM used the bankruptcy to shed agreements with 1,900 of its 6,000 U.S. dealerships.

Unlike Chrysler, which moved to terminate its unwanted dealership before its bankruptcy sale was finalized, GM will keep about 99% of those dealerships to try to have a more controlled wind down of its network.

Some of the dealerships that GM will shed sold Saab, Saturn or Hummer and no other GM brand. Most of the rest of the dealerships will continue to sell vehicles and do warranty work for GM customers into 2010.

GM is staging the dealer closings because they had more than 65,000 cars in their inventories as of May, and the automaker didn’t want to flood the market with unsold vehicles.

Stock in the new GM will not be publicly traded again until 2010 at the earliest. It will need to complete a complex initial public offering — the timing of which will depend on when the market for cars, and for stocks, shows signs of improvement.

"IPOs are difficult to execute when the market is not reasonably robust," said Rattner. He said he hoped that shares could be sold as early as the first half of 2010, but he wasn’t making promises.

Rattner repeated earlier statements that the administration wants to sell its GM stake as soon as possible. But he made clear that it will be awhile.

Dumping its entire stake as soon as GM started trading would depress the stock price. Judging by the history of privatizing government-controlled companies, it is likely to be a multi-year process.

"You can not simply sell it in one day," Rattner said. 

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Stocks tumbled Thursday, with the Dow losing 212 points, after a worse-than-expected jobs report hammered hopes that the economy is close to stabilizing.

The Dow Jones industrial average (INDU) fell 212 points, or 2.5%. The S&P 500 (SPX) index lost 27 points, or 2.9% and the Nasdaq (COMP) fell 49 points, or 2.7%.

The New York Stock Exchange extended trading until 4:15 p.m. ET, so as to allow customers to put through orders that were impacted by system irregularities. The NYSE did not specify what the irregularities were.

Stocks tumbled at the open and remained in the red throughout the session as investors considered the broader implications of the dismal June jobs report.

"The report was kind of a rude awakening and unfortunately I think there’s more to come," said Joseph Saluzzi, co-head of equity trading at Themis Trading.

"People are realizing that the stock market rally doesn’t mean the economy is coming back."

Since bottoming at a 12-year low, the S&P 500 had surged over 40% through June 11. But in the weeks since then, it has lost 5% of that.

Jobs report: Employers cut 467,000 jobs from their payrolls in June, after cutting 322,000 jobs in May, the Labor Department reported Thursday. That made June the first month in four in which job losses rose from the previous month. Economists surveyed by Briefing.com expected 365,000 job losses.

The unemployment rate, generated by a separate survey, rose to 9.5% from 9.4%, short of forecasts for an increase to 9.6%.

"The report was terrible," said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc."It’s telling us that there is a lot more pain than people realize that we are going to have to get through before there can be a recovery."

On the move: Declines were broad based, with all 30 Dow stocks falling, led by oil components Chevron (CVX, Fortune 500) and Exxon Mobil (XOM, Fortune 500). IBM (IBM, Fortune 500), Boeing (BA, Fortune 500), Caterpillar (CAT, Fortune 500), Procter & Gamble (PG, Fortune 500), Johnson & Johnson (JNJ, Fortune 500), United Technologies (UTX, Fortune 500) and Wal-Mart (WMT, Fortune 500) were the other big losers.

Economically sensitive trucking and railroad stocks plunged, dragging down the Dow Jones Transportation (DJT) average by 3.7%.

Financial shares tumbled, including Dow components American Express (AXP, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Travelers Companies (TRV, Fortune 500).

Market breadth was negative and volume was light with Wall Street pros checking out early for the holiday. On the New York Stock Exchange, losers topped winners by over four to one on volume of 733 million shares fast cash advance. On the Nasdaq, decliners beat advancers five to one on volume of 1.95 billion shares.

All financial markets are closed Friday for the Independence Day holiday.

Weak start to new quarter: Stocks climbed Wednesday on the first day of the third quarter as investors found some encouragement in the day’s housing and manufacturing reports. But the advance lost steam Thursday, with the jobs report giving investors a reason to retreat after a strong second quarter.

In the April-through-June period, the S&P 500 gained 15.2%, its best quarter in more than a decade. The Dow rose 11% and the Nasdaq 20%. Both indexes posted their best quarters since the second of 2003. Stocks rallied on hopes that the economy was starting to stabilize after the six months of panic that followed the collapse of Lehman Brothers last September.

But lately, stocks have churned on concerns that the market got ahead of itself.

Economic news: Normally a market mover, the weekly jobless claims report was overshadowed by the June payrolls report.

The number of Americans filing new claims for unemployment fell to 614,000 last week from a revised 630,000 the previous week, the Labor Department reported. Economists thought claims would fall to 615,000.

May factory orders rose 1.2%, the Commerce Department reported, versus forecasts for a rise of 0.9%. Factory orders rose a revised 0.5% in April.

Company news: In deal news, Exelon (EXC, Fortune 500) has sweetened its hostile takeover offer for rival power generator NRG Energy (NRG, Fortune 500). The all-stock offer is $8 billion versus the previous offer of $7 billion.

Johnson & Johnson (JNJ, Fortune 500) will take an 18% equity stake in biotech Elan (ELN) in exchange for a $1 billion investment. J&J will also buy Elan’s share of its Alzheimer’s disease treatment program with Wyeth.

U.S.-traded shares of Elan gained 11% in active New York Stock Exchange trading.

Commodities: Energy prices tumbled, with U.S. light crude oil for August delivery falling $2.37 to $66.94 a barrel on the New York Mercantile Exchange.

COMEX gold for August delivery fell $10.60 to settle at $930.70 an ounce.

Bonds: Treasury prices rallied, lowering the benchmark 10-year note yield to 3.5% from 3.53%. Treasury prices and yields move in opposite directions.

Other markets: In global trade, Asian and European markets ended lower.

In currency trading, the dollar gained versus the euro and fell against the yen. 

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The unemployment crisis is a nationwide concern, but the collapse of the auto industry has made joblessness in Detroit particularly painful.

A U.S. government report released Tuesday shows the Detroit metro area continued to have the highest unemployment rate of large cities, at 14.9%, in May.

That’s before General Motors (GMGMQ) declared bankruptcy June 1, meaning future reports could be even worse for the Motor City.

The Bureau of Labor Statistics report groups cities into metropolitan areas, lagging national unemployment statistics which this month showed the jobless rate rose to a fresh 26-year high of 9.4% in May. A new nationwide report for June comes out Thursday.

"Things in Detroit are just bad, much like the national economy," said Rick Waclawek, a director at the Michigan Department of Labor and Growth. "It all ties back to whether people have spending money or loans available, and right now that’s tough."

GM and Chrysler closed some plants and executed some layoffs before their official bankruptcies, Waclawek said, so "a significant number of those people" are already included in this and previous reports.

Waclawek declined to speculate on future trends, but "it’s too early to say these rates are leveling off," he said.

Tuesday’s report said the Detroit-Warren-Livonia, Mich. area also had the second-largest jobless rate increase over the last year of large cities, at 6 no fax payday loans.6 percentage points - just 0.1 point less than the Portland, Ore., area.

Similarly, year-over-year payrolls in the Detroit area declined by 8%, the largest drop of any area with annual average employment levels above 750,000.

Ripple effect: The impact of the ailing car industry has spread to other auto industry cities — especially two in Indiana that topped the year-over-year unemployment rate increases for all 372 metropolitan areas.

Kokomo, Ind., posted a 11.7-percentage-point jump over last May. The unemployment rate stands at 18.8% in Kokomo, where one-fifth of the workforce is employed in the auto sector.

Kokomo’s largest employer, Chrysler, is attempting to emerge from bankruptcy after being acquired by Fiat, leaving 5,000 Chrysler workers and thousands of retirees left uncertain.

The other Indiana area is Elkhart-Goshen, where the rate rose by 11.4 percentage points to 17.5%.

Overall, 112 cities had rates at 10% or higher, and 15 of those stood at 15% or more. The highest rate of unemployment for a metro area of any size was in El Centro, Calif., near the Mexican border, at 26.8%. 

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Plunking down $2.11 million for a steak lunch might seem a tad bit excessive, even to a successful hedge fund manager.

But for Zhao Danyang it was a small price to pay to dine with Warren Buffett, the man whose strategy Zhao studied to make sense of the investing world.

The manager of Hong Kong-based Pure Heart Asset Management won the lunch date in an annual online charity auction a year ago. The money goes toward the Glide Foundation, an organization that fights poverty and homelessness in the San Francisco area.

The three-hour meal of steak and seafood at Manhattan’s Smith & Wollensky steakhouse, which picked up the tab, puts Zhao in the same company as the likes of David Einhorn of hedge fund Greenlight Capital. Einhorn won the lunch for a bargain $250,100 in 2003.

Buffett joined Zhao and seven of his friends and family members, but the Oracle of Omaha wasn’t the only savvy investor at the table. Zhao says his fund has had a 600% return over six years. Even Buffett had to be impressed.

But Zhao, 37, pointed to the iconic investor as the influence behind his strategy: "Over the last few years I made money," he told Fortune the day after the lunch, "I contribute my success to Warren."

A decade ago Zhao owned a small consumer-electronics company in China and had some money in the stock market. But when the Asian financial markets collapsed in the late 1990s, Zhao lost a significant amount of money.

"I was very angry with myself," he says. "I said to myself, I’m never going to buy stock anymore."

That all changed after he read a book that outlined Buffett’s investment strategy. It made him understand stocks in a way he never had before, Zhao says, and he became committed to the idea of value investing. In 2000 he got back into the market and soon launched his own hedge fund.

This was not the first time Zhao had seen Buffett in person. The CEO of Berkshire Hathaway (BRK.A) invited him out to his annual shareholders meeting in May in Omaha. But this time around he actually had the chance to pick his brain.

"He’s so famous, but he’s just like your friend," Zhao said guaranteed online personal loans.

Buffett has been closed-mouthed about the lunchtime conversation. "That guy just paid $2 million [for] my advice," Buffett told the New York Daily News. "I’m not going to give it to you for free."

Zhao recounted that he and Buffett did not talk about the short-term outlook, saying that as long-term investors it’s irrelevant to them. But they did discuss economic cycles, a concept Zhao said was relatively new to him and to China.

They talked too about Buffett’s philanthropic work. Zhao wanted to know why Buffett gave his money to the Gates Foundation instead of starting an organization of his own. Buffett told him that for the same reason people gave Buffett their money to invest because they believed he could allocate capital effectively, the billionaire gave his money to Gates because Buffett thinks Gates can do the same thing in the philanthropic world.

Zhao’s 5-year-old son also was at the lunch, and Buffett told him he was fortunate to be born in China today. Both the U.S. and China will do well in the next 20 years, he said, but China will grow more quickly and provide serious opportunities.

"He said if he had a choice, he would like to be my son, lucky just like when he grew up in the U.S.," Zhao said.

Zhao was in the U.S. for 10 days on business in addition to the lunch, but in between his full schedule he managed to put down an offer on a New York City apartment. He’s also thinking about opening up an office in the U.S. down the road.

"I want to live here and study everything here to learn more about America," he says. "[The U.S.] will do well in the future so it’s a good time to invest now."

The bidding for next year’s lunch runs through today. But not just anyone can join Buffett for a steak. All bidders must pre-qualify and have at least $25,000 lying around for the opening bid. Hours before the close, the bidding had reached $350,000. 

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