On a GAAP basis, the company reported quarterly EPS of $1.23, compared to $1.33 in the year-ago quarter. The discrepancy between GAAP and adjusted EPS were due to non-cash accounting benefit from the final regulatory approval to transfer its Mountainview power plant to utility rate base.

Edison's revenue fell 14.7% year-over-year to $3.7 billion from $4.3 billion. The downside was more prominent in electric utility revenue (83.7% of total revenues), which decreased 11.6% year-over-year. Competitive power generation revenues fell 27.2% to $592 million. Financial services and other revenues were only $7 million in the reported quarter from $14 million in the year-ago quarter.

Southern California Edison's (SCE) GAAP EPS in the reported quarter was $1.06, compared to $0.72 last year. Core earnings were 92 cents per share, versus 87 cents year-over-year. This increase was primarily due to higher operating income associated with the utility's 2009 General Rate Case (GRC) and lower non-operating expenses, partially offset by higher income tax expense. SCE also recorded a non-core benefit of 14 cents per share in the quarter to reflect the non-cash accounting benefit from the final regulatory approval to transfer its Mountainview power plant to utility rate base. SCE recorded a 15-cent per share non-core charge in the third quarter 2008 resulting from the California Public Utilities Commission (CPUC) performance-based ratemaking decision.

Edison Mission Group's (EMG) reported GAAP EPS of 19 cents per share, compared to 66 cents per share in the year-ago quarter. Core earnings were 19 cents per share, against 64 cents in the year-ago quarter. Core earnings declined primarily from lower income at its coal- and gas-fired projects, driven by lower energy prices and from lower trading income. Core results for the year-ago period included a 5-cent per share charge related to power contracts with Lehman Brothers and excluded 2 cents per share from discontinued operations.

Edison International parent company and other reported a loss of 2 cents per share, compared to a 5-cent loss in the third quarter of 2008.

Edison International reported cash and cash equivalents of $2.4 billion at the end of first nine months of fiscal 2009 from $3.9 billion at year-end fiscal 2008. The company reported $2.1 billion in cash from operating activities for nine months, compared to $1.6 billion at the end of the first nine months of fiscal 2008. Long term debt decreased to $10.4 billion for nine months from $11 billion at the end of fiscal 2008.

Edison International narrowed its core earnings guidance of $2.90 – $3.20 per share for fiscal 2009 to $2.95 – $3.15. Similarly, the company updated its 2009 GAAP earnings guidance from $2.18 – $2.48 to $2.23 – $2.43.

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Corporate High Yield Funds list.

3 Excellent Picks

Rydex/SGI High Yield A (SIHAX) was incepted in August 1996. It seeks high current income with capital appreciation as a secondary objective.

The fund invests at least 80% of its assets in a broad range of high-yield, high risk debt securities rated in medium or lower rating categories. The debt securities in which the fund invests are primarily domestic securities. However, it may also invest in dollar denominated foreign securities.

The fund pays dividends monthly. Capital gains are distributed at least annually. As of June 2009, its portfolio turnover was 29%.

David G. Toussaint has been lead manager of the fund since April 2000. Toussaint is a Chartered Financial Analyst and also holds the Certified Public Accountant designation.

Nuveen Preferred Securities Fund A (NPSAX) was incepted in June 2007 and seeks high current income and total return. It is non-diversified.

The fund invests at least 80% of net assets in preferred securities. It invests up to 35% of net assets in dollar denominated securities of non-U.S. issuers and up to 10% of net assets in other open or closed send funds that invest in similar types of securities.

Shareholders have to make a minimum initial investment of $3,000 to enter this Zacks#1 Rank (“Strong Buy”) fund. It has an expense ratio of 0.95%.

Douglas M. Baker has been lead manager of the fund since July 2007. Baker is a Chartered Financial Analyst and spent three years at Lehman Brothers before his current assignment.

Aegis High Yield (AHYFX) seeks maximum total return with an emphasis on high current income. It was incepted in June 2004.

The fund invests at least 80% of assets in high-yield fixed-income securities. It may invest up to 20% of its net assets in common stocks, warrants, and investment-grade bonds as well as other securities.

Shareholders have to make a minimum initial investment of $10,000 to enter this Zacks#1 Rank (“Strong Buy”) fund. As of June 2009, its portfolio turnover was 92%.

Scott L. Barbee has been lead manager of the fund since October 2008. Barbee is a Chartered Financial Analyst and has been with AFC since 1997.

Discover Many More Funds

Learn more about the new Zacks Mutual Fund Rank and discover some of the best market-beating mutual funds by browsing our mutual funds section. This part of Zacks.com offers a variety of tools, including mutual fund research, a new mutual fund screener, helpful answers to frequently asked questions and quick access to prospectuses and other information.

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward.

Chicago, IL – November 3, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: CIT Group Inc. (CIT), Dean Foods (DF), Frontier Communications (FTR), Verizon Communications (VZ) and Time Warner Cable (TWC).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Monday’s AnalystBlog:

CIT Group Files Chapter 11

CIT Group Inc. (CIT) has filed for Chapter 11 protection on Sunday. The company struggled for months to avoid collapse since the recession elicited billions of dollars in loan losses, and the financial crisis made it incapable of funding itself from its main financing source.

This widely expected Chapter 11 filing is one of the largest in U.S. history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors. The U.S. government will probably lose most of its $2.3 billion aid given to CIT last December through the Troubled Asset Relief Program (TARP). We think the problems at CIT will further weigh on the U.S. economy.

CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. The company cited that its bondholders selected a prepackaged reorganization plan which will reduce total debt by $10 billion while allowing the company to run its business.

According to management, the decision to proceed with the company’s plan of reorganization will allow it to continue to provide funding to two sectors -- small business and middle market customers -- which remain vital to the U.S. economy.

Dean Foods Beats, Ups Guidance

Dean Foods (DF) reported relatively strong third-quarter results with earnings of 34 cents per share. Quarterly earnings were up 21% year-over-year.

Quarterly net sales declined 13.2% year over year to $2.7 billion due to the pass-through of lower overall dairy commodity costs, despite positive contributions from acquisitions and lower net sales volumes in the WhiteWave-Morningstar operations, which were partially offset by acquisition-related volume growth in Fresh Dairy Direct and WhiteWave-Morningstar.

Net sales in the Fresh Dairy Direct segment declined 18.3% as the company passed some of the lower dairy costs to customers but were partially offset by continued volume growth. Raw milk prices were 45% lower compared to the prior-year.

Frontier Deal Wins Key Approvals

Frontier Communications (FTR), a leading telecom operator in rural and suburban areas in the US, has reportedly received approvals from the Public Utilities Commissions of the states of California and Neveda and Public Service Commission of South Carolina for its impending acquisition of the rural fixed-line business of Verizon Communications (VZ).

Moreover, the acquisition was recently approved by the shareholders of Frontier. The transaction is now subject to approval by the Federal Communications Commission (FCC) and other closing conditions and is expected to close during the second quarter of 2010.

Verizon is divesting its rural fixed-line business (involving approximately 4.8 million access lines) in 14 states to Frontier under an agreement valued at approximately $8.6 billion. Under the deal terms, Verizon’s shareholders will receive approximately $5.25 billion in common stock of Frontier, equating to around 68% stake in the company.

Moreover, Verizon will also receive $3.3 billion in cash and debt securities from Frontier. The transaction, if successful, will provide Verizon’s shareholders a controlling interest in Frontier.

This deal represents a major opportunity for Frontier as the company remains significantly challenged by the beleaguered economic conditions in its service territories and contends with loss of legacy landline telephony business to wireless and other competitive offerings by cable TV operators such as Time Warner Cable (TWC). Frontier continues to experience decline in revenues which is, to a great extent, attributable to consistent sequential decline in fixed access lines.

Want more from Zacks Equity Research? Subscribe to the free Profit from the Pros newsletter: http://at.zacks.com/?id=5515.

About Zacks Equity Research

Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=5517

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5518.

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Follow us on Twitter: http://twitter.com/zacksresearch

Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contact:
Mark Vickery
Web Content Editor
312-265-9380
Visit: www.zacks.com

According to the National Stock Exchange, U.S. ETNs had $6.9 billion in assets at the end of September. ETFs were literally 100 times more prevalent, with $697 billion in assets. That included $62 billion just in long commodity ETFs.

That’s just crazy. And it highlights investors’ irrational fear of the ETN product structure.

I remember when ETNs first came to market in 2006: Investors couldn’t get enough of them. Barclays Capital launched the iPath Dow Jones-UBS Commodity Index ETN (NYSEArca: DJP) and it quickly gathered assets.

The reason was simple: ETNs offered two huge advantages over commodity ETFs.

First, they promised perfect tracking. If you bought an ETN, you would receive the full return of the benchmark, minus the fund’s expenses. Period. That’s handy, since commodity ETFs have been more prone to tracking error than most equity funds.

But the real advantage of commodity ETNs was (and remains) their tax treatment. The prospectus said (and still says) that ETNs can be treated basically like zero-dividend stocks for tax purposes. If you hold a commodity ETN for longer than a year, you only pay 15 percent long-term capital gains taxes when you sell. What’s more, you don’t have to pay any taxes until you sell.

By comparison, futures-based commodity ETFs like the PowerShares DB Commodity ETF (NYSEArca: DBC) are treated like futures by the IRS. That means that gains are marked-to-market each year, and investors must pay taxes on those gains at a blended 60 percent/40 percent long-term/short-term capital gains tax rate. For a high-earning investor, that puts the blended tax rate at 23 percent, payable every year.

That’s a huge difference. An ETN investor pays a 15 percent tax rate, deferrable until the ETN is sold; the ETF investor pays a 23 percent tax rate, due annually.

Risk Factor

Why don’t we see more assets flow into ETNs? The only possible reason (short of simple ignorance) is the credit risk.

The N in ETN stands for note, and that’s what they are: unsecured debt notes. Like any other uninsured promise-to-pay, their entire value depends on the credit of the issuing bank. If you buy a Deutsche Bank ETN and Deutsche Bank goes bankrupt, you lose all your money.

It’s not a theoretical fear. The very few people who held the three Lehman Brothers ETNs to the bitter end lost their money when the firm went bankrupt. It’s obvious, looking at the numbers, that the credit crisis stopped the growth of ETNs in their tracks.

But let’s be honest: For an investor who is paying attention, the likelihood of losing money in an ETN is vanishingly small. Most ETNs offer daily redemptions at net asset value, meaning that (even ignoring the quoted market) an investor of size (50,000 shares in the case of iPath) can sell out of the product within 48 hours and get the full net asset value of the note from the issuer.

So ask yourself: How likely is it that Barclays Capital or Deutsche Bank, or whomever is underwriting a particular ETN, will go bankrupt with less than 48 hours’ warning? Or to put a margin of safety on it, how likely is it that they will go bankrupt in the next week?

The answer right now is: not very.

For taxable investors who pay attention to the market, read the newspaper, monitor stock quotes, etc., the likelihood of being caught out on an ETN is tiny. Meanwhile, the risk of overpaying the IRS if you buy and hold a commodity ETF is 100 percent.

ETNs don’t make sense for all investors. In nontaxable accounts, I actually prefer ETFs. If you want a truly fire-and-forget investment, where you can walk away for a year or two, ETFs are the way to go. But for taxable investors who pay close attention to their accounts, there’s a lot to be said for the ETN structure.

(One caveat here: There is a risk that the CFTC’s plan to enact new regulations in the commodities market will force some ETNs to shut down. If that happens, investors would get their money back, but they could be hit with short-term capital gains if they’ve held a note for less than a year. It’s tough to gauge how large a risk this is, but it’s legitimate.)

Today, we're fortunate to have Morris A. Davis, Assistant Professor of Real Estate and Urban Land Economics at University of Wisconsin School of Business, as a guest contributor.

Research by economists inside the Federal Reserve system have shown that two events typically lead homeowners to default on their mortgage (see here). First, the value of the house must be less than the value of the mortgage ("under water"). This is necessary but not sufficient (see here). Second, homeowners must experience a significant disruption and loss of income. The available data suggest there might be a big increase in foreclosures in the immediate future. Zillow estimates that 22 percent of the 50 million homeowners with mortgages are currently under water; unemployment rates are high and are expected to remain high for the next two years.

Why does unemployment lead to a foreclosure when a house is under water? Consider the case of Wisconsin. In Wisconsin, UI benefits are capped at $1,452 per month. According to the 2007 American Community Survey, the average mortgage payment including all mortgages and taxes in Wisconsin is approximately $1,200. If the unemployed make their mortgage payment, they have roughly $63 per week available for food, transportation, and other necessities. After spending down their assets, the unemployed have no choice but default. They cannot sell their house, because they would have to write the bank a check at closing. They cannot make their mortgage payment, because they would have no money left for food.

The Obama Administration's "HAMP" proposal to reduce foreclosures calls for modifying mortgage payments. Mortgage modifications are designed to help borrowers refinance from a "bad" subprime mortgage to a more conventional mortgage. The reason that many legislators and journalists think mortgage modifications are the solution to the foreclosure problem is that the delinquency rate on subprime mortgages is much higher than the delinquency rate on prime mortgages, 12 percent compared to under 3 percent in 2009:Q2.

Although the HAMP plan will help some borrowers, it likely will not help avoid the majority of people facing foreclosure. There are two related reasons for this. First, shown in the table below, in 2009:Q2, 52% of seriously delinquent homeowners have prime mortgages -- so a "bad" mortgage is not the underlying problem. Second, because of the way the HAMP rules are written, the unemployed are essentially ineligible to have their mortgage refinanced. And, the research is quite clear that unemployment is a trigger to foreclosure.

There are two proposals out there that will prevent foreclosures for unemployed homeowners. One plan is from a team of researchers at the Boston Fed (Chris Foote, Jeff Fuhrer, Paul Willen) and Federal Reserve Board (Eileen Mauskopf), the so-called "Boston Fed" plan. The second is from my colleagues Stephen Malpezzi, François Ortalo-Magn&eacute and I here at the Department of Real Estate at the Wisconsin School of Business. We call this the WI-FUR plan. Both plans address the foreclosure problem by providing the temporarily unemployed with temporary assistance. Both plans attempt to mitigate the "moral hazard" problem by specifying that the amount of temporary assistance is independent of the original mortgage amount.

For each unemployed person, the Boston Fed plan (here for details) computes the percentage disruption in income due to unemployment (i.e. the gap between the wage while last employed and the UI benefit), and then pays that percentage of the mortgage directly to the mortgage servicer. This payment could be either a loan or a grant. The loss in income must be demonstrable and significant, at least 25 percent.

The WI-FUR plan (here for details) specifies that all unemployed receiving UI benefits also receive a housing voucher that can be used to pay the mortgage. The housing voucher would be computed such that, on average in each state, homeowners pay 30% of their UI benefits on their mortgage -- the voucher would cover the balance. In Wisconsin, for example, we advocate for an average voucher of about $764. This would make up for the shortfall in a $1,200 mortgage payment if households pay 30% of their UI benefit ($436 = 0.30 × $1,452) towards their mortgage.

You could ask: Why prevent foreclosures? We've known or suspected for some time that foreclosures are costly in terms of time and process (see here); that foreclosures may have "spillover" effects on values of neighboring property (see here); and that foreclosures may affect the well-being of children (see here). But why prevent them now?

People that know me know that I was completely opposed to foreclosure relief in 2007 and 2008. At that time, my view was that homeowners that were being foreclosed on put little down on their property, so they had option value from homeownership with no risk. Further, during the foreclosure process, they lived in the house for free -- no mortgage payment and no taxes. The economic and political environment has changed quite a bit since 2008, and my opinion has changed. Now, I can give two reasons for why, in late 2009, we should implement either the Boston Fed or WI-FUR plan.

First, my opinion is that we experienced two very large (and likely connected) aggregate shocks. I mention this because I want to emphasize that it is possible the foreclosures we’re observing now are not necessarily the result of ex-ante bad or risky decisions by lenders or borrowers, but of decisions that look bad ex-post due to bad luck. The first shock is that house prices have fallen by 30 percent nationwide since the peak in mid-2006. I describe this as a shock because traders appeared to think a big decline in house prices was a possible but low probability event. For example, the "Meltdown" scenario in a Lehman Brothers outlook as of August 2005, assumed to occur with only a 5 percent probability, called for a cumulative decline in house prices of about 15 percent over 3 years: See here. The second shock was the massive recession we just experienced. I describe this as a shock because many economists had become convinced the volatility of major macro aggregates had been cut in half due to the "Great Moderation" -- see here for a recent paper. In a world with a great moderation, the severe recession we just experienced is a very unlikely event. When put together, the large decline in house prices (shock 1) and large increase in unemployment (shock 2) have resulted in an unprecedented surge in foreclosures.

Second, as a society we've committed to spend money to reduce foreclosures. So let’s spend it effectively. The Obama Administration has been authorized to spend $75 billion dollars to try to prevent foreclosures. The Treasury now is spending the money by paying servicers to modify mortgages. This plan might help some people, but it will not address the majority of future foreclosures from unemployed people with prime-rate mortgages. If we want to prevent foreclosures of this group of people, either the Boston Fed plan or the WI-FUR plan will get the job done.

This post written by Morris Davis.

Your recent blog presents the same tired argument: Growth and value show high correlations to one another. Therefore, why bother using them in a portfolio?

I’ll tell you why: Because they work.

People who argue differently have their heads stuck in the ivory tower, too worried about “correlation quotients” to think about what actually matters to investors, which is returns.

Let’s take a simple case. Since the market bottomed on March 9, the rolling three-month correlation between the iShares Russell 3000 Growth ETF (NYSEArca: IWZ) and the iShares Russell 3000 Value ETF (NYSEArca: IWW) has been well over 0.90. To academics, the two are essentially identical.

But in the real world, there’s been a huge difference: IWV has outperformed IWW by more than 7 percent, in a period of just 6 six months. It has also beaten the broad market iShares Russell 3000 ETF (NYSE Arca: IWV) by 3 percent.

Now consider a different stretch: from Sept. 15, 2008 (the day Lehman Brothers went bankrupt) through March 9, 2009. The correlation between IWW and IWV over that stretch was again consistently above 0.90, but on a performance basis, IWW outperformed IWV by 10 percent.

What happened is obvious: After Lehman’s bankruptcy, the market started punishing risk. Not surprisingly, growth stocks (which have stronger fundamentals than value stocks) outperformed. When the market bottomed, investors started to reward risk again, and value gained.

An investor who timed that transition perfectly … who bought growth on Sept. 15 and switched into value on March 9 … is now 8 percent ahead of an investor who just bought the market and held on.

I’m not saying it was easy (or even possible) to call that transition perfectly. But even if you missed it by a week or a month, you still did well.

Not everyone has the inclination or temperament to tweak the risk focus in their portfolios on a real-time basis. I don’t. But I know some investors and advisers that do, including some who have been doing it successfully of late. For them, growth and value (like large-caps and small-caps) are useful.

Chicago, IL – August 31, 2009 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes Adobe Systems (ADBE), Best Buy (BBY), and FedEx (FDX). To see more earnings analysis, visit http://at.zacks.com/?id=3207.

Every day, Zacks.com makes 4 stock picks available, free of charge. To see them, go to http://at.zacks.com/?id=5612.

This Week's Events

So how will the third-quarter look? The Zacks Consensus Estimate calls for S&P 500 earnings of $13.50 per share, a 15.4% decline from a year prior.

Going back to the week's events, the economic calendar will stay busy with inflation, manufacturing and housing data being released.

• Tuesday: August Producer Price Index (PPI), August retail sales, September Empire State survey, July business inventories
• Wednesday: August Consumer Price Index (CPI), August industrial production and capacity utilization, September NAHB housing market index, weekly crude inventories, weekly mortgage applications
• Thursday: August housing starts and building permits, September Philadelphia Fed survey, weekly initial jobless claims, weekly natural gas inventories

President Barack Obama will speak about the financial crisis on Monday, which is also the anniversary of Lehman Brothers' collapse. The same day, Fed Governor Elizabeth Duke and Richmond Federal Reserve Bank President Jeffrey Lacker will give speeches. Duke will discuss regulation and accounting at the AICPA's annual conference in Washington D.C. Lacker will appear before the Charlotte chapter of the Risk Management Association.

Friday will be a quadruple witching day. Stock option contracts, stock futures contracts, market index options and market futures contracts will all expire. This could lead to increased volatility.

We are in a fear and greed market with a relatively small group of traders playing hot potato. Bonds are doing extremely well (fear), while the S&P 500 continues move higher (greed). It doesn't make sense, but stocks are trending higher. Dow 10,000 is only a few good days away and the fast money remains in control.

Companies That Could Issue Positive Earnings Surprises

One analyst just raised his fiscal third-quarter profit forecast on Adobe Systems (ADBE). The revision pushed the Zacks Consensus Estimate a penny higher to 28 cents per share. The most accurate estimate is more bullish at 32 cents per share. Though the software company has only matched expectations over the past 2 quarters, it did top during the previous 4 quarters. Adobe is scheduled to report on Tuesday, Sep 15, after the close of trading.

Three analysts raised their fiscal second-quarter projections on Best Buy (BBY) over the past few weeks. The changes have resulted in a Zacks Consensus Estimate of 41 cents per share, a penny higher than the average forecast of a month ago. The most accurate estimate is slightly more bullish at 42 cents per share. BBY has topped expectations for 3 consecutive quarters. Best Buy is scheduled to report on Tuesday, Sep 15, before the start of trading.

FedEx Corporation (FDX) preannounced fiscal first-quarter earnings of 58 cents per share today. The number is well above both the company's guidance and the Zacks Consensus Estimate of 43 cents per share. Fiscal second-quarter guidance also looks strong at a range of 65 to 95 cents per share. Though the surprise should be baked into the price, if reaction to the conference call is favorable, there is the possibility of additional upside. FDX is scheduled to report on Thursday, Sep 17, before the start of trading.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com.

About the Zacks Rank

Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank Stocks have generated an average annual return of +26%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have underperformed the S&P 500 by 111% annually (-0.8% versus +8%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.

Zacks "Profit from the Pros" e-mail newsletter offers continuous coverage of the industries and the stocks poised to outperform the market. Subscribe to this free newsletter today by visiting http://at.zacks.com/?id=5614.

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros by going to http://at.zacks.com/?id=5615.

Follow us on Twitter: http://twitter.com/zacksresearch

Join us on Facebook: http://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts

Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.

Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security.

Contact: Charles Rotblut, CFA
Company: Zacks.com
Phone: 312-265-9352
Email: pr@zacks.com
Visit: www.Zacks.com

The European Central Bank has made up to €1bn in extra profits from crisis-related emergency lending, but its caution on unconventional policy measures has curbed potential earnings, analysts estimate. Extra liquidity pumped into the eurozone banking system since the collapse of Lehman Brothers last year has probably generated an extra €900m ($1.5bn, £780m) in profits so far, according to calculations by Goldman Sachs.

Some €300m of the total has been generated since June, when the ECB provided €442bn in one-year loans in its biggest liquidity providing operation. The extra profits are on top of the sums that the ECB normally makes on its market operations. Although the interest rate currently charged by the ECB – 1 per cent – was the lowest in its 11-year history, revenues “remain juicy because of the quantity of liquidity that banks keep hoarding”, said Natacha Valla, European economist at Goldman Sachs in Paris.

From last October the ECB has been meeting, in full, eurozone banks’ demand for liquidity. Ms Valla argued, however, that by sticking largely to using policy instruments already in its armoury the ECB had forgone potentially far higher margins.

Profits on the ECB’s programme to buy €60bn in covered bonds – low risk assets issued by banks and backed by public sector loans and mortgages – could be dwarfed by those on schemes launched by other central banks, which have involved higher risk. The Financial Times reported last month that the US Federal Reserve had made a $14bn profit on its crisis loan programmes, with its purchases of commercial paper among its most lucrative operations.

Instead, the ECB has created arbitrage opportunities for eurozone banks, which have used liquidity provided by the central bank to buy large amounts of government bonds, including from some of the smaller eurozone countries and riskier assets. These, in turn, can be used as collateral to raise fresh funds from the ECB. Eurozone banks’ holdings of euro-denominated government bonds have increased by more than €200bn since last year.

So how will the third-quarter look? The Zacks Consensus Estimate calls for S&P 500 earnings of $13.50 per share, a 15.4% decline from a year prior.

Going back to the week's events, the economic calendar will stay busy with inflation, manufacturing and housing data being released.

• Tuesday: August Producer Price Index (PPI), August retail sales, September Empire State survey, July business inventories
• Wednesday: August Consumer Price Index (CPI), August industrial production and capacity utilization, September NAHB housing market index, weekly crude inventories, weekly mortgage applications
• Thursday: August housing starts and building permits, September Philadelphia Fed survey, weekly initial jobless claims, weekly natural gas inventories

President Barack Obama will speak about the financial crisis on Monday, which is also the anniversary of Lehman Brothers' collapse. The same day, Fed Governor Elizabeth Duke and Richmond Federal Reserve Bank President Jeffrey Lacker will give speeches. Duke will discuss regulation and accounting at the AICPA's annual conference in Washington D.C. Lacker will appear before the Charlotte chapter of the Risk Management Association.

Friday will be a quadruple witching day. Stock option contracts, stock futures contracts, market index options and market futures contracts will all expire. This could lead to increased volatility.

We are in a fear and greed market with a relatively small group of traders playing hot potato. Bonds are doing extremely well (fear), while the S&P 500 continues move higher (greed). It doesn't make sense, but stocks are trending higher. Dow 10,000 is only a few good days away and the fast money remains in control.

Companies That Could Issue Positive Earnings Surprises

One analyst just raised his fiscal third-quarter profit forecast on Adobe Systems (ADBE). The revision pushed the Zacks Consensus Estimate a penny higher to 28 cents per share. The most accurate estimate is more bullish at 32 cents per share. Though the software company has only matched expectations over the past 2 quarters, it did top during the previous 4 quarters. Adobe is scheduled to report on Tuesday, Sep 15, after the close of trading.

Three analysts raised their fiscal second-quarter projections on Best Buy (BBY) over the past few weeks. The changes have resulted in a Zacks Consensus Estimate of 41 cents per share, a penny higher than the average forecast of a month ago. The most accurate estimate is slightly more bullish at 42 cents per share. BBY has topped expectations for 3 consecutive quarters. Best Buy is scheduled to report on Tuesday, Sep 15, before the start of trading.

FedEx Corporation (FDX) preannounced fiscal first-quarter earnings of 58 cents per share today. The number is well above both the company's guidance and the Zacks Consensus Estimate of 43 cents per share. Fiscal second-quarter guidance also looks strong at a range of 65 to 95 cents per share. Though the surprise should be baked into the price, if reaction to the conference call is favorable, there is the possibility of additional upside. FDX is scheduled to report on Thursday, Sep 17, before the start of trading.

Companies That Could Issue Negative Earnings Surprises

Earnings estimate trends are not providing a clear indication that any of the scheduled companies will disappoint.

Charles Rotblut, CFA is the senior market analyst for Zacks.com.

Earnings Calendar

Here is a list of companies that we have confirmed will report during the week of Sep 14 - Sep 18. Prices are as of Thursday's, Sep 10, market close.

Company	Stock	Zacks Estimate	Year Ago EPS	Last Qtr Surprise	Date	Time	Price
Majesco Entmnt	CMM	$0.01	$0.01	0.0%	9/14	AMC	$1.69
Pall Corp	CFI	$0.52	$0.61	0.0%	9/14	AMC	$31.60
Sycamore Ntwks	SINA	($0.02)	($0.03)	66.7%	9/14	BTO	$3.21
Wpcs Intl Inc	ADCT	$0.01	$0.12	N/A	9/14	AMC	$3.52
Adobe Systems	CRMT	$0.28	$0.42	0.0%	9/15	AMC	$34.02
Best Buy	APSG	$0.41	$0.48	23.5%	9/15	BTO	$41.05
China Green Agr	BOFI	$0.19	$0.07	31.3%	9/15	AMC	$13.05
Cracker Barrel	CMED	$0.95	$0.91	18.2%	9/15	BTO	$31.58
Kroger Co	DCI	$0.43	$0.42	6.4%	9/15	BTO	$22.00
Apogee Entrprs	EDAP	$0.25	$0.43	8.0%	9/16	AMC	$13.92
Cke Restaurants	IIG	$0.21	$0.23	20.8%	9/16	AMC	$10.27
Clarcor Inc	PIKE	$0.45	$0.51	(13.2%)	9/16	AMC	$32.66
Dress Barn	TUTR	$0.37	$0.34	25.8%	9/16	AMC	$17.78
Oracle Corp	SEAC	$0.29	$0.29	2.3%	9/16	AMC	$22.76
Discover Fin Sv	TTWO	($0.16)	$0.37	35.7%	9/17	BTO	$14.47
Fedex Corp	PAY	$0.43	$1.23	25.5%	9/17	BTO	$72.66
Ihs Inc-A	ABM	$0.47	$0.42	19.0%	9/17	AMC	$51.36
Palm Inc	ADEP	($0.22)	($0.19)	44.4%	9/17	AMC	$13.75
Pier 1 Imports	AMSWA	($0.22)	($0.34)	44.4%	9/17	BTO	$2.60
Somanetics Corp	BRLI	$0.14	$0.23	7.7%	9/17	BTO	$13.75

BTO = Before The Market Open, AMC = After The Market Close

Zacks Investment Research

Following advances in the overseas markets, US stocks are expected to gain at the opening.  The DJIA futures added 79 points for a gain to 9496; the S&P500 increased 9.9 points heading toward a 1023.80 open.  Markets were closed yesterday for the Labor Day holiday.

On Friday, the 30-stock Dow Jones industrial average rose 96.66 points, or 1.03%, to 9,441.27.  The S&P 500 index rose 13.16 points, or 1.31%, to 1,016.40.  The technology-laden NASDAQ advanced 35.58 points, or 1.79%, to 2,018.78.  However, all three indexes ended the week lower.  During the week, the DJIA retreated 1.1% and the S&P 500 was off 1.2%; NASDAQ was comparatively better, easing only 0.5%.   

As stock prices gained, Treasury bonds lost ground.  The yield on the benchmark 10-year note rose 0.09% to 3.44% and the 30-year bond yield rose 0.11 to 4.27%.  On Tuesday $38 billion in 3-year notes is slated for auction, on Wednesday $20 billion of 10-years, and on Thursday $12 billion in 30-years.

Last week, Tax preparer (NYSE:HRB) saw its shares fall after the firm reported a wider-than-expected loss of 39 cents a share.  Apple (NASDAQ:AAPL) shares rose ahead of its media event next week where it is expected to introduce iPod Nano and Touch models that include digital cameras.  Societe Generale sharply raised its price target on the iPhone maker.

Traders return to their desks in a holiday-shortened week with last September’s collapse of Lehman Brothers absorption of Merrill and a government bailout of AIG still fresh in their minds.  Although a lot of water has passed under the bridge since then, traders still remain skeptical about the prospects of a full blown economic recovery.

This week, healthcare and insurance stocks may take a cue from President Obama's attempt to garner support for his much-talked-about healthcare initiative in a rare joint session of Congress Wednesday.  Remarks from Saudi Arabia's oil minister that crude markets are "in good shape" indicate further production cuts are not expected at this week's OPEC meeting.

Moreover, a Credit Suisse (NYSE:CS) report noting, "This is the ideal phase of the economic cycle...There is more of a positive growth surprise to come over the next three to six months," could be viewed in positive light.  Credit Suisse projected a 13% gain in the S&P500 to 1150 by mid-2010.

Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), as a guest blogger.

"Once you've seen one financial market crisis...you've seen one financial market crisis."

-- Attributed to Federal Reserve Board Governor Kevin Warsh by former US Treasury Assistant Secretary for Economic Policy Phillip Swagel in The Financial Crisis: an Inside View, March 2009, p. 4.

The financial crisis has set a lot of records so far; it's certainly the worst US banking crisis of my lifetime. Some, as suggested by the above quote, see such crises as unique events; each one is singular and there's not much to be learned about how to handle one from looking at past crises. For example, there's no precedent that I know of for a banking crisis involves the failure of the biggest counterparties for credit default swaps.

I think a much smaller number of people see the crisis differently; they think of it as another potato, a big one. No two potatoes are exactly alike in size and shape, but they all taste pretty much the same and you can use the same recipe for most of them. For that reason, it's interesting to see to what extent the current crisis behaves like other crises, even if it has some unique features.

I think there's some interesting parallels between the current crisis, the Savings and Loan (S&L) crisis of the 80s and 90s, and the Long-Term Capital Management (LTCM) Crisis of 1998. But before I talk about that, let me talk about what a "typical" banking crisis looks like.

The Basel View of "Typical" Banking Crises

If we set the way-back machine to 2004, a time long before terms like ARM, CDS, and AIG entered common conversation, we can see what people thought a typical bank crisis looked like. That's the year the guys in Basel who worry about such things published "Bank Failures in Mature Economies." They looked at the main banking crises in developed countries from 1980 to 2000 and asked themselves what they saw. To be sure, they saw some differences, but they also saw some patterns. Here's part of their main conclusions (note that "credit risk" is Banker for "bad loans").

Most of the widespread [banking] failures required some amount of public support, sometimes in very large amounts. All of the episodes that involved large amounts of public support were caused by credit risk problems. ...The widespread banking crises that involved credit risk were remarkably similar. A period of financial deregulation resulted in rapid growth in lending, particularly in real estate related lending. Rapidly rising real estate prices encouraged more lending, abetted by lax regulatory systems in many cases. When economic recessions occurred, inflated real estate prices collapsed, leading directly to the failures. (BIS, 2004, p.66)

That sounds a lot like what the US (and some other countries) experienced immediately afterwards. There had been some financial deregulation, which was followed by a period of very rapid growth in real-estate-related lending. Rapidly rising real estate values encouraged more lending. The biggest difference seems to be the last point; the recession did not cause real estate prices to collapse; they had peaked by 2006 and fell before the recession started. We could probably also argue about whether it was financial deregulation or "financial innovation that avoided regulations" that helped fuel the increase in real-estate lending. However, in this view the boom and bust cycle in real estate, the subsequent fallout for the banking sector, and the need for a major publicly-funded bailout is not remarkable; we've seen this kind of story before. In fact, Reinhart and Rogoff have gone so far as to tabulate what happens to government debt in the aftermath of a banking crisis. They find that real government debt increases by an average of 86% in the three years after the start of a crisis. So regardless of how you feel about the US government's spending during the crisis, it seems less remarkable when compared to what typically happens in a banking crisis.

Three American Financial Market Crises

More support for the view that banking crises follow similar patterns can be found by comparing the last three US banking crises; the S&L crisis of the late 80s and early 90s, the collapse of LTCM and the most recent crisis. The S&L crisis closely followed the pattern described by the BIS report quoted above; financial deregulation, followed by a rapid growth in real estate lending, creation of local speculative bubbles in real estate prices, and the failure of institutions as bubbles burst (For descriptions of the S&L crisis, see BIS (2004) or the GAO 1996 report). The General Accounting Office put the cost of the S&L bailout to US taxpayers at $132.1 billion, or a bit under 2% of GDP (United States General Accounting Office (1996) "Financial Audit: Resolution Trust Corporation's 1994 and 1995 Financial Statements," Table 3 and author's calculations). That may seem small compared to the size of TARP or this year's projected federal deficit, but it was shocking at the time.

At first glance, the LTCM crisis appears quite different; no bank failed (LTCM was a hedge fund), its failure was unrelated to real estate investment or credit risk, and the crisis was resolved at no cost to the taxpayer. However, the LTCM crisis showed that, as a result of deregulation, a systemic crisis could start outside the regulated banking system. Another GAO study noted:

The LTCM case illustrated that market discipline can break down and showed that potential systemic risk can be posed not only by a cascade of major firm failures, but also by leveraged trading positions. LTCM was able to establish leveraged trading positions of a size that posed potential systemic risk primarily because the banks and securities and futures firms that were its creditors and counterparties failed to enforce their own risk management standards. (US GAO (1999) p. 29)

The same report noted:

• Gaps in [US Government agencies'] regulatory authority limits their ability to identify and mitigate systemic risk (US GAO (1999) p. 24)
• Regulators did not identify weaknesses in firms' risk management practices until after the crisis (US GAO (1999) p. 16)
• Monitoring did not reveal the potential systemic threat posed by LTCM (US GAO (1999) p. 17)

and provided a variety of proposals (some of which are mentioned below) to reform the financial system by reducing systemic risks.

The success of those reforms can be judged by role of similar factors in the most recent US banking crisis. An important factor in the latter has been the role of trading in derivative securities, primarily mortgage-based securities and credit default swaps (CDS). Again, government oversight of this market was limited due to faith in the market's ability to manage its exposure to risk, and was further weakened by divided responsibilities between multiple agencies. Regulators and private lenders alike were again unaware of major firms' exposure to losses on derivative securities; this time even the heads of major financial institutions were not aware of the extent of their own exposures. Again, this was in part due to the lack of transparency, lack of clearing and high leverage afforded by trade in Over-the-Counter (OTC) derivatives (particularly those traded at Bear Stearns.) Again, weaknesses in firms' risk management practices became apparent only in hindsight. Again, major financial firms that were not regulated as traditional deposit-taking banks took on highly-leveraged positions and posed major systemic threats to the banking system. These included several investment banks (such as Bear Stearns, Goldman Sachs, Lehman Brothers, and CitiGroup) and the insurance company AIG.

Conclusion

Looking at recent events from this perspective, I still see the size of the losses as breathtaking, but the causes and dynamics seem much more familiar. What bothers me is that some of the suggested solutions sound pretty familiar too; make derivative trading more transparent, improve coordination among the regulators, give regulators more power to control systemic risk in new places, and so on. Despite that, not only was there another crisis, but it was much larger than the two previous crises combined.

This post written by Simon van Norden.

Last December, P&G had announced its intention to restrict making new investments in the pharmaceutical division and divest its interest in the healthcare brands. It decided to focus more on over-the-counter products such as Pepto Bismol, Prilosec, Vicks cough medicines and other personal care brands. Management stated that the pressure from generics was also one of the reasons for it to consider divestiture of this business.

Earlier in fiscal 2008, P&G sold its Folgers coffee business to J.M. Smucker Inc. (SJM) and added beauty and grooming businesses to its portfolio. The company’s prescription drugs division comprises products such as Actonel for osteoporosis (which generates more than $1 billion in revenue) and Enablex for the treatment of overactive bladder.

Warner Chilcott, which makes birth control, female hormone therapies and dermatological products, believes this acquisition will be a strategic fit to its existing business. The deal is expected to expand its market share in the women’s health market. Warner Chilcott will run the newly acquired business as its 100% subsidiary.

Private equity firm Cerberus Capital Management and drug maker Forest Laboratories (FRX) had also shown their interest in purchasing P&G’s prescription drug business.

Six banks, including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Credit Suisse (CS), Citigroup (C), Morgan Stanley (MS) and Barclays (BCS) are expected to provide about $4 billion in financing for the deal. Out of this, Warner Chilcott will use $3 billion for the acquisition and the remaining $1 billion for refinancing its existing debt.

The deal is the largest leveraged loan transaction so far this year, providing an indication of reviving credit markets and a positive development in the loan market, especially after the collapse of Lehman Brothers.

The better-than-expected FFO figures were primarily due to lease termination fees associated with the vacancy of Lehman Brothers and General Motors Corporation – both being casualties of the bankruptcy filings. During the quarter, Boston Properties recorded $0.10 per share income due to lease terminations. Lehman Brothers occupied 437,000 net rentable square feet of space at 399 Park Avenue, New York, while General Motors occupied 120,000 square feet of office space at 601 Lexington Avenue, also in New York.

During the quarter, the company placed in service 184,000 net rentable square feet office space in Rockville, Maryland, and a 299,000 net rentable square feet office space in Chevy Chase, Maryland. While the former property is currently 20% leased, the latter is about 91% leased. Also, during the quarter, Boston Properties obtained construction financing of $215 million collateralized by its Atlantic Wharf development project (an 815,000 net rentable square feet mixed-use project) in Boston, Massachusetts.

The company issued 17.25 million common shares during the quarter at $50.00 each, raising net proceeds of $842.0 million. Boston Properties utilized a part of the proceeds to repay the outstanding balance of its $100 million revolving credit facility, and $30.1 million mortgage loan secured by Ten Cambridge Center property in Cambridge, Massachusetts. During the quarter, the company also repaid a mortgage loan of $47.8 million collateralized by Reservoir Place property in Waltham, Massachusetts, utilizing cash in hand.

However, Boston Properties is gradually feeling the heat of declining fundamentals in most of its markets. Overall portfolio occupancy decreased to 92.5% at the end of the quarter, down from 95.6% in the prior-year quarter. With increased vacancy rates across the portfolio, occupancy is further expected to decline in the coming quarters.

Due to weakening demand for office space, the company reduced its FFO guidance for full year 2009 from $4.65 - $4.80 per share to $4.55 - $4.63. The company also reduced its dividend from $0.68 per share to $0.50 in order to increase its liquidity in the current credit-constrained market.

Despite a rapidly deteriorating market, two of the largest markets of the company – New York and Washington DC are still two of the best office markets in the US. Boston Properties should be able to withstand the current downturn in the US economy, as its office space is concentrated in large, high-barrier urban markets, which usually fare better in a faltering economy. We reiterate our Hold rating of the company.

Chicago, IL – July 17, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: CIT Group (CIT), Bank of America (BAC), Citigroup (C), American International Group (AIG) and MGIC Investment Corporation (MTG).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Thursday’s Analyst Blog:

Will CIT Be Allowed to Fail?

It appears that the CIT Group (CIT) is on the verge of filing for bankruptcy as it has been unable to reach a deal with the government for emergency funding. The fate of the ailing business lender will provide a crucial clue into the Obama Administration’s future stance on the bailouts for financial firms.

While CIT is much smaller than other firms that received frequent bailouts -- such as Bank of America (BAC), Citigroup (C) and American International Group (AIG) -- it is not exactly small. However, there appears to be a view in the administration now that it is the type of company that should be allowed to fail since the economy is now strong enough to absorb a failure of company that is not "too big to fail."

If CIT collapses, it will be the first time since the collapse of Lehman Brothers that the administration has declined to bail out a struggling financial company of significant size. The company is a source of funding for thousands of small and mid-size businesses. It is also a big player providing cash advances to clothing manufacturers and suppliers, and credit to retailers.

The impact of its failure could be particularly severe in California because of the state's large apparel-import business. If the company were to file for Chapter 11 protection, it would probably be the fourth-largest bankruptcy by assets.

MGIC Badly Misses Estimates

Before the opening bell today, MGIC Investment Corporation (MTG) announced its second quarter results. Core earnings shrank to -$2.74 per share from -$0.81 in the prior year period, abysmally missing our expectations of ($0.65) per share.

Total revenue increased 7.1% year over year to $454.5 million. Net premiums written decreased 11.14% year over year to $330.4 million. New Insurance written declined considerably by 58% year over year to $5.9 billion. Persistency (% of premium remaining in force from the prior year) improved to 85.1%, compared with 79.7% in the prior-year period. The percent of delinquent loans doubled to 12.04% as compared with 6.02% in the prior-year period.

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The same activity, undertaken in Russia or China in the not-too-distant past, could easily lead to a bullet in the head, or at least a 10-year stretch in the gulag.

For those of us trading in the “free” markets of the West, it’s just a matter of money. Unfortunately, getting stung by having the rules of the game changed when you’re already set in a trading position is a painful reality. It happened to me last July when I had a short position in JP Morgan shares, and the SEC’s emergency order against “naked” short selling (whatever that is) in the securities of Fannie Mae, Freddie Mac and 17 primary dealers caused a huge price spike in all those companies’ shares.

The US$10 jump in JP Morgan’s shares that resulted was enough to blow through my stops, turning a decent profit into a loss. Tough luck for me, but it’s still galling in hindsight, when you see that those short-selling restrictions didn’t do a whole lot of good for investors in Lehman Brothers, Fannie Mae or Freddie Mac, to name three of the companies on the list, and the reason for the introduction of the rules was given as the need to prevent downward pressure on the banks’ share prices.

So when you see the CFTC start to take a look at position limits in futures for all “commodities of finite supply”, watch out. Incidentally, the only commodity I can think of that is not in finite supply is helicopter Ben Bernanke’s US dollar, but I suppose it’s too much to ask for the US authorities to turn that tap off.

We’ll have to wait a bit longer to see what the CFTC comes up with, but if they are in the business of trying to stop energy price “manipulation”, why don’t they take a look at the oil price recommendations put out by Goldman Sachs since the beginning of last year?

To recap, the US bank forecast a “super spike” in the price of crude to $150-200 a barrel last May, not long before the oil price hit a peak of $147. Then, in January this year, the bank predicted a dip in prices to below $30 a barrel, just before the bottom in the crude price. On 4 June, it raised its 2009 price forecast to $85 a barrel, showing uncannily wrong timing again, since the price of WTI crude has since fallen back from over $73 a barrel to the current $60.

Suggestions that the bank has been saying one thing and trading in the opposite direction itself are not new—Forbes ran a story on this a few months ago—but are notoriously difficult to prove. Let’s just say that, if the bank’s proprietary traders had been following their own analysts’ advice, it’s unlikely that the press would be talking about record bonuses in 2009 for Goldman employees.

I’m not holding my breath that the regulators will even turn an eye to this—after all, conflicts of interest in large securities firms have long been endemic. Unless regulators are willing to bite the bullet and fully separate trading and investment banking activities from advisory ones, markets can hardly be seen as a level playing field. Eliot Spitzer had a go at changing things a few years ago, but with little success.

From past experience, unfortunately, complaints against “speculators” are likely to be used as an excuse to favour one group of market participants over another. And the small guys that invest in index-tracking products are unlikely to wield the same clout as the big players in determining how these rules are set.

"Looking forward, I believe a more macroprudential approach to supervision--one that supplements the supervision of individual institutions to address risks to the financial system as a whole--could help to enhance overall financial stability. Our regulatory system must include the capacity to monitor, assess, and, if necessary, address potential systemic risks within the financial system. Elements of a macroprudential agenda include:   

• "monitoring large or rapidly increasing exposures--such as to subprime mortgages--across firms and markets, rather than only at the level of individual firms or sectors;"

• "assessing the potential systemic risks implied by evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products;"

• "assessing the potential systemic risks implied by evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products;"

• "ensuring that each systemically important firm receives oversight commensurate with the risks that its failure would pose to the financial system;"

The solution to that is to make sure that no bank gets big enough to pose such a risk. It is time to break them up, both by function (i.e. reimpose a modern equivalent of Glass-Steagall) and perhaps by region. Ten mini Citigroups (C) would each would not pose an overall risk to the system if one of them were to fail.

Of course you would want to keep an eye on them, just as the military keeps an eye on its 1,000 lb conventional bombs. However, the consequences of one of those going missing is much less profound than a missing nuke warhead.

Unfortunately, in the largely ad-hoc response to the crisis, we have been moving in exactly the wrong direction. JP Morgan (JPM) swallows up Bear Stearns and Washington Mutual, Wells Fargo (WFC) takes over Wachovia, and Bank of America (BAC) now owns Countrywide and Merrill Lynch. All of them were too big to fail before this started, and now they are way too big to fail. Either we regulate them extremely closely -- to the point where they will be complaining that every credit card being issued has to be first cleared with the Federal Reserve Board of N.Y. (OK, I'm exaggerating for effect here) -- or we break them up.   

• "providing a resolution mechanism to safely wind down failing, systemically important institutions;"

Without being in bankruptcy, we had to honor the CDS contracts at 100 cents on the dollar. The result was a huge backdoor handout to the banks (a much bigger scandal than the bonuses, IMHO). This would have provided an intermediate step where the new 80% owners of AIG (aka the taxpayers) could have just returned the premiums on the CDS's and rewritten the bonus contracts when we came in.

We can do this with smaller banks, but not with big bank holding companies or huge non-bank financial firms. We need this, and we need it right away.   

• "ensuring that the critical financial infrastructure, including the institutions that support trading, payments, clearing, and settlement, is robust;"

• "working to mitigate procyclical features of capital regulation and other rules and standards;"

However, somehow I suspect that as soon as good times come back, the banks will flex all their political influence (they have a lot, as Sen. Durbin (D-Il) said of the bankers and the Senate, "they own this place") so the cushion is never built up in the good times. After all requiring more equity will result in a lower ROE, and that might result in bonuses that are only in the seven figures rather than in the eight figures. The horror, the horror!   

• "and identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole."

The OTS actively went looking for more institutions to fall under its supervision, and its key marketing policy was that it would be the most toothless and ineffective of regulators. It was the most gung-ho on deregulation, and many of the biggest failures were firms that it was the primary regulator for, including Washington Mutual, Indymac and of course AIG.

We have to find ways to stop shopping around for your regulator and regulatory capture. The Fed would be a very good place to start. It is not comforting that the head of the New York Fed comes from Goldman, and still holds over ten figures worth of Goldman stock when he is now the primary regulator of the firm. That is more than just an appearance of a conflict of interest.

The board of directors of each of the regional Federal Reserve Banks are all made up of bankers. That is because the Federal Reserve is not owned by the government, rather it is owned (literally, not just figuratively) by the banks. Perhaps it is time we reconsider that arrangement. 

The speech is a good start, but it does not go far enough. We need to return to the principals that were behind the financial regulatory reforms of the 1930's. The three-legged stool of good solid accurate information, including of potential conflicts of interest (the SEC), making it safe to keep your money in the bank (the FDIC) and making sure the bank does not take your money and use it to play the tables in Vegas (Glass-Steagall). The precise form will be different than the old regulations, but the new order should embody the same spirit.