After a two-week selloff, fueled in part by concerns that the seven-month old rally had gotten ahead of any economic recovery, stocks got a boost last week following better-than-estimated economic numbers and Alcoa’s (NYSE:AA) surprise quarterly profit.  That helped investors set aside worries and extend the rally.  Meanwhile, White House economic adviser Lawrence Summers reiterated the Obama administration’s commitment to a strong dollar, citing recent comments by U.S. Treasury Secretary Timothy Geithner.

This morning’s stock futures show markets are headed for a higher opening as the busy week of earnings commences. Ahead of the market's open, Dow Jones industrial average futures are up 59 points, or 0.6%, to 9,866.  Standard & Poor's 500 index futures gained 7.30 points, or 0.7%, to 1,075.40, while Nasdaq 100 index futures rose 11 points, or 0.6%, to 1,736.50.

On Friday, the Dow Jones industrial average rose 78 points, or 0.8%, to 9,864.94 -- its highest closing level in a year.  The S&P 500 index gained 6 points, or 0.6%, to 1,071.49 and the Nasdaq climbed 15 points, or 0.7%, to 2,139.28.  On the New York Stock Exchange, advancing issues beat those that declined in price by a three-to-two margin.  For the week, the DJIA rose 4% and the S&P 500 index gained 4.5% - their best performance since July.  The Nasdaq advanced 4.5% during the week.

Last week's rally saw all but one of the S&P500 industry sector recording gains.  Only telecommunications shares failed to advance, and fell 5.9%, following AT&T's (NYSE:T) announcement that it plans to allow internet-based phone calls on phones including Apple's (NASDAQ:AAPL) iPhones.  The gains last week were led by basic materials (+8.4%), oil and gas (+7.6%), financials (+6.3%), industrials (+5.0%), tech (+4.9%), consumer services (+4.5%), consumer goods as well as utilities (+2.9%), and health care (+2.7%).  Financials rose after a Goldman Sachs (NYSE:GS) report recommended large-cap banks. Gains in industrial shares were helped by last week’s fall in dollar and Caterpillar's (NYSE:CAT) announcement that it plans to hike prices globally in 2010.  Retail shares rose after firms reported better-than-expected comparable monthly sales numbers.

This week sees the release of the first big batch of third-quarter earnings.  Companies reporting their numbers include Johnson & Johnson (NYSE:JNJ), Intel (NASDAQ:INTC), JP Morgan (NYSE:JPM), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), Nokia (NYSE:NOK), Google (NASDAQ:GOOG), IBM (NYSE:IBM), Bank of America (NYSE:BAC), and General Electric (NYSE:GE).

The administration has focused on five key areas:

• Raising capital and liquidity requirements for all institutions, consolidated supervision by the Federal Reserve for "too big to fail" firms and establishing a council of regulators for better coordination
• Robust reporting requirements on the issuers of asset-backed securities, reducing reliance on credit-rating agencies, harmonizing the regulation of futures and securities, and strong oversight of "over-the-counter" derivatives
• Stronger framework for consumer and investor protection
• Resolution mechanism for the orderly resolution of "too big to fail" financial holding companies
• Improving regulation and supervision around the world

As a result, the financial institutions were able to shift risky products to less-regulated entities or entities having favorable accounting treatment. This calls for consolidated supervision of parent companies and all related entities as well as better coordination among all regulators.

The OTC derivatives include credit default swaps that caused the near-collapse of AIG (AIG). In view of the enormous size of the market and the threats these instruments pose to the financial system, their regulation is long overdue.

Also required is stronger coordination with regulators of other countries so as to effectively regulate financial giants like Citigroup (C), Bank of America (BAC) and JP Morgan Chase (JPM), which have operations all over the world.

The Treasury Department cleared the way for as many as ten large banks to return $68 billion in bailout funds on Tuesday in a move that will ease rising concern among these companies regarding federal interference in matters of corporate governance.

JPMorgan Chase & Co. (JPM), American Express Co. (AXP), U.S. Bancorp (USB), Capital One Financial Corp. (COF), Bank of New York Mellon Corp. (BK) and BB&T Corp. (BBT) are among the banks that have confirmed receiving permission from regulators to refund Troubled Asset Relief Program (TARP) money.

Treasury secretary Timothy Geithner said, "These repayments are an encouraging sign of financial repair, but we still have work to do." Congress had created the $700 billion TARP fund last October to rescue beleaguered banks that threatened to capsize as the financial crisis deepened.

The Treasury had initially estimated about $25 billion of taxpayers' money to be returned this year. However, as banks scurried to ward off government checks on executive payment, so far 22 small community banks have already repaid $1.9 billion of those funds. With larger banks now lining up to return their share, the government might be able to help other struggling financial organizations.

These large banks will remain under pressure, however, at least until they are able to rid themselves of preferred shares they issued to the government under terms of the bailout program. Moreover, with the Obama administration chalking basic guidelines on executive compensation at large corporations, including those that have repaid TARP funds, these banks have more to worry about than just the state of the economy.

General Motors' shares were delisted by the New York Stock Exchange and were dropped from the Dow Jones Industrial Average. Dow Jones said General Motors and Citigroup (NYSE:C) will be officially dropped from the average on June 8 and will be replaced by Cisco Systems (NASDAQ:CSCO) and Travelers Companies (NYSE:TRV). Cisco Systems jumped 5.4% to $19.50 and Travelers Cos., the biggest U.S. property insurer by market value, added 3.1% to $41.91.  Dow Jones said Citigroup (NYSE:C) is being dropped from the average amid "a substantial restructuring which will see the government with a large and ongoing stake."

The Commerce Department said US construction spending rose unexpectedly in April, with total spending rising 0.8%, to a seasonally adjusted annual rate of $968.67 billion compared to March.  Wall Street had expected a 0.9% decline.  Prudential Financial (NYSE:PRU), meanwhile, refused to access government's program for additional funds, and announced plans to raise $1.25 billion through a common stock offering. SunTrust (NYSE:STI) which needs $2.2 billion in additional capital outlined by last month's stress tests, announced plans to raise $1.4 billion in a common stock offering.   

Government bonds fell again Monday, driving yields back near last week's highs with the yield on the benchmark 10-year note rising to 3.68% from 3.46% late Friday.  The Reuters/Jefferies CRB Index of 19 raw materials increased for a sixth day, adding 3.1%.  Exxon Mobil Corp. (NYSE:XOM) added 3.5% to $71.76 and Chevron Corp. (NYSE:CVX) jumped 3.8% to $69.21 as crude prices went beyond $68 per barrel.

Treasury Secretary Timothy Geithner arrived in China to reassure the country that its holdings of U.S. debt are safe even as government borrowing rises.

General Motors Corp., the world’s largest automaker for 77 years, will file for bankruptcy today, and emerge with majority ownership by taxpayers and liabilities reduced by more than 50 percent, the U.S. government said. The “new GM” will get $30.1 billion in bankruptcy financing from the government, and the Treasury “does not anticipate providing any additional assistance” after that, the Obama administration said yesterday in a statement. The federal government will have a 60 percent equity stake in the retooled automaker, and 12 percent will be held by the Canadian government, which is lending $9.5 billion to the company

“Our objective is to make sure we’re limiting our involvement to the minimum necessary, and that we get out of those involvements as quickly as we can,” Treasury Secretary Timothy Geithner said today in Beijing. “We want to have a quick, clean exit as soon as conditions permit.” The filing, which GM executives said last year wouldn’t happen, marks the plunge of a company that once made more than half the cars bought in the U.S. The Detroit-based automaker became burdened by higher costs than competitors and a reliance on fuel-guzzling light trucks as gasoline prices rose. GM has been battered by almost $88 billion of losses since 2004.

And the BBC;

Elliot Sloane, spokesman for an ad hoc bondholders committee, said investors representing about 54 percent of GM's bonds had agreed to exchange their unsecured bonds for a 10% stake in a newly restructured company, the Associated Press news agency reported. But it is still possible that dissident bondholders may mount legal challenges in the bankruptcy court.

Meanwhile, a US bankruptcy court judge in New York has approved the sale of fellow US carmaker Chrysler to a consortium including Italy's Fiat. The move, which is backed by both the US and Canadian governments, should enable the carmaker to exit bankruptcy protection in the near future. Under the terms of the deal, Fiat will control 20% of Chrysler, while 68% will be owned by a union trust, and the two governments will share 12%.

And finally, there is Reuters;

Since the start of the year, GM has been kept alive with U.S. government funding as a White House-appointed task force vetted plans for a sweeping reorganization that will be undertaken with $50 billion in government financing. By preparing to take a 60 percent stake in a reorganized GM, the Obama administration is gambling that the automaker can compete with the likes of Toyota Motor Corp after its debt is cut by half and its labor costs are slashed under a new contract with the United Auto Workers union. The governments of Canada and the province of Ontario agreed to provide another $9.5 billion to GM in a late addition to the plans for the bankruptcy that have been taking shape for weeks, U.S. officials said.

GM plans to close 11 U.S. facilities and idle another three plants. It has not provided an updated target for job cuts but had been looking to cut 21,000 factory jobs from the 54,000 UAW workers it now employs in the United States. The UAW would have a 17.5 percent stake in the "new GM." The Canadian government would own 12 percent stake and GM bondholders would get 10 percent.

Fritz Henderson, GM President & Chief Executive Officer will hold a press conference at 12.15 p.m. ET in which one would assume that more details are revealed. Of course, this was hardly surprising and one has the distinct feeling that the financial crisis was only the proverbial nudge which pushed GM into the abyss close to which the company had been situated for a long time due to a poor response to changing market dynamics. But don't take my word for it. Stories about GM's problems and potential demise, to a great extrent, preceded the financial crisis and this is thus not a surprise for anyone I'd imagine.

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Here are highlights from Thursday's Analyst Blog:

Consolidated Banking, Maybe?

Clearly the cobbled-together oversight from various federal agencies was ineffective to contain the current financial crisis that all but swallowed the U.S. last year -- institutions such as but not limited to Citigroup (C), Bank of America (BAC), JP Morgan Chase (JPM) and AIG (AIG) -- and it remains in fairly close proximity to do so again.

Several weeks ago, U.S. Treasury Secretary Timothy Geithner sent to Congress a proposal to potentially to overall the current supervision of financial markets. While much is still up in the air, it is now expected as early as mid-June 2009 that the Obama Administration will make a formal recommendation to Congress for the creation of a single banking regulator to oversee the entire sector. It would be hoped that if such a proposal were sent to Congress it woud be finalized by the end of the year to help resolve the current quagmire.

Currently, a disconnected grouping of state and federal regulators oversee financial institutions throughout the country. It is not anticipated that the Obama Administration will propose the elimination of this so-called "Dual Banking System."

The new regulator would serve as primary regulator for the nationally chartered banks and thrifts, serve as a secondary oversight for the more than 5,000 state-regulated banks and the primary regulator for the nationally chartered banks and thrifts, and help to streamline supervision of banks and make it harder for banks to game the system by shopping for the lightest form of oversight.

UTStarcom - Big Opportunities

We expect UTStarcom, Inc. (UTSI) , a provider of IP-based telecom equipments, to receive further demand for its IPTV solutions as mobile TV systems become increasingly popular in China and India due to nationwide deployments of 3G wireless networks.

UTStarcom's transformation from a mobile handset developer to an IPTV and optical transport solutions provider has been favorably implemented.

Moreover, the company's current valuation is below its net cash position. At the end of the first quarter, the company had approximately $2.41/diluted share of cash position with no outstanding debt.

On the other hand, the markets for IPTV solutions and intelligent switching products are highly competitive and this, together with global economic weakness, may hinder efforts to improve the company's earnings power.

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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=2677

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=4580.

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.

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Visit: www.zacks.com

The U.S. Treasury is expected to extend more than $7 billion in fresh aid to GMAC LLC in a move that could turn the government into a majority stakeholder in both the auto lender and its parent General Motors Corp (GM).

Last week, federal stress tests indicated that GMAC needs to raise $11.5 billion to plug capital holes in order to endure a deepening recession. GMAC has already received more than $5 billion in government bailout last December.

After several weeks of holding talks to secure additional capital, the government's new aid will allow the firm to revive its battered balance sheet from rising home foreclosures and defaults in its auto finance unit. A large part of these funds will be used to provide financing to customers for buying Chrysler and GM vehicles.

After rescuing several large banks from definite failure, the government is now trying to drag Detroit automakers out of doomsday by encouraging more lending. Thus, Treasury Secretary Timothy Geithner recently said that the administration will provide substantial support to GMAC.

After Chrysler's filing last month, it is increasingly looking like GM will be ushered into bankruptcy as well. It remains uncertain if the government will ever get back the funds it has injected or is in the process of putting into these company. The Treasury's investment in GMAC already bought it 5 million preferred shares in December. The Obama administration may push for a conversion of its GMAC stake into common equity after the new capital infusion.

Industry insiders belive that after its merger with Chrysler's financial arm, GMAC under government ownership would have the power to offer better loan terms to buyers of GM and Chrysler vehicles. This will not only pave the way for healthy competition with rivals like Ford (F), but also resuscitate the beleaguered auto sector.

Following the results of regulatory stress tests, several large banks are now seeking permission to return bailout funds received under the Troubled Asset Relief Program (TARP) to finally rid themselves of government intervention. The race for the first place now seems to be between JP Morgan Chase (JPM), Goldman Sachs (GS) and Morgan Stanley (MS).

"We believe we can and should be able to repay TARP," JP Morgan Chief Executive James Dimon said, "in the next few weeks". Speaking at the bank's annual shareholder meeting in lower Manhattan, Dimon said the TARP had been a "traumatic" experience and he would like to repay the $25 billion it received as soon as it got approval from the Federal Reserve.

According to news sources, JP Morgan, Goldman Sachs and Morgan Stanley have already applied to refund a combined $45 billion of TARP funds but the Federal Reserve is not expected to make any statement in that respect before the week of June 8.

Treasury Secretary Timothy Geithner has said that the Obama administration welcomes banks that want to repay funds from the $700 billion TARP. However, industry experts believe that he might delay approval for the refund til the government issues some broad constraints on compensation for the financial sector. One of the reasons behind the banks' fervor for returning the funds is because government intervention includes limitations on executive pay.

The government's stress tests already indicated that Goldman Sachs and JP Morgan did not require additional capital to exit the financial crisis. Morgan Stanley was asked to raise $1.8 billion, which the bank met by selling shares.

While most of the smaller banks that received funds have already repaid the capital, if the three New York banks get approval to return the funds, it would be the largest payback of taxpayers' money. The banks also have to decide whether they want to buy back the warrants that the government holds as part of the TARP agreements.

Pre-market futures suggest a higher opening on the Wall Street, following better-than-expected earnings from Home Depot (NYSE:HD), which reiterated full-year guidance and reported a 44% jump in profit despite lower sales.

On Monday, U.S. stocks rallied as Lowe's (NYSE:LOW) improved earnings outlook fueled optimism of a rebound in housing sector.  Chief Executive Robert Niblock advised, "Encouraging signs in recent weeks that suggest perhaps the worst is behind us."  Lowe's (NYSE:LOW) jumped 8.1%. Shares of Home Depot (NYSE:HD) also rallied on the news and ended the day with a 6.6% gain.  Lowe's results beat Street expectations and the firm's full-year guidance was ahead of consensus views. Goldman (NYSE:GS) added Macy's (NYSE:M) to "conviction buy" list, citing its $400 million cost savings plan and a likely recovery in profits as the economic situation rebounds.

On Monday, the S&P 500 gained 3% to 909.71 for its steepest gain in two weeks. The Dow Jones Industrial Average added 235.44 points, or 2.9%, to 8,504.8.  The NASDAQ led the indices with a 3.1% advance to 1,732.

The National Association of Home Builders' latest Housing Market Index which rose to 16 from 14 in April suggested home builders are growing increasingly confident. Citigroup (NYSE:C) raised its rating on Lennar (NYSE:LEN) from "hold" to "buy;" Lennar (NYSE:LEN) shares jumped 13.7%.  Taking the cue, DR Horton (NYSE:DHI) rose 8.8%; Centex (NYSE:CTX) 8.4%, and KB Home (NYSE:KBH) 8.2%.

The 3-month LIBOR declined 4 basis points to 0.79%, its steepest fall since March 19 and market's volatility index, the CBOE Vix, plunged 8.70% to 30.24.  On the NYSE, advancing issues outpaced declining stocks by a seven-to-one margin.  Volume was relatively moderate at 1.42 billion.

Of the thirty DJIA components, twenty-nine closed higher on Monday.  Financials were the leading gainers, up 6.7%, followed by a 4.8% jump in basic materials stocks, 3.9% in consumer services, and 3.4% surge in oil and gas and industrial sector shares.

Among financial components, Bank of America (NYSE:BAC) led the advancing issues with a 9.9% gain, followed by a 7.8% jump in American Express (NYSE:AXP), and a 6.7% advance in JP Morgan (NYSE:JPM) stocks.  Morgan Stanley (NYSE:MS) shares jumped 8.2%, Goldman Sachs (NYSE:GS) added 6.5%, and Wells Fargo (NYSE:WFC) surged 8.3%.  Financials got a boost after Goldman Sachs (NYSE:GS) added Bank of America (NYSE:BAC) to its "conviction buy" list, citing confidence in the banks' ability to come out of the current credit crisis, as well as expectations of improved second quarter results due to strength in refinancing and capital markets.  Citigroup (NYSE:C) raised its price target on Goldman Sachs (NYSE:GS) shares 10% to $160, citing improved debt and equity underwriting activity.

Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) applied for permission to repay TARP funds worth $45 billion.  State Street (NYSE:STT) shares jumped 8.5% in spite of news the firm would take a $3.7 billion loss putting conduits on its balance sheet.  The company said it will sell stocks to pay back funds borrowed under TARP.  However, after the markets' close, American Express (NYSE:AXP) announced plans to cut 6% of its global workforce, or 4000 jobs, citing increased defaults generated by the weak economy.

Today's economic posts include the 8:30 AM ET housing releases on building permits and housing starts. Both the posts are expected to show modest improvements.  April permits are expected to have risen to 530,000 from 516,000, and starts to 527,000 from 510,000. Minneapolis Fed President Gary Stern speaks at 1:15 PM ET on financial conditions. Crude prices hit $60 this morning, following yesterday's 4.8% increase, upon reports of a Sunoco (NYSE:SUN) refinery fire impacting Northeastern US supplies, and Nigerian militant threats to block waterways.

Chicago, IL - April 27, 2009 - Zacks Equity Research picks Teva Pharmaceuticals (TEVA) as Bull of the Day and Amgen, Inc. (AMGN) as Bear of the Day. In addition, the analysts at Zacks Equity Research discuss the latest on Wells Fargo (WFC), US Bancorp (USB) and SunTrust (STI).

Full analysis of all these stocks is available at: http://at.zacks.com/?id=2678

Bull of the Day

We are initiating coverage on Teva Pharmaceuticals (TEVA) with a Buy rating and a price target of $52. We are impressed with the company's strong performance in 2008 despite the global slowdown and are optimistic on growth prospects.

We expect Teva to continue posting strong revenues and earnings going forward thanks to new product launches, both generic and branded. We are also pleased to see Teva's progress with its branded and biogenerics pipeline. Biogenerics should help drive growth in the long-term.

Meanwhile, the recent acquisition of Barr Pharma should help Teva strengthen its position in the U.S. and expand its presence in Europe. We believe that the current share price represents an attractive entry point for long-term investors and recommend purchase up to the $52 level.

Bear of the Day

Results over the past few quarters demonstrate the challenging environment for Amgen, Inc. (AMGN) specifically with its key products, Aranesp and Enbrel. Management believes that the first quarter represents a trough with respect to product sales.

We struggle to see what re-accelerates Amgen's top-line in the second half of the year. Management's revenue guidance of $14.4 to $14.8 billion looks high to us, and seems to include significant inventory stocking on key product and/or a big upfront licensing deal for denosumab. We are hesitant to model either.

Amgen should be able to meet its EPS target of between $4.55 and $4.75, but with the top-line most likely staying weak, we struggle to see how the stock moves higher. We are advising investors to exit the stock. Our target is $40.

Recent Analysis from the Analyst Blog

World Meets on the Economy 

While we would view these meetings as positive for developing counties, both Dominique Strauss-Kahn [managing director of the International Monetary Fund (IMF)] and Robert Zoellick [the head of the IMF's sister organization, The World Bank] warned that the crisis is far from over. In addition, both believe the U.S. and Europe should allow developing countries an enhanced participation in the management of the World Bank.

In Ms. Strauss-Kahn's speech Thursday, she state that the IMF's governance should be reformed to permit a great influence from emerging markets and low-income countries. Currently, the IMF forecasts that the world economy could moderate by 1.3% this year, marking the first time a global decline would be registered since World War II.

At some point during his meetings with the G7 finance ministers today, Timothy Geithner, U.S. Treasury Secretary, should be outlining will outline the administration's efforts to clean up the U.S. banking system, in order to get the banks to lend again. If the efforts com to fruition, financial entities such as Wells Fargo (WFC), US Bancorp (USB) and SunTrust (STI) may be willing to open there coffers to borrowers.

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About the Bull and Bear of the Day

Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.

About the Analyst Blog

Updated throughout every trading day, the Analyst Blog provides analysis from Zacks Equity Research about the latest news and events impacting stocks and the financial markets.

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 by visiting http://at.zacks.com/?id=2677.

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 InvestmentResearch 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=4582.

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:Mark VickeryWeb Content Editor312-265-9380Visit: www.zacks.com

The Treasury is working with the Federal Reserve, the President's Working Group on Financial Markets, and Congress to put the rules in place.

The framework for regulatory reform will cover 4 broad areas: systemic risk, consumer and investor protection, eliminating gaps in the regulatory structure and international coordination.

Geithner will provide the details for each of these areas in the coming weeks while he focused on the systemic risk reforms in today's testimony.

The key elements of the plan to address systemic risk are:   

• 1) Establishment of a Systemic Risk Regulator    
• 2) More conservative capital requirements for important financial institutions  
  
• 3) Registration of private investment funds with assets over a certain threshold with the SEC    
• 4) Comprehensive framework for oversight of the OTC derivatives market    
• 5) Stronger requirements for money market funds to reduce the risk of withdrawals of funds    
• 6) Stronger resolution mechanism for potential failure of large complex financial institutions

Similarly, proposed oversight of exotic derivatives like the credit-default swaps (CDS) that were used both to hedge against but mostly to speculate on high-risk mortgage-backed securities. The market for CDS has ballooned to trillions of dollars, but has remained unregulated.

Other proposals like establishment of a systemic risk regulator, with authority to seize and restructure impaired firms like AIG (AIG) before they threaten the broader system are critically required. Equally important is the coordination among the national supervisors to properly oversee the risks of financial behemoths like Bank of America (BAC), JP Morgan Chase (JPM), Citigroup (C), which have operations all over the world. Please see Dirk's blog for more analysis on the issue

Well, it is not yet a done deal but to show what it means to be stuck between a rock and a hard place it would serve us well to have look at Hungary which, even among its CEE comrades, look comparatively battered and bruised. To make matters worse, Hungary received another blow to the kidneys as Prime Minister Ferenc Gyurcsany announced on Saturday that he was resigning his position. On the face of it, it is difficult to blame the guy since with Hungary being the first economy in Eastern Europe to secure a loan from the IMF to the tune of 20 million euros the corresponding budgetary cuts demanded look almost cartoonishly unrealistic relative to the economic situation.

Even as he presided over a reduction of the budget deficit from 9.2 percent of GDP in 2006 to about 3.3 percent last year, Gyurcsany was criticized in February by some opposition parties and the central bank for his proposed 900 billion forint ($4.1 billion) tax shuffle to boost growth. Critics said more spending cuts were needed to stabilize the economy in the short run and boost growth in the long run.

“The government no longer had any room to maneuver,” Gyorgy Barcza, chief economist at KBC NV’s Hungarian unit, said yesterday. “Without new measures, the budget deficit would be more than the target.”Failure to continue austerity measures could result in a downgrade of the country’s credit rating, David Heslam, Director of Fitch Ratings’ sovereign team, said in a statement today. The agency rates Hungary’s debt BBB, the second-lowest investment grade, with a negative outlook.

The Socialist Party is less than half as popular as its biggest rival. Backing for the government started slipping when it introduced austerity measures to close a budget gap in 2006. The resulting economic decline was worsened by the global crisis, forcing the country to seek international aid. The party had 23 percent support last month, the lowest in 10 years, compared with 62 percent for the largest opposition party, Fidesz, pollster Median said on its Web site on March 18. Gyurcsany’s popularity fell to 18 percent, making him the most unpopular premier since communism. The poll of 1,200 people has a margin of error of 2 to 6 percentage points.

As Edward put it recently, it is difficult not to note a irrevocable pattern in the (unfortunate) countries subject to IMF intervention whereby they collapse under the yoke of the measures demanded in trade for the loan. Of course, we should not only shoot at the IMF since in the context of e.g. the EU one wonders the extent to which western Europe can just idly watch a country such as Hungary spiral into the abyss without extending some kind of bilateral help. Note in passing here that Gyurcsany's resignation marks the second case of government jitters in an IMF supported economy. The second would be Latvia where the government resigned recently.

As it could have been expected the market was none to happy about the PM's resignation which brings us to question of raising those rates. Consider consequently that the Forint which have already been pounded relative to the Euro completed a 2.6 percent drop to 308.62 against the euro (click on image for better viewing).

Consequently and following the Prime Minister's resignation the central bank was forced to move with comments that all tools would be deployed to avoid the Forint depreciation to spiral out of control. Now, I would not want to contradict myself here and let me very clear then; I think that a weak Forint is a fundamental part of whatever future Hungary may have but in the near term and with the rating agencies thoroughly marking the outlook for Hungary with the negative label it is a tightrope walk for policy makers not least because we still have the unresolved issue of translation risk whereby liabilities are denominated in foreign currency (mostly swiss francs though) and assets in Forints. Conclusively, it is difficult to see why, given the economic reality, the central bank would want to raise rates, but it is also difficult not to concur that they need to do something with respect to ensuring some kind of order vis-à-vis Hungary's stakeholders not to mention investors. Perhaps this duality more than anything shows us the almost impossible situation Hungary now finds itself in.

Raising the Stakes?

Meanwhile and moving across the pond for a minute it appears that US authorities have just raised the stakes in the dramatic jeux d'horrible that is the unfolding economic crisis. Thus and following the Fed's shock and awe treatment of the markets last week as Bernanke rolled out measures to buy treasuries (presumably) in the primary market we got the long awaited details in Timothy Geithner's plan on how to deal with those toxic assets and consequently how to restore confidence in markets so that we just might go back to normal whatever that is these days.

Quite naturally, the plan (see also here and here) which includes most notably a public-private partnership scheme designed to take care of about 1 trillion USD worth of toxic asset has been parsed by many of the most astute economic pundits. From the horses own mouth this is how it is described;

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

Macro Man offers nothing but a sigh, Paul Krugman is in despair, Calculated Risk also seems skeptical that this is the right approach and finally Yves Smith also chimes in with a "thumbs down". I tend to agree with the skeptics and even though I have not really studied the proposal in detail the principal problem for me is that the government is putting up money for assets of which some are surely worthless and others may be work significantly less than current book value. In this way, it does nothing to solve the underlying issue and the risk for the taxpayer seems substantial. What I do like though about the plan is that it explicitly seeks to create a market when there obviously is none and this may be an important first step towards restoring some kind certainty as to where this is going.

Ah well, perhaps I and the rest of the gang above are just party poopers. What is certain is that the markets liked it and in fact Macro Man may have hit the proverbial nail on the head when he recently, and once again, evoked March Madness (click on image for better viewing).

Of course, if there ever was something resembling a sucker rally it is this but so far things look as they are working. Also we cannot rule out that this initiative may just be what it takes to allow these assets to be marked to (a credible) market which would mean that we had taken one important step in moving forward. One thing which I do like by the activism in the US is that it is just that; activist which flies in the face of ostrich attitude prevailing on this side of the pond.

Rates and Stakes

So, what do Hungary and the US have in common here? Except being in the midst of their worst economic crisis of, arguably, all time not a whole lot I guess. However, they are both being forced to move into uncharted waters when it comes to fighting off the current mess in the global economy and her financial system. It will be very interesting to see whether raising rates as well as the stakes will bring forth the intended effects.

One of the reasons this is so outrageous is that the promise of such bonuses was in fact one of the very factors that caused our current problems, creating incentives for managers of AIG to get out of solid insurance underwriting and into hedge fund gambling. If anyone had supposed that AIG had "learned its lesson", this report seemed to dash that hope against the wall like a plate of china.

Some may argue that AIG's hands were tied by contracts the company offered employees in the spring of 2008 promising that 2008 bonuses would be 100% of 2007 bonuses. Or that the inability of the Treasury Secretary to override these bonuses was cemented by the following clause in the American Recovery and Reinvestment Act signed into law on February 17:

The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.

Fox News blamed the above de facto AIG exemption on Senator Christopher Dodd (D-CT), suggesting a possible connection to the fact that Dodd was the largest single recipient of 2008 campaign donations from AIG. But Jane Hamsher documents that the words above were inserted after the bill left the senate and went to conference committee. Hamsher proposes instead that pressure from Treasury Secretary Timothy Geithner and National Economic Council Head Larry Summers played a role in those words' appearance in the final bill.

I have yet to find a clear account with actual names of the representatives and senators who thought prohibiting restrictions on bonuses promised before February 11 was a good idea. But somebody put that clause in, and the claim that the legislators all are shocked-- shocked-- to find this is part of what they voted for is, if nothing else, Exhibit 9,247 for the case that legislation needs to be sufficiently short that everyone can be expected to read it.

But more shocking yet, at least if we measure these things in dollars and cents, is the amount of taxpayer funds that have gone to compensate AIG's counterparties for bets those counterparties never should have been allowed to make.

Source: Capital Chronicls

On Sunday Larry Summers offered this explanation for the bonuses:

We are a country of law. There are contracts.... Binding contracts were entered into long before the government put any money into AIG. We're not a country where contracts just get abrogated willy-nilly.

But here's the point. AIG may have entered into contracts with its managers and its counterparties, but the U.S. taxpayers did not. A precondition for infusion of taxpayer funds has to be sufficient restructuring of pre-existing commitments to ensure that any new funds delivered achieve their purpose rather than simply prolong the problem.

If Geithner and Summers feel they lack the legal authority to ensure that kind of constructive receivership status for recipients of bailout dollars, then they should have delivered proposed legislation to Congress providing such authority on day one.

Or, given that we missed that deadline, maybe they'd consider giving us a plan that works tomorrow.

Technorati Tags: macroeconomics, economics, credit default swaps bailouts, AIG

Sin Stocks & Consumer Staples

That's the recipe for success in this downturn, according to a panel of investment pros put together by Forbes to review portfolio strategies in these troubling times. The story takes a look at a range of investments, including exchange-traded funds.

You can read the story here. 

XLF Gets Hammered In Market's Reaction To Geithner

This Barron's update notes that the Financial Select Sector SPDR (NYSE: XLF) got hammered on Tuesday as investors gave a big thumbs-down to Treasury Secretary Timothy Geithner. 

The article also mentions a column by a Dow Jones Newswires  writer about the speech. Not to toot one's own horn, but you might also be interested in our own Paul Amery's take on the whole affair. He's managing editor of IndexUniverse's European site and his views from the other side of the pond are quite revealing. 

You can read the Barron's story here. Paul's blog is here.

Fund Companies Going For Absolute Returns

David Hoffman at Investment News takes a look at how fund companies are focusing these days on absolute, rather than relative, returns.

You can read the story here.

Treasury Secretary Timothy Geithner began his remarks to the Senate Banking Committee this morning as follows:

To get credit flowing again, to restore confidence in our markets, and restore the faith of the American people, we have proposed a fundamental reshaping of the government's program to repair the financial system.

It all begins with transparency. We propose to establish a new framework of oversight and governance of all aspects of our Financial Stability Plan. The American people will be able to see where their tax dollars are going and the return on their government's investment. They will be able to see whether the conditions placed on banks and institutions are being met and enforced. They will be able to see whether boards of directors are being responsible with taxpayer dollars and how they're compensating their executives. And they will be able to see how these actions are impacting the overall flow of lending and the cost of borrowing.

To which I responded, Amen! And Amen! And I continued reading:

These new requirements, which will be available on a new website FinancialStability.gov, will give the American people the transparency they deserve.

So I surfed to that site, where I read:

This site is coming soon.

Hmmm. Going back to Geithner's statement:

Second, we are going to bring together the government agencies with authority over our nation's major banks and initiate a more consistent, realistic, and forward looking assessment about the risk on balance sheets. We're calling it a financial "stress test." We want banks' balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions that need it.

OK, so what do we do if we discover that an institution's balance sheet is, like, stressed?

Institutions that need additional capital will be able to access a new funding mechanism that uses money from the Treasury as a bridge to private capital. The capital will come with conditions to help ensure that every dollar of assistance is used to generate a level of lending greater than what would have been possible in the absence of government support.

Oh, dear. We obviously don't have clear details of the plan, only the concept, but it sounds to me like the wrong concept. As I've argued before, there basically are five parties who might be asked to absorb the losses on existing assets, namely, stockholders, creditors, managers, employees, and the taxpayers. My favored concept is, we use player 5 to get as much leverage as possible out of the first 4. It appears that the Treasury's concept is instead a continuation of Plan A, namely, hope that if we hold on tight and keep the ship from sinking long enough, everything will turn out OK.

And maybe it will. But if I were in Geithner's position, what I would be asking for immediately is legislative authority, where needed, to crack heads and make the tough decisions necessary to turn the financial system over to good banks rather than the walking dead.

But let's hand the microphone back to the Treasury Secretary:

Third, together with the Fed, the FDIC, and the private sector, we propose the establishment of a Public-Private Investment Fund. This program will provide government capital and government financing to help leverage private capital and get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions.

I'm even less clear as to exactly how that's going to work. Perhaps the statement released separately by the Federal Reserve fills in some details:

The Federal Reserve Board on Tuesday announced that it is prepared to undertake a substantial expansion of the Term Asset-Backed Securities Loan Facility (TALF). The expansion could increase the size of the TALF to as much as $1 trillion and could broaden the eligible collateral to encompass other types of newly issued AAA-rated asset-backed securities, such as commercial mortgage-backed securities, private-label residential mortgage-backed securities, and other asset-backed securities. An expansion of the TALF would be supported by the provision by the Treasury of additional funds from the Troubled Asset Relief Program.

Here's what I don't like about this. The Treasury is acting as though there's a sixth party who can step into the funding gap here in the form of the Federal Reserve. Once again, that will be OK if Plan A works out, that is, if things go well enough that the Fed's losses on any assets acquired and loans extended are limited to the TARP funds already authorized. But if not, we're back to the same calculation-- the Treasury must borrow (if foreigners remain willing) and taxpayers must ultimately pay the bill. Either that, or the Fed just covers the bill by printing money for the whole thing.

There's a very real danger in going as far down the road of Fed-Treasury cooperation as we already have. The Administration starts to think of the Federal Reserve as another cookie jar it can draw on to cover all these pesky bills which, if Plan A fails, we'll find are impossible to pay by any means other than monetization and a huge inflation.

And fear of that, if it catches fire, would be a far more destabilizing event than a controlled receivership for a few more big financial institutions.

S&P500 stock index on Feb 10. Source: Yahoo Finance

Technorati Tags: macroeconomics, economics, bailouts, Treasury Financial Stability Plan, credit crunch