Fed's Rising Balance Sheet Generates $76.9 Billion

January 10, 2012, 9:47 PM EST By Craig Torres

Jan. 10 (Bloomberg) -- The Federal Reserve will pay $76.9 billion to the U.S. Treasury as part of an annual dividend it remits after covering its own expenses from interest on its ballooning bond portfolio and other gains.

Total assets on the Fed’s balance sheet stood at a near- record $2.92 trillion on Jan. 4. The central bank expanded its portfolio by purchasing $2.3 trillion in U.S. Treasury debt, mortgage-backed securities and housing agency debt to push down longer-term interest rates once its benchmark lending rate hit zero in December 2008. The Fed expanded its portfolio in two rounds of asset purchases, known as quantitative easing.

Because the Fed funds itself by emitting currency on which it pays no interest, or by paying 0.25 percent on the deposits banks keep at the Fed, the central bank enjoys positive interest income. The yield on the 10-year Treasury note was 1.97 percent at 11:27 a.m. today in New York.

The bigger the Fed’s balance sheet, the more interest income it generates. This year’s dividend to the Treasury will be the second largest after 2010’s $79.3 billion. By comparison, the Fed paid $29.1 billion to the Treasury in 2006, when total assets on its balance sheet stood at $874 billion at the end of that year. The Fed’s balance sheet rose to a record $2.928 trillion on Dec. 28.

Last year, Federal Reserve’s 12 regional banks had $83.6 billion in interest income on securities held in their portfolios. An additional $2.3 billion was earned on sales of U.S. Treasury securities; the Fed reported $152 million in gains from foreign currency and income for services of $479 million. The reserve banks paid $3.8 billion in interest expenses on deposits held at the Fed.

Operating Expenses

The Fed said the reserve banks had operating expenses of $3.4 billion last year. The Fed was also assessed $1.1 billion for the cost of new currency and the expenses of the Federal Reserve Board in Washington, which does not generate interest income because it doesn’t operate as a reserve bank. Board expenses totaled about $470 million, according to a Fed official who spoke on a conference call with reporters.

Some $242 million of the income was also used to fund the operations of the Bureau of Consumer Financial Protection and $40 million funded the Office of Financial Research, two new units created by the Dodd-Frank legislation overhauling financial regulation.

--Editors: Christopher Wellisz, Gail DeGeorge

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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AutoNation CEO on 2012 Outlook for U.S. Auto Sales

Zynga IPO Outlook July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at

July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at YCMNet Advisors, Bob Rice, general managing partner at Tangent Capital Partners LLC, Paul Martino, managing director at Bullpen Capital, and Paul Bard, director of research at Renaissance Capital LLC, talk about Zynga Inc.'s plan to raise $1 billion in an initial public offering and the outlook for the company. (Excerpts. Source: Bloomberg)

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Europe Banks Resist Draghi Bid to Avoid Crunch by Hoarding Cash

January 11, 2012, 1:55 AM EST By Anne-Sylvaine Chassany and Gabi Thesing

Jan. 11 (Bloomberg) -- Banks are hoarding the European Central Bank’s record 489 billion-euro ($625 billion) injection into the banking system, thwarting attempts by policy makers to avert a credit crunch in the region.

Almost all of the money loaned to 523 euro-area lenders last month wound up back on deposit at the Frankfurt-based central bank instead of pouring into the financial system, according to estimates by Barclays Capital based on ECB data. Banks will use most of the money from the three-year loans to meet their refinancing needs for this year and next, analysts at Morgan Stanley and Royal Bank of Scotland Group Plc estimate.

“It’s illusory to think that the measure will translate into credit generation,” Philippe Waechter, chief economist at Natixis Asset Management in Paris, said in an interview. “It will assuage some of the anxiety banks have regarding their liquidity needs. But they’ve engaged into a massive overhaul of their strategy and shrinkage of their balance sheets, which is, coupled with the deteriorating economy, not compatible with increasing credit.”

Governments are urging European banks to keep lending to companies and individuals while requiring them to raise an additional 114.7 billion euros of core capital by June to weather a deepening sovereign-debt crisis. Instead of raising equity, most lenders across Europe have vowed to meet capital rules by trimming at least 950 billion euros from their balance sheets over the next two years, either by selling assets or not renewing credit lines, according to data compiled by Bloomberg.

That has stirred concern among policy makers that banks will cut lending and throttle growth in the euro region.

ECB Deposits

Banks have been parking almost all extra liquidity from the ECB loans back at the central bank. Barclays Capital estimates firms used 296 billion euros of the Dec. 21 three-year loans to replace maturing shorter-term ECB borrowings. That left only 193 billion euros of additional money for the financial system. Overnight deposits with the ECB have climbed by 219 billion euros since the loans to a record 482 billion euros, suggesting the central bank funds haven’t so far reached customers.

Banks account for about 80 percent of lending to the euro area, making them “crucial to the supply of credit,” according to recently installed ECB President Mario Draghi. By contrast, U.S. companies rely more on capital markets for financing, selling bonds to investors.

The ECB lending, and a follow-up loan offering on Feb. 28, won’t ease the pressure on banks to shrink, say analysts including Huw van Steenis at Morgan Stanley in London.

“The ECB loans will largely be used to pre-fund 2012 and some of 2013’s bank refinancing needs, but it will not stimulate lending,” Van Steenis said. They will “just stop it falling off precipitously.”

Refinancing Needs

Euro-area banks have more than 600 billion euros of debt maturing this year, the Bank of England said in its financial stability report last month. The first ECB loan offering should help cover about two-thirds of that amount, Goldman Sachs Group Inc. analysts say. Morgan Stanley’s Van Steenis estimates banks may reduce assets by as much as 2.5 trillion euros in two years, a process known as deleveraging.

The volume of loans to households and companies in the 17- nation euro area shrank in November for the second consecutive month, the ECB said on Dec. 29. Loans were still up 1.7 percent over the year-earlier period, slowing from a 2.7 percent increase in the 12 months through October.

When granted, loans are getting costlier for borrowers. Since July, interest margins have increased, with investment- grade borrowers in Europe paying an average of 91.6 basis points more than benchmark rates, up from 84.4 basis points during the first half of 2011, according to data compiled by Bloomberg. A basis point is one-hundredth of a percentage point.

Merkel, Sarkozy

“We must avoid a credit crunch for our economies,” European Union President Herman Van Rompuy said on Jan. 9. “The recent measures by the European Central Bank on a long-term lending facility for the banks are welcome in this context.”

The European Banking Authority, which oversees the region’s regulators, asked banks on Dec. 8 to retain earnings, curb bonuses and raise equity to boost core capital before resorting to cuts in lending.

The EBA followed both French President Nicolas Sarkozy and German Chancellor Angela Merkel in urging banks to keep lending. Sarkozy said on Oct. 27 that he had asked firms to shift “almost all” of their dividends into strengthening balance sheets and to make bonus practices “normal.” Merkel said on Oct. 9 she was “determined to do whatever necessary to recapitalize the banks to ensure credit to the economy.”

‘No Credit Crunch’

Bankers have said they haven’t restricted lending and that demand for credit is slowing as growth slows.

“All banks I talk to keep lending to small- and medium- size enterprises and households,” Christian Clausen, president of the European Banking Federation, an industry association, said on Dec. 9. “That part of the bank will keep rolling.”

There is “no credit crunch,” Frederic Oudea, chief executive officer of Societe Generale SA, France’s second- biggest lender, and chairman of the French Banking Federation, said last month. “The reality is that credit is available,” he said in an interview on BFM radio on Dec. 16.

Even so, companies across Europe say credit is tightening.

In France, where credit to the private sector increased by 3.7 percent in November compared with a year earlier, the majority of the country’s company treasurers said they encountered “very strong tensions” in negotiating bank loans, with more than 50 percent of respondents saying the process led to more expensive terms, according to a December survey by the French Association of Corporate Treasurers.

‘Double Punch’

The majority of those polled said obtaining bank financing was “as difficult as at the end of 2008,” after Lehman Brothers Holdings Inc. collapsed.

U.K. banks expect to toughen their criteria on loans to companies and households in the first quarter because of strains in the wholesale funding market, the Bank of England said Jan. 5in its fourth-quarter Credit Conditions Survey.

Belgian credit growth slowed to 3.1 percent in the 12 months to the end of October, from 3.6 percent at the end of September, the country’s central bank said on Dec. 12.

With the ECB’s injection, “deleveraging may happen in a more orderly way, but it doesn’t mean it will be painless,” said Alberto Gallo, head of European credit strategy at RBS. Banks are faced with high long-term financing costs, a deteriorating economy and difficulties raising capital, he said. “It’s what I call the double punch: A combination of negative growth and banks’ deleveraging will affect lending activity.”

Draghi’s Priority

Even the ECB’s Draghi, who has made it one of his priorities is to keep credit flowing into the economy, said the central bank’s loan offerings may fail to achieve that goal.

“Monetary policy cannot do everything, but we’re trying to do our best to avoid a credit crunch that might come from a lack of funding,” Draghi said Dec. 19 at the European Parliament in Brussels. “We have to be extremely careful here, because there may be other reasons that create a credit crunch.”

Draghi may be wary of the U.S. experience with multiple rounds of bond purchases. That so-called quantitative easing hasn’t stimulated lending, Natixis’s Waechter said.

“Lending really picked up when the economy got better,” he said.

The ECB cut its forecast for euro-area economic growth in 2012 to 0.3 percent on Dec. 8 from a September prediction of 1.3 percent. The central bank expects the economy to expand 1.3 percent next year.

‘Kick the Can’

In the U.S., almost all categories of bank lending fell in 2009 and 2010 and didn’t start improving until last year, when the Federal Reserve stopped its second wave of quantitative easing, according to data by the U.S. institution. Banks increased their holdings of Treasury and agency securities in 2009 and 2010, showing they were using the Fed’s cheap money to own safe government paper.

Because quantitative easing tends to improve capital markets first, the healing will be even slower in Europe given its reliance on banks for borrowing, according to Gallo.

“The ECB loans are a kick-the-can measure that doesn’t fix the banks’ structural problems,” Gallo said. “Deleveraging needs to happen.”

--With assistance from Christine Harper in New York, Patricia Kuo in London and John Martens in Brussels. Editors: Keith Campbell, Edward Evans, Robert Friedman.

To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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Hildebrand Resigns After Franc Trade Controversy

Zynga IPO Outlook July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at

July 7 (Bloomberg) -- Michael Yoshikami, chief investment strategist at YCMNet Advisors, Bob Rice, general managing partner at Tangent Capital Partners LLC, Paul Martino, managing director at Bullpen Capital, and Paul Bard, director of research at Renaissance Capital LLC, talk about Zynga Inc.'s plan to raise $1 billion in an initial public offering and the outlook for the company. (Excerpts. Source: Bloomberg)

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Europe’s $39 Trillion Pension Threat Grows as Economies Sputter

January 11, 2012, 1:48 AM EST By Rebecca Christie and Peter Woodifield

(See EXT4 for more on the sovereign debt crisis.)

Jan. 11 (Bloomberg) -- Even before the euro crisis, people were worried about Europe’s pension bomb.

State-funded pension obligations in 19 of the European Union nations were about five times higher than their combined gross debt, according to a study commissioned by the European Central Bank. The countries in the report compiled by the Research Center for Generational Contracts at Freiburg University in 2009 had almost 30 trillion euros ($39.3 trillion) of projected obligations to their existing populations.

Germany accounted for 7.6 trillion euros and France 6.7 trillion euros of the liabilities, authors Christoph Mueller, Bernd Raffelhueschen and Olaf Weddige said in the report.

“This is a totally unsustainable situation that quite clearly has to be reversed,” Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in a telephone interview.

A recession threatening the world’s second-biggest economic bloc, along with efforts to reduce debt across Europe, is exacerbating the financial risks. Stable or falling birthrates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14 percent by 2060, according to the ECB report.

Increased retirement ages and lower benefits must be part of any package to hold the 17-nation euro area together, according to analysts, including Fergal McGuinness, the Zurich- based head of Marsh & McLennan Cos.’s Mercer’s pensions consulting unit for central and eastern Europe.

Ageing Populations

Europe has the highest proportion of people aged over 60 of any region in the world, and that is forecast to rise to almost 35 percent by 2050 from 22 percent in 2009, according to a report from the United Nations. That compares with a global estimate of 22 percent by 2050, up from 11 percent in 2009.

The number of people aged over 65 in the 34 countries in the Organization for Economic Cooperation and Development is forecast to more than quadruple to 350 million in 2050 from 85 million in 1970. Life expectancy in Europe is increasing at the rate of five hours a day, according to Charles Cowling, managing director of JLT Pension Capital Strategies Ltd. in London.

In so-called developed countries, the average lifespan will reach almost 83 by 2050, up from about 75 in 2009, the UN said.

Cutting Costs

Governments and companies have taken steps to reduce future costs with policy makers having increased retirement ages in countries, including France, Germany, Greece, Italy and the U.K.

“Irrespective of whether you’re inside or outside the euro or anything else, raising retirement ages is one of the structural reforms that all of Europe has to do,” Kirkegaard said. “The crisis has forced them to address this. This is actually a positive thing in many ways.”

By 2060, the average French pension benefit will be 48 percent of the national average wage, compared with 63 percent now, said Stefan Moog, a researcher at Freiburg University in Freiburg, Germany.

Pension managers and governments are relying on economic growth to safeguard the promises they make. If the euro zone grows too slowly to bolster public and private coffers, the retirement plans may become unaffordable, according to Mercer’s McGuinness.

Benefits’ Squeeze

“The amount of money countries are going to spend on social security and long-term care is going to go up,” McGuinness said in an interview. “Governments with more generous social-security systems will have difficulty affording them. They will have to recognize these costs will impact their ability to reduce borrowings.”

State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. It’s more sustainable in France than Germany because of France’s higher birthrate.

Last year, there were 4.2 people of working age for every pensioner in France. The ratio will fall to 1.9 by 2050, according to a report by Economist magazine in March. In Germany, the proportion will decline to 1.6 from 4.1 in the same period.

“That is going to put a lot of pressure on Germany’s ability to meet their promises,” McGuinness said. “What they are more likely to do is cut back benefits. Governments face a lot of longevity risks.”

Private pension funds are under pressure too with benchmark euro-area interest rates at the lowest level since the 13-year- old currency was introduced. Low rates mean pension plans have to hold more assets to back their long-term payout projections.

Add to Risks

Unless growth returns, fund managers will effectively be forced to take on more risk, said Phil Suttle, chief economist of the Washington-based Institute of International Finance.

“That creates problems because they all head into sectors that seem a great idea now, and then they blow up, whether it’s commodities or equities or whatever,” Suttle said. “You’re going to intensify the boom-bust cycle.”

The growing doubts facing the euro area is another planning hurdle as companies reconsider investment strategies amid concerns that Greece may default on its debt and spark a broader euro breakup.

The implied probability of one country leaving the euro by the end of 2013 rose to 53 percent on Jan. 9 from 45 percent a week earlier, based on wagers at InTrade.com, an Internet betting market. The probability of one country departing by the end of 2014 is 59 percent.

Pension plans in countries such as Greece or Portugal may benefit from exiting the euro as higher interest rates that would likely accompany a return to their national currencies would cut the cost of liabilities, while assets invested abroad would almost certainly gain in value, according to Mercer, a unit of Marsh & McLennan Cos.

U.K. Plan

In Britain, which has refused to join the euro, occupational pension funds have moved the risk of ensuring adequate retirement income to the employee from the employer in the past decade to curb pension-fund shortfalls.

Unfunded public-sector U.K. pension obligations across 1,500 public bodies totaled 1 trillion pounds ($1.57 trillion) in March 2010, the Treasury said Nov. 29 in the first set of audited Whole of Government Accounts. That compares with a total of 808 billion pounds of outstanding U.K. government bonds and accounts for 90 percent of all public-sector pension liabilities.

Royal Dutch Shell Plc, Europe’s largest oil company, was the last member of the benchmark FTSE 100 Index to close its defined-benefit pension plan to new entrants when it made the decision last month to do so. The company plans to introduce a fund for new employees next year that makes them responsible for ensuring they have enough to live on in old age.

Governments may have to follow the same path for their own employees as well as increasing the retirement age to at least 70 and possibly 75 to make the pensions affordable, Cowling wrote in an article published in July by Public Service Europe.

--Editors: James Hertling, Tim Quinson

To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net; Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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Shrinking China Trade Surplus May Buttress Wen Rebuff on Yuan

January 08, 2012, 6:04 PM EST By Sophie Leung

Jan. 9 (Bloomberg) -- China’s trade surplus may narrow to an eight-year low in 2012 as slowing external demand undermines exports, a shift that may help the nation rebuff overseas criticism for maintaining an undervalued exchange rate.

Bank of America Corp., Credit Agricole CIB and Haitong Securities Co. estimate the surplus this year will slip below $102 billion. For December, the excess shrank to $9.45 billion, according to the median of 18 estimates in a Bloomberg News survey, indicating an annual surplus of $147.9 billion.

The latest monthly figures are due tomorrow, before the arrival in Beijing of U.S. Treasury Secretary Timothy F. Geithner, who said last year that China’s yuan hadn’t risen fast enough. With a prolonged crisis in Europe, the biggest Chinese trading partner, Premier Wen Jiabao may have little appetite to accommodate Geithner’s request, analysts said.

“The dollar-yuan exchange rate could be quite close to the equilibrium value and the room for further rapid yuan appreciation is limited” given a shrinking trade surplus, said Lu Ting, an economist at Bank of America in Hong Kong. “As China comes close to a balance of trade, political pressures from the U.S. will have to cool eventually.”

The yuan declined 0.25 percent last week to close at 6.3095 per dollar in Shanghai, after surpassing 6.3 for the first time in 18 years last month. It will gain 2.4 percent to 6.14 yuan per dollar by the end of this year, compared with a 4.7 percent increase last year, according to the median estimate of 28 analysts in a Bloomberg News survey.

Monetary Policy

A diminishing surplus may help moderate liquidity growth, giving China’s central bank more scope to cut banks’ required reserve ratio. Barclays Capital and Bank of America Merrill Lynch say the reserve requirement may be lowered before a weeklong Chinese New Year holiday starts on Jan. 23.

China’s central bank cut the ratio for the first time in almost three years in December to encourage lending. Money supply growth eased in November to the slowest pace in more than a decade, government data show. Expectations for more monetary easing escalated after inflation cooled to the slowest pace in 14 months in November and industrial output growth weakened.

Economic growth may slow to 8.5 percent this year, down from 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg News survey.

Reserves Moderate

China’s exchange-rate management has seen it accumulate the world’s largest currency reserves, with holdings at $3.2 trillion as of September. As the trade surplus fell and inflows of overseas capital diminished, gains in the reserves moderated. Quarterly growth slowed for four straight quarters through September, according to data compiled by Bloomberg.

“With the gradual stabilization of foreign-exchange reserves and close to zero current-account surpluses, China will have more arguments to oppose Washington’s demand on currency appreciation,” said Herve Lievore, an economist for Asia at AXA Investment Managers in Hong Kong.

China’s import growth outpaced that of exports every month since May as Europe’s turmoil hit. Estimates for December signal a 19 percent drop in the trade surplus last year from 2010. Commerce Minister Chen Deming said Jan. 5 the excess probably dipped 13 percent to $160 billion, or 2 percent of gross domestic product.

Geithner Trip

The U.S. Treasury said last month it will seek further gains in the yuan and called the currency undervalued, while declining to brand China a manipulator of its exchange rate. Geithner’s visit this week is part of a trip that also features a stop in Tokyo, with talks scheduled to include discussions on sanctions on Iran for its nuclear development plans.

Hu Yifan, chief economist at Haitong in Hong Kong, who previously worked at the World Bank, sees the annual trade surplus in a range of $70 billion to $100 billion. Credit Agricole’s Dariusz Kowalczyk predicts the excess at $60 billion. China’s merchandise surplus as a share of GDP rose to a record of 7.5 percent in 2007, when the surplus hit $262.2 billion.

“Given the European debt crisis and sharp slowdown of the European economy, China’s decline in its trade surplus will likely be faster than expected,” said Ma Jun, an economist at Deutsche Bank AG, who rated as top China analyst and Asia economist by Institutional Investor magazine’s 2011 poll. Ma said the surplus may shrink to zero by 2015.

A shrinking labor force and rapid aging of the population in a nation of 1.3 billion people will also reduce China’s surplus, Ma said. Such demographic changes will account for about 60 percent of the drop in the excess in the coming decade, Ma said in his 2011 book “Locus of Money,” based on the assumption that yuan will rise 3 percent annually against the dollar.

Not all economists are predicting a shift to balanced trade. BNP Paribas SA senior China economist Ken Peng, the most accurate forecaster of Chinese economic data in Bloomberg News surveys in 2011, said “China would still have a structural trade surplus, just because of the amount of migrant people employed in the exports industry.”

--With assistance from Ailing Tan in Singapore, Li Yanping in Beijing and Lily Nonomiya in Tokyo. Editors: Chris Anstey,

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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The Number One Biggest Mistake is Not Having a Clear Property Investment Strategy