A20 Thursday, July 16, 2009

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Economy &Business

Obama Hears Dissent on Plan To Reform Financial Regulation

By Tomoeh Murakami Tse and Brady Dennis

Washington Post Staff Writers

BY BRENDAN MCDERMID — REUTERS

Traders work on the floor of the New York Stock Exchange yesterday; U.S. stocks racked up strong gains.

Stocks Get Boost From Tech, Energy

Intel Earnings Beat Analysts’ Forecasts, Help Spark Rally

By Renae Merle

Washington Post Staff Writer

A rally in the technology and en- ergy sectors helped spur a broad Wall Street rebound yesterday, lift- ing stocks to their highest levels in a month.

The Dow Jones industrial aver- age climbed 3.1 percent, or 256.72 points, to close at 8616.21 — the biggest point gain for the blue-chip index since March. The broader Standard & Poor’s 500-stock index was up nearly 3 percent, or 26.84 points, to close at 932.68, while the technology-heavy Nasdaq compos- ite index received the biggest lift, climbing 3.5 percent, or 63.17 points, to 1862.90. Stocks have languished in recent

weeks as investors feared that the recession would be more difficult than expected to escape. But trad- ers have recently regained some footing, sending the Dow up 5.8 percent so far this week, and the S&P and Nasdaq up 6.1 percent. The rally yesterday was sparked by better-than-expected earnings from Intel. The Silicon Valley chip giant reported a loss during the quarter and that sales slipped com- pared with the same period last year. The company’s results were

also weighed down by a charge for a $1.45 billion antitrust fine from the European Commission. But analysts were impressed by the company’s projection that per- sonal computer sales had already begun to improve and would strengthen further in the second half of the year. The results also marked the company’s best first- quarter to second-quarter growth since 1988, according to an Intel statement.

Intel’s stock climbed 7.2 percent

yesterday to $18.05 a share and helped lifted the rest of the sector. Advanced Micro Devices and IBM were up 8.7 percent and 3.8 per- cent, respectively.

Intel and Goldman Sachs kicked off what is expected to be a dismal earnings season this week by beat- ing analysts’ expectations. Inves- tors are hoping for signs that corpo- rations can not only beat low earn- ings projections but present signs that the slump in consumer spend- ing is easing, analysts said. Google, J.P. Morgan Chase and General Electric are all scheduled to report earnings this week. “We already know companies are cutting costs” to help them meet low earnings expectations, said Jack Ablin, chief investment officer

at Harris Private Bank in Chicago. “We would like to see revenue hold up, we want to see a more favorable outlooks.” Meanwhile, energy stocks rallied

yesterday as crude oil prices jumped 3.4 percent, to $61.54 a bar- rel on the New York Mercantile Ex- change. Exxon Mobil and Chevron were up 3.4 percent and 2.5 per- cent, respectively, while Conoco- Phillips climbed 2.7 percent. Investors shrugged off mixed economic news. The nation’s facto- ries cut production again last month, but not as much as expec- ted. And a spike in energy prices led to a 0.7 percent increase in con- sumer prices. Meanwhile, the Fed- eral Reserve forecast that the coun- try’s unemployment rate could rise to about 10 percent by the end of the year. The unemployment rate reached 9.5 percent last month. Investors are more focused on what the second half of the year will bring than more evidence of a weak economy, analysts said. “As long as the economic news is no worse than expected, then they will focus on earnings, which has been better than expected,” said Doug Roberts, chief investment strategist for the New Jersey-based Channel Capital Research Institute.

Key elements of the Obama ad- ministration’s regulatory reform plan came under attack again yester- day, with bankers criticizing propos- als meant to protect consumers and two former top securities regulators opposing plans to make the Federal Reserve the overseer of broader risks to the financial system. The representatives from the banking and mortgage industry ar- gued that the agency — which would have broad powers to guard consumers from abusive lending practices by overseeing mortgages, credit cards and other financial products — could cause more harm than good.

They said that creating a new fed- eral bureaucracy would further com- plicate an already convoluted reg- ulatory system. It would increase costs to consumers, they said, stifle financial innovation and leave cus- tomers with fewer choices in credit products. They also claim that con- sumer-protection issues are inextri- cably linked to an institution’s “safe- ty and soundness,” and that dividing oversight of those roles between regulators could be ruinous. Separately, in New York, an in-

vestors group led by former Securi- ties and Exchange Commission chairmen William Donaldson and Arthur Levitt broke with the admin- istration, saying that a small, inde- pendent board, not the Fed, should oversee risks that large and complex financial institutions and products pose to the broader financial sys- tem.

“We’re proposing what we think will be superior” to the Obama plan, Donaldson said in an interview. “To involve the Federal Reserve has the potential to compromise its main mission” to implement monetary policy, he said. The investor group is seeking to find a middle ground between the Obama administration, which wants the Fed to be the single regulator overseeing the health of the finan- cial system, and the “college of car- dinals” model advocated by some

Standard&Poor’s Commitment to Reform:

Restoring Confidence in the CreditMarkets

The recent global financial crisis has proven beyond doubt that a new course of action is required. Here at Standard & Poor’s, our business is no exception.

As the world’s leading provider of credit ratings, S&P has experienced a period of intense scrutiny since the credit bubble burst two years ago. While the vast majority of the 32 trillion dollars of securities that S&P rates performed as anticipated, the performance of our ratings in the area of residential mortgage- related securities was a major disappointment. This is something that we at S&P deeply regret.We have learned important lessons from this experience, and we have made changes to our business. Today, S&P is a very different place than it was two years ago.

These changes have not been made in a vacuum. Because we provide important global credit risk benchmarks for investors, we have consulted closely with hundreds of investors, regulators, and legislators from around the world.We have also focused on implementing internal reforms to complement new regulations that have been proposed by the Obama administration, the Securities and Exchange Commission, European Union and other governments around the world.

Through this process, we have identified and undertaken four core reforms to restore investor confidence in our ratings.

First, we have further strengthened standards to prevent conflicts of interest. One source of concern has been the issuer pay model for ratings.At S&P, we understand there must be a clear separation between analysts who analyze securities and employees who negotiate issuer fees. In recent months, we have taken steps to strengthen this separation.We have established a new rotational system for our analysts. And when an analyst leaves to work for an issuer, we have mandated “look back” reviews to ensure the integrity of our prior ratings.We have also separated the quality, criteria and rating functions and established a Risk Oversight Committee. To further increase independence from issuers, S&P is exploring proposals for tying compensation to the performance of ratings over time.

To reinforce these practices, we created a new S&POmbudsman earlier this year. The Ombudsman has the authority to bring unresolved matters directly to the CEO of McGraw-Hill and to the Audit Committee of the Board of Directors. The scope of the Ombudsman’s work is open to the SEC, and to public scrutiny.

But more remains to be done.We believe that the new securitization reforms proposed by President Obama, along with regulatory initiatives in Europe and elsewhere, will help further reduce the potential for conflicts of interest. In addition to requiring ratings firms to bolster policies for managing and disclosing conflicts, these regulations will also require issuers to provide investors with stronger representations and warranties, along with fuller disclosure of loan-level data. These measures will improve the quality of the securitization process for investors as well as ratings firms.

Second, we have increased the transparency of our ratings process by publishing “what if” scenario analyses and sharing the risk factors that we consider when analyzing securities.With this information on hand, investors have a clearer understanding of the assumptions that underlie our ratings. If they disagree with these assumptions, they can act accordingly in the market.

Third, we have taken steps to improve our performance in an area where ratings firms have struggled in the past – structured finance.We have revised our criteria to incorporate a measure of stability into investment grade ratings and have published economic stress scenarios to be used as benchmarks for enhancing consistency and comparability of ratings across sectors and over time. And to ensure that our analysts in all sectors are fully prepared, we have partnered with NYU’s Stern School of Business and American College Testing (ACT) to create a new, mandatory certification program.

Finally, we are responding to those who believe ratings firms should be more accountable for their performance to investors and regulators, beyond the market scrutiny our ratings and criteria receive on an ongoing basis.We support these calls for accountability. Like other market participants, ratings firms are already subject to securities fraud laws which prohibit us from knowingly issuing ratings that do not reflect our actual opinions. Under newly proposed legislation, the SEC would have the explicit authority to impose stiff punishments against firms that fail to meet regulations for disclosing conflicts of interest and ratings methodologies, similar to new rules in the European Union.

These new standards and regulations have fundamentally changed S&P, but our work is not complete. As countries continue adopting new regulations, we will continue working closely with policymakers to produce rules that are consistent around the globe. Ultimately, we envision a future when investors share the same safeguards wherever they put their money and when ratings agencies share a level playing field wherever they operate.

In the days ahead, we look forward to continuing our dialogue with investors.We are determined to earn back their trust. The people at S&P are dedicated to the highest quality standards and are committed to the revival of healthy and sustainable global credit markets.We measure our success by the benefits investors and issuers derive from ratings.

—Deven Sharma President

We always look for new ways to improve our business. If you have any suggestions or comments please share them with us at

www.standardandpoors.com

Business Digest

LEGAL

FTC, 19 States Target Loan Consultants

Prosecutors nationwide filed 189 legal actions against loan modification consultants accused of bilking homeowners desperate to make their mortgage payments more affordable. The lawsuits and cease-and-desist orders were part of a nationwide sweep of alleged sham consultants conducted by the Federal Trade Commission and officials in 19 states. The lawsuits seek millions of dollars in civil penalties, restitution for victims and a permanent injunction to keep the companies and the defendants from offering mortgage-relief services. Among the California organizations and companies named in the lawsuits are the Lucas Law Center,U.S. Homeowners Assistance, U.S. Foreclosure Relief, Loss Mitigation Services, Home Relief Services, RMR Group Loss Mitigation and United First. In the meantime, officials urged

borrowers having trouble making mortgage payments to avoid foreclosure counselors that demand upfront fees. Homeowners should never redirect mortgage payments to consultants who promise to pass the money on to lenders, the officials said.

—Associated Press

Justice Confirms Probe Into Credit Derivatives

The Justice Department says it is investigating the credit derivatives industry. Department spokeswoman Laura Sweeney said the antitrust division is probing possible anticompetitive practices in the credit derivatives clearing, trading and information services industry. Confirmation of the probe comes a day after the trading information services company Markit Group said it was being investigated in relation to the market for credit-default swaps.

—Associated Press

Fugitive Broker Captured in Spain

A former Wall Street broker who became a fugitive after being charged in a securities-fraud case has been captured in Spain, U.S. authorities said. Julian Tzolov had been the

lawmakers and heads of regulatory agencies.

Of the two, the administration’s approach has more serious draw- backs, the group said in a report re- leased yesterday. The Fed’s “credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratch- et higher their balance-sheet lever- age and amass huge concentrations of risky, complex securitized prod- ucts,” the group said. “Other serious concerns stem from the Fed’s reg- ulatory failures — its refusal to po- lice mortgage underwriting or to im- pose suitability standards on mort- gage lenders — and the heavy influence that banks have on the Fed’s governance.” Fed officials declined to com-

ment. The investor group was formed in

February with the stated goal to give investors a voice in the debate on regulatory reform. Its 18 members include Bill Miller, chief investment officer of Legg Mason Capital Man- agement; Barbara Roper, a director at the Consumer Federation of America; and Joe Dear, the invest- ment chief of the California public employees’ pension fund. Levitt, a Democrat, was head of the SEC from 1993 to 2001. He is an adviser to the District-based private- equity firm Carlyle Group. Don- aldson was a Republican SEC chair- man under President George W. Bush.

The investor group said that its fi- nancial oversight board would con- sist of a chair and no more than four full-time members and that all should be presidential appointees confirmed by the U.S. Senate. The group argued that the Fed, whose balance sheet has grown by more than $1 trillion as it has taken a lead role in implementing various financial rescue programs, already has a full plate and that its “tendency to favor secrecy could undermine consumer and investor protec- tions.”

The group added that while it

was concerned about the Fed’s pro- posed role, it “embraces” the crea- tion of a consumer-protection agen-

cy.

Also yesterday, multiple trade as- sociations representing the insur- ance industry wrote to lawmakers, urging them to exclude all lines of insurance from the new agency’s purview.

The organizations wrote that while they favor strong consumer protection, “existing consumer pro- tection standards already apply to insurers and producers, and the pro- posed legislation could have adverse unintended consequences.” The letter was signed by more than a dozen organizations, includ- ing the American Insurance Associ- ation and the American Council of Life Insurers.

The debates came as members of Congress have heightened their criticism of the Fed, including Chair- man Ben S. Bernanke’s role in keep- ing Bank of America chief executive Kenneth D. Lewis from backing out of a merger deal with Merrill Lynch. Recently, some lawmakers have proposed increased oversight of the Fed, including opening up its mon- etary-policy decisions for audits by the Government Accountability Of- fice, an investigative arm of Con- gress.

Reflecting growing concern

about lawmakers’ efforts, more than 250 economists have signed an open letter to Congress and the Obama administration, urging politicians to reaffirm their support for the Fed’s independence.

“Calls to alter the structure or personnel selection of the Federal Reserve System easily could back- fire by raising inflation expectations and borrowing costs and dimming prospects for recovery,” the letter says.

Meanwhile, the administration continued yesterday to push its agenda for financial overhaul, as it delivered proposed legislation to federal lawmakers that would re- quire all advisers to hedge funds and other private pools of capital, in- cluding private equity and venture capital funds, to register with the SEC.

Murakami Tse reported from New York, Dennis from Washington.

The Washington Post

subject of an international manhunt since early May, when the former broker for Credit Suisse’s private banking division disappeared a few weeks before he was scheduled to go to trial in federal court in Brooklyn.

—Associated Press

Calpers Sues Bond-Rating Firms

The California Public Employees’ Retirement System, the largest U.S. public pension fund, sued the three major bond-rating companies over $1 billion in losses it said were caused by “wildly inaccurate” risk assessments. Standard & Poor’s, Moody’s

Investors Service and Fitch Ratings all gave their highest ratings to Cheyne Finance, Stanfield Victoria Funding and Sigma Finance, prompting Calpers to invest in them in 2006, the fund said in its complaint. The “structured investment vehicles” collapsed in 2007 and 2008, defaulting on payments to Calpers, it said. The underlying assets of the three firms, Calpers said, consisted primarily of risky subprime mortgages.

—Bloomberg News

SEC Charges 11 With Insider Trading

The Securities and Exchange Commission charged 11 people in connection with separate insider trading schemes related to acquisition deals at two different companies.

According to the SEC, five people illegally tipped off others or traded on private information ahead of Liberty Mutual Insurance’s 2008 announcement that it would acquire insurer Safeco.

The SEC also charged six other people for illegally trading on private information ahead of private equity firm Odyssey Investment Partners’ 2005 announcement that it would acquire equipment rental company Neff Corp.

—Associated Press

AUTOMOTIVE

GM to Invest $1 Billion in Brazil

General Motors will invest $1 billion to develop two car models in Brazil, despite woes at the company’s headquarters in the

United States. The bulk of the investment will go for production of new small- and mid-size cars at the Gravatai plant in southern Brazil, said Jaime Ardila, president of GM’s operations in Brazil and other Mercosur trade bloc nations.

—Associated Press

White House Opposes Dealership Legislation

The White House yesterday said that it opposed legislation that would compel General Motors and Chrysler to keep open some of the 2,000 dealerships the companies have slated for closure. Both of the automakers, now partially owned by the U.S. government, have sought to close dealerships in an attempt to shrink their sales networks in proportion to the drop in car sales.

The White House said the bill, which now has more than 240 sponsors in the House, could set a “dangerous precedent.” The administration noted that several constituencies — unions, retirees, shareholders, suppliers — have granted concessions as the companies have made painful cuts.

—Peter Whoriskey

EARNINGS

American Airlines’ Loss Narrows

American Airlines parent company AMR reported second-quarter results that beat analysts’ expectations as it posted a narrower second-quarter loss, $390 million, compared with a $1.46 billion loss a year ago. Revenue fell 21 percent, to $4.89 billion from $6.18 billion in the year-ago period, offsetting the airlines’ savings in fuel costs; American reported that fuel costs fell 45 percent from a year ago, a savings of nearly $1.1 billion.

—Associated Press

Abbott Profit Dips On Lower Sales

Drug developer and medical device maker Abbott Laboratories said second-quarter profit fell 3 percent compared with the same period a year earlier, to $1.29 billion, on a mix of buyout charges and lower drug sales, but the results still met Wall Street forecasts. Revenue rose 2.5 percent, to $7.5 billion from $7.31 billion a year ago.

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