Friday, August 22, 2014

Bank of America pays US$16.6 billion to settle claims on role on subprime mortgage collapse

The Bank of America has paid almost $US17 billion to settle allegations about its role in the events leading up to the global financial crisis.

US regulators had been probing claims that the bank misled investors into buying dodgy mortgage-backed securities which exploded when America's housing boom went bust more than six years ago.

It is a record payout, but Bank of America was not on its own in spruiking these risky subprime mortgages.

There were trillions of dollars of bets that US housing prices would continue to rise.

However, at almost $US17 billion, Bank of America is paying a much bigger price than other banks to resolve around a dozen state and federal investigations.

This morning, the US attorney-general Eric Holder said Bank of America's unlawful, unethical and immoral behaviour in marketing dodgy products had taken to US economy to the brink of collapse.

"These loans contained material underwriting defects. They were secured by properties with inflated appraisals. They failed to comply with the federal, state and local laws and they were insufficiently collateralised," he said.

"Yet these financial institutions knowingly and fraudulently marked and sold these loans as sound and reliable investments."

AUDIO: Bank of America fined US$17b over role in subprime crisis (AM)

Around $US7 billion of the settlement will be used for what is being called "consumer relief" for Americans who found the value of their home was suddenly a lot less than the outstanding mortgage.

Some will see their mortgage debts reduced, others will get lower interest rates and some of the settlement will be used to build affordable rental housing.

While that is a long-awaited positive, there is criticism that, so far, no banking boss has faced criminal charges in relation to the subprime mortgage collapse.

Dennis Kelleher of US financial watchdog Better Markets says, while a $US17 billion fine for Bank of

America sounds like a lot, it might be only be a fraction of what banks made from marketing dodgy products.

"There's no way to evaluate whether or not it is a lot of money, or whether or not it's fair punishment, or whether or not it will deter or incentivise future crime unless you actually know how much money the Bank of
America actually made from its illegal conduct, how much money its investors, customers and clients lost," he argued.

"So, for example, if they paid $US17 billion but they actually made $US200 billion from illegal conduct, then that's not much money and not only won't it deter future crime, it actually incentivises future crime."

Thursday, August 21, 2014

Fed softening world up for rate rise in early 2015

Throughout the year, the US Federal Reserve has been softening up for the world for what - at the moment at least - appears to be inevitable.

Once the US economy is on a firmer footing, inflation starts rising and the labour market has sufficiently strengthened - interest rates will need to move from their current emergency level of between zero and 0.25 percent.

But the big question has been one of "when".

The minutes from the Fed's July meeting released early this morning Australia time stoked anticipation about what will almost certainty be a dramatic event for global financial markets.

"Many participants noted that if convergence toward the committee's objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated". 

The unusually direct and optimistic tone from the Fed - almost six years after the Wall Street collapse - was fresh fodder for pundits who are now talking about a small rate hike early next year.

The changed language comes as the Fed's massive quantitative easing program is set to evaporate in October, having been reduced by a steady US$10 billion per month since late last year.

This time last year, the money printing program was pumping out US$85 billion per month as speculation began to build that an improving labour market meant the party of cheap and easy money was about to end.

Today's measured signal is not to say the messages from the Fed have always run to plan.

Back in March, in her first major appearance as the world's most powerful central banker, Federal Reserve chair Janet Yellen perhaps accidentally triggered the softening up strategy she told reporters that the first rate rise could be six months after the money printing ends. 

REPORTER: Could you tell us how long of a gap we might expect before the rate hikes do begin?

JANET YELLEN: You know, probably means something on the order of around six months or that type of thing but you know, it depends, what the statement is saying is it depends what conditions are like. 

Those surprisingly frank comments from Dr Yellen sparked a small fall on Wall Street as the prospect of an eventual rate rise began to take on some distant reality.

This morning's reaction was more subdued as investors focused on what they saw as positives - that the Fed will continue to support America's still-recovering economy for as long as needed and that any rate movement will be gradual.

While the US jobless rate is down from global financial crisis highs to 6.2 percent, there's growing scrutiny on hidden unemployment and whether the quality of jobs on offer amount to what America once regarded as a living wage.

Wednesday, August 20, 2014

BHP Billiton boss plays down Clive Palmer's "bastards" & "mongrels"swipe at China

The chief executive of BHP Billiton has played down Clive Palmer's comments that the Chinese are "bastards" and "mongrels" who shoot their own people.

Andrew Mackenzie says the relationship that BHP and the Australian government has with China remains warm and strong despite Mr Palmer's slap-down.

But the federal government has attacked Mr Palmer's comments about Australia's biggest trading partner as "hugely damaging" while the Chinese Embassy has branded them "absurd and irresponsible".

The diplomatic war of words overshadowed  a 23 per cent jump in BHP's full-year net profit to US$13.8 billion which in large part is from its trade with China.

Mr Mackenzie told AM that Mr Palmer's swipe, directed at the state-owned firm Citic Pacific, is unlikely to cause long term damage to either BHP or Australia.

"I believe that the strength of our company's relationships and the relationships that are enjoyed at government level and also many other companies are warm," Mr Mackenzie said.

"The mutual regard for the quality of our product, the security of our supply, are the ones that are going to rank more highly .. in the minds of the Chinese.

"China can see through that and the vast majority of Australians and how they relate to the Chinese people  and their country."

Mr Mackenzie sought to characterise Mr Palmer's comments on the ABC's Q&Aprogram as personal as the the federal government cautioned the mining magnate not to misuse his political postion.

"They're comments by an individual and you know, they're not on behalf of any other Australian supplier. And I do repeat that I think the quality of the relationships and the way in which companies like us and many others is what will actually be the bigger picture that'll be seen by most if not all Chinese. "

The head of the world's biggest miner also weighed in on the government's difficulty in getting key Budget measures though the Senate and agreed the impasse was a threat to business and consumer confidence.

Not surprisingly, Mr Mackenzie called for the urgent repeal of the minerals resource rent tax (MRRT) which was one of the Abbott government's key election pledges.

"I am concerned about that. I'm very supportive of the Government's agenda to build the competitiveness of Australia," Mr Mackenzie told AM.

"Something like the MRRT raises very little revenue, is highly volatile, and is no basis for strong fiscal planning in the country. And yet for many potential investors this is quite a disincentive to invest."

But Mr Mackenzie had a pragmatic response to growing calls for a Budget "reset" or a mini-Budget to smooth passage through the Senate - and to win approval from Clive Palmer's PUP which hold the balance of power.

"Look, I'm a businessman and they're politicians and politics is the art of the possible. I leave that to them."

Tuesday, August 19, 2014

Reserve Bank warns of "significant uncertainty" about economic outlook

The Reserve Bank says the outlook for Australia's economy appears uncertain and that the high exchange rate remains a key problem.

Underscoring the challenge of managing an economy in transition, the RBA has pointed to "a significant degree of uncertainty about the the outlook, given the number of forces working in different directions".

And in the minutes from its August meeting, the RBA says that despite a record low cash rate the exchange rate "remained high by historical standards".

The RBA also says the high dollar is "notable" given the decline in the prices of some key commodities.

Appearing to express some frustration in the face of a record low cash rate, the Board says the high dollar is "offering less assistance than it might in achieving balanced growth in the economy".

The RBA has cut the cash rate by 2.25 percentage points since November 2011 with the aim, in part, of lowering the currency.

In leaving the cash rate on hold at 2.5 percent at the August 5 meeting, the Board repeated that monetary policy "was appropriately configured" and that "the most prudent course was likely to be a period of stability".

The August meeting was held two days before the release of official employment figures for July where the jobless rate spiked unexpectedly to 6.4 per cent.

In its Quarterly Statement on Monetary Policy released after the surprise unemployment increase, the RBA signalled the result could have been a blip caused by a revised definition of employment.

However, the RBA's August board meeting was referred to "a notable degree degree of spare capacity" in the workforce with a relatively high unemployment rate and the participation rate remaining steady.

Echoing the quarterly statement, the Board was told that despite recent higher reading, inflation was remain within the 2 to 3 per cent target band over the next two years.

The minutes repeat that economic growth will be below average over 2014/15 before getting back above average pace in 2016.