Business

Puts and Calls: Institutional investors lose confidence

Tom Karol Occasional Political Commentator
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Investor confidence down: The Wall Street Journal reports that confidence among institutional investors has suffered its largest one-month drop since the collapse of Lehman Brothers, with uncertainty over of the U.K. election, the “flash crash” in the U.S. and high levels of market volatility combining to make investors more risk averse. The State Street Investor Confidence Index for May reports global investor confidence fell 11.2 points to 88.2, or about 10 percent. Declines in investing sentiment in North America were a key contributor, with institutional investor confidence falling among European investors, too. Investing patterns by institutional investors in Asia, by contrast, showed confidence was robust, rising about 7 percent. But these Asian investors were selective, favoring commodity-producing countries and avoiding Europe and the U.S.

AIG deal questioned, again: RiskMetrics, the international proxy advisory service, has warned Prudential investors to vote against the proposed purchase of AIG’s Asian unit. The deal has “a sensible strategic rationale,” said RiskMetrics, but “a full price, integration risk and ambitious targets that barely meet the cost of capital do not make a compelling combination.” The warning is further bad news for Prudential, which has been struggling to hold the deal together. Shareholders will vote on June 7 and Prudential needs 75 percent of voting stock to be cast in favor for the deal to go through. The $35.5 billion deal was first announced in Marc, but U.K. regulators have expressed concerns about Prudential’s resulting capital position. The $25 billion cash portion of the deal would be used to help repay the $47.5 billion provided by the U.S. government to AIG in September 2008.

Sovereign wealth fund interest in TARP assets: On the positive side, Qatar Investment Authority, the sovereign wealth fund from Qatar with $65 billion in assets, has expressed interest in buying part of Treasury’s 27 percent stake in Citigroup. In April, the Treasury department said it would sell up to 1.5 billion shares of Citigroup stock, about 20 percent of the government’s ownership stake. The government received about 7.7 billion shares, or a 27 percent ownership stake, as compensation for the $25 billion it provided to Citigroup in late 2008, which represented 51.6 percent of the overall bank industry bailout. Treasury said in March that it would soon begin selling its Citigroup stock and planned to complete the sales this year. Unlike most other SWFs, Qatar is comfortable and has done well with its investments in financial services — 10 percent stake in Credit Suisse, 7.4 percent of Barclays and 15 percent of the London Stock Exchange 15.1 percent — and reportedly would like to pick up some Citi for the right price and terms.

Insanity is doing the same thing and expecting different results: The administration’s $75 billion foreclosure prevention program under TARP started in April 2009, but has only distributed $242 million — 3 percent — to date. The Treasury department reports that approximately 72 percent of its active trials, approximately 86,000 homeowners, have been in trials for longer than six months. How could that be? For starters, the Obama administration was eager for early political wins and initially allowed banks sign up people without first obtaining documents proving they were eligible. The program is run by banks, those same folks that needed $245 billion in other TARP funds to recoup from their mismanagement, primarily related to mortgages. Another possible reason for the delays is that the program is administered by Fannie Mae and Freddie Mac, the mortgage businesses that were essentially nationalized and placed under the conservatorship in 2008 because of their mismanagement. In the meantime, the foreclosure crisis may be getting worse. Mortgage applications for single-family homes have dropped 27 percent and 15 percent of homeowners are either in foreclosure or late on their payments. Before the financial crisis, most financial firms’ asset-backed security models assumed that levels of delinquency could not exceed 5 percent.

Is “nimble government” an oxymoron? Elizabeth Warren, chair of the Congressional Oversight Panel has long called for the creation of a new consumer financial protection agency as a more nimble form of government. “Congress passes a law, and over 15 to 20 years, the industry figures out how to get around it,” she said. “The consumer agency changes that. When the industry moves, the agency will move, too. That’s a huge difference.” Now, the Senate bill includes a Financial Stability Oversight Council and the House bill has a Financial Services Oversight Council. Both proposals have as members of the council: the Treasury Secretary; Federal Reserve Chair, Comptroller of Currency, Consumer Financial Protection Agency/Bureau Director, SEC Chair, FDIC Chair, CFTC Chair and the Federal Housing Finance Agency Director. Keeping these folks informed of industry moves will be an Office of Financial Research, which the Senate puts at Treasury and the House places in the Fed. The key question is how this Office can be adequately staffed and resourced to keep the Council interested, informed and responsive to the critical industry moves.