Friday, June 22, 2012

Story of the Day
Moody’s Cuts Credit Ratings of 15 Big Banks (Deal Book)

Washington Update
Obama Urges Students, Parents to Pressure Congress on Student Loans (Washington Post)
Norquist: No Tax Pledge At New Peak (Washington Wire)

Market Talk
A Darkening Jobs Picture (Economix)
Bank Investors Dismiss Moody’s Cuts As Years Too Late (Bloomberg)
Sales Show Housing Fragile Recovery (Wall Street Journal)

Editorials & Opinions
A History of Money Funds (Wall Street Journal Editorial)
Why Dodd-Frank is Unconstitutional (Gray and Purcell in Wall Street Journal)

Story of the Day

Moody’s Cuts Credit Ratings of 15 Big Banks (Deal Book)

Already grappling with weak profits and global economic turmoil, 15 major banks were hit with credit downgrades on Thursday that could do more damage to their bottom lines and further unsettle equity markets. The credit agency, Moody’s Investors Service, which warned banks in February that a downgrade was possible, cut the credit scores of banks to new lows to reflect new risks that the industry has encountered since the financial crisis. “The risks of this industry became apparent in the financial crisis,” said Robert Young, a managing director at Moody’s. “These new ratings capture those risks.” Citigroup and Bank of America, which have struggled to fully recover from the financial crisis, were among the hardest hit. After the downgrades, the banks stand barely above the minimum for an investment grade rating, a level also known as junk and a sign of the difficult business conditions they face.

Washington Update

Obama Urges Students, Parents to Pressure Congress on Student Loans (Washington Post)

With slightly more than a week left before student loan rates double for millions of Americans on July 1, President Obama on Thursday urged students and their parents to continue to press for congressional action. It was the second time in as many weeks that Obama, facing off again with House Republicans, used his bully pulpit to press for a resolution of the dispute over how to pay for an extension of lower loan rates for another year. “This issue didn’t come out of nowhere. It’s been looming for months. But we’ve been stuck watching Congress play chicken with another deadline,” Obama said in a brief East Room statement before a group of students. “Keep telling Congress to do what’s right to get this done,” he said. On Capitol Hill, GOP leaders complain that Obama’s public remarks are at odds with his administration’s refusal to engage in serious negotiations on how to pay for $6 billion in subsidies for the federal Stafford loans.

Norquist: No Tax Pledge At New Peak (Washington Wire)

Grover Norquist says his no-new-taxes pledge is more popular than ever, despite a few Senate Republicans showing signs of going wobbly on him lately. As evidence, he says, the pledge is growing in popularity among congressional candidates. In all, 449 incumbents and challengers signed the pledge in 2010, including 241 challengers and 208 incumbents. This time around, 534 have signed the pledge, including 255 challengers and 279 incumbents, he said. Mr. Norquist, the president of the conservative Americans for Tax Reform, spoke on Thursday to House Republicans (many of them pledge signers themselves), in an effort to reassure them about the pledge’s usefulness, as Congress slowly pivots toward addressing the government’s woeful fiscal situation, including chronic deficits and the tax-code mess.

Market Talk

A Darkening Jobs Picture (Economix)

The jobs picture is darkening. The latest batch of economic data has been fairly weak, especially surveys from the manufacturing sector. As a result, The Times’s weekly jobs tracker, based on forecasts from Moody’s Analytics, now shows a projected employment gain of only 125,000 in June, down from a projection of 150,000 last week. Economists at Moody’s write “June is shaping up as another difficult month for the U.S. job market, raising the odds that the Federal Reserve will have to do more, potentially as soon as August.” With Moody’s also downgrading its projections for July and August, the latest outlook revises the projected average monthly job growth for the six-month period before the presidential election to 149,000, from last week’s 157,000. That is still squarely in the range historically associated with a close electoral outcome, but not an encouraging direction for the incumbent.

Bank Investors Dismiss Moody’s Cuts As Years Too Late (Bloomberg)

Downgrades of Morgan Stanley, Credit Suisse Group and 13 other global banks, announced by Moody’s Investors Service after months of speculation about dire fallout, were met instead by rallies in stocks and bonds. The cost to protect Morgan Stanley’s debt against losses dropped, and the shares rallied as much as 4.6 percent in extended trading yesterday after the ratings firm cut the bank by two levels rather than a threatened three grades. Credit- default swaps tied to Bank of America Corp., which was lowered to within two levels of junk along with Citigroup Inc, also improved, along with those of Goldman Sachs. The pending downgrades have weighed on banks since Moody’s said Feb. 15 it was reviewing 17 banks with capital-markets operations because of fragile confidence and tighter regulations that pinched revenue. Pressure mounted as Europe’s sovereign- debt crisis intensified and cast doubt on the health of some of the continent’s lenders.

Sales Show Housing Fragile Recovery (Wall Street Journal)

Sales of previously owned homes in May posted sharp gains compared with a year ago, but were down from April, underscoring the fragility of the housing market's recovery. The National Association of Realtors reported Thursday that sales of existing, or previously owned, homes sold at a seasonally adjusted annual rate of 4.55 million units in May. While that was down 1.5% from 4.62 million in April, it represented an increase of 9.6% compared with a year earlier and represented the 11th consecutive month of year-over-year increases in sales. The data reflect completed sales transaction of single-family homes, townhouses and condominiums.

Editorials & Opinions

A History of Money Funds (Wall Street Journal Editorial)

The money-fund problem was revealed during the 2008 financial crisis when an institutional run caused the federal government to wrap a taxpayer guarantee around the industry. Regulation had created a perception that money funds are as safe as cash. In fact, they are pools of securities that can rise and fall in value, and investors need to know that. We've argued for greater transparency and are encouraged by a proposal from Securities and Exchange Commission Chairman Mary Schapiro to allow the funds' net asset values per share to float, like they do for other securities, to more accurately reflect the value of the underlying assets. Reform opponents first responded that allowing investors to see more accurate pricing would cause investors to flee money funds for unregulated, shadowy ventures operating offshore. After that argument was hooted down, they now predict the opposite—that money will flow to regulated banks that are too big to fail. Which is it?

Why Dodd-Frank is Unconstitutional (Gray and Purcell in Wall Street Journal)

When President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law nearly two years ago, he stated that "our financial system only works—our market is only free—when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system." We completely agree. Which is why we filed a lawsuit on Thursday asking a federal court to declare that two parts of Dodd-Frank violate a bedrock rule of law: the Constitution's separation of powers, which the Founders designed specifically to limit the growth of government.

e21: Economic Policies for the 21st Century is a nonprofit, nonpartisan organization dedicated to economic research and innovative public policies for the 21st century. Drawing on the expertise of practitioners, policymakers, and academics, we aim to advance free enterprise, fiscal discipline, economic growth, and the rule of law.

2011, e21: Economic Policies for the 21st Century