Monday, February 1, 2010

The Next Real Estate Bubble?

Chinese regulators have begun restricting new loans in an effort to curb the incredible growth of the Chinese real estate market and to prevent a US style real estate meltdown in the future. Last year Chinese banks advanced 9.59 trillion yuan(1.4 trillion dollars) in new loans which helped increase the Shanghai Composite Index by 80% and cause real estate prices to rise to their biggest gain in 18 months. In reaction to government lowering the amount lending, the Shanghai Composite Index has slumped 7.9% since the beginning of the year. It is difficult to tell whether the Chinese government is preventing a future crises or a crisis is already brewing. The Chinese government exerts a large amount of control over its economy; with an almost fixed exchange rate of the yuan with US dollar and reported consistent economic growth in spite of the global financial crisis. Information supplied by the Chinese government needs to taken with a grain of salt and investors such as Jim Chanos of Kynikos Investments, who successfully bet on the fall of Enron, are already betting on a bubble bursting in China.

By: Jason Wu - WFU MBA 11'

For further information, please see full Bloomberg article:

Saturday, January 30, 2010

Obama Unveiled $90 Billion Bank Tax With Sharp Words

President Barack Obama unveiled his proposed $90 billion bank tax on Jan 14th with some of his toughest rhetoric yet toward Wall Street, saying: "We want our money back, and we're going to get it." The president's tough line dovetails with a political push by Democrats to capitalize on anger over bonuses and profits from banks that benefited from taxpayer bailouts during the nadir of the financial crisis.

The White House pushed hard against opposition to the tax. The president spoke of "obscene bonuses" and the "twisted logic" of bank executives who oppose the tax. White House spokesman Robert Gibbs suggested the banks were trying to pass the tab for their woes to taxpayers. Democratic leaders responded cautiously to the proposal, mindful that the president's pledge last year to retrieve bonuses paid to AIG executives has yet to be fulfilled, according to senior leadership aides. One senior Democratic aide said the House wouldn't move forward on the tax proposal until leaders there were sure the Senate would follow suit.

While much of the banking industry is up in arms over the proposed tax, the impact would likely be a relatively modest dent to the companies' profits. The 10-year assessment on bank liabilities—dubbed the Financial Crisis Responsibility Fee—would fall most heavily on the nation's top six banking companies: Citigroup Inc., J.P. Morgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo & Co. Each would likely face an annual bill of $1 billion or more, with Citigroup and J.P. Morgan facing the largest liabilities, likely more than $2.4 billion apiece.

If approved by Congress, the tax would force about 50 banks, insurance companies and large broker-dealers to collectively pay roughly $90 billion over 10 years. Under the plan, a 0.15% tax would be levied on liabilities and would apply to a range of firms that received taxpayer assistance, excepting the Detroit auto makers. The tax would be levied on total assets, minus a type of capital considered high quality, such as common stock, and disclosed and retained earnings. The nation's large regional banks would face smaller fees than their Wall Street counterparts, based on the composition of their balance sheets.

Industry officials warned that the new tax could constrain bankers' ability to make new loans, which could hurt the economy. However, the impact could be muted if the fee is tax-deductible, an issue that hasn't been addressed by the Treasury Department. In addition, some analysts cautioned that the plan could encourage banks, to reduce their exposure to the fee, to shift more assets and liabilities into the types of off-balance-sheet vehicles that helped sow the seeds of the financial crisis.

White House officials said the president was serious about his bank-tax proposal, which has been under discussion since August. A provision inserted in the legislation authorizing the Troubled Asset Relief Program required the administration to come up with a way to recover money spent to save the financial system. Still, it is the latest in a string of recent federal initiatives that could erode bank profits. In November, the Federal Reserve announced rules, set to take effect in July, that will bar banks from charging certain overdraft fees without explicit consent from their customers. And other changes that could be costly to the banking industry continue to work their way through Congress, such as legislation that would impose new restrictions on the trading of derivatives.

Article Provided by: Ajit Bhat - WFU MBA 11'

Source: The Wall Street Journal