Receiving Wide Coverage…
Fed Fallout Continues: The results of the Federal Reserve's decision to raise interest rates continue to become clear. On Thursday, the initial results of the Fed's rate experiment came in – and so far, it's a success. The federal funds rate moved to 0.35% in early morning trading, well within the range of 0.25% to 0.5% that the central bank had announced. The rate demonstrated what the Wall Street Journal termed an "orderly" response to the Fed's decision. But while the fed funds rate grew, other U.S. interest rates fell yesterday, including the rate for Treasurys. The problem for the Fed now is that it is how investors globally buy and sell Treasurys that sets this rate, which is used to determine the rates for other products including mortgages and corporate loans. While the Fed expected this discrepancy to occur, if it persists for too long that could mean trouble. The Fed's decision also caused a flurry of activity at other central banks worldwide. In the Middle East, Saudi Arabia, Kuwait, the United Arab Emirates and Bahrain all raised rates in line with the Fed, as did Hong Kong and Mexico. But Norway, Indonesia and the Philippines chose to keep rates put, and Vietnam even cut rates. And in Europe, it became clearer that the European Central Bank may lose its stronghold on guiding the euro in the New Year. That's a result of how the Fed's rates decision has given the dollar a major boost – which will have trickle down effects on other global currencies including the euro as they aim to compete.
Japan's Surprise Move: The Bank of Japan surprised Friday, announcing that it will add new measures to its easing program. The Japanese central bank said it plans to expand how many exchange-traded funds it purchases and the length of the maturities of the bonds it buys. The news precipitated a drop in bond yields and led to a 1.9% downturn in the Nikkei as ecstasy over the news gave way to confusion. The central bank said the plan would work to help persuade companies into taking action, which would boost consumption and inflation. But some of its choices are especially odd – particularly the focus on ETFs, since none that meet the definition set by the central bank seem to exist yet. And if the Bank of Japan is really attempting to ease further, this latest move will likely not be enough.
Wall Street Journal
As banks perform a dual role of owner and adviser for tech companies, some are worried that tensions will form around future public offerings. Many of the country's largest investment banks have become major investors in tech start-ups, pumping some $3.75 billion into venture capital rounds in 2015 alone to reach a new 14-year high. But these same tech companies have stumbled at times when going public due to the discrepancy between the price they fetch on the market and private valuations, which has led to big losses for some investors. Some banks have found ways around both these losses and the perception that their advice is tainted by their ownership in the companies. With the recent Square deal, for instance, Goldman Sachs and J.P. Morgan Chase served as advisers to the IPO. As owners though, they declined to underwrite it – that job went to Morgan Stanley. And when it came to avoiding losses, they set up their advising in such a way that Square fetched a higher price, they'd earn a lower fee, but if it didn't then they would be given free shares in the company. That amounts to a win-win proposition, particularly since Square's stock sold at a lower price than expected by then popped in trading – making this a model that other banks very well could follow.
Shareholders wishing for a revival of Fannie Mae and Freddie Mac have likely had their hopes squashed by the U.S. Congress. The Jumpstart GSE Act, part of the omnibus spending agreement approved on Capitol Hill, would prohibit the Treasury from selling the preferred stakes it holds in Fannie and Freddie for at least two years. Consequently, if approved by Obama, it wouldn't be until 2018 at the earliest that Fannie and Freddie would be released from conservatorship, meaning that hopes of a recapitalization in the near-term would fizzle away. While this shouldn't be surprising – the government has never favored recapitalization and release – it could hurt shareholder cases in courts now that demand the Treasury pay back the earnings it takes from the two government-sponsored enterprises. The Jumpstart Act could show Congress' willingness to go along with the Treasury in its treatment of the two companies, at least in the eyes of the courts.
The chairwoman of the committee that oversaw the Libor has stepped down amid alleged conflict with the head of the company that sets the benchmark. Joanna Perkins left the committee in July, and at the time the Ice Benchmark Administration did not explain the departure. Now, some are saying she left following much tension with IBA chief executive Finbarr Hutcheson over how much of a role her committee should play in the Libor's overhaul. IBA chairman Andre Villeneuve was reportedly the one to ask her to step down, the paper says. The departure throws not only the committee, which was set up in 2013 after a rigging scandal came to light, into question, but also creates concerns over whether meaningful change in the processes underpinning the interest-rate benchmark are taking place.
Holding companies have a newfound place of importance for banks, particularly when it comes to regulation. Holding companies have become a solution to the question of how to deal with investors buying bank bonds in the event in a way that won't have a negative impact on depositors. To achieve this, banks are now issuing their unsecured debt out of their holding companies. The proceeds are funneled to the bank for other subordinated instruments, but the holding company owns the actual debt to keep it off of banks' books. While such a strategy is the norm in the U.S., it's a novel approach in the U.K. and Switzerland, where it's been gaining steam recently. That's in part because this set-up has made elements of pricing easier as regulators throw banks for repeated loops with new forms of debt to issue.
New York Times
The House of Representatives has green-lit a new bill that would end the tax-free advantages of spinning off corporate real estate into a publicly traded real estate investment trust separate from the company. The move, which is expected to generate $1.9 billion in tax revenue, is something of a blow to activist investors. The strategy had become a common one in recent years, since it was an easy way for activist investors to improve shareholder value at struggling companies – and the REIT itself used to avoid most taxes if it funneled its proceeds toward shareholders. It's been clear for a while now that Congress planned to close the loophole. But the law could prove to benefit the commercial real estate industry, which some say may see greater investment making it a positive change as a result.