Bernanke defends his Federal Reserve record

Federal Reserve Chairman Ben Bernanke has defended the central bank’s response to the global crisis.

He made the statement to a Senate panel sitting to consider his nomination for a second four-year term.

Under Mr Bernanke’s tenure, the Fed has cut interest rates close to zero, as well as spending $3 trillion (£1.8tn) to buoy the credit markets.

He also said that a retreat from low interest rates “will require careful analysis and judgement”.

He’s the smartest guy in the world, why didn’t he do anything to prevent us from sinking into this disaster?
Senator Bernie Sanders of Vermont

World’s mightiest banker humbled

“My colleagues on the Federal Open Market Committee and I are committed to implementing our exit strategy in a manner that both supports job creation and fosters continued price stability,” he told the panel.

Opening the hearing, Senate Banking Committee Chairman Christopher Dodd said he would support Mr Bernanke’s re-nomination, saying it would send the “right signal” to financial markets.

It is expected that the Senate will vote on the renewal of Mr Bernanke’s tenure before Christmas, which is up for renewal at the end of January.

But not everyone is in agreement that Mr Bernanke should remain in the post.

Senator Bernie Sanders of Vermont is angry about the bailouts and says he will attempt to block the nomination when it reaches the senate floor.

Ben approached a financial system on the verge of collapse with calm and wisdom
President Barack Obama

“I absolutely will not vote for Mr Bernanke. He is part of the problem. He’s the smartest guy in the world, why didn’t he do anything to prevent us from sinking into this disaster that Wall Street caused and which he was a part of?” he asked the panel.

And the banking committee’s chief Republican, Senator Richard Shelby, has criticised the Fed’s pre-crisis policies.

Both houses in Congress are moving legislation to cut the Fed’s powers. They want an audit of the central bank’s interest rate decisions, weaker regulatory powers over banks, and a reduced role for private bankers in the 12 regional Fed banks.

Presidential support

President Barack Obama nominated Mr Bernanke for another term as chairman of the US central bank, the Federal Reserve, in August.

At the time, Mr Obama said he believed Mr Bernanke’s action to bail out failing banks had limited the effects of the economic crisis.

“Ben approached a financial system on the verge of collapse with calm and wisdom, with bold action and outside-the-box thinking that has helped put the brakes on our economic free-fall,” the president said at the time.

In partnership with the US Treasury, the Fed organised the $700bn bank bail-out plan in October 2008.

Mr Bernanke was named as Federal Reserve chairman by Mr Obama’s predecessor, George W Bush, in 2005.

His reappointment must be confirmed by the Senate.

Compliance-related Issues Foreseen as Biggest Challenge for Companies if U.S. VAT Is Implemented

More than half of senior business executives surveyed by the Tax Governance Institute (TGI) expect some type of value-added tax (VAT) to be introduced in the United States within five years.

Acknowledging the need for additional revenue to help address the growing chasm between the country’s existing revenue flows and its built-in expenditure obligations, 57 percent of the executives in the TGI survey said they believe VAT legislation will be introduced in the United States within five years, while 18 percent expect it within 10 years.

“The survey responses underscore a recognition that the short- and long-term outlook for the U.S. fiscal deficit is bleak unless some combination of spending cuts and additional revenue is implemented within the next decade or sooner,” said Hank Gutman, KPMG tax principal and director of the Tax Governance Institute, and former chief of staff of the U.S. Congressional Joint Committee on Taxation.

“The United States is the only G20 country without a federal VAT or Goods and Services Tax. The executives we surveyed clearly believe that VAT legislation is likely to be proposed as a means to raise much-needed revenue to reduce the deficit,” Gutman said.

BIGGEST VAT CHALLENGE FOR COMPANIES

When asked to identify the biggest challenge they foresee for their companies if a VAT is adopted in the United States, 24 percent of the executives cited compliance-related issues, according to the TGI survey. Other executives saw major challenges in data collection and analysis (18 percent), management and monitoring (16 percent), and tax technology software system changes (16 percent).

“Executives are wise to focus on compliance. VAT touches many different parts of the supply chain, and tracking and collecting all the required information is critical,” said Tom Boniface, partner-in-charge of KPMG LLP’s VAT practice. “To help ensure VAT compliance, many companies will need to deploy new VAT software or update existing platforms to properly manage the requirements of a new U.S. VAT regime. If not implemented correctly, this could result in incorrectly calculated and remitted VAT amounts and potentially significant liabilities for the company.”

According to the TGI survey, 34 percent of executives said their companies would need 12-18 months to prepare for compliance with a U.S. VAT. Twenty-one percent said they would need two years or more.

COORDINATION WITH STATE AND LOCAL TAXES

TGI survey respondents were split over how state and local taxes should be collected and administered alongside a federal VAT. Nearly one-third (32 percent) of the TGI survey respondents said that if a U.S. VAT is implemented, state and local sales taxes should be collected in tandem with the federal VAT and distributed back to states and localities. Twenty percent said that if a U.S. VAT is implemented, states and localities should tax the same goods and services as the federal VAT, but continue to have separate rates and be administered by the states as they are now. Only one-quarter of the TGI survey respondents said that if a U.S. VAT is implemented, state and local sales taxes should be collected and administered separately as they are today without regard to the federal VAT requirements.

“Around the world, there are many different examples of how a federal VAT works in concert with sales taxes in a country’s provinces or states,” said Harley Duncan, State and Local Tax managing director with KPMG LLP’s Washington National Tax practice. “If a federal VAT is adopted, a harmonized approach — where the states piggyback on the federal VAT — could result in cost-savings for the federal, state and local governments and provide a better tax base, but it’s certainly not the only solution. What is clear from the survey is that many of the business executives believe that state and local sales tax should be coordinated in some fashion with a federal VAT.”

The TGI executive survey results discussed above reflect the responses of more than 600 members of the Tax Governance Institute, including board members, chief financial officers, and tax directors.

The Tax Governance Institute currently comprises more than 17,000 members. Launched in 2007, it provides a forum for board members, corporate management, stakeholders, and government representatives to share knowledge regarding the identification, oversight, management, and appropriate disclosure of tax risk.

About KPMG LLP

KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International. KPMG International’s member firms have 137,000 professionals, including more than 7,600 partners, in 144 countries.

Deputy Attorney General David Ogden to Leave Department of Justice

Deputy Attorney General David W. Ogden announced today that he will leave the Department on February 5, 2010 to return to private practice. Prior to joining the Department as Deputy Attorney General in March, Ogden chaired the Obama Administration’s transition team for the Department of Justice.

“David Ogden has been an invaluable leader for the Department of Justice and for this Administration,” said Attorney General Eric Holder. “From leading the transition team that established early goals for the Department to spearheading major initiatives such as our effort to fight health care fraud, he has been an effective and diligent advocate for the American people. Through his work here, he has helped reinvigorate the Department’s traditional missions, restore its reputation for independence, and make the country safer and more secure. I am sorry to see him go, and I thank him for his service to the Department and to the nation.”

Prior to his confirmation, Deputy Attorney General Ogden was a partner at the law firm of WilmerHale, which he joined in 2001. He previously served in senior positions at the Department of Justice during the Clinton Administration.

Deputy Attorney General Ogden made the following statement:

“I took a leave from my practice of law thirteen months ago on Election Day to lead the Department of Justice transition for President Obama. My hope then was to identify the goals for a successful transition at a critical time for the Department, when its credibility was under attack and when its traditional law enforcement missions had suffered. During the transition, President-elect Obama and Attorney General-designate Holder asked me to serve as the Deputy Attorney General, which gave me the opportunity to complete the transition process and see the Department solidly on a path to achieving those goals. I accepted that challenge, with the intention of returning to my practice as soon as I felt the Department was firmly on that path.

“I believe the objectives established over a year ago have been accomplished. In order to afford the President and the Attorney General sufficient time to identify my successor and to ensure a smooth transition, I have agreed to continue to serve until February 5, 2010, when I will step down to return to private practice.

“The Department today is on the path we first set out over a year ago. First, we have reinvigorated the Department’s traditional law enforcement mission with new resources and new initiatives. I am proud of the work we have done in establishing a Financial Fraud Enforcement Task Force to fight financial crime, leading a Health Care Prevention Task Force that has already pursued major prosecutions, establishing a Border Working Group to combat Mexican cartels, and attacking international organized crime through increased intelligence sharing with our partners. We have implemented new policies to stem the terrible tide of violence against women and children in Indian Country, crafted budgets that will provide critical new funding for law enforcement, civil rights and our nation’s prison system, and we will soon make key recommendations for reforms of sentencing and corrections policy. I appreciate the Attorney General’s having asked me to lead these initiatives and am proud of the progress we have made.

“Second, we have taken significant steps to ensure that we vigorously protect our national security consistent with the rule of law, including working closely with the FBI and the Intelligence Community on major counter-terrorism investigations, working on closing the detention facility at Guantanamo Bay and bringing perpetrators to justice in federal courts or military commissions, and developing a new policy for effective and lawful interrogations.

“Third, we have substantially restored the Department’s historically strong relationship with state, local, and tribal law enforcement through outreach and inclusion on the Department’s major initiatives including the Financial Fraud Enforcement Task Force and HEAT.

“And finally, we have put in place a terrific senior management team that under the Attorney General’s leadership will build on this foundation. Through our work in each of these areas, the goals I hoped to achieve when I accepted this position either have been or soon will be fulfilled. The Department is in good hands, and I feel I can now return to the private practice I have missed these thirteen months.

“It has been a singular privilege to work alongside the Department’s dedicated career professionals, whose commitment to the national interest and the cause of justice is an inspiration to me. I am very grateful to President Obama and Attorney General Holder for the opportunity to serve my country and the Department of Justice in this Administration, and I will continue to assist them in any way possible.”

Xstrata to up 2010 capex, reviews copper smelters

Mining group Xstrata (XTA.L) plans to boost capital spending next year by 89 percent to $6.8 billion (4.1 billion pounds) to expand output and is considering whether to close or sell any of its four profit-squeezed copper smelters.

The firm, which aims to boost overall production by 50 percent by 2013, estimated capex of $3.6 billion this year, Chief Financial Officer Trevor Reid told an investor seminar on Thursday.

Most of the increased capex would go towards the nickel, coal and copper divisions for new and expanded mines, he added.

The copper unit has six advanced projects to deliver 60 percent production growth by 2015, Charlie Sartain, chief executive of Xstrata’s copper division, said.

“We’re analysing in some detail the value benefits of the different elements of those smelters and each one of those assets needs to stand the scrutiny of whether or not it deserves to remain within the portfolio,” he said.

“The outcome of that I think we’ll see progressively in the coming months where we need to take some decisions … whether we have to do some further rationalisation.”

Xstrata, the world’s fourth-biggest producer of mined copper and third largest in refined copper, has four smelters with a combined capacity of about 800,000 tonnes.

BoE mulls corporate bond sales to boost market liquidity

The Bank of England is consulting on changes to its asset purchase scheme that would allow it to sell, as well as buy, corporate bonds to improve secondary market liquidity, it said on Thursday.

The BoE has been buying small amounts of corporate bonds since March as part of its 200 billion pound quantitative easing scheme, but it noted on Thursday that trading conditions in the secondary market were still restricted.

It said it aimed to launch the revamped scheme as soon as possible in 2010.

“The changes proposed today are aimed at improving secondary market liquidity by the Fund operating as a seller, as well as a buyer, of bonds,” the BoE said.

The central bank said its holdings of the securities would vary in line with market demand and it was not targeting any particular portfolio size.

It added that if its corporate bond portfolio was reduced while the Monetary Policy Committee’s programme of asset purchases continued, it would be offset by greater purchases of gilts.

However, analysts said the impact would be small since corporate bonds account for a tiny fraction of the BoE’s QE asset purchases. Almost 99 percent of the BoE’s QE purchases so far have been gilts, with purchases of commercial paper and corporate bonds accounting for the remainder.

“The BoE’s holdings of corporate bonds are tiny,” said Mohit Kumar, head of sterling fixed income strategy at Deutsche Bank. “It’s interesting that they are doing this, but I view it simply as a liquidity measure.”

ECB takes first steps to rein in market support

The European Central Bank on Thursday announced its first steps to unwind some of the extraordinary measures it took to prop up the euro zone economy during the global crisis.

Speaking after the ECB kept rates at a record low of 1 percent as expected, ECB President Jean-Claude laid out a number of decisions on ending and tightening up the measures it has taken to support liquidity in the banking sector.

With markets still some way from normality, all 80 economists in the latest Reuters poll had predicted the bank would stay on hold.

But the bank’s moves on the liquidity steps sent the euro and euro zone bonds lower. Stocks were little moved.

Trichet said the ECB had decided to hold its last six months refinancing operation on March 31 and confirmed it would make this month’s 12-month tender its last. This time the interest rate on the one-year loans, which have up to now been offered at just 1 percent, would be linked to any changes in shorter-term rates.

“The improved conditions on financial markets have indicated that not all of our measures are needed to the same extent as in the past,” Trichet said.

He also announced new forecasts by European Central Bank staff which upped their expectations for euro zone growth next year after the euro zone emerged from recession in the third quarter. However, the mid-point of their forecast range for 2011 inflation was still well below the bank’s 2 percent ceiling.

The moves bring an end to more than a year of intensive ECB policy easing and herald a change of direction.

But policymakers will probably want to avoid pushing for a rapid exit at this stage with countries including Spain still in the grip of recession, unemployment set to rise further and an already-strong euro threatening to sap the fledgling recovery.

Some central banks such as Australia’s and Norway’s have already begun to raise rates. But the U.S. Federal Reserve has stuck to its commitment to ultra-low interest rates while taking some small steps to wind down its emergency support.

At the far end of the scale, the Bank of Japan this week offered to pump more funds at banks to lower longer-term money market rates.

STAFF FORECASTS

Trichet said on Thursday staff saw inflation in a range of 0.8 to 2.0 percent in 2011, the crucial period for today’s monetary policy decisions given the long lead time and implying little need for rapid interest rate rises.

Staff revised up forecasts for growth in 2010 to between 1.1 percent and 1.5 percent, from between -0.5 and +0.9 percent in September forecasts.

ECB staff also upgraded their projections for this year, and said they expected gross domestic product (GDP) to fall between 3.9 and 4.1 percent in 2009, a slightly smaller contraction than the 4.4 to 3.8 percent range given in September.

“Some of the factors supporting the recovery at present are of a temporary nature,” Trichet said.

“The Governing Council expects the euro area economy to grow at a moderate pace in 2010, recognizing that the recovery process is likely to be uneven and that the outlook remains subject to high uncertainty.”

Inflation remains subdued after months of falling prices and the bank is not expected to start to raise interest rates before the end of next year.

ECB staff inflation projections were edged up but inflation next year was seen remaining well under the ECB’s target of below, but close to 2 percent. The staff projections put 2010 inflation between 0.9 and 1.7 percent, from 0.8 and 1.6 percent in September.

Dubai crisis to shape 2010 global risk mindset

Dubai’s debt crisis may not sow lasting global contagion, but it may colour a 2010 investment landscape where asset managers will likely differentiate more between risks rather than embracing them indiscriminately.

The global market sell-off after last Wednesday’s Dubai bombshell on delaying debt payments from its state-owned conglomerates lasted only two days. World stocks have bounced back 2.5 percent this week.

For all the ripples this aftershock of the credit crisis will create, the direct material impact of any debt rescheduling on international banks or governments outside the region pales in comparison to an event like last year’s bankruptcy of Lehman Brothers, for example.

Of the $26 billion (16.5 billion pounds) affected by the rescheduling, analysts reckon no more than 50 percent is held by global banks, and individual lenders can absorb that sort of hit. Credit ratings firm Moody’s said on Tuesday it saw no reason to alter international bank ratings due to developments.

But while there’s little rationale for direct contagion, the implications may seep through market psychology for many months to come.

The event was a reminder of the excessive leverage the world is still trying to shed and triggered what many investors, including giant U.S. bond fund Pimco, saw as a much-needed correction to 2009’s surge in risky assets and emerging markets.

While many may see this as a good opportunity to re-enter the market, they will likely be more choosy on their return.

“Fundamentals will become more apparent again. It’s the theme that will carry on in 2010. It’s going to become much more discerning. We do appreciate next year will be turbulent for investors,” said Rekha Sharma, global strategist at JP Morgan Asset Management.

Growth-sensitive emerging market assets were the main beneficiaries this year of the wholesale shift out of low-risk, low-yielding money market instruments that took place since March of this year.

But the liquidity and growth landscape is set to change next year as Western central banks seek to time their exits from super-cheap money policies flooding the world and as many emerging economies attempt to frustrate speculative flows with a variety of controls, taxes and state intervention.

As a result, country-specific risks are rising in the face of recent capital curbs by the likes of Brazil and Taiwan.

Reflecting these rising idiosyncratic risks, for example, Brazil has moved to the top of Swiss bank UBS’s growth surprise rankings followed by China, Korea and Poland.

“We have, since October, been in a decidedly different phase of the recovery where differentiation increasingly matters. Recent events will only serve to intensify the market’s scrutiny,” Morgan Stanley said in a note to clients.

“If March-September was a beta trade — buy anything and it will go up — now it’s all about picking your spots. The run-on risks have increased as the scrutiny on sovereign balance sheets has intensified.”

DIFFERENTIATION

Investors might also put a greater focus on differentiating between sovereign risks especially after the credit crisis effectively nationalised some private sector risks.

After the Dubai debt crisis, investors demanded higher compensation for holding debt of economies that are less fiscally robust and sold growth-sensitive currencies with weaker economic fundamentals, such as sterling and the New Zealand dollar.

For example, the 10-year Greek yield spread over safe-haven German debt widened to as much as 200 basis points after last week, compared with 100 bps in August.

The cost of protecting debt of Greek and Irish debt against default also surged last week.

The Dubai event may also prompt a review on default risks of quasi-sovereigns and other corporates. Moody’s highlighted this point on Tuesday and said any Dubai World default could change long-held assumptions regarding implicit government supports.

Francesco Garzarelli, strategist at Goldman Sachs, said the developments in Dubai serve as a reminder that a sovereign’s willingness to assume corporate default risk reflects rational political and economic considerations.

“Just as … Abu Dhabi evidently could not find enough benefits to justify the fiscal costs of bailing out its neighbour, so too we continue to think that European sovereigns will fail to find justifications for future bailouts of either financial or non-financial corporates,” he noted.

UK moves to calm fears of RBS walkout over bonuses

Prime Minister Gordon Brown moved to allay fears of a mass walk out by the board of Royal Bank of Scotland, saying it would not be singled out for unduly harsh treatment over bonuses.

In a rare move by politicians to calm the global backlash against big payouts to bankers, Brown said nobody was being “discriminated against” while his business secretary Peter Mandelson said he understood the concerns of RBS directors.

Their comments followed a Wall Street Journal report that Goldman Sachs is meeting investors in an effort to head off anger over planned bonuses that will put employees on track to earn an average of $700,000 each this year.

UK rival Barclays, meanwhile, is to bump up the fixed salaries of staff in its Barclays Capital investment bank to compensate for lower bonuses at the end of the year, an industry source said. Barclays will also backdate some of the pay rise.

Other banks have increased basic salaries as pressure builds on them to limit their annual bonus awards — an unintended consequence of guidelines set by G20 countries, and likely to add to the debate about fat payouts to bankers after the crisis.

RBS, set to become 84 percent state-owned after its latest government bailout, warned on Wednesday it could struggle to hire or retain key staff after the government took control of bonuses in return for insuring its bad debts.

Industry sources, who say the bank’s board could resign en masse were the government to veto bonuses, point out directors have a fiduciary duty to act in the best interests of the whole company and therefore all its shareholders, big or small.

“People like Standard Life and the Prudential and Fidelity, I think now need to stand up and speak publicly about their position on large bonuses and large payments,” British Treasury Minister Paul Myners told Sky television.

Analysts warn the government, facing an uphill battle to win a general election due by June, risks undermining its investment, and therefore the potential return for taxpayers, if it bows to public anger and imposes a draconian cap on bonuses.

“No major bank, let alone one with a major capital markets business, is in a position to compete if it can’t pay the market rate for its staff,” said Simon Willis, banks analyst at NCB Stockbrokers.”

Shares in RBS which fell 2 percent on Wednesday following its warning on bonus caps bounced back on Thursday to trade 2.5 percent higher at 34.40 pence at 1:27 p.m. Barclays was up 3.2 percent at 307.2 pence.

NO DISCRIMINATION

The problem faced by the government is that investment banking, which pays the biggest bonuses, is one of the few areas where banks are making profits in the current environment.

RBS Chief Executive Stephen Hester warned lawmakers on Wednesday of the “tension” between short-term political pressures on the government to clamp down on bonuses and the longer-term aim of turning around the bank.

But Mandelson said it was important that all banks exercised restraint on bonuses and that RBS should not be put at a competitive disadvantage to its rivals.

“I understand the point of view that RBS directors are expressing. They say they have to remain competitive in the market in recruiting senior executives and that’s why it’s important that all the banks are equally restrained and that RBS is not singled out,” Mandelson told BBC Radio 4.

Brown and Mandelson both stressed the importance of a level playing field when governing bonuses.

“These procedures for bonuses are governed by the G20 agreements that we reached with all other countries,” Brown told a news conference. “Nobody is being discriminated against.”

But in a sign the furore is unlikely to die down soon Vince Cable, finance spokesman for the Liberal Democrats which is the smaller of Britain’s two main opposition parties, said Brown should not be deterred by the risk of resignations at RBS.

“I would accept the resignations and call their bluff and be very clear that the bank has got to act in the interests of the public,” he told Radio 4.

Meanwhile Myners signalled that the government was not ready to allow a free-for-all on bonuses.

“The profits of our banks this year reflect very benign conditions, the consequences of quantitative easing and government intervention and it’s far from clear that that should lead to wholly fortuitous large bonus payments.”

Most in U.S. want public health option

Most Americans would like to see a “public option” in health insurance reform but doubt anything Congress does will lower costs or improve care in the short term, according to a poll released on Thursday.

The survey of 2,999 households by Thomson Reuters Corp shows a public skeptical about the cost, quality and accessibility of medical care.

Just under 60 percent of those surveyed said they would like a public option as part of any final healthcare reform legislation, which Republicans and a few Democrats oppose.

Here are some of the results of the telephone survey of 2,999 households called from November 9-17 as part of the Thomson Reuters PULSE Healthcare Survey:

* Believe in public option: 59.9 percent yes, 40.1 percent no.

* 86 percent of Democrats support the public option versus 57 percent of Independents and 33 percent of Republicans.

* Quality of healthcare will be better 12 months from now: 35 percent strongly disagree. 11.6 percent strongly agree. 29.9 percent put themselves in the middle.

* Believe the amount of money spent on healthcare will be less 12 months from now: 52 percent strongly disagree, 13 percent strongly agree.

* 23 percent believe it will be easier for people to receive the care they need a year from now.

The nationally representative survey has a margin of error of plus or minus 1.8 percent.

The House of Representatives passed a healthcare overhaul bill last month.

The Senate is debating a plan and will vote on Thursday on competing measures to ensure women have access to mammograms and other preventive screenings and amendments on proposed spending cuts in the Medicare government health program for the elderly.

If the Senate passes a bill, the two versions will have to be reconciled and passed again by each chamber before being sent to President Barack Obama for his signature.

The Senate plan is designed to slow the rate of growth in healthcare, expand coverage to about 30 million uninsured Americans and halt industry practices such as denying coverage to those with pre-existing medical conditions.

It would require everyone to have insurance, provide federal subsidies to help them pay for it and establish a new government-run insurance option to compete with private industry.

Fellow Iraqi turns tables on Bush shoe-thrower

An Iraqi reporter imprisoned for throwing his shoes at President George W. Bush found himself on the receiving end of a similar footwear attack in Paris Tuesday.

Muntazer al-Zaidi, whose flare-up against Bush last December turned into a symbol of Iraqi anger, was speaking at a news conference to promote his campaign for victims of the war in Iraq when a man in the audience hurled a shoe at him.

It hit the wall next to his head and a scuffle ensued in the audience, television footage showed.

French media said the attacker was an exiled Iraqi journalist who spoke in defense of U.S. policy, accusing Zaidi of siding with a dictatorship, before throwing his shoe.

Zaidi’s own outburst summed up the feelings of many Iraqis about the U.S. military invasion of their country and the ensuing bloodshed and sectarian killing.

Millions of people around the world saw images of him shouting “this is a goodbye kiss from the Iraqi people, dog,” during a news conference by the former U.S. leader, before throwing his shoes at him.

Zaidi, a television reporter, was sentenced to three years’ imprisonment for assaulting a head of state. This was later reduced to one year and he was released in September.

He has alleged that he was tortured by guards after his arrest.