Monday, February 28, 2011

US Dollar: A Safe Haven Reversal

The US Dollar is generally a safe-haven when the global markets are volatile. This was illustrated this past summer, during the EU financial crisis, when the dollar rose nearly 10%. According to the WSJ, the dollar actually rose 24% against major currencies during the financial crisis, which had a global rippling effect. But alas, the Dollar has hit a snag, as political unrest in Africa and the Middle East sends the dollar in the other direction. Investors are likely concerned over regions in turmoil prices overshadow the foreign exchange markets. The key difference is the attention to our heavy reliance on energy, as we watch the oil prices climb. This is what is driving the currency downward against other major currencies.
Even though America’s overall reliance on oil has declined in recent years, oil remains our capital weakness. US Consumption is still much higher than Europe and Japan, whose currencies are not as impacted by the mid-east fallout. There is a saying: “One man’s loss, is another man’s gain”: as the US Dollar suffers declines as a result of anticipated Oil price surge, other currencies, such as the Swiss Franc, the Norwegian Krone, and Canadian Dollar have seen gains. In contrast to the Unites States, the latter two countries are large oil exporters, with lower consumption than the US. France’s consumption is also much less than the US, which perhaps explains the currencies jump to high levels against the dollar last Thursday. As for the US Dollar; Fasten your seat belts, this is going to be a bumpy ride.

Monday, February 21, 2011

Too Small to Survive: Impact of the Recession on Neighborhood Banks

The impact of the recession could not be more devastating than it has been for the banking industry. While Bear Stearns and Merrill Lynch were able to narrowly escape extinction, there were hundreds of local banks that struggled to survive the volatility stemming from the steep recession. Since 2007, when the recession is alleged to have begun, as many as 348 banks have failed. That translates to over $651 billion in aggregate assets, and a staggering $76.1 billion in FDIC payouts to depositors.
In 2010 alone 157 neighborhood banks across the country were forced to shut their doors, accounting for over 45% of the total number of banks that have failed during this recession. Apparently by default, they were too “small to succeed”. Totally passed over for TARP bail outs distributed to banks identified as “too big to fail”, the small and midsized banks were left to sink or swim, with little or no support from the Federal Government.

It may appear to the layman, that neither the Bush, nor the Obama administration saw a need to include the little guys when they were passing out survival kits in the form of Cash. While it is primarily the small commercial banks, who make up over a half a trillion dollars in assets now lost. Meanwhile, politicians and lawmakers fail to realize that the small, neighborhood banks are the backbone of communities throughout the country. It is the small bank that often provides construction and mezzanine loans for housing development projects and small businesses that make up a more than 50% of our GDP. Although the economists proclaimed the recession was officially over in 2009, this year has already seen 23 banks shut down, and we are only in the first quarter.

Given the role of Banks in the near collapse of the financial markets, it is difficult to defend their position, particularly when they continued to distribute huge bonuses in the wake of the crisis. Nevertheless,it is not realistic to perceive that the small commercial banks were involved in packaging and selling large volumes of toxic collateralized loans (one of the key causes of the financial crisis).

Neighborhood banks are a vital part the economic vitality of the communities they serve. They are responsible for fostering business development and growth, while stimulating the local economy. This is an unfortunate fallout from the recession that is clearly a travesty, but surprisingly remains under-reported. Without a small bank association, lobbyist or public figure advocating for the plight of the small bank, there has not been much attention drawn to this matter.
See interesting article about Small Banks being co-dependent.

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K. Reilly
The Cohn-Reilly Report

Sunday, February 13, 2011

Too Small to Succeed: Neighborhood Banks Becoming Extinct

There were hundreds of local banks that have struggled to survive the volatile economic wave over the past two years. Since 2008, 238 banks have failed. That translates to 613.2 billion in assets, not to mention the amount of losses that had to be covered by the FDIC for depositors. In 2009 alone, 140 neighborhood banks across the country were forced to shut their doors, accounting for nearly 60% of the total number of banks that have failed during this recession. Apparently, they were too small to succeed. Totally passed over by the TARP bail outs distributed to banks identified as “too big to fail”, the small and midsized banks were left to sink or swim, with little or no support from the Federal Government. It may appear to the layman, that neither the Bush, nor the Obama administration saw a need to include the little guys, who made up over a half a trillion dollars in assets. Meanwhile the small banks are the backbone of many communities throughout the country. It is the small bank that often provides construction loans, and mezzanine loans for housing development projects and small businesses that make up a more than 50% of our GDP. This year has seen 73 banks close, and we are only in the second quarter. I am not a big fan of banks, given their unsavory role in the near collapse of the financial makets, but I always take a stand for the overlooked and underserved.

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K. Reilly
The Cohn-Reilly Report

Tuesday, February 8, 2011

Google: Reinventing itself

In the headlines several times in the last couple of weeks, Google appears to be making major changes to bolster its competitive advantage, and gear up for the next plateau in technology. Following failed attempts to expand into the instant messaging /social network genre with Google Wave, and the Nexus One phone, Google is bent on exploiting every ounce of its brand equity to slide into other online businesses. To this end, CEO Eric Schmidt is stepping down to hand the reins over to co-founder Larry Page, 37, to take the company where no man has gone before (hopefully).

Schmidt, for the most part, successfully accomplished what he set out to. He was brought on to bring some “grey hair” into the fold; meaning provide the company with steady, experienced management, while the two co-founders, then only 27 year old, gain more management experience as they tweaked their golden goose to perfection. Co-founders Larry Page and Sergey Brin were essentially kids at the time, and certainly did the right thing by bringing on someone with Schmidt’s expertise to keep the operation afloat. Schmidt, by the way, is a former board member of Apple, Inc, and was CEO of Novell when he left to become Chairman and CEO of Google. Eric Schmidt has been criticized for not have the technical dexterity of his bosses, Brin and Page, but in his defense, that is not what he was there for. Nevertheless his stint at Google was extremely successful, which is made abundantly clear by the 4th quarter earnings report showing Google had a 29% jump in revenues. Since August of 2001, Schmidt, Page and Brin ran the company as a triumvirate, and the company’s shares grew more than six-fold.

What’s Next for the Iconic Internet Giant, with 67% Market Share of the Internet Search Engines industry,
whose name has become a verb?

For starters, Google expected to acquire ITA software for $700 million. As the story goes, an agreement was reached for the acquisition of ITA software, which powers travel sites, including, as well as the reservation systems of American and Continental Airlines. Although the golden goose of the internet was initially cleared for by the Federal Trade Commission, but it is anticipated that the next hurdle will be met with resistance. It is reported that the government may be preparing to file an anti-trust suit against Google to stop this deal in its tracts. Google has had some issues come up about privacy, and concerns about the lack of security of the information Google has gathered, as well as how this information is being used. It would seem that if Google also had proprietary information collecting from million of airline customers, they may prove to be deemed a little too much “information” or a conflict of interest, or both. I will be watching to see how this plays out. It is certainly intriguing to say the least.

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Cohn-Reilly Report

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Anonymous said......
It looks like Google's founders may have grown into their roles as chief executives, but can they stay ahead of the technology curve as Apple has been able to do, time and time again? Schmidt should probably stay on as a consultant, to keep an eye on the ship, while the barely seasoned founders find their rhythm.
K. Reilly said......
I understand your feeling, and Schmidt has certainly been a solid guardian for Google, but I tend to believe the Mssrs. Page an Brin have earned great experience over the past 10 years, and well prepared to lead the company to the next level.

Tuesday, February 1, 2011

Financial Crisis Retrospect

According to a recently released inquiry report investigating how the 2008 financial crisis unraveled, 12 of the 13 largest U.S. financial institutions "were at risk of failure", while at least 50 hedge funds tried to capitalize on it.

The report indicates a huge run occurred on the bank at Morgan Stanley and describes the alleged trading practices of a secretive hedge fund, while tallying the number of such funds betting against U.S. homeowners. The 545-page document paints a picture of a financial system let loose by lax regulation and spiraling out of control. Regulators now are hammering out a financial-regulatory overhaul spear-headed by the Dodd-Frank act, though some analysts say not enough has been done since to prevent a recurrence.

The report described a shadow banking system that helped trigger a more than tenfold surge in financial-sector debt, to $36 trillion in 2007 from $3 trillion in 1978. Then it crumbled, Federal Reserve Chairman Ben Bernanke told the commission in a November 2009 interview. "As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression," Mr. Bernanke said, according to the commission's report. Of the 13 most important U.S. financial institutions, "12 were at risk of failure within a period of a week or two," the report quoted Mr. Bernanke as saying.

The list of potential failures included Goldman Sachs Group Inc., people familiar with the report said. The only major financial institution not at risk at the time was J.P. Morgan Chase. Spokesmen for J.P. Morgan Chase and Goldman Sachs declined to comment on the report. Hedge funds pulled $86 billion in assets from Morgan Stanley in the week following the Sept. 15 Lehman bankruptcy filing, stemming from concerns about Morgan Stanley's viability, according to a Morgan Stanley email at the time to the New York Federal Reserve titled "Liquidity Landscape." "Many of our sophisticated clients started to liquefy," Morgan Stanley Treasurer David Wong told the commission in October. A Morgan Stanley spokeswoman declined to comment.

The report also provided clarity about the number of hedge funds gambling homeowners couldn't pay their mortgages. In an interview with the commission, former Deutsche Bank AG trader Greg Lippmann, who played a key role in facilitating short bets, told the commission that in 2006 and 2007 he handled trades for at least 50 hedge funds and "maybe as many as 100" betting that mortgage-backed securities would fall. An FCIC survey of some hedge funds found they had a total of $45 billion of short bets, which easily outweighed roughly $25 billion of bullish positions they had on mortgages. The panel also scrutinized the conflicts of interest involving Wall Street banks, hedge funds and investors created by the pools of mortgage debt known as collateralized debt obligations.

We hope that Dodd-Frank will help prevent a repeat of the crisis, as regulators interpret the 254 page document that details sweeping reforms of how financial institutions will conduct their business. This will include derivatives regulation, broker-dealer disclosures and consumer protection clauses that must be implemented by Wall Street firms or by law, they won't be able to continue operating. Look for updates in future articles.

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C. Cohn
Cohn-Reilly Report

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