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Bond Issue Considered by IMF: Will This Help Improve Lending Programs?

The International Monetary Fund (IMF) is now considering selling its bonds to developing countries in order to raise sufficient capital against the worldwide economic crisis. Brazil and China are among the countries that showed interest in purchasing the securities. The tentative offer opens new doors in the way member states can contribute to the fund. The IMF, through all its years of history, has never issued bonds before.

Essentially, the fund is looking for ways to finance loans and provide aid to members during the worst-economic crisis in its history. With more uncertainties ahead, the institution is tapping into its 185 members for fresh cash infusions. However, developing countries have suggested that they want more decision-making authority within the IMF; this sets up a possible clash with developed countries in the future.

Is the Bond Issue Likely to Push Through?

According to Dominique Strauss-Kahn, “I’m sure that this vehicle will be used…we’re discussing with different creditors the way to implement it and the amount that we put in it.” He further added that bonds provide flexibility. Despite the prospects of the IMF bond issue, Brazilian Finance Minister Guido Mantega has said that the sale proposal is premature.

Brazil is demanding higher yields compared to those attached to US Treasuries before they will buy. Mantega has met with his counterparts from China, India, and Russia to discuss the situation. Contributions made by the four largest developing countries are “provisional”. That is, they want to increase their decision-making power in the IMF.

What does it mean to both Rich and Emerging Economies?

If the bond issue really pushes through, it is inevitable for emerging economies especially the four largest developing nations mentioned earlier to attain more decision-making power within the IMF. Right now, Mantega has revealed that they want their contribution to help developing countries weather the global financial slump instead of strengthening the “current structure of the fund”.

There was an implicit suggestion made by Bank of France Governor Christian Noyer that the IMF should forget this kind of “exercise”. But everyone agrees that the fund needs to be correctly capitalized in order to be operational. Though the next move of the IMF is unclear, the common aspect everyone agrees on is that institutions like the IMF and the World Bank need to contain the crisis that seems to be worse than what was previously projected.

Will the Stress Test Restore Confidence?

Although the government has previously said that distressed banks need to raise additional capital to meet the strict standards of the “stress tests”, the Obama administration also revealed that it is ready to provide help if the banks needed it. Performed on 19 financial firms, the stress test is intended to boost consumer confidence. It is important to take note that the 19 major firms account for half the loans in the United States banking system and it has become a big part in the government’s rescue plan.

Restoring Consumer Confidence

With today’s economic crisis, you, your friends, and your loved ones might be cutting back to save up for any unforeseen circumstance. This causes great damage to the economy if majority of Americans are doing the same thing. The government wants to stop this trend by assuring the public about the relative strength of the financial sector. Once investors and the public are assured that the country’s biggest financial firms are stable, recovery can begin at a faster pace.

The Federal Reserve has already held top-level meetings with bank executives to give them the lowdown about what the status of certain banks will be if the recession got any worse. Senior Fed officials assured the public that they will keep a close eye on banking institutions to ensure that they have sufficient capital to withstand major economic shocks. The results of the stress test will be announced on May 4. Already, its effects are being felt in a positive way. Wall Street is brimming with anticipation and the Dow Jones Industrial rose by 119 points to close at 8,076.

Criticism of the Stress Test

The concept of the stress test has garnered both praise and criticisms from economic experts. Some critics maintained that the stress test may achieve the opposite effect of what the government wanted. The uncertainty that it creates feels on market volatility. In addition, the market may not accept the hypothetical testing as a realistic one.

How the Government Will Help

The philosophy that major financial firms are “too big to fail” seems to be a fundamental one. The Fed can use several tools to improve a bank’s balance sheet including converting Treasury loans into the bank’s common shares of stocks. Another method would be to compel financial institutions to raise more capital from private market to get more money from the bailout fund. If worse comes to worse, the rescue plan may involve a government-backed merger.

What are Bank “Stress Tests”?

When you hear the words “stress test”, a treadmill, a heart monitor, and your next physical probably come to mind.  When you hear the words “stress test” in the news these days, it is actually referring to something else-tests the government is currently performing on America’s “big banks” amidst this financial crisis.

What are bank “stress tests?”

Shortly after officially taking office as President, Obama and his administration decided to perform stress tests on the nation’s struggling banks.  According to an online article published by NPR back in February, these stress tests “are a widely used method of figuring out how strong a bank’s balance sheet is – essentially using computer models based on historical data to judge how it would withstand various hypothetical situations.“  Another term used to describe the stress testing process is called “shocking” the bank’s books.

Which banks are undergoing government-imposed stress tests?

In February of 2009, the government mandated that all U.S. banks with assets of more than $100 billion would be required to undergo stress tests. This brings the grand total to 19 banks.  These tests were designed to ensure that banks could survive, and continue lending, even if the following shifts were to happen in the future:  unemployment rising to above 10 percent and home prices falling by an additional 25 percent.

Why are they being conducted?

The Treasury stated that banks will undergo these stress tests to determine whether they “have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.” All of the 19 banks being tested are expected to pass the stress test; however, some banks will be rated higher or lower than others.

Implications of making stress test results public

The White House is still deciding whether or not they will make the results of these stress tests available to the public.  Previously, all of the banks receiving bailout money had been considered equally, preventing the more deeply wounded banks from receiving any negative attention.  The Federal Reserve even announced last week that all results must be kept confidential, as financial results like this are rarely made available to the public.  Nevertheless, some within Obama’s administration believe that results need to be released to confirm the validity of the assessments to the American people.

What if a bank fails the stress test?

As citizens affected by the credit crisis on a daily basis across various aspects of life, it is important to ask yourself what you would do if the bank you bank with failed this government-imposed stress test.  According to Treasury officials, the stress test actually “won’t be “pass or fail,” but a question of what level of capital was adequate.” Either way, these “stress tests” should have little, or no affect on the way you bank.

Wells Fargo to Report Profits

This past Thursday, Wells Fargo released a surprising first quarter earning report that displayed profits, mirroring what Citi Financial profit reports stated a few weeks ago.  Stocks of Wells Fargo surged to their highest level in 2 months, shooting way past the expectations of financial analysts.  More specifically, Wells Fargo reported that it expects earnings of approximately $3 billion for its first quarter; The Dow rose 246.27, or 3.1 percent, on Thursday to 8,083.38.  According to information released on Forbes.com, “the profit forecast of 55 cents a share is more than double the Street’s consensus estimate.”

You may be wondering how Wells Fargo doing so well amidst the recent credit crisis that America faces?  They have stated that acquiring Wachovia has achieved better results than previously anticipated.  Wachovia has contributed approximately 40 percent of its total revenue, which comes to $20 billion.  Many believe this may be a sign of better times to come for the banking industry, which means better times to come for the people of America.

Wells Fargo’s CEO, John Stumpf, commented that “Our business momentum is strong, and we expect our operating margins to remain at the top of our peer group.”

These profits have sent waves of encouragement throughout Wall Street during an otherwise relatively quiet week; this type of positive news has been rare during these tough economic times.   The hope is that Wells Fargo’s success this first quarter will spill over to other banks as well.  Furthermore, The New York Times reported that all 19 banks would pass federal regulators’ ongoing “stress tests”; the objective of this government-imposed test is to estimate how banks would hold up if the economy were to crash even further.

So what does this mean for consumers with regard to loan financing options?  Wells Fargo earned good fees; simultaneously, low interest rates drove 450,000 customers to either purchase new homes or to refinance existing loans.  Doing so has successfully lowered people’s monthly payments.  As a result of the Wachovia acquisition, along with an increase in the number of mortgage applications, the low amount of borrowing activity is likely to increase.

Furthermore, The Federal Reserve has helped reduce mortgage interest rates by buying lots of the Fannie and Freddie-backed loans packages.  President Obama echoed the widespread enthusiasm, stating that “A lot more people can take advantage” of the refinancing program.  He also urged Americans to find out if they are eligible at the website www.makinghomeaffordable.gov

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