May 28, 2009

Economic Outlook: Banks and bailouts

Stocks in Asia were mixed Thursday, while stocks in Europe fell in the wake of a long slide in U.S. equities late Wednesday.

Without a perceptible turning point, the Dow Jones industrial average slid into negative territory Wednesday, ending the day 173 points behind. In Asia, the Nikkei average held its own, gaining 0.13 percent. The Hang Seng index in Hong Kong jumped 5.26 percent, while the Singapore Straits Times fell 0.57 percent and the S&P/ASX in Australia lost 1.19 percent.

In midday trading, European stocks edged lower. The FTSE 100 in London fell 0.99 percent, while the DAX 30 in Frankfurt dropped 1.08 percent. The CAC 40 in Paris lost 0.93 percent. The DJStoxx 600 fell 1.15 percent.

In Berlin, negotiators for General Motors Corp., the German government and the U.S. Treasury Department failed to agree on a bridge loan that would keep Opel in production when GM files for bankruptcy, The New York Times reported.

The talks that lasted through the night trimmed the list of bidders for GM's European operations to two: Fiat of Italy and Magna, the Canadian auto parts supplier. But German negotiators were frustrated the U.S. Treasury could not guarantee a GM bankruptcy, which could come any day, would not pull $2 billion in German aid out of the country.

In Washington, Treasury officials are working on plans to reduce bank oversight to a single regulator, sources close to the discussions said.

As officials debate whether to streamline regulations or the delivery system, a single-regulator proposal is likely to spark more than one turf war among agencies and lively debate on Capital Hill, the Washington Post reported.

Officials are considering a new consumer protection agency with oversight of financial products and a consolidation of the Securities and Exchange Commission and the Commodity Futures Trading Commission. In addition, the Office of the Comptroller of the Currency and the Office of Thrift Supervision could merge, while the Federal Reserve and the Federal Deposit Insurance Corp. could lose their roles as bank supervisors, the Post said.

The administration is also expected to propose the Fed take on oversight of systemic risk and the FDIC be granted power to take over companies that aren't banks, such as insurance giant American International Group Inc.

FDIC Chairman Sheila Bair said Wednesday the nation's banks are not out of the woods yet.

In the first quarter, 21 FDIC-insured banks failed, the highest number since the fourth quarter of 1992. During the first quarter, 20 percent of the banks under its jurisdiction failed to make a profit and 60 percent saw profits drop compared to the same period a year ago.

The first quarter results are telling us that the banking industry still faces tremendous challenges, Bair said in a statement.