Stocks rebounded nicely today as the Dow recouped most of its losses from yesterday.Stocks soared in late trading on reports that France and Germany agreed to boost the rescue fund. We'll see how long that lasts.
Bank of America earned $6.2 billion on accounting gains and the sale of its stake in a Chinese bank. The Accounting rule that created this relates to a drop in the value of its debt. When the price of the bank's debt falls, the bank could theoretically buy it back at a lower cost. Accounting rules require that an income gain be recorded when that happens. Banks in this week's reporting are benefiting from this in their financial statements.
It looks like Money Markets aren't as safe as they seem to be.
Here are the top financial stories of the day:
1) Stocks jump on reports of progress in Europe-From the AP
Stocks are closing sharply higher on reports that Germany and France are moving closer to resolving the European debt crisis.
The Guardian newspaper reported Tuesday that France and Germany have agreed to expand a rescue fund. European officials are expected to take up the expansion along with other measures at a meeting this weekend.
The Dow Jones industrial average rose 180 points, or 1.6 percent, to close at 11,577.
The S&P 500 index rose 25 points, or 2 percent, to 1,225. Bank stocks were among the strongest performers.
The Nasdaq composite rose 43 points, or 1.6 percent, to 2,657.
More than five stocks rose for every one that fell on the New York Stock Exchange. Trading volume was higher than average at 4.9 billion shares.
2) Bank of America earns $6.2B on accounting gains-From the AP
Bank of America earned $6.2 billion in the third quarter on accounting gains and the sale of a stake in a Chinese bank, which offset lower revenue and income in its credit card, real estate and investment banking businesses.
Bank of America is also no longer the largest bank in the nation by assets, which fell to $2.21 trillion in the quarter. The Charlotte, N.C. bank ceded the bragging rights to rival JPMorgan Chase & Co. which reported total assets of $2.28 trillion.
The slimming down reflects Bank of America's strategy of cutting costs and selling off businesses that don't fit into its simpler banking model. CEO Brian Moynihan said in a conference call with analysts Tuesday he had begun the process of a "strategic transformation of the company."
Bank of America earned 56 cents per share, following a loss of $7.3 billion, or 77 cents a share in the same quarter last year. Analysts surveyed by FactSet forecast the bank would earn 28 cents per share.
Bank of America Corp.'s stock rose 3 percent to $6.21 at 10 a.m. Tuesday.
The income included accounting gains of $4.5 billion and $1.7 billion, both related to drops in the value of its debt. When the price of the bank's debt falls, the bank could theoretically buy it back at a lower cost. Accounting rules require that an income gain be recorded when that happens.
Bank of America gained $3.6 billion from selling its stake in China Construction Bank and recorded a loss in its private equity business of $2.2 billion as the value of its investments fell.
The sale of its stake in the Chinese bank was part of the bank's effort to focus the company and shed non-core businesses. During the quarter Moynihan realigned the business and reshuffled top management. He got rid of two of the bank's top executives -- head of wealth management Sallie Krawcheck and head of consumer banking Joe Price. Moynihan replaced them with two chief operating officers -- David Darnell to head all consumer businesses and Tom Montag to oversee all commercial relationships.
During the quarter, the bank also announced 30,000 job cuts in the quarter as part of an initiative to reduce expenses. Its goal is to reduce expenses by $5 billion a year in the next three years.
The third quarter results were hurt by declines in investment banking and trading from its Merrill Lynch division, which has been an income generator in previous quarters. Turbulent financial markets in the third quarter, brought on by the debt crisis in Europe and a downgrade of the U.S. government's credit rating, kept many investors away and led companies to put off stock and bond offerings.
Bank of America's investment banking and trading business reported a net loss of $302 million, compared to net income of $1.5 billion in the year-ago quarter. Revenue declined 26 percent to $5.2 billion. Fixed income, currency and commodity sales fell by $3.2 billion, while equity trading declined by $201 million. Investment banking fees fell 21 percent to $1.1 billion.
Bank of America's results are considered a proxy for the health of the U.S. consumer because the bank serves about half of all American households. The consumer business results showed that Americans were still holding back spending and demand for loans was low.
The bank's consumer real estate business reported a loss of $1.1 billion, while revenue declined 22 percent to $2.8 billion. The bank said it wrote fewer real estate loans due to lower demand.
One of the largest credit card issuers, Bank of America's revenue from the division dropped 16 percent to $4.5 billion. Customers used less credit than last year, leading to lower income for the bank.
The bank set aside less money for losses as more Americans got their financial houses in order and paid their bills on time. Bank of America's provision for losses from credit cards decreased $2 billion from a year ago to $1 billion.
3) Hidden Dangers Lurking In Money-Market Funds-From The Wall Street Journal
It's always the quiet ones.
Money-market funds—U.S. mutual funds that buy short-term debt issued by companies, banks and governments—are supposed to be safe, cash-like investments that lead an inconspicuous life in the lower reaches of the financial system.
In normal times, these funds, which collectively have more than $2.5 trillion under management, should be stored away in the drawer marked "BBB"—"Big But Boring"—and forgotten.
But times have been anything but normal in recent years. Cue a whirlwind of regulatory activity, led by the Securities and Exchange Commission, that could fundamentally change the nature of this huge sector, and not a minute too soon.
The issue is simple-yet-frightening: Money-market funds have become "systemic" institutions, whose size, interconnectedness and behavior have the potential to cause serious damage to companies, investors and the economy.
Exhibit A is from September 2008: After Lehman Brothers Holdings Inc. collapsed, the near-failure of the $62 billion Reserve Primary Fund precipitated a ruinous, and unexpected, domino effect that paralyzed financial markets and the global economy. Money markets were badly hit in the aftermath and the U.S. government had to step in to bail out the sector.
Exhibit B is more recent. In the past few months, investors have been gripped by concerns over these funds' exposure to the wobbly European banking sector. Conversely, fears of a money-market funds pullback has spooked shareholders in the European lenders, particularly the French ones, that rely on them for funding.
Any overhaul should start by tackling three misconceptions embedded in the current regime.
First, individual investors and companies perceive money-market funds as "safe" and treat them as current accounts, withdrawing money at will, writing checks against their deposits and so on. This attitude overlooks the fact that, unlike banks, these deposits aren't federally insured so in the event of a run, investors are at risk of losing money.
Second, money-market funds keep their net asset value fixed at $1 a share regardless of market movements. This fiction is justifiable on tax and accounting grounds, partly because changes in the daily prices of those short-term investments are tiny, but it does reinforce the mistaken impression of money markets as "stable" and "risk-free."
In fact, the run on the Reserve Fund happened precisely because its Lehman losses had forced it to "break the buck"—i.e., admit that its net asset value had fallen below $1.
The third issue centers on foreign banks. Since most of them don't have U.S. deposits, they fund dollar loans by issuing debt to money funds.
But there is a catch: By borrowing short-term funds and lending them out for years banks leave themselves far too exposed to changes in interest rates, credit markets and economic conditions, as shown by European lenders' current plight.
The nuclear option for regulators would be to scrap money-market funds' fixed net asset value, or NAV, and make it floatable, like other mutual funds. That would let investors know exactly how money funds are doing and might deter their managers from taking risky positions.
The only problem is that it might kill off the entire industry. As Karrie McMillan, general counsel of the Investment Company Institute, the trade association for mutual funds, told me: "The floating NAV is the worst possible option on the table."
Industry practitioners argue that a floating NAV would be an accounting nightmare for borrowers, drive investors away by forcing them to pay capital-gains taxes every time they withdraw money and wouldn't prevent runs on the funds anyway.
A more viable solution would be to require money-market funds to hold a bank-like capital buffer to pay out investors during a crisis.
The SEC is seriously considering such a cushion but it is still undecided on its size. Hard-liners would like to set it at around 3% of a fund's assets, a level that would require the industry to raise a not-inconsiderable total of $75 billion in new capital.
Money-market funds are pushing for something more like 1%, warning that higher requirements would saddle them with excessive costs and make their business uneconomical.
Industry representatives point out, with some reason, that only two funds have ever broken the buck, adding that, since the outset of the euro-crisis, the sector has steadily reduced holdings of European bank debt.
Indeed, the much-scrutinized French banks no longer feature among the top 10 borrowers from U.S mutual funds, according to the latest figures from Crane Data.
That is reassuring news but not reassuring enough to ease the regulatory pressure.
Let's face it: The rarity of breaking-the-buck incidents is offset by the catastrophe that ensued when the last one occurred. I wouldn't play Russian roulette even if I knew the gun's drum had 1,000 slots and only one bullet.
Moreover, even after sharply lowering their lending to Europe, U.S. money-market funds still have around the same level of exposure to some large French banks as the Reserve Fund had to Lehman in 2008.
As every fan of whodunits knows, overlooking the quiet and unassuming types can lead to unexpected dangers.
Quote of the Day from Dave Ramsey.com:
Man's mind, once stretched by a new idea, never regains its original dimensions. — Oliver Wendell Holmes, Jr.
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