The Digital Financier The Digital Financier Update (DFIN.COM Update) provides a weekly commentary on important stories with significant financial, and or Internet implications. The purpose is to provide finance professionals and there staff with a timely brief synopses of recent and historic news events that best illustrates the changing digital economy. The stories will eventually impact all of us. Many of our stories may have received very little popular press coverage. The weekly summary is e-mailed at no cost to participating subscribers for distribution to staff and co-workers.
This publication is designed to be a quick read and the archive is a good resource for financial history.
The most common sources for the DFIN.COM Update include UP, AP, Fast Company, Business Week,The Economist, Forbes, Wired, Federal Reserve Bank Publications. The Wall Street Journal Interactive, MSNBC, L.A. Times, San Jose Mercury News.
Week of September 28, 1997
FASB Derivative Ruling Still Moving Forward. The Wall Street Journal (Online Edition, September 29, 1997) reports lessening opposition to the Financial Accounting Standards Board's proposed rules on financial derivatives. This comes only days before congressional hearing are scheduled. FASB's proposal requires companies to mark derivative positions to market. Most companies argue that this is difficult to accomplish given the limited trading of many derivatives and there complicated structure. Others argue that earnings would be too volatile.
Mexico Leads World Stock Market So Far in 1997. The Wall Street Journal (October 1, 1997, p. C1) reports that the Mexican stock market rose nearly 59% measured in pesos and 61% in U.S. dollars through September 30, 1997. The U.S. came in sixth with a 28% gain. The biggest losers were in Asia with Thailand, Philippines, and Malaysia registering about 35% losses. Measured in U.S. dollars, the losses were over 50%.
Asian Currency Crises Not Scaring Away U.S. Investment Bankers. Business Week (October 13, 1997, pp. 90-94) reports that U.S. investment bankers continue to invest heavily in Asia even as the currency crisis in that region continues. They see great opportunities in this fast-growing region of the world. U.S. investment bankers have an advantage over the strongly entrenched Hong Kong firms in that they have stronger global activities.
Commercial Bank Profits Hit Another Record for 2nd Quarter. The FDIC Quarterly Banking Profile (Second Quarter 1997, p. 1) reports that commercial bank industry profits reached $14.6 billion in the 2nd quarter of 1997, up 6.2% from the year earlier. The return on average assets was the fifth highest on record at 1.24% and the return on equity a strong 14.72%.
Week of September 21, 1997
Malaysia Leader Blames Currency Speculators for Currency Crisis. The Economist (September 27, 1997, p. 87) reported that Mahathir Mohammed, the prime minister of Malaysia, told the annual meeting of the IMF and World Bank that excessive currency speculation of the type that brought down South Asian currencies in recent months was "unnecessary, unproductive and immoral." In today’s environment of generally floating exchange rates, the IMF estimates that hedge funds and others can mobilize between $600 billion and $1 trillion to make currency bets. These profit-seeking speculators provide liquidity to markets and help expose countries with weak economic fundamentals. Nearly 30 years ago, the British politicians blamed the "gnomes of Zurich" for their big devaluation. It seems clear that currency speculators and politicians from targeted countries will rarely agree.
Travelers’ Makes Offer to Buy Salomon Inc. American Banker Online (September 25, 1997, p.1) reported that Travelers Group announced a $9 billion offer to buy the investment banker Salomon Inc. The transaction will merge Travelers-owned Smith Barney Holdings Inc. and Salomon to create one of the world’s largest investment banks with both institutional and retail strengths. The Wall Street Journal (September 25, 1997, A1) reported that the combined market value of the new Travelers Group will exceed that the Merrill Lynch & Co. The Economist (September 27, 1997, pp. 79-80) reports that the marriage will be a tough one given the high bonus culture at Salomon and the lower-pay retail culture at Smith Barney. Adding to Travelers’ problems is the fact that Salomon has highly volatile earnings compared to it other businesses.
Borrowing Against Future Record Sales. The Wall Street Journal (September 26, 1997, p. B1) reported that rock star David Bowie plans to sell $55 million in securities collateralized by royalties from future record sales. A number of investment bankers are planning to set up units to do more entertainment industry financings.
Thrift Institution Charters in Demand. The Wall Street Journal (September 24, 1997, C1) reports that a growing number of investment bankers and insurance companies are lining up to obtain thrift charters. The appeal is the fact that thrifts can underwrite insurance and banks cannot. This makes if possible for insurance companies and brokers to offer retail bank products and underwrite insurance.
Week of September 14, 1997
AT&T Rebuked for Fraud Suits: Business Week (September 15, 1997, pp. 118-119) reports that AT&T has been meeting resistance in a number of states to their efforts to collect on delinquent credit card borrowers who have filed bankruptcy by suing them for fraud. Although not unknown in the credit card business, the AT&T program is apparently more widespread. Some judges have come down hard on AT&T recognizing that many individuals would rather settle the suit than incur the high lawyer costs of putting up a defense.
New Electronic Trading System Approved by SEC. The Wall Street Journal (September 19, 1997, pp. C1-C27) reports that the U.S. Security and Exchange Commission has approved an electronic trading system for large equity block traders that will be operated by OptiMark Technologies. The system uses artificial intelligence to attempt to replicate the supply and demand curves for particular stocks. The selling point of the system is that it is touted as a system that avoids large price moves when a large block of stock is offered or bid. This black box system avoids the actions of traders who profit from a type of "front-running" of a large block trade.
ATM Charges Continue to Rile Politicians. Business Week (September 15, 1997, p. 124) reports that state and federal politicians continue to make threats concerning the rising cost of automated teller machine fees. A number of states have introduced antisurcharge bills in their state legislatures in order to control charges of ATM providers who have lifted fees to as high as $3 per transaction. The fees are important to ATM providers with estimates of ATM surcharges of as high as $3.7 billion for 1997.
Financial Institutions and Congress Try to Deal With Electronic Banking Privacy Issues. The American Banker Online (September 19, 1997, p. 1) reported that bank representatives at a recent hearing in the U.S. House of Representatives established eight privacy principles which include giving customers the option to prevent disclosures of personal information and limiting corporate employees' access to such data. The financial industry is attempting to preempt congressional action with a self-regulation. This approach came under fire by some representatives and consumer groups.
Week of September 6, 1997
"Irrational Exuberance" Haunts U.S. Stock Market. Investor's Business Daily (September 10, 1997, p. B1) reported that Federal Reserve Chairman Allan Greenspan and other Fed officials continue to fret over the level of U.S. stock prices. Using an internal Fed valuation model, the stock market is overvalued by 20 percent. Stock market analysts wonder if this view will cause the Fed to tighten monetary policy. Some experts contend that stock prices aren't too high, but rather, bond interest rates are too high. A lower bond interest rate would justify current stock price levels
Week of August 30, 1997
Recommendations Offered for Dealing with Monetary Crises. The Wall Street Journal (September 2, 1997, p. A2) reported that central bankers and economists have come up with no fool-proof proposals for dealing with potential financial crises such as those which occurred recently in Thailand and earlier in Mexico. Experts do agree that these crises are the result of misguided government policies. However, they have no similar consensus recommendations for how to avoid the costs of dealing with them. There was general agreement that providing the international markets with more and better information about the state of the problem country's fiscal and payments situation would serve to reduce the severity of the problems.
Color Blind Credit Scoring Perpetuates Mortgage Redlining Debate. The Economist (August 30, 1997, pp. 56-57) reported on the academic and regulatory debate that continues to the waged over the presence of alleged redlining in mortgage lending. Although a number of recent studies provide mixed results, the main conclusion is that lenders are resorting to color-blind credit scoring statistical underwriting techniques to make credit judgements in mortgage lending. The result is that the lower income levels of most black applicants than for whites leads to higher rejection rates. Economics, not race, is the likely cause of the alleged redlining results.
.Week of August 24, 1997
NationsBank Corp. to Buy Barnett Banks Inc. and Become Third Largest in U.S. The Interactive Wall Street Journal (August 22, 1997) reported that NationsBank made a $15.5 billion offer to acquire Barnett Banks. Barnett Banks had signaled that is was looking for an acquisition or merger partner. With all its activities concentrated in the rich and fast-growing banking state of Florida, it was a target of many large acquisition-minded firms.
Law and Regulations Bog Down Internet Financial Transactions. The Economist (August 23, 1997, pp. 56-7) reports that a myriad of national laws and regulations is making it nearly impossible for cyber-space financial firms to deliver services globally. In some countries, regulators are requiring that to do business with their citizens you must have a local office. Others are considering requiring that the cyber-finance firm’s computers be maintained locally. Equally perplexing is determining who will enforce the regulations on firms out of the country. At this point there are many questions and few answers.
Fidelity Shuts Magellan Fund to New Investors. Business Week (September 8, 1997, p. 119) reports that Fidelity Investments, the world’s largest mutual fund manager and distributor, will only accept new investments from existing investors. This announcement caught the industry by surprise since Magellan is the largest mutual fund with $60.9 billion of assets. Fidelity executives justified the move as a way to reduce cash flow volatility.
Week of August 17, 1997
The Federal Reserve Proposed New Capital Guidelines for Asset-Backed Securities: American Banker Online (August 22, 1997, p1) reported that the Federal Reserve Board proposed a substantial overhaul of risk-based capital rules for holdings of asset-backed bonds (ABS) and for recourse agreements and credit lines used to sell ABS. The new regulation will help some banks and hurt others depending on their investment holdings and role in issuing ABS. It helps holders of highly rated bonds because it lowers the capital requirement to 1.6% , from 8%, on securities rated AAA. The requirement would be 8% capital of the assets owned or 4% of the total assets in the pool for securities rated BBB to AA. Below-investment-grade portions would require 8% capital against the entire pool of assets.
Some banks will be hurt by the abolishment of a rule requiring capital backing for only a portion of the pools covered under recourse agreements and direct credit substitutes such as lines of credit. Now banks will have to hold capital against the entire pool.
Insurance Group Organizes Thrift to Lend to Policyholders: American Banker Online (August 20, 1997, p. 1) reported that the National Association of Mutual Insurance Companies plans to charter a federal thrift in order to make available loans to policyholders. The plan follows those of a number of large insurance companies that are proposing to charter or purchase thrifts. Some of the largest include State Farm Mutual Automobile Insurance Co., Transamerica Corp. and Travelers Corp. These initiatives point to the growing convergence of financial service industries as many depositories expand into insurance sales.
NASD Approves New Listing Rules: The Wall Street Journal Interactive Edition (August 23, 1997, front page) reported that the Securities and Exchange Commission approved new rules designed to improve listing standards. The most important is the new requirement that all Nasdaq-listed issues trade for at least $1. The new rules do not apply to the OTC Bulletin Board market, which generally lists the smallest capitalized stocks.
Week of August 10, 1997
Pace of Financial Institution Mergers Remains High. The Economist (Aug. 16, 1997, pp. 53-55) reports that the pace of mergers in the financial services industry remains at the record high levels of the last three years. Over 4,000 mergers took place in the industry each year during 1995-6. That compares to around 3,000 during the early 1990s. The value of year-to-date 1997 deals exceeds $200 billion. With so many cross-industry mergers, the question most analysts are asking is whether this means the financial supermarket is the wave of the future.
Credit Reporting Firm Shuts Down Internet System. The Wall Street Journal Interactive Edition (August 16, 1997, p. 1) reported that Experian Inc., one of the U.S.’s largest credit reporting bureaus, shut down its Internet credit reporting system due to reports being misdirected. The problem served to raise concerns of critics concerned about using the Internet to send private information.
U.S. Stock Market Falls. The Wall Street Journal Interactive Edition (August 16, 1996, p.1) reported that the Dow Jones Industrial Average dropped 247 points, the second largest point decline, on Friday August 15th. The decline represented a 3.1% decline, a fraction of the 23% decline in the record one-day 1987 crash. Rising interest rates and disappointing earnings by some companies helped trigger the decline.
Week of August 3, 1997
New IRA Law, New Savings and Just Switching? Business Week (August 25, 1997, p. 47) reports that the newly-passed Individual Retirement Account laws may do little to increase the stock of savings, but it will certainly reshuffle the existing stock. The early experience with IRA popularity in 1982-86 did little to increase the savings rate even though IRA accounts were opened at a fast pace. Most of the funds came from existing savings in taxable accounts.
Greenspan Attacks New FASB Derivative Ruling. The Wall Street Journal (August 7, 1997, p. A6) reports that Federal Reserve Board Chairman Alan Greenspan has asked the Financial Accounting Standards Board to abandon its proposal to have public companies mark the value of derivative contracts to market through their income statements. The two main objections are that the proposal will lead to volatile earnings and that many derivative contracts are difficult to value.
Week of July 27, 1997
Organized Futures and Options Exchanges Fight Off OTC Dealers. Futures Magazine (August 1997, pp. 81-83) reports that the organized futures and options exchanges are fighting hard to maintain market share in the derivative markets against hard charging over-the-counter (OTC) dealers. It isn’t so much the battle between electronic trading versus the open out-cry exchange systems, but the innovation and flexibility of the OTC that is making it hard on the organized exchanges. The organized exchanges have fought back with customized contracts and a willingness to offer settlement and mark-to-market services to OTC players.
Valuation Models Are Consultants’ Newest Fad. The Economist (Aug. 2, 1997) reports that management consultants are hyping the use of valuation models such as Stern Stewart’s Economic Value Added (EVA), Boston Consulting Group and HOLT Value Associate’s cash flow return on investment (CFROI), and Stern Stewart’s Market Value Added (MVA). The approaches have been adopted by some of the world’s largest companies such as Coca-Cola, Monsanto, and Procter & Gamble. The measures have their critics, however. They don’t really evaluate innovation or strategy advantages. Moreover, the EVA, CFROI, and EVA models all produce different results.
Collection Business Profits from Delinquent Credit Cards. Business Week (Aug. 11, 1997, pp. 74-75) reports that twelve-year-old Commercial Financial Services is turning the credit collection business on its head. The firm buys delinquent credit card contracts from lenders, securitizes them, and then works successfully to collect the balances. The firm’s success is attributed to employee training of collection techniques and use of technology in collection methods. Its skip tracing data base (used to find a borrower who moved) is said to be advanced as is its automated phone dialer system.
Week of July 20, 1997
Value-at-Risk Portfolio Analysis Methodology Goes Main Street. The Wall Street Journal (July 23, 1997, p. c1) reported that Dow Jones & Co. and International Business Machines Corp. have created a joint venture to provide value-at-risk modeling services to individuals over the Internet. The Web site will allow individuals to specify individual stocks and stock portfolios while the service uses historical data and a value-at-risk algorithm to provide value-at-risk estimates. The Web site is http://www.riskview.com.
Samurai Bond Market Continues Boom. Current Issues in Economics and Finance ("The Samurai Bond Market," Frank Packer and Elizabeth Reynolds, Federal Reserve Bank of New York, June 1997) reports that foreign issues of yen-denominated bonds in Japan, known as Samurai bonds, have risen from US $17 billion in 1995 to US $36 billion in 1996. Although many observers claim that Japanese investors largely ignore credit risk, Packer and Reynolds show that pricing of the bonds does reflect the relative credit ratings of both Japanese and U.S. rating organizations.
First Union Corp. Buyout of Signet Bank Highlights High Cost of Bank Acquisitions. Business Week (August 4, 1997, p. 38) reports that the record stock market is making bank acquisitions increasingly costly and risky. The Signet stockholders will receive 3.5 times book value for their holdings. What makes these deals possible is that the acquiring institution’s own stock is similarly valued.
Money Laundering Becoming Bigger Focus for World Governments. The Economist (July 26, 1997, pp. 19-21) reports that while money laundering grows, government responses to it remain spotty. The United Nation’s estimate global trade in illicit drugs is $400 billion. This figure ignores financial fraud, prostitution and other crimes. Richer countries are fighting the problem with tougher laws, improved financial intelligence, and calls for greater international cooperation. Despite these efforts, the U.S. State Department’s list of problem "high-priority" money laundering centers includes the United States, Britain and Canada. The absence of bank secrecy laws in some countries is a serious problem. Advocates of greater control claim that the first step to any solution is an international agreement and establishment of minimal standards.
Week of July 13, 1997
Currency Devaluation's Sweep Asia. Business Week (July 28, 1997, pp. 66-71) reports that currency turmoil is likely to impact growth rates throughout Asia. Thailand, Malaysia, Singapore, Indonesia, and the Philippines have all experienced declining currencies in recent months. Despite strong growth and high savings rates, much of Asia has been living off of high levels of foreign borrowing. To keep up growth against the aggressive China, many of these countries are using a cheaper currency. The fallout will certainly impact the Tokyo banks that are heavy lenders to Asia.
FASB Moving to Tighten Reporting Rules for Derivatives. The Wall Street Journal (July 17, 1997, p. A2) reported that the Financial Accounting Standards Board has decided to implement a new rule requiring that companies note the presence of derivatives on their balance sheet and report gains and losses on their income statement on the outstanding positions. Derivatives include options, futures, forward contracts, and swaps. Many companies complained that the rule will cause significant earnings volatility.
Year 2000 Computer Problems Have Lawyers Salivating. Forbes (July 28, 1997, p. 45) reports that many firms are unlikely to solve the rewriting of software to properly handle years after the year 2000 in time to avoid computing errors. Estimates are that to fix the problem will cost businesses over $300 billion. Not to be left out, some lawyers are gearing up to sue firms whose computer 2000 errors cause problems for businesses and consumers.
US Foreign Debt Continues to Rise Significantly. The Economist (July 12, 1997, p. 24) reports that the US international trade deficit position leaped by a huge $193 billion in 1996 to a record $831 billion. The US had a surplus net position as recently as 1987. The reason for the growing deficit is the country’s negative balance of trade. Fortunately, many experts view the situation as less alarming than during the 1980s, since the U.S. budget situation is now nearly in balance.
Week of July 5, 1997
Credit Derivatives Booming on Wall Street. Business Week (July 21, 1997, pp. 102-103) reports that credit derivatives are becoming big business on Wall Street. Credit derivatives are contracts that allow losses from credit default to be swapped, optioned, or sold in tranches and separately traded. The benefits of the contracts are said to be increased ease of diversification, reduced credit concentration, and more efficient pricing of credit risk.
Japan’s Planned Financial Deregulation Could Cause Major Dislocations. The Economist (June 28, 1997, "A Whopping Explosion" insert) reports that the plans to deregulate Japan’s financial system are likely to cause major disruption. Japan’s financial system is currently dominated by commercial banks that have implicit government guarantees. There have been few changes since World War II. Moreover, the system is heavily regulated by the Ministry of Finance. According to experts, the result is serious credit problems and inefficient credit allocation. Deregulation will change all that, but not without winners and losers. Firms favored by banks will lose as will the now dominant banks. In the longer-run, however, the Japanese economy will gain efficiencies making the price worthwhile according to experts.
Fannie Mae and Freddie Mac Investments Questioned. The Wall Street Journal (July 11, 1997, p. C17) reports that the Department of Housing and Urban Development is considering limits on purchases of certain investments by the mortgage government sponsored enterprises (GSEs). The two GSEs have invested over $65 billion in corporate securities, asset-backed bonds, municipals and other cash equivalents that provide an arbitrage-type profit when financed at the GSE’s government-favored interest rates. The Federal Home Loan Banks have already faced questions about their investment activities.
US Stock Markets Compete for Listings of Foreign Stocks. The Wall Street Journal (July 8, 1997, p. C1) reports that the New York Stock Exchange and Nasdaq are competing vigorously for listings of non-US companies. Nasdaq reports over 400 listings at mid-year 1997, while the NYSE is catching up quickly with over 300 listings.
Mutual Fund Mergers Accelerate. The Wall Street Journal (July 8, 1997, pp. C1-C27) reports that mergers of mutual funds have accelerated. Since 1992, over 12 mega-sized mutual fund mergers have taken place with market values over $300 million. Analysts question whether one of the rationale for the mergers, economies of scale to reduce costs to shareholders, is being achieved. In fact, mergers can sometimes cost investors good investment managers.
Week of June 29, 1997
LIFFE Overtakes US’s Chicago Mercantile Exchange(CME) in Contract Volume. The Economist (July 5, 1997, pp. 73-74) reported that the young 15-year old London-based LIFFE futures exchange took over second place in the trading race from the century-old CME in trading contracts during the first half of 1997. The success of the LIFFE is attributed to responsive decision making, more advanced electronic trading systems, and a willingness to trade contracts used primarily in other European countries.
Narrower Trading Spreads Blamed for Stock Market Volatility. The Wall Street Journal (July 2, 1997, pp. C1) reports that traders are blaming the New York Stock Exchange’s move to 1/16th pricing for an increase in price volatility. Program trading is highly dependent on bid-ask spreads, so, when the narrow spreads were introduced, more program trades were initiated creating increased volatility.
Value at Risk Methodology Becoming Mainstream. Business Week (July 14, 1997, pp. 52-53) reports that value at risk estimates of potential portfolio gains and losses attributable to changes in market interest rates are becoming mainstream. The advantage of these measures is that they allow portfolio manages to look at a wide variety of different types of assets simultaneously. Regulators also like the measures since they view them as more accurate than the risk-based capital methods now used. The problem is that price relationships between different types of assets are based on historical movements. As with all such measures, the past does not forecast the future.
Week of June 22, 1997
Japan’s Prime Minister Shakes US Stock Market. The Wall Street Journal (June 24, 1997, p. C1) reported that the June 23, 1997, 192.25 point drop in the Dow Jones Industrial Average was linked to comments by Japan’s Prime Minister Ryutaro Hashimoto who, during a New York speech, suggested the possibility of Japanese sales of US securities if the US dollar/Yen exchange rate was allowed to become too unstable.
Junk Bond Market Booming. Business Week (July 7, 1997, pp. 116-117) reports that the US junk bond market is booming with prices at record highs, spreads to Treasury down sharply and new issues up. A strong economy, high stock prices and record money flows into junk bond mutual funds are some of the reasons attributed to the market’s strength.
Major Financial Acquisitions Announced During Week. The Wall Street Journal (June 25, 1997, p. A3, June 27, 1997, A3 and June 27, 1997, C1) reported major financial institution acquisition announcements in the banking and brokerage businesses. Wachovia Corp. agreed to a $2.3 billion acquisition of Central Fidelity Banks Inc. The purchase will make Wachovia the largest bank in Virginia and, at $60.2 billion is assets, the US’s 17th largest bank. Zurich Group, a large Swiss insurance company, agreed to purchase Scudder, Stevens & Clark, an old-line US mutual fund and money management firm. The week also included reports that NationsBank Corp. was in talks to buy Montgomery Securities, a San Francisco-based investment banking firm.
Week of June 15, 1997
Barriers Between Banks and Nonfinancial Firms Reduced by House Proposal. The American Banker Online (June, 19, 1997) reported that the House Banking Committee reported out legislation to permit nonfinancial firms to own one banking institutions. The vote margin was narrow, however, suggesting changes ahead. The law would also allow cross-marketing between insurance underwriters and banks.
Stock Market Registers Record Valuations. The Wall Street Journal (June 16, 1997, p. C1) reported that the Standard & Poor’s 500-stock index now trades at over 21 times trailing operating earnings, a 30-year high. The index is also at a record 4.5 times book value, while the dividend yield languishes at 1.72%. Optimists point to low inflation, a near balance federal budget and high earnings growth to justify the record prices.
Events in France and Germany Add Suspense to January 1, 1999 Single Currency Start Date. The Economist (June 7, 1997, p. 19) reported that France’s Socialist election victory and Germany’s failed effort to revalue it gold reserves to meet Maastricht guidelines have added new suspense to the question of whether a single currency is going to be launched in 1999. Public opinion has turned slightly against the single currency in Germany while France is still favors it. Germans are concerned about a weak new currency.
Red-chip Stock Rally has Generated Many Skeptics. Business Week (June 30, 1007, p. 54) reports that red chip stocks, firms traded in Hong Kong that are located on mainland China, have risen 400 percent since early 1993. These firms are selling at an average 78 times projected 1997 earnings. Of major concern is evidence of insider trading and market manipulation. Many experts express concern over the possibility of a decline after Hong Kong’s takeover by China on June 30, 1997.
Week of June 8, 1997
Personal Bankruptcies Hit Record Calling Into Question US Bankruptcy Laws. The Economist (June 7, 1997, p. 25) reported that personal bankruptcies hit 1,124,286 in 1996, up 28.6% from 1995 and 44.1% from 1994. Blame for the record includes the sharp growth in consumer credit over the last few years. Also being blamed are the US’s lenient bankruptcy laws that are not "needs based." As a result, a student can pay off a federal student loan bill with credit card funds and then file bankruptcy. Reformers argue in favor of a needs-based system.
European Banks Begin Down the Merger Consolidation Road. Business Week (June 23, 1997, p. 62EB) reports that Europe is undergoing a large number of bank mergers. Several countries in Europe, such as Germany, have more branches per capita than most others, making consolidation necessary. Adding to the pressure is the upcoming common currency which will reduce foreign exchange earnings at banks throughout the European Common Market.
Commercial Bank Profits Lifted by Low Savings and CD Rates. Monetary Trends (June 1997, Federal Reserve Bank of St. Louis, p. 1) reports that 1996 surveys and data for interest rates paid by commercial banks on retail deposits show them to be significantly below comparable Treasury rates. Savings deposit rates for 1996 averaged 2.86% at banks versus 3-month Treasury rates averaging 5.01%. On 1 year to 2 ½ year deposits, the Treasury paid 70 bp. higher rates. The study suggests that all of the rise in bank profits from 1992 through 1996 was due to paying lower relative deposit rates.
Week of June 1, 1997
New York Stock Exchange Votes to Trade in Decimals. The Wall Street Journal (June 6, 1997, C1) reported that the New York Stock Exchange voted to trade stock in decimal increments, abandoning the 1/8th point convention. Pressure from earlier moves by the Pacific Stock Exchange, American Stock Exchange and Nasdaq combined to force the action. The conversion is to be complete by the year 2000. The exchange will price in 1/16th points beginning June 23, 1997. The move is expected to help small investors who face wider bid/ask spreads because of the current pricing.
Dow Jones Agrees to License Name for Futures and Options Contracts. Forbes (June 16, 1997, p. 62) reported that Dow Jones & Co. has agreed to license its name for derivative products. Currently, Standard and Poor’s collects license fees for the popular futures and options contracts bearing its name. The fee is estimated to be 10 cents per contract traded. The Wall Street Journal (June 6, 1997, P. C1) reported that the Chicago Board Options Exchange, Board of Trade and American Stock Exchange will offer contracts bearing the name of the 101-year-old industrial average.
French Election Helps Dollar and Puts EMU in Question. Business Week (June 16, 1997, p. 48-50) reports that the election in France, interpreted widely to mean a defense of the welfare state, has raised questions about the future of the European Monetary Union (EMU). Without fiscal discipline by countries like France and Germany, any EMU currency that is issued is expected to be weak against the US dollar and Japanese Yen. The Wall Street Journal (June 3, 1997, p. C21) reported that the US dollar registered sharp gains in the day following the French election of Socialists.
Ahmanson Shelves Bid for Great Western. The Wall Street Journal (June 5, 1997, A4) reported that H.F. Ahmanson & Co. abandoned it takeover plan for Great Western Financial Corp. (GW). This left Washington Mutual Corp. alone in the running to acquire GW. Speculation is now that Ahmanson may itself become a target if it doesn't move quickly to make an acquisition.
Sears, Roebuck & Co. To Settle Credit Dispute for Between $178 and $265 million. The Wall Street Journal (June 5, 1997, p. A3) reported that Sears settled a dispute with the US Federal Trade Commission (FTC) to refund $100 million to consumers who were targets of its "flawed" collection practices. The Wall Street Journal (June 6, 1997, p. B4) reported that Sears will take a second quarter write down of between $178 and $265 to cover the expected costs of the FTC refund combined with claims by consumers and attorneys general from 39 states.
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