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.
Tokyo's Stock Market Falls to Number Three. The Wall Street Journal (March 31, 1998, p. C1) reported that the Tokyo' s stock market post-1989 price slide has left its market value well below that of the booming U.S. market and a tad below that of Britain. The Wall Street Journal estimates the March market capitalization of U.S. stock at around $12 trillion versus $1.94 trillion in Britain and $1.881 trillion in Japan. The decline represents a sharp contrast from 1989 when the Tokyo market valuation was comfortably above both the U.S. and British markets.
High Savings Rates Don't Necessarily Correlate with Economic Growth. The Economist (March 21, 1998, pp. 85-86) reported that high savings rates in Malaysia, Thailand, South Korea, and Japan do not guarantee high economic growth. Germany, the United States and Britain all have much lower savings rates, but far fewer economic problems. The answer is not so simply how much savings is available, but how the savings available is used. Governments that steer capital into unproductive public and private investments can "waste" even a large amount of precious capital.
Electronic Market Markers Threaten NASDAQ's Deal Market. Forbes (April 6,1998, pp. 114-120) reports that new U.S. Security and Exchange Commission rules are forcing Nasdaq dealers to accept lower bid-ask spreads. The new rules require that marketmakers fill or publicly list limit orders for all other marketmakers. Electronic communication networks (ECN) can also post prices. These listed prices often take away the discretion of dealers to avoid executing an order until they get the "spread" they have targeted. ECNs can move in to profit from what they view to be excessive spreads. Some analysts believe that the pressure from the new rules pushed the Nasdaq into its proposal to merge with the American Stock Exchange which uses the auction system.
Week of March 22, 1998
Credit Unions Win First Round In Congress. The American Banker Online (March 27, 1998, p. 1) reported that the House Banking Committee voted to let occupation-based credit unions serve an unlimited number of small companies. The committee bill does, however, subject credit unions to bank-like regulations, including community reinvestment requirements. Overall, commercial banks, who won a favorable U.S. Supreme Court ruling recently that restricted expansion of credit unions to multiple companies, were very disappointed by the Congressional action.
NYSE Considers Expanding 50-point Collar. The Wall Street Journal (March 23, 1998, pa. C1) reported that the New York Stock Exchange is considering widening its current 50-point collar which, when breached, curbs computer-assisted trading. Backers consider the current collar disruptive and feel that trading would be more orderly with a wider band. Others worry that the market will be more volatile.
Treasury Inflation Indexed Bonds Prove to Be Less Risky. The Economic Review of the Federal Reserve Bank of Kansas City (First Quarter 1998, pp. 23-38) reported in their article "Features and Risks of Treasury Inflation Protection Securities" by Pu Shen, that the Treasury's new 5- and 10-year inflation indexed bonds are proving to be less volatile in price than the coupon varieties. The bondholders still must accept the risks of changes in real interest rates, however.
Stock Prices Keep Rising. The Economist (March 28, 1998, pp. 67-68) reports that to many analysts U.S. stock prices now longer bear a reasonable relationship to fundamental earnings. These analysts say that record stock prices are the result of two factors. The firs is the "baby-boomer" effect, a strong demand for stocks from the baby boom generation who are now saving for retirement. The second is the tendency of institutional investors to stay in the market despite high prices because if they are wrong they will lose clients. For these investors, it is better to be wrong and accept falling prices with the masses.
Congress Considering Closing REIT "Loophole." The Wall Street Journal (March 27, 1998, p. A3-A8) reports that Congress and the Administration are working on legislation that would outlaw the "paired-share" company now used by several hotel management firms whose stockholders also own REITs that in turn own the hotel properties. The REITs can avoid federal income tax. Some of the paired-share firms are looking at separating the management and real estate companies to form what is known as a "paper-clip" structure if the prohibition is enacted.
Justice Department Probing "Front-Running" at NYSE. The Wall Street Journal (March 20, 1998, p. C1) reported that the U.S. Justice Department is investigating eight NYSE floor brokers that may have conspired in various "front-running" transactions where a broker uses information about customer order to make profitable trades ahead of the customer's trade.
Week of March 15, 1998
Washington Mutual Agrees to Acquire H.F. Ahmanson. The Wall Street Journal (March 18, 1998, p. A3) reported that Washington Mutual Inc. agreed to acquire H. F. Ahmanson & Co. for slightly over $10 billion. Washington Mutual recently acquired another California giant, Great Western Financial Corp. The union will lift the assets of the combined firm to nearly $150 billion and raise its market share in California to near that of Wells Fargo & Co.
Credit-Card Delinquencies Fall Sharply. The Wall Street Journal (March 18, 1998, p. A3) reported that credit-card delinquencies fell sharply in the fourth quarter of 1997, the second straight month of decline. The current level brings delinquencies down to the level of late 1994. The decline is attributed to more careful promotions by card issuers.
European Economic Differences Raise Questions About the Impact of the Euro. The Economist (March 7,1998, pp. 75-76) reports that some economists question the impact that a single currency and monetary policy will have on the eleven countries in Europe that are expected to form the initial members of the monetary union. These countries have significantly different GDP growth rates, inflation, interest, and unemployment rates. A single monetary policy may not be right for each of them say some critics.
Week of March 8, 1998London's Futures Market Goes Electronic. The Economist (March 14, 1998, pp. 82-83) reported that the LIFFE futures exchange proposed allowing brokers to buy and sell contracts from computer screens in addition to using trading pits. The change, strongly resisted a year ago, is motivated by strong competition from Germany's DTB exchange which provides electronic trading combined with the expected loss of many currency and bond contracts when major European currencies are replaced by the Euro currency and bonds.
Nasdaq and Amex Propose Merger. The Wall Street Journal (March 13, 1998, C.1) reported that the Nasdaq Stock Market and American Stock Exchange (Amex) have proposed merger. Major securities firms quickly endorsed the proposal. The plan proposes heavy investments in technology to enhance the Amex exchange's capabilities and a plan to add options to the menu of exchange-traded contracts. The combination is expected to create a strong competitor for the New York Stock Exchange.
SEC Approves Simplified Mutual Fund Summary Prospectuses. The Wall Street Journal (March 11,1998, p. C1) reported that the U.S. Securities and Exchange Commission approved the issuance of 3-6 page simplified mutual fund prospectuses. The move is expected to save money in promoting funds. Currently all prospective investors must send a full prospectus to every potential investor.
Commercial Bank Profits Remain Strong. The American Banker Online (March 13, 1998, p. 1) reported that commercial banks earned $15.3 billion in the fourth quarter of 1997, up from $14.8 the year before according to a Federal Deposit Insurance Corp. release. 1997's full year income of $59.2 billion was 13% higher than in 1996. The report made clear the importance of noninterest income, which rose 11.7%. The industry-wide return on assets hit a record 1.23%, up from 1.19% in 1996. The report also indicated that loan quality remained strong.
Week of March 1, 1998
OCC Opens Door to Bank Sales of Insurance in Big Cities. The American Banker Online (March 4, 1998) reported that a ruling by the Office of the Comptroller of the Currency (OCC) may allow banks to sell insurance from urban areas. Currently, national banks can sell insurance in small towns with fewer than 5,000 people. The move could lead to a court challenge by the insurance brokers and agents and will likely create controversy in the Congress as well. The ruling came in a letter from the OCC to Florida state insurance regulators in an attempt to define a "place of 5,000," which is the National Bank Act limitation. The letter states that "The word 'place' clearly contemplates a 'place' that the Census Bureau has identified and for which a population total may be computed using census data." These places must have fewer than 5,000 people but may be inside city boundaries as long they have 2,500 or more inhabitants. In rural areas, census designated places must have 1,000 or more inhabitants.
Concerns of Risk-based Capital Requirements for Banks Grows. The Economist (February 28, 1998, pp. 79-80) reported that bank regulators around the world are looking for ways to improve on their 8% risk-based capital requirement system in light of recent bank failures in Asia and new ways of managing risks. Bank failures due to poor loan quality is seen as the biggest cause of concern. Many banks now use sophisticated computerized portfolio credit risk measurement tools. Regulators feel they need to catch up. Adding to the mix are new credit derivatives that allow banks to shift credit risks to other firms. Some banks have also used new rules allowing them to segment assets into "trading" portfolios as a way to reduce capital requirements. At this point there is little agreement about how to change the system, since both the regulators and regulatees have concerns.
Bonds Being Used to Spread Insurance Risks. The Economist (February 29, 1998, pp. 73-74) reported that bonds are being used to spread insurance risk beyond insurance companies. The large insurance company losses in 1992's Hurricane Andrew and 1994's Northridge earthquake have convinced many insurance companies that a way to spread these risks outside of the insurance industry is needed. Initially called "cat," or catastrophe bonds, an issue might provide a higher than market interest rate with the quid pro quo that an insurance loss might eat into the bond investor's principal. Suddenly, the world of insurance has become the domain of investment banking. Since 1996, $1.1 billion of the bonds have been sold. Another approach is for an insurance company to sell puts on its own stock to be able to raise capital in the time of need. These risk management techniques will have profound impacts on the reinsurance business and on the insurance industry in general as securitization of risk moves beyond the packaging of loans.
Week of February 22,1998
Credit Unions Loss a Supreme Court Decision on Membership Expansion. The Wall Street Journal (Feb. 26, 1998, p. A3) reported that the U.S. Supreme Court ruled against a 10-year old decision by the National Credit Union Administration to allow federally-chartered credit unions to expand their membership base by representing employees in more than one company, community or organization. For years, commercial banks have argued that the credit unions enjoy federal income tax exemption with unlimited expansion potential. The Congress is expected to take up the issue of credit union membership in the near future. Commercial banks are expected to argue that any broad membership definition should bring taxation.
New York Stock Exchange (NYSE) Floor Brokers Charged with Front-Running. The Wall Street Journal Interactive (February 26, 1998) reported that several floor brokers on the NYSE were charged with profiting from information about pending orders and other topics which were used to profit on trades in secret accounts. The scheme allegedly resulted in $10 million of illicit profits over a three-year period.
Credit Scoring Now Norm in Small Business Lending. Future Banker Online (February 23, 1998) reported that preliminary findings of the 1998 Small Business Banking study conducted by the Consumer Bankers Association and Furash & Co. disclosed that 91 percent of the lenders used credit scoring for small business lending in 1998. This was a big increase from the 69 percent in 1997. The median loan size jumped from $100,000 to $150,000 in the one-year period.
Year 2000 (Y2K) Fix to Cost Citicorp $600 million. The American Banker Online (February 27, 1998, p. 1) reported that Citicorp's recent SEC 10-K filing indicated that fixing the computer Y2K problem is estimated to cost the bank $600 million over three years. The Y2K problem relates to older computer programs that read years in two digits may interpret "00" as 1900 instead of 2000, leading to mistakes in interest rate calculations and other transactions. The largest U.S. banking company, Chase Manhattan Corp., has projected spending $250 million over three years.
Week of February 15, 1998
Household Shows Interest in Beneficial. The Wall Street Journal Interactive (February 18, 1998) reported that Household International Inc. indicated an interest in acquiring Beneficial Corp., after it indicated it was considering being acquired. Following the Beneficial announcement that that it would it would welcome offers, its shares rose $30.625.
Year 2000 Problems (Y2K) Becoming Serious Concern. Business Week (March 2, 1998, pp. 93-98) reports that the software 2000 problem has to potential to create economic havoc. While many sectors of the economy have lagged in understanding the threat of the 2000 software problem, large financial institutions, spurred by regulators are among the best prepared. Many other sectors, however, have not done enough. Government and smaller firms are vulnerable to Y2K problems that could adversely affect economic growth.
Rising Money Supplies Have Some Economists Worried. The Economist (February 21, 1998) reported that fast growth in the broadly defined money supplies in the United States and Britain have some economists concerned that these policies will soon fuel inflation. Fast economic growth, low unemployment, and high equity prices have some wondering whether monetary policies in these countries have been too stimulative. These economists are worried that the problems in Asia are causing policy makers to pursue offsetting stimulative policies that will fuel inflation.
Week of February 8, 1998
7-Eleven Expands Financial Services. The American Banker Online (February 13, 1998, p. 1) reported that the huge convenience store chain, with 4,600 cash dispensers and automated teller machines, is installing more advanced financial service kiosks that cash checks, issue money orders, and can operate as fuller-service bank facilities. Some analysts see the move as a way to attract a large bank joint venture partner.
Trouble in the "Big 6" Accounting World. The Wall Street Journal Interactive (February 13,1997, p.1) report that Ernst & Young LLP and KPMG Peat Marwick LLP abandoned their planned merger due to difficulties in satisfying antitrust regulators in countries around the world.
More trouble in the accounting world was evidenced by a suit filed by Andersen Consulting against its parent, Andersen Worldwide, arguing that it is subsidizing the creation of a rival consulting company at the parent. The two firms are planning to split. They currently have an income-sharing agreement that has been paying Arthur Andersen Worldwide about $150 million a year for the past few years.
Prudential Insurance Plans to Convert to Stock Company. The Wall Street Journal (February 13, 1998, p.A1-A3) reported that Prudential Insurance Co. of America plans to convert from the mutual to stock form of ownership. Like Mutual Life Insurance Co. of New Year that announced a similar move in September 1997, Prudential plans to distribute stock to policy holders, the rightful owners of the company, assuming approvals can be obtained by state authorities. The company is the largest U.S. issuer of life insurance with total assets of over $260 billion.
Bulk of 401k Funds Invested in Company Stock. The Wall Street Journal Interactive (February 11, 1998, p. 1) reported that a Institute of Management and Administration survey of 401(k) plans at 176 companies with an average of about 30,000 employees each disclosed that more than 30% of the plans' assets are invested in employer stock. This result indicates a significant lack of diversification since these employees also rely of their firm for employment income.
Commercial Banks Combine Operations to Provide Largest Stock Transfer Service Company. American Banker Online (February 11, 1998, p. 1) reported that First Chicago NBD Corp., BankBoston Corp., and State Street Corp. are creating Equiserve, expected to be the nation's largest stock transfer services company with 40% of the market. The banks expect to realize cost savings through economies of scale with the new unit by combining their existing operations.
Week of February 1, 1998
Mortgage Refinance Boom May Be Biggest Yet. The American Banker Online (February 6, 1998, p. 1) reported that mortgage originators are facing a record demand for loans as an already active home purchase market is compounded by heavy refinance demand.
Countrywide Credit Industries Inc., reported a mortgage pipeline of $11.8 billion at Jan. 31, up from $4.4 billion a year earlier
California Federal Bank agreed to acquire Golden State Bancorp Inc. The Wall Street Journal Interactive (February 6, 1998) reported that California Federal Bank's holding company controlled by Ronald Perelman made an estimated $2.8 billion offer for Golden State Bancorp Inc. whose principal subsidiary is Glendale Federal Bank. The combined firm consists of 430 branches and $51 billion in assets. The deal is complicated by the fact that Glendale Federal Bank has an outstanding lawsuit pending against a federal government agency. That resulted in the granting of additional warrants to Golden State stockholders.
Big Board Adopts New Circuit Breakers. The Wall Street Journal (February 6, 1998, p. C1) reported that the New York Stock Exchange voted to adopt new circuit breakers based on percent changes in the Dow Jones Industrial Average (DJIA) stock price index rather than a fixed point change. The complex new plan includes: (1) a 10% drop in the DJIA before 2 p.m. halts trading one hour; halts trading 30 minutes if between 2 p.m. and 2:30 p.m.; and not at all if after 2:30 p.m.; (2) a 20% drop in the DJIA before 1 p.m. would halt trading two hours; halts trading one hour if between 1 p.m. and 2 p.m.; and closes the market if after 2 p.m.; and (3) a 30% drop in the DJIA at any time would close the market for the day.
Clinton Administration Proposes Eliminating Annuity Tax Advantages. The Wall Street Journal (February 4, 1998, p. C1) reported that Clinton's 1999 Budget called for changes in the tax rules related to fixed and variable annuities. The changes involve eliminating tax free status for transfers within an annuity between different investments. This tax free feature has been one of the major advantages of the annuity concept along with the tax deferral feature.
Berkshire Hathaway Makes Major Commitment to Silver Market. The Wall Street Journal (February 4, 1998, p. C1) reported that Berkshire Hathaway, the closed-end investment fund run by Warren Buffett, disclosed that it had acquired 129.7 million ounces of silver. This represented nearly 25% of a yearly supply. The announcement added additional fuel to the silver rally that began in 1998. The Wall Street Journal Interactive (February 4, 1998, p. 1 ) reported that the Comex March contract rose 40.5 cents to $7.02 an ounce on February 4, 1998, the day after the Berkshire announcement.
Week of January 25, 1998
Commercial Bank Earnings Reach New Record in 3rd Quarter. The FDIC Quarterly Banking Profile (Third Quarter 1998) reported that quarterly net income of commercial banks rose to $14.8 billion in the 3rd quarter of 1998, up 12.3% from the year earlier quarter. The annualized return on assets was 1.22% down from 1.24% in the second quarter while the return on equity was a strong 14.43%. Net interest income rose 6.7% while noninterest income 19.3% during the quarter compared to the year-ago period.
Load Funds Make a Comeback. The Wall Street Journal (January 28, 1998, p. C1) reports that after years of touting no-load mutual funds, a number of large mutual fund managers are converting or starting new funds with sales loads. Experts claim the return of the load fund is due to the growth in the number of investors with large retirement balances that require investment advice and the leveling off in the number of do-it-yourself investors.
Piggyback Mortgage Being Sold as Alternative to Private Mortgage Insurance (PMI). The Wall Street Journal (January 29, 1998, p. C1) reports that a number of mortgage originators are offering combined first and second mortgages that allow the borrower to avoid the need for PMI on loans with loan-to-value ratios about 80%. A piggyback consists of a 80% loan-to-value first mortgage sold to one of the government sponsored mortgage enterprises combined with a 10% loan-to-value second mortgage sold to a high risk investor. This combination avoids the need for PMI insurance that would be required if the first mortgage exceeded 80% loan-to-value.
New S&P Stock Listings Experience Rising Prices. The Wall Street Journal (January 30, 1998, p. C1) reported that recent statistics support the theory that stocks newly added to the S&P 500-stock index experience a sharp rise in price after it is announced that the stock will be added to the index. In 1997, these stocks experienced a average 3% increase in prices after the announcement.
Power Derivative Exchanges Undergoing Substantial Change. Futures (February 1998, pp. 70-75) reported that the International Petroleum Exchange is considering the significant structural change of moving from an open-outcry trading system to electronic trading. At the same time, deregulation in the power markets is making electricity futures a more promising derivative.
Week of January 17, 1998
Asset-backed Security Issues Continue to Grow. The Wall Street Journal (January 19, 1998, p. C1) reported that over $200 billion of asset-backed securities (issues backed by auto loans, credit card receivables, etc.) were issued in 1997. It was not a great year for investors in the securities, some of which under-performed similar duration Treasury securities. One reason may have been the high volume of issues. A new concern facing the market is whether some servicers of the loans that act as collateral for the bonds will face problems due to high delinquency rates.
Asian Problems Linked to Faulty Banking Sector. The Economist (January 10, 1998, p. 66) reported that many analysts blame government backing and poor supervision of commercial banks for many Asian currency and economic problems. Asian banks operated with implicit government guarantees which allowed them to attract deposits without investor scrutiny. Meanwhile, bank regulation was inadequate. The combination caused the banks to compete for loans against one another. Too many of the loans were poor credits. These are the two factors that lead to the savings and loan problems in the United States during the 1980s.
Clinton Sex Scandal Affects Financial Markets. The Wall Street Journal Interactive Edition (January 24, 1998, p. 1) Allegations of sexual impropriety by President Clinton sent shock waves through U.S. bond, stock and currency markets. Many investors, concerned about a weakened U.S. president at a time of crisis in Asia and problems in Iran, voted against U.S. securities and its currency late this week sending prices down.
Personal Bankruptcies Climb to Record. The Economist (January 10, 1998, p. 25) reported that personal bankruptcies in the United States rose to 1.34 million in 1997, up 19.5% from the previous year, despite a robust economy. The reasons for the climb according to experts include the reduced social stigma attached to it and a bankruptcy law that permits borrowers with assets to file for protection from creditors.
Week of January 11, 1998
Fee (Noninterest) Income Boosts Depository Profits. The American Banker Online (January 16, 1998, p. 1) reports that large depositories were able to extend profit increases into the fourth quarter of 1997 by emphasizing fee income. Net interest income, on the other hand, showed weak growth, if any, as loan markets remain very competitive.
At First Chicago NBD Corp.net interest income declined 2%, while noninterest income rose 7%. Credit card revenues and investment management fees fell slightly. Norwest benefited more from its banking and mortgage operations. Fleet Financial Group, a $85.5 billion-asset banking company, experienced a strong 10% increase in investment services revenue, while KeyCorp, with assets of $73.7 billion, recorded a 28% increase in noninterest income as trust and insurance businesses helped boost noninterest income. Meanwhile, $75.1 billion-asset PNC spent money in the quarter to bolster fee businesses such as asset management, treasury management, capital markets, and mutual fund servicing bringing noninterest revenues to 44% of total revenues. U.S. Bancorp, the $71.3 billion-asset company, recorded only a 1% increase in net interest, while noninterest income climbed 17%. U.S. Bancorp had across-the-board gains in fee businesses, including credit cards, service charges, and trust and investment management fees. At BankBoston noninterest gains were particularly strong in corporate banking services including venture capital income and syndication and agent fees.
Exchanges Back Off Plan to Trade Stock in Dollars and Cents. Business Week (January 19, 1998, p. 56) reported that only seven months after the New York Stock Exchange agreed to trade stocks in dollars and cents rather than fractions, the exchange has indicated that the change may not occur until the year 2001. Although the brokerage community denies that the change will cut profits by reducing bid/ask spreads, there is already evidence that the move to 1/16th pricing has reduced investor costs by as much as $1 billion. The exchange says that other issues, such as solving the Year 2000 computer-programming problem, must take precedence.
Week of January 4, 1998
Indonesia's Currency in Free Fall. The Economist (January 10, 1998, pp. 62-63) reported that Indonesia suffered a free fall in the value of its currency as its government reported out a proposed budget including increased government spending, more subsidies, continued tax breaks, and a projected 4% real growth with a stronger currency, the Rupiah, projected to be at R4,000 to the U.S. dollar. The proposals completely ignored the International Monetary Fund's (IMF) loan agreement covenants. Before the week was out, the Rupiah had fallen to below R10,000 to the U.S. dollar. Indonesia's President Suharto all but ignored IMF requirements in favor of more politically palatable policies, presumably to contain domestic unrest. Business Week (January 19, 1998, pp. 54-55) meanwhile reported that Indonesia faces some of the most difficult prospects with over $100 billion in foreign debt and an essentially bankrupt corporate sector.
U.S. Bond Market, the Darling of the World. The Wall Street Journal (January 7, 1998, p. C1) reported that the U.S. bond market continued its strong rally on news of worsening Asian problems and resulting expectations of lower growth and inflation. The yield on the 30-year bond dropped to the lowest level since that bond was first offered. Business Week (January 19, 1998, pp. 30-31) reported that Alan Greenspan, Chairman of the Federal Reserve Board of Governors, added fuel to the rally by merely mentioning "deflation" in a speech on January 3th.
Commercial Bank Equities Off to Shaky Start in 1998. The Economist (January 10, 1998, pp.63-64) reported that U.S. commercial bank equities fell substantially in early 1998. Part of the reason is concern over large banks that have significant exposure in Asia. However, others feel that the prospect of more mergers and consolidations can be expected to keep prices high. The Wall Street Journal (January 7, 1998, p. C1) reported that another reason for concern over the future of bank stocks is the flattening yield curve. Long-term rates are dropping relative to short-term rates. This is likely to cause depositories to experience large refinances of longer-term assets such as mortgages, without the benefit of lower money costs and hurt bank earnings.
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