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The Digital Financier Update (DFIN.COM Update) provided a weekly commentary on important stories with significant financial, and or Internet implications during the early years of Internet commerce. The purpose was designed to provide finance professionals and staff with a timely brief synopses of recent and news that best illustrates the changing digital economy. The stories have impacted all of us. Many of our stories may have received very little popular press coverage.
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.
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Week of June 28, 1998
Japan Announces New Effort to Deal with Problem Banks. The Wall Street Journal Interactive (July 3, 1998, p.1) reported that Japan’s ruling political party announced plans for a five-year program to establish a "bridge bank" to take over some of Japan’s weak banks. Government officials would operate the problem banks and separate the good from the bad loans. The plan has few details relating to how the weak banks would continue to lend to existing customers and whether bad loans would be sold in quantity. The implications on Japan’s real estate market are expected to be substantial since a large amount of the nonperforming loans are collateralized by real estate.
Internet Brokerage Firms Provide Banking Services. The Wall Street Journal (July 2, 1998, p. C1) reports that several of the major Internet online brokerage firms are offering banking services such as money market checking, credit cards and even insured CDs.
Midwestern U.S. Banks Star Banc and Firstar Plan Merger. The Wall Street Journal Interaactive (June 30, 1998, p1) and The Wall Street Journal (July 2, 1998, p. A6) reported that Star Banc Corp. of Cincinnati and Firstar Corp. of Milwaukee, announced a merger valued at around $7 billion. The merger creates a company with about 625 branches in seven Midwestern states and Arizona, and assets of nearly $35 billion.
Federal Reserve Raises Issue of Bank Lending Quality. The Federal Reserve Board (Board of Governors, SR 98-18 (SUP) June 23, 1998) warned bankers about a potential reduction in loan credit quality in the last year. Specifically, the supervisory letter suggested that: (1) banks stress forward-looking analyses in the loan approval process; (2) review loan pricing in relation to risk since loan spreads appear under downward pressure; and (3) warn that some institutions appear too aggressive in lending to real estate investment trusts (REITs). They report that many REIT loans are typically large, syndicated, and unsecured.
Week of June 21, 1998
U.S. Stock Price/Earnings (P/E) Ratio a Record High. Monetary Trends (Federal Reserve Bank of St. Louis, June 1998, p.1) reports that the April 1998 P/E ratio on the Standard and Poor’s composite stock average hit a record high 27.76 times earnings. This was the highest level recorded since the measure was first tabulated in 1871. The high level is even more significant since it is occurring near the end of an economic expansion, not the beginning as has historically been the case. The average P/E over the 1871-1989 period has been 13.4 times earnings. Forbes (July 6, 1998, p. 106) reports that with the stock market at record levels, several public employee state pension funds, namely in South Carolina, Indiana, and West Virginia, have decided to divert investment funds from formerly bond funds to mixed equity/bond portfolios. Some analysts question the move at this time.
Japan's Sumitomo Trust & Banking Co. Considering Buying Long-Term Credit Bank of Japan Ltd. The Wall Street Journal Interactive (June 26, 1998, p.1) reported that Sumitomo Bank is in talks to buy the "good" assets of the weak Long-Term Credit Bank. Sumitomo vowed it would buy only LTCB's sound loans. Some expect that LTCB would sell its nonperforming loans to a public "bridge bank" that the government is considering forming. This new organization would act in a similar capacity as the Resolution Trust Corporation used in the United States to liquidate failed depositories during the early 1990s.
Russia and South Africa Latest International Currency Problems. The Wall Street Journal Interactive (June 26, 1998, p. 1) reported that the Russian government raised its prime interest rates to 80% from 60% in order to support the market for its Treasury securities, GKOs. The Wall Street Journal (June 26, 1998, p.1) also reported that U.S. and U.K. central banks were buying the South African rand which has recently dropped by 15% against the U.S. dollar. Although the problems are not related, they point out the persistence of international market volatility.
Insured Depositories Experience Strong First Quarter Earnings. The Quarterly Banking Profile (Federal Deposit Insurance Corp., www.fdic.gov , First Quarter 1998) reported that insured commercial banks reported a first quarter earnings record of $15.9 billion, an increase of 10.1 percent over year-earlier results. The industry’s return on average assets (ROA) rose to 1.26 percent, compared to 1.24 percent in the fourth quarter of 1997 and 1.25 percent in the first quarter of 1997.
Savings institutions reported $2.6 billion in earnings for the first quarter of 1998, for an average annualized return on assets (ROA) of 1.01 percent. The quarter matched the first quarter of 1997. Savings institution income was lower and more transitory, however, than commercial bank earnings. Net operating income – net income less gains on the sales of securities and extraordinary gains – was $110 million lower than a year ago as gains on the sales of securities offset the decline in net operating income by rising to the highest level since the fourth quarter of 1992.
Week of June 7, 1998
SEC Looks at Pre-IPO Option Issuance. The Wall Street Journal (June 18,1998, p. C17) reported that the U.S. Securities and Exchange Commission has been looking at disclosures by companies planning initial public offerings that have issued management options with strike prices far less than the expected offering price. These "cheap options" must be accounted for as compensation when the option price is below the offering price.
United States Involved in Japanese Currency Intervention. The Wall Street Journal (June 18, 1998, p.A12) reported that the U.S.'s effort to shore up the Japanese Yen is expected to be backed up with Japanese efforts to deal with its weak banking system and their huge portfolios of bad loans. In the wake of Wednesday's U.S. Yen support effort, Japanese officials vowed to speed up efforts to deal with its banking crisis and deregulate certain markets.
Wall Street Moves to Expand Insurance Pool Bond Issuance. The Wall Street Journal (June 15, 1998, C4) reported that the issuance of bonds backed by pools of insurance policies is expanding rapidly. These bonds allow investors to participate in the premiums earned on property and casualty policies and in any loses if underwriting results are poor. It is estimated that about $2 billion of the bonds have been issued in the last few years. Several investment banking firms have established Bermuda-based reinsurance subsidiaries to participate in the market.
KeyCorp to Buy McDonald & Co. The Wall Street Journal (June 16, 1998, p. A4) reported that KeyCorp of Cleveland is following a number of other large bank holding companies in purchasing an investment banker, McDonald & Company Investments Inc., also of Cleveland. The transaction is taking place at 3.8 times McDonald's book value.
Goldman Sachs & Co. Plans to Go Public. The Wall Street Journal (June 16, 1998, p C1) reported that Goldman Sachs is preparing a public offering in hopes of selling about 10% of the firm. This will mean the end of Wall Street's last remaining big private investment banking partnership.
Treasury Reports Budget Surplus Since October 1, 1997. The Wall Street Journal Interactive (June19, 1998, p. 1) reported that government receipts totaled $1.21 trillion, and outlays $1.12 trillion from October 1, 1997 through May 1998. The result was a surplus of $15.962 billion, compared with a deficit of $67.718 billion during the same period in the previous fiscal year.
In Banking Big May Not Be Beautiful. The Economist (June 20, 1998, p.89) reported that a study by Strategic Finance and Andersen Consulting concluded that super-large banks are costlier to operate and less profitable per customer than smaller banks. More over, a study by SNL Securities in the same article demonstrated that the ten most acquisition minded banks over the 5-year period ending March 1998, experienced total returns to stockholders below that of an index of all banks.
Week of June 6
Wells Fargo and Norwest Agree to Merger. The Wall Street Journal (June 9, 1998, p. A2) reported that Norwest Corp. and Wells Fargo & Co. agreed to a merger valued at $31 billion. The combined entity will create the U.S.’s seventh largest bank with $191 billion in assets. The combination was questioned by analysts who find it surprising that a bank with a sales-oriented branch strategy, such as Norwest, would merge with a bank like Wells that has closed hundreds of branches in favor of technology.
Yen in Free Fall. The Economist (June 14, 1998, pp. 68-70) reported that the fall in the value of the Japanese Yen is having a significant impact on financial markets around the world, especially Asia, but may be helping U.S. policymakers. The Yen hit over 142 to the U.S. dollar in the week of June 7. This compares to less than 80 Yen to the dollar in 1985. The weakness is attributed to growing weakness in the Japanese economy. Japanese business investment, consumer durable, and nondurable spending have all weakened in recent months. The weak Yen has played into the desire of U.S. economic policymakers seeking low inflation.
Hedge Funds Keep Growing. The Economist (June 14, 1998, p. 76) reported that hedge funds continue to grow in number and financial strength. Hedge funds are today’s performance funds. They are free to short financial assets, leverage through borrowing and avoid most disclosure. The managers of these funds typically receive "average" management fees in return for a significant performance fees of 15-20% of the funds’ profits. It is estimated that in 1998 there are over 1,200 of these funds with nearly $120 billion in assets. Although the funds have been criticized by government officials, the Economist finds little evidence that they destabilize foreign exchange markets.
Philadelphia Exchange Plans Merger with AMEX. Business Week (June 22, 1998, p. 182) reported that the Philadelphia Stock Exchange planned to merge with the American Stock Exchange (AMEX). With shrinking bid/ask spreads, computerized market technologies, and global communication, the role of regional markets is declining. The New York Stock Exchange now commands over 74% of all NYSE-listed trades versus 65% in 1992. This provides less opportunity for regional markets.
Week of June 1,1998
Electronic Markets in London Sends Traders Packing. The Wall Street Journal (June 1, 1998, p. C19) reported that the London International Financial Futures and Options Exchange's (LIFFE) decision to expand its electronic trading capabilities has caused many traders to look for new jobs. The existing "open-outcry" system of human negotiation on the floor of the exchange appears to be losing out to the computer. LIFFE's action follows similar moves at Paris's Matif SA market. Frankfort's Deutsche Terminboerse became the largest market in the 10-year German bund contract after it covered to electronic trading earlier this year.
Merrill Lynch Pays Orange County Over $400. The Economist (June 6, 1998, p. 75) reported that Merrill Lynch & Co. settled out of court a suit brought against it by Orange County, CA over alleged risky investments purchased by its Treasurer Robert Citron in 1993 and 1994. The Treasurer used securities to leverage additional investments that lost value in the April 1994 bond market drop and forced the county into bankruptcy. The settlement left open the question of the obligations of buyers and sellers of the complicated financial contracts involved. Merrill’s settlement will combine with those of the county’s auditor KPMG and another investment banker, Credit Suisse First Boston, to substantial reduce the loses sustained by the county.
International Investment Banking Get Big Lift. The Wall Street Journal (June 1, 1998, p. A3) reported that Travelers Group made a $1.6 billion investment in Japan's Nikko Securities Co. in order to establish a Japanese investment banking firm joint venture. The investment will give Travelers a 25% stake in Nikko, Japan's third largest investment banking firm. The venture will have responsibility for all Japanese investment banking operations.
U.S. Stock’s "High" Prices Hard to Support Using Conventional Valuation Models. Forbes (June 15, 1998, pp. 139-140) reported that using Tobin's "q" theory of equity valuation, the U.S. stock market appears to be significantly overvalued. Tobin's "q" holds that stocks should be valued at near the cost of replicating the assets owned by the companies. According to Stephen Wright of Cambridge University, at current levels the U.S. market faces a 70% chance of falling in the next 12 months and a 90% chance of being lower in real terms, adjusted for inflation, ten years from now.
Buying Personal Bankruptcy Debt Can Be Profitable. Forbes (June 15, 1998, pp. 44-45) reported that Bear Stearns Co. is making money buying personal debt from creditors after Chapter 13 bankruptcy filings. Using Chapter 13, consumers can keep their assets as long as they restructure their debt payments to creditors under court supervision. Bear Stearns buys the debt from creditors, such as credit card issuers, and collects partial payments from trustees. The market is estimated to be as much as $6 billion per year.
Week of May 24, 1998
Russia Makes Promises to Receive International Monetary Fund Help. The Wall Street Journal Interactive (May 29, 1998, News, p. 1) reported that Boris Yeltsin appointed a new head of the country’s tax service who promises to lower tax rates but increase penalties for nonpayment. The country also took steps to cut spending and accelerate privatization. These actions were taken in light of recent drops in stock prices and a step drop in the value of the Russian currency. The International Monetary Fund (IMF) announced it would release $700 million of a previously delayed loan to support the government’s efforts.
High-yield Debt Blankets Europe. Business Week (June 8, 1998, p. 116) reported that European high-yield debt new issues exceeded $8 billion in the first five months of 1998. That compares to $6 billion in all of 1997. Telecom, cable, and leveraged buyouts lead of list of high-yield issuers. U.S.-based investment bankers lead in underwriting the most issues which are largely denominated in U.S. dollars to appeal to the U.S. investors.
U.S. Mutual Funds Reach $5 trillion Milestone. The Wall Street Journal (May 29, 1998, p. C1) reported that mutual fund assets exceeded $5 trillion at month-end April 1998. Mutual fund assets were only $1.1 trillion at year-end 1990.
New York Stock Exchange (NYSE) Plans $1 billion Investment in Trading Floor. The Economist Online (May 30, 1998, "Trading Places") reported that the NYSE plans to invest $1 billion to expand its trading floor despite continued growth in electronic trading. Although 85% of NYSE trading is already conducted electronically, the exchange relies on "specialists" to insure its competitive advantage. The specialists are there to provide more price stability during volatile markets buy acting as a buyer when few bidders exist and a seller when little is offered. Despite its defense of the old system, many economists think that electronic trading will eventually win out, with organized exchanges acting largely as data processing centers and rule-makers.
Week of May 17, 1998
Online Trading Takes Off. The Wall Street Journal (May 22, 1998, p. C1) reported that online trading may now account for as much as 25 percent of all stock trades. A sharp drop in commission rates and more competitors are the reasons for the online trading growth. Industry leader, Charles Schwab Corp. is estimated to be trading over 55 percent of all its business online. With online trading commission rates as low as $5 per trade, the industry leaders will have tough time competing.
Emerging Markets Giving Investment Bankers Second Thoughts. The Economist (May 9, 1998, pp. 75-76) reported that many investment bankers are rethinking their commitments to emerging markets in Asia and Latin America. Stock price volatility, poor investment performance compared to the Standard and Poor's 500 index and erratic private capital flows have made it difficult to sustain profits. As a result, many firms are cutting back.
Securitization Has No Limits on Collateral But Does Carry New Risks. The Economist (May 9, 1998, pp. 71-72) reported that new issues of asset-backed securities approached $500 billion in 1997, up 25 percent from the year earlier. These securities sometimes contain unusual risks that are hard for investors to assess. Prepayment risk on mortgages is one such risk that has been analyzed for decades and still is hard to deal with. But consider the risk of a security backed by to-be-earned royalties of entertainers. Where do investors get information needed to assess that risk? Other new issues include bonds backed by beer sales and rental income from pubs and other issues with "moral hazard" problems such as one whose cash flows are dependent on the issuer's willingness to promote sales of records and videos.
Price Bubble Debate Continues. The Economist (May 98, 1998, p. 78) reported that a new U.S. price index which includes prices of property and common stock, by Joseph Carson, an economist of New York's Deutsche Morgan Grenfell, is up almost 6 percent from a year ago. This compares to only 2 percent for the consumer price index. This asset-based index suggests to bubble theorists that the Federal Reserve Board has delayed tightening credit for far too long. The fear it that more severe adjustment will now be required.
Week of May 10, 1998
International Accounting Rules Pushed. The Wall Street Journal (May 11, 1998, p. 1) reported that the International Accounting Standards Committee plans to publish international accounting standards in the fall of 1998. The London-based organization has the attention of regulators around the world including the U.S.'s Security and Exchange Commission (SEC). While many firms and organizations around the world plan to embrace the new rules, the Financial Accounting Standards Board, FASB, which is overseen by the SEC, believes it has more comprehensive and higher quality standards. It is unlikely that FASB will endorse the new standards any time soon.
Indonesian Riots Shake Asian Currency and Stock Markets. The Wall Street Journal (May 14, 1998, p. C1) reported that concern over student deaths in rioting in Jakarta, Indonesia has put a number of Asia currencies and stock markets under pressure. Several days of major rioting has taken a toll on the Indonesian stock market and currency. The drop in the value of the Indonesian Rupiah along with a fall in stock prices, combined to create a nearly 25% decline in the value of Indonesian stocks measured in U.S. dollar terms. A number of U.S. companies operating there have stopped operations. There continues to be ongoing speculation over President Suharto's next move.
All Eyes on Next Fed Open Market Committee Meeting. Business Week (May 25, 1998, pp. 29-30) reported that a tight labor market and rising money supply will put pressure on the Federal Reserve Board's Chairman, Alan Greenspan, to increase the federal funds target rate at the May 19th meeting. With the unemployment rate at a 28-year low, wage growth increasing steadily, and the money supply growing rapidly, there will likely be a number of Federal Reserve Open Market Committee (FOMC) members that will agitate for tighter policies. The FOMC is the policymaking group that establishes U.S. monetary policy. The Wall Street Journal (May 15, 1998, p.1) reported that volatile conditions in Asia might lead to a postponement of any tightening move.
Week of May 3, 1998
Stocks Traded In Decimals Targeted. The Wall Street Journal (May 8, 1999, p. B10) reported that the U.S.’s major stock exchanges are ready to trade stocks in decimals sometime during the year 2000. A U.S. House of Representatives committee is considering a deadline for this conversion in September of that year. The major exchanges claim that attempting to convert before the year 2000 would jeopardize their efforts to program for the Year 2000 problem (Y2k).
U.S. Treasury Responses to Budget Surpluses. The Wall Street Journal (May 7,1 998, p. C1) reported that the U.S. Treasury will discontinue issuing 3-year notes in response to the growing U.S. budget surplus. In addition to the elimination of the 3-year note, the Treasury plans to reduce the number of security sales auctions from 39 to 27. The revisions are being made to respond to prospects for a budget surplus for the 1998 fiscal year now estimated by the Congressional Budget Office to be between $43 and $63 billion.
New Mortality Tables Sought by Annuity Firms. The Wall Street Journal (May 4, 1998, pp. C1-C24) reported that insurance firms selling annuities are pushing for a change in the 20-year old mortality tables used to determine monthly annuity payments. With U.S. citizens living longer, the old tables do not reflect the longer periods during which sellers of life annuities must pay out to policyholders. The insurance industry believes that the current mortality tables underestimate the longevity of policyholders which results in underestimates of the payments that must be made to them. Using tables based on more current mortality experience would lower payments to annuity holders.
OTS Derivatives Market Affected by Threat of Regulation. The Wall Street Journal (May 4, 1998, pp. C1-C16) reported that efforts by the Commodity Futures Trading Commission (CFTC) to regulate the over-the-counter (OTC) derivatives market is meeting with strong objections by the dealer community and some federal financial regulators. The total outstanding value of over-the-counter derivatives is estimated to be over $60 trillion at year-end 1997 compared to just over $20 trillion in 1992. The largest volume of OTC derivatives are swap transactions in which two parties agree to exchange cash flows on a specified amount of nominal principal based on different indices. The conflict relates to plans by the CFTC to regulate this market. The Wall Street Journal (May 8, 1998, p. C1) reported that the CFTC issued a "concept release" asking 75 questions about the state of OTC derivative regulation.
European Derivative Exchanges Vie for New Euro Contracts. Futures (May 1998, pp. 84-86) reported that Europe’s major derivative exchanges are working hard to create futures and options contracts that will succeed in the upcoming EURO market with its new ECU currency. The two leaders in the race include the Eurotop 100 futures and options contacts based on stock prices of 100 companies in nine European countries. The challenger is the Dow Jones Stoxx indices for 50 European and 50 EMU countries. These indices are expected to be traded as both futures and options contracts.
Greenspan Warns of Interbank Lending. American Banker Online (May 9, 1999, p. 1) reported that Federal Reserve Chairman Alan Greenspan warned that cross-border Interbank loans many create unexpected financial disruption since the presumed government support of its banks may not materialize. Greenspan suggested that the risks could be mitigated with higher capital requirements or the assessment of the special "safety net" fee, a type of insurance premium.
Week of April 26, 1998
Mutual Fund Industry May Be Seeding Its Own Problems. The Wall Street Journal (April 29, 1998, p. C1) reports that as the U.S. mutual fund industry’s assets approach $5 trillion, some investors are noticing that weaknesses exist. Several of the more important are the majority of funds whose performance does not match that of the major averages, such as the Standard and Poor’s 500-index. Another serious problem is that funds force investors to recognize capital gains even if it’s not in the investors interest to do so for tax reasons. Gains must be taken in the year the fund sells the assets at a profit. Some investors may desire to postpone the gains. Some investors may try to avoid these concerns by investing directly in the market.
Internet Markets Likely to Affect Product and Service Pricing. Business Week (May 4, 1998, pp. 71-84) reports that the growing number of Internet markets is eliminating the old distribution paradigm that includes middlemen organizations in the sales chain by connecting buyers directly with suppliers. This sets up a negotiation situation that allows for more flexible pricing. Many Internet-based markets operate much like auctions rather than fixed-price market situations. The result of the lower cost of information that the Internet offers is lower prices.
Restoration Stock Options May Be Too Good a Deal for Management. Business Week (May 4, 1998, pp. 111-112) reports that many managers are enjoying substantial benefits from a new stock option incentive program called "restoration options." The most common form of restoration option is one that allows the employee to receive additional options if she or he converts existing options and holds the stock. Critics say the new option takes away the long-term incentive by permitting early conversion. Others argue that compensation committees no longer have enough say in the process.
Chinese Banks Next to Fall? The Economist (May 2, 1998, pp. 68-69) reports that China’s four largest banks that lend primarily to state-owned firms and already suffer from thin capital resources are probably insolvent by more reasonable standards. The banks receive inexpensive deposits and are still relatively unprofitable, with a return on assets of about .3% versus over 1.0% for banks in developed Western countries. Efforts to recapitalize and impose stricter examination standards are likely to expose the weaknesses many experts fear.
Week of April 19, 1998
Mellon Bank Spurns Bank of New York Offer. The Wall Street Journal (April 24, 1998, p. A3) reported that Mellon Bank Corp. filled a lawsuit against Bank of New York Corp. to stop BofNY's unsolicited takeover offer of Mellon announced this week. Mellon officials claimed that a merger would result in problems associated with management style and philosophy.
Level 3 Communications Inc. Sells Record $2 billion in Junk Bonds. The Wall Street Journal (April 24, 1998, p. C1) reported that the young telecommunications company, Level 3 Communications, sold a record $2 billion in junk bonds. Some bond analysts worried that the deal may signal that the junk market has become overheated. The original $1.5 billion offering was increased by $500 million due to a strong investor reception. The nearly $54 billion in junk bond offerings thus far in 1998 is up nearly 100% over a year ago.
Electronic Security Trading Business Getting Crowded. The Economist (April 25, 1998, pp. 73-74) reported that the number of U.S. online brokerages has reached 70 firms. Although the number of online trades was estimated to be up 181% over 1997, the growth in firms offering plain-vanilla online trading at commission levels of less than $20 per trade is growing. This severe price competition has many questioning the profitability of the business. Some online firms are going upscale to capture additional revenue by offering products and services traditionally offered by the more full-service firms. An even bigger competitive threat to the established brokerage firms is the potential competition from commercial banks offering new Internet-based online trading.
Share Buyback Popularity Up. The Economist (April 25, 1998, p. 76) reported that U.S. companies purchased $181 billion of their own stock in 1997, up 82% from the level of 1985. Buying stock with excess funds, rather than increasing dividend payments, has the advantage that shareholders can choose to sell their stock (presumably at a higher price) and pay the current taxes or keep their stock and avoid the current tax liability. The problem is that share buybacks appear to be concentrated in companies whose management has substantial stock options, creating a significant conflict of interest for those managers.
Japan Adopts Fiscal Stimulus Package. The Wall Street Journal Interactive (April 24, 1998, p. 1) reported that the Japanese government will implement a 16.65 trillion yen fiscal stimulus package ($127.9 billion) with 4 trillion yen of temporary tax cuts in 1998 and 1999 and 7.7 trillion yen of public works spending. A number of economists have warned that consumers, viewing the tax cuts as temporary, will save the tax savings instead of spend. The Japanese stock market did rise moderately on the news.
Week of April 12, 1998
Growing Signs of a U.S. Financial Bubble. The Economist (April 18, 1998, pp. 67-68) warns of signs of a financial bubble forming in the United States. Bubbles either burst or send their inflated prices throughout the economy. Recent signs suggest the latter. Soaring stock prices, merger mania, rising home and commercial property prices and rents, and rising art prices suggest a bubble economy. The recent sharp increases in the broadly defined U.S. money supply, M2, also indicates the presence of excessive liquidity. The four previous merger waves in the 1900s, the 1920s, the 1960s, and the 1980s either ended in stock market crashes or a recession.
BankAmerica/NationsBank and Banc One/First Chicago have agreed to mergers. The Wall Street Journal (April 13, 1998, p. 1) reported that the large Midwest regional banks, Banc One Corp. and NBD Corp., have agreed to form the largest Midwest bank with assets of nearly $240 billion spread over 14 states. BankAmerica Corp. and NationsBank Corp., two large bank holding companies covering the Southeastern and Western United States, agreed to a merger creating a bank with $570 billion in assets. Bank equity valuations were further enhanced by the announcement as many analysts forecast a continuation of the merger trend.
The SEC Approves New NYSE Circuit Breakers. The Wall Street Journal (April 13, 1998, p. C3) reported that the U.S. Securities and Exchange Commission approved the New York Stock Exchange's plan to adopt one-day circuit breakers triggered by 10, 20, and 30 percent drops in the Dow Jones Industrial Average.
CANADIAN IMPERIAL and Toronto Dominion announce merger. The Wall Street Journal Interactive (April 17, 1998, p. 1) reported an agreement of a $15 billion merger between Canada's CANADIAN IMPERIAL and Toronto Dominion banks. The combination would create the second-largest bank in Canada and 10th largest in North America. The merger would combine Canada's first and fifth largest banks with $322 billion in assets and indicates that bank merger fever has spread beyond the U.S. border.
Week of April 5, 1998
Citicorp and Traveler's Group Announce Merger Plan. The Wall Street Journal (April 7, 1998, p.1) reported that Citicorp and Traveler's Group announced plans for a merger valued at over $75 billion. The merger is being sold by the companies as a way to deliver a broader range of products to customers through cross-selling, reduce costs, and break down barriers between security and insurance underwriting and banking. Although the stocks of both companies rose on the news, a number of analysts question whether this new effort to promote a "one-stop financial center" will succeed.
Japan Seeks to Break Yen's Fall. The Wall Street Journal Interactive (April 10, 1998, p. 1) reported that the Bank of Japan was intervening to support the Yen against the U.S. dollar. The intervention appeared to have little impact, as the Yen fell to 131Y per dollar. Economists argue that the continued weakness in the Yen represents investor doubts about Japan's efforts to stimulate their economy with tax cuts. Some experts argue that the cuts will be viewed as temporary by the Japanese, causing them to increase savings instead of spending. Far-reaching bank and market reforms are needed to stimulate the Japanese economy according to these experts.
Merger Fewer Spreads Through Wall Street. The Wall Street Journal (April 8, 1998, p. A2) reported that Conseco Inc., an insurance company, agreed to acquire Green Tree Financial Corp., a mobile home and sub-prime lender, in a deal valued at $6 billion. In another report (A2), the paper reported that Household International Inc. was the successful $7.7 billion bidder for Beneficial Corp. Both are finance companies. Despite the acquisitions, some analysts (C1) question whether investors are getting "merger fever," as valuations of financial firms thought to be merger candidates jump in price. They worry that the current optimism is unfounded.
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