DFIN.COM Financial Archives With A Digital Bias
(Synopses of News that Impacts Finance in a Digital World)

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. 

Custom Search

Week of December 27, 1998

The last week of the year was relatively quiet.   The Euro will soon be unveiled and e-tail sales continue to exceed expectations. There should be more e-tail pleasant surprises in the next few weeks.  During this week the market capitalization of Charles Schwab exceeded Merrill Lynch for the first time as did Amazon.com versus Sears..

Due to its uniqueness and size, our only report this week is an MSNBC review of the global economy.  With the exceptions of  deletions, this report is replicated as presented by MSNBC.

Global mending, long and slow, By Kari Huus, MSNBC, Dec. 31 - "As 1998 came to a close, the economic crisis that has ravaged global markets for 18 months seemed to be taking a breather. After a punishing lapse in confidence, Asian, Latin America and African markets regained a tenuous balance. But most leaders could not honestly claim that it was over. Despite promising reforms, many emerging markets are still looking into the teeth of recession and political upheaval. Russia and Indonesia are mired in political and economic chaos. Yet the Dow Jones industrial average, after a panicky plunge at mid-year, shrugged it off in the end, to close 16.1 percent higher for the year. Does it suggest the beginning of the end of the worst? Take a country-by-country tour of the wreckage:"

SOUTH AFRICA: FLIGHT OF OPTIMISM
"But since the economic contagion spread outside of Asia, South Africa too has suffered. "

"As a result, the country’s trade deficit has ballooned dangerously, and the economy slid into recession in the second half of 1988. Through the third quarter, the country’s GDP was running at an annualized rate of about -0.3 percent and consumer inflation was in the 9 percent range. The stock market suffered as well. The Johannesburg Stock Exchange’s All Share index ended the year down 12.4 percent.
Outlook: Pretoria predicts economic recovery in 1999, but analysts are more wary.   However, for South Africa, the worst appears to be over.
Impact: Economic malaise in South Africa is bad news for other countries on the continent, particularly those in the southern region, which otherwise benefit from South African investment.

AUSTRALIA: TOO CLOSE FOR COMFORT
For years, Australia has debated its identity: is it Asian or is it not? The answer, in economic terms, is that Australia had become heavily dependent on the once fast-growing economies of Asia, which buy 60 percent of its exports. When its biggest trading partners started falling into recession, the land down under started slowing. But for Australia, the problem came at a good time, for a crisis.

In August, the Australian dollar hit 55.3 cents to the U.S. dollar — an all-time low. Still, the country’s stock market managed to rally. The benchmark All Ordinaries index gained 7.5 percent for the year.

Canberra considered raising interest rates to defend the Australian dollar, but in the end did not and overnight rates currently stand at about 4.75 percent. Instead, policy makers allowed the economy to adjust to the crisis. That had the positive side effect of lowering worrisome inflation. The currency has strengthened somewhat — and now trades at 62 cents to the U.S. dollar.
Outlook: For 1998, the Reserve Bank of Australia says the economy will likely grow 4 percent, above more pessimistic forecasts of 2.5 to 3 percent. Also, higher gold prices will help out the Aussie mining companies. But the bank expects recovery from the regional crisis to be slow—and that the Australian economy will slow further in 1999.

CHINA: STILL TRUNDLING ALONG
While economies around the region have floundered, China has been isolated from the mayhem because its markets were not exposed to large capital flows. But the giant market is on all radar screens. Still growing at 7.8 percent in 1998 (according to government figures released this week), China is a key market for exports from the United States and elsewhere. What it does to maintain growth and stability is critical to global recovery.
Remedies: In the effort to promote growth, Beijing has lowered interest rates over the past year; short-term rates are in the 6.5 percent range. It has also launched public works projects from dams and roads to port improvements intended to provide jobs and keep the economy humming along.
Outlook: The crisis has understandably made Beijing more reluctant to throw open the doors in a variety of areas, including financial services. Also, the government has slowed the restructuring of state factories, evidently fearing that growth is now not strong enough to absorb the thousands of laid off workers.
Impact: Beijing has won kudos from world leaders for resisting the temptation to devalue its currency, the yuan, to make its exports more competitive. Had it done otherwise, economists believe it would have set off another round of damaging devaluations throughout the region. However, as China’s exports to the U.S. outpace its imports, a bitter trade dispute is heating up. Washington is already accusing Beijing of subsidizing exporters, which some officials say represents a de facto devaluation.
              
INDONESIA: RUN AMOK
Economic crisis in Indonesia has opened the country’s political Pandora’s Box. As the rupiah lost some 60 percent of its value, millions were pushed below the poverty line. Rioting and protests against President Suharto and his family drove him from power after 32 years. But the crisis has never ceased. Suharto’s successor B.J. Habibie, despite implementing some economic and political reforms, is under fire unsatisfied protesters. Nationalistic and religious groups are also pressing their agendas. Perhaps no country in the world, aside from Russia, is faced with such an intense fight for life. Even with a $40 billion loan from the International Monetary Fund, it’s an uphill battle.

After the July 2, 1997 devaluation of the baht in Thailand, Indonesia was the next target for currency speculators. They bet that the country was on an unsustainable track — with a growing current account deficit, companies mired in debt, and an overvalued currency. Ultimately, when Jakarta allowed devaluation of its currency, it dropped through the floor. Not only did the market come to a standstill, but also millions of people fell below the poverty line.
Remedies: Popular riots against corruption and nepotism led to the resignation of President Suharto in May, after 32 years in power. But as 1998 comes to a close, the new regime faces continuing protest — some pressing for greater reform and others whose main sentiment is anger. The continuing — albeit cautious — aid of the IMF has helped press for certain key reforms areas such as banking and bankruptcy, helping to stabilize the currency. The rupiah now hovers around 7,500 — roughly midway between its pre-crisis level and its mid-crisis nadir. However, a clear policy direction isn’t likely at least until presidential elections, slated for June.
Outlook: Despite some return to currency stability, the damage to the economy has been profound. The IMF forecasts that Indonesia’s GDP will fall 3.4 percent in 1999 after a greater than 15 percent contraction this year. Inflation, running at nearly 80 percent, and short-term interest rates at more than 40 percent further paralyze the economy. As government contracts are canceled, and some companies actually close and sell off their plant equipment from Indonesia operations, it becomes clear that even with inspired new leadership, recovery will be protracted. Food agencies say poor nutrition for the country’s children will also set it back for the long term.
Impact: Indonesia’s turmoil continues to rattle its neighbors, especially Singapore. How it manages also affects investor confidence in the region more generally, and renewed conflict raises concerns in the U.S. and Japan about security of shipping lanes used to transport oil.
       
JAPAN: THE BIG UNANSWERED QUESTION
The writing was on the wall as the world’s second largest economy slowed through the 1990s, but few foresaw that Japan would slide into the worst recession in the post World War Two period. Over the past year, a changing of the guard in Tokyo and a series of large stimulus packages have done little to revive Japan’s economy from its coma. But its health is seen as essential to regional health.

In November 1997 came an ominous sign — the collapse of the Hokkaido Takushoku Bank, one of the country’s top financial institutions. It emerged as the tip of the iceberg in an industry holding some $580 billion in bad or questionable debt. By June 1998, as the yen plummeted, Japan released data showing it had crashed into recession for the first time in 23 years. The economy contracted 2.8 percent in 1998, while the key Nikkei stock market index finished the year 1,416.57 points, or 9.28 percent, below the level where it began.
Remedies: Under pressure from Washington and Asia, Tokyo has launched a series of massive programs to stimulate its economy — putting in place plans for more than $300 billion in public works spending and tax cuts. It has launched a $505 billion program to restructure its failing banks and cut the central bank interest rate to a record low 0.25 percent. When the yen sank to an alarming low of 144 to the dollar in June, Washington also jumped in to help prop it up. Though its own economy seems unbudging, Japan has provided more than $30 billion to aid floundering economies in the region.
Outlook: While the IMF says Tokyo’s anti-crisis measures have helped calm markets, it still has a long recovery period ahead. Japan’s economy is expected to continue contracting by 0.5 percent in 1999 after shrinking 2.8 percent in 1998. As Tokyo heads into 1999, the ruling Liberal Democratic Party is likely to form a coalition with its rival Liberal Party. Whether it will last is yet another wildcard.
Impact: Japan’s influence on the region and the world can hardly be overstated. The World Bank, which already projects just 2 percent growth for the world for 1999, says it could turn to global recession if Japan does not begin a recovery. Japan’s inability to expand imports is also raising the temperature on trade disputes with the United States.

THAILAND: WHERE IT ALL STARTED
Bangkok was bursting with gleaming new office towers, tangles of luxury cars, easy loans, and ringing cell phones. Thailand was growing a heady 6-7 percent a year in the 1990s. Then in mid-1997, the Asian miracle started to unravel. Speculators started here, forcing the economy to its knees before moving elsewhere in the region. Though it was the model of disaster, Thailand may also be the model for recovery.

In May of 1997, currency speculators started betting against the Thai currency, the baht, on the hunch that a soaring current account deficit and large debt obligations were unsustainable. The government, unable to afford continued support of the currency, finally allowed a “managed float,” which triggered a 20 percent drop in value — and that was just the beginning. The stock market plunged, property prices fell and businesses failed, unable to import materials, or pay off dollar debt. Only the tourism industry, able to offer cheap tours, had a good year.
Remedies: On Aug. 5, 1997 the IMF and Asian lenders announced a $17.2 billion rescue package for Thailand. In return, Bangkok promised to adhere to painful austerity measures and financial sector clean up, including debt restructuring and bank recapitalization.
Outlook: The recession has increased poverty, joblessness and despair in Thailand, but there are growing reasons for optimism. The economy is expected to grow 1 percent in 1999, after shrinking about 8 percent in 1998 and 0.4 percent in 1997. The baht stabilized at year end at 36.40 to the dollar, down 29 percent from July 1997, but well above its crisis low of 59.9 in January 1998. A gaping current account deficit has turned into a $13-14 billion surplus. Investors are beginning to look seriously at the country again, this time with more confidence in the long term. In December, Thai officials announced that the country might not have to use its entire bailout package.
Impact: Thailand’s currency collapse sparked the economic crisis. It is unlikely that it can have the same effect in recovery. These days, investors are more likely to dissect the numbers, laws and economic approach on a country-by-country basis.

RUSSIA: WINTER OF DISCONTENT
If Asian economic turmoil was a surprise, Russia’s should not have been. The country has a notoriously weak banking sector, a poor tax collection system, an active post-communist Mafia and an entrenched state sector. Moreover, as President Boris Yeltsin disappears from the scene, and prime ministers cycle through the office, Russia suffers from a leadership void at the worst possible moment.
Flu symptoms: Russia’s illness came on late, but hit hard. In June, nearly a year into the Asian crisis, investors cast a wary eye on Moscow and its deadlock over proposed budget cuts, an improved tax code, and financial reforms. Gun-shy investors lost confidence in Russia and its ruble. After a last minute effort to prop up the currency failed, the ruble fell through the floor in August. In a dramatic reversal, Moscow let the ruble drop by a third and suspended debt payments, triggering panic among Moscovites, who line up at banks and among Western lenders. Major investors lost billions, and potential investors fled. As for the country’s stock market, the Russian Trading System index fell a full 85 percent for the year.
Remedies: Economic crisis has widened Russia’s political crisis. Many blame reforms pushed by the U.S. and the IMF for causing the crisis. Anger with former prime minister Sergei Kiriyenko forced his resignation, leaving the government rudderless during the ensuing battle over a new appointment. Former foreign minister Yevgeny Primakov, who finally got approval from the parliament has the difficult task of forging consensus among Communists, nationalists and business tycoons. Their economic policy also has to contain enough reform to convince the IMF to resume payments of a $22.6 billion bailout fund. In December Primakov pushed through a new budget, but with glaring contradictions between the lines. International lenders remain at a skeptical distance.
Impact: But the collapse has had an impact that far outweighs the size of its economy, serving as the main conduit of the economic crisis from Asia to the rest of the world. It hit German banks with large exposure to Russia and spawned a generalized fear of “emerging markets” from South Africa to Brazil, despite their clear differences. Russia has greater strategic importance because of its nuclear arsenal, so Washington is likely to remain heavily involved in its recovery.
Outlook: The IMF expects Russia’s economy to shrink 5.7 percent this year and 8.3 percent next year. But those figures may be optimistic given the nearly 10 percent contraction — on an annualized basis — that the economy has already endured through September. Inflation is running around 60 percent, and the ruble is trading at a miserable 20 to the dollar. Russia’s power void is likely to persist at least until presidential elections in 1999. Social unrest may well be in the cards.

BRITAIN: REALITY KNOCKS
Britain had been enjoying a five-year boom when the global crisis landed on its doorstep. Despite interest rate cuts and promised public spending, the economy is slowing to a crawl. Politicians are in a heated debate over what is to be done.

As the Japanese economy ground down and other Asian economies crashed, it put the first big dents in the market for Britain’s manufactured exports. Then the British pound strengthened, making the country’s goods even less attractive to crisis stricken markets. But the clarion call came in August, when Russia’s ruble collapsed. Share prices on the London Stock Exchange took a dive, together with the Dow and market indicators across Europe. Though shares recovered from the blow, recession looms in Britain’s manufacturing sector — which accounts for a quarter of the economy — and may spread to other sectors. Overall, the economy has grown at about a 1.5 percent annualized pace over the last three months.
Remedies: Britain, which had interest rates about twice as high as the rest of Europe, has made a series of cuts to spur growth. Short term interest rates now are a bit over 6 percent. The government of Tony Blair has plans to boost public spending by 57 billion pounds in the next three years.
Impact: Britain’s strong currency still helps its European neighbors, who have taken the opportunity to sell to the British.
Outlook: The IMF predicts that growth will slow sharply next year — to an anemic 0.9 percent in 1999 from 2.6 percent this year and most observers agree. But the government contends Britain will experience a powerful rebound and strong growth in 2000. Government critics call that “Peter Pan economics” and suggest the country may fall into recession.

GERMANY: ROCKED BY RUSSIA
The European giant was more focused on its struggle to graft a former communist state into its capitalist economy as the Asian economic crisis hit last year.

Germany is Russia’s biggest trade partner, and German banks are by far the biggest lenders to Russia, to the tune of about $30 billion. So Germany’s markets quaked, along with Wall Street and other European exchanges when the value of the ruble sank in August. Chaos in Moscow focused Bonn on the global fallout. Among other things, Germany’s manufacturing sector — seeing declining sales in Asia — may be headed for recession. Still, the Extra AX stock index ended the year up 18.5 percent.
Remedies: In early December, the Bundesbank announced interest rate cuts, a move followed by the 11 countries taking part in monetary union. German short-term interest rates are now about 3 percent — in line with the 10 other Eurobond participants. That rate cut helped scotch the perception that Germany was unwilling to help in stimulating global growth. Washington wants Bonn to go a step further, and help buy up excess products from Japan and Russia.
Outlook: The German Bank Federation has scaled back growth forecasts for Germany, to around 2 percent. Throughout the EU, the average rate is expected to hover around 2.4 percent in 1999, down from 2.8 percent in 1998. Though the monetary union is a source of optimism that Europe’s companies will become leaner and more profitable, analysts are watching newly elected Chancellor Gerhard Schroeder, who may favor slower reforms, and more left-leaning social policy.
Impact: Germany is the world’s third largest economy, so how it formulates its response to economic crisis will affect not only the EU, but markets around the world.

CANADA: THE LOONIE FALLS
Asia’s decline has sideswiped this North American giant, driving currency and share prices into a deep slide. Lower global commodity prices amplified the effect.

Tourism suffered too, with arrivals from Japan declining nearly 17 percent this year. The Canadian dollar — or “loonie” — fell to a record low in August, and has climbed slightly, trading at 64-65 U.S. cents, down from about 75 cents before the crisis.
Remedies: As the loonie slumped to alarming lows, Ottawa tried to intervene by selling U.S. currency, and then raised interest rates. It has since reversed course and cut rates, in line with an U.S. initiative to spur world growth. Short-term rates now stand at 5 percent.
Impact: Canada is the biggest trading partner of the United States. The U.S. can expect weakening demand for all goods and services, including tourism. Shortly after the loonie started its dive, Florida reported a 16 percent drop in “snow birds” from Canada.
Outlook: The IMF says Canada will grow just 2.2 percent in the coming year, a figure it recently revised downward from 2.5 though private economists are generally not so generous. A recent OECD report has highlighted Canada’s poor productivity and declining standard of living. The poor exchange rate also complicates Canada’s effort to invest in machinery and technology that would make it less reliant on commodities.

BRAZIL
As the crisis spread from Asia to Russia in the summer, Brazil too came under the microscope. Though it was a more developed market than many it was compared to, it shared some common problems. Fears that Latin America’s biggest economy, the tenth largest in the world, might descend into economic chaos shook Wall Street and the globe. The world insisted that Brazil not be allowed to melt down.

Brazil’s reforms in the 1990s subdued inflation and liberalized the economy, making it a powerful magnet for foreign investment. But failure to reform social security and curtail government spending pushed debt to a dangerous 7 percent of GDP, drawing comparisons with fiscally-challenged Russia. The stock market tumbled, badly shaking confidence in the whole region.

Under the “Real Plan” of 1994, President Fernando Henrique Cardoso won a battle against punishing hyperinflation by pegging the Brazil’s real to the U.S. dollar. Thus, his government has refused to devalue the currency. Instead, when speculators attacked, the government spent some $38 billion of its foreign exchange reserves and pushed interest rates sky-high. They now stand at about 32 percent. But longer-term reforms needed to restore confidence were delayed until perilously late, after Cardoso’s re-election. Finally in November, social security reforms passed Brazil’s Congress. The IMF, World Bank and other lenders agreed to a $41.5 billion rescue package for Brazil. Wall Street rebounded from its funk and Brazilian shares jumped 57 percent from its lows in September, boosting markets around the region.
Impact: Brazil’s economic health was seen as key to preventing a global economic resection. It’s policy has a direct impact on Latin America. Also, the U.S. sells about 20 percent of its exports to Latin American and the Caribbean. Regional devaluation would have a direct impact on this trade.
Outlook: Though crisis has been averted, Brazil and its neighbor, Argentina, are likely heading for recession in the coming year. The IMF forecasts 1 percent contraction for Brazil’s economy in 1999, after nearly flat GDP for 1998. Longer term, however, Brazil’s market of 160 million and the country’s solid privatization program will continue to draw foreign direct investment.

CHILE: THE STAR PERFORMER FLOUNDERS
For the boosters of free markets, Chile is often held up as an example. How it finally emerges from the battering of the global marketplace will be a test of this model of liberal trade and investment.

When Asia floundered, it was a double whammy for Chile. The country is heavily dependent on exports to Asia, a market that suddenly contracted. It’s also heavily dependent on the export of copper, which has seen its price collapse on world markets. The Santiago Stock Exchange closed 23 percent lower at the end of 1998 than where it started the year.

The government has restored currency stability through modest fiscal and monetary tightening which it will continue. Santiago has reduced the penalty interest rate paid by portfolio investments from abroad to encourage inflows, and issued dollar-denominated debt to satisfy dollar hungry investors. Santiago uses reserves to shore up the peso, which is linked to the U.S. dollar by a crawling peg. As the strain on the currency has eased, the government is also modified the peg to allow more flexibility.
Impact: The crisis will be a trial for Chile’s private pension system. During boom times, the system caught on among other developing countries, especially in Latin America. But in the bear market, pensioners are becoming aware of the risks.
Outlook: Fears of cataclysmic meltdown in Latin countries have subsided since November, when Brazil won a rescue package from international lenders. Chile’s economy was growing at near 3 percent rate during the third quarter — a modest pace after 14 years of an average 6 percent growth. Santiago also faces political uncertainty raised by the arrest in Britain of former dictator General Augusto Pinochet. However, Chile still outpaces the region, which is expected to slow to 1 percent growth in 1999, down from 2.3 percent in 1998, and 5.2 percent in 1997

VENEZUELA: BOLIVAR BLUES
It’s a bad time to be oil dependent, as Venezuela is finding out. The country earns 50 percent of government revenues from oil exports, but the commodity’s price just keeps on skidding to near 12-year lows. Oil and other factors chipped away at Venezuela’s economic health, until it finally reached a state that some compared to Russia. But, with political crisis averted, there is room for cautious optimism.

Venezuela’s oil revenues are down 37 percent this year compared to 1997. With oil revenues low, and government spending high, Venezuela’s climbing debt set off alarms signaling speculators to bet against the country. The stock market lost 51 percent in dollar terms over the course of 1998, remaining the most depressed bourse in the region.
Remedies: Throughout the summer, politics further undermined confidence in Venezuela. Hugo Chavez, a former revolutionary who ran for president on a populist platform, was elected on Dec. 6. However, he surprised the business community by soliciting the advice of respected technocrats. Chavez has announced a program to slash government spending and beef up tax collection to bring the budget in line.
Outlook: Early announcements by Chavez caused the Venezuelan market to rebound strongly and the currency, the Bolivar, to strengthen. But the numbers remain grim. In 1997, the central government budget deficit balance was a surplus equal to 1.3 percent of GDP. This year, it’s expected to plunge to a deficit equal to about six percent of GDP. The economy was heading for a 1-to-2 percent contraction in 1998, after a year of 5 percent growth. There are still concerns that Chavez might beef up social programs at the expense of the state oil monopoly, Petroleos de Venezuela.
Impact: Venezuela remains the most troubling major economy in South America, which could damage confidence among its neighbors. It is also the second largest supplier of oil to the U.S., so Washington will be watching its policies closely.

Week of December 20, 1998

Money poured into mutual funds this week as we prepared to add the first Internet stock to the Fortune 500 (AOL). The impeachment causes concern on financial reform but had little effect on the stock market. 

Our lead story is the failure of Merrill Lynch to implement online trading. This is not there first postponement but maybe it will be there last. Maybe they should buy e-trade.

Out with the old and in with the new, as Woolworth (old name) leaves the 500 and AOL enters.  This will make for unusually high volumes in the traditionally slow last week of the year.  Commodities continue week and Internet stocks continue to soar.  With the advent of after hour markets (Instanet), online trading and alternative trading systems, we can toss out many of the old expectations.  What is the significance of a gap opening?

Credit quality concerns are showing up in many sectors we move into the new year.

Merrill again delays online trading, By Rebecca Buckman & Patrick McGee, December 22, 1998 THE WALL STREET JOURNAL  -  This major brokerage company continues to experience technical system problems and has again delayed customers online trading.  "Merrill Lynch & Co. has again delayed plans to offer online stock trading to some of its wealthiest customers, partly due to its concerns about the recent volatility and heavy trading volume in some Nasdaq stocks, including highflying Internet issues."

Merrill has postponed implementation before. "In March of 1997 Merrill, the nation’s largest brokerage firm, said it might offer limited online trading as soon as the first quarter of 1998. Then in February the firm said it planned to offer the fast-growing capability — which firm executives have sometimes criticized as risky when practiced to excess — by the end of this year to wealthy customers in its Financial Advantage and Asset Power accounts."

Upon implementation of Internet trading, It appears that Merrill does not plan on passing on the labor savings to the customers. "Merrill’s version of online stock-trading will serve as a perk for, at first, just about 55,000 customers in the two fee-based accounts, Mr. Steffens said. Merrill has said for almost a year that it eventually plans to allow those customers to trade online, though not at the deep discounts offered by firms such as Charles Schwab Corp. and E*Trade Group Inc."

Amid Turmoil, Revenues from Derivatives Hit Four-Year Low, By David Harrison, Monday, December 21, 1998 WASHINGTON - "As use of derivatives surged in the third quarter, bank trading revenue in the area sank to the lowest level in four years, the Office of the Comptroller of the Currency said Friday."

Market risks are substantial and "the notional amount of derivatives increased by $4.5 trillion in the quarter, to a record $32.6 trillion, the agency said." 

Record charge offs were reported and derivative and cash trading declined substantially after record quarters. "Trading revenue -- which includes derivatives and cash instruments -- was a slim $614 million in the third quarter, down from $2.5 billion in the second quarter and a record $2.7 billion in the first quarter." "Banks also had to charge off a record $445.4 million of derivatives during the third quarter, almost five times the $93.7 million reported in the second quarter."

"Interest rate derivatives continued as the dominant type of contract. Banks had nearly $24 trillion of these in the third quarter; foreign exchange derivatives topped $7.9 trillion; and credit derivatives reached $162 million, the OCC said." 

"More regulatory guidelines can be expected. "Mr. Brosnan said the drop in revenue had prompted examiners of banks engaged heavily in derivatives to begin discussing alternative ways to manage their risks. The agency will decide in the next few weeks whether more formal guidance is required, he said." Within the banking community 94% of the total notional amount of derivatives is accounted for by 7 domestic banks and only 464 banks use derivatives.

Year of the day trader on Wall St. OPINION, By Chris Byron December 25, 1998, MSNBC - In 1998 the Internet proved its influence in the stock market. This took the form of day traders. When will its influence similarly be felt in other financial services?

"Not since the elimination of fixed commission rates and the birth of the NASDAQ electronic stock market more than 20 years earlier had Wall Street seen a more dramatic shakeup of the status quo than what occurred in 1998." The result? "the creation of a phenomenon heretofore almost totally unknown on Wall Street: the retail “day trader,” referring to investors who buy and sell stock, minute-to-minute, all day long."

In the early 1970's many of us will remember the "round trip" commissions quoted by full service brokerage firms as an inducement to trading. "In any case, day trading is not that new a pursuit after all, for a search of old newspaper archives finds the term to have been in use at least as far back as the early 1970s. First known reference to a day trader? A 1972 story in the Washington Post, in which the reporter blamed “short-covering by day traders” for an upturn in Chicago grain prices."

"But in 1998, day trading moved from brokerage firm offices onto the Web itself, as investors by the tens of thousands began actively trading their accounts using the real-time quote services of financial data content providers of every sort imaginable."
       
"According to Forrester Research of Cambridge, Mass., more than 3 million people were active investors via online brokerage accounts by year’s end, and Forrester now expects the total to top 15 million by 2002. Another study, from International Data Corp., sees nearly one-third of all individual investors in the country having online trading accounts by the year 2002, generating $5 billion in commissions."

"The process was most in evidence when it came to the stocks of Internet companies themselves. One example: Amazon.com, which went public in 1997 at $18 and is now selling for close to $300. In August and September, close to 10 percent of the total trading volume in the stock was accounted for by day traders of just one firm: Broadway Consulting & Trading in New York."
     
All wasn't rosy for day traders. On "November 13th, day traders placed close to $20 million in “buy at the market” orders for an IPO of an internet company virtually no one knew anything about, theGlobe.com. That heavy betting was followed by $500 million more in the first 60 minutes of trading. Then they watched in horror as the stock, having leaped within mere seconds of its opening from its pre-market price of $9 to an aftermarket quote of $97, keeled over and fell all the way back to an end-of-day close of $63, turning nearly every day trader in the shares into a massive loser."  

Silicon Valley Bank's Charge Raises Caution Flag in Region, Wednesday, December 23, 1998, American Banker, By Matt Andrejczak - Is the high technology growth slowing? "A California bank's sharply reduced earnings forecast has raised concerns about a slowdown in the high-technology economy and its effects on lenders."

Silicon Valley Bank has offices in high tech communities throughout the country and its focus on tech companies is a good barometer on economic activity. "Silicon Valley Bancshares, which is as closely identified with the Northern California high-tech sector as its name implies, said its fourth-quarter earnings could be as much as 50% below analysts' estimates."  "The Santa Clara-based banking company said it will charge off $7 million and take a loan-loss provision of $16 million to $20 million."

The problems appear to be in the bridge loan underwriting standards.  As competition increased standards were relaxed.  Amplifying the problem is the rapidly changing Internet technology. "Internet companies' business models quickly becoming obsolete and needing retooling, and venture capitalists showing less willingness to participate in later financing rounds, such lending has become increasingly risky, company officials said."  

Commercial Lenders Predicting Unhappy New Year, Survey Says, American Banker, David Weidner,Monday, December 21, 1998 - "Commercial lenders expect the economy to worsen in the first half of 1999, and with it loan volume, bankruptcies, and defaults amid stiffening competition, according to a Phoenix Management Services Inc. report.

"Their bearish assessment was reinforced by another report last week from Veribanc Inc. of Wakefield, Mass. It found banks have not offset the risk of problematic loans with more reserves, though this "safety cushion" remains above limits set by the Federal Reserve."

"There were indications in the Phoenix responses that underwriting standards will toughen. More than 40% of lenders whose average loan size was greater than $10 million expected to tighten credit standards during the coming six months, compared with only 18% of lenders surveyed six months ago."

"More than half of those who responded said they would be less likely to lend to retail, construction, or start-up companies."

"Kind of bleak," said Chad Leat, co-head of loan syndications at Salomon Smith Barney Inc. "I agree with the broad numbers, but I expect some exceptions."

"In contrast to the domestic gloom, even though 80% in the lender survey said international lending would decrease, most agreed that the euro will create vast opportunities in fueling cross-border trade."

Uncertainty for Banks' Agenda As the Clinton Drama Unfolds, By Dean Anason, Tuesday, December 22, 1998 WASHINGTON -   "With Capitol Hill consumed by the impeachment of the President and another vacancy for Speaker of the House, banking lobbyists face the prospect of pushing their legislative agendas through the most volatile political climate in at least a quarter century."

"If there is a full-blown trial," said Robert A. Rusbuldt, executive vice president of the Independent Insurance Agents of America, financial issues "are going to be pushed to the back burner. Only essential things will get done."

"Mr. Baptista, who represents a coalition of financial service reform advocates, even saw an upside. Lawmakers desperate to put down a list of legislative accomplishments might want to push through bills that already have been heavily debated." "If you are looking for a big issue that can be addressed in a bipartisan manner, financial reform is one," he said."

"As a member of the House Commerce Committee, he (Rep. Hastert) voted for financial reform but raised concerns about its impact on community banks, sources said. Rep. Hastert backed provisions that would have let banks underwrite municipal revenue bonds and opened the Federal Home Loan Bank System's doors wider to small banks. He also favored scaling back community reinvestment requirements for small banks."

"Some banking industry officials worry that Rep. Hastert may bring the House Commerce Committee bias for placing expanded financial powers in holding company units instead of within banks."

"It could give the insurance lobby and the securities lobby a little more clout in the House," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America."

"Allen R. Caskie, senior counsel on federal relations for the American Council of Life Insurance, was more skeptical, saying "it is unlikely the new leadership group in the House is going to be as committed [to the financial bill] as the last one."

Week of December 13, 1998

This was a week of the Presidents impeachment, the US.British  attack on Iraq, exploding Internet sales reports, a tech rally lifted Nasdaq to a new record of 2086.14 on Fridays close.  Oil broke through $11 per barrel on the downside and the hot market in Internet stocks continues.  In an interesting difference of opinion, Amazon.COM rose 61 to 284 (52,760,000 shares outstanding) after an analyst at Oppenheimer raised the price target to $400 a share, Merril Lynch says value is $50. Someday we should all have personal web search agents that will allow us to shop for the lowest priced F.O.B. product.

Nasdaq, Hong Kong stock exchange join Web sites, Mercury Center, December 17, 1998, NEW YORK (Reuters) - "The Nasdaq and the Hong Kong Stock Exchange said Thursday they have set up a joint Web site to share data, including delayed stock prices, which could lead to greater ties later."   The web site address is (http://www.porttracker.nasdaq-sehk.com).

"We're in a new era of cooperation between international exchanges, and this could be just a start,'' said Frank Zarb, chairman of the National Association of Securities Dealers (NASD), the parent of the Nasdaq stock market and the American Stock Exchange."

Home Banking Group Weighs Options for Restructuring, By Chris Costanzo, Friday, American Banker, December 18, 1998 - The Integrion Financial Network, founded by IBM,VISA and 17 major banks may liquidate. Founded about 2 years ago in response to Internet banking opportunities the group invested in developing the necessary technology for banking in the future. This type of group is generally difficult to hold together.

AOL holiday shoppers surge 350 percent, Mercury Center, December 16, 1998, -  DULLES, Va. (Reuters) - Consistent with our personal experience, "America Online Inc. said Wednesday that holiday traffic on its shopping channel has been three and a half times higher than last year, with shoppers spending an average of 50 percent more than they did in 1997."

"This included 750,000 first-time online shoppers in the first two weeks of the season, AOL said. Members of the company's Internet service are buying more often -- an average of two items every week -- and are spending 48 percent more on each purchase, for an average of $54 an item."

Online business expected to hit $1.3 trillion in 2003, Reuters, Mercury Center, December 17, 1998, NEW YORK (Reuters) CAMBRIDGE, Mass. -
The ease of Internet commerce are showing up in the sales numbers.   More importantly, the actual results are greater than the predictions.  The financial community should start to experience greater activity soon. "U.S. business trade on the Internet will explode from $43 billion in 1998 to $1.3 trillion in 2003, Forrester Research Inc. predicted in a report released on Thursday."

"Forrester said it expected on-line business trade to surpass 9 percent of total U.S. business sales by 2003."

"By 2003, the leading industries will include aerospace and defense, petrochemicals, utilities, and motor vehicles, Forrester said."

"In mid-1997, Forrester predicted that U.S. Internet business trade would reach $327 billion by 2002. But in the subsequent 18 months, the pace of growth has exceeded the level Forrester expected, leading to the new forecast."

"One of the major factors in the new forecast is recent research indicating that the United States has entered the commerce threshold -- an 18- to 24-month building period preceding five to 10 years of Internet commerce hypergrowth,'' Forrester said."

Internet-Focused First USA Poised to Be No. 1 Card Issuer, Lisa Fickenscher, Friday, December 18, 1998 American Banker Online -  "The credit card industry seems on the brink of crowning a new No. 1 issuer, a company whose strong faith in the Internet may reshape the way card products are marketed." Others are having similar success. Look at NextCard and its instantaneous Internet loan approval process http://www.nextcard.com/ .

"Assuming current growth patterns hold true, First USA, the credit card unit of Bank One Corp., will overtake Citigroup's Citibank this quarter as the company with the most card receivables. It may already have done so. Each bank had more than $63 billion in loans in the third quarter."

"As it relentlessly pursues new business via the Web, First USA may be leading a race that other companies have yet to join." 

"That firm conducted a survey in September indicating that First USA attracted 25% of the 6.7 million people who said on-line marketing prompted them to apply for a card and open an account."

California e-commerce board wants Net tax ban, Mercury Center, December 13, 1998, PALO ALTO, Calif. (Reuters) - What state will win the Internet business war? What states will e-business be attracted to? It appears that the high tax state California is getting a jump on the competition.

"An electronic commerce committee formed by California Governor Pete Wilson will recommend Monday a new set of Internet-friendly tax initiatives, including a permanent ban on new taxes on online transactions and some cuts in existing taxes, sources say."

"The proposals are likely to intensify the nationwide debate over the role state and federal governments play in promoting businesses on the Internet versus preserving those on Main Street."

"California earlier this year passed a three-year moratorium on Internet taxes, but that measure was presented as an interim way to support the electronic commerce industry in its infancy. A permanent ban could be far more controversial, since it would eventually apply to businesses that are established and even flourishing."

Week of December 6, 1998

German Challenge to MS Office, by Karsten Lemm 3:00 a.m. 7.Dec.98.PST: In an effort to capture the office application software market, a German company is offering individual users free applications suite software.  "Star Division, a small and little-known German software firm"  is making this offer.

"The program, Star Office 5.0, is available in seven languages for the Windows, Macintosh, OS/2, Linux, and Sun Solaris operating systems. It includes a word processor, a database app, drawing software, an email client, and a spreadsheet. A Java version is available, too, as are server versions for NT and Sun SPARC systems. The software generally received favorable reviews and, until recently, carried a price tag of roughly 500 German marks (US$300)".

"Three weeks into the offer, which has been widely announced only in Germany, 200,000 people have downloaded Star Office from the company's national and international Web sites."

We have reviewed the web site but have not used the software. All reports that we have read have been positive.

Wall Street Taking Steps to Speed Growth of Secondary Loan Market By David Weidner, December 8, 1998: Through the Loan Syndications and Trading Association Inc., LSTA efforts are being made to liquefy commercial loans.  This will again expand the competition for traditional bank loans.   As long as Wall Street can resell these loans they will originate the loans at the detriment of the commercial banks.  "Alden L. Toevs, executive vice president of First Manhattan Consulting Group in New York, said that as investment banks gobble up a larger share of the bank loan underwriting market, they have brought along their trading mentality."  "Here's a market that has been long the domain of commercial banks, but includes a product that is similar to junk bonds," Mr. Toevs said.

"Steven M. Bavaria, director of bank loan ratings for Standard & Poor's, agreed that a shift to daily pricing would mark a fundamental change for commercial banks .  "It was never part of a banker's model for thinking about those kinds of market conditions," Mr. Bavaria said. "A banker never cared if he could sell those loans for 100 cents on the dollar."

"Robert Morris Associates, the credit-risk trade group that includes a majority of community and regional banks among its membership, is in favor of a strong secondary loan market."

Boom Expected for Bankruptcy Professionals, By DON LEE, Times Staff Writer, Monday, December 7, 1998:  The annual conference of Bankruptcy   professionals showed signs of life after many solemn years.  "Likening the mood to riding a slow train gaining speed, Deborah D. Williamson, a San Antonio lawyer and president of the Bankruptcy Institute, a 6,500-member group based in Alexandria, Va., said: "We're going to be happy next year, but nobody else is."

"But at this year's meeting, held over the weekend in this oasis city, the talk among the 450 attendees was not about famine but an incipient feast.
Bankruptcy lawyers from Florida talked excitedly about the impending insolvency's of health maintenance organizations struggling with Medicare budget cuts. Midwestern creditors were eyeing weakening agricultural firms. Texas bankruptcy lawyers glowed about renewed work in the sagging oil industry. And insolvency specialists throughout spoke about deteriorating manufacturers, credit-crunched lenders and overpriced real estate investment trusts."

Amazon Reported Ready To Link To Other Merchants - NY Times Dow Jones Newswires New York --" Amazon.com, the rapidly expanding online store, is about to introduce a new service in which it will refer its customers to other Internet merchants selling goods that it does not carry, according to people briefed by the company on the plan, according to The New York Times."  This is a very significant Internet event because Amazon is the premier online merchant.  Having the eyes of web surfers allows them to direct them to others commerce web sites.  This should speed up the adoption of online commerce for all web sites.

In another important action, Amazon.com is providing a "smart shopper" for shoppers on their site. " Junglee has created software enabling Internet users to compare the prices and features of products for sale on any number of sites spread across the World Wide Web."   This is the type of product that will allow shoppers to efficiently and intelligently purchase FOB to their home or office.  A smart shopper will specify delivery dates, delivery address and the low cost provider will be selected.

Net retailer swamped after promotional offer,SEATTLE (Reuters): "An online electronics superstore that opened its virtual doors two months ago was virtually shut down by a stampede of customers after announcing a promotional deal on music and movies, the company's founder said Friday."

"800.com Inc. was overwhelmed by Internet surfers after the company began selling music and movies late Thursday with an introductory offer of three titles for $1, founder and chief executive officer Greg Drew said."

Week of November 29, 1998

"Earlier this week, the NASDAQ Stock Market created a new task force under its Quality of Markets Committee to discuss the recent spike in volatility in many stocks, including Internet issues. The committee is expected to identify reasons for the trend in the next few days and look for possible solutions in coming weeks, a NASDAQ spokesman said."

"Trial of a Chinese PC user, M E R C U R Y C E N T E R, http://www.mercurycenter.com/ Friday, December 4, 1998, 8:30 a.m., By Patricia Sullivan, Online Editor : – Determined to extend its crackdown on dissent to cyberspace, China put a computer entrepreneur on trial today for giving e-mail addresses to a pro-democracy Internet magazine. A closed-door trial held for Lin Hai "doesn't look good," his attorney said after the four-hour hearing. "

"Vietnamese Net crackdown looms: The Communist party in southern Ho Chi Minh City has instructed local authorities to establish a new body aimed at tightening control over Internet access and management, municipal officials said today."

"Encryption control: U.S. officials said Thursday that an agreement had been reached that is expected to produce new international controls on the export of data-scrambling software and hardware, an information age issue that has
pitted individual privacy against national security."

"Not to mention the paper cuts: The Internal Revenue Service, tired of shuffling mounds of paper and dealing with its associated costs, hopes to triple the number of electronic filers by 2007. Last year about 20 percent of taxpayers filed their income tax returns electronically."

Week of November 22, 1998

P&G Launches an Effort to Sell Perfume and Cologne on the Web. SALLY BEATTY,  THE WALL STREET JOURNAL ONLINE   November 24, 1998 In an important action by a large branded retailer, "Procter & Gamble is reaching out to cyberspace shoppers to sell perfume and cologne directly, despite recent public promises not to sell its more-typical products such as soaps and diapers directly to consumers over the Web."

In an example of new marketing tools, "Web surfers can send e-mail to a friend suggesting that Hugo is a dandy Christmas present".

"P&G has been a vociferous proponent of online advertising. Yet it doesn't want to anger the traditional bricks-and-mortar retailers that are its main distribution channel. To that end, the company has staunchly refrained from selling products directly over the Web itself until now, with one exception: custom blends of its Millstone coffee brand."  These are the type of distribution challenges that effect all business.

Within recent months P & G is reported to have encouraged retailers to market P & G products on the Internet. "P&G says the new Hugo Boss site is another exception to the rule, not a change in policy." "We're not going to sell the Tides and Charmins of the world direct to consumers," she adds. "It doesn't make sense. We really see the value traditional retailers bring to the equation. They act as aggregators."  (www.hugo.com)  

Online shopping like never before A slew of new technologies will make it fun, fast and just a fingertip away to buy your favorite fashions and more By Barton Crockett, MSNBC Nov. 25 1998  This will be an important year for online retailers and we don't believe that many will be disappointed. "With millions of people taking the cyber-shopping plunge, the experience is almost becoming predictable. E-stores are converging on a typical layout — lots of text, slim graphics, and product search. Will new technology bring back the novelty?"

" THOSE INNOVATIONS INCLUDE new ways to virtually try on clothing, gauge the view from a stadium seat, or to speed you through the cyber checkout lane. They all aim to use new technology to make cyber-shopping more compelling. "

"Top portals including America Online, Excite and Yahoo, each have come up with new ways to speed up those checkouts, just in time for the holiday season. AOL and Excite have designed new electronic wallets, which store the credit card and shipping, information, and automatically upload it to selected merchants on their services. Their features broadly mimic a one-click checkout feature that Amazon.com pioneered in last year’s holiday season. Yahoo, by contrast, has set up a new online mall, with 2,700 stores, for which it not only offers one click checkouts, but a shopping cart you can drag from merchant to merchant, so you only have to check out once.

Americans again dip into savings Latest numbers show spending still outpacing income, MSNBC Nov. 25 1998

"Americans spent more than they earned again in October, borrowing and dipping into their savings, mutual funds and home equity to maintain their standard of living. The U.S. personal savings rate — savings as a percentage of after-tax income — was minus 0.2 percent last month. That followed a rate of minus 0.1 percent in September and was the worst performance since 1959, when the government began tracking the figure on a monthly basis."

"ON AN ANNUAL basis, the rate hasn’t been negative since 1933, at the depth of the Depression.

Latest Megamerger Leaves The Net Utopians Howling, By JASON FRY and TIMOTHY HANRAHAN, THE WALL STREET JOURNAL INTERACTIVE EDITION November 27, 1998, America Online has purchased Netscape Communications Corporation for $4.3 Billion in stock.  "Once, but not much longer. Netscape, which made the Web browser a household item, jump-started the Web as a popular destination, and which set the standard for Internet stock frenzy, agreed to be acquired by Inc., the world's largest online service, in a $4.3 billion deal that sent shockwaves through the Internet community.

"In the wake of the megadeal came concerns. Did the merger indicate, as Microsoft attorneys argued, that no company -- however gargantuan its market share -- can ever hope to control the Internet? Or did it indicate, as Justice Department officials argued, that Microsoft's predatory conduct had so broken a competitor that it was forced into the arms of another dominant company?"

"Concerns came from other sources. The Nader-allied Consumer Project vowed to fight the deal, foreseeing a time in which AOL could use licensing fees for Netscape's browser to hold its smaller rivals in the Internet-access business hostage. Cyber Dialogue, a New York market-research firm, pointed out that the deal meant one of three U.S. adults who go online will begin their sessions on a page controlled by AOL. Microsoft foes fretted that AOL would skimp on further browser development, giving Microsoft's Internet Explorer a huge R&D edge."

Week of November 15, 1998

Fed Survey of Lending Officers Suggests Tighter Credit Standards. The Board of Governors of the Federal Reserve System (Senior Loan Officer Opinion Survey on Bank Lending Practices, November 1998,   http://www.bog.frb.fed.us/boarddocs/SnLoanSurvey/199811/default.htm) revealed a broad tightening of business lending practices. The respondents indicated concern over the economic outlook causing them to firm standards and terms on loans to large and middle-market businesses and on commercial real estate loans. "Unlike recent surveys, some banks also reported having tightened standards and terms on loans to small businesses. Respondents stated that demand for business and commercial real estate loans had increased, boosted somewhat by customers having difficulty raising funds in the securities markets."

The report also focused on the preparedness of bank customers to solving Year 2K problems. "The results show significant progress in the respondents' evaluation of these problems since the May 1998 survey…. Half of both the domestic and the foreign respondents reported that they had evaluated the year-2000 preparedness of more than 90 percent of the business customers that account for a material proportion of their loans. Virtually all of the respondents found that less than 15 percent of their material business customers were not making satisfactory progress toward achieving year-2000 preparedness."

Fed Reduces Interest Rates ¼%. The Federal Reserve Board of Governors (Press Release, November 17, 1998, http://www.bog.frb.fed.us/boarddocs/press/General/1998/19981117/default.htm ) reported the following set of policy actions:

• "The Board of Governors approved a reduction in the discount rate by 25 basis points from 4-3/4 percent to 4-1/2 percent.

• The federal funds rate is expected to fall 25 basis points from around 5 percent to around 4-3/4 percent.

Although conditions in financial markets have settled down materially since mid-October, unusual strains remain. With the 75 basis point decline in the federal funds rate since September, financial conditions can reasonably be expected to be consistent with fostering sustained economic expansion while keeping inflationary pressures subdued."

NCUA Announces Budget Increase with No Fee Adjustment. The National Credit Union Administration Board (NCUA Press Release, November 19, 1998, http://www.ncua.gov/news/press_releases/fy99budget.html) agreed to not increase the fees it charges credit unions to operate the independent federal agency. The Board approved a $121.96 million budget for Fiscal Year 1999, a 10 percent increase from FY 1998.

NCUA Announces Regulatory Calendar. NCUA (Semiannual Regulatory Agenda for November 1998, http://www.ncua.gov/justposted.html) announced regulations scheduled for final and proposed rule stage. The final stage rules included: "Member Business Loans and Organizations and Operations of Federal Credit Unions: Trustees and Custodians of Pension Funds."

Office of Thrift Supervision Release National Cost of Funds Index. The OTS (CF Report, OTS, November 16, 1998, http://www.ots.treas.gov/docs/23002.pdf) released the national medium cost of funds for member institutions. The September, April-June and January-June medium figures were 4.85%, 4.83%, and 4.83% respectively.

Smart Cards Gain Few Converts. The Economist (November 21, 1998, pp. 73-74) reported that New York’s smart card experiment conducted by Citibank and Chase Manhattan was a failure. Indeed, smart cards have gained little interest the world over. The reason seems to be that consumers don’t value the convenience of an "electronic purse." There are a few exceptions. Some like the cards for use in Laundromats and to feed parking meters in some parts of the world. Others would like to put health information on a card. But few have found that replacing coins with a card is a compelling need.

Mutual Fund Management Fees Gain Attention. Business Week (November 30, 1998, p. 126) reported that several lawsuits against directors of mutual funds have called attention to fees charged mutual fund investors. Critics argue that as funds get larger, the percentage fund fee should decline as economies of scale set it. Actually, the data indicate that the average equity fund fee increased from 1.25% in 1985 to1.53% recently.

Week of November 8, 1998

State Farm Insurance Receives Thrift Charter. The Wall Street Journal Interactive (State Farm Gets Federal Thrift Charter, Deborah Lohse, Nov. 13, 1998) reported that State Farm, an insurance company with over 14,000 agents, based in Bloomington, Ill., plans to offer banking services, eventually nationwide, through a thrift charter recently granted by the Office of Thrift Supervision (OTS). Prudential Insurance Company of America, Allstate Insurance, and Jackson National Life have also received thrift charters from the OTS.

SEC Provides FAQ on Year 2K Disclosure. The U.S. Securities and Exchange Commission (Release No. 33-7609; Nov. 9, 1998; http://www.sec.gov/rules/concept/33-7609.htm) provided a frequently asked questions release on disclosure by public companies of Y2K issues. The FAQ covers the topics of estimating costs of Y2K compliance, disclosure of risks, and extent of disclosure.

OTS Announces Changes in Interest Rate Sensitivity of Thrifts. The Office of Thrift Supervision (The Quarterly Review of Interest Rate Risk, Vol. 3, Number 2, 11-6-98; http://www.ots.treas.gov/whats-new.html) reported that the interest rate sensitivity of thrifts it regulates dropped slightly in the second quarter of 1998. The post-shock NPV dropped slightly to 10.4%, (e.g., the net present value of the industry’s equity to total assets after a rise in market interest rates of 200 basis points). Despite the improvement, the OTS’s estimate of pre-shock NPV, (e.g., the net present value of the industry’s equity to total assets) dropped slightly to 11.7%. The industry stands to lose 15% of its net present value if rate rose 2.00% and only gain 4.6% if rates dropped 2.00%.

FDIC Announces Pending Regulations. The Federal Deposit Insurance Corp. (FDIC) (Press ReleasePR-77-98, 11-13-98) announced outstanding regulations on which comment is being encouraged. Three of the most important include: (1) a proposal revising the FDIC's management interlocks regulation to implement changes to the Management Interlocks Act and to permit otherwise prohibited management interlocks, including a new "small market share exemption." (12 CFR 348); (2) an interim rule, with establishing safety and soundness standards to address the Year 2000 problem. (12 CFR 364); and (3) a proposed regulation requiring insured nonmember banks to develop and maintain "Know Your Customer" programs which would require each institution to develop a program designed to determine the identity of its customers, its customers' source of funds, and the normal and expected transactions of its customers; monitor account activity for transactions that are inconsistent with those normal and expected transactions; and report any transactions of its customers that are determined to be suspicious, in accordance with the FDIC's existing suspicious activity reporting regulations. (12 CFR 326)