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Yet another Bloomberg featured post! =)

Here, I will take notes while watching the video. I have separated the notes based on the “timeline breakdown” on the Bloomberg article. The notes are below the article. Here is the article.

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Wire: BLOOMBERG News (BN) Date: 2008-06-03 17:55:24
Bernanke, Trichet, Shirakawa on Inflation, Rates, Dollar: Video

     June 3 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke, European
Central Bank President Jean-Claude Trichet, Bank of Japan Governor Masaaki
Shirakawa and Bank of Spain Governor Miguel Fernandez Ordonez speak about the
outlook for inflation risks, monetary policy and global economic growth. They
speak at the International Monetary Conference in Barcelona. Bernanke and
Shirakawa speak via satellite. Josef Ackermann, chief executive officer of
Deutsche Bank AG, moderates. (Source: IMC/Bloomberg)

00:00:00 Bernanke: economic “strain” on markets
00:01:15 Bernanke: U.S. housing, credit markets
00:05:13 Bernanke on regulatory action to curb turmoil
00:06:19 Bernanke: subprime loans, “vulnerable” to oil
00:09:17 Bernanke: growth outlook, risks and demand
00:11:24 Bernanke: inflation risks, commodity prices
00:12:55 Bernanke: Fed mandate, acted “proactively”
00:13:51 Bernanke: “attentive” to weak dollar effect
00:14:49 Bernanke: efforts to boost market liquidity
00:16:45 Ordonez: Spain’s economy, banks and risks
00:27:48 Shirakawa: global economy, inflation pressure
00:29:14 Shirakawa: Japan economy, business sentiment
00:30:25 Shirakawa: exports, economic “resilience”
00:32:04 Shirakawa: inflation risks, growth outlook
00:33:28 Shirakawa: BOJ’s “accommodative” policy
00:34:24 Shirakawa: Japan’s financial markets
00:37:20 Trichet on commodity prices, food costs
00:44:53 Trichet: “firmly focused” on price stability
00:47:49 Trichet: credit crunch, liquidity injection
00:51:44 Trichet on cooperation between central banks
00:53:26 Questions: Trichet on Europe bank supervision
00:59:06 Shirakawa: asset prices and monetary policy
01:02:57 Ordonez discusses Spanish banking system.
01:04:23 Bernanke: assessing asset “bubbles”
01:08:01 Bernanke: need to strengthen financial system
01:16:59 Trichet, Bernanke on oil and trade “shocks”

     To watch this report now, click {1 <GO>}. For more Bloomberg audio or
video reports see {AV <GO>}. — Bloomberg Multimedia +44-20-7330-7180 (Chris
Hewitt/Sen)

Running time 01:22:33

Jun/03/2008 17:55 GMT

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Here are my notes:

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00:00:00 Bernanke: economic “strain” on markets
- financial markets in US + other industrial countries = strain
- issue: cost and availability of credit
- most discussion of problems are regarding financial instruments
- in retrospect, turmoil has been sometime in the making
- severity of stress apparent in August 2007
- several longer term developments have served as prologue

00:01:15 Bernanke: U.S. housing, credit markets
- housing boom (began in mid 1990s and picked up steam in 2000)
 - between 2000-2005, house pricing increased 60%
 - starting in 2006, boom turn to bust
 - over past two years building activity fallen in half
- broad credit boom (lenders/investors took credit risk even though risk premiums contract)
 - explosive growth of subprime credit lending over the past two years
 - responsible sumprime lending is good to achieve social goals
 - but most of 2005, 2006 subprime credit lending was not responsible lending
- emerging market growth - double edged sword
 - PRO: low prices imports help inflation
 - PRO: increased demand for US goods help offset
 - CON: however, strain on resources has increased commodity prices
- net supply of saving increased
 - rapid growth of high saving asian countries
 - high profits in oil countries
 - led to lower long term interest rates for world
 - US received most of these flows
 - which = good, provided they invested inflows wisely
 - however, it created questionable practices

00:05:13 Bernanke on regulatory action to curb turmoil
- example: new guidance on non-traditional mortgage/real estate lending
- fed reserve encouraged improvements for risk management practice (for derivatives, etc)
- despite these measures, financial companies failed to manage risk properly

00:06:19 Bernanke: subprime loans, “vulnerable” to oil
- housing boom ended because rising prices make buy house unaffordable
- this increase undermined Adjustable Rate Mortgages
- ended the preconception that you can lend more and more as your house appreciates more and more
- when this proved to fail, investors took their money out
- this forced credit rators to downgrade
- this reversed investors sentiment
- this affected Asset Back Securities and a variety of other structured products
- fortunately, most financial companies were in good financial position when it started
- some able to raise new capital
- reveals weaknesses in risk management

00:09:17 Bernanke: growth outlook, risks and demand
- functioning of financial markets have improved
- some borrowers, highly rated corporations, retain good access to credit
- some areas generally restricted — real estate
- residential construction retract
- consumer spending has held up
 - but face lots of headwinds
- business face rapidly increasing cost of materials
- overall economic growth = slow but position
- activity for current quarter should be relatively weak
- reflecting stimulus
- reduced drag from construction market
- solid demand from abroad
- improved financial markets
- UNTIL housing market (and particularly house prices) shows significant signs in stabilization, growth risk remain to downside

00:11:24 Bernanke: inflation risks, commodity prices
- inflation = high reflect rising commodity prices
- futures markets continue to predict (albeit w/ uncertainty) that commodity prices will level out
- prices of number of commodities have continued up even though dollar and expectations has remained stable
- possibility of continued rise in inflation is risk to inflation forecasts
- high headline inflation, if sustained, may lead the public to expect higher rates in future (self-fulfilling prophecy)

00:12:55 Bernanke: Fed mandate, acted “proactively”
- fed mandate => max employment with price stability
- to achieve — must support concerns of market’
- fed thinks gradual rate reduction would not have been enough

00:13:51 Bernanke: “attentive” to weak dollar effect
- FED carefully monitor FOREX markets
- FED is attentive to inflation and inflation expectations

00:14:49 Bernanke: efforts to boost market liquidity
- to improve market liquidity
- FED…
- has allowed access to central bank’s liquidity
- help promote ordily resolution of market dislocations
- has coordinated with other central banks to ensure everything is well
- takes the regulatory role to put changes in place to increase transparency and resilience

00:16:45 Ordonez: Spain’s economy, banks and risks
- Economic develpments = show some slowdown
- slowdown preceded recent turmoil (in 2005)
- slowdown eroded consumer confidence
- seen signs that credit conditions are tightening
- expect internal demand to continue weakening over 2008
- seeing sharp increases in headline inflation
- spanish economy more vulnerable to second round effects
- how firms and consumers deal with shocks
 - should not believe shocks are permanent
 - should not believe wage increase demands expect to stop inflation
- fiscal policy in Spain is sound
- Debt to GDP in Spain = ~35%
- pretty good
- Financial Sector in Spain
- impact has been limited (low exposure to main problems)
- STOPPED NOTES ON SPAIN SINCE HE ONLY TALKS ABOUT SPAIN (i’m not interested in Spain but I’m listening)
- Bottom Line: Spain was not affected and they’re alright.

00:27:48 Shirakawa: global economy, inflation pressure
- Japan’s economy
- comments on slowing growth on advanced economies
- greater inflation pressures
- difficulty balance act of sustained growth and inflation

00:29:14 Shirakawa: Japan economy, business sentiment
- japan’s economy is slowing due to deteriotation terms of trade from higher import prices
- higher commodity prices
- business sentiment = cautious
- these are expected to stay for some while
- expect to have growth in Japan near potential over 1-2 years

00:30:25 Shirakawa: exports, economic “resilience”
- Japan’s exports will continue to be robust
- Although US slow, more than offset from resource rich countries and emerging economies
- Has also offset weaker terms of trade effects
- Japan’s financial sectors are healthy

00:32:04 Shirakawa: inflation risks, growth outlook
- Core inflation = 1%-1.2% highest in almost 15 years except in 1998
- CPI inflation projection 1.0% for 2008, 2009
- Monitoring how general inflation expectation is changing
- Growth expect to the downside
- Prices expect to the upside

00:33:28 Shirakawa: BOJ’s “accommodative” policy
- Will try to ensure price stability

00:34:24 Shirakawa: Japan’s financial markets
- Japan’s Financial markets are good
- Spreads are tight
- Reason? Low exposure to structured products
- BoJ is good for three reasons (.. left for you to hear on the video)

00:37:20 Trichet on commodity prices, food costs
- capital changing investments instead of investments changing capital
- science and tech making excellent progress
- commodity prices — drivers?
 - man is accustommming itself with the limited resources and liimited capacities of disposal land
 - improving living standards has put pressure in food prices
 - china’s diet has doubled in cost
 - growth in emerging economies have also pushed up energy prices
 - also has prompted alternative fuels - which has helped increased food prices
- pressure of global commodity prices are one of many factors affecting globalization
- a very multidimensional nature of this problem

00:44:53 Trichet: “firmly focused” on price stability
- inflation = monetary phenomenon in long term
- monetary policy should stay focused on price stability
- price stability over the medium term is necessary for sustainable growth

00:47:49 Trichet: credit crunch, liquidity injection
- OMO continue to try to smooth the functioning of commercial banks
- avg level of short-term rates has remained close to the minimum rate

00:51:44 Trichet on cooperation between central banks
- intimate cooperate and discussion with US and Swiss National Bank
- could provide, thanks to fed, US dollar liquidity in Europe
- important to understand the shocks and their relations is vital

00:53:26 Questions: Trichet on Europe bank supervision
- discuss: banks NOT too big to fail, but too INTERCONNECTED to fail
- lessons to do from financial sector view + economic policy view?
- Bubbles? How to detect?
— TRICHET—
** too convoluted to understand and type up notes =\

00:59:06 Shirakawa: asset prices and monetary policy
- asset prices contain valuable information for central banks
- in retrospect Japan’s inflation was quite subdued, even during bubble
- when bubble burst, it went down even more
- “we succeeded in maintaining price stability”
- why no deflation spiral? Because BoJ was able to act as a lender of last resort

01:02:57 Ordonez discusses Spanish banking system.
- …

01:04:23 Bernanke: assessing asset “bubbles”
- the experience of asset bubbles suggests we need to look into these issues
- skeptical about pricking bubbles
- how able to attack only bubbles through?
- how will bubble pop? BOOM? nice slow pop? what are effects on other industries?
- should look into further but doubt monetary policy could be effective
- work towards increasing resilience of financial system
- reduce sensitivity of financial system
- besides supervision and regulation (capital requirements/liquidity/risk management), should look infrastructure, transparency, party risk .. and other examples mentioned
- very central question
- but also very difficult question to resolve in the future

01:08:01 Bernanke: need to strengthen financial system
- financial system needs to be strong and ready to deal with stress
- must have adequate capital, liquity, and risk management systems
- currently, FED Reserve is working with SEC
- thinking about how to go forward
- it will be necessary that all significant institutions have the appropriate strengths to survive the financial stress
—DUBLIN question person: extent of concern with weakness of dollar, implications, and increase of oil price
- weakening of dollar has had some inflation impact
- some impact on commodity prices
- main factor = global supply and demand
- many growing countries
- limitations in supply due to inadequate investment, technology, and geopolitical problems
- even though oil go above $130, dollar pretty stable during then
- everything equal, if dollar goes down, commodities go up (to cancel the effects)
- US is significant importer of Oil
- current accont and trade deficit
- extent that oil and other commodities price rise, it will have adverse effects on balance of trade and lower dollar

01:16:59 Trichet, Bernanke on oil and trade “shocks”
- how are your central banks responding to what seems to be a large ongoing trade shock?
- what are reasonable inflation objectives in short and medium term?
- TRICHET:
- no weaponary to prevent shock
- BERNANKE:
- terms of trade shock (two dimensions)
- 1. change in commodity prices relative to US goods and services
- 2. longer term trade adjustment is the unwinding appreciation of the dollar to restore global balance of current account situation
- effects on living standards, prices and inflation (on short term)

After reading this story, a few thoughts come to mind:

WHOOPS, the guys at FASB didn’t really think things through
or maybe they were persuaded by the big investment banks a little too much from their lobbying efforts…

This is gonna make financial companies less transparent when looking just at their books…|
This will give the edge to hardcore investors but will give the regular investor yet ANOTHER barrier

—–Here’s the story—–

Wire: BLOOMBERG News (BN) Date: 2008-06-01 23:01:00
Wall Street Says -2 + -2 = 4 as Liabilities Get New Bond Math
By Bradley Keoun
June 2 (Bloomberg) — Leave it to Wall Street to profit from
its own distress.
Merrill Lynch & Co., Citigroup Inc. and four other U.S.
financial companies have used an accounting rule adopted last year
to book almost $12 billion of revenue after a decline in prices of
their own bonds. The rule, intended to expand the “mark-to-
market” accounting that banks use to record profits or losses on
trading assets, allows them to report gains when market prices for
their liabilities fall.
The new math, while legal, defies common sense. Merrill, the
third-biggest U.S. securities firm, added $4 billion of revenue
during the past three quarters as the market value of its debt
fell. That was the result of higher yields demanded by investors
spooked by the New York-based company’s $37 billion of writedowns
from assets hurt by the collapse of the subprime mortgage market.
“They can post substantial gains as a result of a decline in
their own creditworthiness,” said James Cataldo, a former
director of treasury risk management for the Federal Home Loan
Bank of Boston and now an assistant professor of accounting at
Suffolk University in Boston. “It’s completely legitimate, but it
doesn’t make sense by any way we currently have of thinking of net
income.”
The paper profits have helped offset more than $160 billion
of writedowns taken by U.S. financial-services companies during
the past year. Now some investors and analysts say the winnings
are illusory and may have to be reversed.
“The piper will have to be paid eventually,” said Robert
Willens, a former Lehman Brothers Holdings Inc. accounting analyst
who left the New York-based firm earlier this year to become an
independent consultant.

Statement 159

The debate over what is known as Statement 159 adds to the
number of accounting techniques called into question as the U.S.
debt market unravels. Investors have criticized banks for booking
some writedowns in an accounting category called “other
comprehensive income” that bypasses their income statements.
Accounting rulemakers are now proposing changes to standards that
let banks use off-balance-sheet vehicles to juice earnings without
tying up precious capital.
Statement 159, formally known as the “Fair Value Option for
Financial Assets and Financial Liabilities,” was issued in
February 2007 by the Financial Accounting Standards Board, or
FASB, which sets U.S. accounting rules. It was adopted by most
large Wall Street firms in the first quarter of last year and
becomes mandatory for all U.S. companies this year, although they
have wide latitude in how to apply it, if at all.

Lobbying Effort

The rule was enacted after lobbying by New York-based
companies, led by Merrill, Morgan Stanley, Goldman Sachs Group
Inc. and Citigroup, which wrote letters to FASB arguing that it
wasn’t fair to make them mark their assets to market value if they
couldn’t also mark their liabilities.
“We do not believe it would be appropriate” to let
investors consider creditworthiness when valuing bonds if the
issuing company couldn’t do the same, wrote Matthew Schroeder,
managing director of accounting policy at Goldman, the largest
U.S. securities firm by market value, in an April 2006 letter.
Companies are allowed to decide for themselves which of their
outstanding bonds, loans and other liabilities will get mark-to-
market treatment. That’s an unprecedented degree of leeway, said
Willens, who is also an adjunct professor at Columbia University
in New York.
“It’s kind of a dumb rule,” Willens said. “In the entire
panoply of accounting, this is the most flexible and elective and
optional rule that we have.”

The Fed Objects

Here’s how it works, according to Richard Bove, an analyst at
New York-based Ladenburg Thalmann & Co. A company decides to
designate $100 million of its subordinated bonds as subject to
mark-to-market accounting. The price of the bonds drops to 80
cents on the dollar from 100 cents. So the firm books $20 million
on the “presumed savings that you have on your liabilities,”
Bove said.
“In the real world you didn’t save a dime,” he said. “You
still owe the $100 million. It’s another one of these accounting
rules that basically takes you further and further away from
reality.”
The Federal Reserve, Federal Deposit Insurance Corp., Office
of the Comptroller of the Currency and Office of Thrift
Supervision objected to the rule before its passage, saying in a
joint 2006 letter to the FASB that it would “have the contrary
effect” of increasing a bank’s net worth at the same time its
“financial condition is deteriorating.”

Split at FASB

The regulators remain so skeptical that they refuse to let
banks apply the phantom revenue toward minimum capital
requirements, according to reporting rules posted on the Web site
of the Federal Financial Institutions Examination Council. Deborah
Lagomarsino, a Washington-based spokeswoman for the Federal
Reserve, declined to comment.
Not even the FASB was united on the new standard. Two of its
seven board members — Thomas Linsmeier and Donald Young — voted
against it, according to the February 2007 statement. Linsmeier
said the rule “will provide an opportunity for entities to report
significantly less earnings volatility than they are exposed to,”
according to the statement.
The FASB tried to limit abuses by forcing companies to
designate their “fair value” liabilities when they adopt the new
standard. Subsequently, they can’t change their minds. Liabilities
added after adoption can only be designated at inception.
“The statement was thoroughly discussed with users and
preparers” in advance of its publication, said Neal McGarity, a
spokesman for Norwalk, Connecticut-based FASB. A March survey by
the CFA Institute, a Charlottesville, Virginia-based group that
administers a financial-analyst designation program, showed that
74 percent of investors believe the standard “has improved market
integrity,” he said.

Merrill’s Liabilities

Merrill designated about $166 billion of liabilities, or 17
percent of its total, as fair-value instruments subject to mark-
to-market accounting at the end of 2007, according to its annual
report. Included in the amount were $76.3 billion of long-term
borrowings and $89.7 billion of payables under securities-
financing transactions.
Prices for the firm’s bonds tumbled over the past year: Its
floating-rate notes due in January 2015 are trading at about 87
cents on the dollar, compared with about 100 cents last June.
Merrill has said its gains from the liabilities don’t add to
true earnings power. In a spreadsheet posted on its Web site,
Merrill says that investors who want a “more meaningful period-
to-period comparison” should exclude the $2.1 billion of revenue
recorded in the first quarter.
Merrill spokeswoman Jessica Oppenheim declined to comment.
The company owns a passive 20 percent stake in Bloomberg LP, the
parent of Bloomberg News.

Lehman to Goldman

Lehman, the fourth-biggest securities firm, has reported $1.9
billion of gains related to a widening of its own bond spreads.
Citigroup, the largest U.S. bank by assets, has booked $1.7
billion; Morgan Stanley $1.7 billion; JPMorgan Chase & Co., the
third-biggest bank, $1.7 billion; and Goldman Sachs $550 million.
There may be more to come, JPMorgan analyst Kenneth
Worthington wrote in a May 28 report. Lehman may book $325 million
for the second fiscal quarter ended in May, and Morgan Stanley,
the second-biggest U.S. securities firm, may report $470 million,
Worthington estimates.
Spokesmen for Lehman, Morgan Stanley, Goldman, Citigroup and
JPMorgan in New York declined to comment.

`Shell Game’

“No one’s going out in the market and actually retiring this So far, most banks’ writedowns are “unrealized,” meaning
they’ve been unwilling or unable to liquidate distressed assets.
If prices reversed, the banks would record mark-to-market profits.
The same is true for the liabilities. Companies can’t
“realize” the mark-to-market gains on their debt unless they buy
it back at the discounted price. They’re unlikely to do so,
because the deterioration in creditworthiness means they’d have to
replace the debt with higher-cost borrowings, Willens said.
debt,” Willens said. “It’s a shell game.”
David Moser, Merrill’s managing director for accounting
policy, acknowledged that concern in an April 10, 2006, letter to
the FASB.
“It seems counterintuitive that when a company’s credit
spreads are widening, it would recognize a gain in earnings,”
Moser wrote. “The amounts are typically not realizable and
therefore less relevant.”
He nevertheless supported the new accounting standard because
it “mitigates some of the uneconomic volatility in earnings”
that results from marking assets to market without doing the same
for liabilities.

Market Reversal

Bear Stearns Cos., which adopted the new standard this year,
reported a $305 million windfall in the fiscal first quarter,
which ended in February, as bond spreads widened on concerns the
company might face a funding shortage. Then in March, after the
New York-based securities firm was forced to sell itself to
JPMorgan, Bear Stearns’s bond spreads tightened, resulting in a
$372 million loss, according to a regulatory filing in April.
Worthington estimates that similar tightening of bond spreads
at Merrill, Morgan Stanley, Lehman and Goldman Sachs may cause
them to reverse $5.96 billion of revenue by the end of the year.
“It could very well hurt earnings,” said Jeffery Harte, an
analyst at Sandler O’Neill & Partners LP in Chicago, in an
interview. On the flip side, a recovery may result in asset write-
ups, he said.
Standard & Poor’s, which relies on banks’ financial
statements to issue credit ratings, said in April 2006 that the
new rule might lead to “diminished analytical transparency.”
“Equity may be overstated as a result of these illusory
gains that may never be realized, hindering the analysis of the
equity cushion to absorb losses,” S&P Chief Accountant Neri
Bukspan wrote in a letter to the FASB.
If and when the “illusory” revenue is reversed as losses,
the banks and brokers may have to work harder to convince
investors to ignore them, Willens said.

For related news:
Merrill earnings: MER US <Equity> TCNI ERN <GO>
Top finance: FTOP <GO>
Credit Market in Turmoil: EXTRA <GO>

–Editors: Robert Friedman, Tim Quinson.

To contact the reporter on this story:
Bradley Keoun in New York at +1-212-617-2310 or
bkeoun@bloomberg.net.

To contact the editor responsible for this story:
Otis Bilodeau at +1-212-617-3921 or
obilodeau@bloomberg.net.
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Copyright (c) 2008, Bloomberg, L. P.

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