Financial Services Update

November 29, 2010

Authored by: Matt Jessee

Irish Bailout Finalized Sunday

On Sunday, Ireland finalized plans for a bailout from the European Union (EU) and International Monetary Fund (IMF), after approval from EU finance ministers. European leaders hoped that such a measure would be a firewall against further bailouts in other Eurozone countries, but concern has grown over the past week that Portugal and Spain could also need such loans. The rescue package for Ireland is estimated to be worth tens of billions of dollars. Individual European nations have also announced their own loans to Ireland. Britain is putting together a $11.5 billion package and Sweden’s prime minister announced a $1.5 billion loan on Thursday. Irish Prime Minister Brian Cowen last week announced a four-year “austerity plan” designed to cut spending and increase taxes. The plan would save $13.4 billion through welfare cuts and raise $6.7 billion through higher taxes. The plan’s spending cuts include reductions in the minimum wage and public-sector pay and fee increases in the VAT, utilities, education tuition, and income taxes.

Car Czar Announces Reduction in Government Oversight of GM

On Friday, the Obama administration’s “Car Czar” Ron Bloom said the government will reduce its oversight of General Motors (GM) as the government sells more of its GM stock. Since GM emerged from bankruptcy sixteen months ago, it has provided the Treasury with “regular, detailed” briefings on its financial condition. Bloom and other Administration officials took an active role during the run-up to GM’s initial public stock offering Thursday, helping to determine how much stock to sell and what price the underwriters should pay. Bloom and others will also attend GM’s first annual meeting as a public company and will vote the government’s shares on key issues. Bloom denied that the government exerted any pressure and pushed for an early IPO. However, Bloom noted that the size of the deal, the pricing and the fees to be paid to underwriters were in the government’s purview. The government ultimately sold more shares than it previously had planned — 358 million of its 912 million shares — at $33 a share. The government will need to sell its remaining shares at an average price of $52.80 to break even.

Geithner Opposes Reduction in Fed Mandate and Extension of Bush Tax Cuts

November’s election results have empowered Congressional Republicans to assert new found authority, leading Republicans to increase their criticisms of the Federal Reserve’s plan, known as “quantitative easing,” to buy $600 billion in assets, saying it would fuel inflation and asset bubbles. Republicans have cited the Fed’s dual mandate to pursue full employment as well as to promote price stability as the cause of the problem. On Tuesday, in reaction to Republican attacks, U.S. Treasury Secretary Timothy Geithner said the Obama administration would oppose any effort to strip the Federal Reserve of its mandate to pursue full employment, saying such attacks by Republicans would politicize the central bank. While Geithner also declined to say what compromise the Obama administration would be willing to make on extending the Bush income tax cuts, he did say he opposed making permanent the tax reductions for those making more than $250,000.

Revised GDP Shows Stronger Growth in Third Quarter

On Tuesday, the Commerce Department released its revised growth rate for the economy during the third quarter. While the Department’s original growth estimate was 2 percent, its recent revision put the figure at 2.5 percent. The Department attributed its upward revision to more consumer spending and rising overseas sales of American-made products, but the modest improvement was not enough to drive down the jobless rate which remained unchanged at 9.6 percent.

Investigation into Hedge Funds’ Insider Trading

On Wednesday, the widening criminal probe of hedge fund insider trading led to the arrest of Don Chu, an analyst at Primary Global Research. Sources indicated that this first arrest in the wide ranging probe was made possible by Chu’s ties to a hedge fund manager involved in the Galleon case who pleaded guilty and is helping the government. Chu worked at a so-called “expert network firm” and allegedly provided a hedge fund client with inside information about earnings-related data prior to a company’s official earnings release. Leading the investigative charge is Preet Bharara, U.S. Attorney for the Southern District of New York. Last year, Bharara’s office charged hedge fund investor Raj Rajaratnam of Galleon Group with insider trading. The high-profile case has resulted in charges against 23 people and 14 guilty pleas.  Rajaratnam pleaded not guilty and will face trial in 2011.

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If you have any questions regarding any of these issues, plesae contact:

Matt Jessee, Policy Advisor
1 314 259 2463