Finance Blog number 1

U.K. consumer confidence held at the highest level since April 2008 as evidence mounted that Britain is emerging from recession, GfK NOP said.

An index of sentiment was unchanged in July at minus 25, the market researcher said in an e-mailed statement today in London. The reading is up from minus 39 a year earlier.

The report adds to signs that the worst slump in a generation is easing after Nationwide Building Society said house prices rose for a third month while mortgage approvals increased. Bank of England policy maker Andrew Sentance said last week the bank may pause its plan to stoke growth by buying bonds if forecasts next month point to an improvement.

“Consumers remain tentative and are waiting to see what happens,” Rachael Joy, an analyst at GfK, said in the statement.

The group’s indexes on shoppers’ personal financial situation over the last 12 months and in the coming year fell one point. Gauges on the general economic situation in the last year and on the climate for major purchases rose one point cash advance loans. A measure of the general outlook for the next 12 months showed no change. GfK questioned 2,001 people from July 3 to July 12.

The average cost of a home rose 1.3 percent to 158,871 pounds ($262,000) in July, Nationwide said yesterday. Prices are down 6.2 percent from a year earlier, the smallest annual drop since May 2008.

U.K. mortgage approvals climbed to a 14-month high of 47,584 in June, the Bank of England said July 29.

Sentance said policy makers will decide whether to extend the plan to print money and buy bonds after they assess new quarterly forecasts on growth and inflation. They’ve spent 125 billion pounds of the 150 billion pounds authorized by the Treasury.

The bank will announce its next decision on the asset- purchase plan and the key interest rate on Aug. 6. All 37 economists in a Bloomberg News survey forecast no change in the benchmark rate from the current 0.5 percent.

Source

European retail sales fell for a 14th month in July as job cuts hurt household spending, the Bloomberg purchasing managers index showed.

The measure of euro-area sales declined to 47.3 from 47.5 in June when adjusted for seasonal swings. It has remained below the 50 mark, indicating contraction, since June of last year. The index is based on a survey of more than 1,000 executives compiled for Bloomberg LP by Markit Economics.

More than 3 million people have joined the euro region’s jobless rolls in the last year, and the Organization for Economic Cooperation and Development expects the unemployment rate to reach 12 percent in 2010, eroding spending power. Most Europeans think the worst of the crisis is still to come and a third of workers are “very concerned” about losing their jobs, a survey published on July 24 by the European Commission showed.

“The European economies are still in a fragile position,” said Howard Archer, chief European economist at IHS Global Insight in London. “Once the summer sales are out of the way, and if later this year inflation starts creeping up a little bit, and if unemployment is still rising, which I’m sure it will be, you’ve got to wonder how robust consumer spending will be.”

The retail-sales measure for Germany, Europe’s largest economy, rose to 49.8 from 46, while sales in France and Italy fell more steeply than the previous month, Markit said. Employment in the euro region’s retail industry contracted for a 16th month, the survey showed.

1,340 Jobs

Metro AG, Germany’s largest retailer, said on July 17 that it plans to eliminate 1,340 jobs at its domestic Cash & Carry wholesale unit to improve profitability business card. Adidas AG, the world’s second-largest sporting-goods maker, said in May it would cut more than 1,000 jobs to save money.

The retail-sales report contrasts with a series of industry and consumer surveys in the last month indicating the worst of the recession may be over. Italy’s consumer confidence increased to the highest in almost two years in July, data showed on July 28, and German business sentiment rose for a fourth month.

European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said on July 24 that it was too early to conclude from data that the recovery was near.

“For a few months now, we’ve been seeing positive data and not so positive data,” he told reporters. “We can’t yet count on the change in trend being lasting.”

Amid the seasonal discount period, sales of clothing rose, on an unadjusted basis, as the measure increased to 50.3 in July from 39.7. Gross margins across the industry fell further, to 41.6 on an adjusted basis from 42.1 in June, the survey showed.

Gross Margins

Luxottica SpA, the world’s biggest maker of eyeglasses, said on July 28 that second-quarter net income fell 13 percent to 115.7 million euros ($163 million). It said the business conditions improved in the first half.

Europe’s economy will return to growth in mid-2010 after contracting about 4.6 percent this year, according to the European Central Bank. The ECB has cut its benchmark interest rate to a record low of 1 percent and started buying as much as 60 billion euros of covered bonds to stimulate bank lending.

Source

Federal Reserve Chairman Ben S. Bernanke’s assets tumbled by as much as 29 percent last year as declining stocks eroded the value of his annuities and other investments, according to his annual financial disclosure forms.

The filings, released by the Fed yesterday, show Bernanke and his family owned $852,000 to $1.9 million in financial assets in 2008, down from $1.2 million to $2.5 million in 2007. The forms, published by the Office of Government Ethics, require officials to report only a range in the value of holdings.

The Fed chairman’s two largest assets in both years were TIAA Traditional, recorded as an annuity, and CREF Stock Large Cap Blend, a variable annuity. While both were valued at $500,001 to $1 million in 2007, the CREF stock fund fell to a range of $250,001 to $500,000 last year, according to the documents.

A retirement account invested in high-yield bonds at BlackRock Inc. held its value in a range of $15,001 to $50,000, and a BlackRock large-cap fund remained in the $1,001 to $15,000 range.

The funds were run by Merrill Lynch & Co. when Bernanke invested in them. Merrill merged them with BlackRock, and the funds were renamed, in 2007. As widely held mutual funds, they are exempt from regulations barring the Fed chairman, and other members of the Fed board, from owning stock in institutions involved in banking or finance cheap payday loan.

The central bank hired BlackRock last year to manage billions of dollars in assets it acquired in the rescue of Bear Stearns Cos. and the bailout of American International Group Inc.

Canadian Bonds

The disclosure forms show Bernanke sold most or all of his holdings in Canadian Treasury bonds. They were valued in 2008 at between zero and $1,001. In 2007 he reported their worth at between $50,001 and $100,000.

Bernanke, 55, who succeeded Alan Greenspan as chairman in 2006, received a salary of $191,300 in 2008, an amount set by Congress.

A former economics professor at Princeton University in New Jersey, Bernanke received between $50,001 and $100,000 in royalties for a textbook he wrote, published by Pearson, Inc. The range was unchanged from his 2007 filing.

A second textbook, published by McGraw-Hill Cos., earned Bernanke between $100,001 and $1,000,000 in royalties, up from $50,001 to $100,000 in 2007. The royalties were his biggest sources of income after his salary.

Bernanke reported no liabilities, individual stocks, gifts or travel expenses in 2008.

Source

The U.K. economy shrank more than twice as much as economists forecast in the second quarter as a record annual slump in construction, banking and business services kept Britain mired in the recession.

Gross domestic product contracted 0.8 percent from the first quarter, the Office for National Statistics said today in London. Economists predicted a 0.3 percent drop, according to the median of 32 forecasts in a Bloomberg News survey. From a year earlier, the economy shrank 5.6 percent, the most since records began in 1955.

Prime Minister Gordon Brown’s Labour Party trails the opposition Conservatives in polls less than a year before an election as the recession drives up unemployment. Bank of England policy maker Andrew Sentance said yesterday that the British economy may start to pick up in the second half of 2009.

“It’s a very sizeable recession indeed,” said George Buckley, chief U.K. economist at Deutsche Bank AG in London. “I think we’ve seen the worst, but what will the post-recession environment look like? There is a risk in the medium term that growth will be weaker than we’re used to.”

The pound dropped as much as 0.5 percent against the dollar after the report. The U.K. currency traded at $1.6466 as of 12:20 p.m. in London.

Today’s report is the first among the Group of Seven nations for the second quarter. The International Monetary Fund forecasts the U.K. will contract 4.2 percent this year, compared with 4.8 percent in the euro area and 2.6 percent in the U.S.

‘Return to Growth’

Brown said today that the Group of 20 nations need to take steps to revive the world economy.

“We are at a point where banks have been stabilized, but we don’t yet have a strategy for a return to growth,” Brown said at the opening of a meeting in his office in London.

Brown, who must call a general election by June, has trailed David Cameron’s Conservatives in every opinion poll this year. A July 19 survey by Ipsos-Mori Ltd. showed the ruling party lagging the biggest opposition party by 16 points.

“Today’s figures are fresh evidence of the sheer scale of the global downturn we’re fighting,” said Liam Byrne, a junior Treasury minister payday loans online. “But they also show the pace of slowdown is easing compared to the winter, which is why we remain cautious but confident that growth will return towards the end of the year.”

The data show the economy has now shrunk by 5.7 percent since the recession began last year. That compares with a total 6 percent slump in the recession period that ended in 1981, the statistics office said.

Annual Decline

Construction fell 2.2 percent on the quarter and 14.7 percent from a year earlier, which was the biggest annual drop since records began in 1948. Business services and finance slumped 0.7 percent on the quarter and had a record annual decline of 4.4 percent, the statistics office said.

While the government has committed as much as 1.4 trillion pounds ($2.3 trillion) to revive lending and rescue banks such as Royal Bank of Scotland Group Plc, it hasn’t stopped joblessness from increasing. Unemployment in the quarter through May increased by 281,000, the most since records began in 1971. The jobless-benefit roll has reached 1.56 million, the most in 12 years.

Policy makers unanimously voted on July 9 to keep the key interest rate at a record low of 0.5 percent and said they will review the size of their 125 billion-pound plan to print money in August, when they publish forecasts on growth and inflation.

Quarterly Predictions

The bank will “make a judgment about whether we need to add further to that stimulus” once the new quarterly predictions are available, Sentance said yesterday in an interview. “The economy is already benefiting from a big monetary stimulus as we go into the second half of this year and next year.”

Former policy maker David Blanchflower said in an interview on Bloomberg Television yesterday that the economy may not be through the worst, and the central bank risks stifling the recovery were it to raise rates or reverse the bond-purchase program prematurely.

“My worry is that the tightening comes too soon and people kill off any recovery that’s coming,” he said. “It’s very early days to say that you know the endgame is even in sight.”

Source

Spain’s unemployment rate rose to 17.9 percent in the second quarter, more than twice the European Union average and the most in a decade, as companies cut payrolls to weather the deepest recession since World War II.

The number of unemployed jumped by 126,700 to 4.14 million people from the previous three months, the Madrid-based National Statistics Institute said today in an e-mailed statement. From a year earlier, 1.76 million people have lost their jobs.

Spain accounts for more than half of the past year’s rise in euro-region unemployment. The economy, suffering from the crash of its once-booming housing market, has more people out of work than Germany, which has twice its population. The European Commission expects the recession to drag on longer in Spain than elsewhere, pushing the jobless rate to 20.5 percent next year.

“The worst is probably passed after this second-quarter data in terms of the rate of increase,” said Dominic Bryant, an economist at BNP Paribas in London. He forecasts unemployment will peak at 22 percent in late 2010 and 2012 is “the earliest you could hope to see a marked improvement.”

The government forecast in June that unemployment would be 17.9 percent this year and peak at 18.9 percent in 2010.

Shedding Jobs

ArcelorMittal, the world’s largest steelmaker, said on June 3 that it may cut working hours at its Spanish unit by as much as 40 percent, idling part of the workforce for the rest of the year life insurance companies. Mecalux SA, Spain’s largest maker of warehouse equipment, said in May it was reducing the working hours of almost 1,000 employees and Nicolas Correa SA, a milling-machine maker, also announced job cuts on July 20.

Almost 30 percent of all unemployed people in the euro area live in Spain, Eurostat says. More than half of Spaniards think their country’s biggest problem is unemployment, a poll by the state-run Center for Sociological Research showed.

The crisis has had a political price. Prime Minister Jose Luis Rodriguez Zapatero’s Socialist Party, reelected last year on pledges of full employment, lost June’s European elections as the opposition People’s Party won 42 percent of the vote.

Spain, riding the wave of a construction boom, created about half the new jobs in the euro region in the five years through 2006. Still, at the height of the boom, about a third of all job contracts were temporary, the most in the 30 countries of the Organization for Economic Cooperation and Development, making it easier for workers to be let go as the crisis hit.

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The U.K.’s house-price slump will persist until 2012 and hurt consumer spending, the National Institute of Economic and Social Research said.

Home values will resume their decline because recent gains were driven by a lack of available homes and the number of mortgages remains 65 percent lower than before the financial crisis, the London-based institute said today. It also predicts gross domestic product will keep falling until the final quarter of this year.

“There has been talk of stabilization and some recovery in the housing market, but we don’t think this is the case,” Simon Kirby, an economist at Niesr, told reporters yesterday. “We only see growth in the housing market returning in 2012.”

The Bank of England said this week that mortgage lending may strengthen in coming months, while Nationwide Building Society says that house prices increased in June. The economy has yet to emerge from recession after contracting the most since 1958 in the first quarter.

“The temporary rise in prices is probably the result of limited supply,” the report said. The institute’s clients include the Treasury and the Bank of England.

Falling house prices will hurt consumer spending growth in the next two years, Niesr said. Together with rising unemployment, this will encourage an increase in the household savings ratio to the highest level since 1997 next year, the institute predicted fast cash loans.

Budget Deficit

Government borrowing will peak at 12 percent of GDP in the fiscal year ending March 2010, or 165.7 billion pounds ($273 billion), before shrinking to 7.5 percent of GDP in 2013-14, Niesr said.

GDP slumped 2.4 percent in the first quarter. Niesr estimates that it fell 0.4 percent in the second quarter. The median forecast of 32 economists in a Bloomberg News survey is for a 0.3 percent drop. The Office for National Statistics will release the data on July 24.

The economy will grow again in the fourth quarter, by 0.5 percent, the institute said.

“The recovery will be weak,” Kirby said. “We see continued contraction in consumer spending and business investment.”

Bank of England policy makers are spending 125 billion pounds of newly printed money on assets to help bolster the economy. Minutes showing how they voted at the July 9 meeting, when they decided to maintain the size of the current buying program, will be released today at 9:30 a.m. in London.

Source

Australia’s benchmark interest rate at a half-century low of 3 percent is helping drive economic growth amid signs domestic demand is more resilient than expected, the central bank said.

“Members judged the current stance of monetary policy to be consistent with fostering sustainable growth and low inflation,” while still giving the bank scope to cut borrowing costs “at a later stage” if needed, policy makers said in minutes of their July 7 meeting released in Sydney today.

The full impact of Reserve Bank of Australia Governor Glenn Stevens’ decision to slash the overnight cash rate target by a record 4.25 percentage points between September and April will “still be coming through for some time,” the minutes said. Australia’s economy has survived the most dangerous phase of the global recession and will expand faster than the government forecasts, research company Access Economics said today.

“The Reserve Bank seems to be tentatively saying the worst is over,” said Annette Beacher, senior fixed-income strategist at TD Securities Ltd. in Singapore. “I got the impression that if they are going to ease, that would be at a later stage.”

The Australian dollar traded at 81.33 U.S. cents at 2:50 p.m. in Sydney from 81.22 cents before the minutes were released. The two-year government bond yield was unchanged at 4.02 percent.

Rate Unchanged

Policy makers left the benchmark rate unchanged two weeks ago for a third month after a report showed gross domestic product unexpectedly grew 0.4 percent in the three months through March 31 after shrinking 0.6 percent in the fourth quarter. Economists had forecast a 0.2 percent contraction.

“The early and substantial easing of both monetary and fiscal policy had been effective in supporting demand, which, if anything, had been more resilient than expected,” today’s minutes said.

Further signs that the economy isn’t as weak as expected include “surprisingly strong” exports, helped by demand from China, reports that some mining companies and ports are “again operating close to capacity,” rising household spending, car sales and demand for homes, the minutes said.

The number of cars sold in June rose 5.7 percent, the third month of gains, to the highest level since August 2008, a government report showed today.

Global Economy

There are “further signs of stabilization in the world economy,” the central bank said today car insurance quotes. “In Japan, recent data had been more encouraging than they had been for some time.”

The Bank of Japan last week raised its economic assessment for a third month, citing an increase in government spending and rebounds in factory output and exports. The economy has “stopped worsening,” the BOJ said, while adding that the economic outlook is “uncertain.”

China’s economy grew a stronger-than-expected 7.9 percent in the second quarter from a year earlier, a report showed last week. Singapore’s GDP also expanded faster than anticipated.

For Australia, “the outlook remained for a gradual recovery to begin later in the year,” the Reserve Bank said.

While the labor market is likely to remain “soft for some time,” there are signs employers are trying to limit job cuts.

“The current inflation outlook afforded scope for some further easing of monetary policy, if that were to be needed to give further support to demand at a later stage,” the bank said.

Consumer Prices

Consumer prices probably rose 1.5 percent in the second quarter from a year earlier, slowing from an annual 2.5 percent gain in the first quarter, according to the median estimate of 19 economists surveyed by Bloomberg. The consumer price index will be released at 11:30 a.m. in Sydney tomorrow.

The economy will expand 0.4 percent in the 12 months through June 2010, compared with the Treasury department’s prediction of a 0.5 percent contraction, Chris Richardson, head of Canberra-based Access Economics said in a report today. Three months ago, Access forecast a 0.2 percent decline.

“Australia made it through the most dangerous phase of the global recession with only collateral damage,” Richardson said.

Investors have increased bets Australia’s benchmark interest rate will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.

Traders forecast the key rate will be 76 basis points higher in a year, the index showed at 2:43 p.m. in Sydney. At the start of June, they forecast 3 basis points of reductions. A basis point is 0.01 percentage point.

“We appear to be getting to the bottom end of the interest rate cycle,” Westpac Banking Corp. Chief Executive Officer Gail Kelly said at a business lunch in Sydney today.

Source

Gill Marcus, chairwoman of Barclays Plc’s Absa Group Ltd., will become South Africa’s central bank governor, succeeding Tito Mboweni, who has been criticized by labor unions for not cutting interest rates faster.

Marcus, 59, a former deputy governor of the South African Reserve Bank, will take over the post Nov. 9 after Mboweni indicated that he wanted to leave the position, South Africa’s President Jacob Zuma told reporters in Pretoria today.

The departure of Mboweni, 50, may raise concerns about the influence exerted by labor unions, who had called for him to be replaced. The Congress of South African Trade Unions, the federation that backed Zuma’s bid to become leader of the ANC, wants the government’s inflation- targeting policy to be reviewed.

“The appointment of Gill Marcus, who is not exactly unknown to the markets, will go some way in reassuring investors of the continuity of policy,” said Razia Khan, head of Africa economic research at Standard Chartered Plc, in London. “But there are question marks. The left has wanted Tito Mboweni to go. That they exert some influence can’t be dismissed.”

Mboweni, who was appointed as governor in August 1999, has been criticized by unions and businesses over monetary policy and for failing to act to weaken the rand as the economy entered its first recession in 17 years.

No Tears

“We didn’t have the best of relationships with Mboweni. Its obvious we won’t shed any tears,” Zwelinzima Vavi, the general secretary of Cosatu, said in a telephone interview. “We are obviously great enemies of inflation targeting, which can only be implemented through high interest rates. We think there will be a change in monetary policy.”

Cosatu hopes that Marcus’s appointment “will mark a change of policy by the Reserve Bank to one more geared to economic growth rather than a rigid obsession with inflation targeting,” federation spokesman Patrick Craven said in an interview.

The South African Communist Party, which together with Cosatu, is part of a political alliance with the ANC, welcomed the appointment.

“The SACP hopes this appointment will bring about a breath of fresh air,” the party said in an e-mailed statement. “The SACP is concerned about interest rates being used as a blunt instrument to control inflation and their impact on the value of the currency, investment, employment and growth.”

Target Range

Under Mboweni, the central bank adopted a target range for inflation of 3 percent to 6 percent. He raised the benchmark interest rate 10 times to 12 percent between June 2006 and June 2008, as surging food and oil prices kept inflation above the target. Since then, the bank has cut the rate five times to 7.5 percent as economic growth plunged and inflation eased.

Mboweni left rates unchanged on June 25 when 21 out of 24 economists surveyed by Bloomberg predicted he would lower it by half a percentage point. The governor cited rising energy costs as the main risk to inflation, which slowed to 8 percent in May.

Marcus today declined to comment on whether she will stick to the inflation-targeting mandate, adding that it was “too early” to be asked questions on that payday loans. She said she will follow a policy of “engagement.”

“Markets will be wary because she is considered an insider of the ANC,” said Peter Attard Montalto, an emerging markets analyst at Nomura International Plc in London.

‘Substantial loss’

Marcus left the central bank in 2004 and was appointed by Absa, South Africa’s largest retail bank, in March 2007.

“That’s quite a substantial loss for Absa but quite a gain for the country,” Jacques Schindehutte, the company’s finance director, said in an interview.

Her experience in business may dissuade her from making policy changes, Graeme Korner, a fund manager at Nedbank Ltd.’s BoE Private Clients said in an interview.

The fact that “she has sat on the other side of the fence gives her good perspective,” he said. “I don’t think the markets are going to be too concerned. In fact this may be quite a comfort.”

The rand posted its first gain against the dollar in three weeks last week, appreciating 2.3 percent to 8.0519 to the dollar. Government bonds advanced in the week, with the benchmark 13.5 percent security due September 2015 yielding 8.56 percent, 10 basis points lower than its close on July 10. Yields move inversely to bond prices.

Exile in London

Marcus sat on the ANC’s National Executive Committee, the party’s top decision-making body, between 1991 and 1999, before moving to the Reserve Bank. She has also served as deputy minister of finance and spent time in exile in London during apartheid.

Economists and unions expected the Reserve Bank to continue cutting interest rates in June as Africa’s biggest economy shrank an annualized 6.4 percent in the first quarter, the most in almost 25 years. The country shed 179,000 non-farm jobs in the same period, pushing the unemployment rate to 23.5 percent, the highest of 62 countries tracked by Bloomberg.

“In terms of the Constitution, the primary objective of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable growth,” Zuma said today. “The Reserve Bank must perform its functions independently and without fear, favor or prejudice.”

Military Training

Mboweni has also been criticized for not doing more to weaken the rand, which has surged 18 percent against the dollar this year, the second-best performer of 16 major currencies tracked by Bloomberg after Brazil’s real. A stronger rand cuts profits for the country’s export industries including gold and platinum mining.

Mboweni spent a decade in exile, undergoing military training in Angola before moving to the ANC’s headquarters in Zambia’s capital Lusaka in the 1980s to research economic policy.

After the ban on the ANC was lifted by the apartheid government in 1990, he joined the party’s economic policy unit in Johannesburg, working with Trevor Manuel, who became finance minister in 1996, and Maria Ramos, now chief executive officer of Absa.

He declined to comment on his future plans.

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Norman Chan, named today as the new head of the Hong Kong Monetary Authority, vowed to maintain the local currency’s peg to the U.S. dollar, while expanding business in Chinese yuan in the city.

Chan, who will replace Joseph Yam on Oct. 1, will be paid 32 percent less than his predecessor, taking home HK$6 million ($774,179) a year. That’s more than three times the salary of U.S. Federal Reserve Chairman Ben S. Bernanke last year.

The 54-year-old Chan takes over the city’s de-facto central bank at a time when the yuan’s 21 percent appreciation over the past four years against the greenback is testing the Hong Kong dollar’s 26-year-old fixed exchange rate. The authority is also considering tougher regulation of financial products after a scandal over the sale of securities linked to the failed Lehman Brothers Holdings Inc.

“There’ll be no change near-term to the peg,” said Callum Henderson, Singapore-based head of currency strategy at Standard Chartered Plc. “It’s served Hong Kong very well and will continue to do so for the foreseeable future. Once the yuan is fully convertible Hong Kong can think about an adjustment to the policy but that’s still many years away.”

Chan, a former deputy at the central bank who oversaw reserves management and international affairs, will return after four years at the office of Hong Kong’s leader, Donald Tsang. Yam, who will step down on Oct. 1, will hand over management of a $207 billion currency reserve pool, the world’s eighth largest.

“It’s crucial that the HKMA strikes to enhance the competitiveness of Hong Kong’s financial services sector,” Chan told a press briefing. “In this regard the development and deepening of yuan business in Hong Kong is an important aspect. I shall use my best endeavors to maintain Hong Kong’s position as a premier financial center in Asia.”

The Peg

Chan joined the civil service in 1976 after graduating from the Chinese University of Hong Kong with a bachelor’s degree in sociology. He was an executive director of the HKMA when it was established with Yam at the helm in 1993 and became deputy chief executive in 1996.

Yam, 60, is Asia’s longest-serving central bank chief, guiding the HKMA through Hong Kong’s final years as a British colony into its first 12 years of Chinese sovereignty. He started his career as a government statistician in 1971.

As head of the HKMA, Yam consistently backed the Hong Kong dollar’s peg to the U.S. dollar. The city’s currency was kept at HK$7.8 versus the greenback since 1983 and from 2005 was allowed to trade in a range of HK$7.75 to HK$7.85. It traded at HK$7.7501 today. Chan told a press briefing he had no plan to change the peg.

Financial Crisis

Yam steered Hong Kong through the late 1990s Asian financial crisis, responding to a speculative attack on the Hong Kong dollar with $15 billion in stock purchases, and other troubles including the outbreak of SARS in 2003.

The HKMA has injected more than HK$195 billion this year to maintain the currency peg as funds pour into the city. The aggregate balance, a measure of liquidity in the banking system, climbed to a record HK$257 billion on May 19 faxless payday loan.

Hong Kong may widen the local currency’s trading band versus the U.S. dollar in the next one to two years, enabling it to appreciate as China’s economic growth lures investment to the city, according to ING Groep NV.

“They’ll realize they’re fighting a battle that’s really leaning against a structural wind, not just a cyclical wind,” said Tim Condon, chief Asia economist at ING in Singapore. “They’ll determine that that’s not a fruitful activity and respond like in May 2005, when they first widened the band.”

Hang Seng

Hong Kong has a “distinct advantage” in helping China become more important in the global financial system, Yam said June 18. The People’s Bank of China approved on July 2 a trial for five Chinese cities to use yuan for settling cross-border trade with Hong Kong, encouraging companies to replace the U.S. dollar in their transactions.

HSBC Holdings Plc and Bank of East Asia Ltd. won approval in May to be the first foreign banks to sell yuan bonds in Hong Kong from Chinese regulators. Yam said July 9 he hopes to have some of the city’s stocks denominated in China’s currency, according to The Wall Street Journal.

Hong Kong’s Hang Seng Index of shares has underperformed this year, rising 31 percent, compared with a 75 percent jump in the Shanghai composite index. The city’s gross domestic product fell 4.3 percent in the first quarter from the fourth, the most since at least 1990, official figures show.

Lehman Collapse

A blot on Yam’s legacy was a scandal involving so-called mini-bonds backed by Lehman. Investors, many of them elderly, say the bonds were marketed by banks as safe investments when in fact they were structured products that plunged in value after Lehman declared bankruptcy late in 2008. Critics pointed the blame largely at what they called lax regulation.

Regulators should “strike a delicate balance” between protecting investor interests and developing different kinds of financial products, Chan told the press briefing.

Yam’s compensation attracted criticism. In 2008, he received HK$11.9 million, compared with Fed Chairman Bernanke’s $191,300 and Bank of England Governor Mervyn King’s 283,564 pounds ($462,000) in 2007. Central Banking Publications described Yam last year as the highest-paid central banker in the world.

Albert Ho, a lawmaker and Chairman of the Democratic Party, said Chan’s appointment lacks “credibility,” Radio Television Hong Kong reported on its Web site. Chan was picked by a three- man committee consisted of former HSBC Holdings Plc chairman John Bond and Li & Fung Ltd.’s founder Victor Fung, Hong Kong’s Financial Secretary John Tsang told reporters.

“Chan’s strong connections on the mainland will enable the HKMA to further enhance its close relationship with the regulatory authorities there,” Margaret Leung, Chief Executive of Hang Seng Bank Ltd., the biggest Hong Kong-based lender by market value, said in an e-mailed statement.

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The U.S. spurning of CIT Group Inc.’s aid request suggests officials are betting they’ve fixed the financial system enough to withstand the bankruptcy of a mid-sized lender.

“I hate to say this, but it was probably expendable,” said Dennis Santiago, chief executive officer of Institutional Risk Analytics, a Torrance, California, research firm that studies systemic risk. “It may have just missed the boat” on federal rescues, Santiago said.

Yesterday’s decision to forego a lifeline for CIT came 10 months after Lehman Brothers Holdings Inc. filed for bankruptcy. Lehman’s collapse ushered in the depths of the credit crisis to date, and resulted in the establishment of a $700 billion bailout fund; officials yesterday indicated programs created with that money would help fill any lending gap left by CIT.

Treasury Secretary Timothy Geithner, en route to Paris as CIT acknowledged policy makers had turned it down, is also wagering the administration will weather any political fallout. Unlike Bear Stearns Cos. or American International Group Inc., which got extraordinary aid last year, New York-based CIT specializes in loans to smaller firms, counting 1 million enterprises, including 300,000 retailers, among its customers.

A Treasury official said the department anticipates losing the $2.3 billion of taxpayer funds that it had already injected into the company from the Troubled Asset Relief Program should it file for bankruptcy.

‘Disruption’ and ‘Anger’

There will be “a lot of disruption and anger among voters, particularly among people who rely on firms such as CIT for funding,” said Sean Egan, head of Egan-Jones Ratings Co. in Haverford, Pennsylvania, which rates CIT below investment grade.

“A major provider of capital in the middle market is likely to be out of business in the near future,” and investors will be concerned, at least in the “short run” about CIT, Egan said.

CIT, whose stock trading was halted by the New York Stock Exchange before the close, said late yesterday it was told “there is no appreciable likelihood of additional government support being provided over the near term.” CIT added that it was “evaluating alternatives” with its advisers.

The Treasury then highlighted in a statement that the government has enacted “powerful” mechanisms to revive credit markets. “Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies,” the department said.

Administration Rationale

An Obama administration official separately said CIT didn’t receive more government assistance because it hadn’t gone to private capital sources to rebuild its balance sheet, something that several of the biggest Wall Street and regional lenders did earlier this year.

The official, who requested anonymity to discuss the deliberations, said the government also determined that CIT didn’t pose systemic risk to the economy if it failed to receive more aid.

Yesterday’s collapse in talks between regulators and CIT followed reluctance by the Federal Deposit Insurance Corp., the bank’s main regulator, to give it permission to participate in the agency’s debt-guarantee program.

The Federal Reserve had separately considered whether to let CIT put some of its parent assets into a banking unit, a move that could have increased its potential borrowing from the central bank. No such aid was forthcoming. The Fed has doubled its balance sheet to more than $2 trillion as it engaged in Wall Street rescues and emergency loans to banks across the nation.

‘Very Big Losses’

“If the government would have rescued them they would have been in there for a very long time, and they would have taken very big losses,” said Eric Hovde, who manages $1 billion at Hovde Capital Advisors LLC in Washington, which concentrates on financial and real-estate related companies affordable health insurance.

Part of the Fed and Treasury efforts to shore up the financial markets have been directed at restarting lending to small businesses. The two agencies in March jointly started the Term Asset-Backed Securities Loan Facility, or TALF. Under the program, the Fed lets investors borrow to purchase securities backed by auto, credit-card and other loans, with the idea that should spur lenders to extend more credit.

TALF loans from the Fed totaled $24.9 billion as of last week, compared with the program’s planned capacity of $1 trillion, backed by $100 billion of funds from the $700 billion Troubled Asset Relief Program.

TALF Aid

Fed officials credit the existence of the TALF with spurring the market for new asset-backed securities and reducing the difference, or spread, between yields and benchmark rates.

“So far, the evidence indicates that the program is working as designed,” New York Fed President William Dudley said in a speech last month. Yield premiums on consumer asset- backed securities have dropped “sharply,” he said.

The three-month London Interbank offered rate for the dollar, a benchmark for liquidity stresses among banks, has fallen every week since mid-March. The rate dropped to 0.51 percent yesterday from 1.43 percentage point at the start of the year.

Other evidence of a stabilization in the financial industry emerged this week, with Goldman Sachs Group Inc. reporting record profits. The Standard & Poor’s 500 Financials Index has rallied 11 percent this week.

Fed policy makers still regarded financial markets as “fragile” and the economy as “vulnerable to further adverse shocks,” minutes of their June 23-24 meeting, released yesterday in Washington, showed.

Regulatory Overhaul

The spurning of CIT comes amid a growing debate among officials, regulators, lawmakers and the financial industry over how to address the issue of firms deemed too big to let fail.

President Barack Obama is seeking the biggest overhaul of banking rules in decades, and wants to give the Fed new powers to oversee capital and liquidity standards. FDIC Chairman Sheila Bair, along with some lawmakers and central bankers, has urged stronger efforts to address the too-big-to-fail issue.

Gary Stern, president of the Minneapolis Fed, said the Obama plan “fails to come to grips” with the challenge, partly because it doesn’t threaten creditors with the risk of loss. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, plans a hearing on the matter July 21.

CIT was created in 1908, after founder Henry Ittleson noticed wholesalers repeatedly short of cash while he was a purchaser for a St. Louis department store. He wanted to create a new company that would serve customers overlooked by larger financial institutions, according to the firm’s Web site.

“I’ve heard from a lot of people, including a lot of people involved in small business, that it would cause a serious problem” for CIT to fail, Frank said in an interview yesterday before the firm’s announcement.

Among financial firms, “especially those on the edge, there’s going to be a scramble to figure out whether you’re in or out” of bailouts, said Joseph Mason, Louisiana State University finance professor. “This classification of systemic risk really is something like pornography — Fed and Treasury know it when they see it. You really can’t pre-commit.”

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