Finance Blog number 1

Sun Hung Kai Properties Ltd., the world’s biggest developer by market value, won Hong Kong’s first land auction of the year with a bid that exceeded most analysts’ estimates after selling 900 homes over the weekend as demand for property in the city surges.

The shares closed 2 percent higher after the developer paid HK$3.37 billion ($434 million) for the site in the eastern Tseung Kwan O district. The company raised HK$4.2 billion in a weekend apartment sale that attracted 120,000 prospective buyers in the city of 7 million.

The land auction and the weekend sale fanned speculation a bubble is forming in Hong Kong’s housing market, where home prices surged 29 percent in 2009 as low interest rates and an increase in buying by mainland Chinese stoked demand. Norman Chan, chief executive of the Hong Kong Monetary Authority, told lawmakers Feb. 1 that the city faces a “huge” potential risk of bubbles forming in its asset markets given high liquidity.

“The outcome is positive for the Hong Kong property market,” said Eva Lee, a Hong Kong-based property analyst at Macquarie Securities Ltd. “People expect 2010 won’t be an easy market given the strong growth last year, but the auction has reinforced their confidence.”

Sun Hung Kai spokeswoman Brenda Wong confirmed the company made the winning bid today. Price estimates for the auction ranged from HK$2.6 billion to HK$3.4 billion, and the median projection of five analysts Bloomberg News surveyed by phone and e-mail was HK$2.9 billion.

‘Reasonable’

Hong Kong is trying to ease a shortage in land supply and new properties that developer Cheung Kong (Holdings) Ltd. said last month may help raise home prices by as much as 20 percent this year.

Sun Hung Kai paid a “reasonable” price for the site, Victor Lui, executive director of Sun Hung Kai’s real estate broker, said by phone today. The price paid was “higher than expected but reasonable,” he said, adding he is “positive” about the outlook for the property market.

Sun Hung Kai plans to invest HK$6.5 billion on the plot of land in a medium-sized residential project, which may take between three and four years to complete, Lui said.

The developer at the weekend sold 900 apartments at the Yoho Midtown apartment complex in northwestern Yuen Long district for an average HK$5,400 per square foot, Amy Teo, Sun Hung Kai project director, said. That compares with an average HK$3,000 per square foot for new homes in the area a year ago, according to Wong Leung-sing, an associate director at Centaline Property Agency Ltd.

Crowds Attracted

“All the ingredients are in place for a property bubble in Hong Kong, including low interest rates and limited supply, but I don’t think we are in one yet,” said Buggle Lau, chief property analyst at Midland Holdings Ltd. “If more speculators enter the market then it could push prices up too high.”

The city had the world’s fastest-growing major housing market last year, according to a survey compiled by real-estate agents Knight Frank LLP.

Some 120,000 prospective buyers have flocked to the show homes since Feb. 19, Teo said, speaking at the display properties set up in a shopping center near the apartment complex in the city’s New Territories. Sun Hung Kai increased the number of apartments on sale to 900 from 700 because of demand, she said. The building complex has a total of 1,890 homes, according to Teo.

About 40 units were immediately advertised for resale at asking prices of as much as 20 percent more than the original costs of purchase, the South China Morning Post newspaper reported, citing property agents.

Supply

The number of private homes completed in Hong Kong last year fell 18 percent to 7,200 units, the lowest since 1997, the government said in a report Jan. 22.

The city’s home sales more than doubled in value in January from a year earlier to HK$36.2 billion, according to figures released by the government’s land registry. Sales gained 4.1 percent last month from December, the agency said.

The authority, Hong Kong’s de facto central bank, raised deposit levels for luxury apartments in October to try to cool lending. The government also plans to raise stamp duty, or transaction tax, on homes selling for more than HK$20 million to 4.5 percent from 3.75 percent in a bid to rein in the property market, the Chinese-language Sing Tao Daily said Feb. 11.

“Government intervention could lead to higher interest rates, but I can’t see mortgage rates much above 2.5 percent this year, which is unlikely to deter some buyers,” said Midland Holdings’ Lau.

Prices may rise as much as 15 percent in the first quarter, Centaline’s Wong said. Hong Kong’s Chamber of Commerce forecasts the city’s economy may grow between 3 percent and 4 percent this year.

“Given that the U.S. is unlikely to raise interest rates sharply and the yuan is under appreciation pressure, Hong Kong property prices may have substantial growth this year, but there is also a risk of a bubble,” said Benny Wong, executive director at Hong Kong-based Pan Asian Mortgage Advisory Company Ltd. “I expect the Hong Kong government will increase land supply this year in response to the high prices.”

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China is likely to soon overtake Japan to become the world’s second largest economy, a milestone that will only fuel growing fears about the economic might of the world’s largest country.

China’s economy grew by 8.7% in 2009, even in the face of a global economic slowdown. Japan, which will report its full-year numbers on Feb. 14, is expected to slip behind China due to the steep decline in its economy in the first half of last year.

Both China and Japan are likely to end the year with a gross domestic product, the broadest measure of economic activity, of just over $5 trillion. To put that in context, that’s only a little more than a third of the size of the U.S. economy.

But with its huge population edge on the United States, many economists believe it is inevitable that China will eventually overtake the United States — even if it takes another 20 or 30 years.

"It’s kind of like the U.S. and Great Britain 125 years ago. Given how much larger we were, it was only a matter of time before we caught them," said Jay Bryson, global economist for Wells Fargo Securities. "And it’s only a matter of time before they catch us."

But there are still many limitations on China’s growth prospects. For those who are scared that the U.S. will fall behind its Chinese rivals sooner rather than later, it’s useful to think back a bit more than 20 years, when Japan was considered a similar threat to U.S. economic dominance.

John Makin, a visiting scholar specializing in Asian economies at the American Enterprise Institute, pointed out that in the late 1980s, Japan was "viewed as the unstoppable force."

Since then the Japanese economy has struggled mightily, suffering through the so-called "Lost Decade" of economic decline followed by a period of only weak growth after that.

Of course, there are differences between Japan in the late 1980s and China today. Most notably, Japan was already a fully developed economy two decades ago.

China is still an emerging economy, feeding off the growth that comes from massive public works projects designed to catch-up to the infrastructure already found in the United States, Europe and Japan, as well as consumers entering the middle class eager to buy their first car or household appliance personal business card.

Echoes of Japan’s problems. But there are plenty of similarities as well.

There are signs of a developing asset bubble in China’s housing and equity markets. China’s banking system has been dogged by questions about its transparency. There is also a dependence on exports that are supported by the government’s manipulation of the currency and limits on population growth.

All were factors in Japan’s troubles over of the last two decades.

The last year shows one of the problems with a country whose economy is greatly export driven. When the global recession hit, China’s exports were not spared, and it took about $586 billion in government spending, to fill the gap.

That turned out to be a much bigger share of China’s GDP than all the various bailouts and stimulus packages in the United States.

Lakshman Achuthan, managing director of Economic Cycle Research Institute, said China’s exports, driven by its cheap currency, makes it vulnerable to even lower-cost developing economies.

"A ‘Lost Decade’ is not an immediate issue for China, but they need to shift away from export dependence," he said.

Adding to these risks is the obvious fact that China is still a communist country where the government, rather than free markets, makes many decisions on the allocation of capital and resources. The free flow of information is also limited.

Most Western economists would argue that this it not conducive to long-term economic growth, even if government control of economic decisions can help to boost output in the short-term.

"It’s a bit like a very powerful but inefficient engine," said Makin. "They need to develop a way to allocate resources and capital that’s not driven by not a bunch of central planners." 

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Democratic leaders have told Oregon Gov. Ted Kulongoski they won’t craft legislation that would change Oregon’s kicker laws.

Kulongoski said in a release late Thursday that leaders “do not intend to refer kicker reform and an emergency reserve fund to the November ballot during this special session, or anytime this year.”

The decision means residents will continue to collect refunds when money collected in Oregon’s general fund exceeds projections the state makes every two years.

It also means a major effort to restructure the state’s revenue system, a primary Kulongoski goal, won’t happen during the governor’s term. Kulongoski leaves office Jan. 1.

Kulongoski and several lawmakers from both sides of the aisle sought to change the kicker rules in order to build state reserves, then use that money to help defray effects from recessions and economic downturns.

Critics of the kicker say that because money is returned to state residents instead schools and public safety programs face peril when Oregon’s economy goes south no fax payday loans.

Kulongoski broached kicker reform as an olive branch to opponents of two tax measures that Oregon voters passed on Jan. 26.

“This decision by legislative leadership is disappointing and a missed opportunity for the people of Oregon who strongly support using a portion of the kicker revenues to build an adequate reserve for critical services,” Kulongoski said in his statement.

Kulongoski went as far to say that kicker reform is the Legislature’s most important issue during the short session, which will end around March 1.

“Oregonians deserve the opportunity to establish an emergency reserve fund in our state constitution that will help provide fiscal stability and certainty in the state’s budgeting process,” he said. “The people of Oregon deserve better.”

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Federal Labour Minister Rona Ambrose is urging the union representing striking Canadian National Railway locomotive engineers to accept binding arbitration as management tried to keep the trains running Saturday.

Ambrose said in a statement she’s "disappointed" the Teamsters union and CN couldn’t reach an agreement before some 1,700 engineers across the country walked off the job Friday at midnight.

Despite sharing several railways in the GTA, CN representatives say GO Transit will not be affected by the engineers strike.

Ambrose said CN has already agreed to binding arbitration and the government is ready to appoint an arbitrator once the union gives its approval.

The Teamsters did not immediately respond Saturday to Ambrose’s statement.

The union has said a strike could have been postponed had the railway agreed to negotiate and not impose a 1.5 per cent wage increase and new mileage caps.

CN made contractual changes after three days of negotiations broke off Nov. 20 following 14 months of talks.

The Teamsters Canada Rail Conference (TCRC) responded by issuing a 72-hour strike notice, saying CN was effectively locking out employees by unilaterally changing the terms of the collective agreement.

TCRC president Daniel Shewchuk said in an interview Saturday that while the union made "substantial movement" during Friday’s talks, the railway wouldn’t budge.

The union has said raising the mileage cap – the maximum distance engineers can travel in one month – by 500 miles to 4,300 mileswould require some workers to work seven days a week, with no time off, and cause layoffs. CN says its locomotive engineers work on average 37 hours a week, and the new cap would increase that to 41 hours.

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Delta Air Lines Inc. has renewed its vendor contract with gategroup, parent company of food contractor Gate Gourmet.

The multi-year extension, valued at more than $1 billion in revenue over the life of the contract, also involves gategroup subsidiaries Gate Safe, eGate Solutions, Pourshins and deSter, the company said in a Wednesday news release.

“Delta is a leading customer for gategroup and its brand companies and has been for more than 50 years,” Guy Dubois, gategroup CEO, said in a statement. “We're delighted to call the world's largest airline one of our top customers. The scope of this business validates gategroup's strategy of building a brand portfolio that provides end-to-end solutions to the travel industry, and demonstrates the cross-selling power of the brands.”

The deal with Atlanta-based Delta (NYSE: DAL) covers 40 airports worldwide and expands catering service to airports in Amsterdam, Fort Lauderdale, Fla electronic check payday advance., Los Angeles and Newark, N.J.

Gate Safe, the catering screening and security subsidiary of Zurich-based gategroup, will expand to serve all Delta, Northwest and Delta Connection stations currently served by Gate Gourmet in the U.S.

The contact also extends agreements with eGate and Pourshins, the company’s in-flight catering management and food, beverage and equipment sourcing and logistics arms.

"Consistency of product delivery is a key component of Delta's brand experience for our customers," Joanne Smith, Delta senior vice president of in-flight services, said in the release. "The complete integration of catering solutions is another important step in bringing together the best of Delta and Northwest."

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Thailand’s economy probably contracted the least in a year last quarter as a nascent global recovery and government spending began to pull the nation out of its first recession in a decade.

Gross domestic product fell 3.2 percent in the third quarter from a year earlier, after contracting 4.9 percent in the previous three months, according to the median estimate of 16 economists surveyed by Bloomberg News. The government will release the data on Nov. 23 at 9:30 a.m. in Bangkok.

The benchmark stock index has risen two straight quarters since the start of April and the baht gained 4.5 percent against the U.S. dollar this year as companies including Hana Microelectronics Pcl report rising orders. Prime Minister Abhisit Vejjajiva said yesterday the government will pursue its stimulus spending plans amid lingering “political problems.”

“A gradual global recovery, fiscal stimulus packages and easy money policy are resulting in improved GDP performance,” said Luz Lorenzo, an economist at ATR-Kim Eng Securities Inc. in Manila. “The improvement will be gradual. This is barring any grave political developments.”

Singapore, which raised its 2009 GDP estimate in October, said yesterday its economy will grow 3 percent to 5 percent in 2010 after shrinking as much as 2.5 percent this year. Malaysia may report today that its recession eased last quarter, according to a Bloomberg News survey.

Interest Rates

The Bank of Thailand said last month Southeast Asia’s second-largest economy is “out of recession”, citing improving employment and quarter-on-quarter GDP expansion. Still, the central bank refrained from raising borrowing costs for a fourth straight meeting on Oct. 21 as it judged the nation’s economic recovery to be at “an early stage.”

There may be cause to keep interest rates low for a while as economists including Morgan Stanley Asia Chairman Stephen Roach say the global recovery faces risks.

“My outlook remains extremely cautious although we can see the worst is over” for the global economy, Roach said in Singapore today. Asian economies are still too export dependent, he said.

Thailand’s consumer confidence fell for the first time in five months in October on concern that the economic recovery may be derailed by rising oil prices, politics and a court case that has stalled 76 government-approved projects on pollution complaints.

Political Risk

At least five people were injured after a bomb exploded at a Nov. 15 protest against former Prime Minister Thaksin Shinawatra, the Nation newspaper reported this week. Power in Thailand has shifted between parties allied to Thaksin and his opponents since the 2006 coup that ousted him, with protests and leadership changes hurting successive governments’ ability to implement spending plans.

Abhisit’s government has managed to stay in power for almost a year and implemented a 116.7 billion-baht stimulus package in the first half of 2009. It plans to spend 1.3 trillion baht on transportation, logistics, health and education projects over three years to help revive the economy.

The fiscal spending helped “stop the economic contraction” and prevented unemployment from jumping, Abhisit said Nov. 16.

“Our only concern is politics,” said Santi Vilassakdanont, chairman of the Federation of Thai Industries. “If the political stability continues like this, the economy can move ahead. If not, things may turn bad again.”

Return to Growth

The government expects the Thai economy to return to growth this quarter. Thailand’s exports dropped the least in 11 months in September as more than $2 trillion in stimulus by governments worldwide helped revive global demand.

Hana Microelectronics, which makes parts for computers and mobile phones including Apple Inc.’s iPhone, has restored its workforce to “pre-crisis” levels and will spend about $20 million by March 31 to expand capacity and meet rising demand, Chief Executive Officer Richard Han said.

“We continue to see robust demand,” said Han. “We expect the fourth-quarter performance to be an improvement over last year.”

The central bank has kept its benchmark interest rate unchanged at 1.25 percent since cutting it by 2.5 percentage points from December to April. Thai consumer prices rose for the first time in October after falling for nine consecutive months.

“The recovering global economy will lead to improving exports and tourism,” Abhisit said yesterday. “The government is also committed to spend money under our stimulus plan. Everything still goes as planned despite political problems” that may persist into next year, he said.

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China predicted an acceleration in industrial production and reported a 190 percent jump in overseas investment for the third quarter, underscoring the nation’s role in driving a global economic recovery.

Investment by Chinese firms abroad rose to $20.5 billion in July through September, almost triple a year earlier, the Ministry of Commerce said in a statement. Industrial output may rise 16 percent in the fourth quarter, Ministry of Industry and Information Technology official Zhu Hongren said in a briefing, compared with a 13.9 percent pace of gains in September.

Policy makers may be encouraging Chinese companies to invest abroad in part to help counter pressure for the nation’s currency to appreciate, analysts said. Investors are betting on the yuan to appreciate in the coming year as China’s growth accelerates from its weakest pace in a year.

“China’s growth is certain and stable,” said Zhu Jianfang, an economist at Citic Securities Co. in Beijing. “Chinese policy makers see pressure for yuan to appreciate, so they encourage companies to invest abroad to strike the balance.”

Today’s figures came after the government last week reported that China, the world’s third-biggest economy, expanded 8.9 percent in the third quarter, the fastest pace in a year.

Yuan Bets

Yuan forwards, which rose to a 14-month high last week, suggest the currency will gain 2.3 percent against the dollar in the coming year. The 12-month offshore contracts were down 0.2 percent today to 6.6730. The yuan climbed 21 percent over three years after the government scrapped a fixed exchange rate in July 2005.

China’s policy on yuan will remain stable until the nation’s exports recover and improve, Jiang Jianjun, an official in the foreign trade department of the Ministry of Commerce told an online forum today.

The projection for China’s production gains encouraged some investors to sell the dollar on confidence that the global recovery will diminish demand for the U.S. currency as a haven. The dollar rose as much as 0.2 percent and traded at $1.4894 per euro at 7:55 a.m. in London.

Stephen Roach, chairman of Morgan Stanley Asia, today said investors are wrong to bet that China will restrain its unprecedented stimulus after the economy accelerated in the third quarter.

‘Growth Surprise’

“The Chinese really are fixated on one thing and one thing alone which is social stability — they don’t want to take a risk of another negative growth surprise” slowdown, Roach said in an interview on Bloomberg Television in Hong Kong.

By contrast, India, Asia’s third-largest economy after Japan and China, today signaled it’s preparing to raise borrowing costs as inflation pressures build. The Reserve Bank of India ordered banks to keep more cash in government bonds, and central bank Governor Duvvuri Subbarao said “it may be appropriate to sequence the ‘exit’ in a calibrated way.”

Inflation in China isn’t a big risk for the nation in the foreseeable future, China central bank Deputy Governor Yi Gang said, the China Securities Journal reported separately today. The government will keep the yuan exchange rate basically stable, the Beijing-based newspaper reported, citing comments the People’s Bank of China’s Yi made at Peking University yesterday.

The nation’s diversification of its foreign currency reserves shouldn’t cause short-term fluctuations in exchange rates, the newspaper cited Yi as saying.

Investment Abroad

Overseas investment by Chinese companies in the first nine months of the year rose 0.5 percent to $32.9 billion, the Beijing-based Commerce Ministry said on its Web site. The figures don’t include financial transactions.

China Investment Corp., the nation’s sovereign wealth fund that holds almost $300 billion, bought an 11 percent stake in Astana, Kazakhstan-based JSC KazMunaiGas Exploration Production for about $939 million, after spending $2.75 billion to acquire Indonesia’s PT Bumi Resources and Noble Group Ltd. in September.

China’s investment in Africa in the first half of the year rose 78.6 percent to $875 million from a year earlier, the Ministry of Commerce said in a statement on its Web site today. Chinese government will continue to encourage companies to invest abroad, the statement said.

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The U.K. inflation rate dropped in September by more than economists forecast to the lowest in five years as the worst recession in a generation purged cost pressures throughout the economy.

Consumer prices rose 1.1 percent from a year earlier, compared with 1.6 percent the previous month, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 31 economists was 1.3 percent. On the month, prices were unchanged for the first time in a September since records began in 1996.

Bank of England policy makers this month stuck to their plan to spend 175 billion pounds ($276 billion) of newly created money on assets to foster economic growth after five quarters of contraction. The U.K. may not have escaped recession in the third quarter, and the bank should consider buying more bonds to secure the recovery, the British Chambers of Commerce said today.

“Given high unemployment, inflation pressures are subdued,” said Alan Clarke, an economist at BNP Paribas SA in London. “The bank will probably expand quantitative easing, and if they’re going to do it, it will probably be in chunks of 50 billion pounds.”

The pound weakened to 94 pence per euro for the first time since March 27 after the inflation data. It was trading at 93.94 pence at 10:10 a.m. in London. The U.K. currency weakened 0.5 percent to $1.5726.

Utility Bills, Food

The main contributors to slower inflation were utility bills, food prices, and restaurant and recreation, the statistics office said. The 7.3 percent annual drop in prices for electricity, gas and other fuels was the biggest since records began. Transport and clothing costs rose on the year.

J Sainsbury Plc, the U.K.’s third-biggest supermarket owner, reported decelerating sales on Oct. 7 and said revenue growth will become more difficult to achieve as food inflation eases. Tesco Plc, the world’s third-largest retailer, said Oct. 6 that sales growth cooled due to slower food-price inflation low fee pay day loans.

Bank of England policy makers said in the minutes of the September meeting that “inflation would probably be higher in the short-term than the committee had thought a month ago, though it was still likely to be extremely volatile.”

Core inflation, which strips out the cost of tobacco, alcohol, food and energy, was 1.7 percent in September compared with 1.8 percent in August, the statistics office said.

Retail Prices

The retail price index, a cost-of-living measure used in wage bargaining, showed a 1.4 percent annual drop, compared with a 1.3 percent decline in August, the statistics office said. Excluding mortgage interest payments, retail prices rose 1.3 percent on the year.

The Bank of England last week left the key interest rate at a record low of 0.5 percent and said it will spend the remainder of its planned bond purchases. The bank’s forecasts show inflation will probably drop below 1 percent later this year and miss its 2 percent goal in three years.

The BCC said today that the economy may not have exited the recession in the third quarter and that the central bank has room to expand asset purchases to 200 billion pounds next month. The Bank of England’s next decision is Nov. 5.

Quantitative easing may not be enough to revive demand for credit in the U.K., according to Howard Davies, formerly chairman of the Financial Services Authority and deputy governor of the Bank of England.

“The supply is there, the problem is demand,” Davies, now the chairman of the London School of Economics, said in an interview on Bloomberg Television in London today. “The economy is still flat on its back. Business demand for lending is actually quite low. I’m not convinced that keeping on pumping in from the bank side is going to solve that problem.”

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President Barack Obama said today’s unemployment numbers indicate “the worst may be behind us” for the recession and that his administration has “rescued our economy from catastrophe.”

The Labor Department report showing a slower rate of job losses, along with gross domestic product figures released earlier, show “we are pointed in the right direction,” Obama said in remarks at the White House.

Obama spoke hours after the government reported the unemployment rate dipped to 9.4 percent in July from 9.5 percent the month before and job losses slowed more than forecast.

“We’ve pulled the financial system back from the brink,” Obama said. “I am convinced that we can see a light at the end of the tunnel.”

For more than a week, the president has been changing his rhetoric as economic indicators show the nation’s worst recession since the Great Depression may have hit bottom.

On July 29, Obama first signaled the economy may have begun to improve when, during speeches in North Carolina and Virginia, he said the U.S. “may be seeing the beginning of the end of the recession.”

‘Still a Lot Wrong’

The administration still expects the unemployment rate will rise to 10 percent or higher before beginning a sustained decline, White House press secretary Robert Gibbs said earlier.

“Obviously, there’s still a lot wrong with our economy,” Gibbs told reporters. “I would describe today’s report as the least-bad report that we’ve had in a year, right? We still have a long way to go.”

The state of the economy later this year is likely to have an impact on the president’s ability to push through Congress his top two domestic priorities: overhauling the health-care system and curbing carbon emissions to combat global warming instant credit report.

In recent weeks, polls show the president’s job-approval ratings have been sinking, fueled by concern about the rising unemployment rate and the growing budget deficit.

A Quinnipiac University poll found half the registered voters surveyed from July 27 to Aug. 3 approve of the job Obama is doing, compared with 42 percent who disapprove. That’s down from 57 percent approval and 33 percent disapproval in a poll taken in late June.

Jobs Lost

The latest Labor Department numbers brought total jobs lost since the recession began in December 2007 to about 6.7 million, the biggest decline in any post-World War II recession.

The Commerce Department reported July 31 that the GDP shrank at a better-than-forecast 1 percent annual pace in the second quarter after a 6.4 percent drop in the prior three months.

The GDP figure “showed a marked improvement over the last few months,” Obama said today. “This morning we received additional signs that the worst may be behind us.”

He used the figures to argue that the $787 billion stimulus plan he pushed through Congress and other measures are having an effect. He also said the U.S. must take steps to ensure a more stable economy in the future, including enacting his health-care and energy initiatives.

“We can’t afford to return to an economy based on inflated profits and maxed-out credit cards, an economy where we depend on dirty and outdated sources of energy, an economy where we’re burdened by soaring health-care costs,” he said.

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The Federal Reserve plans to strengthen its examinations of banks’ lending practices and financial health with new teams composed of experts in everything from law to economics and markets.

Fed Governor Daniel Tarullo outlined the step in testimony prepared for a Senate Banking Committee hearing in Washington today. The overhaul, which would make reviews more uniform across the banking system, builds on the stress tests the central bank completed on the biggest 19 banks in May, he said.

The initiative comes as criticism spreads of President Barack Obama’s proposal to give the Fed powers to oversee systemic financial risks. Treasury Secretary Timothy Geithner last week told regulatory chiefs — including Sheila Bair, the Federal Deposit Insurance Corp. chairman who opposes making the Fed the sole systemic-risk agency — they should stop attempts to campaign against the administration’s revamp of rules for the industry, a person familiar with the matter said.

“We are prioritizing and expanding” the examination process to “assess key operations, risks and risk management activities of large institutions,” Tarullo said in prepared remarks for today’s hearing. “This program will be distinct from the activities of on-site examination teams so as to provide an independent supervisory perspective.”

Regulatory Lapses

The Fed, like other bank agencies, has come under criticism by lawmakers and investors for not curbing excessive risk taking on Wall Street that led to the worst financial crisis since the Great Depression. Congress is weighing the administration’s proposals to toughen oversight and set new rules for banks, the biggest overhaul in decades.

Regulators have each opposed some aspect of the Obama plan. Fed Chairman Ben S. Bernanke has sought to retain authority for protecting consumers of financial products after the administration sought to create a new agency for the task.

Bair and Securities and Exchange Commission Chairman Mary Schapiro have favored a council of agencies — rather than the Fed — to have powers to rein in risk-taking at financial firms so large or interconnected their failure would threaten the system.

Geithner, in a July 31 meeting aimed at cracking down on dissent, used strong language with the regulatory heads, reflecting concern at the fate of the administration’s proposals, the person briefed on the matter said on condition of anonymity.

The Wall Street Journal reported on the meeting yesterday.

Monetary Policy

The Obama plan has drawn fire from both Democrats and Republicans who argue that the central bank should focus on monetary policy. They have pointed out that the Fed, as the regulator of bank holding companies, supervised some of the biggest lenders that required rescuing, including Citigroup Inc. and Bank of America Corp.

Tarullo, 56, the first Fed governor appointed by Obama, has become the central bank’s coordinator on revising the examination process business cards. Within the Fed, he has become an advocate for increasing the board’s control over supervision.

The Senate banking panel also plans to hear testimony from Bair and other regulators about how to improve bank oversight.

“The crisis has revealed significant risk-management deficiencies at a wide range of financial institutions,” Tarullo said. “It has also challenged some of the assumptions and analysis on which conventional supervisory wisdom has been based.”

District Banks

While not giving many details on the supervisory overhaul, Tarullo indicated that the examinations, now run largely by Fed district banks across the country, will be bolstered by the board in Washington.

He said the Fed is “creating an enhanced quantitative surveillance program that will use supervisory information, firm-specific data analysis and market-based indicators to identify developing strains and imbalances that may affect multiple institutions, as well as emerging risks to specific firms.”

“This work will be performed by a multidisciplinary group composed of our economic and market researchers, supervisors, market operations specialists and accounting and legal experts,” Tarullo said.

Losses Soared

Banks and other financial institutions have reported more than $1.5 trillion in credit losses and writedowns worldwide since the global credit crisis began. Many of those losses stemmed from mortgage-related investments that declined with the collapse in the housing market.

Tarullo didn’t discuss the outlook for the U.S. economy or monetary policy in his testimony.

He said the central bank will soon release guidance on how to “promote compensation practices that are consistent with sound risk-management principles and safe and sound banking.”

The Fed governor also said that General Electric Co. and companies that already own finance arms or industrial-loan businesses, known as ILCs, should be able to retain them without being subject to Fed oversight of manufacturing and nonbank operations. While the Fed favors not adding more ILCs, existing structures should be “grandfathered” and not forced to separate “in the interest of fairness,” he said.

GE has supported no changes to the status quo so that it can keep its manufacturing operations along with its GE Capital finance arm without having to separate under a bank holding company structure. Last week, Representative Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, supported Fairfield, Connecticut-based GE’s stance. GE has said it is in favor of systemic regulations and expects change in the rules governing its finance arm.

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