Fitch Ratings gave the United States until 2013 to come up with a "credible plan" to tackle its ballooning budget deficit or risk a downgrade of the country's coveted AAA rating.
The ratings agency on Monday revised to negative from stable the outlook on the U.S. credit rating after a special congressional committee failed last week to agree on at least $1.2 trillion in deficit-reduction measures.
The committee failure made it unlikely that any meaningful deficit plan will be adopted next year, increasing the fiscal burden on the next administration that will be elected in late 2012, Fitch said.
"The negative outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. AAA sovereign rating will be forthcoming," the ratings agency said in a statement, adding that the chance of a downgrade is "slightly greater than 50 percent" now.
The news had little market impact, as a negative outlook from Fitch was widely expected.
"What it shows is that Fitch is putting the U.S. on warning that this cannot go on forever," said Michael Yoshikami, chief investment strategist at YCMNET Advisors in Walnut Creek, California.
"The markets already assumed this was going to happen. It would be different if it was a downgrade but a negative outlook is not the end of the world."
Like Moody's Investors Service, which also has a negative outlook on the U.S. Aaa rating, Fitch does not expect meaningful deficit-reduction measures in 2012, when presidential elections should exacerbate political divisions in Washington.
Rival agency Standard & Poor's cut the U.S. rating to AA-plus in an unprecedented decision on Aug. 5, citing concerns about the government's budget deficit and rising debt burden. It maintains a negative outlook on the credit.
KICKING THE CAN
The so-called "Super Committee" of six Democrats and six Republicans was seen by Fitch as the last chance of an agreement before elections.
Last week, however, its members announced they were unable to agree on a deficit reduction plan, setting in motion automatic cuts worth $1.2 trillion over 10 years. The cuts are designed to be split evenly between domestic and military programs.
Both S&P and Moody's said on Nov. 21 the committee's failure would have no immediate impact on their ratings.
However, Moody's on Nov. 23 warned the United States that its rating could be in jeopardy if lawmakers backtrack on the automatic cuts of $1.2 trillion due to take effect starting in 2013.
In a statement issued after Fitch's decision, the U.S. Treasury said "Fitch's action is a reminder of the need for Congress to reduce the country's long-term deficit in a balanced manner and to avoid efforts that would undo the $1.2 trillion in automatic cuts negotiated last summer."
Fitch is now willing to give the new government that will take office in January 2013 several months to come up with a "sound" deficit reduction plan, top credit analyst David Riley told Reuters in an interview.
"Once we move to the second half (of 2013) and it looks as if a deal can't be done, then the (negative) outlook would likely result in a downgrade," Riley said.
Until then, there is little change of a "material adverse shock" that would trigger an early downgrade of the U.S. rating, he said, playing down concerns about the economic impact of the euro-zone debt crisis.
"If we had a relatively short downturn because, for example, the crisis in Europe got much worse and there was a spillover effect to the U.S. but we thought that it ultimately would prove to be temporary for the U.S. ... then that wouldn't necessarily lead us to change the rating."
Global - Economy and Market
Euro split scenarios risk becoming self-fulfilling
Even as global markets rallied on Monday on talk that a grand plan to save the euro was finally taking shape, more and more researchers are squarely broaching the alternative outcome of the currency's disintegration.
Jean Pisani-Ferry, director of Bruegel, a respected Brussels think tank, noted that market participants and real businesses were increasingly pricing in such a break-up scenario. "It is still hard to think the unthinkable, let alone to work out the details of it, but any rational player has to consider the possibility of it. If disaster expectations build up and a growing number of players start positioning themselves to protect themselves from it, the consequences could become overwhelming," he said in a report.
Fund-raising push speeds European banks' retreat
Europe's banks stepped up efforts to raise funds and offload business in far-flung places on Monday as Bank of Ireland (BKIR.I) sold a parcel of project finance loans and Credit Agricole (CAGR.PA) said it will quit South Africa.
European lenders are expected to ditch up to 3 trillion euros of loans to meet new capital rules, ease funding strains and become more profitable, and a flurry of deals showed efforts to "deleverage" are intensifying.
Fitch revises U.S. rating outlook to negative
Fitch Ratings on Monday revised to negative the outlook on the United States' AAA credit rating after a Congress committee failed last week to agree on at least $1.2 trillion in deficit-reduction measures.
Russia: The central bank left all policy rates unchanged at its meeting on Friday, in line with market
Wall Street ends 7-day slide
Stocks rebounded from seven days of losses on Monday as investors used the latest effort from European leaders to resolve the region's debt crisis as an opportunity to cover short positions.
Japan's Nikkei average rose almost 1 percent on Tuesday, climbing for a second straight session on hopes for more drastic steps to deal with the euro zone debt crisis and a robust start to the U.S. holiday shopping season.
India - Economy and Market
FDI in retail: Government U-turns, says foreign retailers must shop locally
The government on Monday said foreign retailers wanting to set up shop in India must source 30% of their inputs from domestic micro and small enterprises, backtracking from "anywhere in the world" announced last week under political pressure.
Icra lowers GDP forecast to 7.5%; sees Q2 growth at 7%
Rating agency Icra today joined rest of the forecasters to peg down economic growth to 7.3-7.5% from 7.5-7.7% projected earlier, besides pegging Q2 GDP numbers at 7%, following the overall contraction in growth indicators. This is the lowest projections so far from leading agencies as the forecasts from the Government, RBI, Crisil and CMIE are all above or at 7.6%.Icra has also warned that Government will not be able to meet fiscal deficit target of 4.6% and said it will shoot up to 5.5%.
An ET survey shows - economy will grow at an average 7% in the three months to September, according to a poll of 11 leading economists. The economy grew at 7.7% in the April-June quarter. The government is due to announce the GDP growth rate for the second quarter on Wednesday. Economists said the rising costs of funds and policy paralysis in government are weighing heavy on growth. These and the escalating debt crisis in Europe are likely to push growth below the trend, they said, adding that the coming months will be crucial in determining the growth trajectory.
Petrol prices may be cut by about one rupee: Source
The state refiners could cut petrol prices by about one rupee a litre or 1.5% as softening Singapore spot gasoline prices have offset the impact of a declining rupee, an industry source said on Monday
India wants more market access in China to bridge trade gap
The government said it is pursuing market access issues with China for Indian products, a move which will help in bridging the rising trade deficit.
In 2010-11, India's exports to China stood at $19.61 billion, while imports were $43.47 billion, leaving a trade deficit of $23.86 billion.
Indian shares to start lower, Reliance watched
MUMBAI, Nov 29 - Indian shares are set to open lower on Tuesday, weighed down mounting opposition to reforms and as investors await definite moves by European policymakers to address the euro zone debt
Technology News –
Facebook plans IPO between April and June - report
REUTERS - Facebook Inc is looking to go public between April and June 2012 with a valuation of over $100 billion, the Wall Street Journal reported, citing people familiar with the matter.
Twitter acquires mobile security start-up company
REUTERS - Twitter has acquired a start-up company that makes software to improve security and privacy for smartphones and other mobile devices.
Apple beats Android in Britain in Oct-researcher
The long-awaited iPhone 4S launch helped Apple Inc take top spot in the British smartphone market in October, overtaking phones using Google Inc's Android platform, data from research firm Kantar Worldpanel ComTech showed on Monday.
Akaash tablets fuels global interests in the low-cost machine
Panama has approached the Indian Embassy there to buy one lakh units of Akaash. Even Philadelphia has shown interest.
Philippines overtakes India as hub of call centers
MANILA, Philippines: Americans calling the customer service lines of their airlines, phone companies and banks are now more likely to speak to agents named Mark in Manila than people named Bharat in Bangalore.
More Filipinos - about 400,000 - than Indians now spend their nights talking to mostly U.S. consumers, according to industry officials, as companies like AT&T, JPMorgan Chase and Expedia have hired call centers here, or even built their own.
India, where offshore call centers first took off in a big way, fields as many as 350,000 call center agents, according to some industry estimates. The Philippines, which has a population one-tenth as big as India's, overtook India this year, according to Jojo Uligan, executive director of the Contact Center Association of the Philippines.
Facebook, the world's largest Internet social network, is preparing for a initial public stock offering next year, according to a source familiar with the matter.
Facebook is exploring raising $10 billion, the Wall Street Journal said on Monday. It hopes the offering will value the company at more than $100 billion, according to WSJ, which first reported the story.
Facebook's Chief Financial Officer, David Ebersman, had discussed a public float with Silicon Valley bankers but founder and Chief Executive Officer Mark Zuckerberg had not decided on any terms and his plans could change, the Journal said.
The social network, which now claims more than 800 million members after seven years of explosive growth, has not selected bankers to manage what would be a very closely watched IPO. But it had drafted an internal prospectus and was ready at any moment to pull the IPO trigger, the Journal cited people familiar with the matter as saying.
At $100 billion valuation, the company started by Zuckerberg in a Harvard dorm room would have double the valuation of Hewlett-Packard, the Journal said.
A formal S-1 filing could come before the end of the year, though nothing was decided, the newspaper added.
A Facebook representative declined to comment.
Silicon Valley start-ups have this year begun to test investor appetite for a new wave of dotcoms. If it does debut in 2012, Facebook's IPO would dwarf that of any other dotcom waiting to go public.
"Farmville" creator Zynga has filed for an IPO of up to $1 billion. In November, daily deals service Groupon debuted with much fanfare, only to plunge below its IPO price within weeks.
LinkedIn and Pandora are now also trading significantly below the levels their stocks reached during their public debuts earlier this year.
Facebook has become one of the world's most popular Web destinations, challenging established companies such as Google and Yahoo for consumers' online time and for advertising dollars.
Facebook does not disclose its financial results, but a source familiar with the situation told Reuters earlier this year that the company's revenue in the first six months of 2011 doubled year-on-year to $1.6 billion.
Eric Feng, a former partner at venture capital firm Kleiner Perkins Caufield & Byers who now runs social-networking site Erly.com, said that the cash Facebook will get in an IPO would allow them to make more acquisitions and refine or work on new projects, such as a rumored-Facebook phone or a netbook.
Having tradable stock will also allow Facebook to attract more engineering talent who might have been more attracted to the company in earlier days when it was growing faster but now perhaps might be attracted to other companies. "It'll be a powerful bullet for them," said Feng.
Investors have been increasingly eager to buy shares of Facebook and other fast-growing but privately-held Internet social networking companies on special, secondary-market exchanges.
Facebook said in January that it will exceed 500 shareholders this year, and that in accordance with SEC regulations, it will file public financial reports no later than April 30, 2012.
Europe continues to take the centre stage in terms of determining the outlook for global financial markets and economies – and it is therefore critical to try and keep abreast of the constantly evolving events in the Eurozone and incorporate them into your decision making framework. Germany continues to insist on harsh fiscal austerity in the periphery, without a "lender-of-last-resort" role for the ECB and issuance of jointly guaranteed Eurobonds. The horrors of the Weimar hyperinflation of the early 1920s remain firmly entrenched in the national psyche and influence its deep aversion to "monetary financing" (i.e. monetizing government deficits via the printing press). However, Germany should perhaps be even more concerned about the horrors which could be unleashed by a prolonged and deep recession which was actually the real cause for the rise of Hitler in the 1930s as detailed by Dylan Grice of Societe Generale in a fascinating note. To summarise:
-In the aftermath of the collapse of the gold standard in the early 1930s , most countries selected the easier option of devaluation of currencies to inflate themselves out of a painful recession with the main exception being Germany which chose to cling to the gold standard (and resulting deflation), haunted by the horrors of the 1923 hyperinflation (see attached chart).
-The US clung onto the gold standard longer than countries like the UK and Japan and therefore suffered a deeper depression, while Germany experienced an even more devastating depression than the US as it suffered a comparable loss in industrial output but significantly worse (and more prolonged) unemployment levels (33% at its peak - see attached chart).
-It is generally believed that the rise of the third Reich was caused by the 1923 hyperinflation, and while it is true that Hitler made his first attempt to grab power in 1923 with the "Beerhall Putsch", by the late 20s the Nazis were just another large fringe group.
-The depression in Germany which began in the late 1920s (associated with rising unemployment levels) was tightly correlated with the rising share of the Nazis electoral vote (from less than 5% in the mid 20s to late 20s to 45% by 1933-see attached chart).
-What would the course of history have been if Germany had inflated like the UK, which left the gold standard in 1931 and experienced a significant drop in unemployment and a recovery in output. With unemployment levels of 17% rather than 33% would the Nazis have won the March 1933 elections?
-By insisting on imposing harsh fiscal austerity on the periphery, Germany runs the risk of ever-more misery in the affected countries, and a severe political backlash blaming Germany for their misery.
-It is time for Germany to make-up its mind –the Euro or its hard money principles. It is likely that Germany will eventually make the decision in favour of the Euro, and allow the ECB to act as a lender of last resort. A continued economic slowdown in Germany would make this choice even more probable.
-This could be implemented by giving the EFSF a banking license, allowing it to borrow from the ECB and act like a euro IMF – bailing out countries in return for certain conditions to be met (e.g. labour market, welfare and tax reforms). There would be no breach of existing treaties. The treaties could also be changed (in due course) allowing countries to opt out of the Euro.
Absolutely fascinating and yet another example of how easily misconceptions get imbedded in the popular psyche and lead to erroneous actions and unnecessary and widespread misery! Anyway, I agree that Germany will eventually have to make a choice between the Euro and allowing the ECB to act as a lender-of-last-resort – the question is when? Germany is adamant in following a step-by-step process of eventually more European political and fiscal integration via change of treaties (which will take several years to effect), coupled with some level of support for government bond markets via limited purchases by the ECB in the secondary markets, and support from a leveraged EFSF (and possibly a Euro Redemption fund as recently suggested by the German Council of Economic Advisers). This approach may well work but would the markets be patient enough and not force Merkel's hand prematurely? Time will tell, but meanwhile expect continued volatility in markets – though not a meltdown or a significant upward trend until this issue is resolved.
On Asian Credit Growth:
The above note also has relevance to Asia, as it drives home the point that eventually (when push comes to shove), governments when faced a choice between growth and inflation will choose growth as the social consequences of no growth are more severe – yes, inflation is not a pleasant experience as you lose the real value of your income – but the alternative of having no income at all is far worse!. The attached graph highlights this choice by depicting credit growth in Asia over the past decade and highlights China's very timely response to the 2008 financial crisis by embarking on an unprecedented credit growth rate of 35% per year! With the global economy in a slowdown mode yet again, expect China (and the rest of Asia) to embark on another credit growth cycle leading to buoyant stock (but perhaps not property which was the main beneficiary of the credit spurge) markets.
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Global - Economy and Market
Italy's Monti in austerity race as IMF role eyed
ROME - Prime Minister Mario Monti faces a testing week seeking to shore up Italy's strained public finances, with an IMF mission expected in Rome and market pressure building to a point where outside help may be needed to stem a full-scale debt emergency.
China factory unrest flares as global economy slows
DONGGUAN, China - In factory towns across China's export powerhouse in the Pearl River Delta, a vicious cycle of slowing orders from the West and increasing wage pressures has led to a series of major strikes that could reverberate through the economy.
Europe's banks plan accounting tricks to look stronger
European banks are planning to change how they calculate risk-weighted assets to make it look like they have improved their financial conditions. Such a change could allow banks to avoid selling assets or new shares to meet new capital requirements.
China kicks off yuan trading vs Aussie, Canadian dollar
SHANGHAI - China's yuan started trading against the Australian dollar and Canadian dollar in the country's onshore forex market on Monday, the latest currency pairs to be introduced as part of Beijing's efforts to promote the use of its currency.
8:33am IST
China on track to be world's biggest online market by 2015
China will replace the U.S. as the world's biggest online market by 2015, a Boston Consulting Group report says. China will have more than $314 billion in online sales by that year, the report says. China Daily (Beijing) (23 Nov.)
Hungary: Moody's downgraded Hungary's government bond rating by one notch to Ba1, below investment grade, and the kept its outlook negative yesterday
Asian shares jump, euro firms amid Italy aid
TOKYO - Asian shares jumped and the euro firmed on Monday on hopes Europe will come up with some concrete steps this week toward activating a crucial euro zone bail-out fund and reports that the International Monetary Fund is considering helping Italy.
MSCI's broadest index of Asia Pacific shares outside Japan .MIAPJ0000PUS rose 1.6 percent, after slumping to its lowest level since early October on Friday to mark a fourth consecutive week of declines.
Japan's Nikkei .N225 gained 1.9 percent after hitting its lowest in two and a half years on Friday.
India - Economy and Market
RBI: opening up retail to help growth, curb inflation
CHANDIGARH - India's growth story is still "credible" and the move to open up the economy to global supermarket chains will help growth and control inflation, RBI governor Duvvuri Subbarao said on Friday.
Rules stipulating that foreign supermarkets will have to source 30 percent of produce from smaller industries cannot be restricted to the Indian market, as this would violate World Trade Organisation guidelines, a senior official said.
India opens retail sector to foreign investment
The specific conditions linked to the approval are yet to be announced.However, citing an unnamed government official, Bloomberg has reported that these will
likely include two conditions: 1) large overseas retailers would be required to invest a minimum of USD100mn million in India; and 2) the stores would be allowed only in cities with at least 1 million inhabitants. The government will apparently also allow 100% foreign ownership of single brand retail operations, up from 51% earlier.
This is a major and welcome change that could have important implications for inflation going forward.
We think the liberalization measures could spur investment in food storage and transportation facilities that would reduce wastage and therefore frequent supply shortages that drive food price volatility. It is believed that
about 40% of India's fruit and vegetables rot before they are sold, for example. This has been a structural driver of food inflation that has partly kept WPI inflation elevated.
Therefore, if the move successfully results in improved storage facilities, this should provide some relief for the RBI in the future.
FX reserves at $308.624 bln as on Nov 18
MUMBAI - India's foreign exchange reserves fell to $308.624 billion on Nov. 18, from $314.339 billion in the previous week, the RBI said in its weekly statistical supplement on Friday.
Cabinet note on PSU cross-holdings soon
The finance ministry will move a cabinet proposal to allow government companies to acquire equity in other public sector units.
Foodgrain productivity up 8% at 1,921 kg/hectare in 2010-11
Foodgrain productivity rose by 8 per cent to 1,921 kg per hectare in 2010-11 crop year, Parliament was informed today.
The average growth in Gross Domestic Product (GDP) of agriculture and allied sectors suffered a setback due to severe drought in many parts of the country during 2009-10 and drought/deficient rainfall in some states namely Bihar, West Bengal, Jharkhand and East Uttar Pradesh in 2010-11
However, the GDP growth for agriculture sector touched 6.6 per cent in 2010-11 -- the highest growth rate achieved in last six years -- on account of the corrective actions taken by the government
Indian shares to open up; retailers, Reliance eyed
MUMBAI, Nov 28 - Indian shares are expected to start higher on Monday, supported by firmer Asian markets and hopes the government will push more reforms after liberalising foreign investment in the retail sector.
Technology News –
Mid-sized IT cos go for buyouts
Mumbai-based software products and services provider Infrasoft Technologies has mandated three investment banks including Avendus Capital to look for acquisitions in the US in the range on $10-15 million. This comes on the heels of Infrasoft's acquisition of the financial services business of KPIT Cummins in October this year.
Cloud technology for instance has been a focus of many acquisitions in recent times with companies like Aditi Technologies and Vembu Technologies making acquisitions in the space.
Internet startup Flipkart and BPOs like EXL and Hinduja Global Solutions (HGS) have also bought companies over the last few months. HGS in August acquired Canada-based customer relationship management company Online Support (OLS) for $78 million.
Dion Global Solutions, a software solutions provider for financial markets, today said it has acquired UK-based wealth management and stock broking software provider Investmaster Group for an undisclosed amount.
TK Kurien cleans up Wipro with elbow grease, puts it back on growth path
Its operational metrics show that vitality is returning, helped in no small part by TK Kurien, the man who took over as chief executive of the Bangalore based company nine months ago.
Volumes - a measure of the number of hours billed by software engineers - have jumped 6% in the three months to September compared with the well under 2% quarterly growth when Kurien took over. That was marginally behind larger rival TCS (6.3%) and ahead of Infosys (4.6%).
HTC CFO says plans to launch competitive phones in Feb
TAIPEI - Taiwanese smartphone company HTC Corp said it has confidence that new products to be launched at the Barcelona Mobile Conference next February would be more competititive and achieve better sales.
AT&T to offer bigger asset sale to save T-Mobile deal - Bloomberg
REUTERS - AT&T Inc is considering an offer to divest a significantly larger portion of assets than it had initially expected, in order to salvage its $39 billion deal to buy T-Mobile USA, Bloomberg reported citing a person familiar with the plan.
There are all kinds of debt—as small as personal debt or as large as national debt. There's another type of debt as important as the rest—called Sovereign Debt. CNBC Explains.
What is sovereign debt?
It's debt guaranteed by a particular government, often called external debt.
What happens is this: In order to raise money, a government will issue bonds in a currency that is not the government's—and sells those bonds to foreign investors.
This is what makes the debt external, as purchasers are from outside the country.
The currency chosen for the sovereign debt is usually a strong one, in that its value is higher than other currencies.
Bonds, of course, are instruments of debt to be paid back at a certain time—that can be as long as ten years or as short as one year—with the original investment plus interest. Bonds issued by a government in a foreign currency are called sovereign bonds.
The money collected by the sale of the bonds can be used in any manner the issuing government wants. For instance, the funds can be used to spur job growth with spending on infrastructure projects. A government could also give the money to private companies or banks.
It's important to note, sovereign debt is technically owed by a government and not the citizens of the country issuing the sovereign bonds. It's not thenational debt.
However, in order to pay the sovereign debts, the government has to come up with the money in the foreign currency in which it sold the bonds. To get that money, the country could divert funds from internal spending, increase taxes, and/or induce cutbacks in social programs such as pensions.
© 2011 CNBC.com
Economist Paul Volcker was Chairman of the Federal Reserve under Presidents Reagan and Carter. But his name is becoming more well known for a part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. It's called the Volcker rule, and CNBC explains.
What is the Volcker Rule?
The rule restricts U.S. banks, or an institution that owns a bank, from making certain kinds of speculative investments with their own money that could hurt their customers.
That includes any bank or credit union that is federally insured and accepts deposits, as well as traditional banks and investment firms likeGoldman Sachs and Morgan Stanley—which are now bank holding companies.
The rule was proposed by Volcker as part of the the Dodd–Frank reform bill of 2010. Volcker was then the Chairman of the Economic Recovery Advisory Board under President Barack Obama, a post he left in January 2011.
Volcker partly blamed the speculative investing by banks for helping create the financial crisis of 2007-2010. He felt the type of investing the banks were doing resulted in putting customers at great risk for financial losses through the trading.
To be specific, the rule prohibits banks from engaging in short-term trading of any security, derivatives and certain other financial instruments from a bank's own funds. And it prohibits owning, sponsoring, or having certain relationships with a hedge fund or private equity fund.
The rule would require banks to create some sort of internal compliance program for making trades. Banks with major trading operations would have to report to federal agencies.
Banks made huge profits in the years leading up to the financial crisis on the type of trading the Volcker rule would stop—more than $15 billion by some estimates.
President Obama has come out in favor of the rule, as have many consumer groups.
What do critics say about the rule?
Banks say the rule would hurt their profits and cost banks additional money in attempting to comply with all of the rule’s details. Traders say their bonuses would be cut, as they would no longer be able to make commissions on certain trades.
The rule is also subject to many exemptions for trading, which some Volcker Rule supporters say are not stringent enough and banks say are too complex.
Is the Volcker Rule in place?
Not yet. The rule is still being worked on. The Treasury Department, Federal Reserve, Federal Deposit Insurance Corporation and Securities Exchange Commission did release a version of the rule on Oct. 11, 2011. It is 298 pages long.
Regulators have given the public until Jan. 13, 2012 to comment on the proposed draft of the rule.
Under the Dodd-Frank financial reform bill—which was signed into law in 2010—the final version of the Volcker rule will go into effect on July 21, 2012.
© 2011 CNBC.com
What is the Volcker Rule?
The rule restricts U.S. banks, or an institution that owns a bank, from making certain kinds of speculative investments with their own money that could hurt their customers.
That includes any bank or credit union that is federally insured and accepts deposits, as well as traditional banks and investment firms likeGoldman Sachs and Morgan Stanley—which are now bank holding companies.
The rule was proposed by Volcker as part of the the Dodd–Frank reform bill of 2010. Volcker was then the Chairman of the Economic Recovery Advisory Board under President Barack Obama, a post he left in January 2011.
Volcker partly blamed the speculative investing by banks for helping create the financial crisis of 2007-2010. He felt the type of investing the banks were doing resulted in putting customers at great risk for financial losses through the trading.
To be specific, the rule prohibits banks from engaging in short-term trading of any security, derivatives and certain other financial instruments from a bank's own funds. And it prohibits owning, sponsoring, or having certain relationships with a hedge fund or private equity fund.
The rule would require banks to create some sort of internal compliance program for making trades. Banks with major trading operations would have to report to federal agencies.
Banks made huge profits in the years leading up to the financial crisis on the type of trading the Volcker rule would stop—more than $15 billion by some estimates.
President Obama has come out in favor of the rule, as have many consumer groups.
What do critics say about the rule?
Banks say the rule would hurt their profits and cost banks additional money in attempting to comply with all of the rule’s details. Traders say their bonuses would be cut, as they would no longer be able to make commissions on certain trades.
The rule is also subject to many exemptions for trading, which some Volcker Rule supporters say are not stringent enough and banks say are too complex.
Is the Volcker Rule in place?
Not yet. The rule is still being worked on. The Treasury Department, Federal Reserve, Federal Deposit Insurance Corporation and Securities Exchange Commission did release a version of the rule on Oct. 11, 2011. It is 298 pages long.
Regulators have given the public until Jan. 13, 2012 to comment on the proposed draft of the rule.
Under the Dodd-Frank financial reform bill—which was signed into law in 2010—the final version of the Volcker rule will go into effect on July 21, 2012.
© 2011 CNBC.com
