Tuesday, April 28, 2009

TowerGroup Reviews Progress of Financial Services Industry After Obama Administration's First 100 Days

RJ Note: Here's an interesting review of the first 100 days in office. Somehow this report is just not as glowing as some of the recent msm groups.

/PRNewswire/ -- Analysts from leading research and consulting firm TowerGroup today issued the following assessment of the impact on the domestic business and financial environment of the new US presidential administration, as the anniversary of President Obama's first 100 days in power fast approaches.

"The financial challenges facing Mr. Obama upon entering office were frankly enormous, and this predicament has yet to change," said Bob Egan, Global Head of Research & Chief Analyst at TowerGroup. "How the president handles restoring confidence in the markets in the wake of the global financial meltdown will be the hallmark of this administration."

The five major areas of analysis from TowerGroup experts, which correspond to the firm's current research themes, are as follows:

Healing the Financial Services Industry
-- 1Q Results: Positive earnings from financial services institutions
(FSIs) reflect windfall profits from Obama's emergency financial aid
and finance/accounting adjustments. These adjustments mask structural
challenges that most FSIs face in fixing their underlying business
model.
-- Government Intervention: Lack of clarity in installing a repayment
plan for the Troubled Asset Relief Program (TARP) has strained the
relationship between bankers and the U.S. Treasury. The Obama
administration needs an exit strategy from TARP that returns
stability, risk taking and business decision making to the banking
industry.

-- G-20: Obama faces huge obstacles for practical agreement, coordination
and implementation of structural changes needed to stimulate the
global economy. He also faces challenges in maintaining global
collaboration, especially because America's interests may not be well
served by taking an all-for-one approach.

Improving Risk Management and Regulation
-- Financial Regulation: TowerGroup still expects Obama to introduce
significant change in the domestic regulatory structure. However, the
odds of a truly uniform system across banking, securities, and
insurance jurisdictions are extremely low.

-- Stress Testing and Systemic Risk: Stress test results may fall short
of probing the overall financial strength of large FSIs and could mask
systemic issues. Most FSIs remain vulnerable to further severe and
unexpected downturn conditions. TowerGroup believes that the Obama
administration has yet to address and fix the systemic risk issues
that led to the collapse of the financial system.

Reenergizing Consumer Finance
-- Consumer Lending: TowerGroup believes that net macroeconomic
contraction will continue to starve the retail financial sector. As
long as credit remains tight, consumers will keep their wallets in
their pockets and most consumer lending areas will remain frozen.
-- Consumer Deposits: Deposits are a vital source of liquidity and
funding for banks. Uncertainty remains over how already uneasy
consumers will react to the impending return to the basic insurance
cap of $100,000 per FDIC-insured deposit account (except for certain
retirement accounts) from the temporary cap of $250,000 to which it
was raised by the Federal Deposit Insurance Corporation in October
2008.

-- Student Loans: Obama aims to disintermediate FSIs in student lending.
Lenders that are unable to originate loans under Federal Family
Education Loan (FFEL) Program after July 1, 2010, will find eligible
borrowers moving to the subsidized loans of the Federal Direct Student
Loan Program (FDSLP). Most higher education institutions indicate a
preference for the competitive marketplace offered by lenders.

Reviving Mortgage Lending
-- Refinancing: TowerGroup expects the newly introduced Homeowner
Affordability and Stability Plan (HASP) and Making Home Affordable
Program (MHAP) to save many consumers from foreclosure and provide
some stability to fragile real estate markets. Lenders inundated with
refinance and loan modification requests will need to add staff and
automate quickly to implement the programs successfully.
-- Toxic Assets: Positive upticks in mortgage refinancing and origination
revenues do not seem to support the deterioration of toxic assets and
rising credit losses. TowerGroup anticipates continued tightening of
capital and a shortage of consumer credit.

-- Bankruptcy Legislation: Congress is considering legislation to allow
bankruptcy judges to reduce mortgage principal. TowerGroup expects
Obama to encourage Congress to give these reduction programs a chance,
eliminating the need for judicial cram-downs.

Remodeling the Credit Card Business
-- Balancing Act: Obama must sustain the $1 trillion credit card industry
while navigating the highly sensitive issue of protecting consumers
and preventing further reductions in revolving balances. New
restrictions on card issuers could extend the current recession.
-- Operational Efficiency: Banks should focus on improving their
operating models. More efficient operations will help in driving
fundamental change in the U.S. consumer payments business, thus
impacting consumers, both global and local banks and global trade.

-- Business Constraints: Obama is likely to restrict issuers' ability to
raise interest rates unnecessarily. TowerGroup expects tighter
controls and restrictions on fees and management of open lines,
resulting in credit line reductions that will shrink profit margins.

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