January 5, 2012: Fed Boosts Transparency With Decision to Reveal Rate Forecasts; Fresh Data Damp Hopes for Europe

Conversation Starter

GFI Group Inc. Becomes JLN IR & MarketsWiki Sponsor

John Lothian News is pleased to announce GFI Group Inc. has become a Partner level sponsor of JLN Interest Rates and a Friend level sponsor of MarketsWiki and MarketsReformWiki.

“We are pleased to begin an advertising sponsorship with John Lothian News, MarketsWiki and MarketsReformWiki. All are great news and reference sources for the financial services industry and we look forward to participating in the coming year,” said Helena Jarabakova, vice president and head of marketing for GFI.

"We are grateful for the support of GFI," said Christine Nielsen, managing editor of John Lothian News and editor of JLN IR. "There is so much going on in the interest rate sector in terms of regulation and market development, and GFI is a part of it. We look forward to working closely with GFI in the coming year."

About GFI Group Inc.

GFI Group Inc. (NYSE: "GFIG") is a leading provider of wholesale brokerage services, clearing services, electronic execution and trading support products for global financial markets. GFI Group Inc. provides brokerage services, market data, trading platform and analytics software products to institutional clients in markets for a range of fixed income, financial, equity and commodity instruments.

Headquartered in New York, GFI was founded in 1987 and employs more than 2,200 people with additional offices in London, Paris, Nyon, Hong Kong, Seoul, Tokyo, Singapore, Sydney, Cape Town, Santiago, Bogota, Dubai, Dublin, Tel Aviv, Calgary, Los Angeles and Sugar Land (TX). GFI Group Inc. provides services and products to over 2,600 institutional clients, including leading investment and commercial banks, corporations, insurance companies and hedge funds. Its brands include GFI(SM), GFInet, CreditMatch, GFI ForexMatch, EnergyMatch, FENICS, Starsupply, Amerex, Trayport and Kyte.

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-- Note: Christine Nielsen is starting 2012 with a holiday. Nicole V. Rohr, JLN web content editor, was the editor for this newsletter.

Lead Stories

Fed Forecasts Pose Risk For Soft Interest-Rate Futures Volume
NASDAQ
Trading in futures contracts linked to U.S. interest rates could decline following a decision by the Federal Reserve to publish an explicit timetable for when it expects to take action.
http://jlne.ws/yqRmKR

Fed Boosts Transparency With Decision to Reveal Rate Forecasts
Bloomberg Businessweek
A decision to reveal forecasts for the federal funds rate starting this month represents the biggest step toward openness since Bernanke took office in 2006 promising greater transparency, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. and a former Fed board economist. The central bank didn’t even start announcing changes in interest rates until 1994.
http://jlne.ws/zv8jEs

Q+A: Why the Fed is publishing interest rate forecasts
Reuters
The Federal Reserve will begin this month to publish policymakers' forecasts for interest rates, including when interest rates, which are currently near zero, will rise. The move, announced on Tuesday, could give the sluggish economic recovery a bit more lift by better aligning bets in financial markets with the consensus view at the central bank.
http://jlne.ws/x6hHQh

The Fed's new openness policy will create confusion, not clarity
Christian Science Monitor
We believe Fed officials publishing their expectations for the timing of the first rate increase could increase market volatility as differences between the members’ economic forecasts and actual figures that do not impact the projected policy path may confuse market participants. The Fed acknowledges these risks but views these concerns as “manageable.” We view the step as making the Fed more transparent while not doing much to improve clarity.
http://jlne.ws/zavZtp

Fresh Data Damp Hopes for Europe
WSJ.com
Doubts over Europe's strategy to overcome its debt woes re-emerged Thursday amid fresh evidence that the region is in recession, reinforced by concerns about the fragility of its banks. With investors worried about the government funding needs this year—euro-zone governments will need to refinance more than 1 trillion euros (about $1.29 trillion) of maturing short-term and long-term debt in 2012—yields on Italian 10-year bonds crept above 7% and Europe's bailout fund had to offer higher interest rates than in the past to place 3 billion euros of debt.
http://jlne.ws/wRBeyc

Euro hit as investors fret over Europe's banks
Yahoo! News
For a second day running, market concern has centered on the state of the banks following UniCredit's announcement Wednesday that it was selling new shares at a 69 percent discount to Tuesday's closing price. Renewed fears over Europe's shaky banking sector sent the euro skidding to a 15-month low against the dollar Thursday, while stock markets failed to get much of a boost from another round of upbeat U.S. economic data
http://jlne.ws/x5u4dG

European Stocks Decline on Bank-Capital Concern; UniCredit Sinks
Bloomberg Businessweek
European stocks declined for a second day as concern that the region’s banks will have to raise capital overshadowed a report showing that U.S. companies added more workers to their payrolls than economists had predicted. UniCredit SpA, which announced a rights offer at a 43 percent discount yesterday, slumped to a 19-year low. Societe Generale SA dropped 4.5 percent after announcing it will cut corporate- and investment-banking staff.
http://jlne.ws/wqnl5x

Eurozone crisis, MF Global chill trading at CME Group
Chicago Tribune
CME Group and IntercontinentalExchange said on Wednesday that trading volume dropped last month, which analysts attributed to MF Global's collapse and Europe's debt crisis chilling trading in U.S. futures markets. Chicago-based CME, the biggest U.S. futures exchange operator, said trading dropped 9 percent last month to an average of 9.6 million contracts a day, taking the shine off a record-setting year.
http://jlne.ws/wumvvI

Hungary ready to discuss IMF loan: report
MarketWatch
Hungary on Thursday indicated it was ready to negotiate a standby loan with the International Monetary Fund without setting preconditions and was also open to discussing a recent law that critics say compromises the independence of the country's central bank, The Wall Street Journal reported. "The government is aware of how severe the situation is and what's at stake at the talks with the IMF," said Tamas Fellegi, the country's chief negotiator with the Fund.
http://jlne.ws/A8P4yr

Consumer bureau to wield new powers, but challenges loom
CNN Money
Obama on Wednesday made a recess appointment of former Ohio attorney general Richard Cordray to be the first director of the Consumer Financial Protection Bureau. With President Obama's recess appointment of a new chief to run the consumer bureau, the agency can flex new powers regulating financial products from non-banks -- including student loan providers, debt collectors, payday lenders, and mortgage originators and servicers.
http://jlne.ws/z6Mnmj

Obama Chooses Politics Over Principle in Naming Consumer Bureau Head: View
Bloomberg
President Barack Obama bypassed the U.S. Senate and summarily installed Richard Cordray, the former Ohio attorney general, as director of the Consumer Financial Protection Bureau yesterday. Hours later, Obama filled three vacancies on the National Labor Relations Board, possibly the only agency Republicans dislike more than the consumer bureau.
http://jlne.ws/zNdEA1

Cordray: Consumer agency to target shadow banks
Reuters
In his first speech as head of the Consumer Financial Protection Bureau, Richard Cordray said his agency will immediately begin overseeing lenders outside the banking industry, and will take a tough stance against any financial players that break the law.
http://jlne.ws/xGC9xw

The Use of ABX Derivatives in Credit Crisis Litigation
NERA
Since 2007, the losses and write-downs resulting from the credit crisis have reached over $2 trillion worldwide. As the losses have mounted, securities litigation has followed and over 450 related securities cases, both class actions and others, have been filed. Of particular interest to the litigation are a set of credit default swaps (CDS), or credit derivatives, known as the ABX indices (ABX).
http://jlne.ws/xqIu3x

Events

Fixed Income Markets 2012
January 24, 2012
Tabb Forum Looks At Changes Ahead And Staying Ahead In Fixed Incomes
http://jlne.ws/snQ3VO

Treasury Futures: Using International Fixed-Income and Money Market Spreads
January 31, 2012
The IFM Instructs On Using Fixed Income And Money Market Spreads
http://jlne.ws/u7MgUK

Eurodollar (LIBOR): Building Blocks for Interest Rate Swaps
January 26, 2012
The Institute for Financial Markets
http://jlne.ws/woUeXp

National Association of Home Builders' Show
February 10, 2012
Special Session With Fed's Bernanke Open To All Registered Attendees
http://jlne.ws/tEcqjW

Economic News

The Fed's Advice on the Housing Crisis
NYTimes.com
The Federal Reserve tried Wednesday to stir interest among policy makers in the problems afflicting the housing market, sending a white paper to Congress outlining suggestions for easing those problems.
http://jlne.ws/xGhBLf

Treasury prices fall after auto sales and jobs data point to improving economy
The Washington Post
Americans bought about 10 percent more cars in 2011 than in 2010 and analysts expect the momentum to continue in 2012. Also the Labor Department reported that unemployment rates fell in three-quarters of large U.S. cities in November. The improved economic news sent the benchmark U.S. Treasury note down 31.2 cents for every $100 invested on Wednesday. Its yield, which trades in the opposite direction, rose to 1.98 percent from 1.95 percent Tuesday.
http://jlne.ws/xiMBPI

Number of people seeking unemployment aid falls to 372,000, signaling stronger job market
The Washington Post
The number of people seeking unemployment benefits fell further last week, ending the year on a three-month run of declines that point to stronger hiring in 2012. Weekly applications dropped by 15,000 to a seasonally adjusted 372,000 last week, the Labor Department said. That’s 11 percent lower than the same time last year and a positive sign ahead of Friday’s important read on December job growth.
http://jlne.ws/zNyIj3

Manufacturing in U.S. Expands by Most in Six Months
Bloomberg Businessweek
U.S. factories expanded in December at the fastest pace in six months, adding to evidence manufacturing is improving from India to the U.K. entering 2012.
http://jlne.ws/wt7kGW

New Pentagon defense strategy puts more focus on Asia
Yahoo! News
President Barack Obama unveiled adefense strategy on Thursday that calls for greater U.S. military presence in Asia and envisions cutting troops in Europe as thePentagon seeks to reduce spending by nearly half a trillion dollars after a decade of war.
http://jlne.ws/y75QHn

Exchanges, Clearing Houses & MTFs

LCH.Clearnet appoints Lisa Rosen as Group Head of Compliance and Public Affairs
Press Release
LCH.Clearnet Group Ltd (LCH.Clearnet) has appointed Lisa Rosen as Group Head of Compliance and Public Affairs. Previously, Lisa was Managing Director, Global Head of Regulatory Affairs at Barclays Capital in London. In this newly created role, Lisa will oversee LCH.Clearnet’s regulatory and lobbying activities. She will report to Christophe Hémon, Group COO.
http://jlne.ws/zFnSVu

OCC Cleared Contract Volume Reached 4.6 Billion Contracts in 2011 for Record Year
MarketWatch
OCC announced today that total cleared contract volume in 2011 reached 4,600,955,949 contracts, a 17 percent increase over the 2010 volume of 3,925,686,805 contracts. 2011 marked the ninth consecutive year of record volume for OCC and the first time cleared contract volume surpassed 4 billion contracts.
http://jlne.ws/wlLcpc

Firms & Banks

UniCredit selloff highlights bank sector woes
MarketWatch
Shares in UniCredit SpA have tumbled after the Italian lender announced it would sell shares at a massive discount, shaking investor confidence in the health of European banks.
http://jlne.ws/Abd9z8

SocGen Leads French Bank Shares Lower Before Nation’s Debt Sale
Bloomberg Businessweek
Societe Generale SA, France’s second- largest bank, fell as much as 5.4 percent in Paris trading, leading declines among the country’s lenders as the government plans its first debt sale of 2012.
http://jlne.ws/z4y4PB

SNB Chief to Stay On Amid Deals Controversy
WSJ.com
Swiss National Bank President Philipp Hildebrand Thursday sought to defuse a controversy over currency transactions he and his wife made last year, asserting that he broke no rules and would not resign but admitting that the incident had raised ethical questions.
http://jlne.ws/AEx3iM

Gross Backs Away From New Normal After Missing Bond Rally
Bloomberg Businessweek
Bill Gross is backing away from Pacific Investment Management Co.’s outlook for a “new normal” after lagging behind the majority of his peers during the biggest bond-market rally in nine years. The period of muted growth in developed economies, high unemployment and “relatively orderly” deleveraging that Mohamed El-Erian, who shares the title of chief investment officer with Gross, coined in the aftermath of the 2008 financial crisis appears to be morphing into a world of credit and zero-bound interest-rate risk, said Gross, the founder of Pimco and manager of the world’s biggest bond fund.
http://jlne.ws/A1siHm

Barclays Sets Pricing On Sterling Covered Bond, Swaps +1.90 Area
NASDAQ
Barclays Bank PLC (BCS) has set pricing on its sterling- denominated, benchmark-sized, 10-year covered bond in the area of 190 basis points over midswaps, one of the banks running the deal said Thursday.
http://jlne.ws/AbuoeE

Blackstone reaches megafundraising finish line
Yahoo! News
Blackstone Group LP will conclude fundraising for its latest buyout fund in January, raising just over $16 billion, three people familiar with the matter said on Wednesday, in a 4-year process challenged by the global financial crisis.
http://jlne.ws/wjSfcm

Auctions & Statistics

French bond auction fails to dissuade downgrade worries
CNN Money
The French auction of about € 7.9 billion on bonds included more than € 4 billion worth of 10-year bonds, with a yield of 3.29% and a bid-to-cover ratio of 1.64%. That's not too shabby, considering the 10-year is trading at 3.32%, but anxiety continues to dog European bond markets.
http://jlne.ws/AeagQk

Market Morning: Looking Lower
The Street
France sold mostly 10-year notes in the bond auction Thursday. Investors asked for an interest rate of 3.29% to lend France €4.02 billion in 10-year money, up from 3.18% in December, according to The Associated Press. Demand was strong at the auction.
http://jlne.ws/Ar36r8

Bunds up, focus turns to Italian, Spanish auctions
Reuters
German Bunds rallied on Thursday and French paper reversed earlier losses after France drew solid demand at an auction of almost 8 billion euros of bonds. However, bonds issued by Italy, Spain and Belgium were under pressure ahead of Spanish and Italian auctions next week which are seen as their first major financing tests of the year and Bunds may find further support ahead of them.
http://jlne.ws/xVfbfM

Regulators

New Fed voters make weaker U.S. dollar likely for 2012 (UUP, AUS, BZF)
NASDAQ
The three incoming members of the Federal Reserve Open Market Committee are much stronger advocates of monetary measures to stimulate the US economy, almost ensuring that a third round of quantitative easing is on the way. If so, look for the US dollar to go on the defensive.
http://jlne.ws/wNpwOb

Geithner plans Asia trip to discuss Iran
UPI.com
U.S. Treasury Secretary Timothy Geithner will travel to Asia to discuss pressuring Iran to rethink its alleged nuclear weapons program, the department said.
http://jlne.ws/AAgiwB

A New Diversity Monitor for the S.E.C.
NYTimes.com
A provision of the Dodd-Frank Act aimed at bringing more women and minorities to the male-dominated world of finance is moving one step closer to being implemented, after the Securities and Exchange Commission announced this week that it had named Pamela A. Gibbs to head its recently created Office of Minority and Women Inclusion.
http://jlne.ws/xA6Her

OTC

AMR shares to trade over the counter
Yahoo! News
American Airlines parent AMR Corp., whose shares are being removed from the New York Stock Exchange, says the stock will be available on over-the-counter markets beginning Thursday. It will trade on the OTCQB market under the ticker symbol "AAMRQ," the company said.
http://jlne.ws/xBjWPs

Simba Energy Inc. Joins OTCQX
MarketWatch
OTC Markets Group Inc. (otcqx:OTCM), the financial information and technology services company that provides the world's largest electronic marketplace for broker-dealers to trade unlisted stocks, announced that Simba Energy Inc. (otcqx:SMBZF)(tsx.v:SMB) is now trading on the highest tier of the OTC market, OTCQX®. Simba Energy is an oil and gas exploration company focused on overlooked and under explored basins in Africa.
http://jlne.ws/AE2jnQ

Global News

Brazil Suffers Assault on Bank Integrity With Tombini Rate Cuts
Businessweek
Brazilian central bank board member Carlos Hamilton so disagreed with a surprise interest-rate cut in August that he slammed phones and stomped through hallways, according to three bank officials familiar with his reaction.
http://jlne.ws/xyzurs

Treasuries Advance as Europe’s Debt Crisis Boosts Demand for Safe Assets
Bloomberg
Treasury 30-year bonds rose for the first time in three days as an increase in borrowing costs in France and Hungary added to concern the region’s debt crisis is spreading, boosting demand for the safest securities.
http://jlne.ws/zdqh1l

Hungary open to discuss standby deal with IMF
Yahoo! News
Hungary's top financial negotiator said his nation is open to working out a standby loan with the International Monetary Fund but insisted Thursday that Hungary was still able to finance its debts from the markets. That situation could change soon. Hungary's debt management agency sold less than the full amount on offer at an auction Thursday of 12-month Treasury bills, with the average yield rising to 9.96 percent — more than 2 percentage points higher than at a similar auction Dec. 22. That is also significantly higher than the 7 percent level that forced three other European nations to seek bailouts.
http://jlne.ws/zfqYNi

India's Monetary Cycle Has Peaked: Deputy Central Banker
CNBC
The deputy governor of India's central bank said the equation between growth and inflation in the country has become much more balanced in the last few months and indicated that interest rates were unlikely to rise further, though he stopped short of saying whether the next move would be a rate cut.
http://jlne.ws/yscNAz

Swiss central bank chief to explain dollar deals
Yahoo! News
Switzerland's central bank chief was breaking his silence Thursday over a private currency deal that appeared to net his family big profits at a time when he was spearheading efforts to lower the value of the Swiss franc. In a bid to counter a national uproar, the Swiss National Bank said its President Philipp Hildebrand would hold a news conference in Zurich to discuss "financial transactions and events of recent days."
http://jlne.ws/wBeBpO

Sweden Shows Europe How to Cut Debt, Weather the Recession: View
Businessweek
Sweden faces a difficult year, like every other European economy, but unlike the rest of the European Union, it’s equipped to cope. There are lessons here, especially for the EU’s other non-euro countries. Scandinavia’s biggest economy will see growth slow to less than 1 percent in 2012, down from an impressive 4.5 percent in 2011, according to the National Institute of Economic Research. Sweden relies heavily on exports to the rest of Europe, and the EU’s protracted economic crisis will set it back.
http://jlne.ws/yqESFg

Will China Come in for a Hard or Soft Landing?
Morningstar
Many issues have been causing concern for global investors over the past few months. Front and center is the never-ending European debt crisis. The situation in Greece is not improving, and lately investors have been dumping the bonds of even those countries previously considered to be sheltered from the storm, such as France. In this climate, China's slowing pace of growth has not been grabbing as many headlines. But it remains a major issue for managers trying to position their portfolios.
http://jlne.ws/xZ3IKT

Speech - Fed's Elizabeth A. Duke: Fostering Innovation in Community Development Finance

Elizabeth A. Duke: Fostering Innovation in Community Development Finance
May 10, 2011

Good morning. It is a pleasure to be in St. Louis to open the third biennial Exploring Innovation Conference. The first Exploring Innovation conference was opened four years ago by Professor Andrew Hargadon, the Charles J. Soderquist Chair in Entrepreneurship at the University of California, Davis and a senior fellow at the Kauffman Foundation. His remarks established a framework of collaboration for innovation in community development finance. Since then, this conference has served as a forum for sharing ideas and maintaining the networks that are so critical to this work.

Professor Hargadon initially set the stage by explaining that innovation and creativity are not the same. An individual acting alone to solve a problem can be creative, while innovation is the process of adding value by applying a new idea or method to something that is already established. For example, Henry Ford did not contribute the creative energy to invent an automobile. Rather, Ford's innovation was the idea to combine the 100-year-old technology for the automobile with the meat packing industry's assembly line process, resulting in a means to mass produce cars. On the same note, Apple did not invent the MP3 player with the introduction of the iPod. Rather, the company used existing technology and a collaboration with the music industry to develop iTunes software, bringing an affordable application of the MP3 to the public. In each of these examples, improving upon a good idea was as important, if not more important, than the initial idea. The message for community development professionals was the importance of collaboration, sharing ideas, and building upon the ideas of others in order to innovate for the benefit of our communities.

The significance of Professor Hargadon's message should not be lost in today's challenging economic climate. Times are particularly difficult for residents of our low- and moderate-income communities who are struggling more than ever to support their families, obtain affordable housing, and access basic services. We are here this week to develop fresh approaches to address these persistent problems that are even more widespread today than they were four years ago. Throughout the conference, I hope you will contribute your own best ideas and look for ways to use the ideas of others to improve your own communities and enhance your innovation network.

To this end, I would like to talk about efforts underway across the Federal Reserve System and to share some of our ideas and resources. Situated at the intersection of the federal government and private financial institutions, the Federal Reserve System is well-positioned to facilitate collaborative activities among experts in the community development finance industry. Through our network of 12 Reserve Banks across the country, we build relationships with local governments, nonprofits, foundations, academic institutions, and financing entities. We use outreach to connect the creative minds working in community development to generate innovative policy and finance solutions. By adding applied research to the mix, we convene these stakeholders around particular community development topics and disseminate information to low- and moderate-income communities, practitioners, and other interested parties.

I realize that collaboration and innovation can sound abstract, so let me offer some examples of issues that the Fed has championed recently, and where we have seen the results of our efforts.

Housing Crisis
I would like to start with the Federal Reserve System's response to the housing crisis as it unfolded over the past three years. Our multifaceted response included guidance to banks, updates to regulations, changes to monetary policy, and analytical research contributions. It also included engagement in national and regional partnerships to inform policy and practices around foreclosure prevention and neighborhood stabilization in communities hard hit by foreclosures.

From the onset of the crisis, we called on the expertise of community development professionals within the Federal Reserve System to respond to concerns from homeowners by crafting strategies to enhance foreclosure mitigation, encourage loan modifications, and stave off the rising number of rescue scams. The Fed also strengthened existing collaborations with fellow regulators, community groups, policy organizations, financial institutions, and public officials to discuss innovative methods for preventing unnecessary foreclosures and the negative impact they have on communities. One valuable product of this effort was the development and dissemination of data tools, heat maps, and detailed analysis to identify neighborhoods most at risk of foreclosures and their damaging effects. Equipped with this information, community leaders can better target limited resources to borrowers and declining communities. In 2008, as interest in market-specific responses to foreclosures grew, the Fed developed a conference series entitled "Recovery, Renewal, Rebuilding"1 in five cities that represented a variety of housing markets--from older, industrial cities with shrinking populations to boom towns that grew too quickly.

Meanwhile, we also launched online Foreclosure Resource Centers at each Reserve Bank that continue to provide homeowners, prospective home buyers, and community groups with information to help prevent foreclosures and lessen their negative influence on neighborhoods. These centers offer a variety of resources, including an enhanced Foreclosure Mitigation Toolkit, which provides detailed steps and information for localities seeking to develop foreclosure prevention activities. The toolkit also includes a new Foreclosure Recovery Resource Guide to help consumers recover from the foreclosure process.

As the foreclosure crisis unfolded and concerns expanded from loss mitigation and loan modifications to worries about housing values, vacant properties, and neighborhood stabilization, the Fed's response evolved as well. For example, starting in 2009, the Board worked with the Federal Reserve Banks of Boston and Cleveland to produce a publication addressing issues related to the acquisition and disposition of real estate owned properties (REO), a term that refers to property owned by a financial institution, typically a bank, after a foreclosure. The publication, "REO and Vacant Properties," is a compendium of papers by national experts that highlight their key ideas regarding the disposition of vacant properties. Last November, the papers were presented publicly at a forum at the Federal Reserve Board in Washington, D.C., where more than 100 participants shared ideas and lessons learned about community stabilization. In addition, last year, the Federal Reserve worked with other federal regulators to encourage neighborhood stabilization activities through the Community Reinvestment Act. This year, we created video reports that describe specific strategies for managing vacant properties in Cleveland, Phoenix, and Detroit.

Throughout our work on the housing crisis, we have witnessed policy changes and novel responses to the challenges facing our communities. The collaborative efforts and information sharing from national housing and community development experts, including those led by our own staff, helped bring these innovative efforts to fruition. For example, as a result of our neighborhood stabilization work, some Reserve Banks partnered with national groups to help declining cities learn how to use land banks as a potential tool to address high rates of foreclosure and vacant properties. Based on the initial success of the Genesee County Land Bank, established in Michigan in 2002, and resources provided by the National Vacant Properties Campaign, land banking is becoming an integral part of community revitalization efforts for many places across the country. For example, the city of Cleveland has used the Cuyahoga County Land Bank as an important tool to address its vacant property issue. Cuyahoga County works with lenders and servicers, including the government sponsored entities (GSEs), to access properties quickly after they become vacant. This enables the county to make decisions regarding the REO before it becomes dilapidated or a nuisance for neighboring properties.

Because dealing with vacant property is a high profile issue in Cleveland, the Federal Reserve Bank of Cleveland regularly participates in conversations about solutions, such as land banking, and provides research on the neighborhood dynamics of this problem to support communities crafting solutions. The Bank recently released the "Adaptive Policies Needed to Address Changing Foreclosure Landscape" paper to highlight the changing circumstances driving the foreclosure crisis and the need for comprehensive policy approaches that cater to the specific challenges of diverse neighborhoods.

For its part, the city of Cleveland has responded to the growing number of vacant properties through the innovative use of data that allows the city to provide neighborhood-specific responses. NEO CANDO, or the Northeast Ohio Community and Neighborhood Data for Organizing, is a free and publicly accessible social and economic data system provided by the Center on Urban Poverty and Community Development, a research institute housed at Case Western Reserve University. NEO CANDO developers recognize that limited resources are available to address foreclosure issues, and their data support a systemic methodology for allocating available dollars. Hopefully, others will draw on the experiences with targeted data use in Cleveland just as Cleveland drew on the land banking experience of Genesee County.

Small Business Credit
Last year, diminishing credit availability for small businesses emerged as a significant stumbling block to the economic recovery. Small businesses are central to creating jobs and to restoring our economic prosperity. In fact, about one-half of all Americans are employed by firms with fewer than 500 employees. As the challenges facing small business owners surfaced, the Federal Reserve sought to better understand the nuances of the credit tightening.

Together, the Reserve Banks across the System leveraged relationships with lending institutions, small business owners, and community groups to discuss the changes in small business credit and think about potential solutions. Through this initiative, the Federal Reserve sought to deepen its understanding of the dynamics of the supply of and demand for small business credit, to identify specific credit gaps, and to learn of promising practices and suggestions for improvement. In the course of just five months, the Fed hosted more than 40 meetings around the country and finished with a wrap-up forum in Washington, D.C., designed to summarize what we had heard and to plan next steps.7 Some of the meetings took the form of small focus groups or listening sessions. Other meetings were larger in scale, with more formal agendas focusing on a particular aspect of small business financing, such as minority entrepreneurship, the role of Community Development Financial Institutions (CDFIs), or federal guarantee loan programs. Several meetings focused on a specific industry, such as auto suppliers.

Whether small or large, all of the meetings brought together small business owners, small business trade groups, financial institutions and other private lenders, bank supervision officials, CDFIs, and other small business support service providers to discuss ways to improve the flow of credit to viable small businesses. Although the information obtained through these meetings was anecdotal in nature, common themes did emerge. And the ability to obtain real-time information directly from lenders and potential borrowers has proved invaluable to our understanding of the issues affecting credit availability.

Illustrating the importance of small business access to credit, a compilation of the key findings of our outreach effort was included in Chairman Bernanke's semiannual Monetary Policy Report to the Congress in July 2010. Already, a few of the meeting participants' recommendations have become a policy reality for the small business credit market.

Participants in the nationwide meetings recommended improving access for CDFI loan funds to participate as guaranteed lenders in the SBA 7(a) program in order to increase the availability of credit to the underserved markets that depend on CDFIs. Later, the Small Business Administration (SBA) rolled out two pilot programs aimed at increasing the number of loans in these communities. The Community Advantage program will increase the number of lower-dollar loans in underserved communities by allowing CDFIs, and other mission-focused lenders, to originate SBA 7(a) loans up to $250,000. Also, the Small Loan Advantage program is structured to encourage larger, existing SBA lenders to make lower-dollar loans, which often benefit businesses in underserved markets.
Meeting participants also expressed support for additional low-cost, long-term capital for CDFIs. Such capital would allow CDFIs to price loans to reflect their risk and still offer an affordable rate to small businesses that may not qualify under conventional bank standards and products. One participant recommended that policymakers consider capital models for CDFIs that further leverage private dollars and create innovative incentives for the private sector to partner with experienced CDFI fund managers with strong risk-management capacity. Soon, as part of the Small Business Jobs Act, the U.S. Treasury will provide up to $1 billion annually in federal guarantees for the next three years for bonds issued by CDFIs for community development purposes. In addition, the act established a $300 million Small Business Lending Facility for Community Development Loan Funds. The regulations for both of these programs are currently under development.

At this point, I am pleased to tell you that recent anecdotal evidence leads me to believe that conditions are improving for small businesses. Although no definitive data source exists, the combination of a variety of recent survey results paints a picture of increasing optimism about future sales and business conditions and a corresponding easing of credit availability for small businesses.10 While this upward trend is encouraging, the Fed is continuing to look for ideas that will help small businesses as they work through some of the more subtle issues constraining their overall growth.

Going forward, we will coordinate a series of regional forums for financial institutions and CDFIs on the use and deployment of small business programs authorized in the Small Business Jobs Act and on sharing information about issues and successful practices at a national level. The forums are being organized with participation from the Opportunity Finance Network (OFN), the trade organization for CDFIs; the SBA; the Treasury; the CDFI Fund; and our partner regulatory agencies. In addition to providing information to regional forum participants, we will seek to use these forums to gather information on best practices, trends, and any barriers to the successful implementation of these federal programs. This year's work will culminate with a November conference at the Board of Governors, in partnership with the Federal Reserve Bank of Atlanta, to discuss small business credit and workforce training issues facing entrepreneurs--particularly women and minority entrepreneurs and those living in low- and moderate-income communities. Because jobs and the needs of low- and moderate-income communities remain a priority for us, we will continue to foster collaborative efforts in hopes of additional innovative responses.

Community Data Initiative
The Federal Reserve has a long history of using anecdotal information gathered from businesses within the Reserve Districts to better understand underlying regional economies and economic conditions. One of the lessons to be learned from the role of subprime lending in the recent crisis is that it is equally important to pay attention to underlying trends in segments of the economy, such as low- to moderate-income communities or small businesses. The anecdotal information we collect from community advocates and development professionals is quite valuable, but it will be even more actionable if we have a framework for systematically collecting, studying, and disseminating the information. To address this need to identify early warning signs of future economic challenges, we are testing several initiatives to collect information from practitioners and others working directly in the communities. This effort, known as the "Community Data Initiative," is intended to provide a systematic approach to gathering and disseminating on-the-ground intelligence on current conditions and emerging challenges facing low- and moderate-income communities. Insights from the data will inform existing processes at the Fed and provide useful information to low- and moderate-income communities. In order to achieve this new data collection and analysis objective, a number of the Reserve Banks are leveraging their own research resources to survey, poll, or otherwise collect information about communities in their District. At the Board, we are also conducting our own surveys to help validate the District results.

Although the project is in its infant stage, I would like to share some initial findings from two of the Reserve Banks that are already participating in the process. The Federal Reserve Bank of San Francisco's "Community Indicators Project" is a quarterly survey tool that includes a collection of open-ended questions to inform community development policy and practice in a richer way than quantitative data alone. Leaders from banks, nonprofits, community-based organizations, foundations, local government, and the private sector are asked about the conditions and trends affecting low-income households. The lack of jobs was the dominant theme in the first year of data collection, with the majority of respondents identifying unemployment as the primary cause of new distress in the housing sector as increasing numbers of residents struggled to make mortgage or rent payments. One survey participant stated that "prolonged unemployment and underemployment are causing a huge growth in the number of low-and moderate-income individuals and communities. Unemployment is now the driving force behind most of the other crises we are facing."

Similarly, the Federal Reserve Bank of Richmond has been using their Emerging Issues Surveillance Tool (EIST) to identify the most significant current and emerging community development issues in the District's diverse communities. The top three issues in the spring 2011 data release were employment opportunities, access to housing, and home foreclosures. The jobs issue surfaced again, with a focus on the need for training, when a participant stated: "Employment is the key to sustained self-sufficiency. There are jobs available in the Washington, D.C., market, but mostly high-skilled jobs for which low-income residents are unqualified." As with the San Francisco survey, the results from this tool provide useful data for Richmond policymakers and District stakeholders.

Virtual Collaboration
The growth in survey and other tools is intended to expand the Federal Reserve's outreach efforts and to ensure that we are responsive to the entire population. As we continue to improve the tools we use, we hope to continue to engage each of you in the conversation.

In the past, collaboration often required outlays of scarce time and financial resources to attend face-to-face meetings. We are increasingly exploring ways to use technology to effectively expand our reach. For example, the System is using live web-streaming to share key conferences through a YouTube channel as well as sharing information through webinars. In addition, the Federal Reserve Bank of Atlanta has introduced a series of podcasts with information on topics from foreclosure responses to perspectives on real estate. Finally, as noted earlier, the Board just released three video reports about strategies for addressing REO and vacant properties. If I have sparked your interest, I hope you will visit the Board's website to watch the videos.

Conclusion
It is clear that it will take all of us working together to solve the problems that face communities today. Collaboration among government, nonprofits, and our partners in the private sector should focus on innovative ideas that can address the changing conditions of our communities. As the nature of problems change, we all need to be flexible and modify our responses.

Remember Professor Hargadon and his theory about innovation? Well, he also stated that "social network theory divides the world into nodes and ties. You are a node with ties to other people you know. The people you know have ties to each other…. If you can talk to a wide range of people, you are broadening your entire world, the more people you know, the more likely you are to be successful and happy. This has been proven. … The more you share and talk to new people about your ideas, the more likely you are to be innovative." I would like to take this final moment to encourage you to please make the most of your opportunities to share with your colleagues here this week, and to continue to push the envelope on innovation. And I hope the Federal Reserve System continues to be a node of innovation with ties to each of you.

Thank you.