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5 questions U.S. banks could have asked IBM's Watson

These are stories Report on Business is following Tuesday, March 6, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Watson on Wall Street IBM's Watson, the supercomputer and star of Jeopardy last year, will soon put its talents to banking.

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IBM Corp. and Citigroup Inc. announced yesterday that they've reached a deal to study the uses for Watson in banking.

"Under the agreement, Citi will examine the use of deep content analysis and evidence-based learning capabilities found in IBM Watson to help advance customer interactions, and improve and simplify the banking experience," the two companies said in a statement.

"Watson's ability to analyze the meaning and context of human language, and quickly process vast amounts of information to suggest options targeted to a consumers' individual circumstances, can help accelerate and assist decision makers in identifying opportunities, evaluating risks, and exploring alternative actions that are best suited for their clients," they added.

Watson, of course, was the superstar that trounced its human competitors on the popular game show last year.

"The collaboration between IBM and Citi will explore how applying Watson in the consumer financial market could help empower financial professionals to make better business decisions and represents a significant step in delivering on the promise of personalized banking in the 21st century," said Mike Rhodin, senior vice-president of IBM Software Solutions.

If it all sounds a little too Terminator for you, ask yourself what Watson's advice might have been on subprime mortgages in the run-up to the financial crisis. Here are five questions we came up with that the entire U.S. banking industry might have asked Watson at the time. Too late now.

1. How many mortgages on a single Florida property is too many?

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2. Can you tell us how much our borrowers earn, because we haven't asked them?

3. This debt insurance that we bought from AIG is good, right?

4. Can you please run a rigorous stress test and crunch the numbers on our mortgage-backed securities?

5. Can you please not crunch the numbers on our compensation and bonuses? Nothing to see there.

Markets sink Investors are in a foul mood today, driving down stocks and commodities amid concerns over the economic outlook and a looming debt swap in Greece. Until this week, markets had been generally rallying since mid-December and actions then by the European Central Bank.

While speculation continues where Greece is concerned, yesterday's new growth targets in China, coupled with fresh economic readings today in Brazil and the embattled euro zone have added to the angst.

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"Despite the fact that China downgraded its growth forecast yesterday amid concerns about a double-dip in Europe, markets have today decided - somewhat belatedly - that this is a bad thing, and have turned sharply lower," said senior market analyst Michael Hewson of CMC Markets in London.

"Admittedly, sentiment hasn't been helped by news that another emerging economy in the shape of Brazil saw 2011 GDP slip to 2.7 per cent from a 2010 figure of 7.5 per cent, and this helped accelerate the slide."

Markets sank first in Asia and Europe, followed in North America by the S&P 500 and Toronto's S&P/TSX composite. Gold and oil also fell.

Playing into everything, as it has for the past two years, was Greece. There appeared to be some optimism yesterday as a major group of creditors said they would sign on to a debt swap as Athens and private bondholders head toward another key date, this one on Thursday.

But rumours and speculation continued to surround this, and whether the end result is deemed to be a default that would trigger credit insurance payouts. At the same time, Athens threatened to play hardball.

"Equity markets took a plunge on fears that the PSI deal would fail," said Sebastien Galy, senior currency strategist at Société Générale.

"Bargaining reached a crescendo with a few Greek pension funds said to be holding out, while the government threatened to make no payments to holdouts, potentially triggering a credit event.Officials at the Greek ministry subsequently said that the deal would be finalized on Thursday. In the art of barging through open doors, it was a masterpiece and yet sufficient to temporarily calm down equity markets."

Currency strategist Elsa Lignos of RBC in London said she expects the deal will get done, with some measures being forced through what are known as collective action clauses, or CACs, when Thursday rolls around. "But as with all parts of the Greek drama, few will believe it until it is a done deal and then it will be old news anyway."

Yesterday, several of the institutions that form a committee of creditors said they would join in to the so-called private sector involvement, or PSI, that is part of Greece's grand plan to ease its debt crisis.

"At the risk of being cynical there remains a long way to go, given that these particular banks account for only 20 per cent of the available bonds covered in the PSI agreement," said Mr. Hewson.

"We can probably expect a further drip feeding of these types of announcements between now and Thursday's deadline," Mr. Hewson said. "Yesterday's comments by Finance Minister Venizelos that Greece was ready to enforce collective action clauses to enforce losses also raised concerns that such an action would trigger the [credit default swaps] insurance."

Standard & Poor's has already found Greece in "selective default" because of those clauses, which change payment terms on some bonds.

This needs to be done before a bond redemption on March 20, or Greece faces default. Greece wants the buy-in of 90 per cent.

"If participation is below 75 per cent, the restructuring will be scotched on Friday - or Monday at the latest - and everyone will have just a few days to figure out how to avert a default by swapping bonds due on that day for new bonds that will not mature for years," said Carl Weinberg, chief economist at High Frequency Economics.

"The plan is to avert a default by swapping bonds due on that day for new bonds that will not mature for years. We have to hold our noses as we contemplate this plan to pay off paper with paper."

This comes on top of a second reading on economic growth in the embattled euro zone, which showed gross domestic product shrinking 0.3 per cent in the fourth quarter.

"Together it points to a notably weak economy and adds to the negative global growth overtones provided by yesterday's announcement from China that it is targeting 7.5-per-cent growth, below both last year's target and actual," said senior currency strategist Camilla Sutton of Scotia Capital.

Scotiabank boosts dividend Canada's Bank of Nova Scotia boosted its dividend by 3 cents a share today as its first-quarter profit jumped sharply.

Scotiabank said it earned $1.44-billion or $1.23 a share, basic, in the quarter, compared to $1.25-billion or $1.11 a share a year earlier, The Globe and Mail's Grant Robertson reports.

Like a couple of other banks last week, it also hiked its dividend, to 55 cents.

"Consistent execution of our strategy and focus on our core businesses has led to a strong quarter," said chief executive officer Rick Waugh.

"While we continue to watch global economic conditions closely, diversification across our business and focus on high growth international economies have continued to contribute to our results."

Last week, both Royal Bank of Canada and Toronto-Dominion Bank boosted their dividends, while Bank of Montreal left its unchanged.

Memo to Flaherty There are those who will say Canada's finance minister should put every extra penny he can find toward cutting the deficit.

To which I'd say that Jim Flaherty is in an enviable position, and could use his found money to bring down unemployment and still meet his targets.

As The Globe and Mail's Bill Curry reports today, Canada's economic prospects are somewhat better than expected, meaning more revenue for the government. Mr. Flaherty met yesterday with private sector economists, who are upgrading their forecasts for this year as the finance minister prepares his March 29 budget.

According to Toronto-Dominion Bank's deputy chief economist, Derek Burleton, the government could be looking at more than $3-billion a year in extra revenue within just a couple of years from the boost to the economy.

Already, projected Douglas Porter, the deputy chief economist at BMO Nesbitt Burns, the deficit for the current fiscal year, which ends this month, appears to be tracking about $6-billion better than forecast.

Mr. Flaherty has set out his targets, and I'm not suggesting he knock them off course. What I am suggesting is that, rather than pumping the found money into faster deficit reduction, the government look at job-creation measures.

He has the flexibility to do this. Canada's fiscal standing is strong, still triple-A rated and respected around the world. And while the economic outlook may be brightening, unemployment remains high, at 7.6 per cent, with 1.4 million out of work.

For young people, it's worse, with the jobless rate running at 14.5 per cent.

These numbers, of course, pale in comparison with unemployment levels in several other countries, notably the European basket cases where one in five is out of a job and almost half the youth population can't find work.

But I'll say it again: Canada is in an enviable position, and should use it wisely.

"They would have some leeway to support the economy if that's what they choose to do," said Mr. Porter, though he suspects it will go to the deficit.

Such support, he added, could always come through tax relief, rather than just spending. He was not giving an opinion on what Mr. Flaherty should do.

What shape could job-creation measures take if Mr. Flaherty chose that route? Infrastructure spending is a short-term scheme, and takes time to ramp up, Mr. Porter said. But one good move is to keep payroll levies, such as Employment Insurance, as low as possible to reduce the cost of hiring.

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