Can Hank Paulson Defuse This Crisis? IF Henry M. Paulson Jr. hadn’t left Wall Street for Washington to become Treasury secretary in 2006, he would still be making tens of millions of dollars a year as the chairman of Goldman Sachs. He would be comfortably zipping around the globe on a corporate jet. He would be presiding over the only big Wall Street firm that hasn’t lost billions on bad debt. He wouldn’t be answering rounds of questions at meandering Congressional hearings. He wouldn’t be at the center of the Bush administration’s struggle to contain a potential financial meltdown the likes of which the world hasn’t seen since the Great Depression.
Fannie and Freddie: Grow up Not immediately, but at some time in the foreseeable future, Fannie Mae and Freddie Mac must be either officially nationalized or fully privatized. We vote for fully privatized. Let's cut the apron strings that tie them to the taxpayers' wallets and get government out of the business of guaranteeing securitized mortgages altogether. It is inappropriate for the U.S. taxpayer to be standing behind these two for-profit enterprises, helping to protect the shareholders from the poor and risky business practices of its management. Other countries have healthy real estate markets without anything like Fannie Mae of Washington or Freddie Mac of McLean, Va., providing government guarantees of mortgage-backed debt. That implied government guarantee not only contributed to the mortgage meltdown but now has taxpayers on the hook for as much as $5 trillion of mortgage debt.
No Free Bubble The short take on the economic crisis of the 1970s was that regulation failed. Price controls failed; high taxes failed; regulation was outmoded. The mortgage and banking crisis of 2008 feels diametrically different. What failed this time were markets. The lenders who were supposed to regulate mortgage borrowing — and the credit-rating firms who monitored them — failed utterly. The investors whose job it was to monitor the capital of financial institutions were asleep at the switch.
FDIC takes over 2 banks in the West Two banks operating in Nevada, Arizona and California — 1st National Bank of Nevada and First Heritage Bank N.A. — were closed Friday by federal regulators. The 28 branches of the banks, owned by Scottsdale, Ariz.-based First National Bank Holding Co., were scheduled to reopen on Monday as Mutual of Omaha Bank branches, the Federal Deposit Insurance Corp. said. The FDIC said the takeover of the failed banks was the least costly resolution and all depositors, including those with funds in excess of FDIC insurance limits, will switch to Mutual of Omaha with "the full amount of their deposits."
Gulf Arab investors target Asia as U.S. ties wane Gulf Arab investors are increasingly looking to Asia to invest windfall oil revenue, eager to ride the rise of China and India and diversify away from their traditional ties with the United States. "If you look at some of the big investment houses in the region, their appetite for Chinese is high," Nasser al-Shaali, chief executive of the Dubai International Financial Center (DIFC) Authority, told the Reuters Middle East Investment Summit this week. Public and private companies in the world's largest oil-exporting region want to take luxury hotel and resort brands to Beijing and Shanghai, invest in Indian power stations and funnel billions of dollars into Pakistani real estate. "What you are going to see is a capital moving eastward from the Middle East," said Shaali, whose dollar-based investment zone in the Arab world's commercial hub hopes to eventually rival financial centers in London, New York and Hong Kong.
Inflation's next front is retailers as costs rise Coming to a store near you: Even higher prices. Most inflation this year has come from food and fuel, as retailers resisted passing along to strapped consumers the higher prices manufacturers charged them, but coming increases from companies such as Johnson & Johnson and Hasbro Inc. may leave them with no choice. "While these increases have not for the most part been passed on at the retail level, it is inevitable that they will be at some point," said Dean Baker, co-director of the Center for Economic and Policy Research. "Car dealers and other retailers cannot continue to absorb rising costs at the wholesale level and not pass some of these increases on to consumers."
Hedge Funds May Post Worst Month in 5 Years as Bank Bets Sour Hedge funds may post their worst month in at least five years after bets on financial stocks falling and on crude oil rising backfired. Hedge Fund Research Inc.'s Global Hedge Fund Index of more than 55 funds slid 3.2 percent through July 24, heading for the biggest monthly drop since the measure started in 2003. Wagers on a decline in financial stocks and homebuilders, one of the most popular, soured after Fannie Mae and Freddie Mac shares more than doubled in the six trading days to July 23. Bullish bets on crude oil turned to a loss as oil slid 15 percent from a record $145.29 a barrel on July 3 after doubling in a year.
Maximize FDIC coverage LEARNING RULES KEY TO GETTING MOST OUT OF GOVERNMENT'S INSURANCE SERVICE The rules that govern federal deposit insurance are of more than passing interest to Bill Hogle, a 61-year-old Santa Monica retiree. More than half his wealth is tied up in certificates of deposit, and he lives on the income they produce. He knows his money is in different kinds of accounts that make him eligible for more than $100,000 of insurance, and he's been banking on that knowledge. But, in the aftermath of the failure of Pasadena-based IndyMac Bank, we're all increasingly nervous. Payrolls Probably Fell for Seventh Month: U.S. Economy Preview The U.S. lost jobs in July for the seventh straight month, a sign the economy may weaken after tax rebates boosted growth in the second quarter, economists said before reports this week. Payrolls probably shrank by 75,000, according to the median estimate in a Bloomberg News survey ahead of a Labor Department report on Aug. 1. The economy expanded at a 2.3 percent annual rate from April to June, more than twice the pace of the prior quarter, other figures may show. Sustained job losses will take a toll on Americans already burdened by record gasoline costs, plunging home values, and shrinking access to credit. The weakening labor market reinforces concern consumer spending will falter once the cash from the tax rebates is used up. Foreclosure filings more than double The number of households facing the foreclosure process more than doubled in the second quarter compared to a year ago, according to data released Friday. Nationwide, 739,714 homes received at least one foreclosure-related notice during the quarter, or one in every 171 U.S.households, Irvine, Calif.-based RealtyTrac Inc. said. Soft housing sales, declining home values, tighter lending standards and a sluggish U.S. economy have left strapped homeowners with few options to avoid foreclosure. Many can't find buyers or owe more than their home is worth and can't refinance into an affordable loan. Foreclosure filings increased year-over-year in all but two states, North Dakota and Alaska. Nevada, California, Arizona, and Florida continued to clock in the highest foreclosure rates. One in every 43 Nevada households received a filing during the quart.
U.S. Senate approves a wide, deep property 'safety net' Hoping to stretch a safety net under the tumbling U.S. housing market, the Senate overwhelmingly approved a huge package of legislation that includes a program to save hundreds of thousands of American families from losing their homes to foreclosure. The legislation, passed earlier by the House of Representatives, is the latest in a series of extraordinary interventions this year by the administration of President George W. Bush, Congress and the Federal Reserve as they sought to limit shock waves in the housing sector from rippling across the U.S. economy and the world financial system. In the process, the central bank and taxpayers have taken on what critics warn are incalculable liabilities and risk
Mortgage Debt Least of Bad Bets as Investing Sinks The fastest inflation in 17 years and a fourth straight quarter of U.S. profit declines are turning debt sold by Fannie Mae and Freddie Mac into the favorites of the world's biggest bond investors. Pacific Investment Management Co., T. Rowe Price Group Inc., RiverSource Institutional Advisors and U.S. Bancorp's FAF Advisors, which oversee more than $1 trillion, say the government's decision to stand behind the beleaguered U.S. housing finance companies and their yields compared with Treasuries make the bonds a buy. The Senate approved legislation on July 26 allowing the U.S. to inject capital into Fannie and Freddie. President George W. Bush plans to sign it into law.
US credit crunch set to last for months The credit squeeze in the US economy is likely to persist for many months and might even get worse, Gary Stern, president of the Federal Reserve Bank of Minneapolis, has told the Financial Times. He said that with interest rates at 2 per cent the Fed was well-placed to cope with any negative surprises on growth. By contrast, he said, it was not as well positioned to deal with any negative surprises on inflation. Even without any such surprises, the Minneapolis Fed chief also said real interest rates were at levels that, if sustained for too long, would not be compatible with medium-term price stability. Either inflation expectations would have to decline, or the Fed would have to raise interest rates, or both, in order to achieve the required tightening in real rates. However, Mr Stern emphasised the need for the Fed to balance unease about the low level of real interest rates with risks to growth.
More Whipsawing Is in the Forecast for Treasurys$$ Treasury investors face more volatile trading in a data-heavy week as few expect a clear picture to emerge on the state of the economy. Continued stress in the financial sector and the daily seesaw in stocks and crude oil are likely to make things only worse. "It has been a very treacherous environment," said Larry Dyer, rate strategist with HSBC Securities USA Inc. Last week, Treasurys were pummeled by supply, only to rally on soft economic data Thursday, then give up a big part of those gains Friday amid favorable data on durable goods, consumer confidence and new-home sales
Wall St awaits clearer economic picture With Wall Street investors hesitant, fresh data in the coming week could help provide a clearer picture of whether the US economy is in recovery mode or an extended downward spiral. The market saw choppy trade in recent sessions, lifted by lower crude oil prices and hints of an economic rebound, but falling back on indications that a recovery is faltering, as occurred after a disappointing report on existing home sales. Chrysler Lending Arm In Weakened Position As It Refinances$$ Unit's Leasing To Be Eliminated; $30 Million Owed A critical deadline is approaching for Chrysler LLC, which must refinance $30 billion of its lending arm's working capital by Friday amid a shake-up in the unit's leasing strategy. The auto lending business, Chrysler Financial, has come under intense pressure in recent weeks, as resale values on leased cars fall and borrowing conditions tighten. Chrysler LLC on Friday decided to stop offering auto leases through Chrysler Financial beginning in August -- a move that could squeeze car dealers hoping to move Chrysler cars but could pacify the unit's restive lenders, who are worried about the value of Chrysler leases used to back their loans.
This Time, It's Different Global Pressures Have Converged to Forge a New Oil Reality The two events, half a world apart, went largely unheralded. Early this month, Valero Energy in Texas got the unwelcome news that Mexico would be cutting supplies to one of the company's Gulf Coast refineries by up to 15 percent. Mexico's state-owned oil enterprise is one of Valero's main sources of crude, but oil output from Mexican fields, including the giant Cantarell field, is drying up. Mexican sales of crude oil to the United States have plunged to their lowest level in more than a dozen years. The same week, India's Tata Motors announced it was expanding its plans to begin producing a new $2,500 "people's car" called the Nano in the fall. The company hopes that by making automobiles affordable for people in India and elsewhere, it could eventually sell 1 million of them a year. Although neither development made headlines, together they were emblematic of the larger forces of supply and demand that have sent world oil prices bursting through one record level after another. And while the cost of crude has surged before, this oil shock is different. There is little prospect that drivers will ever again see gas prices retreat to the levels they enjoyed for much of the last generation.
Housing Bill Won't 'Perform Miracles' Senate Approves Measure, but Critics Say Law Unlikely to Prevent Most Foreclosures Even as a huge bipartisan majority in the Senate voted yesterday to send a sprawling housing bill to the White House, economists, consumer advocates and other analysts said the package of programs for struggling homeowners and shaken mortgage lenders is unlikely to relieve the foreclosure crisis that is driving the nation toward recession. "This is not the end of the housing crunch," said Jared Bernstein, a senior economist at the Economic Policy Institute. "Housing prices have already fallen 15 percent and they need to fall 10 percent more. This bill isn't going to change that equation."
BANKS ARE STILL ON THE SHORT LIST Some short-sellers on Wall Street are predicting more pain for financial-sectors stocks - despite the rally some shares posted this week in the wake of second-quarter results. One investor, Bill Fleckenstein, president of Fleckenstein Capital, said he's far from calling the bottom on any financial sector stock tied to mortgages and still wouldn't buy a single one of them. "All financials will make new lows, not because of this week's inflated rally, but because we have not factored in the interplay of lower home prices, a slower economy, and we don't have proper marks on assets in our investment banks," said Fleckenstein, who has recently authored a book called "Greenspan's Bubbles."
Economists Weigh Possibility of a Recession Amid Economic Growth$$ House prices are tumbling in the U.S., the job market is faltering, gasoline is about $4 a gallon and financial markets are struggling through their worst shock in decades. This must be a recession, right? Maybe, maybe not. The U.S. economy is expanding. It is likely to show a growth rate of more than 2% at an annual rate when the government gives its first estimate of the second-quarter performance Thursday. The continued growth raises a key question: Could this be the first U.S. recession without a decline in economic output?
City and State Brace for Drop in Wall Street Pay Government officials in New York are preparing for what could be the biggest single-year decline in pay on Wall Street in history and with it a vexing shortfall in city and state revenues.A review of the latest statements from the largest financial companies based in the city shows that they intend to hand out about $18 billion less in pay and benefits in 2008 than in 2007. The cutting of payrolls is well under way, but the full effect will not be felt until the year’s end, when bonuses for employees based in New York could shrink by $10 billion or more, according to city officials and compensation experts. In Volatile Times, Investors Tune in All and Any Predictions The news hit Wall Street trading floors on the morning of July 2: Some analyst at Merrill Lynchwas saying the General Motors Corporation might go bankrupt. Within minutes, the share price of G.M., the landmark corporation that once symbolized America’s industrial might, was plunging to its lowest point since 1954. What the Merrill analyst actually wrote, in a downbeat report on the troubled automotive giant, was that bankruptcy for G.M. was “not impossible” — an equivocal forecast that could be applied to almost any event, from winning the lottery to the odds of rain a week from Wednesday. But amid a financial crisis where the unthinkable has seemingly become routine, Wall Street forecasters — and even the markets themselves — are struggling to get a handle on what will happen next. The result has been a flood of brash pronouncements, as the Cassandras of the financial set try to outdo themselves with increasingly outlandish predictions. “These are volatile times. There’s a lot of moving parts here, and nobody can quite figure out how they all mesh,” said the investment strategist Edward Yardeni. “You’re hearing a lot of catastrophic predictions.
WHERE IS THE ECONOMY GOING IN THE NEXT SIX MONTHS? As investors, the question we have to focus most of our attention on just now is what impact the credit crisis, the bursting housing bubble and the actions of the U.S. government will have on the economy and investment markets in the next six months. We have seen the Fed and the federal government move to panic mode as they try to keep the system afloat. As expected, they have cut rates, as well as having given away checks and rearranged the Federal Reserve’s entire balance sheet The underlying problems have not been fixed with this massive bailout. There are still many credit pot holes out there and new lending remains highly constrained. Even the government tax rebate checks, rather than boosting the domestic economy, were largely absorbed by higher oil prices. The resulting cut-back in consumer spending, coupled with ongoing constrictions in lending, will cause a severe slowing of the economy.
TROUBLED GM IS PUTTING THE ARM ON ITS RETIREES GM doesn't only stand for General Motors anymore. It also stands for "grab money." With profits down by a shocking amount in the depressed auto industry, the Grab Money Corp. is getting its liquidity from the people who can least afford it - its retirees The nation's biggest automaker - but no longer the world's - is soon expected to report a big second-quarter loss. And with the economy not showing much acceleration, the hard times are expected to continue. There have even been whispers - nah, make them shouts - that GM might have to file for bankruptcy protection, perhaps along with other American automakers. So, it turns out, that GM is very lucky that its retirees are so generous - even if they probably aren't aware of their own magnanimity.
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