Fannie, Freddie Rescue May Cost Taxpayers $25 Billion, CBO Says Treasury Secretary Henry Paulson's rescue package for Fannie Mae and Freddie Mac will probably cost $25 billion, the Congressional Budget Office said. "There is a significant chance -- probably better than 50 percent -- that the proposed new Treasury authority would not be used before it expired at the end of December 2009,'' the nonpartisan agency, which provides economic and budget analysis for lawmakers, said in a report today. Democratic lawmakers were seeking to determine the cost of Paulson's plan to offer emergency funding to Fannie Mae and Freddie Mac, which own or guarantee almost half of the "the demands'' of the housing downturn and will likely approve this week his request to help the government- sponsored enterprises.
Fannie Mae and Freddie Mac Should Be Cut Down and Cut Loose Cut the government-sponsored behemoths down to size and let the market take care of them Why should Fannie Mae and Freddie Mac enjoy special tax and regulatory privileges unavailable to other publicly traded corporations? Why should U.S. taxpayers be required to lend them money, or pick up the tab if they can't pay their bills? The answer of course is that Fannie and Freddie should get no such privileges and taxpayers should not have to protect them. Fannie and Freddie are specially privileged "government-sponsored enterprises." They're exempt from state and local taxes. And their required "core capital" (mainly stock) is merely 2.5 percent of assets, compared with a 6 to 8 percent norm for banks. As a result, their $5.3 trillion of debt is piled precariously atop a thin cushion of only $81 billion in core capital. It's risky business. But who bears the risk?
Posting Huge Loss, Wachovia Tries to Purge Lending Woes Moving quickly to put an end to the constant spill of red ink, the Wachovia Corporation, the banking giant, booked an $8.9 billion loss and slashed its dividend its first quarter under new leadership. Investors had been bracing for large losses since the bank named Robert K. Steel, a former Treasury under secretary, as chief executive, to help steer it through the housing crisis. At the time, the bank said that it anticipated a loss of $2.6 billion to $2.8 billion on top of an unspecified merger-accounting charge. But Mr. Steel had every incentive to kick off his tenure with a “kitchen sink” quarter as he tries to clean up the bank’s problems.
As Loan Giants Are Inspected, Bush Prods Congress Bank examiners from the Federal Reserve and the Comptroller of the Currency are inspecting the books of the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac, as the Bush administration prods Congress to approve a plan that would enable it to inject billions of dollars into the companies. Treasury Secretary Henry M. Paulson Jr., in a meeting on Monday with reporters and editors of The New York Times, said the Fed and the comptroller’s office began combing the books of the two companies after their declining stock prices caused widespread anxiety in the market. The two companies guarantee or own almost half of the home mortgages in the United States. The Bush administration is hoping they can be the engine that pulls the housing market out of its yearlong slide.
Treasury: Swift support needed for mortgage giants Treasury Secretary Henry Paulson said Congress needs to quickly approve a support package for Fannie Mae and Freddie Mac to make sure the two mortgage giants maintain their critically important role in housing finance. Paulson said Tuesday that the continued operations of Fannie and Freddie -- which guarantee or own almost half of the home mortgages in the country -- would be "central to the speed with which we emerge from this housing correction." Paulson made his comments in a speech in New York in which he again sought to reassure Americans that despite the recent turmoil, the nation's banking system is fundamentally sound.
Overseas investors take hard look at U.S. mortgage giants For more than a decade, Fannie Mae and Freddie Mac, the housing giants that make the American mortgage market run, have attracted overseas investors with a simple pitch: The securities they issue are just as good as the U.S. government's - and they usually pay better. The marketing plan worked: About one-fifth of securities issued by Fannie, Freddie and a handful of much smaller quasi-government agencies, some $1.5 trillion worth, were held by foreign investors at the end of March. One-tenth of all American mortgages are, in effect, in the hands of institutions and governments outside the United States. Now that the two companies are at risk, these foreign holders are watching closely to determine the future of hundreds of billions of dollars of investments. How Fannie and Freddie's rescue is handled will ultimately test the world's faith in U.S. markets and could influence the level of interest rates and weigh on the strength of the dollar for years to come, analysts say.
The Coming Systemic Bust of the U.S. Banking System: "Dead Stocks Rallying"$$ This past week started with concerns about another systemic meltdown of the U.S. financial system as the insolvency of Fannie and Freddie was revealed and as IndyMac went bust (this third largest bank collapse in U.S. history). But the week ended with a remarkable rally of financial stocks as better than expected results from Wells Fargo, JP Morgan and Citi soothed the fears that major financial institutions were in even more distress than already predicted by market analysts. Unfortunately, this massive rally of financial stocks in the latter part of the week is just another temporary bear market rally that will fizzle away once the onslaught of bad financial and macro news builds up again.
Ambrose Evans-Pritchard: World economy in greatest danger It feels like the summer of 1931. The world's two biggest financial institutions have had a heart attack. The global currency system is breaking down. The policy doctrines that got us into this mess are bankrupt. No world leader seems able to discern the problem, let alone forge a solution. The International Monetary Fund has abdicated into schizophrenia. It has upgraded its 2008 world forecast from 3.7 percent to 4.1 percent growth, whilst warning of a "chance of a global recession." Plainly, the IMF cannot or will not offer any useful insights. Its "mean-reversion" model misses the entire point of this crisis, which is that central banks have pushed debt to fatal levels by holding interest too low for a generation, and now the chickens have come home to roost. True "mean-reversion" would imply debt deflation on such a scale that would, if abrupt, threaten democracy. The risk is that these same central banks will commit a fresh error, this time overreacting to the oil spike. The European Central Bank has raised rates, warning of a 1970s wage-price spiral. Fixated on the rear-view mirror, it is not looking through the windscreen.
Gold price manipulation is spelled out to CFTC A financial planner from Chicago, Marcus C. Rodriguez, has written a wonderful letter to the U.S. Commodity Futures Trading Commission documenting the manipulation of the price of gold on U.S. commodities exchanges and urging the commission to compare that manipulation with the huge gold derivative positions held by JPMorganChase, Bank of America, and Citibank. It could only help if other Americans wrote to the CFTC in support of an investigation of the issue Rodriguez has raised.
U.S. food companies plan more hefty price increases U.S. food companies are preparing another round of hefty price increases as soaring commodity costs force them to pass on rises to consumers. Sara Lee, maker of meat products such as Jimmy Dean sausages, said costs would compel it to push up prices on meat lines by up to a fifth later this year. "We will be taking price increases on the vast majority of the protein products in this calendar year," said C.J. Fraleigh, Sara Lee's chief operating officer for North America, in a recent interview. "Price increases vary a lot by type of products but the increases will be as low as zero and some products we will decrease on and other increases [will be] in excess of 20 per cent." Kraft Foods, Kellogg's, ConAgra, and Tyson are also pushing through increases, which are expected to contribute to inflationary pressures in the U.S. Consumer Spending Threatened by High Prices and Lower Wages Consumer spending, which accounts for more than 70% of the economy, will be seriously threatened in the months ahead, as prices continue to rise, wages plateau, and government stimulus checks wear thin. Consumer spending has remained strong in recent months, even jumping 0.8% in the month of May. But that boost was largely inflated by the $50 billion in government rebate checks that were cashed and put to use in the month.
Ford Will Offer Buyouts at 14 More Plants$$ Ford Motor Co. will expand its plant-by-plant buyout program to 14 more facilities in Michigan and Ohio as the struggling auto maker looks to further reduce its payrolls. Ford's plant-by-plant buyouts, started last month at two Kentucky and two Ohio manufacturing sites, will be expanded to the additional 14 facilities by mid-August. Packages include a $15,000 tuition reimbursement for four years, a $100,000 scholarship for family members and a flat payment of $100,000, with six months of basic health care. The auto maker is also clamping down on overtime, figuring that buyouts may look more attractive if the opportunity for extra pay is eliminated.
Poor Economy Slows Women in Workplace Across the country, women in their prime earning years, struggling with an unfriendly economy, are retreating from the work force, either permanently or for long stretches. They had piled into jobs in growing numbers since the 1960s. But that stopped happening this decade, and as the nearly seven-year-old recovery gives way to hard times, the retreat is likely to accelerate. Indeed, for the first time since the women’s movement came to life, an economic recovery has come and gone, and the percentage of women at work has fallen, not risen, the Bureau of Labor Statistics reports. Each of the seven previous recoveries since 1960 ended with a greater percentage of women at work than when it began.
Paulson confident of GSE backstop deal this week U.S. Treasury Secretary Henry Paulson said on Monday he was "quite confident" Congress would approve a backstop plan this week for Fannie Mae and Freddie Mac that would allay market concerns about the housing finance giants. "I'm quite confident that we will get the sort of program we need this week to deal with this situation," Paulson told CNBC television in an interview. "Let me say that I've been gratified by the support in Congress," Paulson added. Paulson's plan would provide the two government-sponsored enterprises with unlimited government loans and equity capital to bolster investor confidence in the two institutions that he views as a key to the recovery of the U.S. housing market and the economy overall. The backstop is being considered as part of a broader housing rescue bill that also would create a stronger regulator for the GSEs.
FDIC Faces Mortgage Mess After Running Failed Bank $$ Subprime Lender Made Problem Loans On Regulators' Watch Federal officials heap much of the blame for the subprime mortgage mess on lenders, claiming they recklessly made too many high-cost home loans to borrowers who couldn't afford them. It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court. The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank's subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.
Businesses Feel Pinch Of Tighter Lending$$ Even Blue Chips Face More Onerous Terms; Individuals Next? With the credit crunch on Wall Street entering its second year, a widening array of businesses are finding it tough to get credit. And with mortgage giants Fannie Mae and Freddie Mac roiling credit markets, individuals could soon find it harder to get a loan as well. One company feeling the strain is Chrysler Financial, the financing arm of the Big Three auto maker that was carved out of the former DaimlerChrysler AG last year. The Chrysler LLC unit has $30 billion of short-term debt due to mature in early August. And bankers, led by J.P. Morgan Chase & Co., are pushing hard to get that debt renewed.
AmEx Results Show Pain Spreading To High End Even the wealthy are showing signs of credit problems. Increasing numbers of American Express card holders defaulted in the second quarter, tarnishing the company's earnings. Late Monday, the credit card issuer posted a 40.6% lower profit in the second quarter, ended June 30, as it set aside more money to cover credit losses.
American Express Profit Falls on Higher Defaults American Express Co., the biggest U.S. credit-card company by purchases, withdrew its 2008 earnings forecast after second-quarter profit fell 37 percent on worse-than-expected consumer defaults. The shares slumped 11 percent in extended trading. Profit from continuing operations declined to $655 million, or 56 cents a share, from $1.04 billion, or 86 cents a year earlier, the company said today in a statement. The average estimate of 17 analysts surveyed by Bloomberg was 82 cents. American Express said it added $600 million before taxes to reserves for U.S. loan losses. "By almost any measure, the U.S. economy and business environment are much weaker than the assumptions'' the company had in January, Chief Executive Officer Kenneth Chenault said today in a conference call. "Unemployment rates took the largest jump in over twenty years. Home prices declined at the fastest rate in decades and consumer confidence is at one of its all-time low points.''
Measures to avoid the worst recession in 30 years Ben Bernanke, Federal Reserve chairman, this week alluded to an economy facing “numerous difficulties”. In fact there are only two, but each alone is cause for genuine concern over the US economy’s prospects: first, an implosion of the financial system triggered by the teetering housing market; and, second, record prices for oil and other commodities that are largely driven by events abroad. Policymaking in the past year has shuttled ineffectively between these two fronts. One day all eyes are focused on the prospective collapse of Fannie Mae and Freddie Mac and the next day we are preoccupied with the prospect of $200, or $500, oil. It is time to devise a programme to promote overall economic recovery by fighting for the economy’s future on both fronts simultaneously.
Paragon in takeover talks with Blackstone Paragon, the struggling buy-to-let mortgage lender, is in talks with Blackstone about a potential takeover, which shows the US private equity group may be ready to call the bottom of the credit crisis. The move shows private equity groups are still keen to invest in the mortgage market, in spite of the crisis it has suffered, as they believe the financial turmoil is creating opportunities for buying bargains. Shares in Paragon have fallen almost 90 per cent in a year, as the credit crunch has inflated the Solihull-based company’s cost of funding, eroded its profitability and restricted its ability to write new mortgages.
Chavez Goes Weapons Shopping in Russia Amid Arms Race Venezuelan President Hugo Chavez heads to Moscow today to shop for air defense systems, submarines and other weaponry as Latin America's arms race quickens amid signs that his regional influence is waning. Past Venezuelan arms purchases from Russia have strengthened ties with Moscow as its rivalry with the U.S. intensifies over President George W. Bush's plans for an Eastern Europe missile defense system and other issues. Chavez, 53, also plans to visit Belarus, a Russian ally that the U.S. considers a dictatorship. Chavez "regularly refers to us as an 'empire,' opposes our initiatives in the Americas and seeks out our adversaries as friends and allies,'' Assistant U.S. Secretary for Western Hemisphere Affairs Thomas Shannon said July 17 in testimony to a congressional committee.
Hu: China sees relationship with Russia as diplomatic priority President Hu Jintao said on Monday that the relationship with Russia has been China's diplomatic priority. He made the comment while meeting with Russia's Minister of Foreign Affairs, Sergei Lavrov. "We will work with Russia to deepen strategic coordination and upgrade the partnership to new heights," said Hu. Describing current Sino-Russian relations as stable and healthy, Hu mentioned his two meetings with Russian President Dmitri Medvedev and comprehensive cooperation and consultation in international affairs. Vital to verify N.Korea nuclear issues: U.S. envoy North Korea and its five negotiating partners must agree a clear process for verifying Pyongyang's declarations on its nuclear disarmament, top U.S. nuclear negotiator Christopher Hill said on Tuesday. Hill told reporters on arrival in Singapore that informal talks this week between U.S. Secretary of State Condoleezza Rice and foreign ministers of the two Koreas, Russia, Japan and China, would centre on Pyongyang's nuclear verification issues and the next phase of disarmament. "We have met with the others and worked together on what the elements of the verification protocol should be," Hill said. "Verification is essential and we really shouldn't think of the declaration without verification, so we are working on that and we hope to make some progress on that very soon," he said. Rice will meet North Korean Foreign Minister Pak Ui-chun for the first time on Wednesday on the sidelines of a Southeast Asian security forum, having held back from meeting him until now.
White House: Iran, DPRK remain in "axis of evil" The White House said Monday that Iran and the Democratic People's Republic of Korea (DPRK) remain part of the "axis of evil" labeled by U.S. President George W. Bush in 2002. "I think that until they give up their nuclear weapons programs completely and verifiably, I think that we keep them in the same category," White House spokeswoman Dana Perino told reporters. Perino said that thanks to great efforts by the international community, the DPRK has agreed in the six-party talks to reveal and dismantle its nuclear programs. The six-party talks, involving the United States, the DPRK, China, South Korea, Japan and Russia, were designed for the settlement of nuclear issues on the Korean peninsula. While the six-party talks are bearing fruit, Perino said "Iran's a different story ... They're missing an opportunity for a very generous incentives package, and that additional sanctions could be on the way." Perino made the remarks after the talks between European Union (EU) foreign policy chief Javier Solana and Iranian top nuclear negotiator Saeed Jalili in Geneva on Saturday.
Fed seems focused on inflation over growth As the dust settles on the latest bout of financial turmoil, the Federal Reserve appears to be focused on inflation rather than economic growth. This inflation bias comes in spite of the continuing troubles at Fannie Mae and Freddie Mac, extreme volatility in bank stocks and the recent dip in the price of oil. Those developments, while reminding policymakers that there are still serious risks to economic growth, do not appear to have fundamentally changed the assessment set out in the minutes of the June 30 policy meeting. At that meeting, the Fed in effect switched gears. The minutes said:"With increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate."
Oil rises past $131 on Iran deadlock, Gulf storm Oil prices rose Monday on a threat of new sanctions against Iran and as Tropical Storm Dolly headed into the Gulf of Mexico, prompting a hurricane watch for parts of Texas and Mexico. Light, sweet crude for August delivery added $2.16 to settle at $131.04 a barrel on the New York Mercantile Exchange. It was oil´s first gain in a week. For drivers in the U.S., pump prices eased by a few pennies. A gallon of regular gasoline now sells for an average just shy of $4.07, according to auto club AAA, the Oil Price Information Service and Wright Express. Diesel prices also pulled back, to an average of $4.818 a gallon. Retail prices may decline even more in the coming days as gas station operators catch up to last week's four-day oil sell-off, which left crude more than $18 below the trading record of $147.27 it hit on July 11.
In Israel House, Brown warns Iran British Prime Minister Gordon Brown warned Iran on Monday it faced growing isolation if it rejected an offer from major powers on its disputed nuclear programme. In the first address to Israel’s parliament, by a British prime minister, Brown pledged to stand by Israel and said Iranian President Mahmoud Ahmadinejad’s threats to wipe the country off the map were totally abhorrent. Iran has a clear choice to make: suspend its nuclear programme and accept our offer of negotiations or face growing isolation and the collective response not just of one nation but of all nations around the world, Brown said. He said Britain, which as a permanent member of the UN Security Council has helped push through three sanctions resolutions against Iran, will continue to lead in our determination to prevent an Iranian nuclear weapons programme.
Rice wants "serious answer" from Iran ABU DHABI (Reuters) - U.S. Secretary of State Condoleezza Rice warned Iran on Monday that it faced more sanctions if it defied a two-week deadline to agree to curb its nuclear program. Rice said Iran was stalling and must give a "serious answer" within the deadline set by six world powers, which offered trade and technical incentives if Tehran halts its uranium enrichment. The West fears Iran wants to build a nuclear bomb. "We are in the strongest possible position to demonstrate that if Iran does not act then it is time to go back to that (sanctions) track," Rice told reporters before arriving in Abu Dhabi en route to Asia. It was her first comment on the subject since Washington broke from usual policy and joined nuclear talks with Iran in Geneva on Saturday. In Jerusalem, British Prime Minister Gordon Brown warned Iran of growing isolation if it rejected the offer from the major powers.
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