Weekday NEWS to Comfort the Disturbed and Disturb the Comfortable.
Wed 07.16.2008
Paulson in hot seat over Fannie, Freddie Treasury chief goes to Congress to seek authority to stand behind mortgage finance giants. He finds some support but plenty of skeptical probing. Treasury Secretary Henry Paulson was hammered by lawmakers on Tuesday over the Bush administration's plan to prop up mortgage finance giants Fannie Mae and Freddie Mac. Members of the Senate Banking Committee drilled into Paulson on a day when the shares of Fannie and Freddie were once again pummeled by investors. Paulson was asked about his request that Congress remove limits on how much money Treasury can lend to the troubled mortgage finance firms - was it just a "blank check" from taxpayers? He also faced questions about a second part of the plan - to allow Treasury to buy equities in the firm - and whether Fannie and Freddie are as safe as the companies, Treasury and regulators now claim. "I fear we're sitting on a financial powder keg," said Sen. Richard Shelby, R-Ala., the committee's ranking Republican.
Democrats See a Need for Further Economic Stimulus Many economists have concluded that a second dose of government stimulus spending is required to prevent a broad economic unraveling and provide relief to millions of Americans grappling with joblessness, plunging home prices and tight credit. Democratic leaders in Congress have already begun fashioning a package of proposed measures, but on Tuesday, President Bush and the Federal Reserve chairman, Ben S. Bernanke, both pronounced such action premature. "Our economy has demonstrated remarkable resilience,” President Bush said at a morning news conference, even as he acknowledged that growth had been “slower than we would have liked."
Is my money safe in a bank? Worried about your bank failing? If the bank collapses, but it's covered by FDIC insurance, your money will be OK -- provided you stay within certain limits that the Federal Deposition Insurance Corporation (or FDIC) requires. As a simple rule of thumb, think $100,000. Normally, if you have no more than $100,000 in a bank you will be fine. You will get back every cent even if a bank fails. But amounts higher than $100,000 can be OK too under some circumstances. The answers to the following questions from readers will help you understand those circumstances.
Goldman questioned on Bear, Lehman share fall: report Goldman Sachs has been questioned by chiefs of rivals Bear Stearns Cos and Lehman Brothers about speculation that the securities firm had a role in putting pressure on their firms' stocks, the Wall Street Journal said on Wednesday citing people familiar with their talk. Alan Schwartz, who headed Bear Stearns when it collapsed in March, has asked Goldman CEO Lloyd Blankfein whether there was any truth to talk that in the days preceding Bear Stearns's fall, traders in Goldman's London office manipulated the struggling firm's stock, the paper said. Lehman Brothers CEO Richard Fuld Jr., whose firm's shares also have been battered, has also spoken with Blankfein. The Lehman chief also contacted traders he felt may have been bad-mouthing his stock, the paper said. Spreading rumors one knows to be false with the intention of manipulating a public company's price is illegal. The U.S. Securities and Exchange Commission has been investigating whether investors have looked to profit by spreading rumors to push down Lehman and Bear shares.
U.S. Consumer Prices Climb by the Most Since 2005 Prices paid by U.S. consumers jumped in June by the most since 2005 on spiraling costs for fuel and food, intensifying the pressure on households struggling with falling home prices and the credit crunch. The cost of living soared 1.1 percent, more than forecast, after a 0.6 percent gain the prior month, the Labor Department said today in Washington. Excluding food and energy, so-called core prices climbed 0.3 percent, also more than anticipated. The figures underscore why Federal Reserve Chairman Ben S. Bernanke yesterday said inflation risks had "intensified.'' The surge in energy costs has also trimmed consumer and business spending, hurting growth and making it less likely policy makers will boost interest rates to stem even bigger price increases.
Downturn gains steam as inflation roars ahead Inflation rises at fastest pace since early 1980s as Fed chair warns of more trouble The U.S. economic downturn gained steam Tuesday, with a report of the highest inflation since the early 1980s, more bad news for banks and automakers and a suggestion by the Federal Reserve chief that worse days are ahead. President Bush sought to bolster confidence by declaring that the financial system was "basically sound," but he conceded: "It's been a difficult time for many American families." The Labor Department said wholesale inflation, driven by skyrocketing gas and food costs, rose by 9.2 percent for the 12 months ending in June -- the fastest pace since the summer of 1981, during another energy crunch. At the same time, consumers hit the brakes hard despite a massive infusion of government stimulus checks. Retail sales turned in their poorest showing in four months. Federal Reserve Chairman Ben Bernanke delivered a somber midyear outlook to Congress, saying the U.S. faces "numerous difficulties" despite the Fed's interest rate-cutting campaign, which began last September in hopes of preventing a recession. Bernanke said the Fed expected the economy to grow for the rest of this year "appreciably below its trend rate." He cautioned inflation was likely to move "temporarily higher" in the near future.
US Commodities: Gold Up, But Gains Pared As Crude Oil Slides Gold futures ended modestly higher Tuesday after plunging crude oil stifled much stronger earlier gains in the metal. August gold finished $5 firmer at $978.70 a troy ounce on the Comex division of the New York Mercantile Exchange. The contracts settled well below the day's strongest level of $988.60 an ounce. "A $9 fall in the price of oil in the afternoon saw widespread profit-taking," BNP Paribas analyst David Thurtell says in a research note. "Oil fell as worries about the U.S. economy heightened concerns about oil demand." U.S. Federal Reserve Chairman Ben Bernanke delivered a bleak outlook on the U.S. economy and President George W. Bush said the U.S. is facing "financial uncertainty." "As oil retreated gold gave up gains," said George Gero, vice president with RBC Capital Markets Global Futures. But the fact that gold held on to some of its gains despite oil's declines indicates bullishness in the gold market, as the metal is still underpinned by financial market worries and a lower dollar, analysts said.
General Motors cutting salaried workers, production, dividend General Motors said today it will lay off salaried workers, cut truck production, suspend its dividend and borrow $2 billion to $3 billion to weather a severe downturn in the U.S. market. GM said the moves will raise $15 billion to help cover losses and turn around its North American operations, including $10 billion from internal cost-cutting and $5 billion from selling some assets and borrowing against others. "In short, our plan is not a plan to survive. It is a plan to win," GM Chairman and CEO Rick Wagoner said in a broadcast to employees. GM's shares fell as much as 6 percent to a new 54-year low of $8.81, then rebounded to $10.04 in afternoon trading, up 66 cents from Monday's close. Chief Operating Officer Fritz Henderson said GM wants to reduce its total salaried costs in the U.S. and Canada by more than 20 percent.
Cramer: The Danger Is Immense You don't need me to tell you it's awful out there. You don't need me to tell you that there's no quick fix for any of these things. But what might help you understand why it feels so bad this time is that I have never, in my career, seen so many companies go off track at the same time. This is one unbelievable moment, and it is made more horrible by the day as companies' stocks just get pummeled, causing people to then question the very viability of the companies involved. First, obviously, are Fannie Mae and Freddie Mac . We don't know what will happen, but we do know that their futures are much darker than their pasts. Their best hope: a Democrat becomes president and shows the usual love to both. But as investments, they are pretty much perma-losers going forward. The losses are that heavy. Yes, it is true that two years from now they will be better, but will the government let them limp through to that? View them as calls on a Democratic win. We all know that Citigroup, Wachovia, Washington Mutual and National City are in trouble. Bank of America says it isn't in trouble, but obviously the market doesn't believe management because the stock failed to rally when it said its dividend was safe. Any short-selling hedge fund could hire 30 actors and have them line up at a Washington Mutual or two and get a bank run going. Then we would have to hear about a "hasty" Treasury department plan to bail out WM. Hasty? How can these guys not see it coming?
The Perils of Freddie and Fannie - part I What we saw this weekend was the world’s biggest temporary sandbag. With the waters rising and about to swallow Freddie and Fannie, Paulson and Bernanke stepped in with—what? A bunch of promises. The Fed promised Freddie and Fannie access to the discount window, and Paulson promised an expanded (but unspecified) government credit line for the giant companies, with the vague promise of equity purchases. These vague promises may keep Fannie and Freddie from sinking beneath the waves for the next week, or month, or two months. But the Paulson/Bernanke sandbags aren’t high enough to save the companies if the economic flood waters really start to rise. If the economy slumps, mortgage delinquencies will rise, and Fannie and Freddie will find themselves in deeper and deeper trouble.
The Perils of Fannie and Freddie - part II Investors figured out today that the Paulson/Bernanke rescue plan is not going to save Fannie and Freddie in their current form as private companies. The stock of the two companies dropped—5% for Fannie and 8% for Freddie—while Freddie had a stronger than expected demand for its debt offering. This is exactly what we would expect. The two companies are now on the inevitable road to being bailed out, nationalized, and shrunk—not as bad as being drawn and quartered, but not good either. Why do I say inevitable? We now have a situation where the Treasury Secretary and the Fed Chairman have taken the first small steps towards placing the full faith and credit of the U.S. government behind two private financial companies. These steps cannot be undone. Once the promise has been made to investors - however vague - the government has to step up to fulfill it. The logical end state here is a full takeover. It’s simply not sustainable for two private companies to be able to do business as usual with a full and explicit government guarantee. It’s not fair to other companies, and it opens up the door for all sorts of risk-taking which could make the problem even worse.
Oil plunges in huge sell-off Oil prices fell harder than they have in 17 years today, as fears that record fuel prices are spreading broad economic pain exacerbated the third big sell-off in just over a week. Light, sweet crude plunged $US6.44, or 4.4 per cent, to settle at $US138.74 a barrel on the New York Mercantile Exchange in an extremely volatile session. Prices at one point plummeted more than $US10 from the day's high. In London, August Brent crude fell $US5.17 to settle at $US138.75 a barrel on the ICE Futures exchange. Mounting concerns about the risks inflation poses to the United States, the world's biggest oil consumer, helped spark the declines. Analysts also attributed the sell-off to Thursday's expiration of options contracts, which tend to increase volatility, and to computers programmed to automatically sell once prices reach certain thresholds.
Taxpayers Bear Brunt of This Bailout Since the creation of the mortgage-backed securities market in the 1970s, Fannie Mae and Freddie Mac have allowed homeowners to secure lower mortgage rates. All the benefits from the past thirty plus years, however, will likely be washed away by the federal bailout of the two firms now on the table, which critics say will eventually leave taxpayers holding the bill. It's difficult to say exactly how much homeowners have saved on lower mortgage rates from having Fannie and Freddie around. The two government-sponsored entities, which collectively own or guarantee about $5 trillion in U.S. residential mortgages, receive tax breaks and have lower costs of capital. This allows them to purchase mortgage loans and mortgage-backed securities at lower yields. In turn, banks and mortgage lenders can offer lower interest rates on mortgages to homebuyers, knowing they can sell the loans to Fannie and Freddie.
Policy shift seen in U.S. decision on Iran talks The decision by the Bush administration to send a senior American official to participate in international talks with Iran this weekend reflects a double policy shift in the struggle to resolve the impasse over the country's nuclear program.. First, the Bush administration has decided to abandon its longstanding position that it will only meet face-to-face with Iran after it first suspends uranium enrichment as demanded by the United Nations Security Council. Second, it infuses the negotiating track between Iran on the one side and the six global powers - France, Britain, Germany, Russia, China and the United States -- on the other with new importance, even though their official stance is that no substantive talks can begin until the uranium enrichment stops.
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