A $2.3 Billion Loss for Fannie Mae Fannie Mae, the home financing giant, posted its fourth consecutive quarterly loss on Friday as home loan defaults increased and said it would slash its dividend more than 85 percent and take other steps to shore up its capital position. Just three weeks after the federal government took sweeping measures to support Fannie Mae and smaller rival Freddie Mac , the Washington-based company reported a greater-than-expected loss of $2.3 billion, excluding preferred dividend payments, or $2.54 a share in the second quarter.
$1 trillion in losses? Bank on more But the bigger-than-expected losses reported by Freddie Mac and Fannie Mae this week, accompanied by dismal forecasts for the housing market, are strong indicators that there are likely more credit-related woes to come. "The banks are still at the mercy of writedowns. I don't think the worst is over for financials yet," said Liz Ann Sonders, chief investment strategist with Charles Schwab & Co. The International Monetary Fund forecasts that global losses tied to the credit crisis will be $945 billion. It's a widely used number, but Sonders thinks it's "potentially very conservative." So how high could losses go? Sonders points to the $1.6 trillion forecast from hedge fund firm Bridgewater Associates or even the $2 trillion number from Nouriel Roubini, the highly-respected professor of economics at NYU's Stern School of Business. And based on the losses already reported, we're not even halfway through the crisis.
Money Market 'Plagued' by Libor That Fed Can't Reduce A year after central banks started to pump trillions of dollars into the financial system to end a seizure in credit markets caused by subprime mortgages, cash is about as tight as it's ever been. The U.S. market for commercial paper, or short-term IOUs, backed by assets such as mortgages has shrunk 40 percent from its peak in July 2007. The amount borrowed in pounds between banks in the U.K. fell by 70 percent in June from a record in February 2007. The European Central Bank received $100 billion of bids for the $25 billion it offered to financial institutions on July 29, the most since the sales began in December. Efforts by the Federal Reserve, ECB and Swiss National Bank to shore up the world's biggest banks and promote lending have had limited success. The London interbank offered rate, the basis for at least $150 trillion of financial products, is within 0.06 percent of the highest since November 1999 compared with the Fed's benchmark interest rate. The largest financial companies have lost almost $500 billion from subprime-linked securities.
U.S. Consumer Debt Spikes In June Americans are filling their pockets with IOUs instead of shopping receipts. The New York Federal Reserve reported a higher than expected surge in consumer debt levels in June, as the cash-strapped borrowed more to get by and more failed to make their monthly payments. Separately, retailers reported lower than expected July sales. Outstanding U.S. consumer credit rose at an annual rate of 6.8% to $2.6 trillion in June versus 3.8% in May. Consumer debt jumped $14.3 billion, far above analysts’ estimates of $6.3 billion. The figure covers most short-term credit extended to individuals, excluding loans secured by real estate. The monthly shift is significant, but not necessarily cause for alarm. Bank Failures Have Customers Wondering About FDIC Protection As U.S. regulators brace for more bank failures, consumers are wondering for the first time since the savings-and-loan crisis of the 1980s about the safety of their money. Harry Newton, a former publisher who lives in New York City, moved $604,000 in cash to seven different banks last month after the seizure of IndyMac Bancorp Inc. to ensure that his funds were covered by the Federal Deposit Insurance Corp. In all, eight banks have been closed in 2008 by state and national regulators amid record losses tied to the collapse of the subprime mortgage market, data compiled by the FDIC show.
Hedge Fund Outlook Is 'Much Worse' Than 1998, LTCM Veteran Says The $1.9 trillion hedge fund industry, mired in its worst performance in two decades, faces "much worse" conditions than in 1998, when Long-Term Capital Management LP collapsed, a veteran of that fund said. "It's definitely a trickier environment,'" said Hans Hufschmid, chief executive officer of GlobeOp Financial Services LP, and a former partner at LTCM and co-head of its London office. "The market is much worse that it was in 1998. Then it was just LTCM, but this impacts everybody." Hedge funds are concerned for the first time about risks related to prime brokers after Bear Stearns Cos.' forced merger with JPMorgan Chase & Co., said Hufschmid, 52, whose London-based company is administrator to funds managing about $104 billion. Banks and brokerages have written down $495 billion and raised $356 billion in capital since the start of 2007 as the U.S. subprime mortgage market collapsed. Banks' increasing reluctance to lend has hurt hedge-fund operations, Hufschmid said in a telephone interview yesterday.
Oil dips on stronger dollar Oil falls as stronger dollar, slowing growth offset Turkish pipeline sabotage Oil prices sagged Friday as a strengthening dollar and worries about economic growth offset supply concerns over pipeline sabotage in Turkey that was claimed by Kurdish rebels. Light, sweet crude for September delivery fell $2.46 to $117.56 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe. The contract rose $1.14 cents overnight to settle at $120.02 a barrel. The gains Thursday in the U.S. came after pro-Kurdish news agency Firat said the separatist group Kurdistan Workers' Party, known as PKK, admitted sabotaging the Turkish section of the critical Baku-Tbilisi-Ceyhan pipeline earlier this week. Turkey's state-run Anatolia news agency reported that the fire, which was said to be under control Thursday, could cause the pipeline to be shut down for up to 15 days, stoking supply worries among oil market traders.
Now Oil's Fall Seems Unstoppable LYou know the oil bulls are in trouble when crude prices fail to react to a major pipeline explosion that could knock out almost 1.0% of global production for weeks. Reports that a sabotaged section of a major pipeline in Turkey could take "weeks" to repair failed to make much headway on Thursday, with oil markets more focused on the weakening global economy. Crude futures slipped 6 cents, to $118.52 per barrel, during afternoon trading in New York, while Brent crude fell to $115.57 per barrel. Although West Texas oil, the American benchmark, rose over one dollar to $119.83 per barrel, it was a pretty weak reaction overall. "Both geopolitical events and supply-related disruptions seem to have lost their grip on the markets," said MF Global analyst Edward Meir, "and are unable to break the downward price spiral we are trapped in."
Worker Productivity, and Wages, Slowed in July The efficiency of America’s workers grew at a slightly slower pace in the spring as companies sought to produce more with leaner work forces. Workers’ compensation growth also slowed. The Labor Department reported Friday that productivity — the amount an employee produces for every hour on the job — grew at an annual rate of 2.2 percent in the quarter. That was down from a 2.6 percent growth rate logged in the first quarter. Economists were forecasting productivity to pick up slightly to a 2.7 percent pace. Meanwhile, growth in compensation — wages and benefits — also slowed as companies were less generous amid troubles in the economy and uncertainty about their own prospects.
In U.S. retail sales, more signs of a slowdown Americans sought out more bargains and cheaper goods in July, leaving the country's retailers bracing for a painful back-to-school shopping season and investors on Wall Street once again worried about the outlook for the economy. Retail sales reports released Thursday revealed a country that is rapidly ratcheting back its spending habits, and abandoning mid-tier and discount shopping mall mainstays that were booming a year ago. The gloomy forecast helped depress stocks, particularly those in the retail sector, and the Dow Jones industrials were down about 220 points in late afternoon trading. Wal-Mart shares tumbled more than 6 percent, and American International Group, the big insurer, plunged nearly 20 percent for its worst one-day performance in nearly four decades.
Jobless Claims and Gauge for Home Sales Rise Claims for jobless aid rose last week, the government reported on Thursday, but a gauge of future home sales rose in a hopeful sign for the battered housing sector. The higher-than-expected June signings of home sale contracts offered some hope that the housing market might be stabilizing. But the jobless claims increased concerns about consumer spending and the corporate profit outlook. Initial claims for state unemployment benefits rose 7,000 last week to 455,000, the highest in six years, the Labor Department said. But it said a new federal program to extend benefits was partly the reason for the elevated level. Still, the four-week moving average of claims, which irons out weekly fluctuations and provides a better view of the underlying trend, also showed that jobs were tough to find as the economy copes with the worst housing downturn since the Great Depression.
New Dogs For The Junk Yard Corporate defaults are on the rise and expected to get much worse unless economic growth rebounds from its current slump, according a Thursday report from Moody's that said the pace of defaults surged in July. The corporate ratings and research firm said there were a total of 11 defaulters in July, nine of which were U.S. companies--a level not seen since July 2003--bringing the year-to-date level 48, compared with last year's total of 12 defaulters. The rate of defaults on speculative-grade fixed-income securities, or junk bonds, rose to 2.5% from June's revised rate of 2.1%. Junk bonds are those with ratings too low to be considered investment quality.
Worries of spreading economic woes depress Asian stocks The U.S. dollar rose sharply to a five-month high against the euro and Asian stocks fell Friday, as investors expected the malaise that has afflicted the U.S. economy would spread to other countries. While the U.S. economy has not greatly improved by almost any measure, investors have begun to reassess other parts of the world, particularly after the European Central Bank president said the euro zone faces substantially weaker growth this year and a Japanese official warned the world's second-largest economy may be in a recession. "We are seeing a shift away from a focus on the U.S. to a more global problem," said Sharada Selvanathan, a currency strategist at BNP Paribas in Hong Kong. "The dollar is getting a boost by default."
Credit crunch in a century’s context A few weeks after Black Monday, the stock market crash of 1987, one Wall Street banker gave a common view of the crisis to Barron’s magazine. “We’re observing the end of an era in two very specific areas,” he said. “First is the uncontrolled deregulation of global financial markets ... The second point is, the mindless commitment of human and financial resources to securitisation has reached its peak and now will contract for the indefinite future.” That he turned out to be entirely wrong illustrates how hard it is to judge the weight of a crisis still under way. The credit crunch is now a year old, but unless a deep real recession follows, it looks like cause for reform rather than revolution in the financial system. The bogeymen of 1987 were computerised trading – now universal – and equity index futures – now among the largest markets in the world. Many called for the reregulation of the financial sector as a result, but by 1999 Glass-Steagall, the measure that separated US banks and securities traders, had been repealed. It takes more than a crash to change the world.
Wall St takes a $20bn U-turn on ARS affair After months of regulatory pressure, Wall Street banks on Thursday took a U-turn, by agreeing to compensate tens of thousands of investors who find themselves stuck in the frozen market for auction-rate securities. Citigroup on Thursday agreed to buy $7.5bn worth of ARS from retail investors in the next three months while Merrill Lynch announced that it would buy back ARS it sold to investors starting next year. There are currently $12bn of such holdiings but Merrill said it expected there would be $10bn by the time it begins its buy-back. Meanwhile, UBS, the Swiss bank, was last night close to finalising the details of its own deal with regulators. The development, which marks one of the biggest settlements in Wall Street history, reflects the banking industry’s desire to draw a line under the regulatory probes that were beginning to cause damage to reputations.
Citi and Merrill in $20bn ARS agreements The credit crunch hit the financial sector hard again on Thursday as Citigroup and Merrill Lynch said they would buy a total of up to $20bn in auction-rate securities (ARS) and AIG shares plunged amid fears the insurer might need more capital. The protracted woes of three of the world’s largest financial groups underline the extent of the problems plaguing Wall Street and suggest that, even after a year of huge losses and writedowns, banks and insurers remain under severe pressure. The widespread sell-off in financial stocks dragged the stock market lower. The Dow Jones Industrial Average fell 1.9 per cent as AIG plunged 18 per cent to close at $23.84, its biggest daily fall since it went public in 1969, after the troubled insurer refused to rule out raising more capital to make up for a $5.4bn second-quarter loss announced on Wednesday. Lehman Brothers shares fell 12 per cent and Merrill was down more than 8 per cent.
NO RECOVERY UNTIL 2010 Blackstone President Tony James provided a dire outlook for an economic recovery yesterday as he announced the private-equity firm's second-quarter earnings. "We still don't see things improving for a while," James said. "We expect the economy to continue to be weak well into 2009 and possibly into 2010." He also noted that Blackstone expects inflation pressures to eventually cause the Federal Reserve to raise interest rates, which would slow down the progress of any economic recovery.
Elvis's Big Cadillac May Go Way of Tail Fins, 25-Cent Gasoline Cadillac's biggest sedans, once a symbol of the American dream, are in danger of joining Elvis Presley and tail fins in the pop-icon obituary column. Plans are on hold for new versions of the largest Caddies, which trace their lineage to the 1950s-era car so beloved by Johnny Cash's fictional factory worker in "One Piece at a Time" that he smuggled one out part by part. General Motors Corp. has sidelined replacements for the Cadillac DTS and STS in favor of more fuel-efficient models, people familiar with the plans said. "In the bad ol' days, the big old Caddy and the big Buicks were the way you showed you'd made it,'" said Alan Baum, director of forecasting at the auto consulting firm Planning Edge in Birmingham, Michigan. "To the extent people still want Cadillacs, they want a very different car."
Retailers brace for a back-to-school slump With the benefits of their stimulus checks dried up, American consumers are focusing even more on necessities like detergent and milk. That's creating big problems for apparel chains at the malls as the important back-to-school shopping season gets under way. Shoppers are struggling with higher food and gas bills, tighter credit and a persistent housing slump. Even more ominous: The number of newly laid off people unexpectedly reached the highest level in more than six years, according to a government report released Thursday. The Labor Department reported Thursday that the number of recently laid-off people signing up for benefits rose by a seasonally adjusted 7,000 to 455,000 for the week ending last Saturday - putting claims at their highest level since late March 2002.
Citi to Buy Back $7.3 Billion of Bonds Settlement Aims to Help Customers Unload Auction-Rate Securities Citigroup agreed Thursday to buy back $7.3 billion of bonds from retail and small-business customers who got stuck holding the debt when the market for so-called auction-rate securities melted down in February. The offer, part of a settlement announced by New York State Attorney General Andrew M. Cuomo, will be extended over the next three months to 40,000 individual, nonprofit and small- and medium-size business customers. The bank also agreed to work with larger customers, including retirement plans and other institutional investors, to help them unload $12 billion of auction-rate debt.
THE FED HAS BIAS TOWARD SLOWER ECONOMIC GROWTH THE Federal Reserve told us this week that it was concerned about both the slow economy and rising inflation. If it had to pick one, which would be the bigger concern? Right now Wall Street thinks the Fed would tilt toward the slow economy. So the stock market rallied strongly Tuesday on the hope that interest rates - or, rather, the few that the Fed controls - won't be raised in the foreseeable future. But that sense could change in the months ahead - especially if, as I mentioned in previous columns, statistics on inflation continue to rise abnormally as payback for seasonal adjustments that made price pressure look artificially tame during the spring.
Indebted Ever After Scared by National Deficit? You Should Be, Filmmakers Say. A private-equity billionaire, a former federal government official and a Baltimore newsletter editor have made a documentary film that they hope can do what an endless parade of policy papers has not: Persuade Americans that debt has created a looming economic crisis that would make the Great Depression look like a market correction. The movie, "I.O.U.S.A.," debuting Aug. 21, is an 87-minute alarum on what it calls the tsunami of debt bearing down on the United States' future, caused by the rising national deficit, the trade imbalance and the pending costs of baby boomers cashing in on entitlements. Early reviewers have dubbed the film "An Inconvenient Truth" for the economy, meaning it's not exactly the feel-good movie of late summer 2008.
Copper, Oil Lead Decline in Commodities as Global Growth Slows Copper and crude oil led a decline in commodities on concern that slower global economic growth will curb demand for raw materials. Copper headed for its biggest weekly drop since March, crude oil fell to the lowest compared with closing prices since May and silver reached its cheapest since January. Italy's second-quarter gross domestic product unexpectedly shrank, the statistics office in Rome said today. Japan's economy probably contracted in the three months ended June, according to the median estimate of 25 economists surveyed by Bloomberg News.
RSS![[Most Recent Quotes from www.kitco.com]](http://www.kitconet.com/images/quotes_7a.gif)