U.S. Initial Jobless Claims Rise to Five-Year High The number of Americans filing first-time claims for unemployment benefits unexpectedly rose last week, reaching the highest level in more than five years. Initial jobless claims increased by 44,000 to 448,000 in the week ended July 26, from a revised 404,000 the prior week, the Labor Department said today in Washington. Economists in a Bloomberg survey had forecast a drop in claims. The total number of people on benefit rolls rose to the most since December 2003.
First Fire, Then Hire Morgan Stanley goes on a hiring spree with the money it saved from firing 10 percent of its workforce. Nowhere but on Wall Street does the phrase "One man's trash is another man's treasure" ring so true. And perhaps no one knows that better than Mack the Knife. Morgan Stanley's John Mack, who saved about $1 billion by firing 4,800 people so far this year, is gingerly spending the savings on new hires, according to a report in the Financial Times. It's already spent $400 million on new recruits, and it hopes to spend the remaining $600 million by the end of this year. The bank sent pink slips to about 10 percent of its workforce in January and April, mostly in areas like investment banking, research, and fixed income. It plans to hire new staff in areas such as derivatives, risk management, and proprietary trading.
Weak US growth adds to gloom The US economy grew at an annual rate of 1.9 per cent in the second quarter, a faster pace than earlier in the year but slower than economists were expecting, the commerce department said on Thursday. Growth was lifted from a downwardly revised annual pace of 0.9 per cent in the first quarter thanks to surging exports and nearly $100bn in stimulus cheques mailed out by the government in May, which boosted consumer spending. However, businesses drew down inventories much more rapidly in the second quarter than they had earlier in the year as they adapted to the tougher economic conditions, keeping gains to GDP below the 2 per cent level forecast by economists.
U.S. Recession May Have Begun in Last Quarter of 2007 The U.S. economy may have tipped into a recession in the last three months of 2007 as consumer spending slowed more than previously estimated and the housing slump worsened, revised government figures showed. The world's largest economy contracted at a 0.2 percent annual pace in the fourth quarter of last year compared with a previously reported 0.6 percent gain, the Commerce Department said today in Washington. Growth for the period from 2005 through 2007 was also trimmed.
Mr. Paulson's New Bonds$$ These days, it's next to impossible to sell a mortgage-backed security -- unless, like Fannie Mae and Freddie Mac, you have access to the full faith and credit of Uncle Sam. So this week Treasury Secretary Hank Paulson teamed up with four of the country's biggest banks to jump start an alternative to securitization known as "covered bonds." A covered bond is a kind of halfway house between securitizing mortgages and simply holding them on bank balance sheets. With a covered bond, the bank gets the proceeds from selling the bonds now, while the investor gets the income from the mortgages. But unlike a mortgage-backed security, the bank doesn't totally wash its hands of the mortgages if the borrowers default or get delinquent. So it's easy to see their attraction at a time when securitization has become a dirty word.
Fed Leaves Door Open to Future Rate Increases Leaders Ponder How and When to Act The Federal Reserve is all but certain to leave interest rates unchanged when it meets next week, and its leaders are disinclined to raise them in the immediate future. But they almost uniformly think that the next time they adjust rates, it will be to raise them, and the debate behind closed doors next week will probably center on how and when to do that. The economy and financial markets have grown shakier since Fed policymakers last met in late June, and oil prices have fallen some. But Fed officials think that the dramatic rate cuts they undertook in the first half of the year are probably sufficient to keep growth from falling off a cliff and that the bank has been vigilant enough in using other tools to protect the financial system that it could raise interest rates without causing a resurgence of the crisis. Home Prices Hit Four-Year Low Home prices in May plummeted 15.8% from a year earlier, to 2004 price levels, wiping away four years of appreciation, according to the S&P/Case-Shiller 20-city home-price index released July 29. Analysts have become increasingly pessimistic that a bottom to the market will arrive anytime soon. The S&P/Case-Shiller report is only the latest evidence that home prices are swinging backward with at least as much force as they swung the other direction during the boom. Places that had double-digit increases a few years ago are now seeing prices drop by as much as 28% in a year. Peter Schiff, president of Darien (Conn.) brokerage Euro Pacific Capital, said prices could slide to levels last seen before the housing boom began in the early 2000s.
Central banks fire new round at credit crisis The U.S., European, and Swiss central banks on Wednesday extended emergency lending facilities for investment banks and expanded other liquidity programs to ease credit market strains that have weighed on the global economy for nearly a year. The joint measures helped lift share prices in the United States and Europe, and were a factor in pushing up U.S. bond yields and the U.S. dollar. The U.S. Federal Reserve said it was prolonging the emergency credit facility for primary dealers to January 30 which had been due to expire in mid-September. The Fed said it acted "in light of continued fragile circumstances in financial markets," and said it would close down the lending program once it determined credit market conditions were no longer "unusual and exigent.
Deutsche Bank writes down another $3.6 billion Deutsche Bank on Thursday announced a further $3.6 billion of write-downs in the second quarter of the year, taking its bill from the global financial crisis beyond $11 billion. The German financier had originally been seen as one of the winners in the chaos but as the problems on global markets continue, Deutsche Bank is being sucked ever deeper into trouble.
IndyMac 'Unattractive' to a Potential Buyer Federal Deposit Insurance Corp. Chairman Sheila Bair said IndyMac Bancorp Inc.'s high-risk lending and mortgage losses make it "unattractive" and leave the agency needing to strengthen the firm to sell it. IndyMac's reliance on large deposits arranged by brokers on behalf of their customers and lack of a strong "core deposit base" also limit its appeal, Bair, 54, said today in an interview to be broadcast this weekend on Bloomberg Television's "Conversations with Judy Woodruff." "There are a number of things about this institution that, to be honest with you, make it unattractive to a potential purchaser," Bair said.
Chrysler in talks with Tata and Fiat: sources Chrysler is in talks to lease U.S. production capacity and share retail distribution with Fiat SpA (FIA.MI), allowing the Italian automaker to return the U.S. market for the first time in 25 years, people briefed on the talks said on Wednesday. Chrysler, the No. 3 U.S. automaker, has also been in discussions with India's Tata Motors Ltd about selling its Jeep Wrangler SUV in India and possibly other Asian markets, said the sources, who were not authorized to discuss the negotiations.
Oil jumps over $4 on surprise drop in gas supplies Oil prices soared over $4 a barrel Wednesday, halting a dramatic two-week slide after a surprise drop in U.S. gasoline supplies fed speculation that record fuel prices aren't keeping Americans off the roads But energy market analysts offered mixed views on whether prices would swing back toward record levels above $147 a barrel hit earlier this month or if Wednesday's big rally was just a temporary bump. Senate Democrats back $6 billion in loan-guarantees for automakers Senate Democrats agreed Wednesday to approve $6 billion in low-cost loans for Detroit's Big Three automakers, which have struggled to raise funds in a weak credit market. Sen. Debbie Stabenow, D-Lansing, said in an interview that the Senate would consider a second stimulus package in September, which will include a portion of the $25 billion in loan guarantees over five years for auto plant retooling Those provisions were authorized in the December 2007 energy bill that required a 40 percent increase in fuel efficiency standards by 2020. That bill didn't include any funding for the loan guarantees. To guarantee $6 billion in loans, Congress must spend $900 million. It would cost an estimated $3.75 billion to back the entire $25 billion package. Congress eyes direct loans for auto industry to make plants green Automakers could receive up to $6 billion in direct loans to modernize their assembly plants to build gas-electric hybrids and advanced vehicles under an agreement reached Wednesday by Senate budget leaders. An additional $300 million would help research and develop advanced batteries critical to plug-in hybrid vehicles, said Sen. Debbie Stabenow, D-Mich., who has sought the funding. Stabenow said the provisions would be included in an economic stimulus package expected to be considered next September. Michigan lawmakers have sought the federal aid as General Motors Corp., Ford Motor Co., and Chrysler LLC, have announced reductions in salaried workers and plant closures amid a difficult economic period.
Singapore to the rescue of a troubled Merrill Lynch The Singapore government has become an unlikely white knight to Wall Street, with a new billion-dollar commitment to Merrill Lynch, even as Merrill, a huge U.S. investment bank, disclosed more problems. Merrill Lynch took a multibillion-dollar write-down and said Monday that it would sell new stock Temasek Holdings, the Singaporean sovereign investment fund, is one of the biggest buyers, pouring an additional $900 million into Merrill Lynch, on top of a nearly $5 billion commitment it made in December. Temasek will also reinvest some $2.5 billion of that earlier commitment back into Merrill Lynch. The new purchase of $3.4 billion in shares brings Temasek's stake in Merrill Lynch to nearly 10 percent.
Kremlin's heavy hand triggers foreign exodus Foreign investors have become extremely wary of the Russian stock market after the Kremlin moved yet again to tighten its noose around the country's energy and mining sector, launching anti-trust probes against London-listed Evraz Holding and Raspadsky Coal The move follows last week's assault on steel and coal giant Mechel for alleged overpricing of raw materials and using off-shore trading to cut its tax bill. Moscow's RTS stock market index has fallen by 25pc since May on fears that premier Vladimir Putin is once again using probes or other heavy-handed methods to reorder the strategic landscape.
Mexicans Sending Less Money Home The amount of money sent home by Mexican migrants declined 2.2 percent during the first six months of 2008, showing what analysts said are the effects of the U.S. economic downturn and the nationwide crackdown on illegal immigrants. The funds transmitted, known as familial remittances, totaled $11.6 billion during the first six months of the year, compared with $11.9 billion during the same period last year, according to numbers released yesterday by Mexico's central bank Remittances are the second-largest source of foreign income for the country, following oil exports. Experts think that the decline could help push more Mexicans deeper into poverty as families there face rising prices on basic necessities. Australia faces worse crisis than America The world's financial storm has swept through Australia and New Zealand this week amid mounting signs of contagion across the Pacific region. Financial shares were pummelled in Sydney on Tuesday after investor flight forced National Australia Bank (NAB) to slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90pc write-down on its £550m holdings of US mortgage debt, an admission that it AAA-rated securities are virtually worthless
Australia Facing 'Once-in-100-Year' Housing Slump Australia may be headed for a housing recession similar to those roiling the U.S. and U.K The cause is a combination of rising default rates, the biggest drop in home prices in five years, the highest borrowing costs in a decade and slowing economic growth. Prices in the property market -- described by the International Monetary Fund in April as one of the world's most "overvalued" -- will fall 30 percent by 2010, according to Gerard Minack, senior economist at Morgan Stanley in Sydney. Prices dropped in all of Australia's major cities last month for the first time since just before the Great Depression.
U.K. Consumer Confidence Fell to Record Low in July U.K. consumer confidence dropped to a record low in July, slipping below the level reached on the eve of the 1990 recession, as house prices slumped and inflation accelerated, GfK NOP said. An index of confidence, based on a survey of 2,001 people, fell 5 points to minus 39, the lowest since the data began in 1974, GfK said today in London. The gauge fell to 4 points below the result for March 1990. Britain's economic outlook has deteriorated in the past month after ``bad news'' on retail sales, Bank of England policy maker David Blanchflower said yesterday. The threat of another recession has helped erode support for Prime Minister Gordon Brown, whose ruling Labour Party had the lowest support since the early 1980s in a Populus Ltd. poll published this week.
European Inflation Quickened to 16-Year High in July Inflation in Europe accelerated to the fastest pace in more than 16 years in July, restricting the European Central Bank's room to bolster the economy even as unemployment starts to increase. The inflation rate for the 15-nation euro region rose to 4.1 percent from 4 percent in June, the European Union statistics office in Luxembourg said today. The rate, the highest since April 1992, matched the median estimate of 36 economists in a Bloomberg News survey. A separate report showed unemployment was 7.3 percent in June, exceeding the 7.2 percent median forecast.
Dubai's borrowings will swell to $32.5b this year The Government of Dubai is raising a further $16.5 billion of loans for its commercial subsidiaries in the syndicated loan market and is turning to European and Asian lenders to counter a lack of liquidity among local banks, banking sources said. The Government-owned entities — known in the loan market as Dubai Inc — will bring state-backed borrowing to $32.5 billion this year, as the emirate has already completed $16 billion of loans in 2008, according to Reuters Loan Pricing Corp data.
Without fanfare, Bush signs mortgage relief bill Avoiding public ceremony, Bush quietly signs measure offering mortgage relief for thousands President Bush signed a housing bill Wednesday intended to rescue about 15 percent of the cash-strapped homeowners in fear of foreclosure in the next year or so. Early in the morning and out of public view, the president signed it without fanfare in the Oval Office, adding his signature to a measure he once threatened to veto. The White House said he was accompanied by Treasury Secretary Henry Paulson, Housing and Urban Development Secretary Steve Preston and other administration officials.
GM to Cut 5,000 White-Collar Jobs by Nov. 1$$ Before Loss Report Friday, It Also Says It Will Trim Leases General Motors Corp., which is expected to post a big second-quarter loss on Friday, said it will remove about 5,000 people from its salaried head count by Nov. 1 as part of a cost-cutting initiative it outlined earlier this month. Those cuts would amount to 15% of GM's North American white-collar work force. The auto maker also confirmed plans to scale back its vehicle-leasing operations, which could further crimp U.S. sales. While GM plans to continue to offer subsidized leases in the U.S., it is adjusting some of the lease terms and will exclude certain vehicles.
Chrysler Slashes Costs, Seeks Partners $$ Chrysler LLC is scrambling to slash costs and line up partnerships with foreign auto makers to shore up its finances amid a painful downturn in sales and a deteriorating outlook for the company, people familiar with the matter said. In recent weeks, the auto maker has had discussions with Tata Motors about having the company sell and possibly assemble Jeeps in India, these people said. Separately, Chrysler has had talks about leasing one of its U.S. plants to produce cars for Italy's Fiat SpA, they said. Chrysler has been exploring alliances since it was acquired a year ago by Cerberus Capital Management LP, and has mapped out a deal to make trucks for Nissan Motor Co. Both sets of talks are preliminary and may not lead to deals, these people said.
A Hidden Toll on Employment: Cut to Part Time The number of Americans who have seen their full-time jobs chopped to part time because of weak business has swelled to more than 3.7 million — the largest figure since the government began tracking such data more than half a century ago. The loss of pay has become a primary source of pain for millions of American families, reinforcing the downturn gripping the economy. Paychecks are shrinking just as home prices plunge and gas prices soar, furthering the austerity across the nation. "I either stop eating, or stop using anything I can," said Marvin L. Zinn, a clerk at a Walgreensdrugstore in St. Joseph, Mich., who has seen his take-home pay drop to about $550 every two weeks from about $650, as his weekly hours have dropped to 37.5 from 44 in recent month.
Nissan offering buyouts to Tennessee employees Nissan North America Inc. said Wednesday it will offer buyouts to about 6,000 employees at the company's two Tennessee plants and eliminate a night shift at one plant because rising fuel prices and the economic downturn have slowed sales of trucks and sport utility vehicles. The technicians and salaried employees at the assembly plant in Smyrna and powertrain plant in Decherd will be offered a lump sum of $100,000 or $125,000 depending on tenure, as well as medical and car purchase benefits, the company said. Nissan spokesman Fred Standish said that even though the company is ending night shift truck production effective Aug. 11, it does not plan any layoffs. "We've never laid off anybody in Smyrna and we don't intend to do it now," he said. Standish said employees on the shift that is being eliminated are expected to either take buyouts or move into jobs made vacant from other workers taking the buyouts. "There's going to be a lot of movement and realignment," he said. The two plants have about 1,200 more employees right now than they need, he said.
Merrill Lynch's woes far from over It announces huge write-down, sells debt at bargain basement price AS ONE analyst says, Merrill Lynch seems to be experiencing death by a thousand cuts. The third-largest US investment bank said on Monday that it will be taking another huge write-down - US$5.7 billion (S$7.8 billion) for the third quarter - as it unloads huge amounts of risky debt, and will also raise US$8.5 billion by selling new stock. This comes less than two weeks after Merrill posted a US$4.9 billion second-quarter loss after being hit by US$9 billion of write-downs in that same period. In a sign of how toxic Merrill's debt holdings have become, it has agreed to sell US$30.6 billion of collateralised debt obligations (CDOs), a kind of repackaged debt, to an affiliate of private equity fund Lone Star Funds for just US$6.7billion, or about 22 US cents on the dollar.
A Deal at Merrill Puts Spotlight on Others Somehow, $4.4 billion just evaporated at Merrill Lynch. Less than two weeks ago, Merrill Lynch valued the toxic mortgage investments on its books at $11.1 billion. Now, it is selling those investments for $6.7 billion — and financing most of the purchase to boot. The fire sale raises a troubling question for the nation’s battered financial industry: Have other banks with similar investments overestimated their values? That question reverberated across Wall Street on Tuesday as analysts began assessing the implications of Merrill’s move to cleanse its tainted balance sheet. Executives at Citigroup, JPMorgan Chase and Bank of America began reviewing the bundles of mortgages, known as collateralized debt obligations, or C.D.O.’s, that their companies hold on their books. Those companies may have to lower their valuations, and take additional charges, if their assets are similar to those sold by Merrill.
Fed extends emergency loan program U.S. central bank says Wall Street banks can borrow emergency funds through Jan. 30. The Federal Reserve said Wednesday it is extending its emergency borrowing program to Wall Street firms and is taking other steps to ease a severe credit crunch that has hobbled the national economy. The Fed said the program, where investment houses can tap the central bank for a quick source of cash, will now be available through Jan 30. Originally the program, started on March 17, was supposed to last until mid-September.
Banks pressed to follow Merrill debt sale Leading global banks including Citigroup and UBS on Tuesday faced renewed pressure to write down or sell billions of dollars in toxic assets following Merrill Lynch’s disposal of $30bn in mortgage-related securities at a cut price. Merrill’s move to sell collateralised debt obligations (CDOs) for $6.7bn, or 22 cents on the dollar – announced on Monday night – raised hopes that other banks would be able to strike similar deals and purge their balance sheets of bad assets. However, the low price paid by Lone Star Funds, a distressed debt investor, to buy Merrill’s CDOs sparked fears that the financial system could enter another spiral of huge writedowns followed by highly dilutive capital raisings.
What Hath Merrill Wrought? Tally of Likely Fallout from CDO Writedown Rises Merrill's surprising, mere ten days after its last investor combo writedown/fundraising announcement still has financial analysts toting up the collateral damage. Remarkably, the US stock market staged a peppy rally, clearly choosing to ignore the implications. The cause for pause was the sale of $30.6 billion in face amount of super senior CDOs at a ostensible price of 22 cents on the dollar. But the sale was 75% financed, non-recourse, and could almost be characterized as a call rather than a sale. Worse, the CDOs were mainly 2005 vintage, and thus should have better quality underlying assets than 2006 and 2007 deals.
Fed Extends Emergency Loan Programs Through January The Federal Reserve extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still too weak to go without a backstop from the central bank. The Fed also plans to give securities dealers options for tapping one of the loan programs to ensure financing through key dates, such as the ends of quarters, when funding needs can jump. Commercial lenders will be able to borrow from the central bank for a longer period, and the Fed boosted its swap line with the European Central Bank. Today's announcement reflects continued turmoil in financial markets, after three U.S. banks failed in as many weeks. Chairman Ben S. Bernanke and New York Fed President Timothy Geithner spearheaded the introduction of three lending programs since December as the credit crisis engulfed Wall Street and caused the collapse of Bear Stearns Cos.
Government announces plans to borrow $27 billion Bush plans $27 billion in borrowing next week as part of effort to handle soaring deficits The Bush administration gave details Wednesday on how it plans to borrow the billions of dollars it will need to cope with the soaring budget deficits. Those plans include raising $27 billion by selling a new 10-year note and a new 30-year bond at the regularly scheduled quarterly auctions to be held next week. The government needs to borrow $171 billion during the current July-September quarter, the second highest quarterly borrowing total on record. The increased borrowing needs reflect the exploding federal budget deficit which is projected to more than double in size this year and to hit an all-time high of $482 billion in the 2009 budget year.
Putting a lasso on inflation Is there any good way to deal with the rapid inflation in commodity prices, or just lesser evils? Governments around the world have been trying a raft of different strategies to deal with the high costs of food and fuel. None of them offer a perfect solution to the problem, but some can be less damaging to an economy than others. One of the smartest solutions maybe the simplest: Income support for poor families. In countries as diverse as Malaysia, Pakistan and Haiti, consumers have received heavy subsidies from the government to aid their purchases of basic foods and fuels. These subsidies were intended to insulate consumers from the immediate effects of high prices, but they can have some fairly undesirable consequences.
Job Security [Hey, lighten up!. . . it's a spoof] Barack Obama's marching orders (as we imagine them) to the nation's top banker.
Good afternoon, Ben.
Thanks for taking the time to meet with me. I know Hank's been keeping you busy with his latest crazy bailout idea - rumor has it he wants to take over those horrid Washington Nationals. Maybe he can get the Yankees to underwrite the deal.
But I like that in meeting with me today you've made long-term career goals your top priority.
It's still early, but the polls and prediction markets say that I have a really good shot at being president. Have you read those stories?
Anyway, let's get to the matter at hand. As we both know, your term is up in January 2010 and it's not going to look great for me to keep around someone appointed by one of our country's worst presidents. At the same time, I know you probably don't want to have the shortest term at the Fed since Bill Miller. So maybe there's a compromise. . . . After 7 Years, Talks Collapse on World Trade World trade talks collapsed here on Tuesday after seven years of on-again, off-again negotiations, in the latest sign of India’s and China’s growing might on the world stage and the decreasing ability of the United States to impose its will globally. Pascal Lamy, director general of the World Trade Organization, could not bridge differences between a group of newly confident developing nations and established Western economic powers. In the end, too few of the real power brokers proved committed enough to make compromises necessary to deliver a deal. The failure appeared to end, for the near term at least, any hopes of a global deal to further open markets, cut farm subsidies and strengthen the international trading system.
America's house price time bomb With the American housing market in its worst crisis since the Great Depression of the 1930s, President Bush is expected to sign into law a massive new government intervention designed to slow the slide. The intervention would come as a little known quirk of US law threatens to drive down house prices even faster. Faced with seemingly never-ending falls in the value of their properties, some American home-owners are taking radical action; they are choosing to walk away from homes and their mortgages. In May 2006, at the height of the housing boom, Karen Trainer bought a $500,000 apartment in California - with money borrowed from her bank. By this year, Karen still owed $500,000 on her mortgage, but her apartment was worth $200,000 less. So she was deep in negative equity and, to make matters worse, the interest rate on her loan was about to increase. "I thought 'this is crazy'," Ms Trainer says. "It just does not make financial sense." Restaurant Chains Close as Diners Reduce Spending Several national restaurant chains were shuttered on Tuesday, possibly offering an early taste of what’s in store this year for businesses that depend on free-spending consumers whose budgets are now being squeezed. The parent company of Bennigan’s, an Irish-themed bar and grill with about 200 sites across the country, filed for bankruptcy, a move that will put hundreds of employees out of work and leave many landlords with empty retail space during a painful time in the real estate market. A sister brand, Steak & Ale, will also close. Franchise units of Bennigan’s will remain open for now, a spokeswoman, Leah Templeton, wrote in an e-mail message. The restaurants are the latest casualties in the so-called casual dining sector, considered a cut above fast food. Soaring food costs and a surfeit of locations have hurt the companies’ bottom lines just as Americans are choosing to take more meals at home.
Chrysler's credit rating downgraded Fitch cuts the automaker's credit rating two notches to deeper junk, saying tighter financing likely to curtail sales. Fitch Ratings cut Chrysler LLC's credit rating further into junk territory on Tuesday, saying restricted access to financing for its vehicles will result in lower retail volumes. The credit ratings agency lowered Chrysler's issuer default rating two notches to "CCC" from "B-". It said the company's restricted access to economic retail financing for its vehicles is likely to lead to a further slowdown in its retail sales and more costly sales incentives.
Oil deepens slide to $122, looks to U.S. fuel stocks Oil prices extended their steepest slide in a year and a half on Tuesday, as traders looked ahead to U.S. oil stock data expected to show a rise in fuel inventories amid eroding demand in the world's biggest consumer. Prices, which are now at their lowest in nearly three months, were also under pressure from signs of strength in the U.S. dollar, which held firm after rallying on a combination of weaker oil prices and an unexpected rise in U.S. consumer confidence. U.S. light crude for September fell 9 cents to $122.10 a barrel by 11:16 p.m. EDT after slumping by $2.54 on Tuesday, hitting an intra-day low of $120.42, the lowest since May 6 and marking the deepest sell-off in prices since early 2007.
NY Gov Paterson Warns of Economic Crisis In a rare, brief televised address, Gov. David A. Paterson announced on Tuesday afternoon that he would call the Legislature into an emergency session on Aug. 19 to address what he called an economic and budget crisis confronting New York State as a result of plummeting revenues and rising costs. The new governor avoided any mention of new taxes, instead arguing forcefully for austerity. He said he was calling on the Legislature to reduce the size of the state workforce; cut agency spending; reduce property taxes for homeowners; aid New Yorkers with the soaring costs of home energy; and even consider public-private partnerships that would take over state assets.
U.S. is on brink of survival crisis, according to Moscow Moscow thinks that the United States could face a serious domestic crisis in the near future. "The U.S. is on the brink of a mass crisis of surviving," a source with the Russian Foreign Ministry told journalists on Tuesday. "The U.S. is on the track of drastic and painful changes," he said. "At first, they have to learn to live within their means," the diplomat added. Speaking about relations between Moscow and Washington, the source said that less interdependency in Russian-U.S. relations would be useful. "We can in the future reach the moment when we will be able to stop discussing only the issues the U.S. side is interested in," he said. "We are not enemies with the U.S., and unfortunately we are still not friends, but we are depending on each other less and less," the diplomat said.
Oil? Ah, let Russia have it State Department gives away 125,000 square miles of Alaskan ocean floor Even if Congress follows President Bush's lead in opening off-shore oil exploration, there exist over 125,000 square miles of sea bottom that won't be explored, because the State Department – amid controversy and against the will of Alaskans – has surrendered the land to Russia. Eight islands and their surrounding sea floors were ceded to the former Soviet Union as part of the U.S.-U.S.S.R. Maritime Boundary Treaty in 1991, a treaty signed by the U.S. Senate and President George Bush but never ratified by the Soviets. Nonetheless, an executive agreement enforcing the terms of the treaty until ratification has been in place through three presidencies, meaning the State Department officially recognizes the islands as Russian territory. Alaskan legislators, who were given no input or authority on the island giveaway, have long protested the treaty, declaring it null and void without Russian ratification. US general warns Russia on nuclear bombers in Cuba Russia would cross "a red line for the United States of America" if it were to base nuclear capable bombers in Cuba, a top US air force officer warned on Tuesday. "If they did I think we should stand strong and indicate that is something that crosses a threshold, crosses a red line for the United States of America," said General Norton Schwartz, nominated to be the air force's chief of staff. He was referring to a Russian news report that said the military is thinking of flying long-range bombers to Cuba on a regular basis. It was unclear from the report whether that would involve permanent basing of nuclear bombers in Cuba, or just use of the island as a refueling stop. In his confirmation hearing to become the air force's chief of staff, Schwartz was asked what he would recommend if Russia were to base nuclear capable bombers in Cuba.
Russia Warns of Military Response to US Missile Shield A dispute between Russia and the United States over the planned deployment of a U.S. anti-missile defense shield in eastern Europe deepened Tuesday, with Moscow warning of a “military-technological” response to the move. Reacting to the signing of an agreement between Washington and Prague on setting up a radar base as a key part of the system, Moscow’s foreign ministry reiterated its view – long denied by the U.S. – that the shield poses a threat to Russia. Russia has no doubts that the plan aims to weaken Russia’s strategic deterrent, it said. “If the real deployment of the U.S. strategic missile defense system begins near our borders, then we will have to respond using not diplomatic but military-technological methods.” Secretary of State Condoleezza Rice and her Czech counterpart Karel Schwarzenberg on Tuesday signed the main treaty on the stationing of a U.S. radar base on Czech soil.
Chavez Goes Weapons Shopping in Russia Amid Arms Race Venezuelan President Hugo Chavez heads to Moscow 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.
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Tues 07.29.2008
Americans remain gloomy about the economy Americans, squeezed by higher gas and food prices and a housing market that keeps slumping, remain the most pessimistic about the economy since the tail end of the last prolonged recession 16 years ago, a private research group said Tuesday. The New York-based Conference Board said that its Consumer Confidence Index for July stands at 51.9, up only slightly from the revised 51.0 in June and slightly better than the reading of 50 predicted by economists surveyed by Thomson/IFR. Still, the index remains about half of what it was a year ago.
Congress Mortgages the Economy's Future to Save Fannie Mae and Freddie Mac With President Bush no longer threatening a veto, the subprime mortgage and Fannie Mae and Freddie Mac "bailout" bill sailed through Congress. In anticipation of its enactment, Congress had the foresight to raise the national debt limit to $10.6 trillion. Who says that politicians don’t plan ahead? Once signed into law, which should happen sometime this week according to a White House spokesman, the budget busting legislation will hand the Administration a blank check to prop up the ailing home lenders. The ultimate cost is anybody’s guess. I believe that the price tag will be higher than just about anyone imagines. Treasury Secretary Henry Paulson's "Bazooka" will be locked and loaded with enough firepower to blow what’s left of our economy into the dustbin of history.
'It's Going to Get Worse Before It Gets Better,' says Global Crisis Fund Manager "Never bet on the end of the world because it’s only going to happen once and how are you going to collect?" Those words, from a longtime source, have stuck with me every time the market seems like it’s going to hell and a hand basket, i.e., times like these. Maybe it's foolhardy to bet on Armageddon but taking steps to protect your portfolio against a financial crisis certainly makes a lot of sense in the current environment. That’s the mindset at Penso Capital Markets, a firm that provides strategic risk management for institutions high and net worth individuals, which launched a Global Crisis Strategy fund in February. "Things are going to get worse before they get better," says Ari Bergmann, managing principal of Penso in the accompanying video. "We are in a long, protracted, difficult situation."
U.S. July Consumer Confidence Rose From 16-Year Low Consumer confidence in July stayed near a 16-year low as Americans worried about job prospects, a private report showed. The Conference Board's confidence index rose to 51.9, higher than forecast, from a revised 51 in June. A separate report showed home prices in 20 metropolitan areas dropped 15.8 percent in May from the same time last year. Job losses, smaller wage gains, falling property values and rising food and fuel bills may prompt consumers to scale back on purchases and vacation plans in the second half of the year. The report increases the risk that the economic expansion will come to a halt once the lift from the tax rebates subsides.
Fannie, Freddie On a Tightrope Mortgage Giants Navigate Market Volatility, Unique Role The collapse in the stock prices of Fannie Mae and Freddie Mac earlier this month, followed by an equally dramatic rebound, underscored the vulnerability of today's agitated markets to panic and the mercurial behavior of global traders. Financial experts said the drop, nearly 50 percent in a week, was precipitated by a series of alarming reports from analysts and in the media and was then turbocharged by a surge in short selling, bets made by investors that the shares would fall.
White House Predicts $482 Billion Deficit The White House predicted Monday that President Bush would leave a record $482 billion deficit to his successor, a sobering turnabout in the nation’s fiscal condition from 2001, when Mr. Bush took office after three consecutive years of budget surpluses. The worst may be yet to come. The deficit announced by Jim Nussle, the White House budget director, does not reflect the full cost of military operations in Iraq and Afghanistan, the potential $50 billion cost of another economic stimulus package, or the possibility of steeper losses in tax revenues if individual income or corporate profits decline. The new deficit numbers also do not account for any drains on the national treasury that might result from further declines in the housing market.
America must not act rashly over inflation The startling jump in US consumer price inflation over the past several months has sparked concern over whether the economy is entering an inflationary spiral similar to that of the 1970s. Lost in most of the commentary about inflation has been a careful inspection of its underlying mechanics. Almost all the recent increase in headline consumer price index inflation is due to rocketing energy and food prices. Inflation excluding energy and food is significantly lower. The increase in the core CPI over the past year was just 2.4 per cent, slightly above the Federal Reserve’s comfort zone of 1 to 2 per cent. The feeding through of food and energy costs to core prices did produce an uptick this past month. Over the coming year, however, below-capacity output growth and softening oil and commodity prices are likely to push core inflation back towards the comfort zone. Why care about headline inflation versus core inflation? Simply put, a sustained move of headline inflation to the levels of the 1970s is unlikely without an accompanying increase in the core component. The reason is simple: although they can be highly persistent, rapid increases in the relative prices of energy and food cannot go on indefinitely. Once this process dies down, as long as core inflation remains anchored, headline inflation must converge to it.
Oil Declines as Stronger U.S. Dollar Dims Commodities' Appeal Crude oil declined as the U.S. dollar strengthened against the euro, limiting the appeal of commodities as an inflation hedge. Oil has fallen 16 percent since its July 11 record as the dollar has strengthened against the euro. Futures rose earlier as Royal Dutch Shell Plc said it may suspend exports of Bonny Light crude from Nigeria after a militant attack in the Nembe Creek trunk line yesterday. "A stronger dollar translates into weaker crude," said Tom Bentz, a broker at BNP Paribas in New York. "The market is still kind of in this downward trend here in the short term and is having troubling turning back up."
Home Price Index Down 15.8% in May Home prices continued to fall in May across the country, a private group said on Tuesday, a sign that the housing slump may get worse. The decline in the last year is the steepest annual drop since the Case-Shiller index began two decades ago, according to Standard & Poor’s, which releases the index. Case-Shiller is a widely watched measure of the housing market that measures prices in 20 major metropolitan areas. From May 2007, prices have dipped 15.8 percent, falling 0.9 percent in May this year. The 10-city price index, which dates to 1988, dropped 16.9 percent. All 20 cities measured by the index had annual declines in home values, and 10 cities have suffered double-digit percentage declines in the last year. Miami and Las Vegas have fared the worst, with prices in each city dropping more than 28 percent since May 2007.
IMF says housing slump critical The International Monetary Fund (IMF) said Monday there's no end in sight to the U.S. housing recession and warned that deteriorating credit conditions for consumers and banks may prolong a period of slow economic growth. "At the moment, a bottom for the housing market is not visible," the IMF said in its Global Financial Stability Report, released Monday. "Stemming the decline in the U.S. housing market is necessary for market stabilization as this would help both households and financial institutions to recover." The IMF, which a year ago failed to foresee the depth of the subprime mortgage collapse, stood by its April forecast for about $1 trillion in losses stemming from the U.S. mortgage crisis. While U.S. policy makers have helped contain the financial losses, "credit risks remain elevated" and banks need to raise more capital.
A New Way to Generate Mortgages The financial establishment came together Monday in search of a new way for banks to come up with cash for home mortgages. Regulators, bankers and traders, led by Treasury Secretary Henry M. Paulson Jr., all pledged to do their best to get a “covered bond market” going in the United States. Covered seems to be a synonym for collateralized, but it also has other meanings that may be appropriate in this effort to salvage the housing market. Think of covered wagons, which can be circled in times of crisis. With banks reluctant to lend their own money for mortgages, and the private securitization market quiescent if not dead, the cost of mortgage loans has been rising even as housing prices fall, making a bad situation worse. At best, a covered bond market would provide a cheaper source of financing for banks while reassuring investors that their money is safe. Essentially investors would buy into a pool of mortgages that would be kept on the balance sheet of the bank that made the loans. These would be high-quality loans, and at the first sign of trouble in the underlying mortgages, those mortgages would be replaced in the mortgage pool. WE'RE LIKELY TO GET AN UGLY JOBS REPORT ON FRIDAY FINALLY, we should get some honest figures on the health of the nation's job market. On Friday the Labor Department will report the July payroll survey and the month's unemployment rate. Wall Street thinks that the nation lost another 75,000 jobs this month, with the headline unemployment rate rising to 5.6 percent. Unemployment was at 5.5 percent in June, showing a tremendous jump from 5.0 percent in May. And 62,000 jobs disappeared in June. In fact, the number of jobs in the US has declined every month this year. But as I've been explaining in this column for years, the number of jobs that are lost or gained each month has a lot to do with tricky statistics. Friday's number, while not perfect, will be the first monthly job report this year that isn't defiled by ridiculous assumptions.
Banks Act to Aid Mortgage Lending$$ 'Covered Bond' Plan Of Four Firms Seeks To Boost Financing Four of the nation's largest banks will begin issuing a type of debt the Bush administration has been pushing as a way to help reinvigorate the housing market. On Monday, Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co., said they would begin issuing so-called covered bonds, a popular method of financing in Europe that could make more mortgage financing available in the U.S. The move came as federal regulators announced a set of voluntary industry guidelines intended to provide clarity to issuers and investors about the types of assets banks must hold if they issue such bonds and how investors would fare in the event of a bank failure.
Worried Banks Sharply Reduce Business Loans Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring. Two vital forms of credit used by companies - commercial and industrial loans from banks, and short-term "commercial paper" not backed by collateral - collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001. The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.
Gold futures fall, pressured by dollar's gains Gold futures declined early Tuesday, as falling oil prices and a higher U.S. dollar left traders inclined to sell the precious metal. Gold for August delivery fell $5.20, changing hands at $922.50 an ounce on the New York Mercantile Exchange. On Monday, gold finished little changed, ending up 90 an ounce. "The metal may struggle to gain significantly until either oil or the dollar can provide support," wrote James Moore, analyst at TheBullionDesk.com. "However, with fresh sizable writedowns being posted by the large investment banks, we expect investors to remain cautious and risk averse as a result, which should draw more safe-haven investment demand from longer-term players," Moore said in a note.
Merrill Aims to Raise Billions More Firm Dumps Mortgage Assets as Crisis Drags On; Another Big Write-Down Merrill Lynch & Co. agreed to sell more than $30 billion in toxic mortgage-related assets at a steep loss, hoping to purge its balance sheet of problems that continue to plague the giant brokerage firm. The move was described by a person close to Merrill as an effort to "lance the boil" that has resulted in more than $46 billion in write-downs since June 2007. Dumping the assets for just 22 cents on the dollar will result in a write-down of $5.7 billion. That is an ominous sign for other Wall Street firms and commercial banks trying to get rid of loans and securities in a market flooded with distressed assets.
Merrill to sell troubled assets, raise capital Merrill Lynch to cut mortgage-backed securities, raise new capital by issuing shares Merrill Lynch & Co., in a broad move to clean up its troubled balance sheet, said Monday it will sell a big slice of its toxic asset-backed securities and issue new stock to raise $8.5 billion of fresh capital. The world's largest brokerage, struggling to right itself as the credit crisis continues, said it will issue more than 200 million new common shares as part of the deal. Merrill said it will write-down $5.7 billion because of additional losses on the sale of mortgage securities and hedging contracts. Chief Executive John Thain, who joined Merrill Lynch last year, had vowed in the past he wanted to avoid using a public offering to raise money. The latest move comes just over a week after Merrill reported a $4.6 billion second-quarter loss, where he raised $8 billion of much needed capital from asset sales instead of diluting the stock by issuing more shares.
MGM, Dubai Fall Behind on $3.5 Billion Loan for Las Vegas Plan MGM Mirage and Dubai World are late in raising as much as $3.5 billion for their $11.2 billion CityCenter project in Las Vegas because banks saddled with debt to casinos and hotels are wary of making new loans. Deutsche Bank AG and Credit Suisse Group, the Zurich-based bank that advised Dubai World last year when it invested $5.1 billion in MGM, are among the holdouts, bankers with knowledge of the matter said. Funding was supposed to be completed by the end of June, MGM Chief Financial Officer Daniel D'Arrigo told analysts in May. President James Murren said Frankfurt-based Deutsche Bank has been part of every MGM loan since 1998.
Turning the American Dream Into a Nightmare for Taxpayers President Bush is about to sign a major bill to bail out 400,000 reckless homeowners who find themselves in the cross hairs of greedy lenders seeking to foreclose on delinquent mortgages… This bail out will also throw tens of billions of taxpayer money at Fannie Mae and Freddie Mac, two private corporations specifically created by Congress to bring stability to mortgage lending. Heaven knows, no one wants to see any American kicked out of his or her home. But this action is yet another punch in the stomach to millions of Americans who have chosen to live their lives responsibly and within their financial means. Given the government’s penchant for serving as Uncle Nanny when it comes to home ownership, why in Hades should any responsible citizen scrimp and save and work hard when those who are reckless and irresponsible can count on being bailed out with taxpayer money?
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Mon 07.28.2008
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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Fri 07.25.2008
With Fannie/Freddie Bailout Plan, Treasury Secretary Paulson is Armed and Dangerous With the nation’s financial infrastructure crumbling before our very eyes, the country’s top two economic policymakers made their way to Congress last week for an extraordinary episode of political theater. Fannie Mae and Freddie Mac, the quasi-government entities that form the backbone of America’s gargantuan mortgage market, appeared to be cracking. To the somewhat bewildered members of Congress, U.S. Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson offered radical bailout remedies to save the lenders. Despite the fact that the proposed policies would thoroughly redefine America’s supposedly capitalistic pedigree, the moves were presented as wholly inevitable, and in the end, benevolent and costless.
Mortgage Writedowns to Total $1 Trillion, Gross Says Falling U.S. home prices will force financial firms to write down $1 trillion from their balance sheets, crimping bank lending and sparking sales of assets, said Bill Gross, who manages the world's biggest bond fund. A total of $5 trillion of mortgage loans, or almost half of the nation's home loans, belong to "risky asset categories" such as subprime and Alt-A, Gross of Pacific Investment Management Co. said in commentary posted on the firm's Web site today. About 25 million U.S. homes are at risk of negative equity, which could lead to more foreclosures and a further drop in prices, he said. A home has negative equity when it's worth less than the mortgage with which it was bought. "The problem with writing off $1 trillion from the finance industry's cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth," Gross wrote. If you are looking for a new chapter in American history, it has just begun. Call it the bailout boom.
Foreclosure filings up 120% 220,000 homes were lost to bank repossessions in the second quarter, and the annual forecast for 2008 will have to be revised upward. As foreclosures continue to soar, 220,000 homes were lost to bank repossessions in the second quarter, according to a housing market report Friday issued by RealtyTrac. That's nearly triple the number from the same period in 2007. A total of 739,714 foreclosure filings were recorded during that three-month period, up 14% from the first quarter, and 121% from the same period in 2007. That means that one of every 171 U.S. households received a filing, which include notices of default, auction sale notices and bank repossessions. "Most areas of the country are seeing at least some increase in foreclosure activity," said James Saccadic, CEO of RealtyTrac, an online marketer of foreclosed homes. "Forty-eight of 50 states and 95 out of the nation's 100 largest metro areas experienced year-over-year increases in foreclosure activity."
U.S. Foreclosures Double as House Prices Decline U.S. foreclosure filings more than doubled in the second quarter from a year earlier as falling home prices left borrowers owing more on mortgages than their properties were worth. One in every 171 households was foreclosed on, received a default notice or was warned of a pending auction. That was an increase of 121 percent from a year earlier and 14 percent from the first quarter, RealtyTrac Inc. said today in a statement. Almost 740,000 properties were in some stage of foreclosure, the most since the Irvine, California-based data company began reporting in January 2005. "Rising foreclosures are putting downward pressure on prices, increasing the possibility that homeowners will go upside- down on their mortgages," said Sheryl King, chief U.S. economist at Merrill Lynch & Co. in New York. "That will cause more losses in mortgage portfolios and less willingness from investors to securitize mortgages and therefore fewer mortgages."
Nerves return to financial sector as investors dump shares in WaMu The fear and the speculation that has plagued the financial sector since the start of the credit crisis returned with a vengeance yesterday, with investors dumping shares in one of the country's largest mortgage lenders. Washington Mutual, the Seattle-based savings and loan company, tried to calm nerves, saying it was well capitalised, following a research report which said that many of its creditors had been quietly pulling their money out. Gimme Credit analyst Kathleen Shanley made the claim following a review of the small-print in the company's financial results statement on Tuesday. Since that statement, shares in WaMu – as the company is affectionately known – have lost almost a third of their value
WaMu Bond Risk Rises as Credit-Default Swaps Climb to Record The cost to protect Washington Mutual Inc. bonds from default rose for a third day to a record amid concern that the biggest U.S. savings and loan won't be able to weather the worst housing crisis since the Great Depression. Credit-default swaps on Seattle-based Washington Mutual traded at a record high after Gimme Credit LLC " Washington Mutual this week reported a $3.3 billion second-quarter loss and increased loan loss provisions 69 percent to $5.9 billion as borrowers fell behind on their mortgages.
Daimler's GotThe Shakes While some European automakers see their earnings prospects this year unaffected by rising raw material and gasoline prices and slowing consumer spending, Daimler begs to differ. The automaker said Thursday that car markets deteriorated significantly in June and continued to do so in July, according to TradeTheNews.com. "Overall economic conditions have not improved and we had to reassess our performance," Thomas Froehlich, spokesman for Daimler, told Forbes.com. The German automaker cut its 2008 outlook after reporting its second-quarter results, which were in line with analysts' expectations. Traders manipulated oil prices - U.S. Regulators claim firm attempted to 'bang the close' by amassing large positions just before markets closed. The government charged an oil trading firm Thursday with manipulating oil prices in the first complaint to be announced since the regulators began a new investigation into wrongdoings in the energy markets. The Commodity Futures Trading Commission accused Optiver Holding, two of its subsidiaries and three employees with manipulation and attempted manipulation of crude oil, heating oil and gasoline futures on the New York Mercantile Exchange. "Optiver traders amassed large trading positions, then conducted trades in such a way to bully and hammer the markets," CFTC Acting Chairman Walt Lukken said at a press conference. "These charges go to the heart of the CFTC's core mission of detecting and rooting out illegal manipulation of the markets." In May, under the backdrop of record oil prices and calls from legislators to crack down on speculative oil trading and market manipulation, the CFTC announced a wide-ranging probe into oil price manipulation. The agency says it has dozens of investigations ongoing.
Stocks Fall Sharply [on Thursday] Renewed Housing Worries Wall Street abruptly ended an earnings-driven rally and closed sharply lower Thursday after a steeper-than-expected decline in existing home sales and worries about the financial sector chilled the market's recent optimism. The major indexes fell about 2 percent, including the Dow Jones industrial average, which lost more than 280 points. The National Association of Realtors said sales resumed their decline in June after a slight rebound in May. Existing home sales declined by 2.6 percent in June, well beyond the 1 percent drop economists had forecast. Investors punished shares of homebuilders and financial companies Thursday because both sectors have struggled with the declining housing market.
US financial stocks in worst fall since 2000 US financial stocks suffered their worst one-day fall since 2000 on Thursday, as investors’ recent optimism was hit by renewed fears over the health of Washington Mutual and weak housing data. Financial shares had rallied more than 30 per cent in the preceding five days amid relief at smaller-than-expected losses at several leading lenders and a government crackdown on abusive short-selling. But the market cracked in the morning after the release of figures showing sharp drops in US home sales and house prices. The rout then gained momentum after Gimme Credit, a research firm, suggested that creditors and customers were cutting their exposure to WaMu – prompting a spirited response by the lender.
Sour Economy Spurs Government$$ Amid Turmoil, U.S. Turns Away From Decades of Deregulation The housing and financial crisis convulsing the U.S. is powering a new wave of government regulation of business and the economy. Federal and state governments alike are increasingly hands-on in their effort to deal with failing businesses, plunging house prices, worthless mortgages and soaring energy prices. The steps add up to a major challenge to the movement toward deregulation that has defined American governance for much of the past quarter-century since the "Reagan Revolution" of the early 1980s. In fact, some proponents today of a bigger oversight role for government are Republican heirs to the legacy of President Reagan.
Dow Skids Amid Grim Housing Data [Thursday] $$ Disappointing housing data plunged stocks into the doldrums Thursday as investors' fears about the mortgage crisis and economic weakness rekindled. The Dow Jones Industrial Average, which enjoyed a 165-point rally over the previous two sessions, erased all of those gains and then some, hobbled by sharp losses in all its financial components. The blue-chip average finished down 283.10 points, off 2.4%, at 11349.28, its lowest close since July 16. The measure has moved back within range of bear-market territory, 19.9% off its record high seen in October. The stock market opened lower and saw its losses widen after the National Association of Realtors reported a larger-than-expected drop in sales of existing homes in June. Sales were off 2.6% to a seasonally adjusted annual rate of 4.86 million units. The decline was more than double the drop expected by Wall Street.
The Short View: Oil and US banks Bastille Day, July 14, is a good day for an old order to come to a sudden and brutal end. And on July 14, the blade came down on the phenomenally successful “buy oil, sell financials” trade. This trade, popular with hedge funds, offered a rare way to make money this year. It exploited the credit crisis and the response it provoked from the Federal Reserve. Investors deserted banks in the US (and Europe to a lesser extent) and bet that liquidity would instead flow to oil. As higher oil prices made it harder to aid banks with lower rates, and intensified pressure on banks’ customers, it was self-reinforcing.
What Financials Rally?$$ Countrywide Loans Marked to Market Show Sector Frailty No sooner had financial stocks gotten up off the mat than poor existing-home sales body-slammed them. The abrupt halt Thursday to the relief rally that started last week underscored how little confidence investors have in the sector. Many feel they can't get a handle on bank balance sheets. Details that emerged earlier this week from Bank of America's purchase of Countrywide Financial help explain why that is the case. The deal's numbers show that big losses could still lurk in banks' closets. If so, their loan portfolios are worth far less than the stated values, and reserves taken against possible losses are inadequate. And if bank capital is overstated, firms could again be forced into dilutive capital raising.
GOP kills effort to release oil from US stockpile House Republicans on Thursday scuttled a bill that Democrats hoped would help lower gasoline prices by forcing the Energy Department to release 70 million barrels of oil - about a three-day supply - from the national stockpile. Democrats promised that the action would have produced immediate relief at the pump, as was the case with similar releases in 1991, 2000 and 2005. The Strategic Petroleum Reserve now holds about 700 million barrels. Despite winning a clear 268-157 majority, the measure still lost. Democratic leaders had brought the proposal up for debate under rules requiring a two-thirds vote to pass. But passing the bill by just a majority would have meant allowing Republicans to force a vote on new offshore drilling leases.
Ford posts $8.7 billion loss on asset write-downs Ford Motor Co. posted the worst quarterly performance in its history Thursday, losing $8.67 billion in the second quarter. The company also said it will retool two more North American truck and sport utility vehicle plants to build small, fuel-efficient vehicles, and it announced plans to bring six new small vehicles to North America from Europe by the end of 2012. The net loss includes $8.03 billion worth of write-offs because the sharp decline in U.S. truck and SUV sales has reduced the value of Ford's North American truck plants and Ford Motor Credit Co.'s lease portfolio. Even excluding those items, Ford lost 62 cents per share, worse than Wall Street expected. Twelve analysts surveyed by Thomson Financial, on average, expected a 27 cent loss per share.
Bleeding cash, Ford looks to Europe for help Bleeding cash and with its very survival uncertain, Ford Motor Co., an icon of American automaking, will try to import some of its success from across the Atlantic. Ford reported its worst-ever quarterly loss Thursday and announced plans to bring over six small, fuel-efficient cars it makes in Europe and start selling them in North America, where Ford is losing billions on its truck-heavy lineup. The company burned through nearly $11 billion of its cash stockpile in the past year and reported a second-quarter loss of $8.7 billion. Ford is trying to save itself by quickly morphing from a truck company into a car company. But the help from Europe won't arrive until 2010: It takes time to retool U.S. plants, and importing the cars directly is too costly. Industry watchers wonder whether Ford has enough cash to survive until then.
Ford, Daimler, Hyundai profits fall; Renault up Ford Motor Co. posted its worst quarterly loss ever Thursday in a roiling global auto market that also saw profits fall at Daimler AG, Hyundai Motor Co. and AutoNation Inc. Renault SA reported a profit increase in the first half of the year but still plans to cut jobs and scale back production. The rising cost of oil and raw materials and the economic slowdown in North America and Western Europe were generally to blame for the automakers' woes. In the U.S., auto sales dropped 10 percent in the first half of the year as consumers were stunned by high gas prices and falling home values. Sales in Europe dropped 8 percent in June and threaten to continue their slide. "Demand in Western Europe has deteriorated sharply and there are no signs of recovery in the remainder of the year," Standard and Poor's Ratings Services said Thursday as it revised its outlook on Renault to negative. AutoNation Inc., the largest U.S. auto retailer, said its second-quarter profits tumbled 33 percent to $51.8 million as sales dried up. The Fort Lauderdale, Fla.-based company announced plans to cut 1,300 jobs and sell underperforming dealerships in order to reduce costs by $100 million per year.
Retail seen to risk meltdown in next 10 years Rising costs and depressed demand could reshape Britain's retail industry over the next 10 years, with bankruptcies and job losses set to rise as companies struggle to adapt, a report showed on Friday. The cost of running a retail business is set to explode over the next decade as tighter environmental regulations, higher energy prices and more expensive supply chains create a sustained period of inflation, according to the ActiveResilience Retail Risks report by Verdict Consulting. Verdict estimates retail cost inflation could rise to 9 percent or more over the next 10 years, from 4 percent now. At the same time, it believes consumer demand will slow, with retail spending growth moderating to 2.6 percent in the 2010s from 6 percent in the 1990s. "Managing a simultaneous increase in costs and a slowdown in demand will be extremely challenging," Verdict said." Over the medium term the number of retail bankruptcies and job losses will increase steadily as players adapt to the new retail reality."
New York sues UBS for securities fraud The attorney general of New York accused UBS of consumer and securities fraud on Thursday, saying the bank misled investors when it sold them auction-rate securities. Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. But the $300 billion market for these instruments collapsed in February, trapping investors who had been told that they were safe and easy to cash in. Even as a senior executive at UBS called the market "a complete loser," the bank continued to pitch the securities as short-term, liquid investments, according to the civil complaint filed by Andrew M. Cuomo, attorney general of New York. At the same time, seven executives at the bank sold their personal holdings of the securities, which totaled $21 million, to avoid losses, according to the complaint.
Take taxpayers off hook for rot at Fannie, Freddie By John McCain, Special to the Times Americans should be outraged at the latest sweetheart deal in Washington. Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac. It's a tribute to what these two institutions — which most Americans have never heard of — have bought with more than $170-million worth of lobbyists in the past decade. With combined obligations of roughly $5-trillion, the rapid failure of Fannie and Freddie would be a threat to mortgage markets and financial markets as a whole. Because of that threat, I support taking the unfortunate but necessary steps needed to keep the financial troubles at these two companies from further squeezing American families. But let us not forget that the threat that Fannie Mae and Freddie Mac pose to financial markets is a tribute to crony capitalism that reflects the power of the Washington establishment.
IT COULD BE CURTAINS FOR LINENS 'N THINGS Linens 'n Things has experienced alarmingly steep sales declines since it went bankrupt, raising worries that the home-furnishings chain may be forced to liquidate its business. The Clifton, NJ-based retailer - taken private in 2005 for $1.3 billion by billionaire Leon Black's Apollo Management - has been hemorrhaging customers since it filed for Chapter 11 reorganization in May, as the chain virtually stopped advertising to conserve cash following a spring ad-spending binge, sources said.
The Fed did not panic The Fed had to prevent a disaster Let us scotch one foolish and dangerous notion already gaining acceptance. Those who accuse the Fed of acting out of panic in slashing rates 75 basis points on Wednesday do not grasp the seriousness of the situation. The move was imperative to prevent a grave financial crisis spiralling into disaster. The threat of a melt-down in the $2.4 trillion market for US municipal bonds had suddenly moved from possible to imminent. No monetary authority could ignore such risks. As skittish markets showed today, more will undoubtedly be required, and soon. But at least the US authorities are facing up to the predicament that they created in the first place by fixing the price of credit artificially low for year after year, and failing to regulate banks, derivatives, and structured credit with a minimum of common sense. "Central banks have lost control," said George Soros to the chastened elites in Davos today, so humbled from the hubris of last year.
Credit card demand surges among small firms Small businesses are increasingly turning to credit cards to keep them afloat, The Bank of England's quarterley credit survey suggests. The banks report that demand for credit cards has increased at the fastest rate in a year. Demand for other forms of unsecured lending have fallen and demand for secured lending has fallen dramatically. The Bank has been conducting this survey every quarter for a year now and it is the first time that the banks report that they expect far less demand from small firms for secured lending over the next three months. What is driving this change? The banks say that they are increasing the price of unsecured and secured loans and toughening up their lending criteria. Why this is driving smaller firms to make more use of credit cards remains unexplained.
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