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History > 2008 > USA > Economy (I)

 


 

 

Illustration: Lewis Scott

Editorial cartoon

 

Trouble in Our Economic House        NYT        24.1.2008

http://www.nytimes.com/2008/01/24/opinion/l24econ.html

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stocks Slump in Early Trading

 

January 31, 2008
The New York Times
By MICHAEL M. GRYNBAUM

 

Investors, frightened by the prospect of a new subprime mortgage crisis that could dwarf the write-downs of the last few months, sent stock markets lower in early trading on Thursday, extending a slump that began late Wednesday.

The Dow Jones industrials fell nearly 200 points minutes after the opening bell before recovering much of their losses. The blue-chip index was down 76 points, or 0.6 percent, to 12,366.66, at 10:30 a.m. The broader Standard & Poor’s 500-stock index and the Nasdaq composite index were also off 0.6 percent.

A wave of bad news about the bond insurance industry — a previously little noticed player in the subprime-linked securities crisis — has rocked Wall Street over the last 24 hours.

On Wednesday afternoon, a leading agency cut its credit rating on Financial Guaranty, one of the nation’s largest bond insurers. And William Ackman, a hedge fund manager who stands to profit if shares of bond insurers fall, said that two other industry leaders, MBIA and Ambac, could be forced to write down $11.6 billion each.

Investors are concerned that bond insurers will be forced to renege on their guarantees of bonds linked to risky home loans. Some of the nation’s largest banks would be stuck holding assets of little to no value, potentially leading to billions of losses and worsening the credit problems facing the financial industry.

In an announcement that came just after midnight, MBIA said it lost $2.3 billion last quarter, the worst performance in company history. Its stock was down 7 percent in early trading Thursday, to $13 a share.

Meanwhile, Standard & Poor’s, the major ratings group, said that losses related to subprime mortgages could exceed $265 billion at various United States and overseas financial firms.

The fear on Wall Street, analysts say, is driven by uncertainty: investors do not know how widespread these losses will ultimately be. “So many people know so little about what could happen,” said Sam Stovall, chief investment strategist at S.& P. “These companies, they just don’t tell what they have. It’s anybody’s guess.”

That anxiety is having a clear effect on the markets. A triple-digit rally in the Dow on Wednesday, prompted by the Ferderal Reserve’s decision to cut its benchmark rate by another half-point, abruptly vanished after the news on bond insurers began to trickle out. The Dow’s 170-point gain withered to a 37-point loss. “The news about MBIA and Ambac really did undo any euphoria there was,” Mr. Stovall said.

A mixed batch of economic data released Thursday may also have jarred investors. New unemployment claims, a leading indicator of the labor market, increased by 69,000 to 375,000 in the week that ended Jan. 26, the Labor Department said. It was the highest level since October 2005.

Consumer spending, which makes up more than two-thirds of the nation’s economic activity, slowed in December, growing by 0.2 percent after a 1.0 percent rise in November. Adjusted for inflation, spending was flat last month.

Inflation also remains a concern, putting the Federal Reserve in tough position as it mulls changes in monetary policy. Prices have risen 3.5 percent since December 2006, far above the Fed’s so-called “comfort zone” of 1 percent to 2 percent. Core inflation, which excludes food and energy prices, is up 2.2 percent from 12 months ago, the Commerce Department said.

Stocks Slump in Early Trading, NYT, 31.1.2008,
https://www.nytimes.com/2008/01/31/
business/31cnd-stox.html

 

 

 

 

 

Consumer Spending Falls Off

 

January 31, 2008
The New York Times
By MICHAEL M. GRYNBAUM

 

Consumer spending slowed in December and inflation continued to rise, the government said Thursday, leaving the Federal Reserve little leeway as it ponders policy decisions in the months ahead.

Spending by consumers, which accounts for more than two-thirds of the nation’s economic growth, rose by an anemic 0.2 percent in December after jumping 1 percent in November. Adjusted for inflation, spending was flat for the month.

Economists have predicted a significant downturn in spending as consumers grapple with record-high oil and food prices. The report from the Commerce Department reinforces the disappointing holiday sales figures that leading retail chains released in the last few weeks.

“With the labor market weakening and housing remaining a huge weight, the pace of consumer spending growth ought to remain painfully slow in the months ahead,” wrote Joshua Shapiro, an economist at MFR, a research firm.

As spending slows, prices continue to rise, a combination that has some economists suggesting the United States could face a period of stagflation. A closely watched gauge of inflation ticked up last month, to a 2.2 percent annual rate; that figure, the core personal consumption expenditures deflator, excludes prices of food and energy.

Over all, prices in December were 3.5 percent higher than they were a year ago, far above the Fed’s so-called “comfort zone” of 1 percent to 2 percent.

High inflation puts the Fed in a difficult situation. The central bank primarily sets monetary policy by changing a key interest rate. Lowering the rate stimulates growth, but also causes prices to rise, creating an increased inflation risk.

In its most recent policy statement, released Wednesday, Fed officials said they expect inflation “to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.”

The Commerce Department report also showed that personal income levels rose 0.5 percent in December. Disposable income — after-tax salary adjusted for inflation — rose 2.1 percent since December 2006.A separate report from the Labor Department showed that new unemployment claims, a leading indicator of the labor market, increased by 69,000, to 375,000, in the week ended Jan. 26. It was the highest level since October 2005.

Meanwhile, a Chicago-based barometer of business activity fell in January. New orders dropped sharply to the lowest level since May 2003, and the price of production rose, underscoring the impact of high inflation on business owners.

“These numbers are not at recession levels, but they are only one bad month away,” wrote Ian Shepherdson, a London-based economist at High Frequency Economics, in a note to clients. “The manufacturing sector is coming under increasing pressure.”

The report, issued by the Chicago arm of the National Association of Purchasing Management, may not bode well for the ISM manufacturing index, a closely watched indicator of United States business activity. The index for December will be released on Friday.

Employment at Chicago-area businesses also fell this month. Over all, the index dropped to 51.5 from 56.4 in December.

    Consumer Spending Falls Off, NYT, 31.1.2008, http://www.nytimes.com/2008/01/31/business/31cnd-econ.html?hp

 

 

 

 

 

A Warning on Insurers Frays Nerves

 

January 31, 2008
The New York Times
By VIKAS BAJAJ and JULIE CRESWELL

 

While the Federal Reserve tried to soothe Wall Street’s nerves on Wednesday, a hedge fund manager frayed them by warning that two pillars of the financial markets might crumble.

Even as the Fed delivered another big cut in interest rates, William A. Ackman, a prominent money manager, fanned growing fears that the bond insurance industry might suffer crippling losses.

Mr. Ackman, who runs a New York hedge fund called Pershing Square and has bet against the insurers’ shares, issued a report late in the afternoon predicting that two of the companies, MBIA and the Ambac Financial Group, might lose $24 billion on complex mortgage investments they have guaranteed. Such a hole might threaten their survival and touch off a chain reaction of losses at some of Wall Street’s biggest banks, as well as raise borrowing costs for states and municipalities.

His report, along with the downgrading of a smaller bond guarantor, helped quash a rally in stocks caused by the Fed’s rate cut. The Standard & Poor’s 500-stock index closed down 0.5 percent after being up by as much as 1.7 percent an hour before the close. Shares of financial services stocks fell about 1.1 percent.

“Here comes Ackman at the 11th hour upsetting the apple cart,” said Douglas M. Peta, chief market strategist at J.& W. Seligman & Company. “I don’t think anybody has really thought it all through, but we all understand the implications of real trouble in the bond insurers could be far reaching.”

Bond insurers could face more pressure today as the stock markets open. Just after midnight Thursday, MBIA reported that it lost $2.3 billion, or $18.61 a share in the fourth quarter, compared with profit of $181 million, or $1.32 a share in the quarter a year ago.

Together MBIA and Ambac guarantee more than $1 trillion in municipal, corporate and mortgage debt and carry a mark of distinction — a triple-A credit rating — a boast that even the most well-heeled of corporations like I.B.M. cannot make.

Ratings agencies like S.& P. and Moody’s Investors Service have said they are considering downgrading the insurers because the companies may not have enough capital to pay claims on future losses in the complex mortgage-related investments they have insured.

At the same time, insurance regulators hope to head off the downgradings by persuading Wall Street banks to inject capital into the companies or provide them with backup lines of credit.

Highlighting the uncertainty facing the insurers and regulators, S.& P. said on Wednesday that it had already downgraded or was considering reducing the rating on more than half a trillion dollars of mortgage securities. These are the kind of investments that MBIA and Ambac have insured and are required to make interest and principal payments on if homeowners default and their homes are sold at a loss.

For their part, MBIA and Ambac have argued that concerns about their viability, let alone their triple-A rating, are overblown. They say defaults will not be high enough that they would suffer significant losses, and even then they say the claims would be minimal and have to be paid over years, not right away.

MBIA said late Wednesday that it had secured $500 million in capital from Warburg Pincus, the private equity firm, as part of a previously announced $1 billion investment. The company also added two representatives from Warburg Pincus to its board and said an executive from Deutsche Bank would be leaving the board.

Investors in the stock market appear to have little faith in the insurers. Shares of MBIA and Ambac have plunged more than 80 percent in the last 12 months.

On Wednesday, Mr. Ackman released detailed estimates for losses on mortgage securities guaranteed by MBIA and Ambac, saying the estimates were based on conservative assumptions. He said the data, which he released online so it could be analyzed by other investors, would give lie to the companies’ assertions that they only insured safe securities.

“Now it’s a level playing field,” Mr. Ackman said in a telephone interview. “We are putting it out there and we are saying don’t rely on us. Do your own work. Here is the data that you can use.”

In a letter addressed to insurance regulators and the Securities and Exchange Commission, he said that he received details of the bonds that the two companies had insured from an unidentified “global bank.”

Mr. Ackman said the bank, which he believes also has bearish positions on the insurers, gathered the data from publicly available sources that included the companies’ financial statements and regulatory filings.

MBIA declined to comment and Ambac did not return a telephone call.

Fitch Ratings, meanwhile, downgraded another insurer, the Financial Guarantee Insurance Company, to double-A, from triple-A, after the company failed to meet a deadline to raise $1 billion in new capital. The loss of the rating will make it harder for the company to write new insurance policies.

Later in the day, S.& P. further rattled the market by issuing its warning about downgrades to mortgage securities. The move could, the rating firm acknowledged, force big losses at European and Asian banks as well as American regional banks, credit unions and the government-sponsored finance companies that have not yet written down the value of their subprime holdings to reflect market values.

The downgradings “could lead to the realization of those losses,” analysts at S.& P. said in a news release. The rating firm also said it would start to review its ratings for some banks, particularly those that “are thinly capitalized.”

For bigger banks, trouble at the bond insurers could unleash another wave of big losses. Meredith Whitney, an analyst at Oppenheimer & Company, estimates big banks may have to write down their investments by $40 billion to $70 billion if the guarantors lose their ratings. That would be on top of the more than $135 billion in write-downs they have already taken.

The latest changes in ratings and estimates of large losses will put more pressure on the New York insurance superintendent, Eric Dinallo, who is leading an effort to shore up MBIA and Ambac. This week, Mr. Dinallo hired Joseph R. Perella, a well-known investment banker, to advise him and persuade large banks to commit capital or loans to the insurers. The involvement of Mr. Perella has helped ameliorate some of the criticism of the effort among some Wall Street banks that did not have a big exposure to MBIA and Ambac, according to two people with knowledge of the talks.



Michael M. Grynbaum contributed reporting.

    A Warning on Insurers Frays Nerves, NYT, 31.1.2008, http://www.nytimes.com/2008/01/31/business/31bonded-web.html

 

 

 

 

 

MBIA Posts $2.3 Billion Loss in Quarter

 

January 31, 2008
The New York Times
By REUTERS

 

MBIA Inc., a bond insurer struggling to maintain the top credit ratings necessary for its business, posted a quarterly loss on Thursday after a $3.5 billion write-down.

The company had a loss of $2.3 billion, or $18.61 a share, compared with profit of $181 million, or $1.32 a sharen the quarter a year earlier. The company, which said it was going to announce results after the market closed on Wednesday, released the information shortly after midnight on Thursday.

The company said it was writing down $3.5 billion on its credit derivatives portfolio, including a credit impairment of $200 million that it expects to actually incur.

It also set aside $713.5 million, which includes a special addition of $100 million for an unallocated loss reserve for MBIA’s prime, second-lien mortgage exposure. MBIA sold $1 billion of surplus notes to boost its capital levels earlier this month.

The chief executive Gary C. Dunton said the measures would offset the reserves and impairment.

“We believe that these steps, along with reduced capital requirements resulting from slower business growth,” Mr. Dunton said, “will result in our capital position surpassing rating agency Triple-A requirements as currently articulated and will allow us to continue serving the needs of our clients and investors.”

Moody’s Investors Service, however, said on Jan. 17 that even with the new capital, it may cut the top credit ratings for MBIA’s main unit.

MBIA, like many of its rivals, is expected to make big payouts in the future after insuring bonds linked to subprime mortgages.

The after-tax operating loss for the quarter was $407.8 million, compared to an income of $179.2 million in the year-ago period.

It was the second consecutive quarterly loss for the company, based in Armonk, N.Y. It reported $737 million in losses in the fourth quarter, largely for securities made up of high-quality residential home equity loans.

    MBIA Posts $2.3 Billion Loss in Quarter, NYT, 31.1.2008, http://www.nytimes.com/2008/01/31/business/31mbiaweb.html?ref=business

 

 

 

 

 

Oil Falls to $91 on Economic Concerns

 

January 31, 2008
Filed at 5:09 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

SINGAPORE (AP) -- Oil prices slid more than $1 a barrel Thursday after Wall Street's overnight decline and a report that U.S. crude stockpiles rose last week.

Wall Street -- despite initially advancing after the U.S. Federal Reserve cut interest rates half a percentage point -- closed lower Wednesday as investors collected profits after two sessions of gains.

''These days, there's a pretty strong tie-in between movements of the oil market and the equities markets,'' said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

''The equities market drops because of expectations of slower economic activity in the U.S. and also in other markets globally, and so if the economies slow down, oil demand may also slow down,'' Shum said.

Light, sweet crude for March delivery fell $1.06 to $91.27 a barrel in Asian electronic trading on the New York Mercantile Exchange by last afternoon in Singapore.

The contract rose 69 cents to settle at $92.33 a barrel on Wednesday.

The Federal Reserve lowered the fed funds rate, or the interest banks pay one another for overnight loans, to 3 percent, the lowest level since spring 2005. It also lowered the discount rate, or the interest the Fed charges on loans to banks, by a half-point to 3.50 percent.

''The rate cut announced yesterday in the U.S. was actually expected and had already been priced into crude futures,'' Shum said.

Analysts said the cut had already been priced into stock values as well. Asian markets were mixed after the Dow Jones industrial average dropped 0.3 percent overnight.

A report of growing U.S. crude stockpiles also weighed on oil prices.

In its weekly inventory snapshot, the U.S. Energy Department's Energy Information Administration said crude and gasoline stocks rose 3.6 million barrels each during the week ended Jan. 25. Analysts had expected crude stockpiles to rise 2.3 million barrels and gasoline inventories to rise 1.9 million barrels.

Supporting prices were expectations that the Organization of Petroleum Exporting Countries would not raise its production quotas when it meets Friday in Vienna, and word that a 315,000 barrel a day Canadian oil sands field has been temporarily shut down due to freezing temperatures. Canada is the single largest supplier of crude oil to the U.S.

Heating oil futures lost 2.28 cents to $2.5265 a gallon while gasoline prices fell 3.56 cents to $2.2984 a gallon.

Natural gas futures declined 1 cent to $8.035 per 1,000 cubic feet.

Brent crude futures lost $1.01 to $91.52 a barrel on the ICE Futures exchange in London.

    Oil Falls to $91 on Economic Concerns, NYT, 31.1.2008, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html

 

 

 

 

 

White House plays down talk of recession

 

Thu Jan 31, 2008
5:22am EST
Reuters

 

ABOARD AIR FORCE ONE (Reuters) - The White House played down talk that the United States might be headed for a recession and said a report on fourth-quarter gross domestic product released earlier on Wednesday did not change its outlook.

"I have not heard at all that we have changed our outlook, and we are not forecasting a recession," White House spokesman Tony Fratto told reporters traveling with President George W. Bush to California for the start of a tour of western states.

U.S. GDP in the fourth-quarter grew at a meager annual rate of 0.6 percent, the Commerce Department said. That reading was weaker than 1.2 percent rate forecast by private economists.

The report also said GDP increased by 2.2 percent in all of 2007, the slowest pace in five years.

Fratto also urged the U.S. Senate to move quickly to pass a $150 billion stimulus package aimed at boosting the economy.

"I think the only thing we can do is help remind them that America is expecting action and they are expecting it quickly and the only way for an economic growth package to have the desired impact is to do it quickly," he said.



(Reporting by Caren Bohan; Editing by Neil Stempleman)

    White House plays down talk of recession, R, 31.1.2008, http://www.reuters.com/article/domesticNews/idUSWBT00827120080131

 

 

 

 

 

Editorial

After the Fed

 

January 31, 2008
The New York Times

 

Whether or not the Federal Reserve’s recent dramatic interest rate cuts are the right medicine for today’s stalling economy — and the jury is very much out on that — it is clear that the Fed has used up a big chunk of its recession-fighting ammunition in a very short span of time. In just over a week, it has slashed its benchmark interest rate by a total of 1.25 percentage points, to 3 percent. That doesn’t leave a lot of room to cut further without opening the door to a potentially nasty upsurge in prices, which are already rising at a worrisome rate, and a possible disorderly decline in the dollar.

For now, however, the Fed has obviously concluded (and we hope it’s right) that it’s more important to try to mitigate current conditions than to worry about hypothetical concerns. Economic growth in the fourth quarter of 2007 slowed to a barely perceptible 0.6 percent. Housing is already in a recession, and manufacturing is headed down. Foreclosures are rising. Lending is constrained. Consumers are pulling back in the face of job uncertainty and a reduced ability to borrow against their homes.

The next employment report, due Friday, will provide more evidence of the extent to which jobs and paychecks — the linchpins of Americans’ economic well-being — are at risk. Last month’s report was grim: Employment in the private sector contracted and the ranks of the unemployed swelled.

With so much going wrong, even aggressive rate cuts are unlikely to turn things around anytime soon. Lower rates won’t loosen lending as long as lenders are preoccupied with mounting losses on securities and existing loans and fearful of more to come. Anxious, debt-burdened and unemployed consumers are unlikely to spend freely.

In short, no matter what the Fed does, it will take time, certainly a period of retrenchment, and quite likely of recession, to work off the excesses of the bubble years. That means foreclosures and financial ruin for some, joblessness and belt-tightening for others and less vibrant and less viable communities for many.

The damage, now becoming apparent, demands that policy makers take stock of how the economy arrived at this place. The bubbles in housing and mortgages would not have been possible were it not for the progressive deterioration in regulation over the past several decades, culminating for all practical purposes in a regulatory collapse during the Bush years. The antiregulatory ethos, in turn, derived its potency from a pervasive ideology that markets are self-regulating and self-correcting and therefore best handled with incentives and voluntary best practices, rather than rules and boundaries.

The task of reinforcing the regulatory apparatus of the nation’s economy is as formidable a challenge as managing the downturn, and ultimately of more lasting importance.

    After the Fed, NYT, 31.1.2008, http://www.nytimes.com/2008/01/31/opinion/31thu1.html

 

 

 

 

 

Fed Moves Again, Cutting Key Rate by Half a Point

 

January 31, 2008
The New York Times
By EDMUND L. ANDREWS and DAVID M. HERSZENHORN

 

WASHINGTON — The Federal Reserve cut short-term interest rates on Wednesday for the second time in eight days, meeting Wall Street hopes for cheaper money. At the same time, the Senate pushed ahead on a $161 billion plan to prop up Main Street with tax rebates and temporary tax cuts.

In lowering its benchmark federal funds rate by half a percentage point, to 3 percent, the central bank signaled that it was ready to err on the side of boldness in fending off a possible recession. It also left open the possibility of additional rate cuts.

The Fed’s move was part of a one-two punch by Washington aimed at jolting the economy with easier credit and extra money. Senate Democrats advanced a fiscal stimulus bill that could inject $161 billion into the economy this year through tax rebates for individuals and tax breaks for businesses.

If anyone needed more evidence that the economy is stumbling, it came just hours before the Fed announced its decision. The Commerce Department reported that the economy went into a stall in the last quarter of 2007, estimating that growth slowed to an annual rate of 0.6 percent, from 4.9 percent in the third quarter.

Despite some disagreement, all the major power centers in Washington — the White House, Congress and the Federal Reserve — agree about the need to bolster the economy with both fiscal and monetary policy.

The Senate Finance Committee passed a stimulus package on Wednesday that was more expensive than one the House passed on Tuesday, but only three Republicans on the panel voted for it, a signal that bipartisan cooperation may be faltering.

President Bush, in a speech at the Robinson Helicopter Company in Los Angeles, repeated his call for the Senate to move fast. “I understand people having their points of view, and of course, we welcome points of view in Washington,” he said. “There appears to be a lot of them up there.”

The big rate cut prompted a rally in stocks, with the Dow Jones industrial average jumping more than 100 points immediately after the Fed announcement. But relief was quickly overshadowed by anxiety about another wave of potential losses tied to subprime mortgage defaults.

The major stock indexes ended the day slightly below where they had started after reports that credit-rating agencies were poised to lower their ratings on companies that insure bonds containing packages of mortgages.

Many economists are far from convinced that even a combination of tax rebates and cheaper money would prevent a recession. And in a sign that bond investors are fretting that the moves could lead to higher inflation, yields on 10-year and 30-year Treasury securities edged up slightly on Wednesday.

But both Congress and the Fed were under heavy pressure to provide reassurance to their respective constituencies.

Noting that “downside risks remain,” Fed officials said in a statement accompanying their rate decision that they would “act in a timely manner as needed to address those risks.”

The Fed’s action was its second big rate reduction in eight days and its fifth rate cut since September. The central bank has reduced overnight lending rates by 1.25 percentage points since Tuesday of last week and by 2.25 percentage points since August.

By comparison, under its former chairman, Alan Greenspan, the Fed reduced the overnight rate by only half a percentage point after the terrorist attacks on Sept. 11, 2001, though it eventually pushed its benchmark rate as low as 1 percent in 2003 to encourage an economic recovery.

The Fed’s move on Wednesday came after an even bigger surprise rate cut of three-quarters of a percentage point on Jan. 22 at a rare unscheduled meeting.

Among investors, the big uncertainty was whether Ben S. Bernanke, the Fed chairman, would persuade his colleagues to cut rates by one-half point or just one-quarter. Investors were betting heavily that the Fed would make the bolder choice, and many analysts predicted investors would pummel stock prices if the Fed disappointed them.

But Fed officials were already under fire from investors and analysts on Wall Street who complained that the Fed had responded too timidly to signs of a downturn, and from a small but significant number of economists who complained that policy makers were being pushed by the stock market into rash decisions.

The decision by the Fed’s policy-making committee provoked a dissenting vote, by Richard W. Fisher, president of the Federal Reserve Bank of Dallas. He favored no change in rates, but other well-known skeptics about rate reductions voted in favor.

“The message came through loud and clear that they are embracing the need for an accommodative monetary policy,” said Robert V. DiClemente, an economist at Citigroup.

But while many analysts praised Mr. Bernanke and the Fed, some said the Fed had become unpredictable and might end up acting capriciously.

While it is clear that economic growth has slowed sharply, the evidence of a looming recession is still ambiguous. Housing construction and home sales have both plunged by more than half over the last 12 months, and home prices are declining in most parts of the country.

Retail sales were sluggish during the crucial holiday season, but the government estimated on Wednesday that consumer spending climbed at a modest but respectable pace of about 2 percent in the fourth quarter of 2007.

Job creation slowed to a crawl in December, according to the Labor Department’s preliminary estimate. But many analysts now predict that the Labor Department, which reports on Friday about January employment, will estimate that the nation added about 100,000 jobs this month.

Inflation, meanwhile, is running higher than Fed officials would like. In its report on Wednesday about economic growth in the fourth quarter, the Commerce Department estimated that consumer prices, excluding energy and food, climbed at an annual pace of 2.7 percent. The Fed’s unofficial comfort zone for inflation is 1 percent to 2 percent.

Congressional leaders were focused on how they could add to what the Fed was already doing.

The stimulus bill approved by the Senate Finance Committee Wednesday would cost $157 billion in 2008 and $193 billion over two years, roughly $32 billion more than the bill the House passed on Tuesday.

At the very least, the effort by Senate Democrats to advance their own plan would create some delay in getting a bill to the White House for the president’s signature, because it would require Senate and House leaders to reconcile different plans.

Both the House and Senate proposals offer tax rebates and business incentives to encourage spending. The Senate package would provide tax rebates of up to $500 for individuals and $1,000 for couples, to be phased out for incomes over $150,000 and $300,000, respectively. It would also provide a minimum payment of $500 for all tax filers reporting at least $3,000 in income, and an additional payment for families of $300 per child.

The Senate plan is more expensive than the House’s in part because it would provide a $500 check to some 20 million elderly whose only income is from Social Security and to about 250,000 veterans living on government benefits. The Senate package also includes a 13-week extension of unemployment benefits.

But the tepid support among Republicans on the Finance Committee created uncertainty about whether the Democrats, who enjoy only a narrow majority in the Senate, could win the 60 votes they need to avoid a filibuster and bring the bill up for a vote.

A more immediate obstacle to bringing the stimulus package to the Senate floor was Republican insistence that the Senate first reach an agreement on renewing the Bush administration’s terrorist surveillance program, which is a major priority for the White House. Aides said that Mitch McConnell, the Republican leader, wanted assurances that the Senate would vote to extend the foreign surveillance program.

Senator Harry Reid, the majority leader, said on Wednesday such a deal was within reach, but he called a special meeting of Democratic senators for 10 a.m. Thursday to discuss the surveillance bill and the stimulus plan, indicating that the fate of those bills was now linked.
 


Peter S. Goodman contributed reporting from New York.

    Fed Moves Again, Cutting Key Rate by Half a Point, NYT, 31.1.2008, http://www.nytimes.com/2008/01/31/business/31econ.html?hp

 

 

 

 

 

Op-Ed Contributor

Rebate Psychology

 

January 31, 2008
By NICHOLAS EPLEY
The New York Times

 

Chicago

THE House of Representatives passed a bill on Tuesday that would try to stimulate the economy, in part, by sending “tax rebates” to more than 100 million families. The logic of a tax rebate is that people will spend more money if they have more to spend. Unfortunately, psychology may interfere with that logic.

Research on decision-making demonstrates that describing a financial windfall as a “rebate” — instead of something equally accurate — increases the likelihood that people will save it. If Congress and President Bush want to increase consumer spending, they should have pitched these $600 and $1,200 checks as “tax bonuses” instead.

Changing the way that identical income is described can significantly affect how people spend it. In an experiment I conducted at Harvard with my colleagues Dennis Mak and Lorraine Chen Idson, participants were given a $50 check. They were told that this money came from a faculty member’s research budget, financed indirectly through tuition dollars. Roughly half of the participants had this money described as a “rebate,” whereas the others had it described as a “bonus.” When unexpectedly contacted one week later, participants who got a “rebate” reported spending less than half of what those who got a “bonus” reported spending ($9.55 versus $22.04, respectively).

We observed this same pattern in other experiments when participants were asked to keep a written record of their spending, as well as in experiments in which the participants were allowed to purchase items in the lab. “Rebates” are understood to be returns from money already spent. A rebate, psychologically speaking, is the return of a loss of one’s own money rather than a pure gain provided by someone else, so it is unlikely to be seen as extra spending money.

Getting a rebate is more like being reimbursed for travel expenses than like getting a year-end bonus. Reimbursements send people on trips to the bank. Bonuses send people on trips to the Bahamas.

This is more than merely a matter of political spin. Decisions depend very heavily on how people’s options are described.

People are more willing to treat 600 people infected with a deadly virus when they are told the treatment will save 200 of those lives, than when they are told that it will kill 400 of them. People are more likely to donate to a charity when the cost is described in terms of pennies per day instead of dollars per year. And more people say they could live on 80 percent of their income than say that they could save 20 percent of their income.

Descriptions are the psychological equivalent of a camera lens. Psychologists use the term “framing effects” to describe their influence. An investment banker who is delighted by saving $5 on a pair of shoes but disgusted by receiving $1,000 for a year-end bonus has experienced the power of framing effects.

If the current proposal for tax rebates sounds familiar, it’s because we have indeed been here before. In 2001, Congress and President Bush returned $38 billion to taxpayers in the form of $300 to $600 tax rebates, with the hope that Americans would stimulate the economy by spending them. But research conducted by two University of Michigan economists, Matthew Shapiro and Joel Slemrod, found that only 28 percent of the people in a national survey reported that they spent most of their rebate checks soon after receiving them. In a country where the personal savings rate has become negative by some accounts, people seem remarkably able to save at the very time their government needs them to spend.

In another experiment my colleagues and I conducted, taxpayers asked to recall the 2001 tax rebate reported that it seemed more like “extra income” when researchers described it as a tax bonus but more like “returned income” when it was described as a tax rebate.

This is exactly the kind of difference in perceptions that would increase spending of bonuses relative to rebates. Describing the checks as rebates highlights that this is simply one’s own money being returned. A bonus, however, is extra cash to be spent.

Under the House plan, the checks that would arrive in people’s mailboxes would go to those who pay the least income taxes, or even pay no income tax at all. Saying the checks are bonuses — or anything else that would call to mind thoughts of receiving a gift rather than getting a reimbursement — may not only be a more effective description for this stimulus package, but it may also be more accurate.

A hamburger can be described as 10 percent fat, but you had better call it 90 percent lean if you want your dinner guests to eat it. Politicians are thought to be expert spin doctors, able to choose the right words to fit any occasion, but they do not seem to be paying attention to how to sell the stimulus package so that consumers spend with patriotic abandon.



Nicholas Epley is a professor of behavioral science at the University of Chicago Graduate School of Business.

    Rebate Psychology, NYT, 31.1.2008, http://www.nytimes.com/2008/01/31/opinion/31epley.html

 

 

 

 

 

Economy Nearly Stalled in 4th Quarter

 

January 30, 2008
Filed at 8:45 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

WASHINGTON (AP) -- The economy almost stalled in the final quarter of last year with a growth rate of just 0.6 percent, culminating its worst year since 2002.

The Commerce Department's report on the gross domestic product, released Wednesday, showed an economy that had deteriorated considerably during the October-to-December quarter as worsening problems in the housing market and harder-to-get credit made individuals and businesses more cautious in their spending. Fears of a recession have grown.

For all of 2007, the economy grew by just 2.2 percent, the weakest performance in five years, when the country was struggling to recover from the 2001 recession. The housing collapse dealt the economy its biggest blow last year. Builders slashed spending on housing projects by 16.9 percent on an annualized basis, the most in 25 years.

The fourth-quarter's performance was much weaker -- half the pace -- than economists were expecting. They were forecasting growth to clock in a 1.2 percent pace.

The 0.6 percent annualized increase in gross domestic product (GDP) marked a big loss of momentum from the third quarter's brisk, 4.9 percent showing. The fourth-quarter pace was the slowest since the first quarter of last year.

The GDP figures come as worries mount that the country is on the verge of a recession or perhaps is already sliding into one.

To help bolster the economy, the Federal Reserve was poised Wednesday to again cut interest rates. An afternoon announcement was expected.

The fragile economic situation has spurred rare cooperation among Democrats, Republicans and the White House to quickly enact legislation to stimulate the economy.

GDP measures the value of all goods and services produced within the United States and is the best barometer of the country's economic health.

Consumers whose spending is critical to the economy's well-being tightened their belts.

In the fourth quarter, consumer spending slowed to a pace of 2 percent, down from a 2.8 percent growth rate in the prior quarter. For all of last year, consumers boosted spending by 2.9 percent, the smallest increase since 2003.

Businesses also watched their spending more closely during the final quarter of last year. Fearing a lessening appetite from their customers, they cut inventories of goods. That shaved 1.25 percentage points from fourth-quarter GDP, the most in a year.

Spending by businesses on equipment and software slowed to a pace of 3.8 percent in the fourth quarter. For the year, such spending was up just 1.4 percent, the worst showing since 2002.

Sales of U.S. goods and services abroad also slowed sharply in the fourth quarter. Exports grew at a 3.9 percent pace, compared with a sizzling 19.1 percent growth rate in the third quarter. That strong export growth was a key reason why the economy performed so well as a whole in the prior quarter. For all of 2007, exports grew by 7.9 percent, the slowest in two years.

Meanwhile, inflation picked up sharply. However, for all of 2007, it moderated slightly.

A gauge of inflation linked to the GDP report showed that ''core'' prices -- excluding food and energy -- grew at a rate of 2.7 percent in the fourth quarter. That was up from a 2 percent rate in the prior quarter and was the biggest quarterly increase since the spring of 2006.

For all of last year, core prices went up 2.1 percent, down from 2.2 percent in 2006.

High energy prices are a double-edged sword. They can put a damper on growth and also stoke inflation, which would be a dangerous combination for the economy.

The inflation figures could complicate the Fed's job of trying to energize overall economic growth while also keeping inflation under control.

Some analysts think the economy is on pace to recede from January through March. Under one rough rule, the economy would have to contract for six months in a row for the country is considered to be in a recession. The odds of a recession have risen sharply over the last year, and analysts increasingly believe the U.S. will be in one during the first half of this year.

The big worry is that consumers will clamp down on spending and businesses will put a lid on capital spending and hiring, throwing the economy into a tailspin.

The collapse of the housing market, soured mortgage investments and much harder-to-get credit are weighing on people and businesses alike. Foreclosures have hit record highs and banks have wracked up multibillion losses. The fallout has shaken Wall Street, catapulted the economy as Topic A among voters and galvanized political figures, including those vying to be the next president.

    Economy Nearly Stalled in 4th Quarter, NYT, 30.1.2008, http://www.nytimes.com/aponline/us/AP-Economy.html

 

 

 

 

 

Economy Grew at 0.6% Annual Rate in 4th Quarter

 

January 30, 2008
The New York Times
By REUTERS

 

WASHINGTON, Jan 30 (Reuters) - U.S. growth skidded lower in the fourth quarter and was the weakest in five years for all of 2007, according to a government report on Wednesday that highlighted the toll an enfeebled housing sector has taken on the national economy.

Gross domestic product, which measures total goods and services output within U.S. borders, edged up at a weaker-than-expected 0.6 percent annual rate in the fourth quarter and for the full year advanced only 2.2 percent - the slowest growth in annual GDP since 1.6 percent in 2002.

Analysts surveyed by Reuters had forecast that fourth-quarter GDP would grow at a 1.2 percent rate. The lackluster fourth quarter performance followed a booming third quarter when GDP surged at a 4.9 percent rate and is likely to fuel fears the economy is at risk of tumbling into recession in 2008.

Spending on new-home building plunged 23.9 percent in the fourth quarter, the biggest quarterly drop in 26 years, after falling 20.5 percent in the third quarter. Over the course of the full year, residential spending fell 16.9 percent, the worst annual performance since 1982.

There were also signs that prices were bubbling higher as a gauge favored by the Federal Reserve - personal consumption spending excluding food and energy items - gained at a 2.7 percent annual rate in the fourth quarter. That was well ahead of the third quarter's 2 percent increase and Wall Street expectations. It was the biggest increase for any three months in 1-1/2 years.

The Fed already has cut U.S. interest rates by 1-3/4 percentage points since last fall and is expected to announce later on Wednesday that it is reducing them again, while the Bush administration is negotiating with Congress on a fiscal stimulus package to try to spur growth.

Consumer spending, which fuels more than two-thirds of U.S. growth, held up relatively well in the fourth quarter, growing at a 2 percent annual rate compared with 2.8 percent in the third quarter. But growth in consumer spending for the full year 2007 was the softest since 2003, a further indication that weakening housing prices and markets are putting a strain on household finances and confidence.

    Economy Grew at 0.6% Annual Rate in 4th Quarter, NYT, 30.1.2008, http://www.nytimes.com/reuters/business/reuters-gdp.html

 

 

 

 

 

House Approves Economic Stimulus Plan

 

January 30, 2008
The New York Times
By DAVID M. HERSZENHORN

 

WASHINGTON — The House voted on Tuesday to approve a $146 billion fiscal stimulus package, hoping to seal a fast-paced deal with President Bush on tax rebates and business incentives intended to jolt the economy with new spending.

But the deal, which would be the most striking show of bipartisan cooperation since Democrats won control of Congress in 2006, was at risk as Senate Democrats forged ahead with their own, more expensive plan and jockeyed over what to include in it.

The House plan was approved by an overwhelming vote of 385 to 35. Speaker Nancy Pelosi and the Republican leader, Representative John A. Boehner of Ohio, immediately called on the Senate to adopt the House bill without changes, as did President Bush when he was signing an executive order at the White House.

“The temptation is going to be for the Senate to load it up,” Mr. Bush said. “My concern is that we need to get this bill out of the Senate and on my desk so the checks can get in the hands of our consumers, and our businesses can be assured of the incentives necessary to make investments.”

But there was little indication that the Senate would simply bow to the lower chamber.

Instead, Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, advanced a $163 billion stimulus package that he said was better, despite warnings from House leaders and the White House that he could derail the agreement or plunge the nation too far in debt, so the money to pay for the stimulus would have to be borrowed.

And while the one-year difference in cost of the two plans would seem to be $17 billion, House officials criticized the Senate for trying to blur the full price tag by pushing some expenses into 2009. That would make the two-year cost of the Senate package almost $196 billion compared to almost $161 billion for the House version.

Both plans focus on personal tax rebates and incentives for businesses intended to spur spending. The Senate plan also extends unemployment benefits for 13 weeks beyond the 26 weeks currently provided in most states — at a cost of $10 billion in 2008.

And it drops a component of the House package that would raise the limit on so-called “conforming” mortgages that can be insured by the Federal Housing Administration or bought by Fannie Mae and Freddie Mac, the government-sponsored finance companies — a step that would help homeowners in expensive markets refinance their loans.

The majority leader, Senator Harry Reid of Nevada, said the bill would be on the floor by late Wednesday and was likely to be approved this week. And he said he remained confident that there would be a good deal, despite the continued jockeying by senators, who he said had made at least 15 competing requests to add components to the plan by amending the bill.

Among the potential amendments were ones to give more money to food banks, to increase food stamps temporarily, to increase subsidies for home heating and other energy costs for low-income families, to adopt alternative energy tax credits and to finance infrastructure projects.

In a sign of how Senate Democrats were still wrangling over exactly how to structure the package, Mr. Reid said he strongly opposed a Baucus proposal to give tax rebates even to the wealthiest filers, unlike the House plan, which set caps on eligibility.

“To take out the caps,” Mr. Reid said, “it’s causing me to want to gag, O.K.?”

Mr. Reid pointed out that, without the caps, even members of Congress would get the rebates, which Democrats have said they want directed to middle-class Americans.

“I think it would send the wrong message to spend an extra $5 billion to give me a rebate,” Mr. Reid said. “I’m not going to spend the money. I think it’s wrong. I think Warren Buffett should not have the rebate, and I’m totally opposed to it.”

The White House and House leaders had said that one of the advantages of their stimulus plan was its simplicity.

It calls for tax rebates of up to $600 for individuals and $1,200 for couples, with the payments phased out for individuals earning more than $75,000 and couples earning more than $150,000.

It would provide a minimum payment of $300 for individuals paying less than that in income taxes who show earned income of at least $3,000. And it would provide an additional payment of $300 a child for all families receiving a payment.

On the business side, the House plan would give companies a 50 percent bonus deduction on new equipment that would normally be depreciated over many years. And it would double the limit on expenses to $250,000 from $125,000 that small businesses can deduct from annual income, with a total cap of $800,000.

Mr. Baucus said that he, too, wanted a simple stimulus plan. “I do not want to load it up with lots of other provisions,” he said.

He denied suggestions that he was complicating things by proposing a rival plan that would have to be reconciled with the measure adopted by the House.

“Oh, no, no,” Mr. Baucus said when asked if he was complicating the package. “Someone could say the sky is purple, too. That’s not accurate. What we’re doing is we’re making it work better.”

He said the Senate rebate plan was more straightforward, providing payments of $500 for individuals, $1,000 for couples filing jointly and an additional $300 a child, with no income cap.

The Senate plan would also send $500 checks to some 20 million Americans over the age of 62 who live only on Social Security benefits and would not have qualified for payments under the House proposal.

The Senate also structures its business tax breaks differently and would give businesses the added ability to deduct losses from up to five years ago. Current law allows businesses to deduct losses from only two years ago.

Ms. Pelosi had initially sought an extension of jobless benefits and an increase in food stamps, but dropped those demands in favor of an agreement to provide $28 billion in one-time payments to more than 35 million families that would not otherwise have qualified for income-tax rebates.

But on Tuesday, Ms. Pelosi said that her own support for some of the proposals being floated in the Senate was secondary to the urgent need to secure a short-term stimulus plan, without vastly increasing the national debt.

“I don’t want anything that’s done in the Senate, as much as I would support many of those initiatives, to do any harm to what we have done in our rebate package,” Ms. Pelosi said. “It doesn’t mean that all of those initiatives are not worthy, and in fact, I advocated for them myself. But instead we got a package that we could agree upon and move quickly with.”

Senator Mitch McConnell of Kentucky, the Republican leader, said he, too, supported swift adoption of the House plan.

“I hope that will be possible,” Mr. McConnell said. “This is not a time to get into some kind of testing of wills between the two Congressional bodies. This is a time to show that we can rise above partisanship, do something important and do it quickly.”



Carl Hulse contributed reporting.

    House Approves Economic Stimulus Plan, NYT, 30.1.2008, http://www.nytimes.com/2008/01/30/us/30fiscal.html?hp

 

 

 

 

 

Kellogg Quarterly Earnings Slip on Costs

 

January 30, 2008
Filed at 8:34 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

GRAND RAPIDS, Mich. (AP) -- Cereal and snack maker Kellogg Co. said Wednesday its fourth-quarter profit dipped slightly due in part to higher energy and materials costs and more investment in advertising, but still matched Wall Street's expectations.

For the quarter ended Dec. 29, the Battle Creek-based company earned $176 million, or 44 cents per share, compared with $182 million, or 45 cents per share, a year ago.

Revenue rose 8 percent to $2.79 billion from $2.58 billion, benefiting partly from stronger net sales by the Kellogg International division.

The results matched estimates by analysts polled by Thomson Financial, who forecast a profit of 44 cents per share on $2.74 billion in revenue. The analysts' earnings estimates typically exclude one-time items.

The company also affirmed its full-year 2008 adjusted earnings guidance in the range of $2.92 to $2.97 per share.

------

On the Net:

Kellogg Co.: http://www.kellogg.com

    Kellogg Quarterly Earnings Slip on Costs, NYT, 30.1.2008, http://www.nytimes.com/aponline/business/AP-Earns-Kellogg.html

 

 

 

 

 

Merck Posts Loss on Vioxx Settlement

 

January 30, 2008
Filed at 8:44 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

TRENTON, N.J. (AP) -- Merck & Co. on Tuesday posted a $1.63 billion loss in the fourth quarter as whopping charges for its Vioxx litigation settlement and other items dragged down results.

The maker of allergy and asthma pill Singulair and osteoporosis treatment Fosamax said the net loss amounted to 75 cents per share, compared with a year-ago profit of $473.9 million, or 22 cents per share.

The fourth-quarter charges totaled $3.4 billion, or $1.55 per share; that included a charge for Merck's pending $4.85 billion settlement to end the bulk of lawsuits over Vioxx, the painkiller it pulled from the market in September 2004 because it increased risk of heart attack and stroke. Excluding the one-time earnings, net income would have been 80 cents per share.

Analysts surveyed by Thomson Financial were expecting earnings of 74 cents per share and revenues of $6.3 billion. The estimates generally exclude one-time items.

Revenues totaled $6.24 billion, up 3 percent from $6.04 billion in 2006's fourth quarter.

Sales jumped 20 percent for Singulair, to $1.15 billion, and rose 3 percent, to $891 million, for related blood pressure drugs Cozaar and Hyzaar. Sales edged up just 1 percent to $796 million for Fosamax, which loses patent protection on Feb. 6. Merck has an agreement with another company to produce an authorized generic version of Fosamax, but it has not disclosed any details about when the product will go on sale.

Whitehouse Station-based Merck said it expects full-year 2008 earnings per share of $3.80 to $4, including one-time items. That's down from its prior forecast, issued in early December, of $3.96 to $4.06, excluding items.

Excluding one-time items, the company expects 2008 earnings per share of $3.28 to $3.38, which matches its Dec. 4, 2007 forecast. Those items include a large gain related to Merck's joint venture with AstraZeneca. (NYSE:AZN)

For the full year, net income totaled $3.28 billion, or $1.49 per share, down 26 percent from $4.43 billion, or $2.03 per share, in 2006. Revenues totaled $24.2 billion, down 7 percent from $22.6 billion in 2006.

"Our performance in 2007 shows that the customer-focused, more efficient business model we began implementing more than two years ago is working," Chief Executive Officer Richard T. Clark said in a statement. "We have a strong portfolio of products, a robust pipeline of potential new therapies and a leadership team focused daily on improving operational performance."

Merck shares rose 24 cents to $48.25 in premarket trading.

On the Net: http://www.merck.com

    Merck Posts Loss on Vioxx Settlement, NYT, 30.1.2008, http://www.nytimes.com/aponline/business/AP-Earns-Merck.html

 

 

 

 

 

Yahoo to Cut 1,000 Jobs, and Warns on Growth

 

January 30, 2008
The New York Times
By MIGUEL HELFT

 

SAN FRANCISCO — After announcing a sharp drop in fourth-quarter profits Tuesday, Yahoo issued a disappointing outlook for this year, suggesting that investors would have to wait until 2009 for a turnaround.

Yahoo also said that as part of its plan to revive its fortunes, it would cut 1,000 jobs by mid-February to reduce costs and narrow its focus to its most important businesses.

The company, however, said it planned to invest aggressively in some areas, like advertising technology and selected portions of its Internet portal, as it tries to capture a larger share of online ad dollars. Since some laid-off employees could apply for new jobs at Yahoo, the net effect on the work force, which recently grew to 14,300, was not clear.

Jerry Yang, the chief executive, warned investors of “head winds” this year. Yahoo’s projections for revenue growth and profitability in 2008 were either at the low end of analysts’ expectations or below them.

Yahoo executives said those projections were largely independent of the slowdown in the United States economy, noting that it was too early to predict whether weakness in the financial, travel and housing sectors would hurt online advertising.

“There is not a lot of positive about the outlook,” said John Aiken, an analyst with Majestic Research, an investment analysis firm in New York.

In a sign of growing impatience, investors reacted negatively to the announcements, which were made in a conference call after the markets closed. In after-hours trading, Yahoo shares fell more than 10 percent, to levels of more than three years ago.

Yahoo said that its fourth-quarter net income fell to $206 million, or 15 cents a share, down 23 percent from $269 million, or 19 cents a share, in the same quarter a year ago. Revenue grew 8 percent to $1.8 billion. Excluding commissions paid to certain advertising partners, revenue was $1.4 billion, in line with analysts’ expectations.

Mr. Yang, the Yahoo co-founder who was named chief executive last summer amid growing shareholder discontent, has promised to focus on three objectives: becoming a starting point for consumers on the Web; making the company a top choice for marketers seeking to place ads on sites across the Web; and opening Yahoo’s technology infrastructure to third-party programmers and publishers.

It is a strategy that will require time and investments. Yet Mr. Yang said he was upbeat. “We are seeing early signs of success as a result of this clear new focus,” he said.

Yahoo has begun narrowing the focus of its portal on a few key areas, including its front page, the personalized home page service MyYahoo, search, mail, and properties like news, finance and sports.

Improvements to those services has led to double-digit increases in visits to Yahoo, said Susan Decker, Yahoo’s president. Meanwhile, the company has said it would de-emphasize or shut down a number of other services, including photos, podcasts and a largely unsuccessful social network.

Ms. Decker also said that Yahoo had begun to make investments to revamp its advertising and search technology infrastructure, which would allow the company to be more efficient.

Yahoo needs to make some of those investments as it tries to become the seller of ads on a network of Web publishers, which for now includes eBay, Comcast, hundreds of newspapers and others. Some analysts said the plans made sense, but questioned whether the changes could translate into financial gains quickly enough.

“How long does all of this take?” asked Christa Quarles, an analyst with Thomas Weisel Partners. “How long does the board stay satisfied? How long does it take to grow the publisher network? Yahoo’s problems didn’t start in 2007; they started in 2003.”

Yahoo also said that it renegotiated and expanded a lucrative partnership with AT&T. Instead of receiving fees for each broadband customer AT&T signs up, Yahoo will share search and display advertising revenue with AT&T. Under the four-year deal, Yahoo’s search technology will also be available to AT&T’s cellphone customers.

The deal will result in upfront payments from AT&T to Yahoo for $300 million to $400 million, which will be recognized over the length of the agreement. Yahoo executives said that the deal would result in a net revenue loss this year, but that it stood to make more money over the life of the agreement.

Yahoo also said Tuesday that it had appointed Aristotle Balogh, 43, known as Ari, as chief technology officer, a crucial post vacant since Farzad Nazem left months ago. Mr. Balogh had been chief technology officer at the online security firm VeriSign.

    Yahoo to Cut 1,000 Jobs, and Warns on Growth, NYT, 30.1.2008, http://www.nytimes.com/2008/01/30/technology/30yahoo.html

 

 

 

 

 

UBS Takes a $14 Billion Write-Off

 

January 30, 2008
The New York Times
By DAVID JOLLY

 

PARIS — UBS, the largest Swiss bank, said Wednesday that it would write off $14 billion in losses on the troubled U.S. housing market and post a net loss for 2007.

The write-offs will result in a record fourth-quarter net loss of approximately 12.5 billion Swiss francs, or $11.4 billion, the bank said in a preliminary earnings statement. It also said it expected to report a full-year net loss of 4.4 billion francs for 2007.

The numbers “include around $12 billion in losses on positions related to the U.S. subprime mortgage market and approximately $2 billion on other positions related to the U.S. residential mortgage market,” the bank said.

UBS said Dec. 10 that it was writing off $10 billion of subprime investments for the fourth quarter, so the numbers Wednesday represented $4 billion more in losses than it had previously disclosed.

“Once again this is a negative surprise,” said Andreas Weese, a banking analyst at UniCredit in Munich. “I had assumed additional losses, but not of this magnitude.”

The bank had already announced a $4.4 billion loss on subprime investments in the third quarter. The figures Wednesday bring its 2007 U.S. residential mortgage-related losses to $18.4 billion.

Mr. Weese said the bank had not provided much detail, but he theorized that the downgrades of “monoline” bond insurers in the United States had weighed on the results.

Because the values of U.S. mortgage securities have continued to deteriorate, there could still be more write-offs to come in the first quarter of 2008, Mr. Weese said.

UBS shares in Zurich slipped 64 centimes, or 1.3 percent, to 46.12 francs.

The UBS chairman, Marcel Ospel, has come under fire from investors for the recent losses and for plans to raise billions of dollars in capital from investors in the Middle East and the Government of Singapore Investment Corp.

Influential Swiss investors, including Dominique Biedermann, director of the Ethos Investment Foundation, which manages money for the Swiss public pension funds, has called for an independent audit of the bank’s accounts and for shareholders to elect a new chairman. Ospel’s tenure as chairman is set to end in April, but he must face shareholders at a special meeting scheduled for next month to approve the funding plans.

The bank, formed through a merger of Union Bank of Switzerland and Swiss Bank Corp. in June 1998, had never reported an annual net loss before, said Christoph Meier, a UBS spokesman.

Banks worldwide have announced more than $135 billion in credit losses and write-downs since the turmoil in the U.S. housing market started last year, and some analysts estimate that total write-downs could reach $800 billion.

UBS said it would provide further details on its financial performance on Feb. 14, when it publishes its final full-year and fourth quarter 2007 results.

The bank also said it had taken efforts to strengthen its capital base in the last quarter.

    UBS Takes a $14 Billion Write-Off, NYT, 30.1.2008, http://www.nytimes.com/2008/01/30/business/worldbusiness/31ubs.html?hp

 

 

 

 

 

New home sales plunge record 26 percent in '07

 

Mon Jan 28, 2008
6:51pm EST
Reuters
By Patrick Rucker

 

WASHINGTON (Reuters) - Sales of new single-family homes plummeted a record 26 percent in 2007 and builders slashed prices by the most since 1970 in a struggle to cope with a housing bust, a government report showed on Monday.

Sales in December fell 4.7 percent to an annual rate of 604,000 -- the slowest pace since 1995 -- from a downwardly revised rate of 634,000 in November, the Commerce Department said.

The report offered little hope for a turnaround any time soon as a record one-month drop in the median home price for December failed to stoke demand and the number of months needed to clear the inventory of unsold homes rose.

"Homebuilders are cutting production but with sales still collapsing they have to run to stand still," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

"We think the downside for activity and prices remains considerable ... There is no sign of a bottom in any of these data," he added.

The weak data weighed on U.S. stock prices in early trade, but prices later rose on expectations the Federal Reserve would lower interest rates aggressively to shore up the economy.

The Dow Jones industrial average closed up 1.45 percent.

The U.S. central bank begins a two-day monetary policy meeting on Tuesday, and many financial market participants expect it will follow-up last week's emergency rate cut in target benchmark short-term interest rates with another half-point reduction.

Prices of U.S. government debt fell as investors shifted into stocks, while the dollar slipped against most major currencies amid expectations for further U.S. rate cuts.

 

STILL FALLING

Builders have shelved developments and dumped land holdings as the bursting of a U.S. housing bubble two years ago has forced many to scramble to limit losses.

The figure of 774,000 homes sold last year was the lowest since 757,000 were sold in 1996. Sales have tumbled 39.6 percent from 1.283 million at the peak of the market in 2005.

The median new home sales price fell 10.9 percent from November to $219,200, 10.4 percent below the year-ago level.

However, despite those price cuts the glut of houses available continued to swell and put pressure on builders to slow construction below its current crawl, economists said.

The report was much weaker than expected on Wall Street. Economists polled by Reuters were expecting December sales to fall to an annual rate of 640,000 from November's previously reported rate of 647,000.

"It's a pretty big drop and it clearly shows the housing market continues to deteriorate," said Kurt Karl, chief U.S. economist with Swiss Re in New York. "Supply is building up and there's no indication demand will catch up any time soon."

There were 495,000 homes for sale at the end of the December, down 1.4 percent from November.

However, with sales falling faster than inventory, it would take 9.6 months to clear those unsold new homes at the current sales pace, up from the 9.4 months reported for November.

    New home sales plunge record 26 percent in '07, R, 28.1.2008, http://www.reuters.com/article/domesticNews/idUSN2540592620080128

 

 

 

 

 

Building Costs Deal Blow to Local Budgets

 

January 26, 2008
The New York Times
By WILLIAM YARDLEY

 

SEATTLE — State and local governments in many parts of the country are struggling to pay for roads, bridges and other building projects because of rising construction costs, adding another burden to budgets already stressed by the troubled housing market.

The problems have come as many governments pursue ambitious projects to improve roads and airports, build schools and upgrade long-neglected water and sewer systems. Many of the projects were conceived when money from property, sales and income taxes was steady and interest rates low, but officials say the ground has shifted beneath their feet.

“Everybody’s scared,” said Uche Udemezue, director of engineering and transportation for San Leandro, Calif., which will soon put out a request for construction bids on a retiree center and a parking garage. “You don’t know what you’re going to find when you go out to bid.”

Costs have jumped for projects as varied as levee construction in New Orleans, Everglades restoration in Florida and huge sewer system upgrades in Atlanta. The reconstruction of the Interstate 35W bridge in Minneapolis, a $234 million project, has been fast-tracked for completion by December, and state officials say it is too soon to know whether it will come in on budget.

The impact has been felt in different regions at different times, and not every project has been high-profile. In Oregon, high costs have forced the State Department of Transportation to slow the rate at which it upgrades roads and bridges. In Seattle, school building projects were put on a fast track this fall because of fears of cost overruns.

“We escalated our project schedule to get ahead,” said Fred Stephens, director of facilities and construction for Seattle Public Schools.

Nationwide, increasing costs first became a problem for some projects more than two years ago, and in some regions the rate of increase has dropped in the past year. But some regions are tighter than ever, and the pressure from the high costs can be more acute in the context of general revenue declines.

The list of culprits for the increases often depends on the rate of growth and construction in a particular region, with labor costs playing a role along with the rising prices of materials like steel and concrete, and asphalt, fuel and other petroleum-based products.

Experts say high costs are linked to competition from a global development boom, particularly in China and India; the housing boom in the United States; and the rush to rebuild after Hurricane Katrina in 2005 and other recent hurricanes that struck Florida and the Southeast. In the Northwest, public projects have competed with downtown construction surges in Seattle and Portland. Just across the Canadian border, hotels and highways are being built to prepare for the 2010 Winter Olympics in Vancouver.

The costs have added to what has become an increasingly bleak economic forecast for many states and local governments. At least 25 states expect to have budget deficits in 2009, according to the Center on Budget and Policy Priorities, which estimates the combined budget shortfall for 17 of the states at $31 billion or more. Many cities, too, see difficult times ahead as revenues wane and costs increase for wages, pensions and health care.

“We’re talking about all levels of government being in some revenue constraints at a time when the service costs aren’t going down,” said Chris Hoene, the director of policy and research for the National League of Cities.

In some places, the news is not all bad. Recent declines in residential construction are beginning to force contractors to be more competitive when they bid for government work. Yet some government officials see that as a dubious silver lining.

In Oregon, low bids for recent bridge projects came in at $18 million, about 10 percent below what the state had projected. That was unimaginable a year ago, but the relief is relative, said Tom Lauer, the major projects manager for the Transportation Department.

“We’ve been getting hit so hard that we’ve been pumping them up the last couple of years,” Mr. Lauer said of the state’s internal cost projections.

“I didn’t get a price break,” he said of the recent bid. “I may just have more predictable pricing. I still can’t afford to do other stuff.”

In Newcastle, a growing Seattle suburb, the situation is emblematic of the struggles confronting towns and school districts across the country. Two main goals prompted the improvements now under way on a main thoroughfare, Coal Creek Parkway. Widening a bottleneck on the road would help relieve congestion on nearby Interstate 405. And doing it with style — using steel on a bridge to evoke an old train trestle and installing landscaped medians between lanes — would send the signal that Newcastle is ready to do business.

Then the bids came back. “Slack-jawed,” said John Starbard, the city manager, when asked his reaction to the bids.

Mr. Starbard said even the project’s engineering consultant, CH2M Hill, was stunned when what they believed was a very conservative $38 million estimate in March 2007 was met with a low bid of more than $44 million for a mile’s worth of road and bridge improvements.

But waiting to build was not an option. The city had already received help from Senator Patty Murray, Democrat of Washington, and state lawmakers, as well as the State Transportation Improvement Board. It went back to the board and received $2 million more.

“It was a shared sticker shock, but they had seen this with other projects so they were not as surprised,” Mr. Starbard said of the board.

In Newton, Mass., a Boston suburb with a population of more than 80,000, the estimate for the new Newton North High School was $104 million in 2004. Four years later, the foundation is about to be poured and the estimate is now at least $186 million, said Jeremy Solomon, a city spokesman. Mr. Solomon said about $25 million of the increase involved changes to the original plan, for asbestos abatement, adjustments to the heating and air-conditioning system and other factors. Otherwise, he said, the increase resulted from rising building costs.

“We kind of got caught in a period where construction costs grew rapidly,” said Mr. Solomon, citing steel and fuel costs, among others.

The need for public improvements only grows greater. Costs are rising even as engineers across the country say infrastructure is rapidly decaying.

In San Leandro, a city of 78,000 in the San Francisco Bay Area, Mr. Udemezue said the city could not afford to delay work on the parking garage and retiree center.

“We can’t wait,” he said, “because we don’t know if the prices are going to come down or go up.”

In the grading guide known as the Pavement Condition Index, zero is not far from a dirt strip and 100 is a fresh new roadway. When Mr. Udemezue began working for San Leandro 16 years ago, the average road ranking in the city was nearly 70. Now it is closer to 60, despite what Mr. Udemezue said were the city’s efforts to keep up maintenance.

Years ago, there was more money in the city’s general revenue stream that could be diverted to help with basic maintenance, which Mr. Udemezue said required about $5 million a year.

That general revenue now goes to other needs, like public safety, and the roads go wanting, with flat revenue from gas taxes and other declines leaving about $1.2 million to maintain roads each year. The $13 million retiree center and the $8 million parking garage have been affected, too, with the city dropping plans to build commercial space beneath the garage and reducing the space for social programs in the center.

Mr. Udemezue and others say they have heard that things may be stabilizing, but they cannot be sure.

Even in places where the rise of costs has slowed, said Ken Simonson, chief economist with the Associated General Contractors of America, “it’s dormant at best.”

    Building Costs Deal Blow to Local Budgets, NYT, 26.1.2008, http://www.nytimes.com/2008/01/26/us/26build.html?hp

 

 

 

 

 

Oil Futures Jump Back Above $90 a Barrel

 

January 25, 2008
Filed at 1:43 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Oil futures jumped back above $90 a barrel Friday, adding to the previous session's sharp gains on a view that the recession worries that pulled prices lower in recent weeks may have been overblown.

At the pump, meanwhile, gas prices fell below $3 for the first time in weeks.

Energy investors were heartened by recent moves by the Federal Reserve and Congress to shore up the economy, which could prevent oil demand from slowing as much as many had feared.

''This week's emergency interest rate cut by the Fed and the economic stimulus plan proffered by Congress appear to have, for now, stemmed fears of a looming recession in the U.S.,'' said Addison Armstrong, director of exchange traded markets at TFS Energy Futures LLC, of Stamford, Conn., in a research note.

Word that Chinese oil demand grew by 6.4 percent in December, the highest rate in months, contributed to oil's advance.

Concerns that demand from the booming Chinese and Indian economies is outstripping global oil supplies helped push oil to records above $100 earlier this month.

Light, sweet crude for March delivery rose $1.28 to $90.69 on the New York Mercantile Exchange after rising as high as $91.38.

While investors believe the government's $150 billion stimulus plan and the Fed's rate cuts will stave off a serious economic slowdown, rate cuts also tend to weaken the dollar, giving investors another reason to buy oil futures. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

''When (investors in foreign) countries go to buy oil, they're buying it on sale,'' said James Cordier, president of Liberty Trading Corp., in Tampa, Fla.

Many analysts believe the weakening dollar helped draw speculative investors into oil markets this fall and winter, driving oil prices above the $100 mark.

While oil prices are on the rebound, gas prices slid 0.8 cent Friday to a national average of $2.998 a gallon, their first dip below $3 in weeks. Retail prices tend to lag the futures market, meaning that if oil prices continue to rise, gas prices may halt their decline and move back above $3.

Other energy futures also rose Friday. February heating oil futures jumped 4.24 cents to $2.5187 a gallon on the Nymex while February gasoline futures added 4.1 cents to $2.3238 a gallon. Heating oil and gasoline prices were supported by news that Valero Energy Corp.'s 255,000 barrel a day refinery in Aruba was shut down due to a fire.

February natural gas futures rose 13.8 cents to $7.94 per 1,000 cubic feet.

In London, March Brent crude rose $1.90 to $90.97 a barrel Friday on the ICE Futures exchange.

--------

Associated Press writers Pablo Gorondi in Budapest and Thomas Hogue in Bangkok, Thailand, contributed to this report.

    Oil Futures Jump Back Above $90 a Barrel, NYT, 25.1.2008, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html

 

 

 

 

 

Long - Term Treasurys Rise As Stocks Fall

 

January 25, 2008
Filed at 1:42 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Long-term Treasury prices threw off early weakness and rallied Friday after worries about the health of financial services companies kindled demand for safe assets.

News that investment bank Goldman Sachs Group Inc. will lay off about 5 percent of its weak-performing employees helped feed some of the advance, although the investment bank said such cuts are standard practice.

There also were rumors that Dutch banking giants ING and Fortis may have to issue new profits warnings. Those rumors may have had a disproportionate impact because there is great nervousness about European banks this week after a rogue Societe Generale traded brought about $7.1 billion in losses for his institution through illegal trades. Fortis' stock fell and the bank issued a statement that it knew of no reason for the declines.

Another rumor that caught investors' attention concerned the possibility of new hedge fund trouble, according to Tom di Galoma, head of Treasurys trading at Jefferies & Co. That rumor was never verified.

However, there was a large hedge fund liquidation of a market bet on the difference between the yields of the 2-year and 10-year notes, he said. The unwinding of such a trade is not necessarily an indication of distress.

Worries about weakness at financial institutions tend to spark demand for Treasurys, which carry government backing and are largely shielded from the risks of some other asset classes.

The benchmark 10-year Treasury note gained 23/32 to 105 1/32 with a yield of 3.63 percent, down from 3.71 percent in late trade Thursday. Prices and yields move in opposite directions.

The 30-year long bond advanced 26/32 to 111 2/32 with a yield of 4.32 percent, down from 4.37 percent late Thursday.

However, there was slight demand for short-term notes. The 2-year note rose 1/32 to 101 28/32 with a yield of 2.26 percent, down from 2.32 percent late Thursday.

During most of January the stock market was slammed by storms of selling as investors reacted negatively to dismal earnings from major banks and shakiness in the credit markets and overall economy. The aversion to the risks of financial and other stocks created heavy demand for Treasurys, which carry government backing.

Yet investor sentiment may have improved somewhat this week, following a large Federal Reserve rate reduction and an economic stimulus plan agreement between the Bush administration and congressional leaders. Investors since Wednesday in general have been more interested in the bargains in the stock market.

The Fed will hold a monetary policy meeting on Tuesday and Wednesday. Many investors expect the Fed to follow up on this week's sizable 0.75 percentage point rate reduction with a 0.50 percentage point cut that would drive the overnight Fed funds rate charged to commercial banks down to 3 percent.

    Long - Term Treasurys Rise As Stocks Fall, NYT, 25.1.2008, http://www.nytimes.com/aponline/business/AP-Bonds.html

 

 

 

 

 

Bush and House in Accord for $150 Billion Stimulus

 

January 25, 2008
The New York Times
By DAVID M. HERSZENHORN

 

WASHINGTON — Hoping to give a quick adrenaline shot to the ailing economy, President Bush and House leaders struck a deal on Thursday for a $150 billion fiscal stimulus package, including rebates for most tax filers of up to $600 for individuals, $1,200 for couples and, for families, an additional $300 a child.

The deal capped a series of fast-paced and intense negotiations in which the Bush administration and lawmakers in both parties had to agree to numerous compromises after more than a year of acid relations between Congressional Democrats and the White House.

In praising the deal, Mr. Bush said it had resulted from “the kind of cooperation that some predicted was not possible here in Washington.”

The House is expected to approve the package on Feb. 6, and the leaders in both chambers have set a goal of Feb. 15 to send a measure for the president’s signature, a deadline Senate Democrats said they could meet even though they had reservations about the plan.

Although the two sides made big concessions, the deal came together because each side could walk away claiming victory.

The White House made clear early that it would not insist on permanently extending the president’s tax cuts from 2001 and 2003. Many Democrats had seen such a demand as a potential deal breaker.

And Speaker Nancy Pelosi ultimately bowed to Mr. Bush’s insistence that the package not include extending unemployment benefits or increasing food stamps.

And by the time Ms. Pelosi, Treasury Secretary Henry M. Paulson Jr. and the House Republican leader, Representative John A. Boehner of Ohio, formally announced the deal at a brief news conference at the Capitol, the two sides were crowing that they had achieved something remarkable, even as some economists questioned whether the package could be adopted and put into effect quickly enough to have a real effect.

Republicans expressed satisfaction that they had forced House Democrats to show fiscal restraint, by agreeing to a plan focused mostly on tax cuts.

“I have always believed that allowing people to keep more of their own money and use it as they see fit is the best way to help our economy grow,” Mr. Bush said. “I’m also pleased that this agreement does not include any tax increases, as well as unnecessary spending projects.”

House Democrats , in turn, said they were pleased that they had persuaded the White House to endorse a package primarily benefiting middle- and working-class Americans by setting income caps on the full rebates at $75,000 for individuals and $150,000 for joint filers.

Democrats said that would be the reverse of Mr. Bush’s earlier tax policies, which primarily benefited wealthier filers.

“It’s the mirror opposite,” said Representative Rahm Emanuel of Illinois, the Democratic conference chairman. “This is middle class and progressive.”

Senate Democrats, however, immediately criticized the plan, which also provides tax breaks for businesses, and said they were developing their own package that could temporarily extend unemployment benefits and increase food stamps.

Some economists agree with Senate Democrats that increasing the benefits and food stamps would inject money into the economy faster than the rebate checks, which would not be sent until May at the earliest.

House Democrats countered that their package would send more money to low-income workers than an increase in food stamps, and they pointed to a projection that 35 million families would receive one-time payments of $300, even though they did not earn enough money to pay income taxes. Under the deal, tax filers who earned at least $3,000 last year, but paid less than $300 in income tax, would receive the $300.

The majority leader, Senator Harry Reid of Nevada, who had said the House should lead in negotiating the package with the White House, was one of several Democrats calling the House plan “a first step,” but saying the Senate expected to shape the final result.

“The secretary of the Treasury has understood, the president has understood, the speaker has understood that when it comes over here, we are going to take another look at it,” Mr. Reid said.

Among the components the Senate might seek to add, he said, was a summer jobs program for young people at a cost of $500 million to $1 billion. Some Democrats said they would push for more public works spending, which is often given low marks as a tool because projects take too long to start.

Senator Ron Wyden, Democrat of Oregon, said road resurfacing in particular could be done fast. “I am absolutely convinced that there are infrastructure projects that can get off the ground weeks and weeks earlier than the rebate checks end up in people’s hands,” Mr. Wyden said.

Mr. Paulson, standing with the president, acknowledged hurdles remained on Capitol Hill. “The work is far from over,” he said.

The plan’s cost will add to a 2008 budget deficit projected at $219 billion. Over 10 years, House officials said, the plan would add $110 billion to the national debt.

If enacted, the rebates and stipends in the House package, totaling $103 billion, are expected to reach 117 million taxpayers. Payments will be processed automatically for all tax filers.

Full rebates of up to $600 or $1,200 would be paid to individuals earning up to $75,000 adjusted gross income or couples filing jointly and earning up to $150,000. Above that, rebates would be reduced by 5 percent for each $1,000 in income. Rebates would be reduced by $50 for each $1,000 in income, meaning a couple with no children earning $174,000 would have no rebate. A single mother of two children earning $50,000 and paying at least $600 in taxes would receive $1,200 —a $600 individual rebate and $300 a child. A married couple with three children earning $100,000 and paying at least $1,200 in taxes would receive $2,100 — a $1,200 rebate and $300 a child.

On the business side, companies would be given a 50 percent bonus deduction on new equipment that would normally be depreciated over many years. The incentive, which would cost $42.3 billion in 2008, is intended to encourage spending. The package would also double the limit on expenses, to $250,000 from $125,000, that small business can write off as a deduction from annual income, with a total cap of $800,000. That is expected to cost $1 billion in 2008.

In a nod to the mortgage market problems, the plan would allow Fannie Mae and Freddie Mac, the government-sponsored mortgage-finance companies, to buy loans up to $625,500, from the current $417,000 limit. The Federal Housing Administration would be able to insure home loans of up to $725,000, from the current $362,000 ceiling.

The one-year increases would make it easier to obtain new mortgages or refinance loans in expensive markets.

In a major concession, the White House agreed to increase the conforming loan limits and stopped insisting on wider reform of the mortgage finance companies. Mr. Paulson, at a news conference, acknowledged that he was not happy about that.

“I got run down by a bipartisan steamroller,” he said. “Republicans and Democrats reunited on this.”

The cooperation was accelerated by worsening economic news. Mr. Bush had initially intended to wait until his State of the Union speech on Jan. 28 to decide whether a stimulus was needed, but gloomier economic indicators forced him to speed those plans.

He moved swiftly after returning from the Middle East to speak to Congressional leaders and start negotiations. Finally, the declines in global stock markets on Monday and the emergency rate cut by the Federal Reserve on Tuesday pushed the House leaders and the Treasury secretary into high gear.

The House took the lead in part to avoid entangling the stimulus negotiations in presidential politics — two leading Democratic candidates and a leading Republican one are senators — and in part because the Democratic majority is wider and the caucus easier to unify in the House than in the Senate.

The final meeting among Ms. Pelosi, Mr. Paulson and Mr. Boehner was a Wednesday evening session that lasted from just after 7 until about 8:30.

Ms. Pelosi returned to her office where she met late into the night with Representative Charles B. Rangel of New York, chairman of the Ways and Means Committee. Mr. Rangel had lobbied strenuously to include payments for the poorest wage earners, even if they do not have to pay income taxes, and to extend unemployment benefits.

The deal was sealed in phone calls on Thursday morning, less than a week after Mr. Bush had a conference call with Congressional leaders.

Senator Max Baucus, Democrat of Montana and chairman of the Senate Finance Committee, said his panel would mark up its package on Tuesday.

At a Senate hearing on Thursday, Peter R. Orszag, director of the Congressional Budget Office, testified that increases in food stamps and unemployment benefits would have more immediate economic effects than rebates.

“Food stamp and unemployment benefits can affect spending in two months,” Mr. Orszag said. “Rebates would affect spending at the end of 2008.”



Edmund L. Andrews, Carl Hulse, Steven Lee Myers and Robert Pear contributed reporting.

    Bush and House in Accord for $150 Billion Stimulus, NYT, 25.1.2008, http://www.nytimes.com/2008/01/25/washington/25fiscal.html

 

 

 

 

 

AT&T Downplays Damage From Economic Slowdown

 

January 25, 2008
The New York Times
By LAURA M. HOLSON

 

Heads turned on Wall Street on Thursday as AT&T executives tempered earlier statements about the expected impact of lower consumer and business spending on their business.

On Jan. 8, shares of AT&T slid 4.5 percent after Randall L. Stephenson, the chief executive, said at a conference that some customers were having their phone service turned off because of unpaid bills, indicating a weakening economy. But in a conference call after the release of AT&T’s earnings on Thursday, the company played down those concerns.

It emphasized instead the predictable nature of telephone company stocks, which are less vulnerable than those of luxury goods makers or real estate companies during a recession.

Rick Lindner, the chief financial officer, said AT&T, like other communications companies, was indeed seeing the impact of a softer economy on its operations. But, he added, “they are not very severe at this point.” Even in a downturn, consumers are going to want to stay connected, either online or on the phone. “I think for us that continues to point to more of the defensive nature of our business,” he said.

AT&T reported strong fourth-quarter earnings that met analysts’ expectations, with net income rising 63 percent, in large part because of the growth in wireless communications. Revenue hit $30.3 billion in the quarter ended Dec. 31, up from $15.9 billion for the same period in 2006. The increased revenue reflects AT&T’s acquisition of BellSouth and the consolidation of its wireless operations. The company now has 70.1 million customers.

AT&T gained 2.7 million new wireless customers in its fourth quarter, up 13.5 percent from a year earlier, Mr. Lindner said, adding that 40 percent of customers buying Apple’s iPhone, which is sold exclusively through AT&T, are new to the company.

Wireless data revenue increased 57.5 percent from a year earlier as customers sent more e-mail messages by phone, downloaded videos and used the Internet on the go.

Analysts say wireless operations will continue to be a driver of growth. But if consumers get worried about the economy and cut nonessential spending, communications companies may see the impact in ways they do not expect.

Lisa Pierce, a vice president for Forrester Research in Cambridge, Mass., said consumers could decide to forgo spending on mobile music and ring-tone downloads. Such services are moneymakers for companies like AT&T, which have watched the number of phone lines installed in homes shrink.

“Wireless has been part of the reason that revenues have been growing rapidly,” Ms. Pierce said. “Those companies want that to keep going.”

If consumers do shy away from consuming entertainment on their phones, it could have a ripple effect through the media industry. Industry executives and analysts have been betting on mobile media to follow the trajectory of media on the Internet. As with anything in an uncertain economy, Ms. Pierce said, “we’ll have to wait and see.”

Shares of AT&T fell 94 cents to close at $35.75 and continued falling after hours.



Shake-Up at Sprint

The chief financial officer of Sprint Nextel, Paul N. Saleh, and two other senior executives are leaving the company in a management shake-up, the company said Thursday.

Mr. Saleh, who had served as acting chief executive, will leave Friday along with the chief marketing officer, Timothy E. Kelly, and Mark E. Angelino, president for sales and distribution, Sprint said.

Sprint shares closed up more than 4 percent as some investors saw the departures of the marketing and distribution executives as a good sign. Sprint has struggled with marketing and customer service problems.

The chief executive, Daniel R. Hesse, said he was reviewing strategy and would consider both internal and external candidates for the jobs.

    AT&T Downplays Damage From Economic Slowdown, NYT, 25.12008, http://www.nytimes.com/2008/01/25/business/25phone.html

 

 

 

 

 

Microsoft Delivers Strong Growth and Includes a Sunny Forecast

 

January 25, 2008
The New York Times
By STEVE LOHR

 

Microsoft reported quarterly sales and profit gains that surpassed Wall Street’s expectations and delivered an optimistic outlook Thursday, suggesting that a weakening economy would not slow it down.

Microsoft’s strong performance was led by its three major businesses: personal computer operating systems, office productivity programs and software that runs computers in corporate data centers. The company, the world’s largest software maker, continues to struggle and lose money as it battles Google in its new markets for Internet services and online advertising.

But for Microsoft, that is a financial challenge of the future, one overshadowed by the heft and continuing growth in its personal computer products, led by the Windows Vista operating system and Office 2007. Microsoft’s desktop software divisions accounted for 56 percent of the company’s revenue and more than 80 percent of the operating profit of its product groups.

Microsoft’s game console and software business, helped by the best-selling Halo 3 title, has become profitable for the first time.

“Microsoft is still investing without much to show for it yet in the online business, but that is kind of nitpicking when you look at the results of the company over all,” said Charles di Bona, a securities analyst for Sanford C. Bernstein & Company. “The strong performance seems to be pretty much across the board.”

Investors sent Microsoft’s shares up 4 percent in after-hours trading Thursday. The shares closed the regular session at $33.25, up $1.32, or 4.1 percent, after being battered along with other technology stocks this week.

Other leading technology companies, like Intel and Apple, have reported strong quarterly results, only to have their shares punished after they warned of cloudy outlooks given the increasing possibility of an economic recession.

But Microsoft executives still sound confident. In a conference call with analysts, Christopher Liddell, Microsoft’s chief financial officer, said, “We have not seen any significant spillover for an economic slowdown in the U.S.”

Sixty percent of Microsoft’s business is now outside the United States, which helps insulate the company from the chill of a slowdown in the American economy. Even so, Mr. Liddell noted that Microsoft’s sales in the American market in the last six months had grown at a healthy 15 percent clip.

For its 2008 fiscal year ending in June, Microsoft offered a bit more optimism. The company said revenue for the year would be $59.9 billion to $60.5 billion, above the analysts’ consensus of $59.4 billion. Microsoft said its earnings would be $1.85 to $1.88 a share, up from Wall Street’s projection of $1.81 a share.

For its second quarter, Microsoft reported net income of $4.7 billion, or 50 cents a share, a 79 percent rise compared with a year earlier. Analysts had predicted 46 cents a share.

The company reported revenue of nearly $16.4 billion, or 30 percent higher than in the year-earlier quarter. The consensus revenue estimate of securities analysts, as compiled by Thomson Financial, was $15.9 billion.

The percentage gains in sales and profits in the quarter were inflated by comparison with the year-earlier quarter, when Microsoft deferred $1.64 billion in revenue and operating income because of the delay in shipping Windows Vista and Office 2007.

It issued coupons and free upgrades to consumers and businesses that bought personal computers in the holiday season of 2006, allowing them to upgrade to Vista and Office 2007 later.

Yet after adjusting for the effect of last year’s charge, Microsoft still had a stronger-than-expected performance, with revenue rising 15 percent and operating income up 27 percent.

Quarterly sales of the client group, which includes Windows Vista, rose 13 percent to more than $4.3 billion. The company’s antipiracy programs, working in cooperation with local police in 22 nations, have been particularly effective in the last six months, Mr. Liddell said, representing 3 percentage points of the year-to-year growth.

The business division, which includes Office, reported sales of $4.8 billion, a 15 percent gain. Most of that comes from Microsoft’s popular word-processing, spreadsheet and presentation programs. But Mr. Liddell noted that SharePoint, a program for collaboration by teams of workers, has grown to become a $1 billion-a-year product.

The entertainment and devices group, which includes the Xbox game consoles and video games, gained only 3 percent in sales, to $3.1 billion. But the year-ago quarter included a surge in revenue from the introduction of the Xbox 360. More significantly, the division reported a $357 million profit this year, compared with a $302 million loss a year ago, as Microsoft sold more games, which are solidly profitable.

The online services business grew 38 percent to $863 million, helped by the contribution of aQuantive, an online ad agency Microsoft bought last May for $6 billion. But losses more than doubled to $245 million.

    Microsoft Delivers Strong Growth and Includes a Sunny Forecast, NYT, 25.1.2008, http://www.nytimes.com/2008/01/25/technology/25soft.html

 

 

 

 

 

Stocks Fluctuate, Giving Up Early Gains

 

January 25, 2008
Filed at 12:25 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Stocks fluctuated Friday, giving up early gains as investors appeared to take a break from the run-up in stocks this week.

Investors' early burst of enthusiasm, which sent each of the major indexes up more than 1 percent, came after upbeat profit reports from big names like Microsoft Corp. and reports of a possible buyout of a trouble bond insurer.

But rumors of financial troubles among hedge funds appeared to unnerve the market Friday. The notion that a hedge fund could face trouble rekindled concerns that the recent stumbles in the financial sector may not be entirely on the mend; reports of fund problems have contributed to the market's declines over the past few months.

The concerns about further turmoil in the financial sector dampened the market's enthusiasm over Microsoft's bright forecast and earnings that outpaced expectations. The results for a time had appeared to strengthen a notion emerging in recent days that perhaps Wall Street had been too pessimistic in its reading of the economy.

''There are a number of names of hedge funds being bandied about as possibly being in trouble,'' said Tom di Galoma, head of Treasurys trading at Jefferies & Co. It is impossible to discern whether the stories have any basis in fact, he said.

The day's volatility wasn't surprising, particularly as investors readied for the weekend and following two days of gains that heading into Friday's session left the Dow Jones industrial average up by more than 275 points, or 2.3 percent, for the week.

Scott Fullman, director of investment strategy for I. A. Englander & Co., noted the market has had a lot to consider in recent days and a retrenchment or move sideways on a Friday wasn't unexpected.

''The market is extremely sensitive to any news that's out there. A year ago, it brushed off a lot of stuff. Now, it's just the opposite, and we're seeing reactions nearly immediately when things come out,'' he said.

Fullman added that oil's climb back above $90 a barrel probably has some traders concerned.

''People may be looking to take some profits off the table in this volatile market. And there's a lot of activity that's coming up next week,'' Fullman said.

President Bush is scheduled to deliver his State of the Union address Monday. Meanwhile, the Federal Reserve is expected to hold its first regularly scheduled meeting of the year on Tuesday and Wednesday, and then the Labor Department plans to weigh in on the state of the job market on Friday.

In late morning trading, the Dow rose 10.81, or 0.09 percent, to 12,389.42. The Dow had been up more than 100 points in early trading.

Broader stock indicators showed modest gains. The Standard & Poor's 500 index rose 1.35, or 0.10 percent, to 1,353.42. The technology-heavy Nasdaq composite index rose 7.49, or 0.32 percent, to 2,368.41.

Bond prices rose. The yield on the benchmark 10-year Treasury note, which moves opposite its yield, fell to 3.65 percent from 3.71 percent late Thursday.

Wall Street still found room for optimism in part because of reports from U.K. newspapers that billionaire Wilbur Ross was in talks to acquire bond insurer Ambac Financial Group Inc. Financial woes at many U.S. bond insurers have in recent weeks caused headaches for investors worldwide who have worried that the credit crisis could worsen should one of the companies buckle under an inability to draw new business.

Word of Ross' interest follows comments this week by New York State regulators saying they would consider lending support to shore up the struggling bond insurance industry. While uncertainty surrounds what role regulators might play, the comments helped reassure Wall Street and made room for stocks to rally in recent days.

The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude oil rose $1.37 to $90.78 per barrel on the New York Mercantile Exchange.

The stock market's move follow comments from former Fed Chairman Alan Greenspan who told the Financial Times he isn't certain the U.S. will tip into recession even though the economy might not be growing.

Corporate news appeared to offer investors mixed readings on the economy.

Microsoft rose 25 cents to $33.50 after topping Wall Street's expectations. The company raised its forecast for the rest of its fiscal year, which ends in June, and said its quarterly earnings jumped 79 percent to $4.71 billion, or 50 cents per share.

Ambac rose 51 cents, or 4.5 percent, to $11.84 amid the speculation the company could be sold. Ross was not immediately available to comment and calls to Ambac by The Associated Press were not immediately returned.

Diversified manufacturer Honeywell International Inc. late Thursday reported fourth-quarter sales growth that handily topped Wall Street's expectations. The company forecast weaker global economic conditions for the year but said it still expects to report double-digit growth in per-share earnings. The stock rose $2.93, or 5.2 percent, to $59.13.

Caterpillar Inc. which like Honeywell and Microsoft is one of the 30 companies that make up the Dow industrials, warned it sees ''anemic growth'' in the U.S. economy but also predicts ''positive conditions'' for its sales in most other markets. The maker of construction equipment rose $1.21 to $66.46, after reporting its fourth-quarter earnings rose 11 percent amid strong international growth.

The Russell 2000 index of smaller companies rose 5.87, or 0.85 percent, to 698.59.

In afternoon trading Britain's FTSE 100 rose 1.17 percent, Germany's DAX index rose 2.20 percent, and France's CAC-40 rose 1.34 percent.

Earlier, Japan's Nikkei stock average jumped 4.10 percent after falling sharply earlier in the week. Hong Kong's Hang Seng index likewise surged 6.73 percent by the close.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com 

    Stocks Fluctuate, Giving Up Early Gains, NYT, 25.1.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

 

 

 

 

 

Biggest Drop in Existing Home Sales in 25 Years

 

January 24, 2008
Filed at 11:04 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

WASHINGTON (AP) -- Sales of existing homes fell in December, closing out a horrible year for housing in which sales of single-family homes plunged by the largest amount in 25 years. The median home price dropped for the entire year, the first time that has occurred in four decades.

The National Association of Realtors reported that sales of single-family homes and condominiums dropped by 2.2 percent in December to a seasonally adjusted annual rate of 4.89 million units.

For the year, sales of single-family homes were down by 13 percent, the biggest drop since a 17.7 percent plunge in 1982. The median price for a single-family home dropped 1.8 percent to $217,000.

That was the first annual price decline on records going back to 1968. Lawrence Yun, the Realtors' chief economist, said it was likely that the country has not experienced a decline in housing prices for an entire year since the Great Depression of the 1930s.

The new figures underscored the severity of the slump in housing, which has been battered for the past two years after enjoying a boom in which sales set records for five consecutive years.

The housing bust has sent shock waves through the entire economy as defaults have risen, resulting in multibillion-dollar loses for big financial firms whose investments in subprime mortgages have gone sour.

There is a concern that the housing and credit troubles could be enough to push the country into a full-blown recession. After global stock markets experienced a sharp sell-off earlier this week, the Federal Reserve announced a bold three-quarter point cut in a key interest rate and held out the promise of more rate cuts to follow.

The Bush administration and congressional leaders are trying to quickly wrap up negotiations on a stimulus package in an effort to boost consumer and business confidence.

For December, sales were down in all regions of the country. Sales fell by 4.6 percent in the Northeast, 1.7 percent in the Midwest, 1 percent in the South and 2.1 percent in the West.

The inventory of unsold homes dropped by 7.4 percent, raising hopes that backlogs that had hit record levels were starting to be reduced, a key factor necessary to prompt a rebound in the market.

While Yun said he expected sales to start to rebound this spring, other analysts said housing is likely to remain in the doldrums throughout most of 2008, reflecting in part the credit crunch, which has caused lenders to tighten their standards, making it harder for prospective buyers to qualify for loans.

In other economic news, the Labor Department said Thursday that the number of laid off workers filing claims for unemployment benefits fell for a fourth straight week, dropping by 1,000 to 301,000.

Many economists cautioned that they still expected layoffs to start rising in coming weeks, reflecting the sharp economic slowdown that has taken place.

The economy, after racing ahead at an annual rate of 4.9 percent in the July-September quarter, probably slowed to a weak 1 percent rate in the final three months of 2007 and may even fall into negative territory in the current January-March quarter.

A recession is often defined as two consecutive quarters of falling economic output. Many economists believe the risks of a full-blown downturn are roughly 50-50.

The growing worries about the economy in an election year have captured the attention of President Bush and congressional leaders who are working to put together a $150 billion economic stimulus package that will include tax relief for households and businesses in an effort to bolster economic activity.

The drop in unemployment applications to 301,000 for the week ending Jan. 19 left total claims at the lowest level since 300,000 were recorded during the week of Sept. 22.

For the week of Jan. 19, 36 states and territories had increases in claims while 17 had declines.

The biggest increase occurred in California, up 27,194, an upsurge blamed on higher layoffs in construction and service industries, and Florida, with an increase in layoffs of 8,496, which was attributed in part to higher layoffs in construction. California and Florida have been particularly hard hit by the housing slump.

    Biggest Drop in Existing Home Sales in 25 Years, NYT, 24.1.2008, http://www.nytimes.com/aponline/business/AP-Economy.html

 

 

 

 

 

Letters

Trouble in Our Economic House

 

January 24, 2008
The New York Times

 

To the Editor:

Re “Fed, in Surprise, Sets Big Rate Cut to Ease Markets” (front page, Jan. 23):

The actions by Washington and the Federal Reserve on Tuesday are an excellent example of why the free market and the Republican and libertarian philosophy do not work.

Republicans believe in few government controls, yet the Bush administration bails out Wall Street investors every time. They say no to big government except when it affects their pocketbooks.

Robin Wieder
East Rockaway, N.Y., Jan. 23, 2008



To the Editor:

Prudent economists have warned that Americans save too little and spend too much. As a nation, we’ve accumulated debt to maintain lavish spending styles. So what does our government do with monetary and fiscal policy in the face of the current economic crisis? Encourage more debt and spending by lowering rates and giving tax rebates. The message is clear: borrow and spend.

Savers and investors, step aside. What we really need are incentives to invest that will create new businesses and raise productivity. But that takes time, and we are too impatient. Our leaders don’t have the courage to tell us what we must do: sacrifice.

Eventually, we will all pay the price for spending with money we don’t have: a lower standard of living. The political consequences may be dangerous.

James P. Tuthill
Lafayette, Calif., Jan. 23, 2008



To the Editor:

The same folks in Washington who helped give the economy its current problems have now proposed a $150 billion stimulus package to correct them.

The theory used to be that the federal government would run surpluses during the upturn of the business cycle and use them to stimulate the economy during the downturns of the cycle. Now that Washington is running continuous deficits, it will have to borrow the money to finance the stimulus. In effect it is taking money from the economy with its left hand and putting it back with its right hand.

The old theory was also based on the notion that Americans’ use of the stimulus money would have a multiplier effect in the domestic economy. Now in the age of globalization, any additional consumer spending caused by the stimulus may benefit foreign economies more than the domestic one.

George Moss
Columbus, Ohio, Jan. 23, 2008



To the Editor:

“Worries That the Good Times Were a Mirage” (Economic Scene, front page, Jan. 23) states, “For the past 16 years, American consumers have increased their overall spending every single quarter.”

Americans have frequently been the subject of criticism for our spending versus savings habits, but can we really be blamed? Our neighborhood banks, once viewed as the solid repositories of our funds for the rainy day and a hedge against inflation, have been paying their depositors the regal amount of seven-tenths of 1 percent on savings accounts, and now are found to have been lending irresponsibly.

The mattress appears more and more to be an attractive alternative for my funds.

Robert Solomon
Brooklyn, Jan. 23, 2008



To the Editor:

I applaud the Fed for slashing its benchmark interest rate in the hopes of avoiding a recession. But I doubt that the credit card companies will follow suit.

No doubt they will maintain their interest rates at 16-plus percent and use the opportunity to make record profits to enrich their chief executives and, yet again, the wealthiest people in the country.

Shara Lamont
Albuquerque, Jan. 23, 2008



To the Editor:

In response to possible economic stimulus programs, some economists have raised concerns that providing $800 checks to all Americans will not provide the expected multiplier effect to the economy, as many recipients may simply deposit the proceeds or use it to pay down debt.

My wife has the ultimate comeback: Give everyone an $800 gift card. No ifs ands or buts, to get the $800, you have to buy something, anything.

Alan E. Hart
Greenwich, Conn., Jan. 22, 2008



To the Editor:

Paul Krugman argues in “Don’t Cry for Me, America” (column, Jan. 18) that the solution to America’s economic troubles lies in developing financial regulatory systems that take into account the current, complex realities of the United States economy. It should also take into account current social realities.

Out-of-control financial markets contribute not only to economic woes but also to social inequities.

For example, the bursting of the “housing and credit bubble” affects not only investors, but also, and most directly, the holders of subprime mortgages — targeted for these loans precisely because they were already disadvantaged and thus deemed ineligible for conventional loans. Borrowers are now threatened with the loss of their homes and homelessness.

Financial regulatory systems should recognize this impact and protect basic human rights, not just business interests.

Maria Foscarinis
Washington, Jan. 19, 2008

The writer is executive director of the National Law Center on Homelessness and Poverty.

    Trouble in Our Economic House, NYT, 24.1.2008, http://www.nytimes.com/2008/01/24/opinion/l24econ.html

 

 

 

 

 

Next on the Worry List: Shaky Insurers of Bonds

 

January 24, 2008
The New York Times
By VIKAS BAJAJ and JENNY ANDERSON

 

Even as stocks ended five days of losses with a surprising recovery on Wednesday, officials began moving to defuse another potential time bomb in the markets: the weakened condition of two large insurance companies that have guaranteed buyers against losses on more than $1 trillion of bonds.

Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.

That could leave the buyers of the bonds — including many banks and pension funds — on the hook for untold billions of dollars in losses, shaking confidence in the financial system.

To avoid a possible crisis, insurance regulators met with representatives of about a dozen banks on Wednesday to discuss ways to shore up the insurers by injecting fresh capital, much as Wall Street firms have turned to outside investors recently after suffering steep losses related to subprime mortgages.

While it is unclear what steps, if any, the banks and regulators may ultimately take, the talks focused on raising as much as $15 billion for the companies, according to several people briefed on the discussion who asked not to be identified because of the sensitive nature of the discussions.

The notion that the failure of even one big bond insurer might touch off a chain reaction of losses across the financial world has unnerved Wall Street and Washington. It was a factor in the Federal Reserve’s decision on Tuesday to calm investors by reducing interest rates by three-quarters of a point, to 3.5 percent.

News of Wednesday’s meeting helped rally stocks, which had been down as much as 3 percent but ended up about 2 percent. Shares of MBIA jumped by nearly a third and Ambac jumped 72 percent, although they both remain far below their levels before the extent of the mortgage debacle became known.

Traditionally, bond insurance has been a low-risk business. State and municipal bonds rarely defaulted, so the insurers paid out few claims for such debt. But in recent years the bond insurers increasingly have guaranteed debt related to subprime mortgages, a business that they thought was safe but has turned out to be risky.

Now, as many subprime borrowers are defaulting, insurers could be obligated to cover some of the losses on securities backed by these loans.

Eric R. Dinallo, the New York insurance superintendent who regulates MBIA, called Wall Street executives on Tuesday to set up the meeting at his office in Lower Manhattan. He led the session on Wednesday and suggested that the group move in as little as 48 hours to get a deal done ahead of any downgrading of the bond guarantors by credit ratings firms.

According to two people, Mr. Dinallo said he would talk with the bankers one on one and reconvene the group — which included executives from Citigroup, Goldman Sachs and Merrill Lynch — on Thursday or Friday. Neither federal officials nor executives of the two insurers attended the meeting.

“Regulators are furiously trying to come up with a plan,” said Rob Haines, an analyst at CreditSights, a research firm, who was not at the meeting.

Mr. Dinallo could face resistance from banks that do not have significant exposure to the guarantors and thus have less incentive to put up money. It is also unclear how executives and shareholders of the companies would react to the plan and the prospect of ceding control.

Sean Dilweg, the commissioner of insurance in Wisconsin, which regulates Ambac, sat in on the meeting but said he would be working with Ambac directly. Mr. Dilweg said he met separately on Tuesday with executives at Ambac, which is based in New York but chartered in Wisconsin.

“Eric is looking at the overall issue, but I am pretty confident that we will work through Ambac’s specific issues,” Mr. Dilweg said in a telephone interview. “They are a stable and well-capitalized company but they have some choices to make.”

Other options open to the banks include providing lines of credit and other backup financing to the guarantors. A chief goal of any rescue would be to help the companies regain or keep triple-A credit ratings, which are seen as vital to their business.

Late last year, Mr. Dinallo encouraged Berkshire Hathaway, the company controlled by Warren E. Buffett, to enter the bond insurance business. At the time, Mr. Buffett said he did not want to invest in existing guarantors because of their financial problems, and he started his own firm instead.

Since then, the troubles have worsened. Last week, Fitch Ratings downgraded Ambac’s credit ratings to double-A, from triple-A. MBIA still has a triple-A rating from the three agencies; the others are Standard & Poor’s and Moody’s Investors Service.

While $15 billion might seem like a large amount of money for banks to commit to bond guarantors at a time when many investors have lost faith in them, Mr. Haines said it would be smaller than the billions the banks might have to write down if the companies lost their top ratings or incurred major losses.

“It’s a calculated kind of risk,” he said.

A spokesman for Ambac did not return calls seeking comment. A spokeswoman for MBIA declined to comment.

Analysts say it is unclear how much money would be needed to capitalize the companies adequately. Ratings agencies have changed their requirements several times already as they update their assumptions of defaults and losses on mortgage securities.

“What is needed to do the job is to solidify the market perception of a triple-A rating,” said Sean Egan, founder of Egan-Jones Ratings, a firm that says the companies may need to raise as much as $30 billion.

A recent effort by some banks to help a smaller bond insurer, ACA Capital, has not gone smoothly. The banks have twice agreed to give the company, which was downgraded to triple-C from single-A, more time to come up with an acceptable plan.

State regulators are under pressure to help solve a problem that many critics say could have been avoided with closer supervision. The insurers’ problems are also spilling over into the municipal bond market, making it harder for cities, counties and states to raise money for projects.

On Wednesday, for instance, some short-term insured municipal bonds, which typically trade at a premium to other bonds, were trading at a discount of as much as 1.5 percentage points to similar uninsured bonds, said Michael S. Downing, an account manager at Thomson Financial.

The companies have defended their assumptions. They also note that losses on the bonds that they insure would have to rise substantially before they would have to pay claims, and even then they would make interest and principal payments over the life of the bond, not all at once.

MBIA has estimated that in the worst case, which it described as a one in 10,000 event, it expects to incur losses of $10 billion, a fraction of the $673 billion it has insured.

Still, losses of that magnitude could strain the company’s finances, and the difficulties continue to mount. On Wednesday, Moody’s said it was considering downgrading a company, Channel Re, that reinsures more than $40 billion of insurance contracts written by MBIA. If the reinsurer is downgraded, MBIA, which owns more than 17 percent of Channel, would have to acknowledge fresh losses.

“If you are a bond insurer or bank you can never really eliminate the risk that you originated in entirety, unless you sell it,” said Edward J. Gerbeck, chief executive of Tempus Advisors.



Julie Creswell contributed reporting.

    Next on the Worry List: Shaky Insurers of Bonds, NYT, 24.1.2008, http://www.nytimes.com/2008/01/24/business/24bonds.html?hp

 

 

 

 

 

Foreclosures Prompt Cities to Make Plea for Aid

 

January 24, 2008
The New York Times
By IAN URBINA

 

WASHINGTON — Facing a collapse in the subprime mortgage market that has pockmarked their cities with vacant houses and crippled their budgets, the nation’s mayors pleaded Wednesday for a huge infusion of federal aid.

As more than 250 mayors gathered in Washington for the winter meeting of the United States Conference of Mayors, many agreed that the collapse of the subprime market had left a growing problem of vacant houses, depressed property values, tighter credit, and a need to cut services to close municipal budget gaps.

“It’s an economic tsunami that is hitting our cities,” said Mayor Douglas H. Palmer of Trenton, the president of the conference. “We need federal action not six months from now, but within the next 30 days.”

The conference called on Congress to raise the limits on loans bought by Fannie Mae and Freddie Mac to stimulate the mortgage market, and increase Community Development Block Grants to help stabilize neighborhoods.

In December, the conference released a study that said that home values would drop by $1.2 trillion in 2008, hitting city budgets the hardest. States are also beginning to suffer; on Wednesday, the Center for Budget and Policy Priorities in Washington reported that at least 16 states had predicted budget shortfalls for 2009 totaling over $30.1 billion.

“We’re the ones left boarding up these places, cutting their grass, doing demolition on the abandoned structures, picking up the trash, making sure no one breaks in,” said Mayor Frank Jackson of Cleveland.

Cuyahoga County, Ohio, which includes Cleveland, has more than 16,800 homes that have been abandoned because of foreclosures.

“Anything from the federal government short of a massive infusion of resources into urban centers to rebuild infrastructure and pay for services is too little, too late,” Mr. Jackson said.

Speaking to the group, Robert E. Rubin, a former Treasury secretary, urged the mayors to be more aggressive in pressuring Washington for strong federal action, particularly in reviving the housing market.

Mr. Rubin said the government needed to provide more aid to homeowners struggling with mortgage payments.

The subprime mortgage problem has left many cities scrambling to cut services to try to close budget gaps.

City officials in Sacramento have responded to a $55 million projected budget shortfall for next year city by ordering an immediate hiring freeze and an end to some discretionary spending.

In Virginia, Fairfax County is facing a $220 million deficit for the coming fiscal year and is considering cuts to school districts.

This month, Baltimore’s mayor and City Council announced plans to sue Wells Fargo Bank, contending that the bank’s lending practices discriminated against black borrowers and led to a wave of foreclosures that has reduced city tax revenues and increased its costs.

Cleveland has sought monetary damages from 21 lenders.

“By driving down the value of nearby homes, foreclosures also drive down city revenues and place additional financial burdens on the city and its residents,” said Mayor Sheila Dixon of Baltimore. “It is our responsibility to do what we can to stop it.”

Mr. Palmer said the conference had not taken an official stance on the issue of cities suing lenders. He said that Trenton had had a 14 percent increase in foreclosures in the past year but that suing did not seem prudent because litigation would take at least two years.

He said cities should require lenders to pick up the cost of upkeep for abandoned properties after foreclosures occur.

    Foreclosures Prompt Cities to Make Plea for Aid, NYT, 24.1.2008, http://www.nytimes.com/2008/01/24/us/24mayors.html?hp

 

 

 

 

 

Treasurys Rally; More Rate Cuts Expected

 

January 23, 2008
Filed at 11:10 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Treasurys rallied forcefully once more Wednesday, with the 2-year yield plunging to a four-year low and mirroring investors' belief that the Federal Reserve has embarked on a rate cutting spree.

Meanwhile, the yield on the 30-year bond skidded to its weakest level since it was first issued in 1977.

The latest rally added to an advance that began Tuesday after the central bank lowered the benchmark fed funds target by a sizable 0.75 percentage point to 3.5 percent. The Fed is holding a regularly scheduled monetary policy meeting next Tuesday and Wednesday.

The recent rallies have pushed the yield on the 2-year note, which is the most sensitive to interest rate policy, sharply lower as prices and yields move in opposite directions. The yield now reflects investors' belief that the Fed has no option but to cut rates again next week to stimulate battered credit markets and a faltering economy.

''What traders pay attention to is the spread between the Fed funds rate and the 2-year yield and the message here is that rates are going down again,'' said Tom di Galoma, head of Treasurys trading at Jefferies & Co.

On Wednesday, the difference between the 2-year yield and the Fed funds target was 1.64 percentage points. Generally the yield and the target rate trade within 0.25 percentage point of each other.

''The perception is that the Fed will have to reduce rates by another 0.50 percentage point on Jan. 30,'' di Galoma said.

The 2-year yield advanced 9/32 to 102 19/32 with a yield of 1.88 percent, down from 1.99 percent in late trade on Tuesday. Earlier the yield fell as low as 1.85 percent, its weakest level since February 2004.

Other maturities were rallying too. The benchmark 10-year note gained 20/32 to 107 16/32 with a yield of 3.35 percent, down from 3.41 percent late Tuesday. Earlier on Wedensday the yield fell to its weakest point since June, 2003.

The 30-year long bond rose 20/32 to 114 9/32 with a 4.15 percent yield, the same level it traded at when the Treasury Department introduced the maturity in 1977 and down from 4.20 percent late Tuesday.

At the start of the credit market crisis in August 2007, the Fed sought to avoid reacting directly to turbulent financial markets and tried to hinge monetary policy mainly on economic data. But huge losses on Wall Street this year appear to have played a part in the Fed's move this week. The Fed met in emergency session to authorize the latest rate reduction Monday, when global stock exchanges suffered massive selling routs and Wall Street was closed for a holiday.

There is now a sense that the stock and bond markets are helping guide Fed policy, according to Alan Tedford, a fixed-income portfolio manager at Stephens capital Management.

''The Fed has a lot more work to do,'' he said. Investors are wrangling to see the fed funds rate below all major Treasury yields, he said noting that the 10-year yield also is below the 3.5 percent Fed funds target.

''The Fed has got to get the fed funds rate to where banks can lend again,'' he said. ''Right now it costs banks more to borrow than to lend.'' The fed funds target is the rate the Fed charges on its 24-hour commercial loans to banks.

The demand for Treasurys also reflects increased investor demand for safe assets after a number of prominent economists have speculated that the economy has entered a recession. However, a recession consists of two consecutive quarters of economic contraction and can only be declared after the fact.

Still, the concern about a possible recession has fed demand for Treasurys, which carry a government guarantee, and made investors shun stocks, which are viewed as having both higher risk and reward potential.

On Wednesday, stocks were lower following disappointing results from some top technology manufacturers, but selling pressure was restrained

''The markets are not in full panic mode, but there is a lot of fear about recession,'' said Mirko Mikelic, portfolio manager at Fifth Third Asset Management.

    Treasurys Rally; More Rate Cuts Expected, NYT, 23.1.2008, http://www.nytimes.com/aponline/business/AP-Bonds.html

 

 

 

 

 

White House, Lawmakers Seek Economy Deal

 

January 23, 2008
Filed at 11:12 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

WASHINGTON (AP) -- Top House leaders and Treasury Secretary Henry Paulson Wednesday tallied the cost of measures to jolt the economy out of its slump as the three sought a swift bipartisan deal on a recovery package that could move through Congress within weeks.

House Speaker Nancy Pelosi, D-Calif., and Minority Leader John Boehner, R-Ohio, are taking the lead in Capitol Hill negotiations, with the centerpiece of the measure expected to be a tax rebate similar to, but bigger than, the $300-$600 checks sent out in the summer of 2001. The two huddled for a lengthy working breakfast at the Capitol with Paulson, Bush's point man on the package, and planned another gathering this afternoon.

''We looked at a lot of different options,'' Boehner told reporters, adding that the threesome reached ''no conclusions or agreements.'' He said it would ''require a great leap of faith'' from both parties to find common ground.

Senior lawmakers in both parties met on Tuesday with President Bush, who has proposed a stimulus plan worth about $150 billion. Combined with Iraq war costs and decreasing corporate tax revenues because of the economic slump, a package that size would more than double last year's deficit spending of $163 billion, according to new congressional budget estimates.

Bush expressed optimism that his administration can reach quick agreement with Congress.

''I believe we can find common ground to get something done that's big enough, effective enough so that an economy that is inherently strong gets a boost -- to make sure that this uncertainty doesn't translate into more economic woes for our workers and small business people,'' Bush said Tuesday in the Cabinet Room.

Pelosi, Boehner and Paulson are working on hammering out details. Senate leaders Harry Reid, D-Nev., and Mitch McConnell, R-Ky., have agreed to stand back and let the House take the lead in the talks with the administration.

In the Senate, Reid said in an interview, ''There are too many cooks in the kitchen. Send something over to us and we'll try to move it as quickly as we can.''

Perhaps the most important obstacle to overcome is differences of opinion over who should receive rebate checks. Democrats want to deliver help to low-income workers who may not pay income taxes because they make too little or benefit from tax credits such as the child tax credit.

Thus far, talks have focused on setting the parameters of a bill combining rebates with GOP-sought tax breaks for businesses, as well as Democratic-backed help for the unemployed and those on food stamps.

Talks continued as the nonpartisan Congressional Budget Office, citing the weakening economy, estimated that the budget deficit for the current year will jump to about $250 billion. That figure does not reflect at least $100 billion in likely additional red ink from the deficit-financed economic stimulus measure.

Senate Budget Committee Chairman Kent Conrad, D-N.D., said the 2008 deficit would reach more than $350 billion once the costs of the upcoming stimulus bill are factored in.

Both sides have seemed to negotiate in good faith. Republicans and Bush declined to insist on extending Bush's 2001 and 2003 tax cuts that expire in three years, while Democrats offered up tax breaks for business and limited their roster of spending proposals. Democrats also agreed to waive budget rules requiring tax increases to finance the measure.

Noting the aura of bipartisanship surrounding the talks, Rep. Eric Cantor, R-Va., said Democrats ''are seeing the same polls as we are.''

On a visit to Cairo Wednesday, Energy Secretary Samuel Bodman told reporters that high oil prices are starting to adversely affect the U.S. economy.

''The economy has been able to withstand it until now,'' Bodman said. ''I believe the 100 dollar price of oil is starting to have an impact,'' he said.

Bodman has been touring the Middle East to talk about energy, security and other issues.

Oil has retreated from a record high of above $100 barrel earlier this month and is now trading at around $88 a barrel on concerns that a slowing U.S. economy would reduce energy demand.

    White House, Lawmakers Seek Economy Deal, NYT, 23.1.2008, http://www.nytimes.com/aponline/us/AP-Economy-Stimulus.html

 

 

 

 

 

Legislation on Economy Will Start in House

 

January 23, 2008
The New York Times
By CARL HULSE

 

WASHINGTON — Congressional leaders agreed Tuesday that the House would take the lead on legislation intended to stabilize the economy, giving the speaker, Nancy Pelosi, and Representative John A. Boehner, the Republican leader, primary responsibility for reaching an agreement with the White House.

Senate leaders said it made more sense strategically for the House to act first so that Congress could produce an economic package by mid-February.

“We legislatively have a little more difficult time doing things,” said Senator Harry Reid of Nevada, the majority leader, after Congressional leaders met with President Bush at the White House. “We think it would send a tremendous message to the American people that we have something bipartisan that comes to us from the House. We’ll do everything we can in the Senate to move it as quickly as possible.”

The effort will test a new spirit of cooperation that Ms. Pelosi, a California Democrat, and Mr. Boehner, an Ohio Republican, have demonstrated in the opening days of the 2008 Congressional session after a year of partisan friction. But both sides appeared optimistic they could strike a deal.

“I think there’s an agreement on a bipartisan basis that if Congress can act now, we may be able to avert a serious economic downturn, and that’s our goal,” Mr. Boehner said.

But some Republicans have already raised concerns. Senator Judd Gregg of New Hampshire, chairman of the Budget Committee, warned of potential long-term costs from a hasty response to economic turmoil. Other Republicans worried privately that the administration could be in such a hurry to get a bill that the White House could agree to too much spending.

“If we’re going to stimulate the economy through fiscal policy, let’s do it correctly, not in a way that damages the economy for the future or basically gets you a short-term political headline but doesn’t get you the impact you need,” Mr. Gregg said.

Though producing a bill by Feb. 15 would be a virtual sprint for Congress, senior lawmakers who have been in regular talks with the administration said Congress had no choice but to move quickly given the market turmoil.

“It underlines the basic fundamental problem,” said Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee. “I think it will help encourage Congress to focus on a stimulus package that passes quickly and does not get too loaded down with peripheral stuff.”

Senior House aides said no final decision had been made on whether the economic legislation would be subjected to hearings and debated at the committee level, though one said the developing timeline made that unlikely. The alternative, the official said, would be to get the chairmen of the relevant committees to contribute and then sign off on the package.

Few details of the stimulus plan have been settled, according to both lawmakers and senior staff members. Lawmakers say one sticking point will be a Democratic effort to ensure that Americans who do not earn enough to pay income taxes will be eligible for any rebate from the Treasury.

“Ms. Pelosi and I expect we’ll have a vigorous argument over that issue,” Mr. Boehner said.

Democrats, and some Republicans, say lower-income Americans are among those who most need the rebate and would be most likely to pour their money right back into the economy, providing the stimulus sought by the legislation.

Senator Pete V. Domenici, Republican of New Mexico and former chairman of the Budget Committee, said he could support rebates for those who do not pay income taxes. He urged Congress to consider spending more than the $145 billion recommended last week by the president.

“A larger package would allow us to reach more people,” he said in a statement. “I do not believe $300 billion is overreaching.”

    Legislation on Economy Will Start in House, NYT, 23.1.2008, http://www.nytimes.com/2008/01/23/business/23cong.html?ref=business

 

 

 

 

 

Urgently, Washington Responds to Fast-Spreading Market Turbulence

 

January 23, 2008
The New York Times
By STEVEN LEE MYERS and STEVEN R. WEISMAN

 

WASHINGTON — Even though Monday was a holiday, Ben S. Bernanke showed up early at his office at the Federal Reserve. The next day, he was planning a trip to New York.

But those plans quickly changed. He watched with growing concern as stock markets in Japan, China and Hong Kong started plummeting.

Shortly after lunch, Mr. Bernanke called a quick meeting of the Fed officials who decide interest-rate policy. Meanwhile, the Treasury secretary, Henry M. Paulson Jr., watching the same market turmoil spread to Europe, was anxious enough that he called President Bush at the White House at 3:15 p.m.

At 6 p.m., Mr. Bernanke convened a videoconference with Fed governors and an hour and a half later, he orchestrated the biggest one-day cut ever in the benchmark interest rate, which the Fed would announce early Tuesday morning.

Mr. Paulson, having spent the holiday weekend hashing out the details of an economic stimulus package with Congressional leaders, laid the groundwork for a series of White House meetings on Tuesday intended to display bipartisan calm and soothe those who were dubious that the administration could do much to avert a recession.

No one at the White House, at the Treasury or at the Federal Reserve wants to convey a sense of panic, but there seems to be little doubt that the tumult in the economy has unfolded at a far quicker pace than officials anticipated even a few weeks ago. “Now we see across the world that the state of the economy in the U.S. is having an impact as well,” the House speaker, Nancy Pelosi, said Tuesday afternoon outside the West Wing of the White House, emerging from a meeting with Mr. Bush. “So the urgency we feel at home is now even more urgent as we see the impact of our markets on others.”

Mr. Bernanke had previously signaled a rate cut, but not until the Fed’s next regularly scheduled meeting at the end of January, and nothing on the scale of the three-quarters of a percentage point that the Fed announced Tuesday. That seemed to surprise even the White House, which learned of the move, jealously guarded by Fed officials, only moments before it was announced on Tuesday morning before the markets opened.

For Mr. Bush, the economy now looms far larger as a potential crisis in his final year in office, when he had expected to remain focused on Iraq, Iran and the prospect of peace in the Middle East.

His meeting with Congressional leaders at the White House on Tuesday was originally intended to discuss his recent trip to the region. Instead it became an opportunity for the president to confirm that the stimulus package he proposed only four days ago, before Monday’s market plunges, was on track.

“Everybody wants to get something done quickly,” Mr. Bush said in the Cabinet Room. “But we want to make sure it gets done right and make sure that we’re — everybody is — realistic about the timetable.”

Mr. Bush’s proposal of a stimulus package valued at 1 percent of the total size of the United States economy, or roughly $145 billion to $150 billion, has produced some of the most striking bipartisanship of his presidency. Democratic and Republican lawmakers emerged from Tuesday’s meetings, first with Mr. Paulson directly and then at the White House, pledging to pass a package before Congress breaks for the Washington’s Birthday holiday, which is Feb. 18.

“I really feel good that we have the opportunity to do something together,” Senator Harry Reid of Nevada, the Democratic majority leader, said outside the West Wing. “We want this stimulus package to be dealing with the problems of the American people, not ideology.”

Although the discussion of the stimulus plan began last Thursday, the day after Mr. Bush returned home from eight days in the Middle East, the negotiations continued in earnest over the weekend. Mr. Paulson and Senator Reid spoke eight or nine times over the last couple of weeks, most recently on Sunday.

“Everybody was already focused on getting something done quickly before the market events,” said Michele Davis, the Treasury assistant secretary for public affairs.

Later Tuesday, Mr. Bush said Mr. Paulson had been speaking “with people around the world and, obviously, with people inside America about our economy.” Neither White House nor Treasury officials would identify the people he called.

On Capitol Hill, Democrats appeared to be torn between wanting to compromise with the administration and also wanting to blame the administration for failing to act more quickly.

“In any credit crisis, it’s important to communicate competence,” said Representative Rahm Emanuel, the Illinois Democrat who is part of the House leadership. “They have exuded no competence at all.”

Other Democrats said they were impressed with Mr. Paulson’s willingness to compromise to get a package quickly, despite the skepticism about a stimulus package voiced by conservatives in The Weekly Standard and The Wall Street Journal editorial page. In the past, they noted, Treasury secretaries have been prevented from compromising by conservatives at the White House. The declines in markets on Monday appeared to be a unifying moment.

“It underlines the basic fundamental problem,” said Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee. “The economy needs a boost. I think it will help encourage Congress to focus on a stimulus package that passes quickly and not get too loaded down with peripheral stuff.”

The White House is careful to avoid the impression that Mr. Bush might be motivated by market drops, or that he is anything but optimistic about the economy, where fundamentals, he said again on Tuesday, were strong.

“We don’t comment on daily fluctuations in the market,” the press secretary, Dana M. Perino, said on Tuesday morning, just as Wall Street opened and the Fed’s rate cut was announced.

At 10 a.m., though, Mr. Bush met with his economic advisers, including Mr. Paulson, in a previously unscheduled meeting to discuss the global markets and the stimulus package, Ms. Perino announced later.

And at 4 p.m., Mr. Bush appeared with Mr. Paulson again, this time announcing the formation of an advisory committee on “financial literacy,” to be led by Charles R. Schwab, the founder of the financial services firm.

“We want people investing,” Mr. Bush said as Wall Street was closing, the Dow Jones industrial average having recovered some of its initial losses.

“We want people owning homes. But oftentimes, to be able to do so requires literacy when it comes to financial matters,” Mr Bush said. “And sometimes people just simply don’t know what they’re looking at and reading. And it can lead to personal financial crisis, and that personal financial crisis, if accumulated to too many folks, hurts our country.”
 


Edmund L. Andrews contributed reporting.

    Urgently, Washington Responds to Fast-Spreading Market Turbulence, NYT, 23.1.2008, http://www.nytimes.com/2008/01/23/business/23crisis.html

 

 

 

 

 

No recession expected this year: Congressional Budget Office

 

Wed Jan 23, 2008
10:57am EST
Reuters
By Richard Cowan and Donna Smith

 

WASHINGTON (Reuters) - The slowing U.S. economy will not sink into an election-year recession and an economic rebound is likely beginning next year as housing and financial market turmoil fades, the Congressional Budget Office forecast on Wednesday.

In the meantime, the U.S. budget deficit will grow to $219 billion this year, up from the $163 billion registered last year, according to a CBO report submitted to Congress.

But that forecast by Congress' nonpartisan budget analyst does not include the cost of an economic stimulus measure that is quickly moving through Congress and could cost around $150 billion or more. The deficit projection for fiscal 2008, which ends September 30, also does not include more money Congress is likely to approve this year for the war in Iraq.

"Although recent data suggest that the probability of a recession in 2008 has increased, CBO does not expect the slowdown in economic growth to be large enough to register as a recession," CBO said.

"CBO expects the economy to rebound after 2008, as the negative effects of the turmoil in the housing and financial markets fade," the semi-annual budget and economic report said.

The economic slowdown will bring rising unemployment this year, a presidential and congressional election year, CBO forecast.

The jobless rate, currently at 5 percent, is expected to average 5.1 percent this year, but rise to about 5.3 percent by the end of 2008, around the time voters in November will pick a new U.S. president and decide whether Democrats continue their majority in the U.S. House of Representatives and Senate.

CBO said it sees an average 5.4 percent unemployment rate next year and an average 4.9 percent a year in 2010-13.

CBO envisions a $198 billion budget deficit in fiscal 2009 and sees the deficit rising to $241 billion in 2010.

CBO, which bases its estimates on existing law, forecast a fiscal 2011 deficit of $117 billion and a budget surplus of $87 billion in 2012. But that assumes President George W. Bush's 2001 and 2003 tax cuts expire at the end of 2010 and that a temporary measure to fix the alternative minimum tax also expires.

In August, CBO predicted the fiscal 2008 budget deficit would be $155 billion. That was before the pinch of an unfolding economic slowdown became apparent.

CBO said it sees interest rates on Treasury securities remaining low this year and increasing in 2009 as the economy emerges from its current difficulties.

CBO said the weak U.S. dollar and relative economic strength of U.S. trading partners should boost exports and help offset the sluggishness in domestic demand.

It also said emerging economies have become increasingly less dependent on U.S. demand to fuel their economies and as a result have become less vulnerable to slowdowns in the U.S. economy.

Consumer spending, CBO said, is likely to fall off, curtailed by a drop in housing wealth (home equity), increased costs for borrowing, the high price of oil and slower growth of real income.
 


(Editing by Doina Chiacu)

    No recession expected this year: Congressional Budget Office, R, 23.1.2008, http://www.reuters.com/article/politicsNews/idUSWAT00874820080123

 

 

 

 

 

United Tech Profit Rises 23 Percent

 

January 23, 2008
Filed at 11:15 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

HARTFORD, Conn. (AP) -- Industrial conglomerate United Technologies Corp.'s fourth-quarter earnings rose 23 percent as broadbased sales increase led by its aerospace unit Sikorsky and elevator maker Otis, the company said Wednesday.

Net income rose to $1.06 billion, or $1.08 per share, in the three months ended Dec. 31 from $865 million, or 87 cents per share, in the year-ago period.

The result exceeded estimates on Wall Street, where analysts expected profit of $1.06 per share, according to Thomson Financial.

Sikorsky nearly doubled its operating profit to $110 million. Otis benefited from commercial construction and saw profit surge to $648 million from $514 million.

Revenue jumped 15 percent to $14.71 billion from $12.79 billion last year, surpassing Wall Street estimates for $14.08 billion.

Favorable exchange rates accounted for five percentage points of the sales growth. The company said its only weak market was at its Carrier heating and air conditioning unit, where demand slumped because of the U.S. housing crash.

United Technologies reiterated its 2008 forecast for profit of $4.65 to $4.85 per share. Analysts expect earnings of $4.85 per share.

Its shares rose $1.61, or 2.5 percent, to $68.85 in morning trading Wednesday.

United Technologies operates Otis elevators, Pratt & Whitney jet engines, Hamilton Sundstrand industrial products, Sikorsky helicopters and aircraft, UTC Fire & Security and Carrier.

Revenue of $54.7 billion for 2007 was up 14.5 percent from 2006 and beat Wall Street estimates of $54.08 billion, according to Thomson Financial.

Net income for the year was $4.2 billion, up more than 13 percent and slightly ahead of estimates.

''Although the U.S. economic outlook is mixed, UTC's balance across geographic and product markets should sustain yet another year of double digit earnings per share growth,'' chief executive George David said in a statement.

United Technologies said that despite a ''significant deterioration'' in Carrier's North American residential market, its operating profit rose 12 percent on strong performances in its three other global businesses.

------

On the Net: www.utc.com

    United Tech Profit Rises 23 Percent, NYT, 23.1.2008, http://www.nytimes.com/aponline/business/AP-Earns-United-Tech.html

 

 

 

 

 

Apple Earnings Up, but Stock Falls on Outlook

 

January 23, 2008
The New York Times
By LAURA M. HOLSON

 

Apple beat Wall Street expectations with its earnings report Tuesday, but its shares fell more than 11 percent in after-hours trading as investors fretted over its prospects.

Apple earned $1.58 billion, or $1.76 for each diluted share, in the first quarter of fiscal 2008, compared with $1 billion, or $1.14 a share, in the period a year earlier. Revenue was $9.6 billion, up from $7.1 billion.

But while Apple executives paraded those as record-setting figures, investors focused on projections for the next quarter, which were lower than what analysts had expected. Apple said it expected revenue of about $6.8 billion for the second quarter, or diluted earnings of 94 cents a share. Wall Street was forecasting profit of $1.09 a share on revenue of $7 billion.

Peter Oppenheimer, Apple’s chief financial officer, gave two reasons for the lower forecast: a decline in software sales and the normal slowdown in business after Christmas.

When asked whether the lumbering economy could be a factor in Apple’s earnings outlook, Mr. Oppenheimer said: “We’ll leave the economic forecasting to others.” Instead, he said, “our focus is on managing our business.”

A slowdown in the economy is likely to hurt technology companies like Apple, which are dependent on consumers shelling out hundreds of dollars for their products. Just last week, Sprint Nextel announced that it was losing customers more quickly than expected, raising fears that spending on cellphones and other devices was slowing across the industry. Intel was also cautious about its financial outlook last week, in part because of concerns about a recession.

A. M. Sacconaghi Jr., a senior analyst at Bernstein Research, said one reason for concern about Apple was that domestic sales of the iPod were less robust than the company had expected.

Indeed, Mr. Oppenheimer of Apple said that sales of the iPod in the United States were little changed in the quarter, although iPod sales abroad were quite strong. (Over all, Apple saw a 5 percent increase in iPod sales in the first quarter compared with the period a year earlier.)

What is worrisome, Mr. Sacconaghi said, is whether the flat domestic iPod sales are a harbinger of things to come for other Apple products.

“That’s the big question,” he said. “If they feel it here, could they feel it in other products and other parts of the world?”

Apple shares fell $5.72, or 3.5 percent, to close at $155.64. They were down more than $17 in after-hours trading.

The iPhone remained a bright spot for the company. Apple sold 2.3 million in the quarter, according to Mr. Oppenheimer, and is on track to sell 10 million in 2008, as projected.

Apple shipped 2.3 million Macintosh computers, and revenue from Macs grew 47 percent from the year-ago quarter.

Mr. Sacconaghi said sales of Mac computers could start showing lower year-over-year growth. IPod sales could suffer, he said, because the company has been slow to update its cheaper iPod models, and holiday sales of MP3 players at the retailer Best Buy were down.

At the Macworld Expo last week, Steven P. Jobs, Apple’s chief executive, made several announcements about new products or expanded services, including a new ultralight computer called the MacBook Air that, while elegant, has limited memory. Mr. Jobs also announced a deal with all of Hollywood’s major studios to allow digital movie rentals through the iTunes Store.

    Apple Earnings Up, but Stock Falls on Outlook, NYT, 23.1.2008, http://www.nytimes.com/2008/01/23/technology/23apple.html

 

 

 

 

 

Motorola Profit Plunges 84%

 

January 24, 2008
[Mis en ligne le 23 janvier 2008]
By THE ASSOCIATED PRESS
The New York Times

 

CHICAGO (AP) — Motorola said Wednesday its net profit fell 84 percent in the fourth quarter and warned that the recovery in its struggling cell phone unit will take longer than expected.

Its shares fell more than 8 percent in premarket trading.

Motorola reported a net profit of $100 million, or 4 cents a share, down from a year-earlier profit of $623 million, or 25 cents a share. Sales fell to $9.65 billion from $11.79 billion a year earlier.

On a continuing operations basis, Motorola reported a profit of 5 cents a share. That figure includes charges of 9 cents a share for asset write-downs, layoffs and a legal settlement.

Analysts polled by Thomson Financial, on average, expected earnings per share of 13 cents on revenue of $9.6 billion for the quarter.

”The recovery in Mobile Devices will take longer than expected and there is a lot more work to be done,” Motorola’s chief executive Greg Brown said in a statement. ”Our primary focus is on improving profitability and enhancing our product portfolio in this business.”

Motorola, based in the Chicago suburb of Schaumburg, showed tentative progress toward a turnaround in the third quarter of a year in which its handset sales tumbled 33 percent overall from 2006. But sales from the mobile devices division, dominated by cell phones, sank 38 percent to $4.8 billion in the fourth quarter as the company failed to connect with consumers over the holidays.

The handset unit, its biggest, had an operating loss of $388 million and shipped 40.9 million devices during the quarter, in line with analyst expectations but down sharply from past quarters.

Motorola’s other businesses fared better. The home and networks segment, which sells TV set-top boxes and modems, saw sales rise 11 percent to $2.7 billion although operating earnings decreased 14 percent to $192 million. The enterprise mobility solutions unit, which sells computing and communications equipment to businesses, registered a 40 percent increase in operating earnings to $451 million on $2.1 billion in sales, up 35 percent from a year earlier, largely as a result of the acquisition of the Symbol business in early 2007.

The company forecast a first-quarter loss from continuing operations of 5 cents to 7 cents a share. Analysts had estimated earnings per share of 10 cents for the first quarter.

    Motorola Profit Plunges 84%, NYT, 23.1.2008, http://www.nytimes.com/aponline/technology/apee-motorola.html

 

 

 

 

 

Economic Scene

Worries That the Good Times Were Mostly a Mirage

 

January 23, 2008
The New York Times
By DAVID LEONHARDT

 

So, how bad could this get?

Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.

Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”

These days, though, the great moderation isn’t looking quite so great — or so moderate.

The recent financial turmoil has many causes, but they are tied to a basic fear that some of the economic successes of the last generation may yet turn out to be a mirage. That helps explain why problems in the American subprime mortgage market could have spread so quickly through the world’s financial system. On Tuesday, Mr. Bernanke, who is now the Fed chairman, presided over the steepest one-day interest rate cut in the central bank’s history.

The great moderation now seems to have depended — in part — on a huge speculative bubble, first in stocks and then real estate, that hid the economy’s rough edges. Everyone from first-time home buyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn’t go bad. For the past 16 years, American consumers have increased their overall spending every single quarter, which is almost twice as long as any previous streak.

Now, some worry, comes the payback. Martin Feldstein, the éminence grise of Republican economists, says he is concerned that the economy “could slip into a recession and that the recession could be a long, deep, severe one.” In Monday’s Democratic presidential debate, Barack Obama made the same argument: “We could be sliding into an extraordinary recession,” he said.

In the next breath, of course, Mr. Obama suggested that the right policies might still help, while Mr. Feldstein has said that a recession isn’t yet a sure thing. And much of the great moderation is real. Computers allow managers to run their businesses more efficiently and avoid some of the wild swings. The Fed and central banks in other countries have learned from their past mistakes.

But a recession is now more likely than not. It may well have started already. The Philadelphia Fed reported Tuesday that the economy shrank in 23 states last month, including Ohio, Missouri and Arizona, and was stagnant in seven others. California and Florida, with their plunging home values, may soon join the recession list.

The bigger question is how severe the recession will be if it does come to pass. The last two, in 1990-1 and 2001, have been rather mild, which is a crucial part of the great moderation mystique. There are three reasons, though, to think the next recession may not be.

First, Wall Street hasn’t yet come clean. Even after last week, when JPMorgan Chase and Wells Fargo announced big losses in their consumer credit businesses, financial service firms have still probably gone public with less than half of their mortgage-related losses, according to Moody’s Economy.com. They’re not being dishonest; they just haven’t untangled all of their complex investments.

“Part of the big uncertainty,” Raghuram G. Rajan, former chief economist at the International Monetary Fund, said, “is where the bodies are buried.”

As Mr. Rajan pointed out, this situation is more severe than the crisis involving Long Term Capital Management in the late 1990s. That was a case in which a limited set of bad investments, largely at one firm, had the potential to drive down the value of other firms’ holdings in the short term. Those firms then might have stopped lending money because they no longer had the capital to do so. But their own balance sheets were largely healthy.

This time, the firms are facing real losses, which will almost certainly curtail lending, and economic growth, this year.

The second problem is that real estate and stocks remain fairly expensive. This shows just how big the bubbles were: despite the recent declines, stock prices and home values have still not returned to historical norms.

David Rosenberg, a Merrill Lynch economist, says that the stock market is overvalued by 10 percent relative to corporate earnings and interest rates. And remember that stocks usually fall more than they should during a bear market, much as they rise more than they should during a bull market.

The situation with house prices looks worse. Until 2000, the relationship between house prices and rents remained fairly steady. The same could be said about house prices relative to household incomes and mortgage rates. But the boom of the last decade changed this entirely.

For prices to return to the old norm, they would still need to fall 30 percent across much of Florida, California and the Southwest and about 20 percent in the Northeast. This could happen quickly, or prices could remain stagnant for years while incomes and rents caught up.

Cheaper stocks and houses will benefit many people — namely those who don’t yet own a home and still have most of their 401(k) investing in front of them. But the price declines will also lead directly to the third big economic problem.

Consumer spending kept on rising for the last 16 years largely because families tapped into their newfound wealth, often taking out loans to supplement their income. This increase in debt — as a recent study co-written by the vice chairman of the Fed dryly put it — “is not likely to be repeated.” So just as rising asset values cushioned the last two downturns, falling values could aggravate the next one.

“What people have done is make an assumption that these prices could continue rising at the rate they had been,” said Ed McKelvey, an economist at Goldman Sachs. “And that does seem to have been an unreasonable assumption.”

Certainly, there are some forces to push in the other direction. Outside of Wall Street, corporate balance sheets remain remarkably strong, while the recent fall in the dollar will help American companies to sell more goods overseas.

But it’s hard not to believe that the economy will pay a price for the speculative binge of the last two decades, either by going through a tough recession or an extended period of disappointing growth. As is already happening, banks will become less willing to lend money, households will become less willing to spend money they don’t have and investors will become more alert to risk.

Welcome to the new moderation.

    Worries That the Good Times Were Mostly a Mirage, NYT, 23.1.2008, http://www.nytimes.com/2008/01/23/business/23leonhardt.html?hp

 

 

 

 

 

Origins of ‘The Great Moderation’

 

January 23, 2008
The New York Times

 

James Stock, a Harvard economist, coined the phrase “the great moderation” while writing a research paper with Mark Watson of Princeton earlier in this decade. You can read the paper — “Has the Business Cycle Changed and Why” — here.

Ben S. Bernanke gave the phrase a much wider audience in 2004, when he gave a speech titled “The Great Moderation.” At the time, he was a Federal Reserve governor, and Alan Greenspan was the chairman. The speech is available here.

    Origins of ‘The Great Moderation’, NYT, 23.1.2008, http://www.nytimes.com/2008/01/23/business/23leonside.html?ref=business

 

 

 

 

 

Dow Slides Again After Europe Sell-Off

 

January 23, 2008
The New York Times
By DAVID JOLLY and HEATHER TIMMONS

 

The Dow Jones industrials fell 250 points within minutes on Wednesday morning, but the index was starting to recover as American investors remained unsettled about the possibility of a recession.

The three main stock indexes were off more than 1 percent, a day after the Federal Reserve surprised investors — and stemmed a sell-off — with an aggressive unscheduled interest rate cut.

Technology stocks were hit hardest after Motorola and Apple announced disappointing earnings forecasts. The Nasdaq composite index, heavily weighted with the tech sector, dropped 1.6 percent by 10:07 a.m., while the Dow was off by 150 points.

The declines on Wall Street came after another steep sell-off in European stock markets, which were disappointed after the head of the European Central Bank dampened investors’ hopes that the bank would follow the Fed’s lead in cutting interest rates.

Global stocks remained highly volatile a day after the Fed’s emergency interest rate cut on Tuesday. Asian shares gained sharply after a two-day mauling, and many European markets opened with modest gains, in part on hopes for a rate cut in Europe. But the chief European central banker, Jean-Claude Trichet, indicated in Brussels that no monetary easing was in the cards.

“In demanding times of significant market correction and turbulences, it is the responsibility of the central bank to solidly anchor inflation expectations to avoid additional volatility in already highly volatile markets,” Mr. Trichet told the European parliament, according to Reuters.

Mr. Trichet’s remarks, combined with signals from the Bank of England, the Bank of Japan and others that they intended to hold rates steady, sent major European indexes sharply lower, and overnight trading in American index futures signaled that Wall Street would open lower as well.

In mid-afternoon trading, the CAC 40 in Paris was down more than 4 percent, the DAX 30 in Frankfurt 3.2 percent and the FTSE 100 in London nearly 2 percent.

Eric Chaney chief economist for Europe at Morgan Stanley in London, said the market was “impatient” for a European rate cut, but that Mr. Trichet’s comments were not quite as hawkish as some seemed to think.

“The E.C.B. had a tightening bias previously,” Mr. Chaney said, but “Trichet left open the possibility of a move toward a neutral bias.”

Even so, he said, European investors were unlikely to get any short-term relief from the bank, as “news from the real economy in Europe is very good,” and “ we would have to see some bad news from the real economy rather than the markets,” before policy makers cut rates there.

Some traders questioned whether the Fed itself had overreacted.

“The Fed rate cut was both bigger and earlier than people expected,” said Manuel Martin, an equity strategist at WGZ Bank in Frankfurt. “Now people are starting to ask, ‘Is the U.S. economy really that bad off?’ ”

The strong rises on Asian indexes Wednesday reflected buying by speculators to cover short positions, and a sense that shares in the region had fallen more than was justified. Hong Kong’s Hang Seng index, which experienced the biggest drops in Asia this month, led the region’s rebound, soaring 11 percent on Wednesday after the central bank there matched the Fed’s rate cut — an expected move, since the Hong Kong dollar is pegged to the United States dollar.

In China, the CSI 300 index rose 4.7 percent; in Japan, the Nikkei 225 gained 2 percent; in India, the Sensex, another of the biggest losers in the past two days, closed 5.6 percent higher on Wednesday. The Australian stock markets halted a 12-day losing streak.

But the gains on Asian markets were not big enough to erase the losses suffered there in recent days, as worries about the possibility of a crippling recession in the United States swept the globe.

“The system which supported the U.S. credit markets has collapsed,” said Yuuki Sakurai, director and general manager of the financial and investment planning department at Fukoku Mutual Life Insurance in Tokyo. “Merely easing rates will not solve the root problem,” which was that the problems in the mortgage market had upset “standard measures of investment.”

Larry Jones, chief investment officer at Nedgroup Investments, said, “The basic U.S. economic problems are not over, and a lot of them are ahead of us.”

The recent nosedive in Asian markets shows that even if the fast-growing economies of Asia are able to avoid a slowdown from the problems in the United States, the region’s high-flying stock markets will not, he said.

Central banks in Asia faced the question of whether to follow America’s lead on interest rates or Europe’s.

“You have to stay in tune with the developments with the rest of the world,” the Asian Development Bank managing director, General Rajat Nag, told Reuters on Wednesday. ”However, I think central banks in the region have to keep an eye on the inflation front as well,” he added.

Australia’s treasurer, Wayne Swan, said he welcomed the Fed’s move, while predicting that the domestic economy would remain strong despite any U.S. slowdown.

“It’s pretty fair to say that Australians can be confident that the prospects for growth in Asia and developing regions will help us withstand the fallout from the events in the United States and elsewhere,” he said.

Fred Zhang, a stock broker at Mansion House Securities in Hong Kong, said that Hong Kong investors were particularly encouraged by the Federal Reserve’s interest rate cut because of the correlation between currencies. Mr. Zhang said that while many investors were still worried, he was optimistic about the short-term prospects for the Hong Kong market.

“I think it will keep going upward,” he said.

After days of losses, “Asian markets were looking for a reason to move back” to prices that represent the fundamental numbers underlying them, said Subir Gokarn, Standard & Poor’s chief economist in Asia. Now investors need to overlook “the panic and the froth, and see what the reality is,” he said.

On Wall Street, shares of Apple fell more than 11 percent in pre-market trading after a disappointing earnings report late Tuesday.
 


Heather Timmons reported from New Delhi and David Jolly from Paris. Contributing reporting were Tim Johnston in Sydney, Keith Bradsher in Hong Kong, Martin Foster in Tokyo, David Barboza in Shanghai and Michael M. Grynbaum in New York.

    Dow Slides Again After Europe Sell-Off, NYT, 23.1.2008, http://www.nytimes.com/2008/01/23/business/24stox-web.html?hp

 

 

 

 

 

Dollar Falls, Gold Rises in Europe

 

January 22, 2008
By THE ASSOCIATED PRESS
Filed at 12:52 p.m. ET
The New York Times

 

LONDON (AP) -- The U.S. dollar was mostly lower against other major currencies in European trading Tuesday. Gold rose.

The euro traded at $1.4625, up from $1.4446 late Monday in New York. Later, in midday trading in New York, the euro fetched $1.4616.

Other dollar rates in Europe, compared with late Monday, included 106.54 Japanese yen, up from 105.93; 1.0973 Swiss francs, down from 1.1085; and 1.0239 Canadian dollars, down from 1.0347.

The British pound was quoted at $1.9609, up from $1.9430.

In midday New York trading, the dollar bought 106.73 yen and 1.0986 Swiss francs, while the pound was worth $1.9586.

Gold traded in London at $891.70 per troy ounce, up from $866.70 late Monday. In Zurich, gold traded at $887.50 bid per troy ounce, up from $866.20.

Silver traded in London at $16.06, down from $16.08.

    Dollar Falls, Gold Rises in Europe, NYT, 22.1.2008, http://www.nytimes.com/aponline/business/AP-Dollar-Gold.html

 

 

 

 

 

Feeling Misled on Home Price, Buyers Sue Agent

 

January 22, 2008
The New York Times
By DAVID STREITFELD

 

CARLSBAD, Calif. — Marty Ummel feels she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.

What makes Ms. Ummel different is that she is suing her agent, saying it was all his fault.

Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.

Real estate lawyers and brokers say the case, which goes to trial in North County Superior Court on Monday, is likely to be the first of many in which regretful or resentful buyers seek redress from the agents who found them a home and arranged its purchase.

“When your house appreciates $100,000 in the first six months, you’re not quite as concerned that maybe the valuation was $25,000 or $50,000 off,” said Clifford Horner of the law firm Horner & Singer. “But when your house goes down, you ask: ‘Who might have led me astray here?’ ”

Agents representing buyers rarely had the opportunity to make mistakes during the last real estate boom, in the late 1980s, because the job hardly existed then. For decades, residential transactions almost always involved brokers who, whatever assistance they gave the buyer, legally represented only the seller.

The long boom that began in the late 1990s put an end to that one-sided world. As prices spiked, buyer’s agents and brokers became popular as sounding boards, advisers and negotiators. The National Association of Realtors estimates they are now involved in two-thirds of all residential purchases.

That makes this the first housing collapse in which large numbers of buyers had a real estate professional explicitly looking after their interests. The Ummel case poses the question: In a relationship built on trust, where promises are rarely written down and where — as in this case — there is no signed contract, what are the exact obligations of these representatives in guiding their clients through a sizzling market?

“Agents have a lot of fiduciary duties, but they don’t make money unless they close the sale,” said Joel Ruben, a real estate lawyer in Manhattan Beach, Calif. “In an inflated market, there are built-in temptations to cut corners.”

The defendant in the Ummel case is Mike Little, a veteran agent with ReMax Associates. He will argue that Marty Ummel, who brought the case with her husband, Vernon, is trying to shift the blame for the couple’s own failures of research and due diligence.

“They simply didn’t do what is expected of a knowledgeable, sophisticated buyer, and are now looking for someone other than themselves to take responsibility,” Roger Holtsclaw, an agent who was hired by Mr. Little as an expert witness, said in a court deposition.

Ms. Ummel is 60; Mr. Ummel, 71. With retirement on the horizon, they decided in late 2004 to move from the San Francisco Bay area to San Diego, where they would be near their grown children.

Since they were not making the move for job reasons, they decided to take their time and focus on finding a house that was a good value. In a boom, that is no simple task for buyer or agent.

It is clear the Ummels did not rush into a decision: They dismissed one agent and canceled deals on two houses before Mr. Little found them a prospect on a cul-de-sac in a five-year-old luxury development. A deal was struck with the owner, herself a real estate agent, for $1.2 million.

Mr. Little also worked as a mortgage broker. The Ummels say he encouraged them to get their loan through him. Mr. Little ordered an appraisal of the house but did not respond to the couple’s requests to see it, the suit charges.

A few days after the couple moved in, in August 2005, they got a flier on their door from another realty agent. It showed a house up the street had just sold for $105,000 less than theirs, even though it was the same size.

Then they finally got their appraisal, which told them the house up the street was not only cheaper but had a pool. Another flier in early October mentioned a house down the street that was the same size and closed the same day as the Ummels’ but went for $175,000 less.

The Ummels accuse Mr. Little not only of withholding information but of exaggerating the virtues of their house to push them into a deal.

Ms. Ummel said in her deposition that Mr. Little had told them “many times that it was a very good buy.”

“And you believed that?” asked David Bright, the lawyer who represents both Mr. Little and ReMax Associates, which was also named in the suit.

“Yes, we trusted Mike Little,” Ms. Ummel replied.

Mr. Horner, the lawyer, said valuation is a tricky area for brokers.

“Brokers aren’t appraisers,” said Mr. Horner, one of the writers of a guide to suing brokers. “They have no obligation to opine about value. But once they do, it becomes a gray area whether it’s puffery or a misstatement of a known fact.”

Most people who made a bad real estate deal might wince and move on, but people who know Ms. Ummel describe her as unusually determined. She spent a year picketing ReMax offices on weekends.

Mr. Ummel, an administrator at Dominican University, gave her his permission to pursue the case, on one condition: “Don’t tell me how much the legal fees are.” So far, the bills come to $75,000, more than Ms. Ummel’s annual salary as a fund-raiser at California State University in San Marcos.

“I do not think I’m obsessive-compulsive, but I am 114 pounds of absolute perseverance,” Ms. Ummel said.

That persistence has put the Ummels at the forefront of a developing legal question. When buyers have sued their agents in the past, the cases focused on problems with the property itself, often alleging failure by the broker to disclose a known hazard or maintenance issue. After reviewing litigation records for the last five years, the National Association of Realtors could find no cases that revolved solely around the question of valuation.

Ms. Ummel’s original suit included the appraiser, who was accused of skewing his report to make the Ummel’s house seem worth the purchase price, and the mortgage broker. Modest settlements have been reached with both.

In a brief phone interview, Mr. Little called the case “ridiculous,” adding: “The lady’s a nut job. I didn’t do anything wrong.”

Mr. Little said that contrary to Ms. Ummel’s claims, the suit was motivated mainly by the declining market. “When people see their home values and assets declining, they always feel there’s someone to blame,” he said. “This is a dangerous time for all of us in the industry.”

The agent declined several requests to expand on his remarks. His lawyer declined to be interviewed. So did Geoff Mountain, a co-owner of ReMax Associates, which owns the office that the Ummels were dealing with.

Both sides have hired appraisers who have combed the surrounding development. Mr. Little’s appraiser concluded the four-bedroom, 3.5-bath house was worth $1,150,000 to $1.2 million in the summer of 2005. The Ummels’ appraiser said it was worth $1,050,000.

The outlines of Mr. Little’s defense can be seen in his lawyer’s lengthy deposition of the Ummels. Even in a relatively new development, Mr. Bright said, no two houses and no two deals can be seen as identical. For instance, a pool does not necessarily add value because “some buyers like it, some don’t.”

Mr. Little never showed the Ummels the house down the street because the backyard could be viewed from other houses, the lawyer said, and the couple had said they valued their privacy. Ms. Ummel disputes saying this.

The agent who left the flier that led to the case, Margaret Hokkanen, is sympathetic to Mr. Little.

“People are responsible for their own decisions,” said Ms. Hokkanen, who has been subpoenaed as a defense witness.

Her husband and partner, John Hokkanen, is more ambivalent.

“We have seen so much misrepresentation over the last five years,” he said. “So I appreciate where these buyers might be coming from: ‘I’m a lowly consumer, you’re certified by the state of California, you didn’t do X, you didn’t do Y, and I got hurt.’ ”

The Ummels may be on the leading edge of the law, but they are unlikely to be alone for long. With the market falling, many homeowners owe more on their mortgages than their houses are worth. And many of those deals involved brokers who are required to carry professional liability insurance, presenting a tempting target for angry buyers.

“If you put someone into a property at the top of the market, you look really bad if it goes down,” said K. P. Dean Harper, a real estate lawyer in Walnut Creek, Calif. “There are a lot of letters going out from lawyers to real estate agents saying, ‘My client would never have purchased if you had properly evaluated the market conditions and the value of the property.’ ”

    Feeling Misled on Home Price, Buyers Sue Agent, NYT, 22.1.2008, http://www.nytimes.com/2008/01/22/business/22agent.html?hp

 

 

 

 

 

Ambac Posts $3.26 Billion Quarterly Loss

 

January 22, 2008
Filed at 10:34 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Ambac Financial Group Inc. swung to a deep fourth-quarter loss after taking a $5.21 billion write-down, and is reviewing ways to raise capital, the troubled bond insurer said Tuesday.

The New York firm booked a loss of $3.26 billion, or $31.85 per share, versus a profit of $202.7 million, or $1.88 per share, in the year-ago period.

The company took a loss of $5.21 billion, or $33.14 per share, on the book value of certain financial instruments, called credit derivatives. These help insure bond buyers against losses if the bond issuer defaults or the assets underlying the bond lose value.

That total included a charge of $1.11 billion, or $7.03 per share, that the company set aside because it expects to have to pay claims on defaults related to securities backed by risky subprime mortgages.

The company's operating loss reached $6.21 per share versus a profit of $1.88 per share last year. Analysts expected that result to be a loss of $3.50 per share, according to Thomson Financial.

Ambac said it is ''evaluating strategic alternatives with a number of potential partners,'' as it seeks to maintain its ''AAA'' rating with two agencies and regain it after being downgraded by a third.

''We view the current perceptions of Ambac's business by both the market and ratings agencies as underestimating Ambac's strengths and future potential,'' Chief Executive Michael Callen said in a statement.

Fitch Ratings cut Ambac to ''AA'' last week, which could strip the insurer of its ability to drum up new business, particularly with municipalities.

Business slowed sharply in the quarter, with net premiums written dropping 78 percent to $49.3 million. But the company continued to book premium revenue, gaining 4 percent to $233.2 million. If Ambac isn't able to write new insurance, it will still generate premium revenue and have to pay claims, which is known as being in a state of ''run off.''

Municipalities need bond insurers to have the top ''AAA'' rating because that backing enables them to pay lower interest rates on bonds they issue. Ambac and MBIA Inc. insure $700 billion in municipal bonds, a somewhat mundane area of the market but one that delivers steady profits.

But the insurers extended themselves into riskier bond issues -- including ones backed by subprime mortgages -- in search of higher returns. When the assets underlying those bonds started faltering last year, default risks rose.

Fitch said it cut Ambac's ratings because the company does not have enough capital reserves to cover the higher potential defaults. MBIA raised $1 billion in capital last week to boost its reserves, but Ambac balked at such a move, saying the market conditions were not optimal.

Callen said he thinks Ambac can continue to write new insurance and that he is confident the company can ''strengthen our capital position further'' to regain the ''AAA'' rating from Fitch.

    Ambac Posts $3.26 Billion Quarterly Loss, NYT, 22.1.2008, http://www.nytimes.com/aponline/business/AP-Earns-Ambac.html

 

 

 

 

 

Bank of America Profit Plummets

 

January 22, 2008
Filed at 8:46 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

CHARLOTTE, N.C. (AP) -- Bank of America Corp. said Tuesday its fourth-quarter earnings fell 95 percent, hurt by mounting credit losses and weak investment banking results.

Net income at the Charlotte-based bank dropped to $268 million, or 5 cents per share, in the three months ended Dec. 31 from $5.26 billion, or $1.16 per share, a year ago.

The bank's revenue fell 32 percent to $12.67 billion from $18.49 billion last year.

The quarter included results from LaSalle Bank, which Bank of America purchased on Oct. 1.

Analysts expected earnings of 18 cents per share on revenue of $13.24 billion, according to a poll by Thomson Financial. The earnings estimates typically exclude one-time items.

In premarket trading, Bank of America shares were down $1.92 at $34.05.

Crosstown rival Wachovia said its fourth-quarter earnings tumbled to $51 million, or 3 cents per share, from $2.3 billion, or $1.20 per share, during the same period the previous year.

Excluding merger-related expenses, Wachovia earned $160 million, or 8 cents per share, during the fourth quarter.

Analysts polled by Thomson Financial, on average, forecast earnings of 33 cents per share for the quarter.

Wachovia, the nation's fourth-largest bank, took a $1.7 billion write-down during the quarter due to weakening credit markets.

Wachovia shares were down $1.10 at $29.70 in premarket trading.

Results at Bank of America reflected $5.44 billion of trading losses, compared with profits of $460 million a year earlier. This reflected a $5.28 billion write-down related to collateralized debt obligations, which the bank said reduced trading profit by $4.5 billion and other income by about $750 million.

CDOs are complex investments that combine slices of different kind of risk and often are backed in part by subprime mortgages -- loans given to customers with poor credit history -- as well as other loans.

Bank of America said it also set aside $3.31 billion for possible future credit losses.

''We certainly are not pleased with our performance,'' Chief Executive Ken Lewis said in a statement. ''We are cautiously optimistic about 2008, though we believe economic growth will be anemic at best in the first half.''

The news was the latest in a series of earnings declines among the largest U.S. banks as the nation's housing crisis and a slowing economy have forced many consumers to fall behind on their bills.

For the year, Bank of America reported earnings of $14.98 billion, or $3.30 per share, compared with $21.13 billion, or $4.59 cents per share, in 2006. Revenue fell to $66.32 billion from $72.58 billion a year earlier.

------

On the Net:

Bank of America Corp.: http://www.bankofamerica.com

    Bank of America Profit Plummets, NYT, 22.1.2008, http://www.nytimes.com/aponline/business/AP-Earns-Bank-of-America.html

 

 

 

 

 

Fed Cuts Rate 0.75% and Stocks Swing

 

January 22, 2008
The New York Times
By MICHAEL M. GRYNBAUM and JOHN HOLUSHA

 

The Federal Reserve, responding to an international stock sell-off and fears about a possible United States recession, cut its benchmark interest rate by three-quarters of a percentage point on Tuesday, an aggressive move that came ahead of a regularly scheduled meeting of the central bank.

The Fed’s policy-making group, known as the Federal Open Market Committee, lowered its target for the federal funds rate, which regulates overnight loans between banks, to 3.5 percent, from 4.25 percent.

The surprise move, unusual in both its scale and its timing, underscored the severity of the current strains facing the economy.

“It’s a once-in-a-generation event,” said Mark Zandi, chief economist at Moody’s Economy.com. In recent years, the Fed has rarely acted between scheduled meetings of the committee, and almost always in increments of one-quarter or one-half point. It was the biggest single cut since October 1984.

In a statement Tuesday morning, Fed officials said they made the decision to lower rates after “a weakening of the economic outlook” and noted that “broader financial market conditions have continued to deteriorate.”

For the shaken world markets, the move seemed to provide some relief. When trading resumed after a Monday holiday, Wall Street initially joined in the plunge that had shaken Europe and Asia for two days. But after opening down by more than 460 points, the Dow Jones industrial average was off about 190 points, or 1.6 percent, at noon.

Other indexes were down by about 2 percent, but that was still less than the futures markets had indicated. And European markets came surging back, shaking off early losses to post gains of 1 to 3 percent.

In a related action, the Fed approved a 75 basis-point decrease in the discount rate, to 4 percent.

Futures markets are now expecting the Fed to cut another quarter-point off the federal funds rate at its regular meeting, which begins on Jan. 29.

Jan Hatzius, chief United States economist at Goldman Sachs, said the timing of the cut, which came after a significant sell-off in foreign stocks, may turn market performance into a referendum on the Fed’s move.

“By itself, it’s not necessarily a wrong thing to do if you’re worried about systemic stability,” Mr. Hatzius said. “Nevertheless, it’s a little tricky because it ties you from a short-term perspective to what happens in the stock market.” A sell-off could be viewed as a vote of no confidence from investors, he said.

Economists were divided on Tuesday about whether the rate cut would help the economy stave off a recession.

“This is an effort to catch up and get ahead of flagging confidence in the weakening economy,” said Mr. Zandi, who has criticized the Fed for not responding faster to the current crisis. A smaller cut “might have created more panic among investors,” he added. “But the fact that they moved in such a decisive way strongly signals that they are going to work very aggressively to shore up confidence in the economy.”

In its statement, the Fed said: “The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.”

“Moreover,” the statement continued, “incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.”

Fed officials also indicated, albeit obliquely, that they were concerned about a possible recession. “Appreciable downside risks to growth remain,” the Fed said in its statement.

The White House maintained a confident face, but clearly worried about the impact of the global sell-off. “Americans should be confident that the long-term health of the American economy remains strong,” the press secretary, Dana M. Perino, said on Tuesday morning.

As the market news broke on a holiday, Treasury Secretary Henry M. Paulson Jr. called President Bush on Monday afternoon to brief him about what was happening.

"We don’t comment on daily fluctuations in the markets," Ms. Perino said. She also declined to comment on the Federal Reserve’s rate cut, but she did urge Congress to move quickly to pass a stimulus measure, saying she hoped one could be passed within "weeks not months."

Mr. Bush is to meet Congressional leaders later on Tuesday in a regular session almost certain to be dominated by the economy and the stimulus package. "I’m not going to close off any doors," Ms. Perino said when asked about the shape the package might take.

Stimulating the economy using tax rebates or other fiscal policy measures is not simple or quick, the head of the Congressional Budget Office said Tuesday, and risks aggravating inflation if the impact arrives after the economy has recovered on its own.

Testifying before the Senate Finance Committee, the official, Peter Orszag, said workload issues at the Internal Revenue Service would prevent the mailing of rebate checks until after the peak tax filing in late May or early June. And then it could take 8 to 10 weeks to distribute the checks, meaning the impact of the action might not be felt until the second half of 2008 or early 2009.

Responding to questions, Mr. Orszag said previous efforts to stimulate the economy showed that lower-income families were more likely to spend extra money soon after receiving it, rather higher income households with the capacity to borrow. He said the key to any program to bolster the economy would be to get the funds to people who will spend it within two months.

He said any stimulus action should focus on the underlying economy, regardless of what was happening in financial markets, like stock and bond exchanges. In fact, he said, some forecasters are calling for “sluggish growth” this year, rather than a recession, where output actually shrinks for two consecutive quarters.

Mr. Paulson, speaking to the United States Chamber of Commerce, said Tuesday that the administration and Congress needed to agree quickly on a stimulus package.

“Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible,” Mr. Paulson said.

Mr. Paulson said he was optimistic that the administration and legislators could find a bipartisan “common ground” on the economic package and “get this done before winter turns into spring.”

He also said he hoped to do something in the next couple of weeks “that will make a difference this year.”

The Treasury Department, he said, was focusing on the way home mortgages are originated and traded and said the department is developing a new regulatory framework for subprime and jumbo mortgages where he said markets were not functioning well.



Steven Lee Myers contributed reporting.

    Fed Cuts Rate 0.75% and Stocks Swing, NYT, 22.1.2008, http://www.nytimes.com/2008/01/22/business/23cnd-fed.html?hp

 

 

 

 

 

Futures slide sharply on recession fears

 

Mon Jan 21, 2008
12:00pm EST
Reuters
By Kristina Cooke

 

NEW YORK (Reuters) - U.S. stock index futures were sharply lower on Monday, as fears of a U.S. recession gripped investors, suggesting Wall Street will join a global equity markets plunge when they resume trading Tuesday.

Volume was active in spite of the U.S. stock market being closed for the Martin Luther King Jr. Day holiday.

The sell-off in futures tracked global equities losses, as the MSCI's main index of world stocks hit its lowest level in over a year.

If U.S. stocks open on Tuesday at the levels futures are indicating, it would push the market dangerously close to bear market territory -- or a 20 percent drop from their peak in October. That would mark the end of the bull market that began in early October 2002.

"We're going for some tough slugging here," said Paul J. Nolte, director of investments at Hinsdale Associates in Hinsdale Illinois.

"The breadth and the depth of subprime and housing market and its impact on the economy has everybody concerned. Most of the indications are we are in a recession."

S&P 500 futures were down 52 points, far below fair value, a mathematical formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract.

Dow Jones industrial average futures dropped 403 points, and Nasdaq 100 futures slid 63.75 points.

The Standard & Poor's 500 index closed on Friday down 15.33 percent from its peak close on October 9.

One major stock index, the Russell 2000 index .RUT of small-cap stocks, fell into bear market territory last week.
 


(Reporting by Kristina Cooke; Editing by Tom Hals)

    Futures slide sharply on recession fears, NYT, 21.1.2008, http://www.reuters.com/article/hotStocksNews/idUSN2140979520080121

 

 

 

 

 

Wall Street Braces for More Volatility

 

January 21, 2008
Filed at 7:47 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- With Wall Street falling precipitously almost by the day, investors are asking what it will take to revive it. Market experts are increasingly coming to the same answer: Time.

There is no piece of economic data, no corporate earnings report, no move by the Federal Reserve and no government tax plan that will be able to soothe the market's anxiety in the next couple weeks over the weakening economy.

That's not to say the stock market will keep plunging the way it has been. To be sure, bargain hunters will likely see Wall Street's recent slides as buying opportunities, particularly if encouraging news comes along like a hefty interest rate cut or better-than-expected profits at the nation's big-name companies.

Upbeat financial results in the coming week from some of the large, multinational companies that make up the Dow Jones industrials -- Microsoft Corp., AT&T Inc., Johnson & Johnson, Pfizer, Caterpillar Inc. and Honeywell International Inc. -- could lead to some rallies. But no one should be surprised if the gains evaporate as soon as they developed.

Investors simply have too many questions to buy into stocks with confidence -- questions that are not going to be answered until all fourth-quarter results are in, and until Wall Street has a better sense of how the still-young first quarter is going.

''We've baked in a lot of bad news. But we don't know the magnitude of the bad news yet. We don't know if we've overdone it,'' said Arthur Hogan, chief market analyst at Jefferies & Co. ''I don't think there's any combination of things next week that will necessarily turn things around.''

The Dow sank 4.02 percent last week, the Standard & Poor's 500 index dropped 5.41 percent, and the Nasdaq composite index fell 4.10 percent.

Last week brought exactly what investors feared: a wretched manufacturing reading from the Philadelphia Fed, dismal home construction data from the Commerce Department, a worse-than-expected profit at Intel Corp. and historic losses at Citigroup Inc. and Merrill Lynch & Co.

Even the more profitable banks, such as JPMorgan Chase & Co. and Wells Fargo & Co., said they were bracing for more problems in a wide swath of consumer credit, from home equity loans to auto loans and credit cards.

This week will bring earnings from more banks, notably Bank of America Corp. and Wachovia Corp. Companies outside the financial sector with a strong global presence might ease some of the anxiety about America's corporate muscle, but it is unlikely they will cure it.

''There is an earnings recession,'' said Hugh Johnson, chief investment officer of Johnson Illington Advisors, noting that S&P 500 operating earnings growth was lower in the third quarter of 2007 than in second quarter, and is sure to be lower in the fourth quarter of 2007 than in the third.

''The real key question is not whether there's going to be an economic recession. It's not when the economic recession is going to end,'' Johnson said. ''It's when is the earnings recession going to end?''

Martin Luther King Day on Monday is a market holiday and, after that, the government will release only a few economic reports ahead of the Fed's Jan. 29-30 meeting on interest rates. Wall Street will probe those that do come out more closely than usual for clues about how deflated the economy is and how that might affect business.

The Labor Department's weekly jobless claims data will also be watched, as will the National Association of Realtors' report on December sales of existing homes. Economists expect existing home sales to slip again after inching up in November.

With market pessimism at heights not seen in years, it is certainly possible the market is near its bottom. But there are few investors eager to bet on when stocks will resume their climb, and how long it will be before new records are reached again.

''Maybe by the end of the first quarter, things will line up for the market to find to some stability,'' said Steven Goldman, chief market strategist at Weeden & Co.

The Dow is now 14.6 percent below its Oct. 9 record close of 14,164.53, and is less than 100 points away from slipping beneath the 12,000 mark, which it first surpassed in October 2006.

    Wall Street Braces for More Volatility, NYT, 21.1.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street-Week-Ahead.html

 

 

 

 

 

Stocks Plunge in Europe and Asia on U.S. Recession Fear

 

January 21, 2008
The New York Times
By DAVID JOLLY and HEATHER TIMMONS

 

PARIS — Global stock markets plunged on Monday as fears spread that the turmoil in United States mortgage markets is spreading. Indexes in Europe fell as much as 7 percent after a huge sell-off in Asia.

“There’s something approaching panic in the market,” Holger Schmieding, the chief European economist at Bank of America in London, said by telephone. “There’s been a reassessment in the market of the U.S. economic outlook, with most people now thinking that there will be a recession,” and investors are starting to reconsider the idea that the rest of the world “will remain aloof from U.S. problems.”

The selling began in Sydney, with Australian stocks falling nearly 3 percent for an 11th consecutive decline. Major markets in Asia followed suit, with the benchmark Nikkei 225-stock average in Tokyo falling 3.9 percent, the Hang Seng in Hong Kong falling 5.5 percent and the benchmark mainland Chinese index falling more than 5 percent.

European shares were on track for their biggest decline in more than four and a half years as United States recession fears rattled investors. At the close, the Dow Jones Euro Stoxx 50 was down 7.3 percent. The CAC 40 index in Paris was down 6.8 percent, having fallen more than 7 percent at one point. The Dax 30 in Frankfurt was down 7.1 percent, and the FTSE 100 in London was down 5.5 percent.

Stocks followed suit when markets opened in the Western Hemisphere. Canadian stocks were down 4.5 percent at midday, and a key market index in Brazil was off 6.6 percent.

United States markets are closed on Monday in observance of Martin Luther King’s Birthday. But trading Monday in stock index futures, while light and not always a reliable indicator, pointed to a substantial decline on Wall Street. Futures in the Dow Jones industrial average were down 520 points, or more than 4 percent.

Stocks received no lift on Friday despite an announcement that the Bush administration would seek a stimulus package of as much as $145 billion. Market participants said that meant investors were convinced that an American recession is looming, and economists and strategists said the effect would span the globe.

No matter how many bridges, roads and power plants China builds, or new cars India sells, a downturn in the United States will batter Asian economies, they said.

Investors in Asia have been in a state of denial about the possibility of a recession in the United States, said Adrian Mowat, chief strategist for JPMorgan in Asia. But now, he said, “there’s no debate about it.”

Instead, he said investors were asking “how long and how deep” the recession might be.

In recent months, some emerging market investors have preached the idea that fast-growing areas like most of Asia have “decoupled” from developed markets, meaning the economies of the two groups no longer move in tandem. The investing adage “When the United States sneezes, Asia catches a cold” no longer applies, the proponents of decoupling argue.

But a recent slump in emerging markets, capped by Monday’s slide, means investor sentiment is changing.

Mr. Mowat said it did not matter whether global markets were separated by geography or asset class because “we trade together in corrections.”

Deborah Schuller, a regional credit officer for Moody’s Investor Service in Asia, said, “If the United States consumer quits buying things, it is going to hurt” Asian economies.

Most rated corporations in Asia will be able to withstand nine months of United States recession, but if hard times in America stretched to 12 months or more, there could be serious problems, she said.

Worries about the Chinese economy are also giving investors in Asia heartburn.

The country’s private property market is in the midst of a shakeout, and scores of small developers have gone out of business. Meanwhile, fears of inflation have been looming for months. Shanghai’s composite index closed down 5.1 percent at 4,914.44. The Hang Seng’s 5.5 percent fall was the biggest fall since the Sept. 11, 2001, terrorist attacks in the United States. The Hong Kong index fell more than 5 percent last Wednesday.

The decline in Japanese stocks took the market to the lowest levels in more than two years on concerns that a United States recession could be accompanied by a local one. The Nikkei is now down more than 13 percent in January.

The Japanese Finance Ministry said Monday that growth was slowing in five of Japan’s economic regions, which have been hit by stagnant housing investment and the poor employment.

The Bombay Stock Exchange’s Sensex index plummeted 7.4 percent and suffered its biggest-ever point loss of 1,353 to close at 17,605.35.

Hardest hit were some of the most valued Indian companies, including Reliance Communications, Tata Steel and Reliance Industries.

There may be more downturns in store for Asia, particularly as banks report the fallout from their investments in the United States mortgage market. Companies “have not announced their year-end numbers yet,” Schuller, of Moody’s, said, and if they are holding subprime assets, they may need to write-off their value, she said. “They are going to be taking these 25 to 30 percent haircuts we’re seeing on Wall Street,” she said. “I think it is going to shock people.”



David Jolly reported from Paris and Heather Timmons from New Delhi. Tim Johnston contributed reporting from Sydney, and Martin Foster from Tokyo.

    Stocks Plunge in Europe and Asia on U.S. Recession Fear, NYT, 21.1.2008, http://www.nytimes.com/2008/01/21/business/22stox-web.html?hp

 

 

 

 

 

$300 to Learn Risk of Cancer of the Prostate

 

January 17, 2008
The New York Times
By GINA KOLATA

 

A combination of common and minor variations in five regions of DNA can help predict a man’s risk of getting prostate cancer, researchers reported Wednesday.

A company formed by researchers at Wake Forest University School of Medicine is expected to make the test available in a few months, said Karen Richardson, a Wake Forest spokeswoman. It should cost less than $300.

This is, some medical experts say, a first taste of what is expected to be a revolution in medical prognostication. The results, they agree, are clear. But the question is what happens next. And will patients be helped or harmed? Because the new test — which will analyze DNA in blood or saliva samples and is to be offered by ProActive Genetics — cannot predict which men will get aggressive cancers, it could lead to more screening and unnecessary surgery and complications. But, proponents say, it could also help men decide whether they want aggressive screening in the first place.

The researchers found that about 90 percent of the men in the study had one or more of the gene variants and more than half had two or more. The cancer risk increased as the number of variants rose and increased substantially when men had four or five of the variants.

Men with four or five variants made up only 2 percent of the study population but had a 4.5-fold increased risk of having prostate cancer compared with men who had none of the variants. If the men also had a family history of prostate cancer, their risk was nearly 10 times higher than that of men with none of those risk factors. Less than 1 percent of the population had all the variants and a family history.

The researchers report that nearly half of the cases of prostate cancer among the roughly 5,000 men in the study could be attributed to the five gene regions and a family history, with some men having one or two of the gene variants and others having all five and a family history.

Prostate cancer becomes more common as men age — autopsies of elderly men find that most had prostate cancer, whether they knew it or not. But the men in this study had an average age of about 65, when the disease is less common and more likely to kill.

William B. Isaacs, a professor of urology and oncology at Johns Hopkins University and an author of the new report, said that if research validates what has been found, men may want to get the new genetic test when they are young, 35, say. Those at high risk because of their genetics might then choose to start prostate-cancer screening earlier than the usual age of about 50, using a blood test that looks for proteins secreted by prostate tumors.

“I think that makes sense,” said Dr. Howard Sandler, a professor of radiation oncology at the University of Michigan and a spokesman for the American Society of Clinical Oncology.

But others worry that more frequent testing could exacerbate what is already a major problem: most prostate cancers grow so slowly that they would have been harmless if left alone. But since doctors cannot tell which are dangerous, they treat nearly all that they find. And treatment has serious side effects, including, often, impotence and incontinence. Nonetheless, researchers say, the test is a harbinger of things to come.

“It’s the boutique medicine of the future,” said Dr. Peter C. Albertsen, a surgery professor and prostate cancer specialist at the University of Connecticut. “We can know what diseases we will have to face in the rest of our lives.”

That worries him, as it does Dr. Edward P. Gelmann, deputy director of the Comprehensive Cancer Center at Columbia University. “Technology today enables us to find out a huge amount of information,” Dr. Gelmann said. “But how does the public deal with this information? How does it help them make decisions? And if they make a decision, does that lead to a day, a week, a month, of life saved?”

The study, by scientists at Wake Forest University School of Medicine, the Karolinska Institute in Sweden, the Harvard School of Public Health, and Johns Hopkins Medical Institutions, will appear in the Jan. 31 issue of The New England Journal of Medicine. It was released online on Wednesday, a journal spokeswoman said, because “it is a very active area of research with a lot of competition.”

Researchers long knew that the disease often runs in families. Though scientists spent years looking for genes, they found none that were reproducibly associated with a marked effect.

With new technology to scan the entire length of a person’s DNA, researchers tried a new approach. They began looking for small variations in tiny DNA regions that were associated with prostate cancer. That resulted in the discovery, by several groups of investigators in Iceland and the United States, of the gene variants, small alterations in gene sequences. Unlike traditional genetic links to disease, the variants are not mutations that destroy a gene’s function. In fact, no one knows what their effect is.

The next step was to ask whether those variants really could predict who had prostate cancer. So Dr. Jianfeng Xu, a professor of epidemiology and cancer biology at Wake Forest University School of Medicine, and his colleagues studied a Swedish population of 2,893 men with prostate cancer and 1,781 men who did not have it. That led to their finding that each of the five variants independently predicted prostate cancer risk.

“Each confers a moderate risk,” Dr. Xu said, adding that the effect of having just one of the variants — a 10 or 20 percent increase in a man’s chance of having prostate cancer — was not enough to justify using a single variant for screening. But, he added, because each conferred an independent risk, the risks added up so that the more men had, the greater their risk. Then they found that family history of the cancer added an independent risk. “That was very, very surprising to us,” Dr. Xu said.

The next step, Dr. Isaacs said, is to look in other populations. “We think that can happen almost instantaneously,” he said, explaining how scientists have blood samples and family histories of thousands of men who were tested for prostate cancer.

But some said that if the test leads to more screening, it is not necessarily a good thing. There is already too much prostate-cancer screening, they say, resulting in too much treatment. “To me, it is a nightmare,” Dr. Albertsen said. “We are just feeding off of this cancer phobia.”

What is needed, and what the new test does not provide, is a way to decide which cancers are dangerous and which are not, Dr. Isaacs said. Still, he said the new test could help patients if it was used with caution. “We may be premature with this idea — everyone has a different way of thinking about this — but it should not take five years to know if we are on the right track. All this can happen very rapidly.”

“We have worked with enough families that have a positive family history to know that people are anxious to know their risk of prostate cancer,” he said.

    $300 to Learn Risk of Cancer of the Prostate, NYT, 17.1.2008, http://www.nytimes.com/2008/01/17/health/17cancer.html?hp

 

 

 

 

 

When 3rd Place on the Rich List Just Isn’t Enough

 

January 17, 2008
The New York Times
By GARY RIVLIN

 

LAS VEGAS — Sheldon G. Adelson, the casino mogul, has seen his personal net worth plummet by more than $15 billion in recent months as Wall Street investors have grown more bearish about the casino companies that are pushing aggressively into Asia.

That slide might put a crimp in his stated goal of surpassing Bill Gates and Warren E. Buffett, the only two titans ahead of him on Forbes’ most recent list of the country’s richest people. But a few miserable months on the financial front are not likely to have much of an impact on him — or the charities and various conservative political causes he supports.

Mr. Adelson, 74, still holds $19 billion worth of stock in the Las Vegas Sands, which operates the Venetian here and also a pair of giant casinos in Macao, the Chinese territory near Hong Kong that has surpassed the Las Vegas Strip as the world’s top gambling market.

On Thursday, the Venetian formally opens its new Palazzo tower. At 7,200 rooms, the expanded Venetian is the world’s largest hotel.

Few Americans have made as much money in China as Mr. Adelson, and he is a major donor to the Republican Party. Yet Mr. Adelson may well be the richest American that most people have never heard of. One explanation for his relative anonymity is that he is a newcomer to the highest altitudes of the fabulously wealthy.

The Las Vegas Sands went public in December 2004, and over the next two years his net worth soared by $17.5 billion. That works out to almost $1 million an hour, weekends, holidays and nights included. “He got richer faster than anyone else in history,” said Peter W. Bernstein, co-author of “All the Money in the World,” a book about the people on the Forbes 400 list.

Certainly people in Las Vegas know Mr. Adelson, a querulous figure who has existed in a near-constant state of embattlement since building the Venetian in the late 1990s. He filed claims and counterclaims against scores of contractors who worked on that project, and over the years he has started legal fights with the local A.C.L.U., the Culinary Workers, the Las Vegas Convention and Visitors Authority and even the power company, which he thought should pay the cost of removing utility poles from the Venetian site.

“Sheldon is a brilliant businessman, but he can be enormously difficult,” said Gary Loveman, chief executive of Harrah’s, the Las Vegas-based casino giant. “When he has a strong point of view, he pursues it very stridently.”

“He’s very tough,” Mr. Loveman added. “Some would say unreasonably tough.”

Mr. Adelson declined to comment for this article, despite repeated requests. But longtime friends and associates said his hard exterior was rooted in his days growing up in a rough-and-tumble section of Boston, where his father drove a cab.

“Rich in our neighborhood then was having $3 in your pocket,” said Irwin Chafetz, a Sands board member and former business partner who has known Mr. Adelson since grade school. Today Mr. Chafetz’s childhood friend owns homes in Las Vegas, Malibu, Boston and Tel Aviv, and keeps several jets, including a Boeing 767, a 747 and a 737.

Mr. Adelson started a business selling toiletry kits to motels, tried his hand at the mortgage broker business, and in the 1960s he joined Mr. Chafetz and another friend from the old neighborhood, Ted Cutler, in a charter tours start-up.

But it was not until he founded Comdex, the premier computer trade show through much of the 1980s and 1990s, that he hit on an idea that propelled him into the upper reaches of the wealthy.

To this day, Mr. Cutler is not sure if his longtime friend even knows how to use a computer (“we always had people working for us who understood them”). But then a passion for technology was not what spurred Mr. Adelson, a college dropout then in his mid-40s, to create this yearly festival for technology buffs held every November in Las Vegas.

Rather, friends and former work associates said, he was enthralled by the idea of renting convention space for 25 cents a square foot and selling it to vendors for $25 or more. Mr. Adelson’s timing on Comdex could not have been better — yet he seemed to feel more pressure, not less, according to former colleagues.

“His yelling was legendary,” said Peter B. Young, a public relations man who worked Mr. Adelson for the 17 years he ran Comdex. Sometimes Mr. Adelson turned his fury on a particular person, Mr. Young said, but often it was just “generic yelling” that seemed his boss’s preferred way of passing along routine marching orders.

“To work with Sheldon you need to have a coat of Teflon,” said Jason Chudnofsky, chief executive of Comdex under Mr. Adelson from 1987 to 1995.

It helped that his demanding and exacting boss was helping to make him rich, Mr. Chudnofsky said — and that his rants seemed largely about his own larger ambitions.

“Sheldon wanted to be richer than Bill Gates,” he said. “He always wanted to be No. 1.”

To accommodate their growing trade business, Mr. Adelson and his partners — Mr. Chafetz, Mr. Cutler and Jordan Shapiro, an optometrist from the old neighborhood (“the boys,” as they were often called internally) — bought the aging Sands Hotel and Casino from the financier Kirk Kerkorian for $128 million.

“The Sands had enough land to build a convention center,” Mr. Chafetz said. “That’s why we got into the casino business.” When it was completed, at the start of the 1990s, the Sands Expo and Convention Center stood as the largest privately owned exhibition center in the country.

In 1995, Mr. Adelson sold Comdex to Softbank of Japan for $862 million – giving him a personal payoff of just over $500 million. He and his partners were all in their 60s, but where the three other ‘‘boys” chose to semi-retire, Mr. Adelson made even bigger bets.

He demolished the Sands in a spectacular implosion (replete with an anticipatory fireworks show), borrowed hundreds of millions of dollars and in its place built the Venetian, which cost $1.5 billion and opened in 1999.

With the Venetian, Mr. Adelson broke the basic rules of casino design by building a facility that was geared toward conventions rather than centered on the casino. Where the old way was to motivate guests to spend time on the casino floor by offering few amenities in the room, the Venetian parted from Las Vegas tradition, installing mini-bars and fax machines in each guest room

His plans were met with skepticism, if not scorn. But the Venetian is now the Strip’s second most profitable casino hotel, behind only the Bellagio, said Robert A. LaFleur, an industry analyst with the Susquehanna Financial Group, and that is with only a third of its revenue coming from its gambling floor.

“He’s shown people in Las Vegas that there’s a different way to do things,” said Mike Sloan, a retired casino executive who now consults for the MGM Mirage and other gambling concerns.

Yet despite the influential role he played in establishing Las Vegas as a top convention destination, he is better known locally for his quarrels and legal battles. To cite but one of a long list of examples: his attempts to bar members of the Culinary Workers from picketing on the sidewalk in front of the Venetian, a case he pursued all the way to the United States Supreme Court (he lost). The Venetian is the only major Las Vegas casino that is nonunion.

Then there is his long-running feud with Stephen A. Wynn, who built the Mirage and Bellagio, among other large Strip properties. The two tycoons have fought over everything from the noises emitted by the artificial volcano in front of the Mirage to the size of the Venetian’s parking garage.

“Sheldon is a man who harbors a lot of animosity toward a lot of people,” Mr. Wynn said. “And when Sheldon is angry, he gets nasty.”

The two are at it once again, this time in Macao — and so far, a stock market correction notwithstanding, Mr. Adelson is beating his longtime foe. He already runs two resorts in Macao (one has a casino three times the size of Las Vegas’s biggest gambling floor), and his company, the Las Vegas Sands, is in the midst of spending another $7 billion to $9 billion building an additional 13 hotels there. The Sands is also spending another $3.6 billion on a casino hotel in Singapore.

Mr. Wynn who is less bullish on Macao’s short-term prospects than Mr. Adelson, operates a single property in Macao.

“So much of their value is on the come, as they say in the gambling business,” said Mr. LaFleur, the analyst, explaining the inflated price of Sands stock relative to Wynn Resorts and other competitors.

Mr. Adelson has five children from two marriages. He has given tens of millions of dollars to charitable causes, most of them Jewish-related, and has talked about donating billions more to foster medical research.

Last January he gave $1 million to American Solutions for Winning the Future, former House Speaker Newt Gingrich’s political group, and more recently he helped finance Freedom’s Watch, a conservative response to MoveOn.org.

Yet Mr. Adelson is hardly slowing down to enjoy other aspects of life. He is looking past Asia, already talking about replicating his Macao strategy and creating a mini-Las Vegas somewhere in Europe.

“I work for a guy who’s obsessed,” said Robert G. Goldstein, one of a troika of top executives who have been with Mr. Adelson since 1995. Every time the Sands reaches another milestone, Mr. Goldstein said, his boss establishes a new, harder-to-reach goal.

“He has more money than he can ever spend but he has to grow it bigger,” he said.

    When 3rd Place on the Rich List Just Isn’t Enough, NYT, 17.1.2008, http://www.nytimes.com/2008/01/17/business/17adelson.html

 

 

 

 

 

Inflation Continues to Edge Up

 

January 16, 2008
The New York Times
By MICHAEL M. GRYNBAUM

 

Inflation continued to creep up in December, but the rise in prices will likely do little to hold back an interest rate cut by the Federal Reserve this month.

The consumer price index rose 0.3 percent last month, the Labor Department said on Wednesday. The increase was more than expected but also marked a slowdown from a 0.8 percent rise in November.

Prices have been pushed up this year by significant increases in the cost of oil and food. Over all, inflation rose by 4.1 percent in 2007, one of the highest rates in decades.

But some economists focus on the core figure, which removes the volatile costs of food and energy and provides a better sense of inflation’s effect on the broader economy. Core inflation rose 0.2 percent in December and 2.4 percent for the year, slightly above comfortable levels but still relatively contained.

Top Fed officials have said they are closely monitoring inflation levels as they weigh a fourth consecutive cut to the benchmark federal funds rate. Lower interest rates stimulate economic activity but can also contribute to rising prices.

But the central bank appears focused on the current risks to growth, in light of the recent housing downturn and continuing problems in the credit market. Investors expect a half-point cut when Fed policy makers meet on Jan. 29 and 30.

The December report does suggest that the purchasing power of American workers is steadily being eroded. The cost of gasoline rose nearly 30 percent in 2007, and medical care costs also soared. Commodities and food prices ticked up about 5 percent for the year.

    Inflation Continues to Edge Up, NYT, 16.1.2008, http://www.nytimes.com/2008/01/16/business/16cnd-econ.html?ref=business

 

 

 

 

 

JPMorgan Profit Falls 34 Percent

 

January 16, 2008
Filed at 7:19 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- JPMorgan Chase & Co. said Wednesday its fourth-quarter profit fell 34 percent after its exposure to subprime mortgages -- though much smaller than at banking peers like Citigroup Inc. -- devalued its portfolio by $1.3 billion.

JPMorgan's $1.3 billion write-down sent its net income down to $2.97 billion, or 86 cents a share, in the period from October to December, from $4.53 billion, or $1.26 a share, in the same period a year earlier.

Revenue was $17.38 billion, up from $16.19 billion the prior year.

But the bank boosted its provisions for loan losses by $2.54 billion in anticipation of more problems with U.S. consumers' ability to make their loan payments.

Analysts polled by Thomson Financial, on average, predicted fourth-quarter earnings of 93 cents per share on revenue of $17.05 billion.

For the full-year 2007, JPMorgan's net income was a record $15.4 billion, or $4.38 a share, on record revenue of $71.4 billion.

    JPMorgan Profit Falls 34 Percent, NYT, 16.1.2008, http://www.nytimes.com/aponline/business/AP-Earns-JPMorgan-Chase.html

 

 

 

 

 

Home loan demand surges to near four-year high

 

Wed Jan 16, 2008
7:23am EST
By Julie Haviv
Reuters

 

NEW YORK (Reuters) - U.S. mortgage applications surged last week, with demand hitting its highest in nearly four years as interest rates plunged, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended January 11 surged 28.4 percent to 906.4, its highest since the week ended April 2, 2004.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.62 percent, down 0.11 percentage point from the previous week, and its lowest since the week ended July 1, 2005, when they stood at 5.58 percent.

Interest rates were below year-ago levels at 6.19 percent.

Douglas Duncan, chief economist at the MBA, said the robust data offers a glimmer of hope for housing.

"When consumers see an opportunity, no matter how pessimistic they might be, they take it," he said. "It will improve the underlying state of the industry and the longer rates stay down, the more people will take advantage of the opportunity, so that is a good thing."

Mortgage rates have fallen along with U.S. Treasury yields. The benchmark 10-year U.S. Treasury note <US10YT=RR> yield fell below 3.68 percent on Tuesday, its lowest since July 2003 as stocks plunged and expectations of aggressive interest rate cuts from the Federal Reserve rose. Yields move inversely to price.

Overall mortgage applications last week were 35.9 percent above their year-ago level. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 10.1 percent to 687.5.

Fixed 15-year mortgage rates averaged 5.07 percent, down from 5.21 percent the previous week. Rates on one-year adjustable-rate mortgages (ARMs) decreased to 5.77 percent from 6.04 percent.

 

DEMAND SURGES

The MBA's seasonally adjusted purchase index, widely considered a timely gauge of new home sales, jumped 11.4 percent to 461.2, its highest since the week ended December 7, 2007. The index came in above its year-earlier level of 439.7, a rise of 4.9 percent.

Demand for home loan refinancing surged last week as the group's seasonally adjusted index of refinancing applications skyrocketed 43.4 percent to 3,575.5, its highest since the week ended April 2, 2004. The index was up 74.8 percent from its year-ago level of 2,045.8.

The refinance share of applications increased to 62.7 percent from 57.7 percent the previous week. The ARM share of activity edged down to 9.2 percent from 9.3 percent.

"This time of the year you always have to be careful about weather patterns and other factors," Duncan said. "I really think this is, at least in some instances, evidence that with mortgage rates dropping and house prices having leveled off or fallen in some places, there is an improvement in affordability underway."

This week ushers in other key data gauging the state of the hard-hit U.S. housing market.

The National Association of Home Builders will release its January NAHB/Wells Fargo Housing Market Index on Wednesday and the Commerce Department will release data on December housing starts on Thursday.



(Reporting by Julie Haviv; Editing by James Dalgleish)

    Home loan demand surges to near four-year high, R, 16.1.2008, http://www.reuters.com/article/ousiv/idUSN1655472620080116

 

 

 

 

 

U.S. growth worries spook global investors

 

Wed Jan 16, 2008
5:26am EST
Reuters
By Ian Chua

 

LONDON (Reuters) - Stocks and the dollar tumbled on Wednesday as weak U.S. data and corporate news raised worries about the health of the global economy, while government bonds rose as investors took cover in safe-haven assets.

Fears of a U.S. recession fuelled by further bad news on the world's largest economy on Tuesday also hit commodity prices and sent U.S. crude below $91 a barrel to four-week lows.

Technology bellwether Intel Corp's (INTC.O: Quote, Profile, Research) quarterly results and outlook missed Wall Street targets, following hard on the heels of a record loss for Citigroup (C.N: Quote, Profile, Research) and an unexpected fall in U.S. retail sales last month, raising speculation of an early Federal Reserve rate cut.

The dollar hit a record low of about 1.0839 Swiss franc and a 2-1/2 year low near 105.97 yen. The euro edged up 0.1 percent to $1.4820.

"Risk aversion triggered by weak equity markets and widening corporate credit spreads has led carry positions to be slashed leading the dollar to fall against the yen and Swissie," said Michael Klawitter, currency strategist at Dresdner Kleinwort in Frank.

The FTSEurofirst 300 index of top European shares fell more than 1 percent in the first hour of trade as U.S. recession fears hit banks such as HSBC (HSBA.L: Quote, Profile, Research).

MSCI world equity index was down nearly 1.2 percent to hit its weakest since mid-August.

Earlier, Japan's Nikkei ended at a fresh two-year low, closing down 3.4 percent at 13,504.51, while MSCI's measure of other Asian stock markets slid nearly 4 percent.

 

BONDS RISE

Weakness in equities helped boost demand for safe-haven government bonds, driving yields lower. Among euro zone bonds, the 10-year Bund yield fell below 4 percent for the first time since March 2007.

The benchmark 10-year yield for U.S. Treasuries fell to 3.65 percent, after touching a low of about 3.62 percent -- the lowest since mid-2003.

"Given more and more weak economic data and bad news about bank earnings, the market looks set for a further rally even though it's already in an overshoot area," said Yoshio Takahashi, bond strategist for Barclays Capital Japan.

Investors are eyeing key U.S. consumer inflation data due later for clues on how aggressively the Fed could cut interest rates without fanning inflation expectations.

Interest rate futures expect an almost 1-in-2 chance of a hefty 75 basis points cut this month in U.S. benchmark interest rates, from 4.25 percent.

Gold, usually seen as a safe-haven play, fell victim to profit-taking after failing to break the record high of $914 an ounce set on Monday.

Spot gold was trading around $885 an ounce, although further downside was seen limited by a struggling dollar and buying from jewellers.


(Editing by Mike Peacock)

    U.S. growth worries spook global investors, R, 16.1.2008, http://www.reuters.com/article/hotStocksNews/idUSSP7670220080116

 

 

 

 

 

Blue-Collar Jobs Disappear, Taking Families’ Way of Life Along

 

January 16, 2008
The New York Times
By ERIK ECKHOLM

 

JACKSON, Ohio — After 30 years at a factory making truck parts, Jeffrey Evans was earning $14.55 an hour in what he called “one of the better-paying jobs in the area.”

Wearing a Harley-Davidson cap, a bittersweet reminder of crushed dreams, he recently described how astonished and betrayed he felt when the plant was shut down in August after a labor dispute. Despite sporadic construction work, Mr. Evans has seen his income reduced by half.

So he was astonished yet again to find himself, at age 49, selling off his cherished Harley and most of his apartment furniture and moving in with his mother.

Middle-aged men moving in with parents, wives taking two jobs, veteran workers taking overnight shifts at half their former pay, families moving West — these are signs of the turmoil and stresses emerging in the little towns and backwoods mobile homes of southeast Ohio, where dozens of factories and several coal mines have closed over the last decade, and small businesses are giving way to big-box retailers and fast-food outlets.

Here, where the northern swells of the Appalachians lap the southern fringe of the Rust Belt, thousands of people who long had tough but sustainable lives are being wrenched into the working poor.

The region presents an acute example of trends affecting many parts of Ohio, Michigan and other pockets of the Midwest.

Slammed by the continued decline in the automobile and steel businesses, Ohio never recovered from the recession of 2001-2, and blue-collar families who had made it partway up the economic ladder find themselves slipping back, with chaotic effects on families and dreams.

Throughout the state, the percentage of families living below the poverty line — just over $20,000 for a family of four last year — rose slightly from 14 percent in 2005 to 16 percent in 2007, one study found. But equally striking is the rise in younger working families struggling above that line. The numbers are more dismal in the southeastern Appalachian part of the state, where 32 percent of families lived below the poverty line in 2007, according to the study, and 56 percent lived with incomes less than $40,000 for a family of four.

“These younger workers should be the backbone of the economy,” said Shiloh Turner, study director for the Health Foundation of Greater Cincinnati, which conducted the surveys. But in parts of Ohio, Ms. Turner said, half or more “are barely making ends meet.”

One consequence is an upending of the traditional pattern, in which middle-aged children take in an elderly parent. As $15-an-hour factory jobs are replaced by $7- or $8-an-hour retail jobs, more men in their 30s and 40s are moving in with their parents or grandparents, said Cheryl Thiessen, the director of Jackson/Vinton Community Action, which runs medical, fuel and other aid programs in Jackson and Vinton Counties.

Other unemployed or low-wage workers, some with families, find themselves staying with one relative after another, Ms. Thiessen said, serially wearing out their welcome.

“A lot of major employers have left, and the town is drying up,” Ms. Thiessen said of Jackson. “We’re starting to lose small shops, too — Hallmark, the jewelry and shoe stores, the movie theater and most of the grocery stores.”

Shari Joos, 45, a married mother of four boys in nearby Wellston, said, “If you don’t work at Wal-Mart, the only job you can get around here is in fast food.”

Between her husband’s factory job and her intermittent work, they made $30,000 a year in the best of times, Mrs. Joos said. Since last fall, when her husband was laid off by the Merillat cabinet factory, which downsized to one shift a day from three, keeping anywhere near that income required Mrs. Joos to take a second job. She works at a school cafeteria each weekday from 9:30 a.m. to 1 p.m and then drives to Wal-Mart, where she relaxes in her car before starting her 2-to-10 p.m. shift at the deli counter.

Her 20-year-old son went to college for two years, earning an associate degree in information science, but cannot find any jobs nearby. He still works at McDonald’s and lives at home as he ponders whether to move to a distant city, as most local college graduates must. Her 22-year-old son works at Burger King and lives with his grandparents — “that was his way of moving out,” Mrs. Joos said.

In late December her husband landed a new job, driving a fork lift at a Wal-Mart distribution center, a shift that ends at 2:30 a.m. It pays a little less than he used to make and is an hour’s drive away, so gasoline soaks up a painful share of his wages.

“We never see each other,” Mrs. Joos, 45, said on a recent morning as she packed a roast beef and cheese sandwich for her evening meal. “We never even think of taking a vacation.”

Luckily they had paid off their mobile home and an addition they built.

As experienced men in this corner of Ohio have found themselves working for lower wages, others feel they must move.

“I’m ain’t going to work for no $8 an hour!” said Lindsey Webb, 52, who, like Mr. Evans, was one of hundreds laid off when Meridian Automotive Systems closed its local plant. On a recent night, Mr. Webb was helping out in a trailer in front of the old factory, a vigil by the United Steelworkers Union to remind the company of its obligations to former workers.

Mr. Webb, who worked at the plant for 33 years, made more than $16 an hour doing machine maintenance. Now he is thinking of moving to Arizona, taking along his elderly father, whom he helps care for.

Darrel McKenzie, 44, was also a maintenance man at Meridian and grossed more than $60,000 a year. Now he has restarted at the bottom as a union pipe-fitting apprentice and expects to make $20,000 this year. His family just “does less,” Mr. McKenzie said.

Mr. Evans said that moving back into the home where he grew up, after decades of independence, was a stinging reminder that “I lost everything I worked for all my life.”

His mother, Shirley Sheline, 73, had worked 28 years at the same auto parts plant, and shares his dismay. “Can you believe it, a grown man forced to move back with his mother,” she said.

Seeing his desperation last year, she added a room to her house with a separate door.

“I don’t know what I’d have done without my mom,” Mr. Evans said. “At least I can help her, or if I get back on my feet, she can rent it out.”

By contrast, selling his Harley, which he would have paid off this year, was pure torture. He had owned a Harley since he was 20, and weekend cruising with pals was his favorite recreation.

“The buyer said he wanted to take it away in the back of a trailer,” Mr. Evans recalled, “and I said, ‘That won’t happen.’ ”

“Instead I drove it to his house, threw him the keys, came home and got drunk.”

    Blue-Collar Jobs Disappear, Taking Families’ Way of Life Along, NYT, 16.1.2008, http://www.nytimes.com/2008/01/16/us/16ohio.html

 

 

 

 

 

Economic Scene

A Revival of 1992’s Glum Mood
 

January 16, 2008
The New York Times
By DAVID LEONHARDT

 

In April 1992, having just dispatched his rivals for the Democratic nomination, Bill Clinton went to the Wharton School at the University of Pennsylvania to give a big speech on his economic vision. He already knew that he would be able to run against “the Bush recession,” as he called it that day. But he decided to make a much broader argument.

Mr. Clinton said that the economy hadn’t really been working since the early 1970s. The recession had simply aggravated problems that existed long before George H. W. Bush took office. “Even when the Bush recession ends,” Mr. Clinton said, “most Americans will find themselves worse off.”

The economic worries of 1992 helped elect Mr. Clinton, of course. And by the end of the decade, thanks to both his policies and a huge stock market bubble, the American economy was roaring along again. The deep anxiety of 1992 seemed to be a piece of economic history.

No more. Almost 16 years after Mr. Clinton’s speech at Wharton, the economy is again dominating a presidential race. While the details have changed, the main story line remains remarkably similar. A downturn has reawakened fears that the economy no longer works very well for the middle class.

Today, as was the case 16 years ago, the downturn itself isn’t the main problem. By 1992, as a matter of fact, the economy was already growing again. This year, it’s still possible — if less likely after Tuesday’s dismal retail sales report and another sharp decline in stock prices — that the country will avoid a full-blown recession.

The main problem now is that the good times are no longer good enough to carry the middle class through the bad times. For much of the last 35 years, the incomes of most workers have been growing far more slowly than they once did. In the current expansion, which started in 2001, the median weekly paycheck of workers has actually fallen 1 percent, once inflation is taken into account, according to the Labor Department.

Economists argue about the reasons for the great wage slowdown — technology, globalization, health care costs, the decline of unions, the rise of the new wealthy — but it clearly seems to have made people feel more vulnerable to small economic swings. In the latest New York Times/CBS News poll, only 19 percent of those responding said the country was headed in the right direction. That was the lowest percentage since the early 1990s.

This glumness is especially striking because perceptions of the economy usually lag behind reality, and the reality hasn’t deteriorated much yet for most families. But as in 1992, said Alan Blinder, a former vice chairman of the Federal Reserve, “people are more sour about the economy than the data would seem to warrant.”

Senator Robert F. Bennett, a Republican from Utah on the Joint Economic Committee, put it this way to me: “There is a growing disconnect between the way the economy is operating and the way people feel about it. And it stems from individual families’ sense of economic anxiety.”

The most important difference between 1992 and today — if not the most obvious one — is the source of that anxiety. Then, as Mr. Clinton noted at Wharton, Japan and Germany seemed to be leaving the United States behind. Companies weren’t investing enough in new equipment, and productivity — the amount an average worker turns out in an hour — had been growing slowly since the 1970s. None of that would necessarily end when the recession did, he said.

But as the budget deficit fell and stocks soared, business investment and productivity both picked up. Middle-class incomes surged for the first time in decades. Polls showed Americans in the late 1990s to be more optimistic than at any time since the mid-’60s.

In some ways, the good times have continued under the current President Bush. For the last six years, the economy has been growing at a pretty healthy clip. The problem now isn’t the level of growth but how little of it is filtering down to the middle class.

In today’s economy, middle-class incomes have almost no margin for error. Unless there is a true boom, incomes don’t grow much. And the economy has slowed enough this decade to tip the balance and to leave people worrying that worse is yet to come.

“In ’92, there was a greater fear of staying in one place,” said Gene Sperling, an economic adviser to Mr. Clinton then and to Hillary Clinton now. “In 2008, there is a greater fear of falling.”

The solution will probably need to involve some combination of education, health care and tax changes. Keep in mind that middle-class families have received not only modest raises in recent years; they have also received smaller reductions in their overall federal tax rates than high-income families have. That’s a tough combination.

For now, the campaign debate has shifted toward short-term questions like how to design a good stimulus package. Unfortunately, no stimulus package will solve the larger issues. The threat of recession “is a terrible distraction to everyone,” as Douglas Holtz-Eakin, Senator John McCain’s economic adviser, said, because it moves the debate away from globalization, energy policy and climate change, and onto smaller topics like one-time tax rebates.

Yet I think the big questions may still end up dominating the debate. By this summer, and certainly by Jan. 20, 2009, the stimulus package will be old news, one way or the other. Middle-class anxiety won’t be.

“The main problem is not short-term,” Mr. Blinder, the former Fed vice chairman, said. “But short-term problems have a way of grabbing people’s attention.”

    A Revival of 1992’s Glum Mood, NYT, 16.1.2008, http://www.nytimes.com/2008/01/16/business/16leonhardt.html?hp

 

 

 

 

 

Intel Stock Hammered on Economy Fears

 

January 16, 2008
Filed at 1:10 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

SAN FRANCISCO (AP) -- While Intel Corp.'s stock was being hammered over disappointing fourth-quarter results, executives at the world's largest semiconductor company found themselves trying to assure Wall Street the faltering U.S. economy was not to blame for its financial difficulties.

Intel's stock plunged more than 14 percent after its profit and sales figures narrowly missed analyst expectations, a shortfall that triggered fears the Santa Clara-based company is more vulnerable to U.S. economic pressures than many investors had believed.

''You hear all of the pundits saying the world is going to go to a trash basket and you worry,'' Intel Chief Executive Paul Otellini said in a conference call with analysts. ''It may be a self-fulfilling prophecy. At this point we don't see anything on the horizon. Our customers don't see anything on the horizon.''

Otellini noted that three-quarters of Intel's business comes from outside the U.S. and that the PC business appears to be healthy. The company blamed the shortfall on lower-than-expected sales of NAND flash memory.

Intel was also harmed by microprocessor prices staying flat despite an acceleration in sales during the quarter.

Otellini said, however, that it would be ''imprudent'' to brush off the economic pressures facing the U.S., and Intel's latest financial guidance reflected that caution.

As the No. 1 maker of the microprocessors that act as the brains of personal computers, Intel's financial results are a valuable gauge of technology spending and PC demand.

With investors already worried about a possible recession and its effects on tech companies, Intel's miss injected further uncertainty into a jittery market. Investors flocked to technology stocks late last year as a safe haven when the mortgage and credit crisis worsened, but they have since retreated.

Intel shares fell $3.21 to $19.48 in after-hours trading following the results' release. The stock had fallen 39 cents to end regular trading at $22.69.

''The stock is reacting as hard as it is because the market was expecting Intel to be at the tail of the dog -- not really seeing the weakness we're seeing in retail yet,'' said Doug Freedman, an analyst with American Technology Research. ''But the numbers at the top line suggest they are absolutely seeing this weakness.''

Intel posted profit of $2.27 billion, or 38 cents per share, for the three months ended Dec. 29. That compares with net income of $1.5 billion, or 26 cents per share, during the same period a year earlier.

Analysts polled by Thomson Financial were expecting profit of 40 cents per share.

The company struggled with higher-than-exected charges of $234 million resulting from the proposed spinoff of a division that makes NOR flash memory. NOR flash has been losing ground to NAND flash memory for use in portable electronic devices.

Intel said those charges -- for expected losses -- reduced profit by 2.5 cents per share.

Revenues also came in lower than expected.

Intel said it rang up $10.71 billion in sales during the latest quarter, an 11 percent improvement from $9.69 billion in the period a year earlier. But that was about $130 million short of what analysts expected.

''The estimates may have gotten a little ahead of where we are, but I'm very pleased with the progress the company made over the course of the quarter,'' Intel Chief Financial Officer Stacy Smith said in an interview. ''We start 2008 exceptionally well positioned.''

Intel's gross profit margin, a key figure scrutinized by analysts to gauge how well a company is managing its pricing and manufacturing costs, came in at 58.1 percent of revenues, an increase over the third quarter.

The increase was driven by higher sales and lower costs of producing chips.

Intel is ahead of its rival Advanced Micro Devices Inc. in moving to the latest generation of chip technology, which helped Intel drive down the cost of producing its chips while making them more powerful.

For the full fiscal year, Intel reported net income of $6.98 billion, or $1.18 per share, up 38 percent from 2006. Annual revenue rose 8 percent to $38.33 billion.

In the first quarter, Intel expects revenue between $9.4 billion and $10 billion, in the lower end of the range analysts were expecting. Gross profit margin is expected to be 56 percent of revenues, plus or minus a couple percentage points.

    Intel Stock Hammered on Economy Fears, NYT, 16.1.2008, http://www.nytimes.com/aponline/technology/AP-Earns-Intel.html

 

 

 

 

 

Buddy, Can You Spare a Billion?

 

January 16, 2008
The New York Times
By LANDON THOMAS Jr.

 

First hard-pressed Wall Street banks turned to rich foreign governments for help. Now, they are seeking aid from the likes of New Jersey and big mutual funds to bolster their weakened finances.

Citigroup and Merrill Lynch said on Tuesday that they were raising a combined $19.1 billion from parties that range from government-backed funds in Korea and Kuwait to New Jersey’s public pension fund and T. Rowe Price, the big mutual fund company. Other investors include a large bank in Japan, a hedge fund in New York and private investors in the Middle East.

While so-called sovereign wealth funds are investing the most, the emergence of new investors like New Jersey underscores the rising aversion on the part of United States banks to being seen as beholden to foreign governments. In recent months Citigroup, Merrill and several other banks have sold multibillion-dollar stakes to foreign government funds.

The latest sales came as Citigroup reported a $9.83 billion loss for the fourth quarter, the biggest loss in its history, and Merrill prepared to disclose further huge charges on Thursday. Banks worldwide have written down the value of mortgage-related investments by more than $100 billion, and some analysts warn that figure could double as the mortgage crisis grinds on.

Citigroup’s new round of capital-raising was headlined by a $6.8 billion investment by the Government of Singapore Investment Corporation, the investment arm of the Singapore government, and a smaller investment by the Kuwait Investment Authority.

Capital Research, a big United States investment firm, and Prince Walid bin Talal of Saudi Arabia — both longtime Citigroup shareholders — are also investing, along with the New Jersey Division of Investment and Sanford I. Weill, Citi’s former chairman and chief executive.

Merrill Lynch, meantime, is raising $6.6 billion, mostly from the Korean Investment Corporation, the Kuwait Investment Authority and the Mizuho Financial Group of Japan. Merrill also attracted investment from T. Rowe Price, TPG-Axon, a New York-based hedge fund, and the Olayan Group, a private company based in Saudi Arabia.

“There is still a lot of wealth out there,” said Edward Yardeni, an independent investment strategist. “The financial institutions are scrambling to shore up their capital but they also want to make sure that they get it from diversified sources. It also gives them political cover and shows that they are not just dependent on the sovereign wealth funds.”

Driving all these investments is the assumption that the beaten down stock of Merrill and Citigroup represents good value.

In the case of New Jersey, William G. Clark, the chief investment officer of the state’s $81 billion pension fund, approached both Citigroup and Merrill and agreed to invest $400 million in Citigroup and $300 million in Merrill. Even after these investments, the New Jersey fund has an underweight position in financial stocks.

“This fits the strategy of our portfolio,” said Susan Burrows Farber, the chief administrative officer of the fund, adding that New Jersey was open to making more of these types of investments.

For T. Rowe Price and Capital Research, which already own shares of Merrill and Citigroup, the decision to increase their stakes may represent less a statement of confidence than a willingness take a new slug of stock and reduce the cost of their substantial positions. TPG-Axon, a $9 billion fund run by Dinakar Singh, a former Goldman executive, is responding to a capital call from a weakened investment bank for the first time.

Another new presence is the Olayan Group, a private investment company founded by the late Suliman S. Olayan, a Saudi billionaire who made his fortune by investing in areas like food distribution and infrastructure. According to a person with knowledge of the discussions, the investment was headed by Hutham S. Olayan, leader of the group’s activities in the Americas and a board member of Morgan Stanley.

Mizuho Financial Group is the second largest financial institution in Japan. The Korea Investment Corporation is an investment fund begun by the Korean government to make more aggressive investments with the country’s rapidly accumulating foreign exchange reserves.

What remains unclear is how long overseas investment entities will remain patient with United States banks if the financial industry continues to suffer. Since Citic Securities in China invested $1 billion in Bear Stearns last fall, sovereign funds have invested over $50 billion in weakened banks. That is a small amount compared with the $2 trillion in these funds, to say nothing of additional trillions in central banks and other related entities.

But no one likes to lose money, even funds that have very long investment thresholds.

“At some point these investors will say no,” said Mr. Yardeni. “So far these investment have been value traps as opposed to good value.”

Yet with oil prices increasing, sovereign funds and other government-sponsored funds are likely to generate investment surpluses approaching $8 trillion in the next five years, according to McKinsey & Company’s research arm.

“What we find is that a lot of this liquidity is still in Treasury bills,” said Diana Farrell, an analyst at McKinsey who has studied these funds. “This is really just the beginning.”

All of which is good news for Mr. Weill, the architect of Citigroup and the conglomerate’s most passionate defender. Even with its newfound capital, Citigroup still has considerable subprime exposure and could well need another infusion from outside investors.

Mr. Weill, the second largest individual shareholder after Prince Walid, said on Tuesday that he had spoken with Vikram S. Pandit, Citigroup’s chief, last week about investing more in the company. Mr. Weill would not disclose the size of his investment, but called it substantial.

“I really believe in the future of this company,” he said.



Eric Dash contributed reporting.

    Buddy, Can You Spare a Billion?, NYT, 16.1.2008, http://www.nytimes.com/2008/01/16/business/16capital.html?hp

 

 

 

 

 

Citigroup Loss Raises Anxiety Over Economy

 

January 16, 2008
The New York Times
By JENNY ANDERSON and ERIC DASH

 

Citigroup, the nation’s largest bank, reported a staggering fourth-quarter loss of $9.83 billion on Tuesday and issued a sobering forecast that the housing market and the broader economy still had not bottomed out.

To shore up their financial condition, Citigroup and Merrill Lynch, which has also been rocked by the subprime mortgage debacle, both were forced again to go hat in hand for cash infusions from investors in the United States, Asia and the Middle East, for a combined total of nearly $19.1 billion.

Citigroup’s gloomy news will most likely amplify the anxiety of consumers and workers already concerned that the mortgage crisis could plunge the economy into a recession. Adding to worries, the government reported that retail sales in December declined for the first time since 2002.

Growing pessimism led to another sharp sell-off in stocks, which fell about 2 percent for the day and are now down about 6 percent since the beginning of 2008, the third worst start for a year since 1926.

More bad news is coming, with Merrill Lynch expected to report sizable losses this week and major financial institutions like Bank of America retreating from their investment banking business. These moves add to concerns that financial institutions will be forced to pull back on lending at a time the economy most needs access to credit to help cushion against a downturn.

“It looks like the financial sector as a whole will see a big decline in profits, and the only time this happened in the last 100 years — financial firms’ going from making good profits to negative profits — was the Depression in the 1930s,” said Richard Sylla, a professor of financial history at New York University. “I don’t think it will be as bad this time; the Federal Reserve is fighting the problem as hard as it can.”

Just last week, the Federal Reserve chairman, Ben S. Bernanke, said the economy was worsening, bringing widespread hope that the Fed would move swiftly to lower interest rates. Wall Street’s worsening results combined with Mr. Bernanke’s comments will certainly add fuel to the economic stimulus package being debated by the White House, Congress and the central bank.

Citigroup’s record loss was caused by write-downs from soured mortgage-related securities and reserves for current and future bad loans totaling $23.2 billion. Responding to a string of dismal quarters, the bank said it would also lay off another 4,000 workers, on top of announced reductions of 17,000 employees, and cut its dividend to conserve $4.4 billion cash annually.

Citigroup, which earlier raised $7.5 billion from the Abu Dhabi Investment Authority to improve its capital, said it had raised an additional $12.5 billion from a number of investors, including the Government of Singapore Investment Corporation and Citigroup’s former chairman and chief executive, Sanford I. Weill. Citigroup will also offer public investors about $2 billion of newly issued debt securities, a portion of which will be convertible into stock.

At the same time, Merrill Lynch announced it had issued $6.6 billion in preferred stock to the Kuwait Investment Authority, the Korean Investment Corporation, Mizhuo Financial Group, a Japanese bank and other investors, including the New Jersey pension fund and a Saudi investment fund. That is in addition to the $4.4 billion it raised in December from Temasek Holdings of Singapore.

While the banks were able to raise record amounts of cash, they had to circle the globe to get it, and they had to raise it in two separate rounds. There is “a tremendous amount of liquidity in the world,” Mr. Weill said in an interview. “That is witnessed in the amounts of money Citigroup was able to raise in a very short period of time.”

Citigroup, which has a large consumer lending business, sounded some warning bells on Tuesday that the American economy was turning. The bank reported sharp upticks in losses stemming from souring auto, home and credit card loans, with problems coming from the same areas being hit by real estate.

Two-thirds of the credit card losses, for example, occurred in just five states — California, Florida, Illinois, Arizona and Michigan — that have been among those hit hardest by the housing downturn. Gary L. Crittenden, the company’s chief financial officer, acknowledged the bank’s losses appeared to be accelerating month after month.

The banks’ need for additional financing suggests that housing-related problem will persist. Citigroup executives expect house prices around the country will fall, on average, another 6.5 percent to 7 percent.

The news sent the company’s stock tumbling 7.3 percent, to $26.94. It has now fallen about 50 percent in the past year.

The write-downs did not assuage fears in the market that more bad news was coming. “I think the financials will continue to need to raise more money,” said Barry L. Ritholtz, chief executive of Fusion IQ, a quantitative research and asset management firm.

The fear is that financial institutions will continue to take large write-downs as bad loans mount, while consumers, facing higher energy costs, falling house prices and a bleak outlook for job growth, will rein in spending even more than they already have.

Citigroup set aside $4.1 billion for future bad loans, and Mr. Crittenden said the bank is tightening lending standards as credit card defaults increase, a move that could make it harder for consumers to continue the spending that has helped fuel growth in recent years.

Bank of America said on Tuesday that it would lay off 650 people on top of the previously announced 500 and retrench in a number of significant businesses, including certain trading operations and prime brokerage, or servicing hedge funds. Kenneth D. Lewis, its chairman and chief executive, sounded a somber note about the markets.

“I am not sure there are any quick fixes,” he said in a meeting with reporters. “Only time and a little more pain will be the answer.”

Adding concern to the outlook is the significant role that financial service companies have come to play on the back of robust growth. From 1995 through 2006, financial service companies represented 17.8 percent of the Standard & Poor’s 500 index and contributed a whopping 25.1 percent of total earnings. No longer.

Including Citibank’s large fourth-quarter write-down, financial service companies constituted roughly 7 percent of total fourth-quarter earnings, according to Howard Silverblatt, senior index analyst at Standard & Poor’s.

For a sense of how steep the fall has been, Mr. Silverblatt pointed out that for the fourth quarter, earnings for all companies in the index fell 11.2 percent. But taking out financials, the index was up almost 11 percent.

Mr. Ritholtz from Fusion IQ is watching carefully to determine if weakness in consumer spending is psychological and temporary or more severe, stemming from a lack of available capital.

“Lending is a function of trust — trust that people will pay back what they borrow,” he said. “The problem with the banks is that they don’t trust their clients or each other.”

    Citigroup Loss Raises Anxiety Over Economy, NYT, 16.1.2008, http://www.nytimes.com/2008/01/16/business/16bank.html?hp

 

 

 

 

 

Citi Posts $9.83 Billion Loss; Will Cut Jobs

 

January 15, 2008
The New York Times
By ERIC DASH

 

Citigroup announced a steep cut in its stock dividend and another big investment by foreign investors on Tuesday after taking more write-downs related to subprime securities and posting a $9.83 billion loss for the fourth quarter.

Beginning what is expected to be a grim week for financial company earnings, Citigroup said it was writing down $22.2 billion because of soured mortgage-related investments and bad loans. The bank is also cutting its dividend by 41 percent and obtaining a $12.5 billion cash infusion to strengthen its balance sheet, including big investments by its former chairman, Sanford I. Weill, and the Government of Singapore Investment Corporation.

Facing rising expenses and deepening losses, Citigroup is expected to embark on a major cost-cutting campaign that could result in at least 4,000 layoffs. And thousands more could be in the offing in the coming months.

The write-downs caused Citigroup to swing to a loss for the fourth quarter. The fourth-quarter loss translated into $1.99 a share, compared with a profit of $5.1 billion, or $1.03 a share, in the period a year earlier. Revenue fell 70 percent, to $7.22 billion from $23.83 billion.

The write-downs included $18.1 billion from a sharp drop in the value of mortgage-related securities and heavy trading losses. The company also set aside an additional $4.1 billion to cover expected losses from bad loans.

For the full year, Citigroup reported that net income dropped 83 percent, to $3.62 billion, or 72 cents a share, compared with 2006 profit of $21.53 billion, or $4.31 a share. Revenue fell 9 percent, to $81.7 billion in 2007.

Investors sent Citi’s stock lower in morning trading. After about an hour of trading, the shares were at $27.42, down $1.64, or 5.6 percent.

Once one of the world’s mightiest banks, Citigroup’s capital levels have been severely depleted in the fallout from the continuing credit crisis and worsening downturn in the housing market. Even with the $12.5 billion capital injection, analysts think that the bank may need even more money to shore up its balance sheet if economic conditions worsen.

“In an uncertain environment, these actions put us on our ‘front foot,’ focused on capturing opportunities that earn attractive returns for our shareholders,” Vikram S. Pandit, Citigroup’s new chief executive, said in a statement. He said the bank’s fourth-quarter results were “clearly unacceptable.”

Citigroup lined the $12.5 billion of capital through the sale of convertible preferred securities from several big investors, including two funds sponsored by cash-rich foreign governments. That comes on top of a $7.5 billion stake that the company sold to a Middle Eastern government fund, the Abu Dhabi Investment Authority, in November.

The Government of Singapore Investment Corporation will make a $6.88 billion investment, giving it one of the biggest ownership stakes in the company. The Kuwait Investment Authority, Capital Research and Management, Citigroup’s biggest shareholder, and the New Jersey Division of Investment also made large investments.

But the most interesting investments came from Mr. Weill and Prince Alwaleed bin Talal of Saudi Arabia, who met privately to discuss ousting Charles O. Prince III, Citigroup’s former chairman and chief executive, soon before he resigned in early November. Prince Alwaleed, who until recently had been Citigroup’s biggest shareholder, had bailed out the company from the real estate crisis in the early 1990s.

Mr. Weill, Citigroup’s former chairman who four years ago chose Mr. Prince as his successor, has complained his own personal fortune has been hurt by the bank’s poor performance and may see this as his own personal rescue mission. Both are also large existing shareholders and their actions will prevent their ownership stakes from being more severely diluted.

Citigroup announced other actions to strengthen its finances. It will offer public investors about $2 billion in newly issued debt securities, a portion of which will be convertible. It reduced the assets held on its balance sheet by $176 billion, or 7.4 percent, by shedding mortgage-backed securities and other assets held by both its consumer and investment banking businesses. And it sold ownership stakes it held in Redecard, a Brazilian company in the credit card industry, and an investment advisory arm of Nikko Cordial, a Japanese brokerage it agreed to buy last spring.

Citigroup’s board agreed to cut the stock dividend to 32 cents from 54 cents, reversing a position it staunchly held for the last few months. The reduction could free up $4.4 billion a year but could be a significant blow to big institutional shareholders and many retail investors, who bought Citigroup shares for their retirement accounts.

The latest moves highlight the extent to which Citigroup’s capital position has weakened and raise questions about the company’s diversified business model.

“The board has been behind the ball, no doubt about it,” said Meredith A. Whitney, a banking analyst at CIBC World Markets, who has called on Citigroup to cut its dividend. “This is a company with serious capital shortfalls. The balance sheet should be the first thing that should be looked at for a bank, not the last.”

The actions are perhaps the most crucial steps taken by Mr. Pandit since he was named chief executive last month. Over the last few weeks, he has made several changes to the senior management team, including the appointment on Monday of a chief talent officer — a position that had not previously existed. He has also begun reorganizing the company, combining its investment banking and alternative investments groups and changing some of the consumer bank’s reporting lines.

Citigroup’s fourth-quarter performance was dreadful in its biggest businesses. While revenue in its domestic consumer business rose 6 percent, higher credit losses and credit costs led to a loss of $432 million. Its markets and banking business posted an $11 billion loss, compared with a profit of $1.75 billion in the period a year earlier.

Still, some of its smaller businesses did have some bright spots. Revenue at its international consumer unit grew by 45 percent, though much of it came from acquisitions rather than internal growth. Profit rose to $1.3 billion from $628 million. And at its wealth management division, profit rose to $523 million from $411 million.

But for Citigroup, things may yet get worse. Expenses, which rose 18 percent in the fourth quarter, remain bloated. It still has heavy exposure to complex mortgage investments, like collateralized debt obligations. And as rising unemployment adds to the gloomy talk about a recession, Citigroup executives set aside billions of dollars more to cover additional losses on home equity loans, credit card debt and personal loans.

    Citi Posts $9.83 Billion Loss; Will Cut Jobs, NYT, 15.1.2008, http://www.nytimes.com/2008/01/15/business/16citi.html?hp

 

 

 

 

 

MoneyGram Lines Up Cash; Shares Dive

 

January 15, 2008
Filed at 1:23 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

MINNEAPOLIS (AP) -- MoneyGram shares fell by nearly half on Tuesday after it disclosed a bailout that would hand control of the company to Thomas H. Lee Partners because of massive and growing losses on mortgage-backed investments.

MoneyGram International Inc. said it expects to complete a deal this month for a cash and debt infusion from investment firm Thomas H. Lee.

Under the proposed agreement, Thomas H. Lee would inject about $750 million to $850 million in equity, and MoneyGram will get another $550 million to $750 in new debt from third parties, MoneyGram said.

The Minneapolis-based money transfer firm said late Monday that the proposal from Thomas H. Lee calls for it to control roughly 60 percent to 65 percent of MoneyGram, depending on variables such as the size of losses in MoneyGram's investment portfolio.

The company plans to sell off ''a significant portion'' of its investment portfolio, which lost another $571 million between Sept. 30 and Nov. 30, bringing total investment losses to $860 million.

The portfolio was laden with subprime mortgage-backed securities and collateralized debt obligations, or CDOs.

MoneyGram said it sold $1.3 billion of its investment securities this month at a loss of $200 million. That loss doubled after Nov. 30, when it stood at $100 million, MoneyGram said. It said the loss was made worse by the prompt sale.

MoneyGram said it expects ''significant additional losses will be recorded in December,'' and that it will take a ''substantial charge'' against fourth quarter earnings for impaired securities. MoneyGram had previously told investors to ignore its earlier guidance for 2007 profits.

The company said its new investment portfolio would be mostly government bonds.

It expects the talks with Thomas H. Lee to lead to funding in February.

MoneyGram also said it expects to be able to accept a better offer from another investor, if there is one. It said it has signed a confidentiality agreement and held talks with competitor Euronet Worldwide Inc., which had been publicly pressuring MoneyGram to talk about a possible sale.

On Tuesday, Euronet spokeswoman Maggie Pisacane said the company has had a ''brief discussion'' with MoneyGram management. Citing a confidentiality agreement, she declined to say whether Euronet is still interested in MoneyGram given the disclosures about its investment losses.

MoneyGram shares fell $5.82, or 48 percent, to $6.35 afternoon trading.

    MoneyGram Lines Up Cash; Shares Dive, NYT, 15.1.2008, http://www.nytimes.com/aponline/business/AP-MoneyGram.html

 

 

 

 

 

Merrill Lynch to Get $6.6 Billion

 

January 15, 2008
Filed at 1:01 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Merrill Lynch & Co. said Tuesday it is getting a fresh cash investment of $6.6 billion to strengthen its balance sheet, led by three foreign investment groups.

Merrill Lynch has been raising capital after losing billions of dollars on bad bets in the mortgage market. Rising delinquencies and defaults among mortgages have forced banks to write down the value of bonds and debt backed by the troubled loans. That, in turn, has put their levels of spare capital under pressure.

''The move reassures ratings agencies and creditors it got what it needs,'' said Brad Hintz, an analyst with Sanford C. Bernstein and Co. and the former chief financial officer at Lehman Brothers.

The Korean Investment Corp., Kuwait Investment Authority and Mizuho Corporate Bank will receive a special class of stock for their combined $6.6 billion investment.

TPG-Axon Capital, The New Jersey Division of Investment, The Olayan Group and T. Rowe Price Associates Inc., on behalf of various clients, are also part of the investment group acquiring Merrill Lynch stock.

All will be passive investors and none will have any rights of control. The investors will receive a 9 percent dividend and their class of stock will be convertible to common shares in two years and nine months.

Both the Korean and Kuwaiti investment groups are owned by the state governments. Mizuho is a Japanese investment bank.

''This is not a panic move; it's a smart, strategic capital move,'' said Anthony Sabino, a professor of law at the business school at St. John's University.

This is the second round of capital raising Merrill Lynch has announced in the past month. On Dec. 24, Merrill Lynch said it would sell a stake in itself of up to $5 billion to Singapore's state-run Temasek Holdings and an additional $1.2 billion stake to Davis Selected Advisers.

The latest investment might not be the last either, Sabino said.

''No one knows the true extent of the damage,'' he said.

When Merrill Lynch reports fourth-quarter results Thursday, it is widely expected the investment bank will post its second consecutive quarterly loss and take further write-downs, potentially exceeding the $7.9 billion taken in the third quarter.

Shares of Merrill Lynch fell $1.67, or 3 percent, to $54.30. Shares have traded between $47.50 and $98.68 during the past year.

Minutes after Merrill Lynch announced its new investors, Citigroup said it too would raise $12.5 billion from groups including the Kuwaiti authority and a Singapore state fund.

    Merrill Lynch to Get $6.6 Billion, NYT, 15.1.2008, http://www.nytimes.com/aponline/business/AP-Merrill-Lynch.html

 

 

 

 

 

Stocks Plunge on Economic News and Bank Woes

 

January 15, 2008
The New York Times
By VIKAS BAJAJ

 

Stocks fell sharply on Tuesday after an economic report showed retail sales fell in December and two large banks announced big investments from overseas amid rising losses.

At 1 p.m., the Standard & Poor’s 500 stock index had fallen 2 percent, standing at 1,387.77, a decline of 28.48 points. The Dow Jones industrial average lost 201.84 points, or 1.6 percent, to 12,576.31. The Nasdaq composite was down about 2 percent, as well.

Investors were taken aback by a 0.4 percent drop in retail sales in December, with sales of building materials, gasoline, clothing, electronics and sporting goods dropping sharply. The Commerce Department, which reports the data, also revised lower sales increases in October and November.

The drop in sales, coupled with a statement by the oil minister of Saudi Arabia that the kingdom would consider producing more oil, drove down energy prices. Crude oil prices fell $2.65 a barrel, to $91.55. Natural gas, heating oil and gasoline prices also fell as investors considered the potential ramifications of slower consumer spending.

Another economic report showed that wholesale prices fell slightly in December, suggesting that the slowing economy was helping to tamp down prices of some raw materials as demand wanes. The producer price index fell 0.1 percent, though it was up 0.2 percent excluding volatile food and energy prices, according to the Labor Department.

Earlier in the morning, Citigroup, the world’s largest bank, said it would post a $9.8 billion loss as it wrote down the value of mortgage related securities by another $22.2 billion. The company also said it would slash its dividend by 41 percent and raise $12.5 billion in new capital from several foreign and domestic sources. Shares of Citigroup fell $2.06, or 7 percent, to $27.00.

Merrill Lynch & Company, another financial firm that has been rattled by losses tied to mortgages, said it was raising $6.6 billion from two sovereign wealth funds and a bank based in Japan. That is on top of the $6.2 billion the investment bank raised less than a month ago. Merrill stock was down $1.67, or 3 percent, to $54.30.

The sell off in the stock market was fairly broad based, with a vast majority of the nearly 2,000 stocks in the New York Stock Exchange Composite index down. The financial sector, however, suffered the biggest losses, down 3.2 percent, followed by energy companies, which were collectively down 2.8 percent.

Stocks also fell sharply in Europe and Latin America. Stocks in emerging markets, which have largely bucked the bearish sentiment in the American stock market, declined nearly 4 percent, perhaps an indication that investors are worried about what slackening retail sales in the United States might mean for markets that are heavily reliant on exports to the developed world.

    Stocks Plunge on Economic News and Bank Woes, NYT, 15.1.2008, http://www.nytimes.com/2008/01/15/business/15cnd-stox.html?hp

 

 

 

 

 

Stocks Fall on Weak Economic News

 

January 15, 2008
Filed at 1:26 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Stocks skidded Tuesday after weak economic news and a disappointing quarterly report from Citigroup Inc. signaled that Wall Street's worries about the economy are likely to continue unassuaged. The Dow Jones industrials fell almost 200 points.

Investors backed off stocks amid growing concerns that consumer spending will wane this year, contributing to an economic downturn. The latest evidence that consumers are retrenching came from the Commerce Department, which reported retail sales fell in December and revised its November figures lower. Spending by consumers, which accounts for more than two-thirds of U.S. economic activity, has been key to staving off economic slowdowns in recent years.

There is also a growing fear that the Federal Reserve hasn't done enough to keep the economy going -- especially as investors continue to see the fallout from the summer's subprime mortgage crisis. Citigroup, the nation's biggest bank, announced on Tuesday a hefty $18.1 billion write-down for bad mortgage assets and slashed its dividend.

''When consumers are beaten over the head about how bad things are, pretty soon they believe it and that effects their spending habits,'' said Scott Wren, equity strategist for A.G. Edwards & Sons. ''And when there's a lot of uncertainty out there, the Fed needs to be a little more aggressive -- I think they need to cut more than just at this next meeting.''

He said the worrisome fall in retail sales, which also pressures the dollar, builds a case that the cut will be at least 0.50 percentage point. It also increases the likelihood of further cuts after the central bank's Jan. 29-30 meeting.

But, hopes for a rate cut weren't enough to calm investors, who have sold stocks lower so far this year on increasing worries about the economy. In midday trading, the Dow fell 193.15, or 1.51 percent, to 12,585.00.

Broader stock indicators also lost ground. The Standard & Poor's 500 index fell 26.44, or 1.87 percent, to 1,389.81, and the Nasdaq composite index fell 46.06, or 1.86 percent, to 2,432.24.

Declining issues outnumbered advancers by about 5 to 1 on the New York Stock Exchange, where volume came to 623.2 million shares.

Bond price rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.73 percent from 3.77 percent late Monday. The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude fell $2.80 to $91.40 per barrel on the New York Mercantile Exchange.

Through Monday's session, which was only the ninth trading day of 2008, the Dow had fallen 3.67 percent, while the S&P 500 was down 3.55 percent and the Nasdaq was down 6.56 percent.

Also among Tuesday's reports, the New York Federal Reserve's Empire State survey of regional manufacturing showed a drop to 9.03 this month from 9.80 in December.

But there was some relief about inflation. Producer prices fell 0.1 percent, according to the Labor Department. The result was smaller than the 0.2 percent drop expected by economists, but all declines in price pressure are generally good news. Excluding food and energy, producer prices gained 0.2 percent, matching expectations.

Financial services stocks were among the biggest influences on investors during Tuesday's session. Citigroup's drastic efforts to shore up its balance sheet had been widely expected, but it still was a forceful reminder of the serious problems that bad lending practices have created for financial services firms.

Citigroup, which lost $9.83 billion in the fourth quarter, also announced a massive $12.5 billion capital injection. Hope that struggling financial firms will bolster their finances also was stirred by news that Merrill Lynch & Co. Inc. agreed that three foreign investment funds will invest $6.6 billion in the Wall Street firm.

Citi fell $1.99, or 6.9 percent, to $27.07. Merrill -- which reports results on Thursday -- fell $1.57, or 2.8 percent, to $54.40.

Further evidence of the credit market turmoil came from State Street Corp., which posted a fourth-quarter profit that fell 28 percent after the institutional investment firm took a $279 million charge. Shares fell $5.15, or 6.1 percent, to $79.71.

The Russell 2000 index of smaller companies fell 11.64, or 1.63 percent, to 700.84.

Overseas, Japan's Nikkei stock average fell 0.98 percent. In afternoon trading, Britain's FTSE 100 lost 3.06 percent, Germany's DAX index fell 2.65 percent, and France's CAC-40 fell 2.14 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Fall on Weak Economic News, NYT, 15.1.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

 

 

 

 

 

Stocks Rally on Robust IBM Results

 

January 14, 2008
Filed at 11:18 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Wall Street advanced sharply Monday, with solid preliminary results from IBM encouraging investors to buy back into the stock market after last week's rout.

International Business Machines Corp., one of the 30 Dow Jones industrials, released preliminary earnings estimates for the fourth quarter that were 24 percent above year-earlier levels. The results also beat the forecast of analysts surveyed by Thomson Financial.

After falling nearly 250 points on Friday, the Dow rose more than 100 points Monday.

''The market was pretty oversold,'' said Richard E. Cripps, chief market strategist for Stifel Nicolaus. ''We were due to bounce back, and the IBM news didn't hurt.''

The badly beaten financial sector will remain under a microscope, however, after reports over the past week that Citigroup Inc. may have to take a larger-than-feared writedown; the bank's earnings report is due Tuesday.

Elsewhere in the sector, Merrill Lynch & Co. Inc. is seeking $4 billion, in a second capital raising to stanch the losses on its balance sheet, according to the Financial Times. The Kuwait Investment Authority could invest as much as $3 billion in the deal, which could be announced by the middle of the week.

In late morning trading, the Dow gained 116.98, or 0.93 percent, to 12,695.80. IBM was the biggest gainer in the Dow, rising $5.85, or 6 percent, to $103.52.

Broader stock indicators also rose. The Standard & Poor's 500 index added 8.65, or 0.62 percent, to 1,409.67 and the Nasdaq composite index shot up 24.83, or 1.02 percent, to 2,464.77.

With no major economic data on the calendar, investors focused on corporate and commodities news. Overnight in overseas trading, gold futures hit a record, venturing above $913 an ounce as the dollar tumbled against other major currencies. The euro reached a new high above $1.49.

Other commodities were higher, too. Crude oil futures rose 95 cents to $93.62 a barrel on the New York Mercantile Exchange.

Treasurys were trending slightly higher in early dealings. The yield on the benchmark 10-year Treasury note was 3.79 percent, down from 3.81 percent on Friday. Prices and yields trade in opposite directions.

In corporate news, General Motors Corp. Chief Financial Officer Fritz Henderson said that although the GMAC finance wing's auto loan delinquencies were up slightly in the third quarter from year-before levels, the problems for auto loans were not nearly as severe as the credit troubles in the real estate sector. GM sold control of GMAC in 2006 but still owns a large minority stake. GM rose 28 cents to $23.78.

Sears Holdings Corp. warned that its upcoming fourth-quarter report could show a decline as high as 51 percent from year-earlier levels, adding to concerns that economic weakness is slowing the retail sector. The company Monday forecast a result of $2.59 to $3.48 a share, which would be down from $5.33 a year before and a Thomson Financial forecast of $4.43 a share. Sears fell $6.25, or 6.5 percent, to $89.92.

Stocks sold off sharply last week after a chorus of Wall Street economists predicted the U.S. is about to slide into a recession. The Dow lost 1.51 percent during the week, the S&P 500 index dropped 0.75 percent and the Nasdaq gave up 2.58 percent. However, a recession cannot be declared until there are two quarters in a row of economic shrinkage as measured by gross domestic product data, and that has not occurred yet.

At the same time, the talk of economic weakness and recent pointed remarks by Federal Reserve Chairman Ben Bernanke have convinced investors the central bank will cut rates later this month. The expectation of cheaper money also bolstered sentiment Monday. The Fed's monetary policy committee will meet Jan. 29-30.

Advancing issues outnumbered decliners by about 9 to 5 on the New York Stock Exchange, where volume came to 324.9 million shares.

The Russell 2000 index of smaller companies rose 4.76, or 0.68 percent, to 709.41.

Overseas, the Tokyo stock market was closed for a holiday Monday. In Europe London's FTSE 100 rose 0.70 percent, Germany's DAX advanced 0.41 percent and Paris' CAC 40 gained 0.78 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Rally on Robust IBM Results, NYT, 14.1.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html?hp

 

 

 

 

 

I.B.M. Posts Strong Preliminary Results

 

January 14, 2008
Filed at 9:43 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

ARMONK, N.Y. (AP) -- Computer server and software maker IBM said Monday its fourth-quarter earnings from continuing operations rose 24 percent from a year ago, beating Wall Street expectations by a wide margin.

The preliminary report, released in advance of its planned earnings report set for Thursday, sent its shares up 6 percent in morning trading.

IBM said the weaker dollar helped to push revenue up 10 percent.

The company reported quarterly profit from continuing operations of $2.80 per share on revenue of $28.9 billion, easily beating Wall Street's consensus estimates of $2.60 per share on sales of $27.82 billion, according to a Thomson Financial poll.

International Business Machines Corp. said revenue grew 10 percent from the year-ago period, with 6 points of that growth related to the weaker dollar.

''The broad scope of IBM's global business -- led by strong operational performance in Asia, Europe and emerging countries -- drove these outstanding results,'' said Samuel J. Palmisano, IBM chairman, president and chief executive.

For fiscal 2007, IBM reported earnings rose 18 percent to $7.18 per share, including a 5-cent gain on the sale of its printing systems division in the second quarter, on sales of $98.8 billion, representing 8 percent growth year-over-year.

Analysts had predicted full-year profit of $6.97 per share on revenue of $97.73 billion.

Its shares rose $6.13 to $103.80 in morning trading. They have ranged from $88.77 to $121.46 over the past 52 weeks.

IBM's cash balance at the end of 2007 was more than $16 billion.

The company will report full quarterly and full-year results for 2007 on Thursday.

    I.B.M. Posts Strong Preliminary Results, NYT, 14.1.2008, http://www.nytimes.com/aponline/technology/AP-IBM-Outlook.html?hp

 

 

 

 

 

Treasurys Drop As Funds Flow to Stocks

 

January 14, 2008
Filed at 11:31 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Treasury prices generally fell Monday as investors turned their attention back to stocks and bonds gave up their safe-haven allure.

Worries about a possible recession have stoked strong demand for Treasurys and other assets that carry a safety premium in the year to date. The fear is that the contagion from subprime mortgages and a deteriorating housing sector will infect the rest of the economy.

But Monday, investors' attention shifted to developments in other markets, including the rally in stocks, a historic rise in gold futures above $900 an ounce and a new high for the euro at $1.49.

''The Treasury market is trading lower this morning as traders are likely just taking a little money off the table after last week's fear-laden price rally,'' said Kevin Giddis, managing director of fixed income trading at Morgan Keegan.

The benchmark 10-year Treasury note fell 2/32 to 103 21/32 with a yield of 3.80 percent, up from 3.79 percent late Friday. Prices and yields move in opposite directions.

The 30-year long bond was flat at 110 1/32 with a yield of 4.38 percent, unchanged from late Friday.

The 2-year note fell 1/32 to 101 9/32 with a yield of 2.57 percent, matching its Friday close.

The worries about economic weakness and recent pointed remarks by Federal Reserve Chairman Ben Bernanke have left many investors convinced that the Federal Reserve will reduce the overnight Federal funds target at its next meeting Jan. 29-30.

On Monday there was speculation that the sharp rise in gold prices and the new low for the dollar could even compel the Fed to cut rates before the scheduled meeting, according to Ashraf Laidi, chief foreign exchange analyst at CMC Markets.

The recent Treasury rallies have featured very strong demand for 2-year notes, which are the most rate-sensitive. These rallies have pushed the yield on 2-year notes to its lowest level in almost three years.

The difference between the yields of 2- and 10-year notes, popularly known as the yield curve, on Monday was 1.23 percentage points, its greatest gap in three years, according to Laidi's calculations. This is a classic signal that investors expect the Fed to cut rates as they often push short-term yields in the direction that they believe official rates will take.

    Treasurys Drop As Funds Flow to Stocks, NYT, 14.1.2008, http://www.nytimes.com/aponline/business/AP-Bonds.html

 

 

 

 

 

Americans Cut Back Sharply on Spending

 

January 14, 2008
The New York Times
By MICHAEL BARBARO and LOUIS UCHITELLE

 

Strong evidence is emerging that consumer spending, a bulwark against recession over the last year even as energy prices surged and the housing market sputtered, has begun to slow sharply at every level of the American economy, from the working class to the wealthy.

The abrupt pullback raises the possibility that the country may be experiencing a rare decline in personal consumption, not just a slower rate of growth. Such a decline would be the first since 1991, and it would almost certainly push the entire economy into a recession in the middle of an election year.

There are mounting anecdotal signs that beginning in December Americans cut back significantly on personal consumption, which accounts for 70 percent of the economy.

A raft of consumer companies — high-end stores like Nordstrom and Tiffany, and middle-of-the-road ones like Target and J. C. Penney — reported a pronounced slowdown in growth last month, and in several cases an outright drop in business.

American Express said that starting in early December the growth in the rate of spending by its 52 million cardholders, a generally affluent group of consumers, fell 3 percentage points, from 13 percent to 10 percent, the first slowdown since the 2001 recession.

And consumer confidence, an important barometer of economic health, has plunged. Andrew Kohut, president of the Pew Research Center, says consumer satisfaction with the economy has reached a 15-year low, according to the firm’s polling.

Even wealthier consumers, who were seen as invulnerable to rising gasoline prices and falling home values, are feeling the squeeze.

“People are clearly concerned that we are headed into a recession,” said Stephen I. Sadove, the chief executive of Saks Fifth Avenue, the upscale department store whose runaway growth throughout much of the year slowed markedly in December.

Gia Trumpler, 37, a travel consultant who lives in Manhattan, shops at luxury chains like Saks. But she is trimming costs where she can by bringing lunch to work from home, rather than eating out. “Everything just feels more expensive to me now,” she said, including the cost of heating her apartment this winter.

There are plenty of recession naysayers. Average hourly wages and salaries have not fallen, and some economists argue that unless — or until — that happens, consumer spending will hold up despite widespread economic unease. According to these economists, what happened in December was a temporary blip.

“Incomes have managed to hold up,” said Chris Varvares, president of Macroeconomic Advisers, an economic forecasting firm, who added that the data to date did not support the view that a recession was inevitable.

Even in tough economic times Americans rarely reduce their consumption, preferring instead to slow the growth in their spending. Since 1980, they have cut spending in only five quarters — a total of 15 months — most of them in the depths of a recession. The 2001 recession passed without a cutback in consumer spending.

Only once before, in 1980, did consumer spending fall during a presidential election year, helping Ronald Reagan in his campaign against Jimmy Carter, the Democratic incumbent.

Official statistics do not yet show that consumer spending has dropped, but they do suggest that in late 2007, it slowed in areas like automobiles, furniture, building materials and health care, said Mark M. Zandi, chief economist at Moody’s Economy.com.

Fresh evidence of a pullback is pouring in from many quarters as Americans confront the triple threats of higher energy costs, falling home prices and a volatile stock market.

Perhaps the strongest barometer over the last 30 days is the performance of the country’s big chain stores. December turned out to be a blood bath for retailers at every rung on the economic ladder, with sales for the month growing at the slowest rate in seven years.

Sales at stores open at least a year, a crucial yardstick in retailing, plunged by 11 percent at Kohl’s and 7.9 percent at Macy’s, compared with last year.

Chains that cater to the middle and upper classes, which have benefited from years of trading up — when customers splurge on select expensive products — struggled as well. Coach, the leather goods maker, said sales of its popular handbags had become sluggish, prompting the company to issue rare coupons to drum up business.

“This is the real deal — consumers are slowing down across the spectrum,” said David Schick, a retail analyst at Stifel Nicolaus.

But it is the trouble at the highest reaches of retailing that has economists most worried about a recession. Over the last year, even as low-wage and middle-income consumers have cut back, the wealthy have spent freely, keeping high-end chains insulated from the economic turbulence.

That started to change in December, as shoppers held off on buying $300 designer shoes and $500 dresses. For example, store sales fell 4 percent at Nordstrom, the high-end department store.

And Tiffany, the upscale jeweler, said the number of purchases at its stores dropped last month. In an interview, its chief executive, Michael J. Kowalski, said that even if the wealthy remain so at least on paper, their economic anxiety is taking a toll.

“It’s a reaction to the general economic uncertainty everyone is feeling,” he said. “There are housing price declines and financial market instability. There is a lot of caution out there, and it’s reflected in jewelry sales.”

At the same time, the number of overdue payments on American Express cards is surging, the company said — and this among well-heeled cardholders who charge up to $12,000 a year, on average, on each card. American Express has called some cardholders in the last few weeks to ask if they will have trouble paying their bills.

“We are seeing a correlation with housing prices,” said Michael O’Neill, a spokesman for American Express. “The falloff in spending is everywhere in the country, but it is greatest in those areas like south Florida and California, where home prices have fallen the most.”

The big exception is gasoline. American Express and the Consumer Federation of America say that consumers are buying just as many gallons as ever, but paying more for them, and that has forced cutbacks in other purchases. Gasoline prices usually drop after the summer driving season, but this year they shot up, from $2.85 a gallon on average in September to $3.07 in December and $3.15 in the first week of January.

A similar trend is evident in the cost of natural gas, electricity and home heating oil. “We built these big houses in the suburbs, which need a lot of energy to stay warm and a car to go shopping,” said Stephen Brobeck, executive director of the Consumer Federation. “And we can’t change that quickly.”

The impact of rising gasoline prices “is just profound on middle- and lower-income families,” said Mr. Kohut of the Pew center. “Our surveys are showing one of the lowest levels of satisfaction with national conditions in any recent presidential election year. You have to go back to 1992 to get a lower number of people saying the national economy is excellent or good.”

The nation was recovering from recession that year. Consumer spending had contracted in two separate quarters in 1991, and while economic growth was gradually accelerating as Bill Clinton and George H. W. Bush sought the presidency, the Clinton camp famously posted a sign in its campaign war room proclaiming, “It’s the economy, stupid.”

There are some bright spots now in consumer spending. Sales of sports gear and electronic gadgets — particularly G.P.S. navigation devices and flat-panel television sets — have risen over the last three months. To Stephen Baker, vice president for industry analysis at the research firm NPD Group, that suggests there is still enough purchasing power for people to buy what they really want.

“We probably would not have seen strong sales for electronics products that people really want if the overriding issue was economic,” Mr. Baker said.

But not everyone is splurging. Jinal Shah, 22, a college senior in New York, said she wanted to buy the popular Nintendo Wii video game system as a gift for herself this holiday season, but had second thoughts because of the $250 price tag. She ended up not purchasing it.

“You have to make choices,” she said. “I get the Wii, or I go out more. I am just much more aware of the tradeoff now.”



Louise Story contributed reporting.

    Americans Cut Back Sharply on Spending, NYT, 14.1.2008, http://www.nytimes.com/2008/01/14/business/14spend.html?hp

 

 

 

 

 

Mayors face test of spreading foreclosures

 

Sun 13 Jan 2008
23:18 ET
Reuters

 

TRENTON, New Jersey (Reuters) - Mayor Douglas Palmer, meeting with visitors at City Hall, points to a large map peppered with dark dots. Each one represents a home or group of homes on the verge of foreclosure, and there are dozens all over the city.

The dots represent only those properties that the sheriff's department of surrounding Mercer County has identified as being at risk. Many more they don't even know about, Palmer said. "Some people are even afraid to talk about it," he said of homeowners facing skyrocketing mortgage payments. "Half of them don't even call their lender when they run into problems, so they try to fly under the radar screen, which is the worst thing you can do."

The challenge, said Palmer, is to prevent more homes from ending up as specks on the map, but the resources at his disposal are limited.

The site of a pivotal battle in the Revolutionary War, this port city more recently has struggled with drugs, violent crime, joblessness and other urban woes.

The latest crisis threatens to derail years of revitalization under Palmer, a four-term incumbent and the first black mayor in a predominantly black city of 85,000 people.

Like many U.S. cities, it has seen foreclosures surge as people who bought homes in a real estate frenzy in the last few years face mortgage payments that have reset to higher rates they cannot afford.

More than 600 properties went into foreclosure or came under threat of imminent foreclosure last year, up from 421 in 2006, according to the mayor's office, collating data from a number of sources. Those numbers are set to grow this year. As of December, the sheriff's office had identified 260 properties in danger.

 

ANEMIC RESPONSE

It is not just Trenton that Palmer is concerned about. Foreclosure has become a top priority for the U.S. Conference of Mayors, of which he is president and which is holding its winter meeting in Washington Jan. 23-25.

Palmer and other mayors say a mortgage relief plan brokered by President George W. Bush's administration does not help the many people who are already well into the process of losing their homes. "The federal government response has been anemic," said Mayor John DeStefano of New Haven, Connecticut, where foreclosures rose 80 percent in 2007. "Mayors are talking to each other about this," DeStefano said. "No one else is going to help these homeowners."

Thomas Cochran, executive director of the mayors' group said foreclosures could become a defining issue for urban leaders, like the AIDS epidemic in the 1980s, which cities were forced to tackle early on when they saw insufficient federal response.

In Trenton, Palmer has focused for years on creating affordable housing for middle-income people, including a collection of attractive row houses in a once-downtrodden area known as the Battle Monument district.

This was the site of the Battle of Trenton, in which the Continental Army under Gen. George Washington won victory after crossing the Delaware River on Christmas night in 1776.

The mayor fears that even neighborhoods like this one, where mortgages are mostly strong, will suffer as foreclosures rise, homes are shuttered, crime festers and property values fall. Police have reported a rise in copper pipe thefts around the city, for example, as vandals strip unoccupied homes, Palmer said. "This cuts across every area of our economy, of the services we'll have to provide," Palmer said. When homes are boarded up, neighbors complain of blight such as piles of trash and overgrown grass, he said. "Who's going to cut it? The city will have to."

 

LAWSUITS

As mayors confront the problem, some are aiming squarely at mortgage companies. The city of Baltimore has sued Wells Fargo & Co , accusing the lender of preying on minorities in its lending practices. The company denies the allegations.

Elsewhere, cities such as Cleveland and Buffalo, New York, are trying to hold lenders responsible for the maintenance of homes in foreclosure. Cleveland has sued companies including Wells Fargo and Merrill Lynch & Co Inc seeking to recover hundreds of millions of dollars for lost property tax revenue and the clean-up of abandoned houses. "For some cities, this is going to be a crisis," said John Vogel, a professor at Dartmouth College's Tuck School of Business, who studies real estate. A city such as New York "is doing so well on the commercial side and revenue collection, they will be able to deal with this pretty comfortably, whereas a city like Trenton does not have the same sort of resource base."

Mayor Palmer plans to meet in Trenton on Jan. 14 with representatives of major mortgage lenders and community and faith-based organizations in an effort to help city homeowners on the verge of losing their homes.

He's hopeful there are local solutions that other cities could adopt. One idea is for community development organizations to buy homes in foreclosure and lease them to the former owners while helping them prepare to repurchase them, something already being done on a small scale in his area. "It's going to require a lot of creativity, but the most important thing is the mayors in the country and myself have the will to do this," Palmer said.

    Mayors face test of spreading foreclosures, R, 13.1.2008, http://features.us.reuters.com/cover/news/D12B32BA-C257-11DC-A709-A4AE7391.html

 

 

 

 

 

Cleveland Sues 21 Lenders Over Subprime Mortgages

 

January 12, 2008
The New York Times
By CHRISTOPHER MAAG

 

CLEVELAND — Cleveland is suing 21 of the nation’s largest banks and financial institutions, accusing them of knowingly plunging the city into a financial crisis by flooding the local housing market with subprime mortgage loans to people who could never repay.

The city is seeking “at least” hundreds of millions of dollars in damages, Cleveland’s law director, Robert J. Triozzi, said Friday. The list of defendants includes some of the most prominent firms on Wall Street, like Citigroup, Bank of America, Wells Fargo, Merrill Lynch and Countrywide Financial.

Mayor Frank G. Jackson said in an interview on Friday that the companies would be “held accountable for what they’ve done.”

“We’re going after them to get the resources we need to rebuild our city,” Mr. Jackson said.

The financial crisis has hit Cleveland especially hard, with more than 7,000 foreclosures in each of the last two years, Mr. Jackson said. Entire city blocks have been abandoned. The city’s budget has been strained by the effort to maintain thousands of boarded-up homes, and by the cost of responding to a rise in violent crime and arson.

The major banks involved did not return calls about the lawsuit. A spokesman for Merrill Lynch, Mark Herr, said, “We’re declining to comment right now.”

The Cleveland suit is separate from one filed Tuesday in federal court by the City of Baltimore against Wells Fargo, accusing it of violating fair-housing laws by singling out African-Americans for high-interest mortgages.

The Cleveland suit, filed Thursday in Cuyahoga County Common Pleas Court under the state’s public nuisance law, asserts that the financial institutions created nuisances across broad swaths of Cleveland because their loans led to widespread abandonment of homes. “We’ve torn down 1,000 abandoned houses, and haven’t even made a dent,” Mr. Jackson said.

The drop in homeownership, and a steep decline in population — to 444,000 residents in 2007 from almost a million in 1950, according to census figures — has drained Cleveland’s budget. In December, Mr. Jackson announced that the city was unable to borrow money and would be forced to postpone or permanently shelve millions of dollars in public works projects.

“The strain on our budget is too much,” Mr. Jackson said. “These companies have knowingly created a public nuisance by exploiting the city of Cleveland.”

Several Cleveland suburbs have expressed interest in joining the case as a class-action suit, Mr. Triozzi said. Because the city is suing under a state statute, cities outside Ohio could not join. “This case is about what these Wall Street bankers did to Cleveland,” Mr. Triozzi said.

Instead of aiming at the banks that originally made subprime mortgage loans in the city, the lawsuit is against those firms that bundled the loans into securities to be divided into shares and sold on the stock exchange. This process, and the large fees the firms generated from the work, Mr. Triozzi said, drove their effort to make as many loans as possible during an era of low interest rates and a prolonged housing boom.

    Cleveland Sues 21 Lenders Over Subprime Mortgages, NYT, 12.1.2008, http://www.nytimes.com/2008/01/12/us/12cleveland.html

 

 

 

 

 

AP poll: Economy ties war as top issue

 

12 January 2008
USA Today
By Alan Fram, Associated Press Writer

 

WASHINGTON — The faltering economy has caught the Iraq war as people's top worry, a national poll suggests, with the rapid turnabout already showing up on the presidential campaign trail and in maneuvering between President Bush and Congress.

Twenty percent named the economy as the foremost problem in an Associated Press-Ipsos poll released Friday, virtually tying the 21 percent who cited the war. In October, the last time the survey posed the open-ended question about the country's top issue, the war came out on top by a 2-1 majority.

About equal proportions of Republicans, Democrats and independents in the new poll said the economy was their major worry, suggesting the issue looms as a potent one in both parties' presidential contests. It was also cited evenly across all levels of income, underscoring the variety of economic problems the country faces.

Amid increasing trade, job, housing, stock market and gasoline price woes, candidates from each party have started talking about how they would bolster the economy. The issue looms as the dominant one in the next presidential contest: Tuesday's Republican primary in Michigan, which had a 7.4 percent unemployment rate in November that is the nation's worst.

Even as signs of economic weakness in this country have grown in recent months, U.S. and Iraqi casualties in Iraq have been dropping since the summer. Though most in the U.S. remain against the war, growing numbers say they think President Bush's troop increase last year has been working, and politicians say the issue is raised with decreasing frequency by constituents.

"The lines are crossing now," said Whit Ayres, a Republican pollster not working for a presidential candidate. "As Iraq becomes more stable and less violent, concern about Iraq is diminishing. It will still be an important issue, but the economy is filling the vacuum."

Economic concerns were voiced about evenly in most parts of the country in the AP-Ipsos survey. It was particularly high in the Rust Belt region of Michigan, Illinois, Indiana, Ohio and Wisconsin, states that are expected to be pivotal in the November election. About one in three there named the economy.

The poll offered another example of economic anxiety as an index measuring consumer confidence fell to its all-time low in the six years Ipsos has been measuring it. The RBC Cash Index dropped to 56.3 in early January, down from 65.9 in December.

The war was the top problem mentioned by three in 10 Democrats, about twice the number of Republicans who listed it. About one in five independents also put it as the top concern.

Health care was another important issue for Democrats, while Republicans also named morality, immigration and terrorism.

In exit polls of voters in last Tuesday's New Hampshire presidential primaries, people in both parties named the economy as their top concern, including 38 percent of Democrats and 31 percent of Republicans. Of those citing the economy, the most votes went to Hillary Rodham Clinton for Democrats and John McCain among Republicans -- and each won their party's contest.

In the Jan. 3 Iowa presidential caucuses, the economy was tied with Iraq for most important issue among Democrats. Illegal immigration was the most mentioned by Republicans, followed by the economy. The winners in that state -- Republican Mike Huckabee and Democrat Barack Obama -- also got the most support among those chiefly worried about the economy.

On Capitol Hill, Democratic leaders are considering crafting legislation for stimulating the economy that might include tax rebates, longer unemployment benefits and more food stamps. Bush has said he is watching to see if federal steps will be needed, which officials have said might include tax rebates for individuals and tax breaks for business investment.

On Friday, House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., wrote Bush saying they should try to agree quickly on a package. Still, a clash could well occur because there is a history of Democrats seeking more spending and narrower tax cuts than Republicans want.

The issues question in the AP-Ipsos poll was asked of 535 people in telephone interviews conducted from Jan. 7-9. Their responses had a margin of sampling error of plus or minus 4.2 percentage points.

    AP poll: Economy ties war as top issue, UT, 12.1.2008, http://www.usatoday.com/money/topstories/2008-01-12-1690152503_x.htm

 

 

 

 

 

Countrywide's hometown braces for leaner times

 

Fri Jan 11, 2008
3:48pm EST
Reuters
By Nichola Groom and Gina Keating

 

LOS ANGELES (Reuters) - Most mornings are sweet at the Marmalade Cafe, up the street from the Calabasas, California headquarters of Countrywide Financial Corp. But not this Friday.

"We open at 7:30, and we usually have a small crowd waiting outside," manager Shana Naulin said.

A healthy portion of the cafe's lively breakfast and lunch trade comes from employees at Countrywide's nearby headquarters. But hours after news broke early on Friday morning that Bank of America Corp would buy the troubled mortgage lender for $4 billion, not a soul was waiting to be seated.

"Our first customer was at 8:30," Naulin said. "I think people were sitting at home, watching the news to see how it would affect them."

It's still too soon to see how much this small but affluent Los Angeles suburb will suffer from an expected restructuring at Countrywide once Bank of America takes over, but further job losses are sure to deal a new blow to a California economy already feeling the effects of the mortgage crisis, including lower tax revenue and slumping home prices.

Things could have been worse for Calabasas, a city of 23,000 people about 13 miles from downtown Los Angeles where the median household income stands at $93,860, the average home price is $1.6 million and some Hollywood stars keep ranches.

"There could have been much more severe outcomes with respect to staff reductions and capacity if they went into bankruptcy," said Stuart Gabriel, director of the Ziman Center for Real Estate at UCLA's Anderson School of Management.

Countrywide has said it ended December with 50,600 employees, down from a peak of 61,586 at the end of July.

Those cuts have been spread out across Countrywide's hundreds of branches and its corporate headquarters, limiting the impact on the Calabasas economy so far.

"There has not been a real discernible local impact, although there may be one now because their corporate staff is located in Calabasas," Gabriel said. "To the extent that there is a restructuring that goes on there could be some impact in that market."

Despite deep job cuts at Countrywide over the past year as the subprime mortgage crisis deepened, business at Marmalade Cafe has stayed pretty brisk, Naulin said.

Sergio Zendejas, manager at nearby Italian restaurant Mi Piace Italian Kitchen, says Countrywide's woes have not dented his lunchtime business, but he has noticed that some of his regulars have disappeared.

"We still get a few (Countrywide) customers. It's not like a big percentage," Zendejas said.



(Reporting by Gina Keating and Nichola Groom in Los Angeles, editing by Richard Chang)

    Countrywide's hometown braces for leaner times, R, 11.1.2008, http://www.reuters.com/article/domesticNews/idUSN1130567920080111

 

 

 

 

 

Consumer Confidence Sinks to Record Low

 

January 11, 2008
Filed at 6:44 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

WASHINGTON (AP) -- Consumer confidence fell to an all-time low as worries about jobs, energy bills and home foreclosures darkened people's feelings about the country's economic health and their own financial well-being.

According to the RBC Cash Index, confidence tumbled to a mark of 56.3 in early January. That compares with a reading of 65.9 in December -- and a benchmark of 100 -- and was the worst since the index began in 2002.

''People are anxious because everything sounds pretty awful these days,'' said Bill Cheney, chief economist at John Hancock Financial Services Group.

Economists cited several factors for consumers' gloomy outlook:

--Hiring practically stalled in December, pushing the unemployment rate to 5 percent, a two-year high, the government reported last week.

--The meltdown in the housing market has dragged down home values and made people feel less wealthy.

--Harder-to-get credit has made it difficult for some to make big-ticket purchases.

--High energy prices are squeezing wallets and pocketbooks.

--There has been much hand-wringing on Wall Street and Main Street as to whether all these problems will plunge the country into recession.

''Consumers are gloomy. The confidence reading suggests that people believe bad times are upon us,'' said Richard Yamarone, economist at Argus Research.

Over the past year, consumer confidence has eroded sharply as housing and credit woes took their toll. Last January, confidence stood at a solid 95.3. The index is based on the results of the international polling firm Ipsos.

The White House is exploring a rescue plan, possibly including a tax cut, to aid the ailing economy. Federal Reserve Chairman Ben Bernanke, criticized for not doing enough, pledged on Thursday to keep lowering interest rates. They are expected to drop by as much as one-half of a percentage point when central bank policymakers meet later this month.

The public is giving President Bush low marks for his economic stewardship. His approval rating on the economy dipped slightly to 33 percent in January, from 36 percent in December, according to a separate Associated Press-Ipsos poll. His overall job-approval rating was 34 percent, compared with 36 percent last month.

Individuals' sentiments about the economy and their own financial fortunes over the next six months actually fell into negative territory in early January. This gauge came in at a negative 8.2 percent. That was the weakest showing since right after the Gulf Coast hurricanes in August 2005.

Another measure looking at current economic conditions dropped to 78.9 in January. That was the lowest reading since early March 2003, when U.S. troops invaded Iraq.

Oil prices recently surged past $100 a barrel, though the price has moderated somewhat. Gasoline has topped $3 a gallon. Those high energy costs for fueling cars and heating homes are leaving people with less money to spend elsewhere, analysts say. In turn, prices for some other goods and services have risen.

Economists keep close tabs on confidence barometers for clues about people's willingness to spend.

A gauge of attitudes about investing, including comfort in making major purchases, dipped to 76.3 in January. That was the lowest since May 2005.

The housing slump, weaker home values, harder-to-get credit and high energy prices all ''seem likely to weigh on consumer spending as we move into 2008,'' Bernanke said Thursday.

Many economists believe upcoming reports will show the economy grew at a feeble pace of just 1.5 percent or less in the final three months of last year and will be weak in the first three months of this year. Major retailers reported weak sales for December.

Another index tracking consumers' feelings about employment conditions fell to 106.9 in January, a two-year low.

Government and private employers last month added the fewest new jobs to their payrolls in more than four years. In fact, employment at private companies alone actually declined. The jobless rate climbed to 5 percent in December, from 4.7 percent. The Labor Department's report, issued last week, stoked fears about a recession.

The RBC consumer confidence index was based on responses from 1,027 adults surveyed Monday through Wednesday about their attitudes on personal finance and the economy. The survey was taken after the employment report but before Bernanke's comments Thursday signaling additional rate cuts. Results of the survey had a margin of sampling error of plus or minus 3 percentage points.

The overall confidence index is benchmarked to a reading of 100 in January 2002, when Ipsos started the survey.

    Consumer Confidence Sinks to Record Low, NYT, 11.1.2008, http://www.nytimes.com/aponline/us/AP-Consumer-Confidence.html

 

 

 

 

 

Stocks Fall Amid Subprime Concerns

 

January 11, 2008
Filed at 10:13 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Stocks slid Friday amid renewed fears that financial companies will suffer larger-than-expected writedowns from credit market troubles. The major indexes each lost more than 1 percent, with the Dow Jones industrials falling more than 180 points.

The start of earnings season has investors worried about how banks and brokerages have fared after suffering losses in the collapse of the subprime mortgage market. The nation's biggest financial institutions will report results next week, including Merrill Lynch & Co., Citigroup Inc. and JPMorgan Chase & Co.

Adding to investors' unease, Merrill Lynch might take a $15 billion hit from its exposure to soured subprime mortgage investments, according to a report in The New York Times. The nation's largest brokerage is also said to be seeking another capital infusion to help shore up its balance sheet.

In a bright spot, Bank of America Corp. agreed Friday to buy Countrywide Financial Corp. for $4 billion, a deal that rescues the country's largest mortgage lender but pays less than the company's market value. The agreement comes after word of the move Thursday and just months after BofA invested $2 billion in Countrywide.

Investors were also nervous after American Express Corp. warned late Thursday that slower spending and more delinquencies on credit card payments will hamper profit throughout 2008. This follows a similar announcement from rival Capital One Financial Corp., which set aside $650 million to prepare for unpaid credit card bills.

In midmorning trading, the Dow fell 181.11, or 1.41 percent, to 12,671.98.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 13.92, or 0.98 percent, to 1,406.41, and the Nasdaq composite index fell 25.94, or 1.04 percent, to 2,462.58.

Stocks have skidded lower in the new year, with the Dow often falling by triple digits in a single session amid increasing anxiety about a possible recession as well as the continuing fallout from the mortgage crisis.

Bond prices rose amid the continuing credit uncertainty. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.84 percent from 3.88 percent late Thursday. The dollar was mixed against other major currencies, while gold prices fell.

Oil prices were under pressure, with a barrel of light, sweet crude for February delivery down 53 cents at $93.18 on the New York Mercantile Exchange.

In corporate news, Washington Mutual Inc. jumped 48 cents, or 3.4 percent, to $14.64 after CNBC reported JP Morgan is in talks to acquire the nation's largest savings and loan.

The board of Delta Air Lines Inc. on Friday is expected to decide whether to allow formal merger talks between the carrier and Northwest Airlines Corp. and United Air Lines. It is believed that Delta could ultimately choose to combine with one of the carriers.

Delta rose 21 cents to $16.18, while Northwest advanced 23 cents to $16.08, and United fell 39 cents to $31.80.

Other corporate news weighed on investors.

Bank of America fell 50 cents to $38.80, while Countrywide fell $1.05, or 13.6 percent, to $6.70.

American Express fell $4.49, or 9.2 percent, to $44.43, while Capital One fell $1.33, or 3.1 percent, to $41.59.

Beyond company news, stock traders showed little reaction to a Commerce Department report that higher energy prices drove the nation's trade deficit in November to its highest level in more than a year. The government said the gap shot up 9.3 percent to $63.1 billion, the widest since September 2006 and up from $57.8 billion in October. Economists surveyed by Thomson/IFR Markets forecast a trade gap of $58.6 billion.

Separately, there was good news on inflation in December, when import prices were unchanged, the Labor Department said.

Federal Reserve Governor Frederic Mishkin and Boston Fed President Eric Rosengren are set to make speeches during the session. They follow Fed Chairman Ben Bernanke, who on Thursday made clear in a speech that the central bank is poised to cut interest rates later this month.

Declining issues outnumbered advancers by about 3 to 1 on the New York Stock Exchange, where volume came to 220.1 million shares.

The Russell 2000 index of smaller companies fell 8.67, or 1.20 percent, to 711.54.

Overseas, Japan's Nikkei stock average closed up 1.93 percent. In afternoon trading, Britain's FTSE 100 fell 0.23 percent, Germany's DAX index rose 0.11 percent, and France's CAC-40 fell 0.63.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com 

    Stocks Fall Amid Subprime Concerns, NYT, 11.1.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

 

 

 

 

 

U.S. Trade Deficit Widens

 

January 12, 2008
The New York Times
By MICHAEL M. GRYNBAUM

 

Record oil prices widened the United States trade deficit in November as the cost of imported petroleum outpaced a modest rise in exports.

The gap between what Americans import and export grew 9.3 percent, to $63.1 billion, the biggest deficit in 14 months, the Commerce Department said on Friday. Imported oil accounted for more than half of the total.

Export sales rose again in November, by 0.4 percent, to a record $142.3 billion, but decelerated from October’s 0.9 percent rise.

Export sales have accelerated in recent months on the back of a record-low dollar, as foreign buyers flock to bargains on everything from apparel to real estate. Some economists believe foreign demand has kept the American economy from slowing more substantially as domestic business suffers from the housing downturn.

A slowdown in export growth may be troubling in light of the increasingly bearish forecasts for this year’s economy. But the drop-off may be temporary; the trade deficit shrank in September to its lowest level in two years, and November’s data was strongly influenced by the record-high price of crude oil.

Crude petroleum imports jumped 17.3 percent in a month when oil reached nearly $100 a barrel. The increase, which capped a 12-month period where oil imports rose 58.8 percent, pushed total import sales up 3 percent to $205.4 billion.

Import prices remained unchanged in December, according to a separate report from the Labor Department on Friday, down from a 3.3 percent increase in November.

The October trade deficit was revised lower, to $57.7 billion, a drop of about $50 million, the government said.

    U.S. Trade Deficit Widens, NYT, 11.1.2008, http://www.nytimes.com/2008/01/12/business/11cnd-econ.html

 

 

 

 

 

Fed Chief Signals Further Rate Cut

 

January 11, 2008
The New York Times
By LOUIS UCHITELLE and MICHAEL M. GRYNBAUM

 

Presenting a bleak picture of a deteriorating national economy, Ben S. Bernanke, chairman of the Federal Reserve, strongly suggested on Thursday that the Fed would cut interest rates soon, perhaps by a large amount.

“The outlook for real activity in 2008 has worsened,” Mr. Bernanke said after describing all the forces dragging down the economy. “We stand ready to take substantive additional actions as needed to support growth and to provide adequate insurance against downside risks.”

With fears rising that the economy is sliding into recession, Mr. Bernanke’s blunt assessment is expected to encourage politicians to call on Congress to take steps that would stimulate growth beyond what the Fed can achieve through lower interest rates.

Many analysts now expect the Fed’s policy makers to cut half a percentage point off the Fed’s benchmark interest rate, reducing it to 3.75 when they next meet, on Jan. 29 and 30. They expect the Fed to continue cutting, to 3 percent or even lower by summer, to prevent — or at least mitigate — a recession. The goal would be to get people to borrow and spend more.

Consumer spending, however, may already have hit a wall. Shortly before Mr. Bernanke spoke, at a Washington luncheon, the nation’s biggest retailers announced that holiday sales gains were the weakest in the last five years. Only Wal-Mart gained ground, after it slashed prices to draw jittery consumers.

“Bernanke should have made this commitment to cut rates aggressively two or three months ago,” said Mark Zandi, chief economist at Moody’s Economy.com. “Will it be enough? It will be close. With aggressive rate cuts, some fiscal stimulus and a bit of luck, maybe we’ll avoid a recession.”

The stock market responded with uncertainty at first to Mr. Bernanke’s remarks, but then chalked up solid gains. The Dow Jones industrial average surged as he spoke, then fell back, then rose again, closing up nearly 1 percent, to 12,853.09.

Encouraged by other developments as well, including reports that the nation’s largest mortgage lender was about to be acquired by Bank of America, traders apparently concluded that the Fed was at last committed to a more vigorous effort to lift the economy, and to reverse the recent slide in stock prices, which often go up in response to rate cuts.

“Maybe the Fed and the market are not quite on the same page yet,” said Richard Berner, co-head of global economics at Morgan Stanley, “but they are getting a lot closer.”

Mr. Bernanke’s gloomy assessment of the economy represented a turning point for the Fed. Until now, most of the Fed’s top policy makers, starting with Mr. Bernanke, had spoken publicly of their “uncertainty” about what lay ahead. They have cut their benchmark interest rate, the federal funds rate, by a full percentage point since mid-September in response to the credit crisis and the housing downturn.

But they accompanied each cut with a statement that stopped well short of declaring that the economy was clearly in trouble.

Evidence of deterioration has accumulated, however, since the policy makers’ last public statement in mid-December. Within the last week, the Labor Department has reported a sharp jump in the unemployment rate; AT&T said that a number of customers were not paying their bills; American Express reported weaker spending by its cardholders; and the nation’s retailers released their disappointing holiday sales figures.

Acknowledging the evidence, President Bush, speaking in Chicago on Monday, said the nation faces “economic challenges” and “we cannot take growth for granted.”

The mounting evidence has suggested to a growing number of economists and politicians that the Fed by itself cannot stem the economic slide and that Congress must help with fiscal policy in the form of a tax rebate for low-income families, extended unemployment insurance or some other subsidy.

Without addressing the growing demands for fiscal stimulus, Mr. Bernanke devoted most of his talk, at a forum sponsored by Women in Housing and Finance and the Exchequer Club, to a review of the economic damage, which he said had increased in recent weeks.

Housing starts and new-home sales are off 50 percent from their peaks, he said. Foreclosures are rising, and so is the number of households behind on their mortgages. In the financial markets, the subprime shock “has contributed to a considerable increase in investor uncertainty,” he reported, adding that the Fed is seeing “considerable evidence that the banks have become more restrictive in their lending to firms and households.”

Offering an explanation for the Fed’s reluctance to act more aggressively sooner, Mr. Bernanke said that economic growth seemed “to have continued at a moderate pace” until recently, when new information increasingly indicated that “the downside risks to growth have become more pronounced.”

The Fed, Mr. Bernanke said, had counted on an expanding job market to “support moderate growth” in consumer spending. But the government reported Friday that hiring had fallen almost to zero in December and the unemployment rate had jumped to 5 percent from 4.7 percent — a rare one-month surge that almost always indicates coming hard times.

“It would be a mistake to read too much into any one report,” Mr. Bernanke said of the jobs report. “However, should the labor market deteriorate, the risks to consumer spending would rise.”

In a 13-page speech, the Fed chairman devoted only one paragraph to the risk of inflation, although some of his colleagues at the central bank have cited inflationary pressures as a reason to go easy on rate cuts. Mr. Bernanke acknowledged these concerns but clearly put them on the back burner.

“Thus far,” he said, “inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished.”

Mr. Bernanke said the Fed had successfully pumped money to banks and other lenders damaged in the mortgage crisis. Lending to banks directly from the Fed’s discount window, he said, had not worked as well as auctioning fixed multibillion-dollar sums.

Among other advantages, he explained, the auctions gave the Fed greater control over how much money was entering the financial system and the effect on interest rates. The auctions, he said, “may thus become a useful permanent addition to the Fed’s toolbox.”

In his speech, Mr. Bernanke carefully avoided any discussion of a recession, which would be an extended period of contracting economic activity and falling employment. But some economists argue that such a downturn may be unavoidable — or already have started — despite the Fed’s recent efforts to contain the damage from the housing collapse and credit market turmoil.

“However much the Fed cuts rates between now and the spring,” said Brian Bethune, an economist at Global Insights, “the die is cast for a pretty rough six months and a very high risk of recession.”

Asked about the possibility of a recession, Mr. Bernanke sidestepped the question. As a Princeton University economist before he came to Washington, he said, he had served on a committee charged with setting the official starting and ending dates of each recession.

“You really cannot make a determination,” he said with a sly grin, “until well after the event.”

    Fed Chief Signals Further Rate Cut, NYT, 11.1.2008, http://www.nytimes.com/2008/01/11/business/11fed.html?hp

 

 

 

 

 

Bank Agrees to Buy Troubled Loan Giant for $4 Billion

 

January 11, 2008
The New York Times
By GRAHAM BOWLEY and GRETCHEN MORGENSON

 

Bank of America announced Friday that it has agreed to pay about $4 billion in stock to acquire Countrywide Financial, the troubled lender that became a symbol of the excesses that led to the subprime mortgage crisis.

“Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation’s premier lender to consumers,” Kenneth D. Lewis, Bank of America’s chairman and chief executive officer, said in a statement.

The statement, published on the bank’s website, said that the agreement had been approved by the boards of directors of both Bank of America and Countrywide and was subject to approval by Countrywide’s shareholders and regulators.

According to the agreement, Countrywide shareholders would receive 0.1822 of Bank America stock for each Countrywide share.

“We believe this is the right decision for our shareholders, customers and employees,” Angelo R. Mozilo, Countrywide’s chairman and chief executive officer, said in the statement. “Bank of America is one of the largest financial institutions in the U.S. and internationally, and we are confident that the combination of Countrywide and Bank of America will create one of the most powerful mortgage franchises in the world.”

Bank of America said it expected the deal to close in the third quarter of this year. The acquisition would not affect its earnings in 2008, the bank said. It expects $670 million in after-tax cost savings from the transaction, starting in 2009. Most of the cost savings would come in 2010.

According to Reuters, the transaction would value Countrywide at $7.16 per share, a 7.6 percent discount to Thursday’s closing price.

Countrywide shares fell $1.05, or 13.5 percent, to $6.70 in pre-opening trading, after rising by more than 50 percent on Thursday in anticipation of the deal, Reuters reported. Bank of America shares fell slightly.

Because it is an all-stock transaction, Countrywide investors will benefit if Bank of America stock rises, which it did yesterday.

As the nation’s largest mortgage lender, Countrywide helped fuel the housing boom by offering loans to high-risk borrowers. But as home prices began dropping last year and borrower defaults soared, Countrywide’s lending practices came under the spotlight of legislators, regulators and consumer advocates.

With financial pressures mounting, Countrywide’s stock price collapsed in 2007, falling 80 percent, wiping out $20 billion in market value. Earlier this week, Countrywide’s shares plummeted further as speculation about a bankruptcy filing roiled the market, a rumor the company denied.

Countrywide shares soared 51 percent, to $7.75 Thursday on news of a possible sale. The shares are down 83 percent from $45.26 last January.

People briefed on the deal said that negotiations had been going on for about a month.

While a sale of Countrywide, based in Calabasas, Calif., is not expected to affect borrowers, it would underscore the complexities and financial challenges that have engulfed the mortgage industry — from lax lending standards to loose regulatory oversight and the intersection of Main Street homeownership with Wall Street financial engineering.

“Bank of America has always wanted a larger presence in mortgage banking and Ken Lewis has also said that they would wait to buy until blood is running in the streets,” said Charles Peabody, an analyst at Portales Partners in New York. “Mozilo must have thought there was a chance Countrywide wouldn’t survive.”

Almost 150 mortgage lenders failed last year and 43 were acquired by healthier institutions, according to Mortgagedaily.com. Banks and brokerage firms have also suffered steep losses, and several chief executives have been forced out.

As defaults have surged, investors who once flocked to risky mortgage loans for their higher yields have shunned them. Troubles in the housing market have also generated larger concerns about the economy as a whole and the possibility that the country may enter a recession.

News of the possible sale came after Countrywide disclosed on Wednesday that 7.2 percent of the loans in its servicing portfolio were delinquent last month, up from 4.6 percent in December 2006. Foreclosures also more than doubled last month, to 1.44 percent of unpaid principal balances versus 0.70 percent in December 2006.

For Bank of America, buying Countrywide is a bet that it can salvage its $2 billion investment in a preferred stock issued by the company in August; Bank of America paid $18 a share for a 16 percent stake.

But Countrywide’s problems have only worsened, leaving Bank of America with big losses. On Thursday, shares of Bank of America rose 56 cents, to $39.30.

Bank of America would be taking on significant legal liabilities stemming from Countrywide’s lending practices.

Countrywide Credit Industries opened for business in New York City in 1969, the creation of Mr. Mozilo, a butcher’s son from the Bronx, and David Loeb, a founder of a mortgage banking firm. The company became the nation’s largest lender in the early 1990s. By last year, it had become a $500 billion home loan lender with 900 offices and $200 billion in assets. Mr. Loeb died in 2003.

In addition to originating mortgages, Countrywide is the largest servicer of them, overseeing the administration of $1.4 trillion worth of loans. The company also has a bank overseen by the Office of Thrift Supervision; an insurance unit; a subsidiary that provides borrowers with loan closing services like appraisals and flood certifications; and a broker-dealer that trades securities. It employs 51,000 people.

Countrywide showed spectacular growth in both earnings and share price over the years. But in recent months it became clear that its growth was fueled by increasingly loose lending practices. Last year, even as defaults rose, the company was slow to recognize that it needed to change its business practices and lend more conservatively.

In August, as financial markets froze on fears that the subprime mortgage woes were spreading into other parts of the economy, Countrywide was forced to draw down all of its $11.5 billion credit line.

“Countrywide has been a rogue lender with a rogue leader,” said Martin Eakes, chief executive of the Center for Responsible Lending, a consumer advocacy group. “Bank of America would be a responsible home for fixing the problems that Countrywide has created.”

Through acquisitions, Bank of America has transformed itself from a small regional bank into a national powerhouse. In 2003, for example, it paid $48 billion for FleetBoston Financial, which gave it the most branches, customers and checking accounts of any United States bank. In 2005, Bank of America became the biggest credit card issuer when it bought MBNA for $35 billion.

By purchasing Countrywide, Bank of America would combine its 5,800 branches with the mortgage lender’s coast-to-coast network, helping Mr. Lewis achieve his goal of becoming the biggest player in every major consumer finance category.

Bank of America would brush up against a federal cap that prevents a bank holding company from controlling more than 10 percent of the nation’s deposits. Because Countrywide Bank is a federally insured savings and loan, the rule does not apply.

Seeking to ease any regulatory concerns, representatives for the companies were in Washington on Thursday to brief regulators.

Mr. Mozilo is expected to remain as chief executive of Countrywide until the deal closes, probably in the third quarter, people briefed on the transaction said. After that, he would serve on a transition team and would remain with the combined company on an interim basis.

He could be entitled to an exit package of roughly $72 million. That would be on top of the $410 million in pay, including $285 million in option gains, that Mr. Mozilo has taken home since he became Countrywide’s chief executive in 1999.

Selling Countrywide gets Mr. Mozilo out of a tightening financial vise. But doing so at a stock price below $10 is certainly not what he probably envisioned. Indeed, just last March, as the subprime crisis was starting to unfold, Mr. Mozilo crowed that Countrywide would benefit from the spreading mess. “This will be great for Countrywide,” he told an interviewer, “because at the end of the day, all of the irrational competitors will be gone.”



Eric Dash contributed to this article.

    Bank Agrees to Buy Troubled Loan Giant for $4 Billion, NYT, 11.01.2008, http://www.nytimes.com/2008/01/11/business/11cnd-bank.html?hp

 

 

 

 

 

Editorial

Not Just the Fed

 

January 10, 2008
The New York Times

 

The American economy is weakening fast, and some prominent economists are saying a recession is already here. The Federal Reserve, with its prodigious lending capacity and power to cut interest rates, could yet save the day. But with prices, and fears of inflation, also rising, the Fed has less room to maneuver.

That is why it is imperative that President Bush and Congressional leaders begin a serious discussion about how to help revive the economy, if need be, with a short-term stimulus package.

President Bush has suggested that permanent tax cuts (his longtime goal and a favorite of nearly all the Republican presidential candidates) are his fix of choice. But those tax cuts would take effect in 2011, doing nothing for today’s economic woes.

Democrats are broaching more sensible measures, like bolstered spending for unemployment compensation and food stamps and direct aid to states. They should consider adding the idea of a targeted tax rebate. A one-shot rebate would be another way to stimulate the economy — and could draw the tax-phobic White House into a constructive discussion.

If ever there was a time not to let ideology drive economic policy, it is now. More than a million people stand to lose their homes over the next two years. Some 10 million families stand to lose all of their home equity. Inflation is wiping out wage gains, while pushing up prices for food and gasoline. Job growth has stalled and unemployment is rising.

If conditions deteriorate even further, the White House and Congress would need to act quickly. That means they need to start talking now, before things turn grave, about how they would supplement the Fed’s efforts with specific temporary boosts.

In the meantime, Fed Chairman Ben Bernanke has tough calls to make. Wall Street is insisting that lower rates are necessary, despite inflationary pressures, because recession is a more urgent threat than rising prices. There’s truth to that. Yet even if the Fed slashed rates, there’s no guarantee of a big rebound. Lower interest rates could cause the dollar to weaken further. A weaker dollar correlates to higher oil prices, which in turn, would blunt the ability of lower rates to stimulate a lagging economy.

There’s a lot riding on Mr. Bernanke’s judgment. But the White House and Congress also must start preparing to step in if Mr. Bernanke and the Fed can’t turn the economy around. One issue they must agree on: any fiscal stimulus legislation should be targeted and temporary.

Economic history is clear that stimulus measures that are effective in the short run tend to backfire if they go on too long. They become unaffordable, and that is bad for growth. The economy’s challenges are formidable enough, without creating any more problems.

    Not Just the Fed, NYT, 10.1.2008, http://www.nytimes.com/2008/01/10/opinion/10thu1.html

 

 

 

 

 

Baltimore Is Suing Bank

Over Foreclosure Crisis

 

January 8, 2008
The New York Times
By GRETCHEN MORGENSON

 

Baltimore’s mayor and City Council are suing Wells Fargo Bank, contending that its lending practices discriminated against black borrowers and led to a wave of foreclosures that has reduced city tax revenues and increased its costs.

The recent surge in homeowner defaults nationwide, generated by lax lending practices during the real estate boom, has officials bracing for a range of problems that often accompany foreclosures. Some municipalities, including Cleveland and Buffalo, are trying to make lenders responsible for abandoned properties to ward off crimes like arson, drug use and prostitution.

But the civil suit that officials in Baltimore are filing in United States District Court may presage another type of litigation against lenders by municipalities facing shortfalls in their budgets.

In the suit, Mayor Sheila Dixon joined with the City Council to ask that the court bar Wells Fargo from charging higher fees to black borrowers. Many of these borrowers paid more under the bank’s subprime lending program, designed for less creditworthy consumers, and are more likely to default on their loans.

In 2006, Wells Fargo made high-cost loans, with an interest rate at least three percentage points above a federal benchmark, to 65 percent of its black customers in Baltimore and to only 15 percent of its white customers in the area, according to the lawsuit. Similarly, refinancings to black borrowers were more likely to be higher cost than to white ones and to carry prepayment penalties.

The complaint requests unspecified damages to cover the diminished property tax revenues and higher costs that the city said it had incurred. Additional costs include those for fire and police protection in hard-hit neighborhoods and expenditures to buy and rehabilitate vacant properties.

Kevin Waetke, a Wells Fargo spokesman, rejected the contention that race was a factor in the bank’s pricing of mortgage loans. “We do not tolerate illegal discrimination against or unfair treatment of any consumer,” Mr. Waetke said. “Our loan pricing is based on credit risk. We are committed to serving all customers fairly — our continued growth depends on it.”

But Suzanne Sangree, chief solicitor for the Baltimore City Law Department, said: “This wave of foreclosures in minority neighborhoods really threatens to undermine the tremendous progress the city has made in developing distressed neighborhoods and moving the city ahead economically. Wells Fargo could do a lot, as well as other banks that have engaged in similar practices, to help to curb the flood of foreclosures that the city is experiencing now.”

Among the practices cited by the city, Wells Fargo allowed mortgage brokers to charge higher commissions when they put borrowers in loans with higher interest rates than the customers qualified for based on their credit profiles. The bank also failed to underwrite mortgage loans to traditional criteria, the suit said, setting up the borrowers for default. Such practices were common at many lenders during the boom.

Now, Baltimore is a city in a foreclosure crisis, according to the complaint. Citing figures from the Maryland Department of Housing and Community Development, the suit said foreclosure-related events in the city, including notices of default, foreclosure sales and lenders’ purchases of foreclosed properties, rose more than five times between the first and second quarters of 2007.

Wells Fargo has been the largest or second-largest provider of mortgage loans to Baltimore borrowers since 2004, according to the lawsuit. From 2004 through 2006, Wells Fargo made at least 1,285 mortgage loans a year to area residents with a total value of more than $600 million. Wells Fargo now has the largest number of foreclosures in Baltimore of any lender, the suit stated.

Half of the Wells Fargo foreclosures in 2006 occurred in census tracts with populations that were more than 80 percent black, the suit said. Meanwhile, only 16 percent of the foreclosures were found in tracts with populations that are 20 percent or less black. Figures for 2007 were similar, the city said.

John P. Relman, a lawyer at Relman & Dane in Washington, represents the City of Baltimore in its case against Wells Fargo. “Foreclosures have a more profound effect in minority communities because they are closest to the line of distressed neighborhoods in many cities,” Mr. Relman said. “That causes big problems for the cities, not just the lost income from taxes but also the long-term social costs. Programs are going to be needed to stabilize the communities to be rebuilt.”

The Baltimore complaint cited a 2005 study showing that foreclosures required more municipal services and higher costs. The study, commissioned by the Homeownership Preservation Foundation of Minneapolis, identified 26 different costs incurred by government agencies responding to foreclosures in Chicago and in Cook County, Ill., in 2003 and 2004. The analysis concluded that total costs reached $34,199 for each foreclosure.

    Baltimore Is Suing Bank Over Foreclosure Crisis, NYT, 8.1.2008, http://www.nytimes.com/2008/01/08/us/08baltimore.html

 

 

 

 

 

Bush Admits Economy Faces Challenges

 

January 8, 2008
The New York Times
By SHERYL GAY STOLBERG and DAVID M. HERSZENHORN

 

CHICAGO — President Bush, in a marked shift from his usual upbeat economic assessments, conceded here on Monday that the nation faces “economic challenges” due to rising oil prices, the home mortgage crisis and a weakening job market.

“We cannot take growth for granted,” Mr. Bush said in a speech to a group of business leaders in which he acknowledged that “recent economic indicators have become increasingly mixed.”

But even after a government report on Friday that showed unemployment jumped to 5 percent last month from 4.7 percent in November, Mr. Bush stopped short of warning that the nation may be about to enter a recession.

Democrats in Congress and on the campaign trail echoed the president’s sobering view. With a number of analysts now predicting that an economic downturn could be imminent, both Mr. Bush and Congressional Democratic leaders say they are considering whether a rescue package is necessary to counter the threat of a recession, in which economic activity declines and joblessness increases over an extended period of time.

But the two sides would undoubtedly take vastly different approaches, setting up a clash that could dominate the 2008 election campaign and the remainder of the Bush presidency.

If the past is any guide, Mr. Bush is likely to favor broad-based tax cuts of the sort he pushed through early in his presidency. Democrats are discussing more targeted relief — tax cuts, spending programs or a combination of the two — to help lower- and middle-income Americans who would be hurt the most if the economy falters.

“This is going to be a battle over doing more of what George Bush has done for the past six years, or doing more for the middle class,” Representative Rahm Emanuel of Illinois, the chairman of the House Democratic Caucus, said in a telephone interview after spending the day in Chicago with Mr. Bush. “That’s where the fissure is going to be.”

The clash comes as the latest negative signs on the economy, coupled with uncertainty in the housing and credit markets, have forced Mr. Bush to abandon his usual sunny rhetoric and paint a darker picture of the economy’s condition.

After months of insisting that the economy’s fundamentals are strong — a theme he reiterated on Monday — Mr. Bush did not mince words. He acknowledged that “many Americans are anxious about the economy,” and he noted that “jobs are growing at a slower pace.” He said core inflation was low — “except when you’re going to the gas pump, it doesn’t seem that low.”

Still, the White House is not convinced it must act. The deliberations are tightly held, and aides to Mr. Bush say he will not make a decision about whether to offer a stimulus package, or what it should contain, until later this month, in time for his State of the Union address scheduled for Jan. 28. Appearing in New York on Monday, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., echoed that approach, and cautioned against any rush to action.

“Working through the current situation and getting the policy right,” Mr. Paulson said, “is more important than getting the policy announced quickly.”

On Capitol Hill, Democrats were positioning themselves to get ahead of any proposal the White House might present. Aides to Nancy Pelosi, the House speaker, said that she had yet to conclude decisively that a stimulus package was needed, but that she had met with a group of economic advisers last month who urged her to take swift action aimed at stabilizing the jittery economy and lifting consumer confidence.

The group included Lawrence H. Summers, a Treasury secretary under President Bill Clinton; Felix G. Rohatyn, the financier and former ambassador to France; and Laurence D. Fink, the chairman and chief executive of BlackRock, the global investment firm.

An aide to Ms. Pelosi said the three were “unanimous in saying that we should move out ahead." In an interview over the weekend, Mr. Summers said he believed that there was now a greater than 50 percent chance of a recession this year.

“My view is that now is the time to be thinking about policies that would provide recession insurance,” Mr. Summers said, “and if we wait until it’s entirely clear that there is a recession, it will be too late.”

But Democratic leaders said there was already a general consensus within the party that any stimulus package would be temporary and targeted to the middle class and the poor. Among the proposals under consideration are a $500 across-the-board rebate, possibly to be returned to taxpayers in their paychecks through the payroll tax system, as well as a plan to restore the $1,000 per child tax credit to many low-income families that currently do not qualify for it.

Polls show Americans are now more concerned with the economy than the war in Iraq, a trend that is reflected in the presidential campaigns. In New Hampshire on Monday, as the candidates furiously courted voters on the eve of that state’s crucial primary vote, pocketbook issues like the price of home heating oil and health care took center stage.

“The economy’s beginning to have some problems, which I’m worried about,” Senator Hillary Rodham Clinton of New York told a group of voters on Monday morning in Portsmouth, N.H. “We’ve got this energy crisis, with oil now at $100 a barrel,” she said, citing consequences “for our economy, for our security, for the problem of global warming.”

On the Republican side, Mike Huckabee, the former Arkansas governor, sounded similar themes, recalling his humble roots as he tried to persuade voters that he understood their “struggle.” Gas prices, home heating costs and health care bills keep going up, Mr. Huckabee said, “but your paycheck doesn’t go up to cover it.”

As for the Bush administration, Mr. Paulson, the Treasury secretary, tried to offer assurances that the White House is not standing still. He said the administration may seek to expand a program begun last year to help homeowners who cannot afford to repay subprime mortgages once they are adjusted upward.

Mr. Bush had expected to spend his final year in office focused on foreign affairs — he leaves Tuesday for the Middle East — and a few domestic issues, like reauthorizing his signature education bill, No Child Left Behind.

But the president has had trouble getting credit for the economy even when times were good, and he can ill afford to leave office on an economic sour note. Mr. Bush is well aware that if he does not appear to share the public’s concern, he — and, more important for the 2008 elections, his party — could easily look out of touch.

“I think Bush is looking not to give the Democratic candidate any more ammunition than necessary,” said Bruce Bartlett, a Republican economist who has been highly critical of the administration. “If we are in the middle of a recession in November, obviously the Republican Party is going to be blamed for that.”

Still, Mr. Bush must be careful not to depress the economy with pessimistic talk, and so his speech in Chicago on Monday offered a delicate balancing act. “People said, ‘Are you optimistic?’ I said, ‘Absolutely, absolutely optimistic,’” Mr. Bush said. “Do I recognize the reality of the situation? You bet I do.”



Steven R. Weisman contributed reporting from Washington.

    Bush Admits Economy Faces Challenges, NYT, 8.1.2008, http://www.nytimes.com/2008/01/08/business/08bush.html?hp

 

 

 

 

 

Paulson: No Easy Answer to Mortgage Woes

 

January 7, 2008
Filed at 11:16 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

WASHINGTON (AP) -- The Bush administration is working on a number of fronts to combat the country's severe housing crisis but there is no simple solution to the problem, Treasury Secretary Henry Paulson said Monday.

Paulson, in remarks prepared for a New York speech, said that the country was facing an unprecedented wave of 1.8 million subprime mortgage which are scheduled to reset to sharply higher rates over the next two years. He said this raised the possibility of a market failure and was the reason the administration brokered a deal with the mortgage industry to freeze certain subprime mortgage rates for five years to allow the housing market to recover.

''By preventing avoidable foreclosures, we will safeguard neighborhoods and communities and fulfill our responsibility of protecting the broader U.S. economy,'' Paulson said in excerpts of his speech released by Treasury. ''However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years.''

Paulson said that the deal the administration brokered with the industry to freeze certain subprime mortgage rates for five years did not involve the use of any taxpayer money. Conservative critics have complained that the administration's plan represented government intrusion in the operation of markets that would end up rewarding some people who had taken out risky mortgages.

The steep slump in housing has been a serious drag on the overall economy. There are rising fears that the country could topple into a recession. Those worries were heightened after a report Friday showing that the unemployment rate jumped to a two-year high of 5 percent in December with job growth slowing to a crawl.

Paulson called the current housing correction inevitable after what occurred during the five-year boom in which sales and prices climbed to record levels.

''After years of unsustainable price appreciation and lax lending practices, a housing correction is inevitable and necessary,'' Paulson said.

    Paulson: No Easy Answer to Mortgage Woes, NYT, 7.1.2008, http://www.nytimes.com/aponline/us/AP-Paulson-Housing.html

 

 

 

 

 

Wall Street Falls on Iran Worries

 

January 7, 2008
Filed at 11:00 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

NEW YORK (AP) -- Wall Street pulled back Monday after the Bush administration warned Iran following an incident involving that country's forces and three U.S. Navy ships in the Strait of Hormuz.

Stocks had opened higher amid speculation about future interest rate cuts but turned lower after reports of the administration's comments appeared on news services.

U.S. forces were on the verge of firing on the Iranian boats in the early Sunday incident, when the boats turned and moved away, a Pentagon official said. The White House on Monday warned it ''will confront Iranian behavior'' if it threatens the U.S. or its allies.

Concerns about fresh tensions in the Middle East was enough to spook investors on a day with few substantive economic or corporate events. Investors had originally sent stocks higher amid speculation the Federal Reserve will continue its campaign of interest rate cuts to ward off a recession.

Reports on jobs and manufacturing elevated concerns about a recession, and that has turned Wall Street's attention to the Fed's Jan. 29-30 rate-setting meeting. Some clues about the central bank's stance might come when Fed Chairman Ben Bernanke gives a speech on Thursday.

In late morning trading, the Dow Jones industrial average fell 32.93, or 0.26 percent, to 12,767.25. The blue chip index had been up as much as 80 points in early trading.

Broader stock indicators also fell. The Standard & Poor's 500 index dropped 3.09, or 0.22 percent, to 1,408.54, and the tech-heavy Nasdaq composite index fell 25.02, or 1.00 percent, to 2,479.63.

That extended last week's losses. In just the first three trading days of 2008, the Dow Jones industrial average lost 3.50 percent, the Standard & Poor's 500 index fell 3.86 percent, and the Nasdaq composite index dropped 5.57 percent.

Bond prices continued to rise Monday after a rally during the past week. The yield on the benchmark 10-year Treasury note, which moves opposite its price, dipped to 3.85 percent from 3.87 percent late Friday.

Oil prices fell despite a fire at Iraq's largest refinery, and after the incident with Iran. A barrel of light sweet crude fell $1.38 to $96.53 on the New York Mercantile Exchange.

The dollar was mixed against most major currencies, while gold moved lower.

Portfolio managers and other institutional investors are also taking positions ahead of fourth-quarter earnings reports due to be released in the coming weeks. Results will be scrutinized to determine how companies are holding up as the economy cools -- especially investment banks hurt by the ongoing credit crisis.

Alcoa Inc. unofficially opens the earnings season Wednesday when it becomes the first of the 30 Dow industrials to report results. Shares of the company rose 62 cents to $35.40.

Time Warner Inc. rose 12 cents to $16.03 after the entertainment company announced it plans to release high-definition movies on Blu-ray rather than Toshiba Corp.'s HD DVD formal. Blu-ray is owned by Sony Corp.

Napster Inc. fell 1 cent to $1.98 after the online music service announced plans to offer downloads as unprotected MP3 files. Previously, users were not able to play Napster downloads on popular music players like Apple Inc.'s iPod and Microsoft Corp.'s Zune.

Technology stocks could fluctuate as more news comes out of the Consumer Electronics Show, being held in Las Vegas this week.

Krispy Kreme Doughnuts Inc. Chief Executive Daryl Brewster has resigned amid a sputtering turnaround effort. The Winston-Salem, N.C.-based company said Brewster left for personal reasons but will stay with the company until the end of January. Shares rose 21 cents, or 7.4 percent, to $3.04.

The Russell 2000 index of smaller companies tumbled 6.71, or 0.93 percent, to 714.89.

Declining issues outpaced advancers by a 3 to 2 margin on the New York Stock Exchange, where volume came to 223.6 million.

Overseas, Japan's Nikkei stock average closed down 1.30 percent. Britain's FTSE 100 rose 0.34 percent, Germany's DAX index added 0.56 percent, and France's CAC-40 was up 0.41 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com 

    Wall Street Falls on Iran Worries, NYT, 7.1.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

 

 

 

 

 

As Electronics Show Grows, Some Scale Back

 

January 7, 2008
the New York Times
By BRAD STONE and MATT RICHTEL

 

LAS VEGAS — People attending the Consumer Electronics Show, starting here on Monday, will encounter a crowded and noisy stage where technology companies from around the world unveil their latest wares.

They may well not see any of the big consumer electronics hits of 2008.

The convention, one of high-tech’s most important annual gatherings, has never been bigger. Roughly 140,000 attendees will trudge through 1.85 million square feet of exhibition space.

But despite its size, or perhaps because of it, the annual conference has become a challenging and sometimes ineffectual place to introduce new products.

The show, which started in 1967, was once a springboard for the industry’s biggest successes, like the VCR in 1970, the compact disc player in 1981 and the DVD in 1996.

Now, electronics makers and industry analysts say the show has become so loud, sprawling and preoccupied with technical esoterica that for many companies, it is as much a place to get lost as to get discovered.

Part of the problem is that technology has wormed its way into so many products over the years — from toys to kitchen appliances — that it is hard to say exactly what an electronics trade show should be about.

“Everything has morphed into it,” said Michael Gartenberg, an analyst at JupiterResearch, who is skipping the show after attending for four years. “You’ve got a 150-inch plasma screen and next to it some guy selling electronic toothbrushes.”

Technology companies now frequently introduce their products elsewhere, in an effort to reach consumers more directly. The Apple iPhone, the Nintendo Wii and other recent must-haves were not unveiled at C.E.S. One of the industry’s biggest hits in 2007 was the Flip Video camcorder, an easy-to-use pocket-size device that sells for $120.

Executives from Pure Digital Technologies, its maker, visited Las Vegas last year during the show but kept to their hotel suite at the Wynn, quietly briefing retailers on the device. The company introduced the camera in June with a television ad campaign, and stellar word of mouth landed it in the hands of an enthusiastic Oprah Winfrey on her show in October.

“Especially in the camcorder space, C.E.S. is about one-upping the competition with features — ‘My hard drive is bigger than yours,’” said Jonathan Kaplan, Pure Digital’s chief executive. “We would get lost in the noise at C.E.S. trying to talk to a consumer that is probably not even listening.”

Various colors and models of the Flip Video were the five best-selling camcorders on Amazon.com during December.

The show is still unmatched in its sheer number of product introductions, which collectively represent billions of dollars in annual sales. Major vendors from around the world will show off high-definition television sets, novel entertainment set-top boxes for living rooms, robots, electronic toys and an array of new Internet services. Some of those products may manage to rise above the noise and become a breakthrough consumer hit.

Gary Shapiro, chief executive of the Consumer Electronics Association, which runs the show, said sales of recent hit products pale in comparison to the revenue from broad categories like high-definition televisions, which are a big part of the C.E.S. scene.

But many of the products introduced here, rather than representing quantum leaps, are incremental enhancements or important technical changes that may not register immediately with consumers.

That incremental approach is perhaps one reason that news from last year’s electronics show was definitively drowned out by a much smaller gathering: Macworld in San Francisco, where Apple introduced the iPhone.

“One of the reasons Apple stole C.E.S. last year was that its message was simple and succinct,” said Rob Enderle, an analyst with the Enderle Group. “C.E.S. does not have a crystal-clear message. There’s too much information, and it looks like you have to get a Ph.D. to get these things to work.”

Microsoft, one of the largest companies attending the show, has used Bill Gates’s introductory keynote at the show to make major product introductions, like the Xbox game console in 2001.

More recently, Microsoft’s biggest unveilings have not come at the show. The company introduced the Zune music player in the fall of 2006 and upgraded it last November to get the product in front of shoppers during the holiday season. It introduced Surface, a touch-screen tabletop computer, in June at another industry conference.

Microsoft says that in his keynote this year, Mr. Gates will discuss some new partnerships, including one with NBC to distribute coverage of the Olympics, and some new features in Ford Sync, a system that integrates cellphones, navigation and voice commands into automobile dashboards. Mr. Gates first talked about that product during his keynote at last year’s C.E.S.

Todd Thibodeaux, senior vice president for industry relations at the Consumer Electronics Association, said the big issues at this year’s show would revolve around the marriage of hardware and content. Consumer electronics makers, he said, will unveil and pursue partnerships with cable, satellite and phone providers, as well as media companies.

“It’s the biggest comparison-shopping floor in the world of consumer electronics,” Mr. Thibodeaux said. “In terms of major innovations, there are more than ever.”

But will the show produce a big hit product?

“I wouldn’t be surprised if it’s related to WiMax,” a new wide-scale wireless technology, Mr. Thibodeaux said. He added: “It could be the Sony Rolly robot. It’s a small media player that rolls around like a robot.”

    As Electronics Show Grows, Some Scale Back, NYT, 7.1.2008, http://www.nytimes.com/2008/01/07/technology/07show.html?hp

 

 

 

 

 

Age of Riches

Private Cash Sets Agenda for Urban Infrastructure

 

January 6, 2008
The New York Times
By LOUIS UCHITELLE

 

NEW HAVEN — Conceived as a freeway, the Route 34 Connector still promises to whisk motorists across New Haven as they exit Interstate 95. But in less than a mile, the three broad lanes abruptly end, forcing traffic onto side roads that skirt the unbuilt right-of-way — a wasteland of elongated asphalt parking lots and scrub grass.

Mayor John DeStefano Jr. calls the aborted project a tragic example of public infrastructure gone awry. He has drawn up detailed plans to rip up the highway and parking lots and restore the neighborhood of homes and stores that once existed. But lacking money, the mayor’s project only inches forward.

A few streets away, there is no such obstacle. On either side of New Haven’s highway to nowhere, city streets throb with construction activity. A different kind of infrastructure spending — unrelated to roads or rapid transit, airports or levees — is under way.

Yale University is rebuilding itself — drawing on its huge, rapidly growing endowment and on multimillion-dollar gifts, mainly from alumni — to renovate 54 buildings and construct 16 new ones. Not since the 1930s has Yale undertaken so ambitious an expansion.

The message in this outburst of activity, here and in other places across the country, is that private spending, supported handsomely by a growing number of very wealthy families, is gaining ground on traditional public investment. In the case of New Haven, once the recipient of more federal dollars per person for urban renewal than any other city, private investment now far surpasses public outlays.

“For us,” the mayor said, “infrastructure spending has come to mean growing the university. Yale has the money, and what they get from us is the approval to grow.”

But for all the wealth going into private philanthropy, its reach is limited. Richard C. Levin, Yale’s president, is not committing money to the mayor’s reconstruction plan or to other items on Mr. DeStefano’s wish list, like high-speed rail service to Manhattan or lengthening the runway at Tweed New Haven Regional Airport so more airlines will fly here.

Philanthropic spending adds mainly to the nation’s stock of hospitals, libraries, museums, parks, university buildings, theaters and concert halls. Public infrastructure — highways, bridges, rail systems, water works, public schools, port facilities, sewers, airports, energy grids, tunnels, dams and levees — depends mostly on tax dollars. It is hugely expensive and the money available, while still substantial, has shrunk as a share of the national economy.

The American Society of Civil Engineers estimates that government should be spending $320 billion a year over the next five years — double the current outlay — just to bring up to par what already exists.

A few decades ago, after the Depression and World War II, the nation rapidly added infrastructure and “maintenance was a less pressing issue,” Casey Dinges, a society spokesman, said. The entire interstate highway system, for example, was built in just 35 years.

But now 14 years are likely to pass before a widening of just one bridge in that system, spanning the Quinnipiac River here on I-95, is completed. The traffic-congested bridge is to become six lanes in each direction, from the present three.

Nearly six years into the expansion, the approaches are gradually being widened, but the bridge itself is untouched. The first pilings have yet to be sunk to support the additional lanes. The state transportation department, which is handling the $2 billion project, blames the slow flow of money, mainly from the federal government. That flow has averaged less than $45 million a year, according to Albert A. Martin, the department’s deputy commissioner.

“If we had had the $2 billion in hand right from the start, that would have reduced the construction time by half, to seven years,” Mr. Martin said. “The problem is, we don’t have the dollars readily available. That is one of the big differences between us and Yale.”

 

Yale’s Expansive Makeover

Yale’s reconstruction proceeds at warp speed. Scaffolding and gauzelike scrim, to protect pedestrians from falling debris, cover buildings on nearly every block of the urban campus. The emphasis is on those devoted to science and medicine, to enhance Yale’s stature in these fields. But every other department is a beneficiary, too, and all of the 12 residential colleges are being renovated. To keep this work going year-round, Yale built a four-story brick dorm, almost large enough to fill a city block, as temporary student housing.

The 90-year-old football stadium, the Yale Bowl, got a share of the largesse. A mansionlike field house is soon to be built alongside it, which, among other things, will allow the opposing teams to spend halftime in greater comfort. For years they have rested in roped-off exit tunnels beneath the stands; the locker rooms are too far away.

“The field house is a luxury item in a way,” Laura A. Cruickshank, an architect employed by Yale as university planner, acknowledged. “But when you have a stadium that is so old and iconic, you have to do things differently. And how much of a luxury is it when you have players who play the way they do and you have to tape them up at halftime in the tunnels?”

Propelled by the construction on campus, Yale has become a big owner of commercial real estate in the surrounding downtown, engaging in a form of urban renewal not unlike what Mayor DeStefano wants for Route 34. But while the mayor has to extract state and federal subsidies, Yale goes forward with its own money.

Biotech start-ups, restaurants and stores now occupy Yale-owned buildings. Wanting its new campus in upscale surroundings, the university even employs two people full time to recruit boutique retailers in New York and Boston as tenants on spruced-up streets.

“The mayor was far-sighted enough,” said Mr. Levin, who has been Yale’s president since 1993, the same year that Mr. DeStefano first won his office, “to recognize that working with us, with our capital, we could actually revive the downtown, which we’re doing.”

The person in charge of improving the neighborhood around Yale is Bruce Alexander, 64, a former real estate entrepreneur who helped develop the Inner Harbor in Baltimore. Mr. Levin recruited him in 1998 and, during a recent tour of the city, Mr. Alexander pointed out one of his favorite achievements — the purchase of a group of contiguous buildings occupying a square block in the heart of the city.

The owner had gone bankrupt, and to avoid having the buildings auctioned piecemeal, Yale bought them all, at the mayor’s request, and filled them with stores and restaurants at street level, and apartments and offices on the upper floors.

“When you own a block of property,” Mr. Alexander said, “you can create an identity.”

 

Infrastructure Spending Lags

The shift from public money to private wealth in shaping the nation’s cities is evident in national data. Government outlays on physical infrastructure have declined to 2.7 percent of the gross domestic product, from 3.6 percent in the 1960s. Philanthropic giving, in contrast, has jumped to nearly 2.5 percent of G.D.P., from 1.5 percent in 1995 and 2 percent in the ’60s.

Most of this money goes into endowments and foundations, or comes in the form of individual gifts, and then is increased through leverage. Of the $3 billion that Yale has spent so far on its vast building program, for example, slightly less than two-thirds came from gifts and from the endowment, which now totals $22.5 billion. The rest was borrowed, Mr. Levin said.

Yale now spends more than $400 million annually on its renaissance, nearly six times its outlays for construction and renovation in the mid-1990s. New Haven, by contrast, budgeted $137 million in the current fiscal year for all its capital projects, including those subsidized by state and federal governments. That is less than twice the amount budgeted in the mid-’90s.

Government investment nationwide has lagged for several reasons, say business leaders, academics and public officials. Tax cuts have helped to hold down overall government spending. So has the view, widespread in recent decades, that public investment is often inept and wasteful. And politics intrudes, with the widely criticized earmark process in Congress cited lately as a prime example of misdirected spending.

“Governments are accountable to the democratic process, which has many, many virtues; I would not trade it for anything else,” Mr. Levin said. “But it is not particularly good at focusing resources and driving things efficiently.”

Perhaps most important, big businesses no longer put as much clout and attention behind public infrastructure investments. In an earlier era, corporations, many with deep roots in local communities, lobbied government for the railroads, highways and many other facilities they needed to operate successfully. And they served as a crucial fountain of local tax revenue.

But companies are more mobile today. And many of the urban manufacturers most dependent on public infrastructure have moved or gone out of business. The Winchester Repeating Arms Company, once New Haven’s largest employer, is among the departed. Yale, which pays some taxes and escapes others that most corporations pay — particularly property taxes — is now the city’s biggest employer.

Anthony P. Rescigno, president of the Greater New Haven Chamber of Commerce, is struggling to revive the commitment of his members. He is trying to drum up stronger support among local businesses to lengthen the airport runway to 5,000 feet from the present 4,000 so that commercial airlines will bring in more flights. His members favor the longer runway, but not passionately.

“We had an example of a biotech company in New Haven bringing people here all the time,” Mr. Rescigno said. “Because he couldn’t bring them here easily by air, he would bring them to New York. The meetings and conferences took place there, not here. He had an option.”

Some government-business alliances still carry weight. In the Seattle area, for example, Microsoft has pushed its headquarters city, Redmond, to spend millions to upgrade roads for its expanding campus, along with the millions that the software giant has spent.

Now Microsoft wants the state to replace a 40-year-old, two-lane bridge on a highway that connects Seattle and Redmond. “We joined the city in arguing for the new bridge,” said Lou Gellos, a Microsoft spokesman, “and that was instrumental in bringing the issue to the forefront.”

But such examples are increasingly rare these days.

“If you had 30 C.E.O.’s saying, ‘Damn it, we need new bridges or faster trains,’ then that would happen,” said Peter R. Orszag, director of the Congressional Budget Office. “The fact of the matter is that public infrastructure spending does not have much momentum behind it at all.”

 

Money Tight, Progress Slow

Mayor DeStefano, 52, an intense man who grew up here, has chosen to spend most of his limited capital budget to renovate New Haven’s public school buildings and add three high schools.

His goal, he says, is to raise the quality of the education so that families will choose to use the public schools, even moving back from the suburbs. His argument is not unlike Mr. Levin’s: Newer buildings, better equipped, make for a better education.

“The high school dropout rate has been cut in half,” the mayor said, arguing that the multiyear reconstruction project is showing results. “Eighty-two percent of the kids go on to two- and four-year colleges. That is higher than the state average.”

Mayor DeStefano’s efforts to rebuild New Haven as a city of middle- and working-class neighborhoods represent a reversal of the large urban renewal projects that once dominated public infrastructure spending. New Haven was at the forefront of that movement. Under an earlier mayor, Richard C. Lee, federal tax dollars poured in for slum clearance, highway construction, big public housing projects, a coliseum and a huge downtown shopping mall.

Most of this is gone now. A community college rises where two department stores stood, and the mall is closed. The 10,000-seat coliseum, a Mecca for wrestling matches and minor-league hockey, was torn down last January.

The Route 34 Connector would have linked I-95, south of the city, to the existing Route 34 in the north. Environmentalists helped to halt the project, objecting in particular to a section of the freeway that would have crossed wetlands. More recently, low-income families living near the right-of-way petitioned the mayor to return the land to streets, stores and homes.

“They want to recreate the neighborhood in which they grew up, or where their parents and grandparents grew up,” said Karyn M. Gilvarg, executive director of the New Haven City Plan Department. She estimates the cost of doing so at $150 million, a relatively small sum for Yale, but too expensive for the mayor to proceed quickly.

There are other delays. The mayor would like Metro-North Railroad’s New Haven line to offer a high-speed service to Manhattan, cutting the 80-mile run to an hour, from an hour and 40 minutes.

“The largest cluster of hedge fund managers after New York and London is in Fairfield County,” the mayor said, arguing that New Haven would get some of that business “if it were a half-hour or an hour closer” by train to Midtown Manhattan.

The state government, which owns the New Haven line, is indeed gradually building up an infrastructure to make faster train service possible. Three hundred new rail cars, built to run at high speeds, will start arriving in 2010.

“We are in the process of repairing bridges and upgrading power lines,” Mr. Martin, the transportation official, said. “And we are looking at installing concrete ties as replacements for the wooden ones.”

Given the limited pool of federal and state money, however, the project moves at a snail’s pace. Under the best-case schedule, high-speed service will not arrive in New Haven for a decade.

“We don’t have the big companies pushing the government to get the work done, because they don’t need it,” Ms. Gilvarg said. “They are all going to China or wherever, and the business sector is smaller in New Haven than it was.”

 

Blurred Lines in New Haven

For New Haven, that leaves Yale.

“There are no corporate citizens left in New Haven except Yale,” Mr. Levin, the university president, said. He, too, would like to see the airport runway lengthened and high-speed rail service to New York. But they are not central to what he considers his mission, which is to make Yale pre-eminent among universities, not just in science and the arts, but in the students’ daily lives.

Eight of the 12 residential colleges have already been rebuilt, at a cost of at least $40 million each. In appearance, the colleges are the same elegant gray sandstone Gothic structures dating from the early 20th century. The new comforts and efficiencies, though, are evident on closer inspection.

Visiting Trumbull College, next to Sterling Library, Ms. Cruickshank, the university planner, points to the leaded glass windows, which are double paned now, eliminating the unsightly plexiglass that had been screwed to the windows to keep down heating bills.

The bedrooms are still small, but they are organized for the first time in clusters of four or five around a common room, creating a much more social environment. “You cannot walk from one place to another without passing students,” said Janet B. Henrich, the master at Trumbull.

Reconfiguring rooms and passageways is costly without being as noticeably expensive as the changes in the basement, which long housed a small theater for student productions, a gallery for their art, a music practice room and a snack bar. But exposed pipes ran along the ceiling, limiting the space.

That was solved by enlarging the basement and encasing the intrusive mechanicals, so that the basement no longer seems like one. The theater in particular benefited. It has 60 cushioned seats, banked steeply over the stage, and equipped with the latest lighting and sound devices.

“I am not sure it makes for better performances,” Ms. Henrich said, “but it is probably safer and easier to learn the basics.”

As Yale invests, pursuing its goals, Mayor DeStefano falls increasingly into step, blurring the line between public and philanthropic infrastructure spending. Yale has acquired land to build two more residential colleges, and the mayor contributed by closing off and giving portions of two streets to the university.

In return, Yale has agreed to spend $10 million to repair bridges, streets, lights and sidewalks in the neighborhood — in effect, picking up a bill that would strain the city’s budget.

“The streets of their campus are the streets of the city,” Ms. Gilvarg, the city planner, said. “They are part of the public infrastructure, not private roads.”

    Private Cash Sets Agenda for Urban Infrastructure, NYT, 6.1.2008, http://www.nytimes.com/2008/01/06/business/06haven.html?hp

 

 

 

 

 

Unemployment Sounds Warning About Economy

 

January 5, 2008
The New York Times
By PETER S. GOODMAN and MICHAEL M. GRYNBAUM

 

The unemployment rate surged to 5 percent in December as the economy added a meager 18,000 jobs, the smallest monthly increase in four years, the Labor Department reported on Friday.

Economists viewed the report as the most powerful indication to date that the United States could well be falling into a recessionary downturn. Evidence of widening unemployment heightened anticipation that the Federal Reserve would further cut interest rates this month, perhaps by an unusually large half a percentage point, in a bid to prevent the economy from sliding into the muck.

“This is unambiguously negative,” said Mark Zandi, chief economist at Moody’s Economy.com. “The economy is on the edge of recession, if we’re not already engulfed in one.”

A recession is typically defined as an extended period of at least several months during which economic activity shrinks and unemployment rises.

The swift deterioration in the job market resonated as a warning sign that troubles once confined to real estate and construction are spilling into the broader economy, threatening the ability of American consumers to keep spending with customary abandon.

On Wall Street, the report led to a big sell-off that sent the Dow Jones industrial average plunging nearly 2 percent.

As the presidential race heated up, Democrats seized upon the bleak job numbers to indict Republican-led economic policies. “This morning’s jobs report confirms what most Americans already knew,” Nancy Pelosi, the House speaker, said in a statement. “President Bush’s economic policies have failed our country’s middle class.”

President Bush cautioned that “we can’t take economic growth for granted” and said he would work with Congress to be “more diligent” on protecting the economy. Speaking to reporters at the White House after a meeting with his economic advisers, Mr. Bush warned that “the worst thing the Congress could do is raise taxes on the American people.”

The lone consolation for investors, workers and the public at large was that the bad news seemed severe enough to prod the Fed to push its benchmark rate below its current 4.25 percent when policy makers meet at the end of the month. Lower interest rates decrease borrowing costs and encourage banks to lend more freely, spurring spending, hiring and investment.

The Fed has already eased rates three times since September in a bid to inject confidence into jittery markets. But analysts cautioned that central bankers may now feel constrained against further easing: inflation is growing, particularly as oil hovers near $100 a barrel. Lower interest rates, over time, can generate the seeds of inflation, and could make an already weak dollar worth less against foreign currencies.

“The Fed is trying to juggle a two-sided sword,” said Ryan Larson, senior equity trader at Voyageur Asset Management. “They’re trying to fight inflation moving higher and they’re trying to fight a slowdown in growth.”

In an effort to encourage lending, the Fed has been pumping cash through the banking system by auctioning off loans at discounted rates. On Friday, it said it would expand a pair of auctions scheduled for this month, offering $30 billion.

Some economists said the markets and other analysts were making too much of a lone jobs report that could yet be revised.

“The stock and bond markets are going into panic mode,” said Michael Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “We’re going to have a slowdown, but I don’t think we’re going to have a recession.”

While filings for jobless benefits have been rising in recent weeks, the pace has not been swift enough to justify such a sharp jump in the unemployment rate, Mr. Darda added.

For months, the economy had managed to grow vigorously despite worrying developments, from the unraveling of the housing industry to turmoil in the credit markets. Through it all, economists marveled at the resilience of the labor market, suggesting that as long as the economy kept creating jobs by the tens of thousands each month, Americans would keep spending and growth would carry on.

But the jobs report for December suggested that the negatives dogging the economy finally appear to be dragging it down.

“There’s no mystery as to why the unemployment rate went up,” said Robert A. Barbera, chief economist at the research firm ITG. “The mystery is why it took so long.”

December’s addition of 18,000 jobs to nonfarm payrolls was an abrupt drop from the 115,000 created in November — a figure revised on Friday from an initial estimate of 94,000. It put the annual rate of job growth at its lowest since 2004.

Some areas of the economy continued to expand, according to the report. Government jobs grew, and health care added 28,000 jobs. Food services added 27,000.

But that growth was largely reversed by pain elsewhere. Retailing lost 24,000 jobs in December. Financial services lost 7,000. Construction shed another 49,000 jobs. Even commercial construction, which some have suggested could compensate for woes among home builders, lost 17,000 jobs. Over all, private sector jobs slid by 13,000.

Despite a weak dollar, which has helped compensate for disappointment at home by lifting American sales abroad, the nation shed 31,000 manufacturing jobs in December.

For the third consecutive month, wages grew slower than the pace of inflation, cutting into the real income of many workers. Among rank-and-file workers, who make up more than four-fifths of the labor force, average hourly earnings rose 3.7 percent last year, below the 4.3 percent rise in 2006.

Job growth has been slowing steadily for two years. In 2005, the economy generated 212,000 new jobs a month, according to the Labor Department. Last year, the pace dropped to 122,000.

The spike in the unemployment rate, which was 4.7 percent in November, suggested that the deterioration of the job market is now accelerating.

Last year, companies fretted about business prospects amid falling housing prices and tightening credit. Many stopped hiring, but large-scale layoffs were rare. But now, some appear to have concluded that they can no longer tough it out.

“December’s bleak jobs report represents the siren call that this business cycle is just about over,” declared Bernard Baumohl, managing director at the Economic Outlook Group, in a note to clients. “We’re about to tilt over to the other side of the economic curve and begin the downsizing.”

In Penacook, N.H., the tilt came during the Christmas season: Riverside Millwork, a supplier of windows, doors and stair parts, laid off 43 people. That added to a wave of layoffs that has winnowed the staff from 225 to 40 since October 2005, when home building began its decline.

“We’ve cut just about everything that we can possibly cut,” said Larry Byer, the company’s human resource manager. “When you don’t have assets to sell or to keep you going, the bodies have to go.”

In calculating the rate of job growth, the Labor Department relies upon a sampling of payroll data and an extrapolation of how many jobs have been created and destroyed. An accompanying survey of households, used to calculate the unemployment rate, presented an even bleaker picture, showing that the number of Americans saying they were working plunged by 436,000 in December — the worst number in five years.

The trend was pronounced for teenagers, blacks and Hispanics, with unemployment among those groups jumping 0.6 percentage point, triple the increase for whites.

The household survey is notoriously volatile and treated with skepticism. But unlike the payroll data, it is not subject to revision, other than for seasonal factors, making it a better indicator when the economy is on the cusp of change, Mr. Barbera said.

Between December 2005 and December 2006, the household survey showed jobs increasing by 2.2 percent. Over the last year, jobs grew less than 0.2 percent.

“Every time we’ve gotten down to this level since 1956, there’s been a recession,” Mr. Barbera said.

The risk is that the weakening job market will swell from a symptom of malaise to a cause. As fewer jobs are created, spending power could dry up. Faced with declining business, employers could further trim payrolls. As unemployment grows, more homeowners could fall behind on mortgages, leading to more losses at banks, and more layoffs.

“The risk of a vicious cycle setting in now is very high,” Mr. Zandi said. “The job market’s operating at stall speed. Either it picks up soon or it quickly unravels.”



Edmund L. Andrews contributed reporting.

    Unemployment Sounds Warning About Economy, NYT, 5.1.2008, http://www.nytimes.com/2008/01/05/business/05econ.html?hp

 

 

 

 

 

Stocks Fall After Weak Jobs Reading

 

January 4, 2008
Filed at 11:21 a.m. ET
By THE ASSOCIATED PRESS
the New York Times

 

NEW YORK (AP) -- Stocks lost ground Friday after the government's much-anticipated employment report showed weaker-than-expected job growth and a rise in the unemployment rate. The major indexes each fell more than 1 percent, including the Dow Jones industrial average, which lost more than 200 points.

The Labor Department's report employers raised payrolls by only 18,000 and that the nation's unemployment rate rose to its highest level since November 2005 unnerved investors worried that a weakening job market will hurt consumer spending.

A better-than-expected economic reading on the nation's service sector briefly pulled stocks off their lows but wasn't enough to shake investors' concerns.

Investors had been awaiting the jobs report for weeks as they tried to determine whether the economy would continue to benefit from robust consumer spending even as sectors like home construction, mortgage writing and manufacturing slow. Wall Street is concerned that areas of weakness could puncture growth and even tip the economy into recession if consumers can't depend on a solid job market.

Manufacturers, construction companies and financial services companies all cut jobs during the month amid an anemic housing market. Retailers also made reductions.

The December report showed employers added the fewest jobs to their payrolls since August 2003. Economists had predicted a jobs growth figure of about 70,000 and an unemployment rate of 4.8 percent. Instead, unemployment climbed to 5 percent in December from 4.7 percent in November. While 5 percent unemployment is still considered good by historical standards, the increase from November clearly made some investors nervous.

''It's a scary number, no question about it. No matter how good you wanted to feel about the economy averting a recession there is far less conviction than even two or three days ago,'' said Joe Balestrino, senior portfolio manager at Federated Investors.

In late morning trading, the Dow fell 205.01, or 1.57 percent, to 12,851.71.

Broader stock indicators also fell. The Standard & Poor's 500 index declined 26.10, or 1.80 percent, to 1,421.06. The technology-focused Nasdaq composite index fell 75.58, or 2.90 percent, to 2,527.10, in part after an analyst downgrade of Intel Corp.

Small-capitalization companies also fell. Investors often view smaller companies, without the benefit of sizable overseas operations, for example, as less likely to fare well in an economic slowdown. The Russell 2000 index of smaller companies fell 20.46, or 5.75 percent, to 724.55.

Declining issues outnumbered advancers by about 4 to 1 on the New York Stock Exchange, where volume came to 465.1 million shares.

Bond prices rose as investors sought the safety of government-backed debt after the employment reading. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.83 percent from 3.89 percent late Thursday. The dollar was mixed against other major currencies. Gold prices, which have risen to nearly 30-year highs in recent days, declined.

Light, sweet crude fell $1.73 to $97.45 on the New York Mercantile Exchange. Oil touched $100 per barrel this week for the first time, stirring concerns about inflation.

The employment figures overshadowed a report from the Institute for Supply Management, a business group, which said its December index of non-manufacturing activity showed the nation's service sector grew in December. However, the pace was slightly slower than in November and the index fell to 53.9 in December from 54.1 the prior month. Analysts had expected a further decline.

''It's hard to point to any piece of data in recent weeks that makes you feel comfortable,'' said Balestrino, noting that many bullish investors had hoped a strong jobs picture would lift Wall Street's mood.

''This the one piece that was holding up pretty well and now it's showing some weakness as well,'' he said. ''In our business it's not the absolute number, it's the direction of the number and especially the direction versus the expectations.''

In corporate news, a JPMorgan analyst lowered his rating on Intel to ''neutral'' from ''overweight,'' citing a drop in chip orders from computer manufacturers during the fourth quarter and high inventories. Intel, one of the 30 stocks that comprise the Dow industrials, fell $1.76, or 7.1 percent, to $22.91.

Another chip stock, Micrel Inc. fell $1.69, or 21.6 percent, to $6.13 after the company lowered its fourth-quarter sales and earnings forecasts, pointing to lower-than-expected Asian orders.

Regions Financial Corp. fell $2.18, or 9.4 percent, to $21.10 after warning it will set aside $360 million to cover bad loans in the fourth quarter. The bank, with branches mostly in the South and Midwest, said a sharp decline in demand for real estate is hurting loans to builders and property developers.

Overseas, Japan's Nikkei stock average fell sharply, finishing down 4.03 percent to its lowest level since July 2006 after being closed since the previous Friday for holidays. The pullback followed uncertainty on Wall Street about the U.S. economy and rising oil prices.

In afternoon trading, Britain's FTSE 100 fell 0.93 percent, Germany's DAX index fell 1.40 percent, and France's CAC-40 fell 2.09 percent.

------

On the Net:

New York Stock Exchange: http://www.nyse.com

Nasdaq Stock Market: http://www.nasdaq.com

    Stocks Fall After Weak Jobs Reading, NYT, 4.1.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html?hp

 

 

 

 

 

Job Growth Sputtered in December

 

January 4, 2008
The New York Times
By MICHAEL M. GRYNBAUM

 

Job growth shrank significantly in December, the government reported on Friday, setting off renewed fears of a recession and all but assuring that interest rates will be lowered this month. The news sent stocks down sharply in morning trading.

The economy added 18,000 jobs to nonfarm payrolls, the Labor Department said, the smallest monthly gain in more than four years. The unemployment rate rose to 5 percent after hovering near 4.7 percent since the summer.

“This is a far weaker report than we expected,” Jared Bernstein, an economist at the Economics Policy Institute, wrote in an e-mail message. “The uptick in the unemployment rate alone, which won’t be revised away, is flashing recession.”

Investors appeared to concur. By 11:15 a.m., the Dow Jones industrial average was down 194.28 points, or 1.5 percent, at 12,862.44. The Standard & Poor’s 500-stock index lost more than 1.8 percent, and the technology-heavy Nasdaq composite was off by 2.9 percent.

Big losers among the Dow industrials included Intel, the chip maker, whose shares were off more than 7 percent. Home Depot, Alcoa, General Motors and Microsoft also showed big declines.

Wall Street has been on edge since a manufacturing report came in weaker than expected on Wednesday, and many investors were looking to the employment figures for a clearer picture of the economy’s growth prospects in 2008.

They did not like what they saw. Payroll growth slowed significantly throughout 2007, but the weak December number makes for a particularly painful finish to the year. The report came in far below analysts’ estimates of 70,000 additional jobs, putting annual job growth at its lowest level since 2004.

The weak report bolstered expectations that the Federal Reserve will cut its benchmark interest rate at its policy meeting later this month. Fed officials have indicated they will focus on sustaining economic growth, even as inflation remains a concern.

Economists expressed surprise in recent weeks that the employment had held relatively steady amid the financial turmoil stemming from the subprime mortgage crisis. “Sorry to say,” Mr. Bernstein said, “we can almost surely put aside the question as to when the overall economic head winds will reach the labor market. They’re here.”

Indeed, weakness in the housing sector dragged down employment in December, with the manufacturing and construction sectors recording substantial job losses. Private payrolls decreased last month by 13,000 jobs, as a drop in the retail sector could not offset a surge in service-providing jobs.

Among rank-and-file workers, who make up more than 80 percent of the workforce, average hourly earnings rose 3.7 percent last year, below the 4.3 percent rise in 2006. Wages stayed flat in December, with average hourly earnings rising 0.4 percent, the same amount as November.

In November, the economy added 115,000 jobs, which was revised up from the government’s preliminary estimate of a 94,000 increase. Growth in October was revised down to 159,000 jobs from an initial estimate of 170,000.

    Job Growth Sputtered in December, NYT, 4.1.2008, http://www.nytimes.com/2008/01/04/business/04cnd-econ.html?hp

 

 

 

 

 

Manhattan housing prices at record high

 

Thu Jan 3, 2008
10:33am EST
Reuters
By Ilaina Jonas

 

NEW YORK (Reuters) - The U.S. housing market may be a seller's nightmare but Manhattan's was a dream in the fourth quarter as foreign buyers pushed up demand while supply stayed tight, sending the average sales price to a record high.

Two swanky condominium projects, The Plaza and 15 Central Park West, helped propel the average price of a Manhattan apartment to a record $1,439,909, up 17.6 percent from a year earlier and 5.1 percent from the third quarter, according to Prudential Douglas Elliman Manhattan Market Overview.

"Foreign demand has been a big part of the story," said Jonathan Miller, director of research at Radar Logic and author of Prudential's quarterly overview reports, but foreigners are not permitted to buy cooperatives.

"In a lot of new development we've seen significant activity from domestic purchasers as well," Miller added.

The average price per square foot of $1,180 set a record, up 18.2 percent from a year earlier and 3.1 percent from the prior quarter, according to the Prudential report.

The median price -- the midway point between the highest and lowest sales prices -- rose to $850,000, up 6.4 percent from a year earlier, according to the Prudential report.

The average sales price of a U.S. home overall declined last year. Prospective buyers in many U.S. markets have found prices still too high, and stiffer mortgage requirements arising out of the subprime crisis have also sidelined them.

The overall market suffers from a 10.3-month overhang of supply of homes for sale.

But supply shrank in Manhattan.

The number of apartments for sale fell 13.5 percent to 5,133, according to the Prudential report, while the number of sales rose 3.2 percent to 2,518 units.

According to Terra Holdings, sales prices at The Plaza, a former luxury hotel, and 15 Central Park West averaged nearly $7 million in the fourth quarter, helping to fuel a 51 percent increase in the average price of a Manhattan condominium.

Stripping out The Plaza and 15 Central Park West, the average selling price would have been $1.37 million, a 12 percent rise over the 2006 fourth quarter's $1,223,160, said Terra Holdings, the parent company of residential brokerages Halstead Property and Brown Harris Stevens.

Prices for condominiums, which usually make up half of new sales, rose 51 percent in the fourth quarter to a record $1,851,709, according to Terra Holdings. The average sales price of a cooperative apartment rose 21 percent to a record $1,074,369 in the fourth quarter from a year earlier.

The average sales price for all Manhattan apartments rose 34 percent to a record $1,430,514 in the fourth quarter, while the median price was up 14 percent to a record $828,000, according to Terra.

Figures from the Terra and Prudential reports differ because of the different times at which the organizations receive notice and prices of closed sales.

Gregory Heym of Terra Holdings said the Manhattan apartment market had not yet felt downward pressure from cuts in bonuses on Wall Street, where jobs are on the line as big investment banks take huge write-downs due to the subprime crisis.

"Somebody who's worried about their bonus is going to be hesitant to buy," Heym said. "Somebody who's worried about losing their job is going to be incredibly hesitant to buy."

But any real estate effect probably won't show up until the second half of the year, he said.



(Editing by Gary Hill)

    Manhattan housing prices at record high, R, 3.1.2008, http://www.reuters.com/article/domesticNews/idUSN0265243020080103

 

 

 

 

 

Oil Hits $100 a Barrel for the First Time

 

January 2, 2008
The New York Times
By JAD MOUAWAD

 

Oil prices reached the symbolic level of $100 a barrel for the first time on Wednesday, a long-awaited milestone in an era of rapidly escalating energy demand.

Crude oil futures for February delivery hit $100 on the New York Mercantile Exchange shortly after noon New York time, before falling back slightly. Oil prices, which had fallen to a low of $50 a barrel at the beginning of 2007, have quadrupled since 2003.

Shortly after 2:30 p.m., futures were trading at $99.47, up $3.49 on the day.

The rise in oil prices in recent years has been driven by an unprecedented surge in demand from the United States, China and other Asian and Middle Eastern countries. Booming economies have led to more consumption of oil-derived products like gasoline, jet fuel and diesel. Meanwhile, new oil supplies have struggled to catch up.

Oil markets have become increasingly volatile and unpredictable, with large swings in 2007 that analysts attributed partly to financial speculation, not just market fundamentals. Political tensions in the Middle East, where more than two-thirds of the world’s proven oil reserves are located, have also fueled the rise in prices.

Gasoline has lagged the rise in the price of oil. It stands at a nationwide average of $3.05 a gallon for regular grade, according to AAA, the automobile club. That is below the all-time peak in May of $3.23 a gallon, but it is 73 cents higher than at this time a year ago. Some analysts worry that gasoline could hit $4 a gallon by next spring if oil prices remain at high levels.

Oil is now within reach of its historic inflation-adjusted high reached in April 1980 in the aftermath of the Iranian revolution when oil prices jumped to the equivalent of $102.81 a barrel in today’s money.

Unlike the oil shocks of the 1970s and 1980s, which were caused by sudden interruptions in oil supplies from the Middle East, Wednesday’s surge is fundamentally different. Prices have risen steadily over several years because of a rise in demand for oil and gasoline in both developed and developing countries.

    Oil Hits $100 a Barrel for the First Time, NYT, 2.1.2008, http://www.nytimes.com/2008/01/02/business/02cnd-oil.html?hp

 

 

 

 

 

Housing, Credit and Financial Problems Drove Fed Rate Cut

 

January 2, 2008
Filed at 2:04 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

 

WASHINGTON (AP) -- Worsening problems in the housing, credit and financial markets drove the Federal Reserve to do an about-face in December and slice its key interest rate yet again with the hope it would help bolster an economy that was losing speed, according to meeting minutes made public Wednesday.

All those problems also greatly increased uncertainty about the economy's outlook, prompting Fed policymakers to keep all their option open about their next move, the minutes of the closed door meeting on Dec. 11 revealed.

''Although members agreed that the stance of policy should be eased, they also recognized that the situation was quite fluid and the economic outlook unusually uncertain,'' the minutes said.

Fed Chairman Ben Bernanke and all but one of his colleagues agreed to trim the Fed key rate by one-quarter percentage point to 4.25 percent, a two-year low. The central bank ordered its key rate to be lowered three times last year; the December reduction was most recent one.

    Housing, Credit and Financial Problems Drove Fed Rate Cut, NYT, 2.1.2008, http://www.nytimes.com/aponline/business/AP-Fed-Minutes.html

 

 

 

 

 

In the Land of Many Ifs

 

January 2, 2008
The New York Times
By PETER S. GOODMAN and VIKAS BAJAJ

 

For months, the American economy has been assailed by a wave of troubling news, from plunging housing prices to the soaring cost of oil, provoking gloomy talk of a possible recession. Yet so far the economy has found a way to shrug it all off and keep growing.

How much longer can the expansion carry on? As a new year unfolds, analysts expect a verdict soon: Either the negatives finally metastasize and drag the economy down, or a fresh source of growth emerges, helping to sustain consumer spending despite the ongoing worries about housing and tight credit.

“There are even odds of a recession,” said Mark Zandi, chief economist at Moody’s Economy.com. “It literally could go either way.”

The year that just ended was not for the faint of heart. As mortgage debt became synonymous with toxic waste, banks got spooked and tightfisted. Job growth slowed. Inflation fears grew. Still, consumers kept spending, and unemployment stayed flat. American companies found enough sales abroad to compensate for weakness at home.

The bursting housing bubble remains a locus of concern. An era of free-flowing credit and speculation has led to a far-flung empire of vacant, unsold homes — 2.1 million, or about 2.6 percent of the nation’s housing stock, Mr. Zandi said. Even in the worst years of recessions in the early 1980s and 1990s, the share of vacant homes did not exceed 1.9 percent.

This assemblage of unsold properties will not be whittled down to normal levels, economists suggest, until national home prices fall by at least 15 percent from their peak, reached in the summer of 2006. So far, prices have dropped a little more than 5 percent, according to the Standard & Poor’s Case-Shiller home price index.

The glut could be exacerbated if an already alarming wave of foreclosures continues to broaden, claiming even those with supposedly good credit.

Last year, the trouble in the mortgage market was largely confined to subprime loans extended to homeowners with weak credit. Nearly one-fourth of such loans were in default as of November, according to data from First American LoanPerformance and the Federal Reserve Bank of New York.

Though default rates on loans to homeowners with relatively good credit are far lower, they are rising sharply, too. In November, 6.6 percent of so-called Alt-A home loans — those deemed somewhat less risky than subprime — were either delinquent by 60 days or more, in foreclosure, or had been repossessed. That was up from 4.3 percent in August.

This is a potentially ominous sign, because subprime and Alt-A mortgages issued in 2006 together made up about 40 percent of all mortgages. Like many of the subprime loans that have landed in trouble, Alt-A loans often begin with a low introductory interest rate that later escalates.

The spike in foreclosures is happening even before many mortgages have reset to higher rates, suggesting that borrowers are falling behind because their homes are worth less. Many are having trouble refinancing as banks tighten lending standards.

All of which explains why many economists expect national housing prices to fall by 5 to 10 percent more in 2008, and perhaps into 2009 as well, before hitting bottom.

Such a drop could ripple out to the broader economy by depressing consumer spending, which accounts for about 70 percent of all economic activity.

“It’s almost inconceivable that there won’t be severe constraints on the U.S. consumer economy,” said Bernard Connolly, chief global strategist at Banque AIG in London.

Through the recent era of multiplying housing prices, Americans have turned increased home values into cash via sales, refinanced mortgages and home equity loans — more than $800 billion a year from 2004 to 2006, according to several analysts. The pace of this flow has slowed sharply in recent months.

Fierce debate centers on how much of that money winds up financing consumer purchases, but estimates suggest that every dollar of lost housing value is likely to constrain 5 to 10 cents of spending by consumers that otherwise would have taken place over the next year or two. That could be enough to turn an expansion into an recession.

Forecasting the demise of consumer spending, however, is notoriously risky. The willingness of Americans to spend, whatever the size of their debts, seems to transcend the rules of economics.

But conditions suggesting a slowdown have been taking shape: The labor market cooled last year, creating new jobs at roughly half the rate of 2006. Wages grew slower than inflation during the last two months. Early indications suggest Americans were relatively thrifty during the holiday season.

“You have to ask yourself: where does the consumer continue to get his or her spending power?” said Jared Bernstein, senior economist at the liberal Economic Policy Institute in Washington. “If consumption falters, it’s good night nurse for the American economy.”

This is what many economists deem the most plausible of the negative situations that could unfold in 2008: Housing prices fall, consumers tighten up, and companies eliminate jobs in response to declining business, particularly in retailing, restaurants and travel.

Companies curtail investments, cutting jobs in real estate, construction and banking. This takes more money out of the economy, generating a downward spiral of declining activity. In a word, recession.

Those focused on this prospect are concerned by the weakening job market and recent increases in those filing for unemployment claims. In a report last month, Ian Morris, United States economist for HSBC, predicted that unemployment would climb to 5.3 by the end of 2008, up from an average of 4.7 percent in 2007, with the economy generating only about 40,000 nonfarm jobs each month — about one-third the pace for most of 2007.

The prospect of such a development has spurred the Federal Reserve to cut interest rates three times since September, bringing its benchmark rate down to 4.25 percent from 5.25 percent. Cheaper credit generally lubricates the wheels of the economy by encouraging investment and spending.

The Fed has expressed reluctance to continue cutting because of concerns about inflation. But further signs of economic trouble will impel it to keep lowering borrowing costs. And if oil and other commodity prices fall enough this year to dampen fears of inflation, that would give the Fed room to cut interest rates more aggressively.

The economy is rife with surprises, and unexpected good news could step in to provide relief. American consumers, despite their general gloom about the economy, continue to express satisfaction with their personal finances. That could carry the day, as they tap credit cards to finance meals out and trips to the mall, even as housing wealth dries up.

Added support for the economy is likely to come from abroad, sustaining rising exports, which have been propelled by healthy growth everywhere from China and India to Europe and the Middle East. The weak dollar helps make American products more competitive in foreign markets.

A combination of any of these factors might be enough to generate jobs and keep the economy going, regardless of real estate troubles.

Moreover, some economists assert that worries about the housing market are overblown in terms of the effect on the broader economy. While bad news seems certain to continue for real estate agents, construction companies, home improvement stores and anyone else with fortunes tied to demand for garages and ceramic tiles, the economy can continue to grow even with house prices in the doldrums, they say.

In this view, the crucial factor is the availability of credit. The mortgage crisis has made markets skittish about the extent of losses still hiding in the weeds. Lenders have been casting a wary eye at potential borrowers, diminishing the flow of credit to support everything from car purchases to the development of office towers.

If the Fed’s lowered interest rates do the trick, making banks feel more secure, an upward spiral could commence, as fresh lending spurs business and keeps the economy growing. But if jitters persist and banks remain tight, that could snuff out business, cut jobs and send the economy into a tailspin.

“If the credit card is a little harder to come by, that means there’s a little less shopping going on,” said Neal Soss, an economist at Credit Suisse Securities in New York. “If banks go into hibernation and there’s no cash for anybody, then it’s very hard to get the economy to grow with any vigor.”

    In the Land of Many Ifs, NYT, 2.1.2008, http://www.nytimes.com/2008/01/02/business/02econ.html

 

 

 

 

 

News Analysis

Customers, Not Brokers, Profited in an Odd 2007

 

January 2, 2008
The New York Times
By FLOYD NORRIS

 

The brokers’ customers did reasonably well. The brokers did not.

That is not the usual way of Wall Street. Two-thirds of a century ago, a best seller asked, “Where are the customers’ yachts?” It noted that somehow the brokers always made money, even when their customers suffered. And so it has been for most of the years since then.

But not in 2007.

How could that happen? In recent years, Wall Street came up with what amounted to parallel markets. Ordinary investors could buy and sell stocks and bonds, but the favored insiders could partake of a host of investments not available to the rest of us. There were specialized securities and complex derivatives, and instruments known by their initials: C.D.O.’s, M.B.S.’s and SIVs.

In 2007, the Standard & Poor’s 500-stock index rose a respectable 3.5 percent, and high-quality bonds performed well as long-term interest rates fell — at least for those with good credit. Commodity prices continued to boom, and many foreign stock markets also did very well, particularly when viewed from America, land of the declining dollar. By and large, the customers of the big financial firms had reason to be pleased.

But not the bosses. The chief executives of Citigroup and Merrill Lynch were forced out, while Morgan Stanley’s chief will go without a bonus for the first time anyone can remember.

Those three companies, and some of their competitors, had to go looking for capital infusions to make up for losses in those exotic markets that the public had been kept away from.

Most ordinary investors found out what a C.D.O. was only when they read about the losses C.D.O.’s were bringing to the unfortunate owners.

Some of the biggest profits earlier in this decade went to those who invested in private equity firms, which could take companies private and then get their money back almost immediately, often by having the companies borrow it.

But in 2007, the credit markets seized up, and suddenly it was not as much fun to be in the private equity business. The ones who enjoyed it the least were those newly admitted to the club. The Blackstone Group went public in June, just weeks before the credit markets began to turn hostile. Among the unhappy customers last year were the ones who got in on that deal. The shares, sold to the public at $31, ended the year at $22.13.

Perhaps that shows us this was the Groucho Marx market: a private club that decides to let in anyone may know something the rest of us don’t.

Over all, financial stocks did the worst of all in 2007. Of the 10 economic sectors that make up the Standard & Poor’s 500, eight showed gains, with the best performances turned in by energy and materials stocks — sectors that were helped by surging growth in developing economies. Among the historic names that rose more than 20 percent were Exxon Mobil, United States Steel and Alcoa.

But the financial shares in the S.& P. 500 fell 21 percent as a group. Among the big names that lost at least a third of their value in 2007 were Fannie Mae, Freddie Mac, Bear Stearns, Moody’s and Citigroup. MBIA, a company that specializes in guaranteeing the financial health of others, lost nearly three-quarters of its value.

Financial scares tend to arrive every decade or so, and the American economy and financial system have always bounced back, confounding the skeptics — although in some of those crises there were more than a few financial fatalities. Many of the biggest banks of the 1970’s are no longer around. They vanished into mergers with what had been smaller rivals that did not make the mistakes of earlier eras — notably lending to Latin American countries and overinvesting in commercial real estate.

The survivors of that wave of mergers, by and large, were regional banks. Two of the country’s largest banks, Bank of America and Wachovia, have their headquarters in Charlotte, N.C. (Whether it is a coincidence or not, Charlotte is now the strongest major housing market in the country, according to one index.)

On a relative basis, 2007 was the worst year for financial stocks since at least 1970 — the earliest year for which Standard & Poor’s could provide comparable records. (The financials suffered larger falls in 1974 and 1990, both years of crises on Wall Street, but those were years when most stocks fell. By contrast, 2007 was a year when most nonfinancial stocks rose.)

The most recent period of severe underperformance of financial stocks was in some ways the opposite of this one. In 1997 and 1998, financial markets were shaken first by the collapse of some Asian currencies, then by Russia’s default on its debt. A weak world economy sent commodity markets plunging, with oil falling almost to $10 a barrel.

Now, commodities are strong, with gold topping $800 an ounce for the first time since 1980 and oil almost reaching $100 a barrel. Russia is riding high, and the government of Singapore, which suffered along with its neighbors a decade ago, bailed out Merrill Lynch.

The crisis of the late 1990s caused consternation in financial circles, and led to the rescue of a big hedge fund, Long-Term Capital Management. But it had little effect on America’s economy, particularly on consumers. House prices, to cite one example, rose steadily during the period.

In this cycle, a decline in home prices helped to reveal financial excesses in the subprime mortgage market, where lending standards seemed to have all but evaporated in 2006 and the first half of 2007.

The results of that did spread, but not yet to the entire economy. The other economic sector where stocks fell in 2007 was consumer discretionary companies, a group that includes retailers and home builders. An index of department store stocks fell 35 percent, as forecasts of poor holiday sales came true.

But those stocks did better than those of home builders, which were down 42 percent. And the entire economy kept growing, in part because of rising world demand.

Many of the subprime mortgages had been financed through the securitization market, where a wondrous financial alchemy enabled risky investments to be transformed into supposedly safe investments rated AAA by the bond rating agencies, whose calculations of maximum possible losses turned out to have been woefully low.

In 2008, the biggest issue for Wall Street and the banks will be assessing the damage. Can the securitization market recover, and continue to provide financing for everything from credit cards to corporate loans? Or will its failure in the area of subprime loans spread, leaving it discredited and other parts of the economy desperate for cash?

On the answer to that question may hinge the answer to whether the latest financial crisis will pass with little impact on the real economy, or whether it will pull down all the parts of the economy that enabled most investors to have a good year while their brokers were suffering.

If the former, the banks and brokers will recover, and the bailouts from China, Singapore and Abu Dhabi will appear brilliant, proving that governments can identify bargain investments.

But picking bottoms is not easy, as Bank of America found. Its $2 billion rescue of Countrywide Financial in August was hailed as a bold move at the time, but the price it paid looks very high now.

There was, it turned out, a lot more bad news about Countrywide that was yet to emerge when Bank of America acted. If that is true for the banks and brokerage firms that received bailouts in late 2007, neither the rescuers nor the customers of those financial firms are likely to find much to enjoy in 2008.

    Customers, Not Brokers, Profited in an Odd 2007, NYT, 2.1.2008, http://www.nytimes.com/2008/01/02/business/02markets.html?hp

 

 

 

 

 

More needed to help stabilize U.S. housing: W.House

 

Tue Jan 1, 2008
5:07pm EST
Reuters
By Jeremy Pelofsky

 

WASHINGTON (Reuters) - More steps by Congress and the Bush administration are likely needed to stabilize the imploding U.S. housing market, a senior White House official said on Tuesday, as more signs of distress appear.

Early last month, President George W. Bush unveiled a plan to help some homeowners avoid foreclosures as some 1.8 million mortgages with low starter interest rates are due to reset to sharply higher rates this year.

Ed Gillespie, counselor to Bush, pointed to efforts by the U.S. Congress to overhaul the Federal Housing Administration program developed in 1934 amid the Great Depression and designed to make home ownership more affordable. Members of the House of Representatives and Senate have been trying to work out a compromise plan.

"There's more to be done we think on the housing front to address the concerns people have about the housing markets, including FHA reform and other reforms that the president has called for," Gillespie told reporters aboard Air Force One as Bush returned from a weeklong holiday at his Texas ranch.

"We think there's an opportunity for bipartisan consensus on that."

One idea that has been under consideration by the administration and Congress is allowing mortgage finance companies Fannie Mae and Freddie Mac to buy loans above the current ceiling of $417,000, mortgages known as jumbo loans, he said.

While Gillespie declined to provide more specifics, his comments revealed that the administration is closely watching the housing market as fears grow that it could send the overall U.S. economy into a recession.

A report on Friday showed sales of new homes dropped 9 percent in November, to the lowest rate in more than 12 years, while another report on Monday showed the pace of existing home sales moved up slightly in November off a record low.

Gillespie also made it clear the administration would not bail out investors who made risky investments.

"You have to tread a fine line here of helping those who found themselves in a difficult situation and maybe didn't realize at the time the situation into which they were headed, and on the other hand removing any sense of moral hazard from the marketplace for those who are engaged in speculation," he said.

With growing talk of a possible recession, Gillespie said the White House was carefully eyeing the economic data and would not take off the table the idea of an economic stimulus package as recommended by some leading economists.

"We'll do what we think is appropriate to foster economic growth," Gillespie said.
 


(Editing by Mohammad Zargham)

More needed to help stabilize U.S. housing: W.House, R, 1.2.2008, http://www.reuters.com/article/domesticNews/idUSN0161223420080101