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History > 2008 > USA > Economy (III)





Charles Prince, former chief of Citigroup;

Richard D. Parsons,

former chair of Citigroup's

compensation committee;

E. Stanley O'Neal,

former chief of Merrill Lynch;

John Finnegan,

chair of Merrill's compensation committee;

and Angelo R. Mozilo,

chief of Countrywide Financial;

and Harley W. Snyder,

a consultant and private investor in real estate,

appeared before a House committee

looking into C.E.O. pay and retirement packages

at companies deeply involved in the current mortgage crisis.



Doug Mills/The New York Times


Congress Questions Executives on Compensation


















Financial Overhaul At - A - Glance


March 31, 2008
Filed at 3:12 a.m. ET
The New York Times


The Bush administration's plan to overhaul financial regulation, as outlined in a summary obtained by The Associated Press, would:

--Expand the role of the President's Working Group on Financial Markets to include the entire financial sector rather than just financial markets.

--Create a federal commission, the Mortgage Origination Commission, to develop uniform, minimum licensing standards for mortgage market participants.

--Close the Office of Thrift Supervision, which regulates thrift institutions, and move those functions to the Office of the Comptroller of the Currency, which regulates banks.

--Merge the functions of the Commodity Futures Trading Commission into the Securities and Exchange Commission to create one agency to provide unified oversight of the futures and securities industries.

--Establish an Office of National Insurance within the Treasury Department to regulate those in the insurance industry who want to operate under an optional federal charter.

--Work to establish as a long-term goal three major regulators: the Federal Reserve as a ''market stability regulator''; a ''prudential financial regulator'' to take over the functions of five separate banking regulators; and a ''business conduct regulator'' to regulate business conduct and consumer protection.

Financial Overhaul At - A - Glance, NYT, 31.3.2008,






Financial Regulation Plan Proposed


March 31, 2008
Filed at 3:11 a.m. ET
The New York Times


WASHINGTON (AP) -- The Bush administration is proposing the biggest overhaul of financial regulation since the Great Depression. The sweeping plan is already drawing intense criticism -- a debate unlikely to be settled until a new president takes office.

The 200-page document, which was to be released Monday by Treasury Secretary Henry Paulson, proposes giving broad new powers to the Federal Reserve to combat the type of severe credit crisis currently gripping financial markets.

It would designate the Fed as a ''market stability regulator'' and give it the power to examine the books of any financial institution, not just banks, that might pose a threat to the stability of the financial system.

According to a 22-page executive summary obtained by The Associated Press, the plan would also eliminate the Office of Thrift Supervision and the Commodity Futures Trading Commission, merging their functions into other agencies.

The Paulson plan, which the administration has been working on for a year, calls for the eventual creation of three regulatory agencies.

In addition to the Fed as a ''market stability regulator,'' the plan would create a ''prudential financial regulator'' for the nation's banks, thrifts and credit unions, in place of the five agencies that perform that task now.

The third new agency would regulate business conduct and consumer protection, taking over many of the functions of the Securities and Exchange Commission.

The proposed overhaul would be the most extensive since the current regulatory system was created in response to the 1929 stock market crash and the Great Depression.

It comes at a time when the financial system faces its most severe credit crisis in two decades, one that has resulted in billions of dollars of losses for big banks and investment houses and the near-collapse of the country's fifth-largest investment bank.

The rising tide of bad debt has made it harder for consumers and businesses to get credit, further weighing on an economy struggling with a prolonged housing slump and soaring energy prices. Many economists believe the country is already in a recession.

The market turmoil has presented an opening for critics to make the case for stronger federal rules to prevent abuses. Treasury Secretary Paulson rejects making that link.

''I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil,'' Paulson said in a draft of remarks he was to deliver Monday.

Democrats said the plan wouldn't do enough to crack down on problems in mortgage lending and the sale of complex financial products that have been exposed by the current market turmoil.

Senate Banking Committee Chairman Christopher Dodd said that the administration blueprint ''would do little if anything to alleviate the current crisis.''

House Financial Services Committee Chairman Barney Frank, D-Mass., who is working on his own regulatory revamp, called Paulson's plan a ''constructive step forward'' but said it wouldn't give the Federal Reserve the regulatory authority needed for its broader market stability role.

Frank and others said that given the complexity of the issues, they expect the debate on the Paulson proposal and Democratic alternatives will continue in Congress as the next president takes office.

Business groups are split on the Paulson approach. The U.S. Chamber of Commerce and the securities industry support the broad outlines, but banking lobbyists are critical of some of the details affecting their industry.

''Dismantling the thrift charter and crippling state banking charters will weaken banking in America,'' said Edward Yingling, president of the American Bankers Association.

Financial Regulation Plan Proposed, NYT, 31.3.2008, http://www.nytimes.com/aponline/us/AP-Fed-Overhaul.html






The Foreclosure Machine


March 30, 2008
The New York Times


NOBODY wins when a home enters foreclosure — neither the borrower, who is evicted, nor the lender, who takes a loss when the home is resold. That’s the conventional wisdom, anyway.

The reality is very different. Behind the scenes in these dramas, a small army of law firms and default servicing companies, who represent mortgage lenders, have been raking in mounting profits. These little-known firms assess legal fees and a host of other charges, calculate what the borrowers owe and draw up the documents required to remove them from their homes.

As the subprime mortgage crisis has spread, the volume of the business has soared, and firms that handle loan defaults have been the primary beneficiaries. Law firms, paid by the number of motions filed in foreclosure cases, have sometimes issued a flurry of claims without regard for the requirements of bankruptcy law, several judges say.

Much as Wall Street’s mortgage securitization machinery helped to fuel questionable lending across the United States, default, or foreclosure, servicing operations have been compounding the woes of troubled borrowers. Court documents say that some of the largest firms in the industry have repeatedly submitted erroneous affidavits when moving to seize homes and levied improper fees that make it harder for homeowners to get back on track with payments. Consumer lawyers call these operations “foreclosure mills.”

“They get paid by the volume and speed with which they process these foreclosures,” said Mal Maynard, director of the Financial Protection Law Center, a nonprofit firm in Wilmington, N.C.

John and Robin Atchley of Waleska, Ga., have experienced dubious foreclosure practices at first hand. Twice during a four-month period in 2006, the Atchleys were almost forced from their home when Countrywide Home Loans, part of Countrywide Financial, and the law firm representing it said they were delinquent on their mortgage. Countrywide’s lawyers withdrew their motions to seize the Atchleys’ home only after the couple proved them wrong in court.

The possibility that some lenders and their representatives are running roughshod over borrowers is of increasing concern to bankruptcy judges overseeing Chapter 13 cases across the country. The United States Trustee Program, a unit of the Justice Department that oversees the integrity of the nation’s bankruptcy courts, is bringing cases against lenders that it says are abusing the bankruptcy system.

Joel B. Rosenthal, a United States bankruptcy judge in the Western District of Massachusetts, wrote in a case last year involving Wells Fargo Bank that rising foreclosures were resulting in greater numbers of lenders that “in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system.”

Law firms and default servicing operations that process large numbers of cases have made it harder for borrowers to design repayment plans, or workouts, consumer lawyers say. “As I talk to people around the country, they all unanimously state that the foreclosure mills are impediments to loan workouts,” Mr. Maynard said.

LAST month, almost 225,000 properties in the United States were in some stage of foreclosure, up nearly 60 percent from the period a year earlier, according to RealtyTrac, an online foreclosure research firm and marketplace.

These proceedings generate considerable revenue for the firms involved: eviction and appraisal charges, late fees, title search costs, recording fees, certified mailing costs, document retrieval fees, and legal fees. The borrower, already in financial distress, is billed for these often burdensome costs. While much of the revenue goes to the law firms hired by lenders, some is kept by the servicers of the loans.

Fidelity National Default Solutions, a unit of Fidelity National Information Services of Jacksonville, Fla., is one of the biggest foreclosure service companies. It assists 19 of the top 25 residential mortgage servicers and 14 of the top 25 subprime loan servicers.

Citing “accelerating demand” for foreclosure services last year, Fidelity generated operating income of $443 million in its lender processing unit, a 13.3 percent increase over 2006. By contrast, the increase from 2005 to 2006 was just 1 percent. The firm is not associated with Fidelity Investments.

Law firms representing lenders are also big beneficiaries of the foreclosure surge. These include Barrett Burke Wilson Castle Daffin & Frappier, a 38-lawyer firm in Houston; McCalla, Raymer, Padrick, Cobb, Nichols & Clark, a 37-member firm in Atlanta that is a designated counsel to Fannie Mae; and the Shapiro Attorneys Network, a nationwide group of 24 firms.

While these private firms do not disclose their revenues, Wesley W. Steen, chief bankruptcy judge for the Southern District of Texas, recently estimated that Barrett Burke generated between $9.7 million and $11.6 million a year in its practice. Another judge estimated last year that the firm generated $125,000 every two weeks — or $3.3 million a year — filing motions that start the process of seizing borrowers’ homes.

Court records from 2007 indicate that McCalla, Raymer generated $10.4 million a year on its work for Countrywide alone. In 2005, some McCalla, Raymer employees left the firm and created MR Default Services, an entity that provides foreclosure services; it is now called Prommis Solutions.

For years, consumer lawyers say, bankruptcy courts routinely approved these firms’ claims and fees. Now, as the foreclosure tsunami threatens millions of families, the firms’ practices are coming under scrutiny.

And none too soon, consumer lawyers say, because most foreclosures are uncontested by borrowers, who generally rely on what the lender or its representative says is owed, including hefty fees assessed during the foreclosure process. In Georgia, for example, a borrower can watch his home go up for auction on the courthouse steps after just 40 days in foreclosure, leaving relatively little chance to question fees that his lender has levied.

A recent analysis of 1,733 foreclosures across the country by Katherine M. Porter, associate professor of law at the University of Iowa, showed that questionable fees were added to borrowers’ bills in almost half the loans.

Specific cases inching through the courts support the notion that figures supplied by lenders are often incorrect. Lawyers representing clients who have filed for Chapter 13 bankruptcy, the program intended to help them keep their homes, say it is especially distressing when these numbers are used to evict borrowers.

“If the debtor wants accurate information in a bankruptcy case on her mortgage, she has got to work hard to find that out,” said Howard D. Rothbloom, a lawyer in Marietta, Ga., who represents borrowers. That work, usually done by a lawyer, is costly.

Mr. Rothbloom represents the Atchleys, who almost lost their home in early 2006 when legal representatives of their loan servicer, Countrywide, incorrectly told the court that the Atchleys were 60 days delinquent in Chapter 13 plan payments two times over four months. Borrowers can lose their homes if they fail to make such payments.

After the Atchleys supplied proof that they had made their payments on both occasions, Countrywide withdrew its motions to begin foreclosure. But the company also levied $2,793 in fees on the Atchleys’ loan that it did not explain, court documents said. “Every paycheck went to what they said we owed,” Robin Atchley said. “And every statement we got, the payoff was $179,000 and it never went down. I really think they took advantage of us.”

The Atchleys, who have four children, sold the house and now rent. Mrs. Atchley said they lost more than $23,000 in equity in the home because of fees levied by Countrywide.

The United States Trustee sued Countrywide last month in the Atchley case, saying its pattern of conduct was an abuse of the bankruptcy system. Countrywide said that it could not comment on pending litigation and that privacy concerns prevented it from discussing specific borrowers.

A generation ago, home foreclosures were a local business, lawyers say. If a borrower got into trouble, the lender who made the loan was often a nearby bank that held on to the mortgage. That bank would hire a local lawyer to try to work with the borrower; foreclosure proceedings were a last resort.

Now foreclosures are farmed out to third-party processors who hire local counsel to litigate. Lenders negotiate flat-fee arrangements to try to keep legal bills down.

AN unfortunate result, according to several judges, is a drive to increase revenue by filing more motions. Jeff Bohm, a bankruptcy judge in Texas who oversaw a case between William Allen Parsley, a borrower in Willis, Tex., and legal representatives for Countrywide, said the flat-fee structure “has fostered a corrosive ‘assembly line’ culture of practicing law.” Both McCalla, Raymer and Barrett Burke represented Countrywide in the matter.

Gee Aldridge, managing partner at McCalla, Raymer, called the Parsley case unique. “It is the goal of every single one of my clients to do whatever they can do to keep borrowers in their homes,” he said. Officials at Barrett Burke did not return phone calls seeking comment.

In a statement, Countrywide said it recognized the importance of the efficient functioning of the bankruptcy system. It said that servicing loans for borrowers in bankruptcy was complex, but that it had improved its procedures, hired new employees and was “aggressively exploring additional technology solutions to ensure that we are servicing loans in a manner consistent with applicable guidelines and policies.”

The September 2006 issue of The Summit, an in-house promotional publication of Fidelity National Foreclosure Solutions, another unit of Fidelity, trumpeted the efficiency of its 18-member “document execution team.” Set up “like a production line,” the publication said, the team executes 1,000 documents a day, on average.

OTHER judges are cracking down on some foreclosure practices. In 2006, Morris Stern, the federal bankruptcy judge overseeing a matter involving Jenny Rivera, a borrower in Lodi, N.J., issued a $125,000 sanction against the Shapiro & Diaz firm, which is a part of the Shapiro Attorneys Network. The judge found that Shapiro & Diaz had filed 250 motions seeking permission to seize homes using pre-signed certifications of default executed by an employee who had not worked at the firm for more than a year.

In testimony before the judge, a Shapiro & Diaz employee said that the firm used the pre-signed documents beginning in 2000 and that they were attached to “95 percent” of the firm’s motions seeking permission to seize a borrower’s home. Individuals making such filings are supposed to attest to their accuracy. Judge Stern called Shapiro & Diaz’s use of these documents “the blithe implementation of a renegade practice.”

Nelson Diaz, a partner at the firm, did not return a phone call seeking comment.

Butler & Hosch, a law firm in Orlando, Fla., that is employed by Fannie Mae, has also been the subject of penalties. Last year, a judge sanctioned the firm $33,500 for filing 67 faulty motions to remove borrowers from their homes. A spokesman for the firm declined to comment.

Barrett Burke in Texas has come under intense scrutiny by bankruptcy judges. Overseeing a case last year involving James Patrick Allen, a homeowner in Victoria, Tex., Judge Steen examined the firm’s conduct in eight other foreclosure cases and found problems in all of them. In five of the matters, documents show, the firm used inaccurate information about defaults or failed to attach proper documentation when it moved to seize borrowers’ homes. Judge Steen imposed $75,000 in sanctions against Barrett Burke for a pattern of errors in the Allen case.

A former Barrett Burke lawyer, who requested anonymity to avoid possible retaliation from the firm, said, “They’re trying to find a fine line between providing efficient, less costly service to the mortgage companies” and not harming the borrower.

Both he and another former lawyer at the firm said Barrett Burke relied heavily on paralegals and other nonlawyer employees in its foreclosure and bankruptcy practices. For example, they said, paralegals prepared documents to be filed in bankruptcy court, demanding that the court authorize foreclosure on a borrower’s home. Lawyers were supposed to review the documents before they were filed. Both former Barrett lawyers said that with at least 1,000 filings a month, it was hard to keep up with the volume.

This factory-line approach to litigation was one reason he decided to leave the firm, the first lawyer said. “I had questions,” he added, “about whether doing things efficiently was worth whatever the cost was to the consumer.”

James R. and Tracy A. Edwards, who are now living in New Mexico, say they have had problems with questionable fees charged by Countrywide and actions by Barrett Burke. In one month in 2002, when the couple lived in Houston, Countrywide Home Loans withdrew three monthly mortgage payments from their bank account, Mrs. Edwards said, leaving them unable to pay other bills. The family filed for bankruptcy to try to keep their home, cars and other assets.

Filings in the bankruptcy case of the Edwards family show that on at least three occasions, Countrywide’s lawyers at Barrett Burke filed motions contending that the borrowers had fallen behind. The firm subsequently withdrew the motions.

“They kept saying we owed tons and tons of fees on the house,” Mrs. Edwards said. Tired of this battle, the family gave up the Houston house and moved to one in Rio Rancho, N.M., that they had previously rented out.

Countrywide tried to foreclose on that house, too, contending that Mr. and Mrs. Edwards were behind in their payments. Again, Mrs. Edwards said, the culprit was a raft of fees that Countrywide had never told them about — and that were related to their Texas home. Mrs. Edwards says that she and her husband plan to sue Countrywide to block foreclosure on their New Mexico home.

Pamela L. Stewart, president of the Houston Association of Debtor Attorneys, said she has become skeptical of lenders’ claims of fees owed. “I want to see documents that back up where these numbers are coming from,” Ms. Stewart said. “To me, they’re pulled out of the air.”

An inaccurate mortgage payment history supplied by Ameriquest, a mortgage lender that is now defunct, was central to a case last year in federal bankruptcy court in Massachusetts. “Ameriquest is simply unable or unwilling to conform its accounting practices to what is required under the bankruptcy code,” Judge Rosenthal wrote. He awarded the borrower $250,000 in emotional-distress damages and $500,000 in punitive damages.

Fidelity National Information Services has also been sued. A complaint filed on behalf of Ernest and Mattie Harris in federal bankruptcy court in Houston contends that Fidelity receives kickbacks from the lawyers it works with on foreclosure matters.

The case shines some light on the complex relationships between lenders and default servicers and the law firms that represent them. The Harrises’ loan servicer is Saxon Mortgage Services, a Morgan Stanley unit, which signed an agreement with Fidelity National Foreclosure Solutions. Under it, Fidelity was to provide foreclosure and bankruptcy services on loans serviced by Saxon, as well as to manage lawyers acting on Saxon’s behalf. The agreement also specified that Saxon would pay the fees of the lawyers managed by Fidelity.

But Fidelity also struck a second agreement, with an outside law firm, Mann & Stevens in Houston, which spelled out the fees Fidelity was to be paid each time the law firm made filings in a case. Mann & Stevens, which did respond to phone calls, represented Saxon in the Harrises’ bankruptcy proceedings.

According to the complaint, Mann & Stevens billed Saxon $200 for filing an objection to the borrowers’ plan to emerge from bankruptcy. Saxon paid the $200 fee, then charged that amount to the Harrises, according to the complaint. But Mann & Stevens kept only $150, paying the remaining $50 to Fidelity, the complaint said.

This arrangement constitutes improper fee-sharing, the Harrises argued. Texas rules of professional conduct bar fee-sharing between lawyers and nonlawyers because that could motivate them to raise prices — and the Harrises argue that this is why the law firm charged $200 instead of $150. And under these rules, sharing fees with someone who is not a lawyer creates a risk that the financial relationship could affect the judgment of the lawyer, whose duty is to the client. Few exceptions are permitted — like sharing court-awarded fees with a nonprofit organization or keeping a retirement plan for nonlawyer employees of a law firm.

“If it’s fee-sharing, and if it doesn’t fall into those categories, it sounds wrong,” said Michael S. Frisch, adjunct professor of law at Georgetown University. Greg Whitworth, president of loan portfolio solutions at Fidelity, defended the arrangement, saying it was not unusual for a company to have an intermediary manage outside law firms on its behalf.

The Harrises contend that the bankruptcy-related fees charged by the law firms managed by Fidelity “are inflated by 25 to 50 percent.” The agreement between Fidelity and the law firm is also hidden, according to their complaint, so a presiding judge sees only the lender and the law firm, not the middleman.

Fidelity said the money it received from the law firm was not a kickback, but payments for services, just as a law firm would pay a copying service to duplicate documents. In response to the complaint, Fidelity asserted in a court filing that the Harrises’ claims were “nothing more than scandalous, hollow rhetoric.”

But the Fidelity fee schedule shows a charge for each action taken by the law firm, not a fee per page or kilobyte. And Fidelity’s contract appears to indemnify Saxon if the arrangement between Fidelity and its law firm runs afoul of conduct rules.

Mr. Whitworth of Fidelity said that the arrangement with Mann & Stevens did not constitute fee sharing, because Fidelity was to be paid by that law firm even if the law firm itself was not paid.

He also said that by helping a servicer manage dozens or even hundreds of law firms, Fidelity lowered the cost of foreclosure or bankruptcy proceedings, to the benefit of the law firm, the servicer and the borrower. “Both parties want us to be in the middle here,” Mr. Whitworth said, referring to law firms and mortgage servicing companies.

THE Fidelity contract attached to the complaint also hints at the money each motion generates. Foreclosures earn lawyers fees of $500 or more under the contract; evictions generate about $300. Those fees aren’t enormous if they require a substantial amount of time. But a few thousand such motions a month, executed by lawyers’ employees, translates into many hundreds of thousands of dollars in revenue to the law firm — and the lower the firm’s costs, the greater the profits.

“Congress needs to enact a national foreclosure bill that sets a uniform procedure in every state that provides adequate notice, due process and transparency about fees and charges,” said O. Max Gardner III, a consumer lawyer in Shelby, N.C. “A lot of this stuff is such a maze of numbers and complex organizational structure most lawyers can’t get through it. For the average consumer, it is mission impossible.”

    The Foreclosure Machine, NYT, 30.3.2008, http://www.nytimes.com/2008/03/30/business/30mills.html






Fed Offers $100 Billion More to Banks


March 28, 2008
Filed at 12:03 p.m. ET
The New York Times


WASHINGTON (AP) -- The Federal Reserve will auction another $100 billion in April to cash-strapped banks as it continues to combat the effects of a credit crisis.

The central bank said Friday it would make $50 billion available at each of two auctions on April 7 and April 21.

Through the end of March, the Fed has provided $260 billion in short-term loans to commercial banks through an innovative auction process. It also has employed Depression-era provisions to provide money to investment banks.

All the moves are designed to cope with a financial crisis that has roiled U.S. and global markets and caused the near-collapse of Bear Stearns, the nation's fifth largest investment bank.

    Fed Offers $100 Billion More to Banks, NYT, 28.3.2008, http://www.nytimes.com/aponline/us/AP-Fed-Credit-Crisis.html






February Spending Flat, Inflation Threat Recedes


March 28, 2008
The New Yorkj Times


Consumer spending stayed stagnant in February, growing at the slowest pace in more than a year, as the housing slump and a weak job market continued to put pressure on the pocketbooks of Americans.

At the same time, inflation receded and Americans took home slightly more income, a pair of positive developments that suggest a weak economy, not a collapsing one.

Adjusted for inflation, consumer spending stayed flat in February after growing 0.1 percent in January and declining in December. In current dollars, spending rose 0.1 percent last month, the Commerce Department reported on Friday.

“The consumer has lost whatever support they might have had from wages and salaries,” said Joshua Shapiro, the chief United States economist at MFR, a New York research firm. “There’s no momentum, no growth.”

Spending by consumers is the primary engine of the economy, accounting for more than two-thirds of the gross domestic product. Recent surveys suggest the drop-off will continue. Confidence in the economy remained at a 16-year low in March, according to a separate report released Friday by the University of Michigan and Reuters.

Americans also feel worse now about the economy’s prospects than at any time since 1973, according to a private survey of 2,500 households released earlier this week.

Still, Wall Street appeared to shrug off the news, as stock markets moved higher after the open. The Dow Jones industrials gained about 30 points and the Standard & Poor’s 500 index advanced 0.2 percent shortly after 10:30 a.m.

Investors may have been pleased about an unexpected increase in personal income, which accelerated to 0.5 percent last month after a 0.3 percent reading in January. The savings rate — a measure of how much income Americans retain after expenses — moved back into positive territory after three consecutive months of flat or negative readings.

And one major impediment to spending — the soaring price of consumer products like food and gasoline — may be receding. A closely watched measure of inflation, known as the “core” P.C.E. deflator, rose 2 percent in February, returning to the so-called “comfort zone” that the Federal Reserve prefers. The January reading was revised down to 2 percent.

“The Fed is getting more concerned about inflation risks the lower it pushes interest rates, but this reading indicates that the Fed has room to cut further,” Nigel Gault, an economist at Global Insight, a research firm in Lexington, Mass., wrote in a note to clients.

The “core” gauge excludes volatile prices of food and energy products but offers insight into price pressures in the broader economy. Over all, inflation grew 3.4 percent last month, declining from a 3.5 percent reading in January, which was revised down from its initial estimate.

    February Spending Flat, Inflation Threat Recedes, NYT, 28.3.2008, http://www.nytimes.com/2008/03/28/business/28cnd-econ.html?hp






New Home Sales Fall


March 26, 2008
Filed at 10:21 a.m. ET
The New York Times


WASHINGTON (AP) -- Sales of new homes fell in February for the fourth straight month, pushing activity down to a 13-year low as the steep slump in housing continued.

The Commerce Department reported Wednesday that new home sales dropped 1.8 percent last month to a seasonally adjusted annual rate of 590,000 units, the slowest sales pace since February 1995. The decline was slightly worse than expected.

The median price of a home sold last month dropped to $244,100, down 2.7 percent from the level of a year ago.

The prolonged slump in housing has dragged down overall economic activity. Many analysts believe the slump could combine with a multitude of other problems including a severe credit crunch, soaring energy prices and plunging consumer confidence, to push the country into a full-blown recession.

The number of unsold homes on the market at the end of the month represented a 9.8 months' supply at the February sales pace, the same as in January. That was the highest inventory level in more than 26 years and reflects the fact that increased numbers of mortgage foreclosures are dumping even more homes on an already glutted market.

Sales dropped the most in the Northeast, falling by 40.6 percent. Sales were also down in the Midwest, dropping by 6.4 percent, but posted gains in the South of 5.7 percent and 0.7 percent in the West.

Many analysts believe that the slump in housing, which began in 2006, could last into 2009. It was reported on Tuesday that the Standard & Poor's/Case-Shiller index of home prices fell nearly 11 percent in January from a year ago, the biggest year-over-year decline in the history of the index.

Analysts said that housing is being hurt currently by tighter lending conditions as banks react to soaring mortgage defaults and the reluctance of prospective buyers to make a decision, fearing that prices have further to fall.

In other economic news, orders to factories for big-ticket manufactured goods fell 1.7 percent in February, a second consecutive decline and further evidence of the economic troubles gripping the country.

The declines in orders for durable goods, items expected to last at least three years, showed up in a number of areas. Demand for manufacturing equipment plunged by 13.3 percent, the largest amount on record, while orders for nondefense capital goods excluding aircraft, the category that is seen as a good proxy for business investment, fell by 2.6 percent, the biggest decline in four months.

Economic growth slowed to a barely discernible 0.6 percent in the final three months of last year, and many economists believe the gross domestic product will turn negative in the current quarter, signaling the start of a recession.

The 1.7 percent drop in orders for durable goods, items expected to last at least three years, was worse than the 1 percent increase that many economists had expected.

The weakness came even though orders for transportation equipment rebounded with a 0.6 percent rise in February after a big 12.6 percent plunge in January. The swing in both months reflected changes in demand for commercial aircraft, which rose 5.4 percent in February following a 30.2 percent plunge in January. Orders for motor vehicles fell by 2.7 percent in February as U.S. automakers continued to face weak demand, reflecting the weak economy and soaring energy prices.

Excluding transportation, orders fell by 2.6 percent in February, representing the fourth decline in the past five months.

Economists believe that if the country does slip into a recession, the downturn may not be as severe in manufacturing, which is being helped by continued strong growth overseas, which is bolstering U.S. exports.

    New Home Sales Fall, NYT, 26.3.2008, http://www.nytimes.com/aponline/us/AP-Economy.html






Consumer Attitudes and Home Prices Sour


March 26, 2008
The New York Times


Americans are bracing for rising unemployment and shrinking salaries, a gloomy outlook that could translate into a serious cutback in consumer spending, the primary engine of the economy.

A private survey of about 2,500 households found that Americans feel worse now about the economy’s prospects than at any time since 1973, when Americans struggled with soaring oil prices and runaway inflation.

Fears often prove overblown, of course, and this particular survey, which was released on Tuesday by the Conference Board, has a spotty track record as an indicator. But expectations can often be self-fulfilling: worried consumers are less likely to make the big purchases that help keep the economy humming.

“It signals a great deal of concern and anxiety and uncertainty among consumers,” Bernard Baumohl of the Economic Outlook Group, a research firm in Princeton, N.J., said of the survey.

“Add that to the fact that the job market has weakened dramatically, and incomes haven’t been rising very much — certainly below the pace of inflation — and you really have the ingredients of a significant cutback of consumer spending,” he said.

With home prices falling at record rates, Americans are also finding it more difficult to draw on their home equity, further depressing their spending power. A separate report on Tuesday said the value of single-family homes in major metropolitan areas plummeted 10.7 percent in January from a year earlier, the steepest annual decline since the 1990s housing slump.

“Consumer-led recessions are among the most difficult to turn around in an economy,” Mr. Baumohl said. “Particularly this one, because of the fact that many households feel a lot poorer than they did a year ago, primarily because of the collapse in the value of their homes.”

Sales of goods and services make up more than two-thirds of gross domestic product, so a significant spending slowdown can speed the onset of a recession or make a downturn even worse.

And the gloom among consumers appeared widespread. A quarter of those surveyed said that businesses conditions would worsen in the next six months, and nearly a third said the economy would have fewer jobs. Fewer Americans plan to purchase big-ticket items like refrigerators, vehicles and television sets, and more than half said that jobs were currently “not so plentiful.”

Responding to a question about income expectations, the proportion of Americans who said they expected their incomes to rise over the next six months dropped to 14.9 percent, the lowest level since the Conference Board began its survey in 1967.

Still, some economists said the report may represent the worst of the current downturn, rather than a harbinger of more pain to come.

“Typically, these readings look the worst when the economy is bottoming,” said Michael T. Darda, chief economist at MKM Partners, a research and trading firm. He said that on average, the stock market has risen substantially in the six months after Americans’ economic expectations bottom out.

“As bad as this looks — and it is bad — it might mean we are in a recession right now,” Mr. Darda said. “It’s not necessarily a forward-looking indicator.”

Over all, consumer confidence — a measure of current sentiment — stood at a five-year low in March, the Conference Board said. The results echoed a separate consumer survey by the University of Michigan and Reuters, which reached a 16-year low in March.

Home values are also falling at a rapid rate, according to the closely watched Standard & Poor’s Case-Shiller index, which on Tuesday released its latest survey of home prices in 20 metropolitan areas.

In January, all 20 regions recorded price declines, with the steepest losses in Las Vegas, Phoenix, and Los Angeles. Over all, prices dipped 2.36 percent in January, after falling 2.1 percent a month before.

Homes in Miami and Las Vegas have lost nearly 20 percent of their value in the 12 months ended in January. In only one area, Charlotte, N.C., have prices risen over the last year.

Though the price declines will hurt homeowners, they may also help to lure buyers back into the ailing housing market. Economists said the price drop was necessary to bring down inventories, which have ballooned in recent months as buyers waited for prices to fall even further.

“It’s a necessary thing,” Joshua Shapiro, an economist at the research firm MFR, said. “If pain is necessary, bring it on. That’s where we are right now.”

Falling prices may have already started to attract some buyers. Sales of previously owned homes ticked up last month, according to the National Association of Realtors, ending a six-month streak of declines.

The positive sales figure led some analysts to suggest that the housing market is approaching its bottom. But other economists predict that prices will have to fall further, and for several more months, before sales pick up in earnest.

In the New York metropolitan area, home values fell just 0.9 percent in January, and 5.8 percent compared with a year earlier. But the decline appeared to be gaining speed: values are down nearly 10 percent on a three-month annualized basis.

    Consumer Attitudes and Home Prices Sour, NYT, 26.3.2008, http://www.nytimes.com/2008/03/26/business/26econ.html






Factory Orders Drop Unexpectedly


March 26, 2008
The New York Times


Manufacturers suffered a sharp pullback in orders in February as a closely watched barometer of business spending unexpectedly slipped for the second consecutive month.

Faced with an economic slowdown and a deep housing slump, American industry has been reluctant to make large investments, sending new orders of long-term manufactured goods down 1.7 percent in February, the Commerce Department said on Wednesday. The decline follows a 4.7 percent drop in January, which was revised slightly higher.

The worse-than-expected number sent the major stock indexes down at the opening with the Dow falling about 80 points. The Standard & Poor’s 500-stock index and the Nasdaq were both off less than one percent.

“The data strongly suggests that the period of retrenchment in the manufacturing sector is likely to get far worse before things stabilize,” Joseph Brusuelas, chief United States economist at IdeaGlobal, a research firm, wrote in a note to clients.

Over all, orders for durable goods, which are meant to last for three years or more, fell in February to a seasonally adjusted $210.65 billion, down from $214.24 billion in January.

The sharpest drop came in orders of large-scale manufacturing machinery, which plummeted 13.3 percent, the largest amount on record and a sign that factories may be bracing for a significant downturn.

Economists had expected a slight rebound in the factory number for January, in part because of their belief that, if there is a recession, manufacturers may do better than other sectors because of strong exports.

“Businesses are reluctant to invest because they still have no clue about how the economy is going to shake out over the next 6 to 12 months,” Bernard Baumohl, managing director of the Economic Outlook Group, a forecasting firm, said recently in an interview.

Motor vehicle orders also dropped, along with orders of capital goods. Electronics, computers, and communications equipment all saw slight upticks in orders. Civilian and defense aircraft orders rose.

A closely watched indicator of business spending, which measures orders of nondefense capital goods and excludes aircraft orders, dropped 2.6 percent in February after falling 1.8 percent a month earlier.

Excluding new orders of transportation goods, which can be erratic from month to month, the index tumbled 2.6 percent, the most since January 2007. Orders for transportation equipment did increase slightly in February, up 0.6 percent, after a 12.6 percent drop in January.

    Factory Orders Drop Unexpectedly, NYT, 26.3.2008, http://www.nytimes.com/2008/03/26/business/26cnd-econ.html?hp







Pain at the Pump and Beyond


March 25, 2008
The New York Times


The surge in the price of energy couldn’t come at a worse time. The average price nationally of regular gasoline has shot up to a record $3.28 a gallon. Combine that with the collapse of the housing market and the seizing financial sector, and it is putting a boot to the gut of an economy that is either already in a recession or close to one.

The Bush administration can’t be entirely blamed for the pain at the gas pump. But its shortsighted energy policies — zealously focused on increasing the energy supply, with little attention paid to conservation and greater fuel-efficiency — means the country is far too dependent on oil that is both ruinously expensive and ruinous for the environment.

There are several reasons for oil’s dizzying price spiral. Soaring demand in fast-growing developing countries like China and India means there is little oil to spare. The turmoil in financial markets — the White House can take a good chunk of the blame for that — has driven prices even higher, as investors have bought oil and other commodities as stocks and the dollar plunge.

Meanwhile, President Bush’s strategy for ensuring that the nation’s energy security is focused on one thing: getting more oil by drilling in the Arctic and sending Vice President Dick Cheney to ask his Saudi friends to pump more. Neither could ever produce enough.

Not everyone is unhappy with oil at $100-plus a barrel. Authoritarian governments in Iran, Venezuela, Sudan and Russia are pocketing the profits and enjoying the political impunity that comes with such riches.

At home, the news is bad and getting worse. Consumer prices rose more than 4 percent in the past year, largely because of rising energy costs. Americans have started to reduce spending on other consumer goods, which is weakening the economy. The risk of inflation leaves the Federal Reserve with less room to maneuver.

If any good can come out of this mess, it would be an understanding — by corporations, consumers and government — that the era of cheap oil is truly over. With that, the country could finally focus on developing clean alternative energy sources and reducing oil consumption, a strategy that has served other countries well.

Take cars. Until last December, Republican and Democratic administrations had refused to raise fuel-efficiency standards for 30 years. And raising the puny gasoline tax remains a political nonstarter. By contrast, in Britain, gas at the pump costs around $7.70 a gallon, of which about $4.90 are taxes. In France, taxes account for about $4.60 of the retail price of $7.50 a gallon. Unsurprisingly, their cars get much better gas mileage than the guzzlers still popular in the United States.

Higher taxes on energy mean other rich countries are more energy-efficient across the board. The average German or Japanese uses little more than half the energy consumed by an average American. In Germany and Japan, per-capita emissions of carbon dioxide spewed by cars, power plants and other sources of energy are half those in the United States. In France, they are a third.

Americans are beginning to curb consumption. Gasoline demand declined in the first 11 weeks of the year for the first time since 1997. But it is far too little, and government policy is lagging far behind the problem.

The landmark energy bill passed in December tightened fuel standards for the first time since 1975 — demanding a 40 percent increase in cars’ and light trucks’ average fuel-efficiency by 2020. Still, the Department of Energy estimates that by 2022, the new standards would have reduced gasoline consumption by about only two million barrels a day, which amounts to a 17 percent cut in projected gasoline consumption.

A lot more needs to be done to prepare the American economy for a world of scarcer, more expensive energy. To start, the nation has to replace the oilmen in the White House with leaders who have a better grasp of the economics of energy and the interests of all Americans.

    Pain at the Pump and Beyond, NYT, 25.3.2008, http://www.nytimes.com/2008/03/25/opinion/25tue1.html






Home Prices and Consumer Sentiment Slide


March 25, 2008
The New York Times


Home prices across the country continued to fall in January at record rates while one measure of consumer confidence reached a five-year low, sending Wall Street shares down in early Tuesday trading.

The value of single-family homes plummeted 10.7 percent in January compared with a year earlier, as measured by the Case-Shiller index, a closely watched survey of 20 major metropolitan regions.

It was the steepest year-over-year decline since the index began eight years ago, and economists said the slump was probably worse than at the height of the last housing recession in the early 1990s.

Stocks on Wall Street gave up early gains in morning trading. The Standard & Poor’s 500-stock index dipped 0.1 percent and the Dow Jones industrials were off about 77 points at noon. The Nasdaq composite index was up 0.1 percent.

The housing price decline may help to lure buyers back into the beleaguered market, where sellers are struggling under a wave of foreclosures and a tight credit market that has made it more difficult for many Americans to take out mortgages. Inventories have ballooned as purchases have dried up, as buyers hold out for prices to fall even further.

The decline in housing prices has been compounded by a general sense of gloom about the economy. Confidence among consumers unexpectedly fell this month to 64.5 from 76.4 in February, as measured by an index created by the Conference Board, a private research group. A value of 100 represents confidence in 1985.

A quarter of those surveyed believe businesses conditions will worsen in the next six months, and nearly a third said the economy would have fewer jobs. Fewer consumers plan to purchase big-ticket items like refrigerators and television sets, and more than half said that employment was currently “not so plentiful.”

Tuesday’s declines on Wall Street follow a major market rally on Monday that was helped in part by a rare bit of positive news from the housing industry. Sales of previously owned homes ticked up last month, according to the National Association of Realtors, ending a six-month streak of declines.

The positive sales figure led some analysts to suggest that the housing market is approaching its bottom. But many economists predict that prices will fall for several more months before sales pick up in earnest.

“It’s a necessary thing,” said Joshua Shapiro, the chief United States economist at MFR, a New York economic research firm. “It’s like the mess going down in financial markets. You gotta get through it. The sooner you get through it you can look for better times.”

All 20 regions included in Tuesday’s Case-Shiller survey recorded price declines, with Sun Belt cities like Las Vegas, Phoenix, and Los Angeles suffering the worst losses in January. Prices in Miami and Las Vegas have lost nearly 20 percent in the 12 months ending in January. Only one region, Charlotte, has seen prices rise over the past year.

Over all, prices dipped 2.36 percent in January alone after falling 2.1 percent in December. Prices in Washington are down nearly 11 percent year-over-year and prices in Denver have lost 5 percent since January 2007.

In the New York metropolitan area, home values fell just 0.9 percent in January, and 5.8 percent compared with a year earlier. But the drop-off appeared to be gaining speed: values are down nearly 10 percent on a three-month annualized basis.

    Home Prices and Consumer Sentiment Slide, NYT, 25.3.2008,  http://www.nytimes.com/2008/03/25/business/25cnd-econ.html?hp


















Slump Moves From Wall St. to Main St.        NYT        21.3.2008















Slump Moves From Wall St. to Main St.


March 21, 2008
The New York Times


In Seattle, sales at a long-established hardware store, Pacific Supply, are suddenly dipping. In Oklahoma City, couples planning their weddings are demonstrating uncustomary thrift, forgoing Dungeness crab and special linens. And in many cities, the registers at department stores like Nordstrom on the higher end and J. C. Penney in the middle are ringing less often.

With Wall Street caught in a credit crisis that has captured headlines, the forces assailing the economy are now spreading beyond areas hit hardest by the boom-turned-bust in real estate like California, Florida and Nevada. Now, the downturn is seeping into new parts of the country, to communities that seemed insulated only months ago.

The broadening of the slowdown, the plunge in home prices and near-paralysis in the financial system are fueling worries that what most economists now see as an inevitable recession could end up being especially painful.

Indeed, some economists fear it will last longer and inflict more bite on workers and businesses than the last two recessions, which gripped the economy in 2001 and for eight months straddling 1990 and 1991. This time, these experts say, a recession in which economic activity falls over a sustained period and joblessness rises across the board could even persist into next year.

“It’s not hard to construct very dark scenarios, primarily because the financial system is in disarray, and it’s not clear how to get it all back together again,” said Mark Zandi, chief economist at Moody’s Economy.com.

To be sure, there are many places where talk of recession still seems as out of place as a diner trying to score a table at a trendy Los Angeles restaurant without reservations on a Saturday night. First-class cabins of airplanes are jammed. So are spas, cigar bars and children’s clothing boutiques selling upscale dresses.

Unemployment, meanwhile, still remains at a relatively low 4.8 percent.

But even after the Federal Reserve’s extraordinary efforts to prevent the collapse of Bear Stearns from spreading to other financial institutions, the danger still lurks that banks will grow even tighter with their funds and will starve the economy of capital.

“If lenders and debtors don’t trust each other, that causes a power outage,” said Michael T. Darda, chief economist at MKM Partners. “And that’s where we are now.” Until recently, Mr. Darda was among those still holding to the notion that the economy could generate enough jobs to keep the economy rolling. But the private sector has shed jobs for three consecutive months. Mr. Darda is now worried.

“We’ll be lucky to make it out of this without something that looks like a recession,” he said.

On Thursday, FedEx , whose global courier business tends to rise and fall with swings in the economy, reported that its earnings actually dropped in the United States and warned that in future months it expected to fall well short of its customary double-digit annualized profit gains.

“We just aren’t going to be able to do that,” Alan Graf, FedEx’s chief financial officer, said in a call with Wall Street analysts. “The crystal ball for everybody is very cloudy here.”

For now, there are still pockets of prosperity across the country. Farmers are enjoying record crop prices as the adoption of ethanol makes corn a way to fill gas tanks, and as rising incomes in China, India and elsewhere spell growing demand for meat. The weak dollar is helping exporters and retailers that cater to foreign tourists.

Eastern Mountain Sports, the outdoor clothing dealer, says sales increased by one-third this month compared with the year before at its store in SoHo. “A lot of that is Europeans coming over,” said Will Manzer, the company’s president.

With oil selling at approximately $100 a barrel, the Taste of Texas Steakhouse in Houston — a popular spot for events held by BP, Shell and Exxon Mobil — is reveling in days of plenty.

Even those areas suffering the downturn can bank on considerable help on the way, economists say, as the impact of lowered interest rates kicks in later this year, encouraging businesses to expand and hire. Tax rebate checks to be mailed out by the government this spring may lubricate spending as well.

Despite fears that the odds for a particularly severe recession have now increased, Mr. Zandi still subscribes to the consensus that the economy will shrink only modestly during the first half of 2008, then resume expanding as more money washes through the system. That would limit the damage to the type of relatively modest recession that hit the economy earlier this decade.

For the country as a whole, recent data shows that the economy is deteriorating at an accelerating rate. From September to January, average home prices fell 6 percent compared with a year earlier. Consumer confidence has been plummeting. The private sector shed 26,000 jobs in January and 101,000 in February, while those out of work have stayed jobless longer, according to the Labor Department.

Now, the broader discomfort is filtering into cities and towns that only recently seemed beyond reach.

Seattle’s real estate market has slowed, but prices have held relatively steady. Even so, sales at the Pacific Supply Company, a hardware store in the Capitol Hill neighborhood, have fallen by 5 to 10 percent in the last few months.

“There’s a general sense of caution,” Michael Go, the store’s general manager, said.

Ritz Sisters sells gift items like soaps and chocolates to shops and catalogs throughout the Pacific Northwest. In recent months, orders have fallen by one-fifth, said Tim Creveling, a co-owner of the business.

“People are just hunkering down,” he said.

In Oklahoma City, Aunt Pittypat’s Catering has lost one-fifth of its business in the last two months, as $25,000 weddings are scaled down to smaller affairs.

“People are just being a lot more conservative,” said Maggie Howell, a co-owner. “They want crab and seafood, but they’re settling for cheese displays.”

In Cleveland, Lincoln Electric, which makes welding gear, has also experienced a slowdown. “Our growth is relatively anemic in North America,” said Vincent Petrella, its chief financial officer.

The slowdown has proved severe enough to poke a hole in the idea that sales abroad can carry the economy even if they dip at home.

In North Carolina, Power Curbers, which makes equipment that turns concrete into curbs, has been sending more gear abroad. But domestic sales plummeted by one-fourth during the first two months of the year, Dyke Messinger, the company’s president, said. In mid-February, Power Curbers laid off 6 of the 80 workers at its factory near Charlotte.

Many economists forecast that overall consumer spending will slip 1 percent for the first three months of the year.

“That’s a wow,” said Robert Barbera, chief economist for the trading and research firm ITG. “Outright declines for real consumer purchases are unusual.”

What is shaping up as the second recession of the 2000s is the product of declines in home values, which play a far bigger role in most Americans’ personal finances than the stock market. Households have borrowed against the increased value of their property to buy cars, send their children to college and add home theater systems.

“This is the bedrock asset for the lion’s share of the population of the United States,” Mr. Barbera said. “It’s not like dot-com stocks, where I bought Webvan for 1,000 times the imaginary earnings, and now it’s worth nothing but I go and have a beer. You’re talking about the value of people’s houses.”

As economists try to assess the likely contours of the unfolding downturn, many see parallels in the recession of 1990 and 1991.

Then, as now, the dollar was weak, oil prices were high and trouble started with a sharp slide in housing prices, followed by major losses for mortgage lenders. The resulting savings and loan crisis spurred a buyout that cost taxpayers $240 billion in inflation-adjusted terms, and it brought a severe tightness of credit.

That recession lasted eight months, slightly less than the average for downturns going back to 1946, according to the National Bureau of Economic Research. This one, though, could drag on longer, some economists say, because the underlying forces are more difficult to attack, even though Washington has been much more active, much earlier in lowering interest rates, sending out tax rebates and taking other measures to arrest an economic decline.

Back in the late 1980s, lending was concentrated in fewer hands. Once the government calculated the size of the problem in the saving and loan industry and assented to the bailout, confidence was restored and the wheels of finance turned anew.

This time, the size of the bad debts remains a mystery, with estimates reaching $400 billion. Markets fret that the next Bear Stearns could pop up anywhere.

The first signs of what became the mortgage crisis emerged back in August.

“Yet we’re still fighting it,” Mr. Darda said. “We’re still dealing with this paralysis.”

    Slump Moves From Wall St. to Main St., NYT, 21.3.2008, http://www.nytimes.com/2008/03/21/business/21econ.html?hp






Oil and Gold Prices Continue to Slide


March 21, 2008
The New York Times


Oil, gold and other major commodities fell sharply on Thursday, capping their steepest weekly drop in a half-century, as investors fled what many had believed to be the last safe haven in turbulent markets.

Oil tumbled 6.9 percent in two days of trading, and most other commodities fell by 7 percent or more in that period — including a precipitous 15 percent drop for wheat.

This week’s declines brought an abrupt end to months of big price increases that had attracted speculative cash. “It was the last thing that bankers could hang their hats on,” said Fadel Gheit, an analyst at Oppenheimer & Company. “Everything else had melted before their eyes.”

For the four-day week ending Thursday, an index created by the Commodity Research Bureau in Chicago fell 8.3 percent, the sharpest one-week decline since the index began in 1956. (Markets are closed for Good Friday.)

Seeking to make sense of the sharp declines, some analysts on Thursday saw a bubble bursting.

“Commodities prices got way out of hand because people felt that when you couldn’t buy stocks because of the soft dollar and the economy, the place to be was in these hard commodities,” said Michael Rose, a trader at Angus Jackson in Fort Lauderdale, Fla. “Every speculator in the world bought gold and crude oil and the grains and coffee and sugar and cocoa. Prices became insane.”

If the declines continue, they could be good news for consumers. Lower prices for commodities like oil and wheat can translate into lower inflation for many products, including gasoline and groceries. Such a development would ease the job of the Federal Reserve, which is battling lower economic growth with steps that risk adding to inflation.

Indeed, one such step earlier in the week may have started the commodity sell-off. Almost all commodities are priced in dollars on global markets. When the dollar falls, commodity prices tend to rise, and vice versa.

On Tuesday, the Federal Reserve cut interest rates by three-quarters of a percentage point. That was less than markets had expected, sending the dollar higher. Within hours, commodity prices — which had been volatile for weeks — began to drop. Investors who had seen commodities as a hedge against the dollar scrambled to get out of their bets.

“The precious metals markets and all commodity markets had built in a higher cut,” said James Steel, a commodities analyst at HSBC.

Gold, which had recently crossed the $1,000-an-ounce mark after a huge run-up, settled on Thursday at $920 in New York trading. Oil intermittently straddled the $100 mark before settling down 2.5 percent, at $101.84 a barrel. That is still an unusually high price, but it is down 7.6 percent since the beginning of the week.

“These are all significant declines,” Mr. Steel said.

Some analysts saw them as more than just a reaction to a higher dollar. In their view, investors are growing increasingly worried that a recession will cause a worldwide drop-off in demand for raw materials.

“This is absolutely indicative that the economy is extremely weak, and perhaps in a recession,” said Adam Robinson, an energy analyst at Lehman Brothers. Since the start of the year, demand for oil in the United States has fallen 2.4 percent, or 510,000 barrels a day, compared with the same period last year.

In the last four weeks, that drop has accelerated, according to figures compiled by Lehman Brothers. Some reports also indicate a softening of demand for precious metals. “We had a battery of data showing a real erosion in jewelry demand in India and China,” Mr. Steel said.

But other analysts said growth in China, India and developing economies would likely keep prices elevated for energy, metals and food. In a report, analysts at Barclays Capital predicted that gold would rebound “towards and beyond $1,000 an ounce.”

In fact, even with the recent declines, several analysts noted that commodity prices remained at historic levels.

“We see headlines: ‘Oil collapses to $102,’ ” said Paul Horsnell, a commodities analyst at Barclays in London. “Is that really a collapse?”

Clifford Krauss, Jad Mouawad and Carter Dougherty contributed reporting.

    Oil and Gold Prices Continue to Slide, NYT, 21.3.2008, http://www.nytimes.com/2008/03/21/business/21commodity.html

















Rob Rogers

The Pittsburgh Post-Gazette, Pennsylvania        Cagle        20 March 2008



















John Darkow

The Columbia Daily Tribune, Missouri        Cagle        20 March 2008
















Obama Ties Economic Woes

to Iraq War


March 20, 2008
Filed at 12:58 p.m. ET
The New York Times


CHARLESTON, W.Va. (AP) -- Barack Obama blamed the Iraq war for higher oil prices and skyrocketing debt Thursday as he sought to tie the unpopular war to the slumping economy in working-class West Virginia.

The Democratic hopeful is trying to cut into Hillary Clinton's base in West Virginia. The state's demographics appear to favor Clinton, whose support is strongest among older white voters and blue-collar workers.

''When you're spending over $50 to fill up your car because the price of oil is four times what it was before Iraq, you're paying a price for this war,'' Obama said. ''When Iraq is costing each household about $100 a month, you're paying a price for this war.''

By linking the economy to the war, Obama is playing to his perceived strength as someone who spoke out against the war as a state lawmaker in Illinois. He has criticized Clinton for only recently opposing the war and said Thursday that her criticism of Republican John McCain's war policies lacks teeth.

''Her point would have been more compelling had she not joined Senator McCain in making the tragically ill-considered decision to vote for the Iraq war in the first place,'' Obama said to cheers.

It was the third consecutive day that Obama set aside his usual stump speech and delivered a more focused issue speech. He discussed race relations on Tuesday and the foreign policy consequences of the Iraq war Wednesday.

Obama has won more states than Clinton, leads in the popular vote and holds a nearly insurmountable lead in pledged delegates. But neither candidate can clinch the nomination without help from superdelegates, the party leaders who are not bound by any primary or caucus and are free to vote for whomever they choose. Clinton hopes a strong finish in the remaining primaries will persuade superdelegates to back her in a close race despite the delegate shortfall.

West Virginia holds its primary May 13. The economy is a key issue in West Virginia., and Obama aides concede that Clinton is expected to perform well here.

''For what folks in this state have been spending on the Iraq war, we could be giving health care to nearly 450,000 of your neighbors, hiring nearly 30,000 new elementary school teachers, and making college more affordable for over 300,000 students,'' Obama said.

Obama was introduced at the University of Charleston by West Virginia Sen. Jay Rockefeller, who played up Obama's blue-collar credentials and his familiarity with his home state's coal industry.

''He's a man who's worked for everything he's achieved. That's something I can't say,'' Rockefeller joked. He said Obama can see the world ''through the eyes of those who are in the trenches everyday struggling to make ends meet and who are fighting to keep their families together.''

    Obama Ties Economic Woes to Iraq War, NYT, 20.3.2008, http://www.nytimes.com/aponline/us/AP-Obama-Iraq.html






Jobless Claims Hit a Two-Month High


March 20, 2008
The New York Times


WASHINGTON (AP) — The number of newly laid off workers filing for unemployment benefits rose last week to the highest level in nearly two months, providing more evidence that the weak economy is huring the the labor market.

The Labor Department said Thursday that applications for jobless benefits totaled 378,000 last week. That was an increase of 22,000 from the previous week and was a far bigger jump than had been expected.

The four-week average for new claims rose to 365,250, which was the highest level since a flood of claims caused by the 2005 Gulf Coast hurricanes.

The current economic slowdown, which many economists believe has already turned into a full-blown recession, is starting to show up in the labor market in terms of higher layoffs and weaker hiring numbers.

The total number of payroll jobs fell by 63,000 in February, an even bigger decline that the drop of 22,000 jobs in January, which had been the first monthly decline since mid-2003.

Part of the increase in benefit applications in recent weeks occurred because of a three-week strike at Axle American, a major parts supplier to General Motors Corporation. The strike has forced G.M. to close all or part of 28 plants, affecting more than 37,000 hourly workers.

The number of unemployed workers who are receiving benefits totaled 2.865 million, the largest amount since late August 2004.

For the week ending March 8, 28 states and territories reported an increase in jobless claims and 25 reported declines. The states with the biggest increases were California, up by 3,755; Michigan, up by 2,236, and Indiana, with an increase of 2,158. The layoffs in Michigan and Indiana were attributed in part to higher layoffs in the auto industry.

The states with the biggest drop in claims two weeks ago were New York, down by 13,504, and Connecticut, which fell by 2,228.

    Jobless Claims Hit a Two-Month High, NYT, 20.3.2008, http://www.nytimes.com/2008/03/20/business/20apecon-web.html






Commodities Tumble In Dash For Cash


March 20, 2008
Filed at 9:21 a.m. ET
The New York Times


LONDON (Reuters) - Commodity prices tumbled across the board on Thursday as investors retreated into cash, taking profits after a series of record peaks this year.

Gold prices fell to a one-month low as traders, eyeing a firmer dollar, took their gains to pay for losses in other markets, while oil and industrial metals fell on worries over the outlook for demand.

Spot gold slipped to $904.65 a troy ounce, a level last seen on February 18, a drop of more than $100 since the precious metal hit a record high of $1,030.80 on Monday. It was at $915.60/916.70 at 1246 GMT from $944.20/945.00 on Wednesday.

Fund managers said the trigger for the sell-off this week could have been a decision by the U.S. Federal Reserve to cut interest rates by only 75 basis points to 2.25 percent against hopes of a one-percentage-point cut.

That helped boost the dollar, which has gained nearly 3 percent against the euro since Tuesday. The dollar's retreat from all-time lows against the euro has surprised some looking for levels beyond $1.60 against the euro.

A rising U.S.-currency makes dollar-denominated commodities more expensive for holders of other currencies. Its tumble this year was one of the reasons for the surge in commodity prices.

"People have done very well in commodities and they may be doing badly elsewhere," said Ian Morley, chief executive at fund manager Dawnay Day Brokers.

"I wouldn't be surprised if they are cashing in to meet margin calls ... Prices in the long term may be going higher, but the recent rise has been speculative and we've run out of fundamentals to explain it."

Some investors are nursing hefty losses in equity and fixed income markets, which has seen U.S. Treasury bond yields fall on an influx of money looking for safety, giving the dollar another boost.



Others seeing no end to financial instability have taken their portfolios back to neutral, which for many including U.S. investors means selling commodities and moving into cash.

Frances Hudson, global thematic strategist agrees there is an element of safety in the move to cash, but thinks the falls in oils and industrial metals are also to do with expectations of a U.S.-led global economic slowdown.

"A lot is being touted on the U.S. slowdown and maybe its also a reaction to how far commodity prices rose," she said.

Crude oil too hit a record high of $111.80 a barrel on Tuesday and since then has slipped by more than 10 percent to below $100 a barrel on concerns about demand erosion in the United States, the world's largest consumer.

Weaker sentiment was reinforced by data showing a 3.2 percent fall in U.S. oil demand over the past four weeks compared with the same period last year.

Copper futures in London hit a five-week low of $7,648 a tonne, a loss of more than 13 percent since the metal hit an all-time high of $8,820 on March 6.

Part of the gain between the middle of January and early March was due to new institutional and speculative money, which led many analysts to replay the de-coupling theme.

But the idea that emerging markets would be able to withstand a U.S. recession is too optimistic.

"I've never really bought the story about the de-linking of Asia," Morley said. "If we are heading into recession, which we are, and economic activity declines, then at some point the demand for commodities will also decline."

Closing long positions in commodity markets also spread into soft commodities, which have recently jumped to new highs.

London cocoa futures fell by nearly 10 percent in early trade. White sugar was down 2.8 percent and May robusta coffee ceded 3.3 percent.

(Additional reporting by Nigel Hunt; editing by Chris Johnson)

    Commodities Tumble In Dash For Cash, NYT, 20.3.2008, http://www.nytimes.com/reuters/business/business-markets-commodities.html






Commodities: Latest Boom, Plentiful Risk


March 20, 2008
The New York Times


The booming commodities market has become increasingly attractive to investors, with hard assets like oil and gold perhaps offering a safe hedge against inflation, as well as the double-digit gains that have fast been disappearing from the markets for stocks, bonds and real estate.

Undeterred by the kind of volatile downdrafts that sent oil plunging 4.5 percent Wednesday, to settle at $104.48 a barrel, large funds and rich individual investors have sent a torrent of cash into this arcane market over the last year, toppling records for new money flowing in.

Small investors are plunging in, too, using dozens of new retail commodity funds to participate in markets that by one measure have jumped almost 20 percent in the last six months and doubled in six years.

But this market, despite its glitter, offers risks of its own, including some dangerous weaknesses that are impairing the ability of regulators to police fraud and protect investors. Commodities are also vulnerable to the same worries affecting the rest of Wall Street, where on Wednesday the Dow Jones industrial average plunged almost 300 points, erasing more than two-thirds of Tuesday’s steep gains.

Moreover, the biggest speculators and lenders in the commodities markets are some of the same giant hedge funds, commercial banks and brokerage houses that are caught in the stormy weather of the equity, housing and credit markets.

As in those markets, an evaporation of credit could force some large investors — especially hedge funds speculating with lots of borrowed money — to sell off their holdings, creating price swings that could affect a host of marketplace prices and wipe out small investors in just a few moments of trading.

“Right now is a very scary time” for commodity market regulators, said Michael Riess, a director of the International Precious Metals Institute, a consultant to commodities investors for more than 30 years. “It’s not a question of overregulating or underregulating. It’s a question of just being swamped by volume, volatility and a dramatic shift toward speculative interests.”

Developments on Wall Street in the last few days underscored the new risks. Both Bear Stearns and its prospective new owner, JPMorgan Chase, are important clearing brokers that process and guarantee their clients’ trades in the commodities markets.

Officials at the exchanges where those trades occur had to monitor Bear Stearns’s financial situation carefully throughout last week to ensure that its cash shortage did not affect its commodity positions or those of its clients.

Walter L. Lukken, who heads the federal agency that regulates most commodity markets, said his staff had been able, so far, to cope with both the markets’ growth and the recent tremors from Wall Street.

"Even with the enormous volume coming through,” said Mr. Lukken, acting chairman of the Commodity Futures Trading Commission, “we think we have gotten a very good handle on the market. You can’t catch them all, of course, and you worry that something will get past the goalie. But we have been able to scale up the regulatory monitoring system to deal with increasing volume.”

Regulators and exchange officials take comfort from the rising commodity prices, which reduce the risk that lenders will grow nervous about their collateral and withhold new credit. Despite a broad commodities sell-off yesterday, a Commodity Research Bureau index remains almost 40 percent higher than a year earlier.

But it has been a roller coaster: commodity prices can record daily percentage changes that dwarf typical movements in stocks. Yesterday, when crude oil gave back some of its 85 percent annual gain and gold dropped almost 6 percent after an annual gain of 44.5 percent, the Standard & Poor’s 500-stock index fell 2.4 percent, leaving it down 7.4 percent over the last year. On its worst single day over the last year, it fell 3.2 percent.

So stock market investors seeking these formidable gains will find themselves on unfamiliar terrain. The heart of commodities markets is the so-called cash market, a “professionals only” setting where producers sell boatloads of iron ore, tanker ships full of oil and silos full of wheat for immediate use.

Wrapped around that core are the commodities futures markets. Here, hedgers and speculators trade various versions of a derivative called a futures contract, which calls for the delivery of a specific quantity of a commodity at a fixed price on a particular date.

Futures contracts trade both on regulated exchanges and in the immensely larger but less regulated over-the-counter market, where banks and brokers privately negotiate futures contracts with hedgers and speculators around the world.

The prices at which all these contracts trade indicate the potential strength of demand and supply for commodities still in the ground or in the fields. That makes them important to everyone who produces, buys and uses those goods — wheat farmers, baking companies, grocery shoppers, oil companies, electric utilities and homeowners.

Prices here can also influence the values of the increasingly popular exchange-traded funds, or E.T.F.’s, that focus on commodity investments. Born barely four years ago, these funds had net assets of $32.8 billion in January, compared with less than $4.8 billion in 2005.

But as the futures markets have grown, the ability of federal regulators to police them for fraud and manipulation has been shrinking, as a result of legislative loopholes and adverse court decisions. And despite widespread agreement that these regulatory gaps are bad for investors and consumers, they have not yet been repaired.

The oldest of these is the so-called Enron loophole, an 11th-hour addition to the Commodity Futures Modernization Act of 2000 that gave an exemption to private energy-trading markets, like the one operated by Enron before its scandalous collapse in 2001. Regulators later accused Enron traders of using this exempt market to victimize a vast number of utility customers by manipulating electricity prices in California.

Related to that loophole is a broader one for a category called exempt commercial markets, envisioned in the 2000 law as innovative professional markets for nonfarm commodities that did not need as much scrutiny as public exchanges.

What lawmakers did not anticipate was that one of the exempt markets, the IntercontinentalExchange, known as the ICE and based in Atlanta, would become a hub for trading in a product that mirrors the natural gas futures contract trading on the regulated New York Mercantile Exchange.

In 2006, traders at a hedge fund used the ICE’s look-alike contract as part of what regulators later asserted was a scheme to manipulate natural gas prices, again at great cost to users. The fund denied the accusation, and civil litigation is pending.

That case persuaded the commission that it needed more power to police these exempt markets, at least when they help set commodity prices. But so far, it has not received it, despite repeated requests to Congress.

Another attempt to close these loopholes is attached to the pending farm bill, which is scheduled to emerge from a Congressional conference committee next month. But this latest effort, too, faces market and industry opposition.

The courts have also curbed the commission’s reach. In three cases since 2000, judges have interpreted federal law to severely limit the commission’s ability to fight fraud involving both over-the-counter markets and specious foreign currency contracts used to victimize individual investors.

The commission has filed appeals, but a far quicker remedy would be for Congress simply to revise the laws, as the commission requests.

Mr. Lukken said he was confident that passage of the commission’s proposed language as part of the farm bill would address those shortcomings, as well as the exempt-market problem.

Finally, the commodities market has not yet dealt with what some economists say are inherent conflicts that have arisen as the futures exchanges, which have substantial self-regulatory duties, have been converted into for-profit companies with responsibilities to shareholders that could conflict with their regulatory duties. (For example, shareholders may benefit when an exchange’s regulatory office ignores infractions by a trader who generates substantial income for the exchange.)

By contrast, when the New York Stock Exchange and Nasdaq became profit-making entities, they spun off their self-regulatory units into an independent agency, now called the Financial Industry Regulatory Authority.

The C.F.T.C. never encouraged that approach, trying instead — so far unsuccessfully — to adopt principles that would encourage the for-profit exchanges to add independent directors to oversee their self-regulatory operations.

Independent directors do not owe any less loyalty to shareholders than management directors would, said Benn Steil, director of international economics at the Council on Foreign Relations. "The statutory regulators have got to acknowledge these conflicts and act accordingly," he said.

His view is opposed by Craig Donohue, chief executive of the CME Group, the for-profit company that operates the Chicago Mercantile Exchange and the Chicago Board of Trade and may soon merge with the New York Mercantile Exchange.

“We succeed because we are regulated markets, among other things. That’s part of our identity and brand,” Mr. Donohue said. Effective self-regulation, he added, is “very consistent with the shareholder interest.”

Mr. Lukken nevertheless plans to push ahead with his call for more public directors. “The important point is trying to minimize and manage conflicts,” he said. “Public directors are uniquely qualified to balance the interests of the public as well as the requirements of the act.” Although the effort has been delayed, he added: “This is not an indefinite stay. It’s a priority of mine that we hope to complete in the coming months.”

But some with experience in the commodities market remain nervous about the new money pouring in so quickly.

Commodity trading firms that have survived for any length of time have excellent risk-management skills, said Jeffrey M. Christian, managing director of the CPM Group, a research firm spun off from Goldman Sachs in 1986. Mr. Christian said he was less certain how the newcomers would deal with risk.

“You have the stupid money coming into the market now,” he said last week. “And I think the smart money is beginning to get a little frightened about what the stupid money will do.”

    Commodities: Latest Boom, Plentiful Risk, NYT, 20.3.2008, http://www.nytimes.com/2008/03/20/business/20commodity.html?hp






Economic Scene

Can’t Grasp Credit Crisis? Join the Club


March 19, 2008
The New York Times


Raise your hand if you don’t quite understand this whole financial crisis.

It has been going on for seven months now, and many people probably feel as if they should understand it. But they don’t, not really. The part about the housing crash seems simple enough. With banks whispering sweet encouragement, people bought homes they couldn’t afford, and now they are falling behind on their mortgages.

But the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression?

I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis.

“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,” an obscure kind of financial contract, until they started causing big problems for Citigroup.

I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, “Can you try to explain this to me?” When they finished, I often had a highly sophisticated follow-up question: “Can you try again?”

I emerged thinking that all the uncertainty has created a panic that is partly unfounded. That said, the crisis isn’t close to ending, either. Ben Bernanke, the Federal Reserve chairman, won’t be able to wave a magic wand and make everything better, no matter how many more times he cuts rates. As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the housing bust.

So let’s go back to the beginning of the boom.

It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend.

The new competition brought down mortgage fees and spurred some useful innovation. Why, after all, should someone who knows that she’s going to move after just a few years have no choice but to take out a 30-year fixed-rate mortgage?

As is often the case with innovations, though, there was soon too much of a good thing. Those same global investors, flush with cash from Asia’s boom or rising oil prices, demanded good returns. Wall Street had an answer: subprime mortgages.

Because these loans go to people stretching to afford a house, they come with higher interest rates — even if they’re disguised by low initial rates — and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.’s (a term that appeared in this newspaper only three times before 2005, but almost every week since last summer). Once bundled, different types of mortgages could be sold to different groups of investors.

Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody’s Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years.

All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people — by “people,” I’m referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners — decided that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy.

And it largely explains why the mortgage mess has had such ripple effects. The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn’t spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit.

Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything. That’s why a hedge fund associated with the prestigious Carlyle Group collapsed last week.

“If anything goes awry, these dominos fall very fast,” said Charles R. Morris, a former banker who tells the story of the crisis in a new book, “The Trillion Dollar Meltdown.”

This toxic combination — the ubiquity of bad investments and their potential to mushroom — has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.

The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears. A recession could cause credit card loans and other forms of debt, some of which were also based on overexuberance, to start going bad as well.

Many economists, on the right and the left, now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the Fed began doing last weekend. This is called a bailout, and there is no doubt that giving a handout to Wall Street lenders or foolish home buyers — as opposed to, say, laid-off factory workers — is deeply distasteful. At this point, though, the alternative may be worse.

Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns, which is why the Fed has been taking unprecedented actions to restore confidence.

“You say, my goodness, how could subprime mortgage loans take out the whole global financial system?” Mr. Zandi said. “That’s how.”

    Can’t Grasp Credit Crisis? Join the Club, NYT, 19.3.2008, http://www.nytimes.com/2008/03/19/business/19leonhardt.html?ref=business






Stocks Pull Back After Huge Rally Tues.


March 19, 2008
Filed at 1:02 p.m. ET
The New York Times


NEW YORK (AP) -- Stocks pulled back Wednesday as investors paused a day after the market's huge rally and digested better-than-expected results at Morgan Stanley that eased concerns about the investment banking sector. The Dow Jones industrials fell about 80 points.

News that the government plans to free up billions of dollars at Fannie Mae and Freddie Mac, a move that could help struggling homeowners, appeared to quell some of the market's fears.

But some profit-taking was to be expected a day after the gains that saw the Dow Jones industrials shoot up 420 points. Investors sent stocks charging higher Tuesday on stronger-than-expected investment bank results and several moves from the Federal Reserve in recent days, including a 0.75 percentage point rate cut, aimed at jump-starting the credit markets.

Morgan Stanley's earnings indicated that the bank is relatively healthy like Lehman Brothers Holdings Inc. and Goldman Sachs & Co., rather than at risk of failure like Bear Stearns Cos. JPMorgan Chase & Co. struck a deal Sunday to acquire Bear Stearns, which was on the verge of succumbing to credit troubles.

Meanwhile, the Office of Federal Housing Enterprise Oversight, which oversees government-backed Fannie and Freddie, said the changes should result in an immediate infusion of up to $200 billion into the market for mortgage-backed securities. This could mean greater demand for mortgages -- an aid for struggling homeowners hoping to refinance at more favorable terms.

George Shipp, chief investment officer at Scott & Stringfellow, said that while some investors appear optimistic, others are still somewhat uneasy about the health of the markets. He contends the back-and-forth days will likely continue as Wall Street tries to feel its way forward.

''Nobody wants to make the first move. There is liquidity on the sidelines. It doesn't really know what to do right now,'' he said, adding the investors are trying to determine whether moves by the Fed and other regulators to stimulate the economy and stabilize the markets will take hold.

In midday trading, the Dow fell 81.90, or 0.66 percent, to 12,310.76.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 5.58, or 0.42 percent, to 1,325.16, and the Nasdaq composite index fell 15.55, or 0.69 percent, to 2,252.71.

Bond prices jumped. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.39 percent from 3.50 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude fell $4.86 to $104.56 per barrel on the New York Mercantile Exchange after government figures suggested the high price of oil and gasoline are damping demand for petroleum products.

Investors' relief over Morgan Stanley follows better than expected earnings news from Lehman and Goldman on Tuesday that gave the Dow its biggest point gain in more than five years. The Dow got an extra boost after the Fed's rate cut.

Morgan Stanley rose $2.84, or 6.6 percent, Wednesday to $45.70. Lehman fell $1.58, or 3.4 percent, to $44.91, while Goldman slipped $1.29 to $174.30.

Investors were also upbeat about the moves at the government mortgage companies. Fannie jumped $2.88, or 10 percent, to $31.10, while Freddie rose $3.99, or 15 percent, to $30.02.

The Fed has slashed key rates by more than half since last summer, when the mortgage crisis claimed its grip on the global credit markets. But the housing and lending industries are still hurting.

Late Tuesday, Visa Inc. launched the largest initial public offering in U.S. history, selling 406 million shares at $44 apiece to raise $17.9 billion. The world's largest credit card processor is not a lender, and many investors are betting that it will easily survive the faltering U.S. economy and credit climate. The stock traded up $16.05, or 36 percent, to $60.05.

Bruce McCain, head of the investment strategy team at Key Private Bank in Cleveland, said recent trading -- days when stocks didn't plummet in the face of bad news and rallied on good news -- is encouraging because it could signal the market is closer to regaining solid footing.

He said while any placidity in the markets would likely need to occur for some time to extinguish some of investors' fears, he was encouraged by some recent signs of strength in consumer discretionary and financial stocks.

''Those are probably the two most important sectors with respect to this market regaining some confidence and maybe starting to shift gears,'' he said.

Wall Street has beaten up stocks like those of financial companies in recent months in favor of energy, materials and industrials. Investors hoping for a change in the winds on Wall Street will be looking for signs that money is moving out of these defensive areas into downtrodden corners of the market, McCain said.

Advancing issues narrowly outpaced decliners on the New York Stock Exchange, where volume came to 894.5 million shares.

The Russell 2000 index of smaller companies fell 5.64, or 0.83 percent, to 676.29.

Overseas, Japan's Nikkei stock average increased 2.48 percent, while Hong Kong's Hang Seng index rose 2.26 percent. In afternoon trading, Britain's FTSE 100 fell 0.95 percent, Germany's DAX index fell 0.41 percent, and France's CAC-40 declined 0.31 percent.


On the Net:

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

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

    Stocks Pull Back After Huge Rally Tues., NYT, 19.3.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html






Visa Shares Jump Sharply as Trading Starts


March 19, 2008
The New York Times


Shares of Visa Inc., the credit card giant, jumped sharply as they began trading on Wednesday after the largest initial public offering in American history.

The shares, priced Tuesday at $44 each, were trading near $60 on the New York Stock Exchange shortly before noon. They are listed under the ticker symbol V.

A boon for big banks and Wall Street, the $18 billion public offering was greeted with fanfare in the financial industry but was unlikely to unleash a new wave of initial stock sales given the turbulence in the markets.

Even so, the offering will generate a windfall for Visa’s thousands of member banks, which own the company. JPMorgan Chase is expected to reap about $1.25 billion, while Bank of America, National City, Citigroup, U.S. Bancorp and Wells Fargo are likely to receive several hundred million dollars each.

Wall Street firms, in the meantime, stand to collect upward of $500 million in underwriting fees from the sale.

“That is a good infusion of capital,” said John E. Fitzgibbon Jr., the founder of IPOScoop.com, a Web site that tracks the industry. “And it’s no secret that Wall Street is capital starved right now.”

Shares of Visa were priced above the expected range of $37 to $42. More than 406 million shares are being offered, with an option to add 40.6 million if there is demand. That means the size of sale could reach as much as $19.7 billion.

In going public, Visa is following in the footsteps of its smaller rival MasterCard, whose shares have risen more than 400 percent since its public offering in May 2006. Shares of MasterCard were also up on Wednesday, trading around $214, a gain of about $4 a share. American Express was up slightly at around $44. Discover Financial fell to around $16, a loss of almost 8 percent, after first-quarter profit fell 65 percent from a year earlier.

In contrast to Visa, many companies are struggling to sell stock given turmoil in the markets.

“There are just not the buyers out there in this environment,” said Scott Sweet, a partner at IPOBoutique, an industry research firm. “They are scared by the market volatility.” Just 10 companies went public during the first two months of 2008, according to Dealogic, a financial services research firm. That compares with 50 public offerings in the first three months of 2007.

Analysts say that the market has essentially been closed to companies outside the energy, natural resources and health care industries. Excluding Visa, roughly 190 deals, valued at a combined $37.7 billion, are still in the pipeline, according to IPO Scoop.com data.

Several high-profile initial public offerings have been scrapped or delayed in the last few months, including one for Kohlberg Kravis Roberts & Company, the big buyout firm. In all, about 77 percent of all public offerings have been withdrawn or postponed, according to bankers, including one this week by Pogo Jet, a jet charter service.

Many companies that have moved forward with sales have scaled back their offerings. CardioNet, a health care technology start-up which Citigroup is taking public on Wednesday, cut the number of shares it allocated in half and lowered the price after several big shareholders backed out of the offering.

Visa, however, is the biggest player in its industry and has a brand known to nearly everyone with a credit card. Wall Street also understands the company’s business.

Visa and MasterCard have prospered as Americans increasingly swipe their cards rather than use cash nearly everywhere. The companies have not been hurt by the credit squeeze, because they do not actually make credit card loans; they merely process transactions for banks that do.

Visa, whose offering is being led by JPMorgan and Goldman Sachs with 17 other banks contributing, has been contemplating such a move for more than two years. In that time, it has bolstered its management team and revamped the company.

Industry observers say investors are complaining that they are being given only a fraction of the shares they requested. “I hear that allocations are being given out with eyedroppers,” Mr. Fitzgibbon said.

    Visa Shares Jump Sharply as Trading Starts, NYT, 19.3.2008, http://www.nytimes.com/2008/03/19/business/19cnd-visa.html






Why Hospitals Want Your Credit Report

Many Are Using Personal Data
To Assess Your Ability to Pay;
Concerns About Denial of Care


March 18, 2008
The Wall Street Journal
Page D1


In a development that consumer groups say raises privacy issues, a growing number of hospitals are mining patients' personal financial information to figure out how likely they are to pay their bills.

Some hospitals are peering into patients' credit reports, which contain information on people's lines of credit, debts and payment histories. Other hospitals are contracting with outside services that predict a patient's income and whether he or she is likely to walk away from a medical bill. Hospitals often use these services when patients are uninsured or have big out-of-pocket costs despite having health insurance.

Hospitals say the practice helps them identify which patients to pursue actively for payment because they can afford to pay. They say it also allows them to figure out more quickly which patients are eligible for charity care or assistance programs.

Administrators also argue that these credit checks can help them minimize losses. In 2006, nearly 5,000 community hospitals provided uncompensated care costing $31.2 billion, the vast majority of it charity care or unpaid patient bills, according to the American Hospital Association.

Hospitals have "a limited amount of resources that are available to actually execute the collection process," says Karen Godfrey, who runs revenue management at Baptist Health South Florida, a Miami system of five nonprofit hospitals that is likely to adopt one of these systems soon. "You want to concentrate on the ones that have the ability to pay."

Consumer advocates say the practice creates the potential for hospitals to misuse the information by denying or cutting back on patients' care if they can't pay. Hospitals say that doesn't happen. Hospitals often ask patients for permission to access their financial records, but such authorization is sometimes buried in the fine print. What's more, hospitals could scour a patient's financial records for credit lines and encourage the patient to tap them, despite high interest rates or other costs. "It has the potential to put people at risk financially," says Mark Rukavina, executive director of the Access Project, a research and advocacy group that focuses on medical debt.

Some hospitals that have begun checking patients' financial information will do so when they first register for treatment, while other hospitals hold off until after patients have received care. By law, hospitals aren't allowed to turn away patients in an emergency. Private hospitals typically aren't required to provide nonemergency treatment, while public hospitals are often required to give nonemergency care that's medically necessary, depending on local laws.

Consumers' credit reports are maintained at the three major credit bureaus, which determine credit-worthiness using criteria such as the well-known FICO score. But while a snapshot of how much credit you have available and your debt-payment history might help predict the likelihood of your repaying, say, a car loan, it's less reliable when it comes to medical-bill payments.

"Health care is always considered that last, almost discretionary, spending," says Stephen Mooney, senior vice president of patient financial services at Tenet Healthcare Corp., the Dallas for-profit hospital company.

To address this problem, Equifax Inc., one of the credit bureaus, has developed a separate credit score specific to health care that aims to predict if a patient can be expected to repay medical bills. The health-credit score is a number derived from a patient's traditional credit report. Equifax developed it by matching up a cross section of hospital payment records with patients' credit reports to look for common patterns.

SearchAmerica Inc. is a company that mines credit bureaus for data on behalf of its hospital clients, which it says have doubled in number to 900 since 2005. As patients register for treatment, the company advises hospitals on whether they are likely to qualify for financial assistance. SearchAmerica also generates a health-care credit score, which factors in a patient's history of paying hospital bills. After the patient receives care, the company factors in the size of the bill and tells the hospital how likely it is that the patient will pay.

Tenet, Fair Isaac Corp., developer of the widely used FICO score, and a venture-capital firm have each contributed $10 million to a start-up called Healthcare Analytics Inc. that is assembling bill-collection data from hospitals to develop methods for predicting patients' payment habits. The firm is analyzing the impact of health-care-specific factors such as insurance-plan design.

The Health Insurance Portability and Accountability Act, or Hipaa, a federal law that has patient-privacy provisions, doesn't bar hospitals from providing patient payment histories to consumer reporting agencies. SearchAmerica says it is required by its contracts with the hospitals to keep the information private. The company says it does not receive any medical information from the hospitals.

One institution -- Orlando Regional Healthcare, a nonprofit system of seven hospitals in Florida -- in 2007 changed its collection practices based on the new health-care credit scores. After patients receive care, the hospital system assigns them an Orlando Regional Risk Score by combining their Equifax health-credit score with any payment history at Orlando Regional. The patients are then categorized as low, medium or high risk.

The hospital figures there's little to be gained from applying more pressure to either low- or high-risk patients. But "we're trying to work with that [medium-risk] population more to try to find some method of payment," says Keith Eggert, Orlando Regional's vice president of revenue management.

Before adopting its new system, Orlando Regional says it sent three billing notices to all patients and waited 65 days before turning unpaid bills over to collection agencies. Now hospital employees call patients on day 15 who are considered at a medium risk of not paying, then call them back at 30-day intervals. The hospital also waits 120 days before turning those cases over to collection agencies.

Charity care at Orlando Regional also has grown to $60 million in treatment costs in 2007, up from $49 million a year earlier.

It's unclear how much latitude hospitals have to legally check a patient's financial information. Under the Fair Credit Reporting Act, hospitals are allowed to obtain patients' credit reports if they get their permission, says Rebecca Kuehn, an assistant director in the Federal Trade Commission's division of privacy and identity protection. And after a patient owes money, the hospital becomes a creditor and has strong grounds for checking a credit report even without permission, especially when a bill is long overdue, she says.

But Equifax and some other industry officials argue that a hospital typically takes on the role of creditor the minute a patient walks in the door, and thus has the right to check credit reports without specific permission before care is delivered. Ms. Kuehn says federal law seems to support that view, though it's hard to be sure without knowing the specific circumstances in which hospitals are pulling the reports prior to treatment. Credit bureau Experian Group Ltd. says it requires hospitals to get authorization for credit checks.

Some patients are uncomfortable with the practice. After being treated for heart problems, and his wife received treatment for lung cancer, Ralph Carter says the New Hanover Regional Medical Center in Wilmington, N.C., suggested he fill out an "extended payment application" to stretch out the family's payments on what their insurance didn't cover. Mr. Carter declined, saying the application asked for information on wages, bank accounts and monthly bills. It also asked for permission to check his credit reports.

"They had no business knowing the information," says Mr. Carter. He says he feared the hospital might take legal action to force him to make larger payments. Hospitals say patients' fears are largely misplaced. They say the personal financial information helps them avoid badgering patients who deserve charity care.

"If people have no ability [to pay] and we're able to determine that, then we have zero reason to put burdens on them that won't lead to any reasonable revenue," says Wayne Sensor, chief executive of Alegent Health, an Omaha, Neb.-based nonprofit system with nine hospitals.

One beneficiary was Shirley Lemm, an uninsured patient from Nebraska, who received free surgery at Alegent to fix severe knee problems after being turned down for treatment elsewhere. Ms. Lemm says she provided detailed financial information, which Alegent verified using a credit report from credit bureau Experian. Although Alegent got Ms. Lemm's permission when she signed a financial-assistance application, Ms. Lemm says she didn't realize the health system pulled her credit data. No matter, she says: "I finally got some help."

Health-credit scores provided to hospitals by firms like Equifax and SearchAmerica aren't accessible to the patients themselves. Both firms say hospital credit inquiries do not adversely affect patients' traditional credit reports.

    Why Hospitals Want Your Credit Report, WSJ, 18.3.2008, http://online.wsj.com/article/SB120580305267343947.html?mod=hpp_us_inside_today






Dow Surges 420 Points on Fed Rate Cut and Earnings


March 18, 2008
The New York Times


Casting aside any hesitation about an aggressive interest rate cut, investors sent stocks soaring to their highest gains in five years on Tuesday as shares of financial firms surged in the hopes that the Federal Reserve has finally taken hold of the credit crisis. The Dow Jones industrial average gained 420 points.

The surge began at the opening bell after two big investment banks, Lehman Brothers and Goldman Sachs, delivered stronger-than-expected earnings. It faltered only briefly after the Fed’s announcement in the afternoon that it would cut its benchmark interest rate by three-quarters of a point, with the Dow tacking on 250 points in the final hour and a half.

At the close, the Dow was at 12,392.66, a gain of 420.41, or 3.5 percent. The broadest measure of the American stock market, the Standard & Poor’s 500-stock index, advanced 4.2 percent, its best performance since October 2002. The Nasdaq composite also gained 4.2 percent.

The rally capped a week of extraordinary efforts on the part of the central bank to restore confidence to financial markets in the wake of the de facto collapse of Bear Stearns, one of Wall Street’s most venerable investment banks. The three-quarter point cut amounted to a strong dose of financial adrenaline, though some investors had expected an even deeper cut.

“The market, after thinking it over for a few minutes, has come to the right conclusion,” said Jerry Webman, the chief economist and senior investment officer of OppenheimerFunds. “If you look at the policy moves over the last five days, the Fed is doing the best it can out of a bad situation.”

But as stock investors enjoyed the euphoria, ominous signs appeared elsewhere in the market. Widening spreads on mortgage and short-term debt indicated that the Fed’s actions may not have cut to the heart of the current crisis: the lack of willingness among financial institutions to lend to one another.

Spreads on lending between banks and Fannie Mae mortgage bonds widened, a sign of decreased confidence, even after a morning where investors had appeared more confident about the repayment of loans.

“The fact that they widened after the Fed announcement showed that there is still some concern in the credit markets,” said David Kovacs, chief investment officer at Turner Investment Partners in Berwyn, Pa. “Even with all the work that the Fed has done, including cutting by 2 percent since the beginning of the year, even with that the risk is not over.”

Shares of financial firms, however, continued to surge in late trading as they recovered from a severe beating on Monday. Lehman Brothers, whose share price plummeted 19 percent a day earlier as rumors swirled that the bank was facing liquidity problems, gained back all its losses after reporting a 57 percent decline in net income for the first quarter. That figure beat expectations and restored some confidence in the company; its stock rose 46 percent to nearly $46.49 a share.

Goldman Sachs reported a 53 percent earnings decline, also better than Wall Street estimates, and its shares rose 16 percent, to $175.59. MF Global, the commodities brokerage firm that plummeted in value on Monday, gained back 35 percent to more than $8 a share. And Bear Stearns, which was valued at $2 a share in the weekend takeover by JPMorgan Chase, finished at $5.91, a 23 percent bounce, as traders bet the company may be able to negotiate a better deal in the near future.

The Fed’s cut to its benchmark lending rate will lower the cost of mortgages, car loans, and other consumer transactions. But it can also lead to higher prices and a devalued dollar.

The yields on Treasury notes, some of which reached 50-year lows on Monday, climbed back on near- and short-term bonds. And commodities like oil and corn recovered from a sell-off a day earlier.

Commodities analysts said traders were responding to the more stable financial markets and continued to see firm fundamentals for future price gains in energy and agricultural commodities. They said the rebound in prices reflected hopes that strong actions by the Fed would avert a slowdown in the United States and reduce the possibility that a recession will douse increasing worldwide demand for energy, metals and food.

“It’s a mild recovery and it’s a logical response to yesterday’s hard sell-off. In general the fundamentals on many commodities remain sound despite jitters over global financial markets,” said Joel Crane, a commodities strategist at Deutsche Bank.

Crude oil gained $3.74 percent to settle at $109.42 a barrel. Gold fell below $1,000 a troy ounce and the dollar gained ground against the euro, which settled at $1.5630.

The bounce on Wall Street followed strong sessions in foreign stock markets, which recovered on the strength of banks and financial services firms. The Nikkei 225 in Tokyo finished up 1.5 percent and Hong Kong’s benchmark Hang Seng index gained 1.4 percent.

In Europe, indexes in London, Paris and Frankfurt all closed more than 3 percent higher, a full recovery from Monday’s declines.

    Dow Surges 420 Points on Fed Rate Cut and Earnings, NYT, 18.3.2008, http://www.nytimes.com/2008/03/18/business/18cnd-stox.html?hp






Fed Cuts Key Interest Rate by 3/4 of a Point


March 18, 2008
The New York Times


WASHINGTON — The Federal Reserve reduced its benchmark interest rate by three-quarters of a percentage point on Tuesday, to 2.25 percent, a cut that was less than investors had been hoping for even though it was one of the deepest in Fed history.

While leaving the door open for additional rate cuts, policy makers also expressed growing concern about inflation. “Uncertainty about the inflation outlook has increased,” the central bank said. “It will be necessary to continue to monitor inflation developments carefully.”

The statement highlighted the growing problem that the Fed faces, between fighting an economic downturn and heading off new inflationary pressures that have become apparent in everything from energy and food prices to the falling value of the dollar.

In a sign of the difficult choices the Fed faces, 2 of the 10 members of the policy-making Federal Open Market Committee dissented from the decision, favoring a smaller rate cut.

The two dissenters in Tuesday’s decision were Richard W. Fisher, president of the Dallas Fed, and Charles I. Plosser, president of the Philadelphia Fed, both of whom have been outspokenly hawkish about inflation issues in recent months.

The Fed’s announcement was the culmination of an extraordinary series of actions over the last two weeks to prop up financial markets and the economy with a flood of cheaper money.

The Federal Reserve has reduced its overnight lending rate, the federal funds rate, six times since September, and did so twice in January alone.

With the latest reduction, the federal funds rate is far below the rate of inflation, meaning that the “real,” or inflation-adjusted, rate is below zero. It is also well below the European Central Bank’s benchmark interest rate of 4 percent or the Bank of England’s rate of 5.25 percent.

Investors had already assumed that the central bank would reduce the cost of borrowing by at least another three-quarters of a percent on Tuesday, but mounting worries about a meltdown in financial markets and the Fed’s emergence as lender of last resort had elevated expectations even higher.

Indeed, expectations about another deep cut in interest rates were so high that the central bank was at risk of setting off a new wave of panicky selling if it had announced a reduction of less than three-quarters of a percentage point.

A lower federal funds usually leads to lower interest rates for mortgages, consumer loans and commercial borrowing.

But Fed officials had been startled and frustrated that their previous rate reductions were doing nothing to lower the long-term interest rates that are most relevant for expanding a business or buying homes or cars.

Part of the reason, analysts said, is that lower overnight interest rates have only limited relevance to the fundamental problem that is roiling the credit markets and the economy: the huge losses caused by the collapse of the housing bubble and the home loan environment that fed it.

Most analysts predict that housing prices, which have already fallen in most parts of the country, will drop much further before they hit bottom.

About eight million homeowners already owe more on their mortgage than their houses are currently worth, and foreclosure rates have soared over the last year.

The Fed’s problem is that its primary tools for stimulating growth — reductions in the cost of borrowing — do little to address the fears about bad loans. Many if not most private forecasters have concluded that the United States has probably entered a recession. The Labor Department has reported back-to-back declines in payroll employment in January and February.

And while the unemployment rate is still low at 4.8 percent, the number of private-sector jobs has declined for three months in a row — a pattern that has almost always been accompanied by a recession in recent decades.

With financial markets becoming dysfunctional, Fed officials have announced a series of steadily bigger lending programs for banks and cash-strapped Wall Street investment firms.

On Sunday, Fed officials agreed to lend up to $30 billion to JPMorgan Chase to engineer its takeover of Bear Stearns, a major Wall Street firm that was near collapse.

But Fed officials face increasingly contradictory pressures: inflation is rising even though growth has stalled.

The federal funds rate is once again edging close to zero, at which point the central bank would have to resort to entirely new strategies if it wants to keep opening its monetary spigots.

But a growing number of economists, including some Fed officials, contend that the housing bubble and bust stemmed at least in part from the central bank’s own decision to keep interest rates at rock-bottom lows from 2001 to the middle of 2004.

Meanwhile, consumer prices, even after excluding the volatile prices of food and energy, are climbing faster than the central bank’s unofficial target of less than 2 percent a year. On Tuesday, the Labor Department said the core measure of the producer price index, which excludes volatile energy and food products, jumped 0.5 percent in February, the biggest gain since November 2006.

The value of the dollar has plunged against most major currencies, a trend that pushes up the prices of imported goods and has contributed to the surging price of oil.

    Fed Cuts Key Interest Rate by 3/4 of a Point, NYT, 18.3.2008, http://www.nytimes.com/2008/03/18/business/18cnd-fed.html?hp






The Week That Shook Wall Street: Inside the Demise of Bear Stearns


March 18, 2008
Wall Street Hournal
Page A1


The past six days have shaken American capitalism.

Between Tuesday, when financial markets began turning against Bear Stearns Cos., and Sunday night, when the bank disappeared into the arms of J.P. Morgan Chase & Co., Washington policy makers, federal regulators and Wall Street bankers struggled to keep the trouble from tanking financial markets and exacerbating the country's deep economic uncertainty.

The mood changed daily, as did the apparent scope of the problem. On Friday, Treasury Secretary Henry Paulson thought markets would be calmed by the announcement that the Federal Reserve had agreed to help bail out Bear Stearns. President Bush gave a reassuring speech that day about the fundamental soundness of the U.S. economy. By Saturday, however, Mr. Paulson had become convinced that a definitive agreement to sell Bear Stearns had to be inked before markets opened yesterday.

Bear Stearns's board of directors was whipsawed by the rapidly unfolding events, in particular by the pressure from Washington to clinch a deal, says one person familiar with their deliberations.

"We thought they gave us 28 days," this person says, in reference to the terms of the Fed's bailout financing. "Then they gave us 24 hours."

In the end, Washington more or less threw its rule book out the window. The Fed, which has been at the forefront of the government response, made a number of unprecedented moves. Among other things, it agreed to temporarily remove from circulation a big chunk of difficult-to-trade securities and to offer direct loans to Wall Street investment banks for the first time.

The terms of the Bear Stearns sale contained some highly unusual features. For one, J.P. Morgan retains the option to purchase Bear's valuable headquarters building in midtown Manhattan, even if Bear's board recommends a rival offer. Also, the Fed has taken responsibility for $30 billion in hard-to-trade securities on Bear Stearns's books, with potential for both profit and loss.

The question now looming over the transaction: Has the government set a precedent for propping up failing financial institutions at a time when its more traditional tools don't appear to be working? Cutting interest rates -- which the Fed is expected to do again today, by between a half percentage point and a full point -- hasn't yet done much to loosen capital markets gummed up by piles of bad debt.

Even though the transaction ultimately could leave taxpayers on the hook for losses, the political response so far has been fairly positive. "When you're looking into the abyss, you don't quibble over details," said New York Democratic Senator Charles Schumer.

Tuesday, March 11

From the earliest days of the financial crisis that began last year, the Federal Reserve had been working on contingency plans to lend to investment banks. Such firms regularly asked for government help to finance their large inventories of securities such as mortgage-backed bonds. They hoped to get the same favorable terms the Fed also gave to banks that borrow from its "discount window." But the Fed is barred from making such loans to firms that aren't banks, except by invoking a special clause which it hadn't used to lend money since the Great Depression. Officials worried that the drama surrounding a decision to do something for the first time since the 1930s could be damaging to confidence.

On Tuesday, officials unveiled what they thought came close: a promise to lend up to $200 billion in Treasury bonds to investment banks for 28 days. In return, the Treasury would get securities backed by home mortgages, whose uncertain values helped spark the current crisis, and other hard-to-trade collateral. The first swap was scheduled for March 27. At first, the firms were elated.

That same day, the market began turning on Bear Stearns. Phones were ringing off the hook at rival firms such as Goldman Sachs Group Inc., Morgan Stanley and Credit Suisse Group. Clients of those firms were growing worried about trades they had entered into with Bear Stearns -- about whether Bear Stearns would be able to make good on its obligations. The clients asked the other investment banks whether they would be willing to take the clients' places in the trades. But credit officers at Goldman, Morgan Stanley and others -- worried themselves about Bear Stearns's condition -- began to say no.

At Bear Stearns, Chief Financial Officer Samuel Molinaro, along with company lawyers and Treasurer Robert Upton, were trying to make sense of the situation. They felt comfortable with their capital base of roughly $17 billion and were looking forward to reporting Bear Stearns's first-quarter earnings, which had been respectable amid the market carnage.

One theory began developing internally: Hedge funds with short positions on Bear -- bets that the company's stock would fall -- were trying to speed the decline by spreading negative rumors.

For the first part of the week, Chief Executive Officer Alan Schwartz was out of pocket. Although Bear Stearns had been struggling with mortgage-related losses and problems in its wealth-management unit, Mr. Schwartz was hosting a Bear Stearns media conference in Palm Beach, Fla. On Wednesday morning, he left the conference briefly to do an interview with CNBC in an effort to deflect rumors about liquidity issues at the firm.


On Thursday evening, after customers had continued to pull their money out of Bear Stearns, the bank reached out to J. P. Morgan, looking to discuss ways the Wall Street giant could help ease Bear's cash crunch.

By then, Bear Stearns's cash position had dwindled to just $2 billion. In a conference call at 7:30 p.m., officials at Bear Stearns and the Securities and Exchange Commission told Fed and Treasury officials that the firm saw little option other than to file for bankruptcy protection the next morning.

Bear Stearns's hope was that the Fed would make a loan from its discount window to provide several weeks of breathing room. That, the firm hoped, would perhaps halt a run on the bank by allowing it to swap bonds for the cash necessary to return to customers.

The Fed's standard preference in dealing with a troubled institution is to first seek a private-sector solution, such as a sale or financing agreement. But the possibility of a bankruptcy filing Friday morning created a hard deadline.

A trigger point was looming for Bear Stearns in the so-called repo market, where banks and securities firms extend and receive short-term loans, typically made overnight and backed by securities. At 7:30 a.m., Bear Stearns would have to begin paying back some of its billions of dollars in repo borrowings. If the firm didn't repay the money on time, its creditors could start selling the collateral Bear had pledged to them. The implications went well beyond Bear Stearns: If other investors questioned the safety of loans they made in the repo market, they could start to withhold funds from other investment banks and companies.

The $4.5 trillion repo market isn't a newfangled innovation like subprime-backed collateralized debt obligations. It is a decades-old, plain-vanilla market critical to the smooth functioning of capital markets. A default by a major counterparty would have been unprecedented, and could have had unpredictable consequences for the entire market.

Federal Reserve Bank of New York President Timothy Geithner worked into the night, grabbing just two hours of sleep near the bank's downtown Manhattan headquarters. His staff spent the night going over Bear's books and talking to potential suitors including J. P. Morgan. The hard reality was that even interested buyers said they needed more time to go over the company.

The pace and complexity of events left Bear's board of directors groping for answers. "It was a traumatic experience," says one person who participated. Sleep deprivation set in, with some of the hundreds of attorneys and bankers sleeping only a few hours during a 72-hour sprint. Dress was casual, with neckties quickly shorn.


At 5 a.m. Friday, Mr. Geithner, Mr. Paulson and Federal Reserve Chairman Ben Bernanke, calling in from home, joined a conference call to debate whether Bear should be allowed to fail or whether the Fed should lend it enough money to get through the weekend. At 7 a.m. they settled on the lifeline option. Mr. Bernanke assembled the Fed's other three available governors to vote for the loan, the first time since the Depression the Fed would use its extraordinary authority to lend to nonbanks.

The Fed announced that it would lend Bear money, through J.P. Morgan, for up to 28 days to get the venerable investment bank through its cash crunch. At 9 a.m., Mr. Geithner, Mr. Paulson and aides addressed a conference call of bond dealers and bankers. Mr. Paulson took the lead, saying the dealer community had "a stake" in the overall deal working out.

But the markets didn't take well to the news that a major investment bank was on the brink of failure. Stocks sank. Other investment banks were seeing lenders turn cautious. Fed officials led by Bill Dudley, head of open-market operations, began planning a more direct response: opening the discount window to all investment banks, a request the Fed had resisted for months.

J.P. Morgan's effort to buy Bear kicked into high gear on Friday afternoon, just hours after the big bank and the Fed had provided Bear with the 28-day lifeline. Steve Black, co-head of J.P. Morgan's investment bank, returned early from vacation in the Caribbean, spearheading the bank's efforts with his J.P. Morgan counterpart in London, Bill Winters.

Mr. Black's role was pivotal. He was a longtime associate of J.P. Morgan Chief Executive James Dimon. And Mr. Black had a long relationship with Bear's CEO, Mr. Schwartz, dating back to the 1970s, when the two were fraternity brothers at Duke University.

J.P. Morgan bankers were broken into some 16 teams -- all with specific due-diligence assignments. Some focused on Bear's prime-brokerage business, which was attractive to J.P. Morgan. Others concentrated on technical operations, commodities, and the like.

As some Fed staffers worked from a conference room on Bear's 12th floor, Federal Reserve officials insisted that the firm complete a deal that weekend. Officials made it clear the loan was only for the short term to ensure a deal got done as quickly as possible. Their priority was that Bear's counterparties -- the parties that stood on the other side of its trades -- would be able to arrive at work Monday knowing their contracts were good, minimizing the risk of a generalized flight from the markets.

Treasury Secretary Paulson knew that the day's work wouldn't be enough to keep Bear afloat over the long term. Still, Mr. Paulson, a former Goldman Sachs chief executive and the administration's point man for financial markets, thought Bear Stearns would survive through the weekend.


That illusion was shattered Saturday morning, when Mr. Paulson was deluged by calls to his home from bank chief executives. They told him they worried the run on Bear would spread to other financial institutions. After several such calls, Mr. Paulson realized the Fed and Treasury had to get the J.P. Morgan deal done before the markets in Asia opened on late Sunday, New York time.

"It was just clear that this franchise was going to unravel if the deal wasn't done by the end of the weekend," Mr. Paulson said in an interview yesterday.

A year ago, Mr. Paulson wouldn't have considered Bear Stearns big enough that its collapse would present a threat to the U.S. financial system. But confidence in the economy and financial sector are so shaky now that he had no doubt that the Fed and government had to act to prevent its bankruptcy, according to a senior Treasury official.

At 8 a.m. Saturday, the J.P. Morgan bankers assembled to receive instructions in the bank's executive offices, located on the 8th floor of its Park Avenue headquarters. One hour later, they headed down the street to Bear Stearns's headquarters to pore over Bear's books. Due diligence had begun.

Back at J.P. Morgan's headquarters, top executives set up war rooms on the executive floor, commandeering offices of colleagues who weren't directly involved in the negotiations. Bankers darted in and out of offices searching for the top brass, who were also moving from room to room. Mr. Dimon, wearing slacks and a dark sweater, urged the bankers to stay calm and focused. "Everyone take a deep breath," he said at one point.

By 7:30 p.m., hunger pangs had taken hold. Someone ordered Chinese food. A security guard lay out a buffet spread.

That evening, Mr. Black got on the phone to Mr. Schwartz, Bear Stearns's CEO. J.P. Morgan would be willing to buy Bear Stearns, subject to the conclusion of due diligence, he told Mr. Schwartz. The J.P. Morgan executives didn't set a specific price, instead providing a dollars-per-share range, according to people familiar with the matter. At the high end was a figure in the low double digits, these people say.

By 1 a.m., the bankers headed home for a few hours of sleep.


Early the next morning, Messrs. Dimon and Black and other top executives sat around a conference-room table to discuss the situation. One by one, they began expressing concern about the speed at which the situation was progressing. They weren't comfortable with the level of due diligence being conducted. Were there more problems hidden deep in Bear's balance sheet that they hadn't found yet? Would market turmoil result in more problems? Was J.P. Morgan really willing to take such a risk without full information?

"Things didn't firm up -- they got more shaky," according to one person familiar with the meeting.

Finally, they came to a conclusion. J.P. Morgan wouldn't buy Bear Stearns on its own. The bank needed help before it would do the deal.

Mr. Paulson was frequently on the phone with Bear and J. P. Morgan executives, negotiating the details of the deal, the senior Treasury official said. Initially, Morgan wanted to pick off select parts of Bear, but Mr. Paulson insisted that it take the entire Bear portfolio, the official said.

This was no normal negotiation, says one person involved in the matter. Instead of two parties, there were three, this person explains, the third being the government. It is unclear what explicit requests were made by the Fed or Treasury. But the deal now in place has a number of features that are highly unusual, according to people who worked on the transaction.

In addition to its option to purchase Bear's headquarters building, J.P. Morgan has the option to purchase just under 20% of Bear Stearns's shares at a price of $2 each. That feature gives J.P. Morgan an ability to largely block a rival offer, says a person with knowledge of the contract.

The deal also is highly "locked up," meaning that J.P. Morgan cannot walk, even if there is a heavy deterioration in Bear's business or future prospects. Bear Stearns holders can, of course, vote the deal down. But the effect that would have on J.P. Morgan's ongoing managerial oversight and the Fed's guarantees is largely unknown.

"We're in hyperspace," says one person who worked on the deal. All these matters are very likely to be litigated in court eventually, this person adds.

The Fed spent the weekend putting together a plan to be announced Sunday evening, regardless of the outcome of Bear's negotiations, that would enable all Wall Street banks to borrow from the central bank. Mr. Bernanke called the Fed's five governors together for a vote Sunday afternoon. All five voted in favor, using for the second time since Friday the Fed's authority to lend to nonbanks.

The steps were announced at the same time the Fed agreed to lend $30 billion to J.P. Morgan to complete its acquisition of Bear Stearns. The loans will be secured solely by difficult-to-value assets inherited from Bear Stearns. If the assets decline in value, the Fed -- and therefore the U.S. taxpayer -- will bear the cost.

Aware of the potential political backlash, Fed and Treasury officials briefed Democrats throughout the weekend. Events moved so fast that there was little time for much substantive outreach. Mr. Bernanke spoke with Massachusetts Democrat and House Financial Services Committee Chairman Barney Frank on Friday. Fed staffers emailed updates to Mr. Frank's office on Sunday.

"I believe this is the right action that was taken over the weekend," said Senate Banking Committee Chairman Christopher Dodd of Connecticut, a Democrat, who spoke with Messrs. Bernanke and Paulson on Sunday during deliberations. "To allow this to go into bankruptcy, I think, would have [created] some systemic problems that would have been massive."

--Dennis K. Berman, Damian Paletta and Sarah Lueck contributed to this article

    The Week That Shook Wall Street: Inside the Demise of Bear Stearns, WSJ, 18.3.2008, http://online.wsj.com/article/SB120580966534444395.html?mod=hpp_us_inside_today
















Home Sweet Investment        NYT        18.3.2008
















Op-Ed Contributor

Home Sweet Investment


March 18, 2008
The New York Times


Fairfax, Va.

FEAR is ruling the financial markets. Billions of dollars have been lost in mortgage-related investments. The Federal Reserve worked madly over the weekend to engineer a takeover of Bear Stearns and avert a systemic meltdown. But the big fear remains. How low will house prices go?

If prices continue to fall, mortgage defaults will move well beyond the subprime sector. Trillions of dollars in losses for investors are not impossible. But that doesn’t mean they are inevitable.

In 1997, inflation-adjusted house prices were close to their average levels over the previous half-century. Only four years later, the price of the average home nationwide exceeded anything ever seen before in the United States. Prices continued to rise for another five years, peaking in 2006 at nearly twice the average price in 1997 (as can be seen on the graph on the bottom right, which is based on data collected by the Yale economist Robert Shiller). If house prices are heading back to the levels seen in 1997, then we are facing catastrophe.

But there are good reasons to believe that much of the increase in prices was a rational response to changes in fundamental factors like interest rates and supply. The deeper fundamentals continue to suggest strong housing prices for the future.

Sure, speculation did run rampant toward the end of the housing boom. (The debut of the reality television show “Flip That House” on Discovery Home Channel, followed shortly by “Flip This House” on A&E, was a clear sign that the boom’s end was near.) Prices will fall further, especially in the speculative developments built on the outskirts of the major cities. So yes, we overshot the fundamentals.

Still, especially in coastal areas where zoning regulations have restricted the supply of land that developers can build on, house prices were driven up by increasing population, low interest rates and strong economic growth.

More and more people want to live on the coasts, but land is hard to come by in places like Manhattan and San Francisco. Cities and regions built on ideas — like Boston, Los Angeles, New York and the San Francisco Bay Area — have grown even as areas built on manufacturing, like Detroit and the Rust Belt, have declined. And of course, government isn’t getting any smaller, so Washington and its suburbs, another hot spot of rising house prices during the boom, will continue to grow.

Even in places where land seems plentiful, zoning and other land-use regulations have made it scarce. To meet demand, we should encourage high-density development, but homeowners fought to restrict housing supply when house prices were increasing. Now that house prices are falling, the incentives of owners to restrict supply are even stronger.

Several studies estimate that the average house prices of 2004 were close to fundamental levels, so we may see prices stabilize near that level.

Granted, a catastrophe is not impossible — it did happen in Japan. House prices shot up in Japan in the late 1980s, and by 1999 they had collapsed. The graph on the top right, of Japanese and American house prices, does make for a worrying comparison. (The data come from the Standard & Poor’s/Case-Shiller national home price index and a similar index for Japan.)

But the resemblance isn’t as close as the graph makes it appear. The Japanese run-up in home prices was faster and reached higher levels than the one in the United States. In addition, the Japanese population at the time wasn’t growing, and today it’s shrinking. (None of the major presidential candidates favor drastic reductions in immigration, so population growth in the United States will continue.) As a result of these and other problems, the Japanese economy was moribund from 1992 to 2002, which kept housing prices low.

There are two very real problems for the housing market: tougher credit conditions and slower growth. Here the United States faces a self-fulfilling prophecy problem.

If the financial markets can predict where and when house prices will stabilize, then credit conditions can quickly return to normal, the economy can expand and house prices will indeed stabilize.

But if the financial markets remain uncertain about when the decline in house prices will end, then fear will tighten credit even further, which would strangle the housing market and generate even more fear.

We have nothing to fear but fear itself, but fear itself can be pretty scary. The best way to overcome fear is to look at the long run. The typical homebuyer keeps a home for 10 years or more, so there is time for those who bought in 2005 and 2006 to weather the current decline in prices. Those who bought at the top are unlikely to see any windfalls from house appreciation, but they will not necessarily suffer from buyers’ remorse. Owning a home has its advantages: the deduction on mortgage interest is substantial and too much of a sacred cow to ever be repealed, and there is a certain security and satisfaction to owning your own home.

The collapse of housing prices certainly feels painful, and for some homeowners, it will be. But the houses are still there, as good as ever. Most of the gains going up were paper gains, and most of the losses going down are paper losses.

The strength of an economy comes, fundamentally, from what it can produce. Can America still produce homes? Yes. Can America still produce desirable urban and suburban areas that people are willing to pay a fortune to live in? Yes.

That’s the real bottom line. The United States has some of the most valuable real estate in the world. Markets should not forget that.

Alex Tabarrok is a professor of economics at George Mason University and the research director for the Independent Institute.

    Home Sweet Investment, NYT, 18.3.2008, http://www.nytimes.com/2008/03/18/opinion/18tabarrok.html






Bush Supports Fed’s Actions, but Critics Quickly Find Fault


March 18, 2008
The New York Times


WASHINGTON — President Bush on Monday welcomed the Federal Reserve’s sweeping intervention in the nation’s financial markets as his administration faced accusations that it had supported the bailout of a prestigious investment bank while doing little to address the hardships of Americans facing foreclosures on their homes.

Meeting with his economic aides at the White House in the morning in the first of two meetings on the economy, Mr. Bush again sought to project optimism at a time of financial turbulence after the Fed’s brokering of the takeover of Bear Stearns by JPMorgan Chase.

Mr. Bush singled out Treasury Secretary Henry M. Paulson Jr. for praise, saying he had shown “the country and the world that the United States is on top of the situation,” an assertion that was broadly disputed by the president’s critics.

“I want to thank you, Mr. Secretary, for working over the weekend,” Mr. Bush said in brief remarks in the Roosevelt Room.

The president’s remarks and his schedule underscored the growing political concern about the economy on a day that would otherwise have been devoted to traditional St. Patrick’s Day meetings and events.

The issue also spilled into the presidential campaign, drawing reactions from both Democratic contenders and the presumptive Republican candidate, underscoring how much the economy has overshadowed the war in Iraq, even as the fifth anniversary of the start of that war approaches on Wednesday.

Mr. Bush, between an Irish-American lunch on Capitol Hill and a dinner at the White House, met with a group of advisers and regulators that included Ben S. Bernanke, the chairman of the Federal Reserve, who has orchestrated a series of moves intended to rescue the nation’s financial markets from what officials feared could have been a chain reaction of defaults.

Mr. Bush’s handling of the economy has vaulted to the top of the political agenda, where the White House would clearly it rather not be. He stood accused on one hand of violating his own ideological opposition to government intervention and on the other of not doing enough to protect the nation’s economy from the disarray in the markets.

“Now that the president has shown his willingness to bail out Wall Street at taxpayer expense, I hope he will drop his opposition to proposals designed to help ordinary homeowners,” Senator Harry Reid, Democrat of Nevada and the majority leader, said in a statement.

Senator Barack Obama of Illinois declared the economy “in shambles,” but he and his rival for the Democratic presidential nomination, Senator Hillary Rodham Clinton, trod carefully, expressing concern about the broader market and, in Mrs. Clinton’s case, for the employees of Bear Stearns, based in her home state, New York.

“There is no doubt that we are teetering on a potential crisis on Wall Street that could have ramifications all across the country,” Mr. Obama said at a news conference after meeting with voters during a campaign stop in Monaca, Pa., a town near the Ohio border. “We have a credit market that is locked up.”

Mrs. Clinton said that Main Street was as important as Wall Street, but like many Democrats, she did not directly criticize the government’s intervention in the sale of Bear Stearns. In a statement, she noted that she had spoken with Mr. Paulson and the president of the New York Federal Reserve Bank, Timothy F. Geithner. She urged that the administration do more.

“We have blown it,” she said at a news conference in Washington in which she linked the economic turmoil in part to Iraq. “And one of the reasons why we must end the war in Iraq is we cannot afford it. We have got to get control of our economic destiny. There are so many danger signs on the horizon.”

Senator John McCain’s campaign issued a statement expressing confidence in the Federal Reserve and Mr. Bernanke, but pointedly excluding any reference to the president.

“John McCain understands the federal government’s responsibility to ensure the stability of the U.S. financial system and is equally committed to protecting the pocketbooks of hardworking American families,” the campaign said in a statement by Doug Holtz-Eakin, a senior policy adviser.

The Fed’s intervention in the case of Bear Stearns intensified calls for the administration to reverse Mr. Bush’s well-known embrace of laissez-faire economic policies.

Mr. Bush’s aides have argued that he has acted aggressively since August to address a financial crisis that was already on the horizon, pointing to the $168 billion economic stimulus package that he had negotiated with Congress this year.

The Internal Revenue Service announced on Monday that the first of 130 million rebates — typically $600 a person or $1,200 for most married couples — would be sent electronically by the first week of May and later by mail until the end of July.

Mr. Bush’s senior aides have said that they hoped the economy can withstand any further buffeting until the effects of those rebates are felt during the spring and summer of the year. The relative stability of Wall Street on Monday raised those hopes.

But the speed of Bear Stearns’s collapse pointed to the danger that the administration and the Fed could be forced to act again soon.

A senior Treasury official, explaining Mr. Paulson’s role, said the secretary was first alerted to a potential crisis at Bear Stearns Thursday afternoon. Mr. Paulson kept Mr. Bush abreast personally on discussions about the problem, giving him a heads-up Friday morning before the president left for a speech to the Economic Club of New York, that some sort of rescue was imminent, and then speaking to him on Sunday afternoon.

By all accounts the crisis brought Mr. Paulson, Mr. Bernanke and Mr. Geithner into an unusually cooperative working relationship that, the senior official said largely excluded Mr. Bush’s team of economic advisers.

Mr. Paulson has been cautious about predicting the future of the markets and the possible necessity of further action to stabilize them. But since the beginning of the market turmoil last August, he has often mentioned that there would be failures of one or more institutions before things got better. Associates say he has taken a pragmatic approach and an attitude that the administration would do what it had to do to stabilize the broader markets.

Mr. Paulson dismissed questions of whether the administration was bailing out a financial giant while homeowners faced foreclosure, noting that Bear Stearns shareholders received only $2 a share for stocks that not long ago had been worth $170.

‘This was an easy decision,” Mr. Paulson said outside the White House after the president’s second meeting with advisers and regulators. “This is the right outcome. And again, in terms of the moral hazard, look at what happened to the Bear Stearns shareholders.”

Many Democrats have called on the administration to do more to support legislative initiatives already on the agenda.

Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Banking Committee, said on Monday in a conference call from Brussels that Mr. Bernanke and Mr. Paulson now might be more willing to back his plan to let the Federal Housing Administration guarantee mortgages if they have been modified by lenders.

In his remarks at the White House, Mr. Bush suggested he would support additional measures. “We obviously will continue to monitor the situation and when need be, will act decisively, in a way that continues to bring order to the financial markets,” he said in the morning meeting.

One prominent Republican, Representative Adam H. Putnam of Florida, chairman of the House Republican Conference, said the administration’s response has been proper, balancing the need to react to economic uncertainty without having the government intervene excessively in the market.

“I think they appropriately hugged that line,” Mr. Putnam said in a telephone interview.

Adam Nagourney and Steven R. Weisman contributed reporting from Washington, and Jeff Zeleny from Monaca, Pa.

    Bush Supports Fed’s Actions, but Critics Quickly Find Fault, NYT, 18.3.2008, http://www.nytimes.com/2008/03/18/business/18bush.html?hp






News Analysis

Rescue Puts Credibility of the Fed on the Line


March 18, 2008
The New York Times


WASHINGTON — Far more than at any time before, the Federal Reserve is putting its vast resources and its reputation on the line to rescue Wall Street’s biggest institutions from their far-reaching mistakes.

Over the next few months, the central bank will lend hundreds of billions of dollars to banks and investment firms that financed a mountain of mortgages now headed toward default.

No one knows how many financial institutions will be looking for money, or how much they will seek. No one knows how much in hard-to-value securities the central bank, in return, will have to hold as collateral.

And no one knows how much the Fed could lose if the borrowers fail to repay their loans or whether hundreds of billions of dollars will ultimately have to come from taxpayers to shield the nation’s financial system from ruin.

In recent weeks, the central bank announced a series of emergency short-term loan programs that totaled about $400 billion. But on Sunday, Fed officials raised the stakes by offering investment banks a new loan program without any explicit size limit.

These moves, along with a $30 billion credit line to help JPMorgan Chase take over the failing Bear Stearns, is fraught with more than financial risk.

The biggest danger is damage to the Federal Reserve’s credibility if it is seen as unwilling to let financial institutions face the consequences of their decisions. Central banks have long been acutely sensitive to “moral hazard,” the danger that rescuing investors from their mistakes will simply encourage others to be more reckless in the future.

Fed officials for years have cringed at the mention of a “Greenspan put,” an allusion to the belief of some investors that Alan Greenspan, the former Fed chairman, would use the Fed’s powers to protect them against a plunge in financial markets and provide them with a metaphorical “put” — an option to unwind their positions at an acceptable price.

But the moves undertaken by the current chairman, Ben S. Bernanke, amount to a much bigger insurance policy than anything Mr. Greenspan provided.

Mr. Bernanke had made clear for months that he wanted to avoid a bailout of Wall Street. But as an economic scholar who spent years studying the Depression of the 1930s, he had also drawn the lesson that panics in financial markets can transform a modest downturn into a cataclysm.

Fed policy makers now contend that the consequences of not coming to the rescue would have been a cascade of bankruptcies and defaults on Wall Street that could have undermined the financial system and risked severe damage to the economy.

Few analysts were ready on Monday to question the Fed’s uncomfortable effort in balancing risks. But it could be months or years before the full consequences become apparent.

Alan Blinder, a professor of economics at Princeton and a former Fed vice chairman, commented: “These kinds of crisis- prevention measures always have to balance potential moral hazard costs down the line against the clear and present danger that something is going to happen right now.

“You’re taking on substantial risks when you do something virtually unprecedented or you put money at risk. The Fed has now done both.”

Another big risk is that the central bank, in providing a cushion of emergency loans, could jeopardize its reputation as an inflation fighter. On Tuesday, Fed officials are all but certain to sharply reduce their benchmark interest rate on short-term loans, the federal funds rate — for the sixth time in six months. The Fed has already reduced the rate in rapid stages to 3 percent from 5.25 percent, and many analysts predicted Monday that it might lower it by a full percentage point more.

Complicating the task, inflation pressures are unmistakable, even though the economy is widely thought to already be in a recession, and a downturn usually leads to slower increases in consumer prices.

On Monday, the dollar continued to decline in value against the euro and the yen, a trend that tends to push up import prices. And in commodities trading in New York, the price of gold for April delivery was quoted as high as $1,006.90 an ounce before falling back to settle at $1,002.60. Those increases stem at least in part from growing concerns among global investors about inflation in the United States and the weakening dollar.

Fed officials acknowledge that inflation has picked up slightly, but they assert that the much bigger risk is a recession caused by the squeeze in the financial markets.

There were hints on Monday that the central bank’s rescue operation might have bolstered confidence in the battered credit markets.

Several measures of risk aversion receded slightly. Spreads between the higher yields that investors demand for debt securities compared with those for safer Treasury bonds declined slightly. So did prices for credit default swaps, which amount to insurance premiums paid to protect bondholders in the case of a default.

“The early evidence is that the Fed is starting to get some traction,” said Michael Darda, chief economist at MKM Partners, a hedge fund and trading firm in Greenwich, Conn. Mr. Darda, who has been critical of the Fed for being inattentive to inflation pressures, said he nonetheless sympathized with policy makers’ fears about a financial market crisis.

“This is really a very ugly situation for the Fed to be in,” Mr. Darda said. “They’re making a calculation about what is the greater evil, and they’ve made a decision that letting the credit crisis exhaust itself is too big a risk.”

Analysts caution that for all its might, the Federal Reserve and its loan program face limits unless officials decide to start printing more money to pay for the rescue.

At the moment, the central bank has committed cash and Treasury bonds that are in its own reserves, totaling about $800 billion. But having agreed to provide at least $400 billion in short-term loans, and probably more, it is pledging a big share of its resources to the rescue.

“The Fed is now running on less than a half tank of gas,” Laurence H. Meyer, a forecaster at Macroeconomic Advisers and a former Fed governor, wrote in a note to clients. “The Fed seems to be running out of room for these types of measures.”

Officials at the central bank brushed aside such concerns, noting that many of the loans would be limited to 28 days and that the longest-term loans have to be repaid within 90 days. Fed officials also say that the combined rescue effort is not as big as the sum of the individual loan programs implies, because some institutions will simply shift from an earlier program that is less convenient to the newest one announced on Sunday.

If the rescue effort fails, taxpayers could indirectly wind up having to assume part of the cost. Tax revenue does not pay for the Federal Reserve’s operations, including the rescue effort, because the Fed earns income from its trading operations.

But the Fed does pay the Treasury a regular stream of money every year out of its trading profits, lowering the amount it needs to borrow from outsiders. If the new borrowers on Wall Street are unable to repay, and if the market value of the securities they pledge as collateral continues to drop, the losses will come out of the Fed’s payments to the Treasury.

    Rescue Puts Credibility of the Fed on the Line, NYT, 18.3.2008, http://www.nytimes.com/2008/03/18/business/18fed.html






Plunge Averted, Markets Look Ahead Uneasily


March 18, 2008
The New York Times


With the Dow Jones industrial average up slightly more than 21 points by the end of trading Monday on the New York Stock Exchange, it may have looked like a calm day on Wall Street.

But under the surface, the scene was far from serene. After policy makers hastily arranged a sale of the embattled investment bank Bear Stearns to JPMorgan Chase over the weekend, stocks and other financial instruments fluctuated wildly during much of the day as investors started worrying about who and what would be next in the line of fire.

Traders beat down stocks like Lehman Brothers and commodities like oil and wheat.

After a shaky opening, the worst fears of a market plunge were avoided. Although Federal Reserve officials do not place much significance in the performance of markets in a single day, they took some comfort from the fact that many markets were relatively stable on Monday after the initial fall.

In early trading Tuesday, Asian markets rose for the first time in four days, led by financial companies.

But nervousness pervaded Wall Street despite efforts by the Fed and the Bush administration to soothe investors and assure them that Washington will do everything in its power to restore order to the financial system.

“There is something mixed up in the market,” said Edward Rombach, an analyst at Thomson Financial. “The market is eating itself up.”

In the case of Lehman Brothers, some investors fear that the firm is vulnerable to the same ills that undid Bear Stearns. Like Bear Stearns, Lehman is small and more reliant on the mortgage business than its rivals. Its defenders, though, say that Lehman is much better positioned to ride out the financial storm.

And even as nerve endings remained frayed, there were a few notable signs of improvement on Wall Street, Mr. Rombach and other specialists noted. Particularly encouraging was the sharp narrowing of the spread between ultra-safe Treasuries and bonds backed by Fannie Mae, the government-chartered buyer of mortgages — a sign that investors are willing to consider riskier investments.

If that move toward a more normal assessment of risk persists, it could help drive down interest rates on home loans in the coming days.

The broad Standard & Poor’s 500-stock index, meanwhile, closed down less than 1 percent, recovering much of its losses from early in the day and bucking a strong downdraft from Europe and Asia.

Specialists say their biggest worry now is not whether the economy is already or will soon be in a recession. Far more fundamental and troubling is the health of the financial system that greases the wheels of capitalism.

“Recessions come and go — that is something investors can deal with,” said Marc D. Stern, chief investment officer at Bessemer Trust, an investment firm in New York. “The bigger issue is, Can our financial system be restored to a sense of normalcy? In recent weeks we have been moving away from that, which is potentially very serious.”

Mr. Stern said he was encouraged by the Fed’s response to the problems at Bear Stearns. In addition to facilitating the firm’s sale to JPMorgan, the central bank also started directly lending to securities firms, something it has not done since the Depression of the 1930s.

The policy-making committee of the Fed is expected to cut its benchmark short-term interest rate at a scheduled meeting on Tuesday by as much as one percentage point, from the current 3 percent, making it cheaper for banks to borrow from each other.

Since last summer, the Fed has tried many approaches to ease the strain in the credit markets. It has cut its benchmark rate from 5.25 percent in a series of jagged steps. It has aggressively lent money to banks and accepted lower-quality collateral that might not even be tradable in the market.

Despite those efforts, financial conditions have worsened. And specialists say the latest measures might meet the same fate if banks and securities firms do not put to work the new money the Fed is offering to lend to them.

“The Fed can do no good at all if they effectively print money and give it to the banks, and the banks dig a hole in the ground and put it in there,” said Donald Brownstein, president of Structured Portfolio Management, a hedge fund in Stamford, Conn., that specializes in mortgage securities.

Other investors are worried that the Fed’s extensive intervention will put the central bank at risk of significant losses and that it will create a “moral hazard” by bailing out institutions that should be allowed to fail. And some complain that the Fed’s backing for a $30 billion loan to Bear Stearns by JPMorgan shifts all the risk to Washington while keeping the profits on Wall Street.

“The government is taking all the downside and none of the upside,” said Douglas A. Dachille, chief executive of First Principles Capital, a bond trading firm.

On Wall Street, however, the Fed’s moves, especially its decision to lend directly to 20 securities dealers, were welcomed.

“They stand committed to protect the system,” said Richard S. Fuld Jr., the chairman and chief executive of Lehman Brothers. Mr. Fuld said the Fed had eliminated the liquidity concerns that had cast a pall over brokerage firms like his. He also said his firm, the biggest underwriter of mortgage securities on Wall Street during the housing boom, had plenty of cash and access to safe securities it could sell if it needed to raise money. Investors, however, did not see it that way. Shares of Lehman fell $7.51, or 19 percent, to $31.75. The stock is down 51.5 percent for the year and is among the worst performers in the stock market.

Another financial firm that found itself under assault was MF Global, one of the world’s biggest commodities brokers. Its shares fell $11.30, or 65 percent, to $6.05, on rumors that it was losing clients and rival firms were refusing to deal with it.

Last month, MF Global announced that a trader had lost $141.5 million betting on wheat futures with money he did not have. The firm had turned off risk controls for some traders because the controls slowed transactions.

Reassurances from the New York Mercantile Exchange and the United States Commodity Futures Trading Commission that MF Global remained on sound footing did little to stem the negative sentiment.

MF also appears to be suffering from broader worries that commodities have become speculative bubbles.

Crude oil, for instance, was up nearly 90 percent on Friday from a year ago. On Monday, oil futures fell 4.1 percent, or $4.53, to $105.68 a barrel. Most commodities, with the exception of hogs, gold and nickel, fell on Monday. A Goldman Sachs index that tracks raw materials had its biggest one-day drop in more than three years.

Many investors have been betting that oil, wheat and other commodities will buck other investments on the belief that growth abroad, particularly in China and India, will sustain demand in the face of the housing-led downturn in the United States.

But skeptics say the slowing demand here will push down prices on commodities markets in the United States and in other countries, many still highly reliant on American consumers.

“Wall Street likes a good growth story,” said Tobias Levkovich, the chief equity strategist at Citigroup. “And that’s the argument for global growth — they will keep growing irrespective” of the United States.

Stock markets in China and India suffered the biggest losses on Monday. The Shanghai A share market was down 3.6 percent, the Hang Seng index in Hong Kong was down 5.2 percent and the Nifty index in India was down 5.1 percent. Early Tuesday, the Shanghai A was drifting lower, but the Hang Seng was trading slightly up and the Nikkei in Japan was up nearly 1.5 percent.

Investors in the region were also troubled by a weekend of news reports of unrest in Tibet and adjacent Chinese provinces.

“Local investor sentiment is not good,” said Ricky Chan, a stockbroker at Phoenix Capital Securities Ltd. in Hong Kong. “The Hong Kong market is really caught in the middle between happenings in China and the United States.”

Jenny Anderson, Keith Bradsher, Michael M. Grynbaum and David Leonhardt contributed reporting.

    Plunge Averted, Markets Look Ahead Uneasily, NYT, 18.3.2008, http://www.nytimes.com/2008/03/18/business/18street.html?hp






Bank-to-bank lending freezes; bankers ask "who's next?"


Mon Mar 17, 2008
12:22pm EDT
By Mike Dolan and Kirsten Donovan


LONDON (Reuters) - Financial trading and interbank lending almost ground to a halt on Monday as banks grew fearful of dealing with each other following Friday's near collapse of U.S. investment firm Bear Stearns, prompting talk of another round of coordinated central bank aid.

As banking stock prices and the U.S. dollar plummeted, banks' access to unsecured borrowing from other banks fell to a relative trickle and dealers said the over-the-counter market had become highly discriminatory, depending on the bank name.

The seizure in money markets was reflected in a dramatic 80 basis point surge in overnight dollar London interbank offered rates (Libor), the biggest daily increase since the attacks of September 11, 2001.

"Banks and institutions are just scrambling for cash, any cash they can get their hands on," said a money market trader at a European bank.

"And it's seen as a U.S. market problem for the moment, or a dollar problem anyway," he said, noting the relatively modest increase in overnight euro and sterling Libor.

Published dealing rates were unreliable and analysts said any bank that had not already secured funding further than a week or so would struggle to raise cash at all.

"Bear's near-collapse and takeover accelerates the liquidity crunch and the money market crisis," Dresdner Kleinwort analyst Willem Sels told clients in a note.

"Banks' risk aversion and sensitivity to counterparty risk should rise even further, leading to more pressure on hedge funds. Money markets are having a brutal wake-up call."



Bankers said they were struggling to assess developments since the New York Federal Reserve said on Friday it was propping up the stricken firm via Wall St bank JP Morgan, and intense concerns about the stability and solvency of financial counterparties had dealing volumes in lending markets seize up.

In an effort to minimize the fallout and in conjunction with the fire sale of Bear Stearns to JP Morgan, the Fed on Sunday cut its discount lending rate by a quarter percentage point to 3.25 percent and announced another series of liquidity measures.

But with concerns about whether other firms may meet a similar fate to Bear Stearns, nerves on every trade were jangled.

"It's quite illiquid this morning. If you want unsecured cash you're really going to have to pay up for it. It's really quite an intense situation," said Calyon analyst David Keeble.

Banks led the losers as stock markets lost more than 3 percent. UBS, Royal Bank of Scotland and Barclays all fell more than 8 percent. HBOS and Alliance & Leicester slid more than 11 percent.

Shares in Lehman Brothers dropped 34 percent before the opening bell on Wall St.

"There's turmoil in all markets after Bear Stearns," said BNP Paribas strategist Edmund Shing. "Everyone's asking: Who's next? Is there a Bear Stearns in Europe? Could investment banks start to fail?"

The problem was said to be particularly acute in sterling markets, with the gap between indicative three-month interbank borrowing rates and the Bank of England loans more than 70 basis points -- the highest for the year.

Some analysts said major players on the interbank market had been doing as little as 700 million pounds a day of business over the past week, a fraction of the several billions that would have been executed a year ago, and far less on Monday.

"Counterparty risk is back in play, every trade is being scrutinized ahead of time," one interest rate trader said. "

The stress in the market forced the UK central bank to make an emergency offer of five billion pounds of three-day funds.

"This action is being taken in response to conditions in the short-term money markets this morning," the Bank said in a statement. "Along with other central banks, the Bank of England is closely monitoring market conditions."



Three-month euro interbank rates were also some 65 basis points above ECB rates, compared with around 40 basis points at the start of the month. The spread reached a peak of around 90 at the end of last year.

Dollar spreads were also wider than on Friday but heavy discounting of further Fed rate cuts have meant the spread has actually narrowed this month to around 65 versus 80 basis points at the start of March.

The European Central Bank declined to comment, even though speculation of coordinated central bank statements, liquidity injections and even synchronized rate cuts circulated around markets.

A German finance ministry spokesman said no extraordinary meetings of the Group of Seven economic powers was planned. "We're watching developments very closely in the United States."

But International Monetary Fund chief Dominique Strauss-Kahn said the global financial markets crisis was worsening and risk of contagion was increasing.

With the dollar sliding to record lows, traders said currency options markets were seizing up too, another reflection of the state of panic and fear that appears to be dominating all financial markets.

Implied volatilities on FX options, a measure of expected volatility in the underlying asset price and investors' demand to protect themselves against these moves, soared on Monday.

As the dollar sank to 13-year lows against the yen further below 100 yen, one-week dollar/yen implied "vols" jumped to 25 percent, a level not seen since 1999.

"This is a market where you should be on your guard. Shorting options is quite a difficult position to manage," said the senior FX trader in Tokyo.

(Reporting by Jamie McGeever and Sitaraman Shankar; editing by Stephen Nisbet)

    Bank-to-bank lending freezes; bankers ask "who's next?", R, 17.3.2008, http://www.reuters.com/article/newsOne/idUSL1710220420080317






Bear fire sale sparks rout


Mon Mar 17, 2008
12:22pm EDT
By Jack Reerink


NEW YORK (Reuters)- A fire sale of Bear Stearns Cos Inc stunned Wall Street and pummeled global financial stocks on Monday on fears that few banks are safe from deepening market turmoil.

Trying to assuage worries that the credit crisis is spinning out of control, President George W. Bush said the United States was "on top of the situation."

And the Federal Reserve geared up for a deep cut in interest rates on Tuesday to blow money into the fragile financial system -- the latest in a series of rate cuts that has brought down borrowing costs by 2-1/4 percentage points and hammered the U.S. dollar to record lows.

Staff at Bear Stearns' Manhattan headquarters were welcomed to work on Monday by a two-dollar bill stuck to the revolving doors -- a spoof on the bargain-basement price of $2 per share that JPMorgan Chase is offering for the firm. A hopeful Coldwell Banker real estate agent was hawking cheap apartments to employees who saw the value of their stock options go up in smoke.

The combination of Bear Stearns' bailout and the Fed's offer on Sunday to extend direct lending to securities firms for the first time since the Great Depression highlighted just how hard the credit crisis has hit Wall Street.

And it scared market players worldwide.

"If you get a crisis of confidence in the wholesale banking space and something the size of Bear Stearns could go under, then people start to panic. You get a real fear factor," said Simon Maughan, analyst at MF Global in London.

The grim mood spread beyond Bear, Wall Street's fifth-biggest bank, as investors bailed from rival Lehman Bros for fear it would be next to face a cash crunch. Lehman shares briefly touched a 6-1/2 year low and later traded down 20 percent.

JPMorgan shares, by contrast, jumped 10 percent after the bank worked out a deal to buy Bear for $236 million -- just 1.2 percent of what it was worth a little over a year ago. JPMorgan's chief, Jamie Dimon, a details-oriented Wall Street luminary with a track record of fixing up banks, also got the Fed to agree to finance up to $30 billion of Bear's assets.



The financial world is more interconnected than ever and the merest whiff of trouble can result in an old-fashioned run on a bank: trading partners and funds pulling out money and calling in loans. Indeed, Bear's fall shows how fast things can change on Wall Street.

Bankers around the world were already fretting about job losses because of the endless series of credit losses and paralyzed markets. The mayhem could spill over to Main Street because the financial industry is at the heart of a U.S. economy where services make up 80 percent of the pie.

That's why policymakers worldwide have pulled out all the stops, from cutting interest rates to flooding the financial system with cash to prevent it from seizing up.

Government funds from the booming Gulf and Asia-Pacific countries have pitched in by buying stakes in big-name banks such as Citi and brokerages such as Merrill Lynch worldwide.

This time around, though, the funds were conspicuously absent from Bear's bailout -- spelling trouble ahead.

"There's no way anybody's going to catch a falling knife. Why come in now?" said Craig Russell, Beijing-based chief market strategist at Saxo Bank.

The problem is that banks need the cash from these so-called sovereign wealth funds to shore up their balance sheets. So shares of European banks -- including UBS in Switzerland, HBOS in Britain and SocGen in France -- fell more than 10 percent Monday on concerns they have to take bigger hits -- haircuts, in Wall Street speak -- on their holdings of risky credit assets.



The sale of Bear came as a shock to the firm's 14,000 staff, who own roughly 30 percent of the company.

"The valuation is virtually nothing," said a Singapore-based Bear Stearns employee. "It is indeed rock bottom. We have tanked. It's very, very sad. Everyone is in mourning."

The mood among U.S. staff was similarly solemn. "My job's been eliminated," said one male employee arriving for work in New York. He'd been given 90 days' notice.

Bear Stearns was caught in a tailspin after speculation swirled last week that it faced problems and its cash reserves were drained by fleeing customers.

JPMorgan picked it up on the cheap -- although the bank estimated the total price tag at $6 billion to account for litigation and severance costs.

A lot of people lost a lot of money: Entrepreneur Joseph Lewis, a reclusive Englishman who made a fortune trading currencies, bought a stake of about 10 percent in Bear and stands to lose around $1 billion.

That has the phones ringing off the hooks at law firms that specialize in suing corporations whose stock has plummeted.

"Shareholders don't contact me when they are happy with the way things are going with their investments," said Ira Press, a lawyer at class-action firm Kirby McInerney.

(Writing by Jack Reerink; Reporting by Umesh Desai in Hong Kong; Steve Slater, Olesya Dmitracova and Mathieu Robbins in London; Herb Lash and Kristina Cooke in New York; Editing by David Holmes and John Wallace)

    Bear fire sale sparks rout, R, 17.3.2008, http://www.reuters.com/article/newsOne/idUSN1650564120080317






Fears That Bear Stearns’s Downfall May Spread


March 17, 2008
The New York Times


The cash squeeze that brought Bear Stearns to its knees is fanning fears that other investment banks might be vulnerable to the crisis of confidence gripping Wall Street.

Investors are bracing for another volatile week in the markets as bankers and policy makers deal with the fallout from their bid to rescue Bear Stearns.

For now, the prospect of a new wave of consolidation in the beleaguered financial services industry seems remote. That is because would-be acquirers and everyday investors alike have lost faith in the values that Wall Street firms are placing on their own assets.

Of particular concern are the so-called marks placed on mortgage-linked investments like those that undid Bear Stearns, prompting a run on the firm that led the Federal Reserve and JPMorgan Chase to throw Bear Stearns a financial lifeline last week.

James E. Cayne, the chairman of Bear Stearns, mused eight years ago that he might consider selling the 85-year-old bank for a lofty price of four times what it values itself on its books. But now such a notion seems absurd — and not just for Bear Stearns.

The unhappy experience of Bear Stearns proves that it is a lack of confidence, not capital, that ultimately topples even the savviest financial institutions.

“Once you have a run on the bank you are in a death spiral and your assets become worthless,” said David Trone, a brokerage analyst at Fox Pitt Kelton.

In all-day meetings over the weekend, Alan D. Schwartz, the chief executive of Bear Stearns, met with his top executives at the firm’s Madison Avenue headquarters, trying desperately to persuade skeptical potential suitors that the firm was worth buying.

But the market had already passed a harsh judgment on Bear Stearns. On Friday, its stock plunged 47 percent, closing at $30. At that price, its shares were trading at a gaping 62 percent discount to the $80 book value that the firm has reported, reflecting the broad view that the fallout from the credit crisis had permanently devastated Bear Stearns’s core mortgage operations.

In Washington, the Treasury secretary, Henry M. Paulson Jr., signaled strong support for the Fed’s role in supplying a lifeline to Bear Stearns during the crisis negotiations, saying that his priority was to stabilize the financial system and to worry less right now about the problem of avoiding a “moral hazard” by bailing out errant institutions.

“We’re very aware of moral hazard,” Mr. Paulson said in a television interview with George Stephanopoulos on ABC. “But our primary concern right now — my primary concern — is the stability of our financial system, the orderliness of the markets. And that’s where our focus is.”

Indeed, investors are taking a grim view of the prospects for other investment banks like Lehman Brothers and Merrill Lynch. Managers of hedge funds and mutual funds say the problems at Bear confirmed their worst fears about the brokerages — that they have relied too much on leverage and have done a poor job managing the risks they took on during the boom.

The price of insurance on investment banks has surged in the last few days and is exponentially higher than it was last spring. Credit default swaps that offer protection on Bear Stearns debt traded as low as $35 per $10,000 of bonds in May. As of last Friday, the cost was $830.

Shares of investment banks in the Standard & Poor’s 500-stock index are down nearly 28 percent so far this year, and stock futures on Friday showed that a few investors were betting that Bear Stearns stock could lose virtually all of its value in the next few weeks.

“People have started to realize the risks that are there,” said Steven Gross, a principal at Penso Capital Markets, an investment firm in Cedarhurst, N.Y. “The question is have we reached the bottom.

Citigroup, one of the nation’s largest banking companies, is now trading below its book value. Lehman Brothers, at $39, is trading just below the book value it reported at the end of last year. This year, Bear’s stock is down 65 percent and Lehman’s has sunk 40 percent.

Bear Stearns, one of Wall Street’s oldest investment banks, had a market value of $4.1 billion as of last Friday.

But the market did not put much faith in the Fed’s bailout of the firm, announced on Friday. Bear Stearns’s hedge fund servicing business and its clearing operations have traditionally been profitable operations, although they have suffered in recent months as investors and lenders have lost confidence.

Throughout much of its history, Bear Stearns has masterfully persuaded the market that its business — narrowly focused on mortgage finance — was worth more than it actually was. To some degree this trick has been a testament to the coy gamesmanship of two of its past leaders, Alan Greenberg and Mr. Cayne.

Both men are devout bridge players and Mr. Greenberg is an amateur magician as well, so they are well schooled in the art of not showing their hand.

Mr. Cayne’s hint eight years ago — that he would only sell the firm for four times its book value — was even then a flight of financial fancy. Wall Street investment banks rarely command such a premium to their book value, given the inherent and unpredictable risks of their business.

Nevertheless, Mr. Cayne and Mr. Greenberg were adept at spreading the view that Bear Stearns was constantly being pursued by buyers as varied as European commercial banks and even JPMorgan, although it was never clear that any of these talks reached a serious level.

But Bear Stearns’s quirky culture and the high pay it awarded its senior executives made it a difficult fit for larger, more staid institutions, and it always seemed that Mr. Greenberg and Mr. Cayne were having too much fun running their business to sell it to an outsider.

In the last few days, Mr. Schwartz, a veteran investment banker whose approach to deal making is more pragmatic and results-oriented than his predecessor, raced against the clock to seal a deal that salvages some measure of value for shell shocked Bear Stearns employees, who own over 30 percent of the firm, and its investors.

And while Bear’s peers on Wall Street are not yet in such dire shape, they have surely accepted the reality of leaner times and lower valuations in the months to come.

“Banks and brokerages are a house of cards built on the confidence of clients, creditors and counterparties,” Mr. Trone said. “If you take chunks out of that confidence, things can go awry pretty quickly. It could happen to any one of the brokers.”

Vikas Bajaj, Jenny Anderson and Steven R. Weisman contributed reporting.

    Fears That Bear Stearns’s Downfall May Spread, NYT, 17.3.2008, http://www.nytimes.com/2008/03/17/business/17econ.html?ref=business






Sale Price Reflects the Depth of Bear’s Problems


March 17, 2008
The New York Times


In a shocking deal reached on Sunday to save Bear Stearns, JPMorgan Chase agreed to pay a mere $2 a share to buy all of Bear — less than one-tenth the firm’s market price on Friday.

As part of the watershed deal, JPMorgan and the Federal Reserve will guarantee the huge trading obligations of the troubled firm, which was driven to the brink of bankruptcy by what amounted to a run on the bank.

Reflecting Bear’s dire straits, JPMorgan agreed to pay only about $270 million in stock for the firm, which had run up big losses on investments linked to mortgages.

JPMorgan is buying Bear, which has 14,000 employees, for a third the price at which the smaller firm went public in 1985. Only a year ago, Bear’s shares sold for $170. The sale price includes Bear Stearns’s soaring Madison Avenue headquarters.

The agreement ended a day in which bankers and policy makers were racing to complete the takeover agreement before financial markets in Asia opened on Monday, fearing that the financial panic could spread if the 85-year-old investment bank failed to find a buyer.

Even with the frantic rescue operation, world markets were roiled as the trading day began. In Tokyo, the Nikkei index ended down 3.7 percent, while European markets were down more than 2 percent in afternoon trading.

In the United States, stocks plunged at the opening bell before recovering some ground in the first hour, and investors faced another week of gut-wrenching volatility.

Despite the sale of Bear, investors fear that others in the industry, like Lehman Brothers, already reeling from losses on mortgage-related investments, could face further blows.

The deal for Bear, done at the behest of the Fed and the Treasury Department, punctuates the stunning downfall of one of Wall Street’s biggest and most storied firms. Bear had weathered the vagaries of the markets for 85 years, surviving the Depression and a dozen recessions only to meet its end in the rapidly unfolding credit crisis now afflicting the American economy.

A throwback to a bygone era, Bear Stearns still operated as a cigar-chomping, suspender-wearing culture where taking risks was rewarded. It was a firm that was never considered truly white-shoe, an outsider that defied its mainstream rivals.

When the Federal Reserve helped plan a bailout in 1998 of Long Term Capital Management, the hedge fund, Bear Stearns proudly refused to join the effort. Until recent weeks, Alan “Ace” Greenberg, Bear Stearns’s chairman for more than 20 years and a championship bridge player, still regaled its partners over lengthy lunches about gambling with the firm’s money in its wood-paneled dining room.

The cut-price deal for Bear Stearns reflects deep misgivings about its future and the enormous obligations that JPMorgan is assuming in guaranteeing the firm’s obligations. In an unusual move, the Fed will provide financing for the transaction, including support for as much as $30 billion of Bear Stearns’s “less-liquid assets.”

Wall Street was stunned by the news on Sunday night. “This is like waking up in summer with snow on the ground,” said Ron Geffner, a partner Sadis & Goldberg and a former enforcement lawyer for the Securities and Exchange Commission. “The price is indicative that there were bigger problems at Bear than clients and the public realized.”

The deal followed a weekend of frantic negotiations to save the ailing firm. With the Fed and Treasury Department patched in by conference call from Washington, Bear Stearns executives held the equivalent of a speed-dating auction over the weekend, with prospective bidders holed up in a half dozen conference rooms at its Madison Avenue headquarters. More than 150 JPMorgan employees descended on Bear Stearns to examine the firm’s books and trading accounts.

Even as those talks took place, Bear Stearns simultaneously prepared to file for bankruptcy protection in the event a deal could not be struck, underscoring the severity of its troubles.

On Sunday night, Jamie Dimon, the chief executive of JPMorgan, held a conference call with the heads of major American financial companies to alert them to the deal and allay their concerns about doing business with Bear Stearns.

“JPMorgan Chase stands behind Bear Stearns,” Mr. Dimon said in a statement. “Bear Stearns’s clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’s counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.” While Bear Stearns toyed with suitors like big private equity firms like the J.C. Flowers & Company, the only meaningful bidder was JPMorgan.

The deal is a major coup for Mr. Dimon, who slept only a handful of hours over the weekend while negotiating with Bear and government officials. Over the last few years, he has focused intensely on cutting costs, improving technology and integrating JPMorgan’s disparate operations. But he also has been adamant about preparing the company for an economic downturn.

For JPMorgan, one of the few major banks to emerge relatively unscathed from the subprime crisis, the deal provides a major entry to prime brokerage, which provides financing to hedge funds. While that business has been lucrative in recent years, it has slowed as the financial markets have slumped.

Bear also would give JPMorgan a much bigger presence in the mortgage securities business, which the bank’s executives say they are committed in spite of the recent market downturn.

There are, of course, some drawbacks to a deal, even at a bargain-basement price. Mr. Dimon has long expressed doubts that combining two big investment banks is a good idea. Bear’s prime brokerage business would require a big technology investment. And there are often severe cultural issues and significant management overlap.

It is unclear how many of Bear Stearns’s employees, who together own a third of the company, will remain after the combination. People involved in the talks suggested that as much as a third of the staff could lose their jobs. The deal also raises the prospect that some employees at JPMorgan, which was already considering cutbacks, may face the prospect of additional layoffs as the two firms merge their operations.

With Bear, JPMorgan also inherits a balance sheet that is packed with financial land mines, though the Fed has agreed to protect the firm from a certain amount of liability. Even though JPMorgan has performed well through this recent turbulence, it is unclear if it would want that additional risk.

“Having taken Bear Stearns out of the problem category, and the strong action by the Federal Reserve, we would anticipate the market will behave quite differently on Monday than it was Thursday or Friday,” Michael Cavanaugh, JPMorgan’s chief financial officer, told analysts during a conference call.

The swiftness of Mr. Dimon’s decision to buy Bear is remarkable given that he has not been an aggressive acquirer since he joined the firm after selling it BankOne, where he was chief executive. He has cautioned patience about making acquisitions, though he had suggested in recent months that the firm might be ready to make a major deal.

Earlier this month, the co-chief executive of JPMorgan’s investment bank, William T. Winters, said on a conference call with investors: “If a special opportunity came up to acquire a prime broker at a decent return, we wouldn’t hesitate. We’ve always said, ‘Boy, if there was one for sale, we’d love to look at it.’ ”

A deal needed to be reached quickly to protect the business from collapsing entirely. With most if not all of its clients stopping trading with the firm, its days were numbered.

James E. Cayne, Bear Stearns’s former chief executive and one of its largest individual shareholder, will likely walk away with a little more than $13.4 million, the value of his Bear stock holdings, according to James F. Redda & Associates. Those would have been worth $1.2 billion in January 2007, when Bear’s stock was trading at a $171.51. Mr. Cayne has taken home more than $232 million in salary, bonus and other pay between 1993 and 2006, the time period for which there is publicly available data, according to Equilar, an as an executive compensation research firm.

Many hedge funds had started expressing concern about Bear Stearns by late Thursday. Jana Partners, a large hedge fund, for example, sent a memo to its investors that said, “In response to many recent inquiries regarding Bear Stearns, we are writing to inform you that we have no direct exposure to Bear Stearns or its affiliates through a prime brokerage relationship or otherwise.”

Not all investors are expected to be pleased with the deal. A conference call with investors and analysts on Sunday night was broken up when a Bear Stearns shareholder sought an explanation of why he would be better off approving this transaction rather than seeing Bear Stearns file for a Chapter 11 bankruptcy.

The JPMorgan executives demurred, instead referring the investor to Bear Stearns executives for an explanation. The shareholder declared that he would vote against the deal.

Afterward, Mr. Cavanaugh said JPMorgan felt comfortable in pulling the trigger despite the short due-diligence process. “We’ve known Bear Stearns for a long time,” Mr. Cavanaugh said.

Jenny Anderson and Eric Dash contributed reporting.

    Sale Price Reflects the Depth of Bear’s Problems, NYT, 17.3.2008, http://www.nytimes.com/2008/03/17/business/17cnd-bear.html?hp






Dollar Falls Against Euro, Yen


March 17, 2008
Filed at 12:09 p.m. ET
The New York Times


BERLIN (AP) -- The dollar fell to record low against the euro on Monday, and sank to its lowest level in more than 12 years against the Japanese yen as investors reacted to the latest emergency rate cut by the U.S. Federal Reserve and to news that JPMorgan Chase is buying rival investment bank Bear Stearns for a fraction of what it was worth last week.

In European trading, the euro rose as high as $1.5904 but soon fell back to $1.5746. That was still above the $1.5687 it bought late Friday in New York trading.

The U.S. Commerce Department said that the deficit in the current account dropped by 9 percent last year to $738.6 billion. Later, the Fed said U.S. industrial output fell half a percent in February, the biggest amount in four months.

The dollar fell as low as 95.72 Japanese yen, its lowest since August 1995, before recovering to 97.03 yen but still below the 99.21 yen it bought in New York on Friday. The dollar broke below 100 yen just last Thursday.

The lows came a day after the Fed approved a cut in its emergency lending rate to financial institutions to 3.25 percent from 3.5 percent.

Also on Sunday, JPMorgan Chase & Co. said it would acquire Bear Stearns for $236.2 million in a deal backed by the Fed. JP Morgan will pay $2 per share, down from Bear Stearns closing price of $30 per share on Friday.

''It has certainly been something of an historic weekend, with an emergency Fed rate cut and news that J.P. Morgan intends to acquire Bear Stearns marking the next chapter in the credit crisis,'' said James Hughes of CMC Markets in London.

''Unsurprisingly this has been broadly bad news for the dollar with (the) euro-dollar managing a short-lived breach above 1.5900 -- yet another all-time record high -- although this has been short lived with profit takers stepping in,'' Hughes said.

The Fed is scheduled to meet Tuesday, and analysts are predicting that the central bank could reduce its 3 percent benchmark rate on overnight loans between commercial banks by as much as another percent.

The European Central Bank, by comparison, has left its own rate at 4 percent as inflation in the 15-nation euro zone hit yet another record high last month.

Lower interest rates can jump-start a nation's economy, but can also weigh on its currency as traders transfer funds to countries where they can earn higher returns.

So far the ECB has remained steadfast in keeping its rates unchanged because inflation has been so high, but politicians and some companies have bemoaned the strong euro because it makes goods produced in the euro zone far more expensive elsewhere and undermines exports.

However, at the same time, the higher euro can increase domestic purchasing power.

The Bank of England said Monday it will offer an extra 5 billion pounds -- around $10.1 billion -- of reserves into the short-term money market because of conditions in the market.

The dollar rose against the British pound, which fell to $2.0059 from $2.0218 on Friday.

    Dollar Falls Against Euro, Yen, NYT, 17.3.2008, http://www.nytimes.com/aponline/business/AP-Dollar.html






White House Signals More Steps Are Possible


March 17, 2008
The New York Times


WASHINGTON — President Bush on Monday welcomed the Federal Reserve’s sweeping intervention in the nation’s financial markets over the weekend, while his press secretary suggested that other steps could be possible.

Meeting with his economic aides at the White House in the morning in the first of two meetings on the turmoil, Mr. Bush singled out Secretary of the Treasury Henry M. Paulson Jr., saying that he had shown “the country and the world that the United States is on top of the situation.”

As he did in New York on Friday, Mr. Bush again projected an optimistic front, though his remarks and his schedule reflected a growing concern about the markets on a day that would otherwise be devoted to the traditional St. Patrick’s Day meetings and lunches.

“One thing is for certain,” Mr. Bush said in brief remarks in the Roosevelt Room. “We’re in challenging times.”

He was surrounded by, among others, Mr. Paulson; the under secretary of the Treasury for domestic finance, Robert K. Steel; the director of the National Economic Council, Keith Hennessey, and the chairman of the Council of Economic Advisers, Edward P. Lazear.

It was not clear what other steps the White House might be prepared to take, but Mr. Bush’s aides seemed sensitive to the accusation that the government had bailed out Bear Stearns, or at least facilitated a bailout.

“He recognizes that there’s going to be questions in terms of the moral hazards,” the press secretary, Dana M. Perino, said, using a phrase Mr. Paulson used on Monday.

Mr. Bush, however, suggested he would support additional measures. “We obviously will continue to monitor the situation and when need be, will act decisively, in a way that continues to bring order to the financial markets,” he said.

    White House Signals More Steps Are Possible, NYT, 17.3.2008, http://www.nytimes.com/2008/03/17/business/17cnd-bush.html






U.S. Markets Volatile After Fed Actions


March 17, 2008
The New York Times


Stocks got off to a rocky start on Monday as Wall Street weighed a stunning series of weekend developments that confirmed investors’ worst fears about the fragile state of the financial industry.

Shares of financial firms plummeted as one of Wall Street’s most storied banks, Bear Stearns, lay on its deathbed and central bankers scrambled to stave off a devastating crisis of confidence in the investment community.

The broadest measure of the American stock market, the Standard & Poor’s 500-stock index, was down 1.8 percent at midday, as the index edged toward bear-market territory. The Dow was down about 120 points after recovering from a 200-point plunge at the start of trading.

While stocks steered clear of a painful sell-off, the credit market sounded a more alarming note. Investors appeared to shrug off a series of emergency measures taken by the Federal Reserve on Sunday to shore up confidence in banks’ ability to pay back loans. Instead, the cost of overnight borrowing between banks rose by the most in seven years, as a benchmark gauge of the credit market remained elevated far above its normal level.

Investors remain fearful that a panic in the credit markets — which threw Bear Stearns to the brink of bankruptcy and forced a sale to JPMorgan Chase at the humbling price of $2 a share — could spread to other big brokerage firms with extensive exposure to toxic mortgage-backed securities. The concerns drove investors to the safety of government notes, sending the spread between three-month London interbank lending rates and Treasury bills up to 1.9 percentage points.

“The problem is bigger than the Fed,” said Meredith A. Whitney, an Oppenheimer financial services analyst. “Trillions of dollars of securities were underwritten on the false assumption house prices could never go down on a national basis. That falsehood has put the entire financial system in a tailspin.”

Shares of Bear Stearns lost an astounding 86 percent to $3.96 a share. But the stock was trading above the $2 a share paid by JPMorgan Chase, which saw its own shares rise almost 10 percent to $40.02.

JPMorgan was the only Wall Street firm to post a gain on Monday. Lehman Brothers, which has also been the subject of rumors about financing problems in recent days, lost 20 percent in morning trading.

A few positive signs appeared amid the gloom. In some areas of the credit markets, investors seemed comforted by the events of the weekend. The spread between debt backed by Fannie Mae, the large government-charted buyer of mortgages, and Treasuries narrowed slightly, and the cost of protection against an investment bank default fell modestly, according to Ed Rombach, a derivatives analyst at Thomson Financial.

“The market has yet to find its footing,” Mr. Rombach said.

The losses on Wall Street follow widespread declines in the European and Asian markets, led by painful losses for financial firms. Shares of the Bank of East Asia, France’s Société Générale, Barclays, and Credit Suisse all declined nearly 10 percent.

Hong Kong’s benchmark index lost 5.2 percent and Tokyo’s Nikkei 225 index lost 3.7 percent to close at 11,787.51, after declining as much as 5 percent during the day.

All the major European stock indexes, from London to Paris to Berlin, were down about 2 percent, though they trimmed their losses in afternoon trading. The declines came after the Bank of England, the Fed’s counterpart, offered $10 billion in short-term loans to bolster financial markets and lower lending rates.

On Wall Street, the Nasdaq composite index, heavily weighted with technology stocks, shed 1.9 percent.

The euro rose again against the dollar and investors rushed to the relative safety of United States Treasuries. The dollar fell to a 13-year low against the yen, and oil hit a new record, near $112 in Asia before falling back. Gold prices, already at record levels, also rose.

Investors across Europe and Asia tried to figure out who might invest more capital to shore up Western financial institutions caught with heavy losses on their holdings of mortgage-backed securities. Chinese state-run institutions, with some of the largest cash holdings, appeared to be on the sidelines, watching as the prices of financial shares plunged, while Citic announced that it would not proceed with a previously announced deal to acquire a $2 billion stake in Bear Stearns.

The declines in Tokyo came even as the Japanese central bank, the Bank of Japan, moved to shore up financial markets by injecting $4.1 billion into short-term money markets. Asian stocks have also been hurt by the weakness of the dollar, which erodes the value in local currencies of overseas profits and forces big exporters like Toyota and Sony to raise prices in foreign markets.

Stock markets in Asia’s two emerging giants, China and India, suffered the biggest losses on Monday. The Shanghai A share market was down 3.6 percent in late trading, the Hang Seng Index in Hong Kong was down 5.2 percent and the Shenzhen A share market was down 6.4 percent. Investors in the China region were troubled not only by the ongoing financial troubles in the United States but also by a weekend of news reports of unrest in Tibet and adjacent Chinese provinces.

“Local investor sentiment is not good — the Hong Kong market is really caught in the middle between happenings in China and the United States,” said Ricky Chan, a stockbroker at Phoenix Capital Securities Ltd. in Hong Kong. With the Shanghai market declining, he said, “plus with the turmoil in Tibet, the local market is quite nervous at this point in time.”

In India, the Sensex 30 index in Bombay plunged 5.1 percent by early afternoon. The index had climbed 47 percent last year on an often speculative boom fueled to a considerable extent by foreign investment.

But India also imports nearly all of its oil, and now faces rising costs with crude oil close to $110 a barrel; this has contributed to a weakening of industrial production, up just 5.3 percent in January from the same month a year ago, and rising wholesale prices, up 5.11 percent for the week ending March 1.

Officials for the China Investment Corporation, China’s $200 billion sovereign wealth fund for domestic and overseas stock purchases, declined to comment on whether American financial companies had any appeal in the current credit market difficulties. Analysts were skeptical that the Chinese would step in while markets remain in turmoil.

“I would think the Chinese will be very careful,” said Hong Liang, a Goldman Sachs economist who specializes in China.

Vikas Bajaj, David Barboza, Eric Dash, Martin Fackler and Susanne Fowler contributed reporting.

    U.S. Markets Volatile After Fed Actions, NYT, 17.3.2008, http://www.nytimes.com/2008/03/17/business/worldbusiness/17cnd-stox.html?hp






Fed Acts to Rescue Financial Markets


March 17, 2008
The New York Times


WASHINGTON — Hoping to avoid a systemic meltdown in financial markets, the Federal Reserve on Sunday approved a $30 billion credit line to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street.

In a third move aimed at helping banks and thrifts, the Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.

The moves amounted to a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the nation’s financial markets from what officials feared could be a chain reaction of defaults.

After a weekend of intense negotiations, the Federal Reserve approved a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.

In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk.

On Monday, President Bush said the Fed “has moved quickly to bring order to the financial markets” by taking “strong and decisive action.”

The Fed, working closely with bank regulators and the Treasury Department, raced to complete the deal Sunday night in order to prevent investors from panicking on Monday about the ability of Bear Stearns to make good on billions of dollars in trading commitments.

Even so, the markets opened to upheaval in both Asia and Europe, with declines of 3 percent or more on several major exchanges. On Wall Street, stocks plunged at the opening bell before trimming some of their losses within the first hour.

In a potentially even bigger move, the Federal Reserve also announced its biggest commitment yet to lend money to struggling investment banks. The central bank said its new lending program would make money available to the 20 large investment banks that serve as “primary dealers” and trade Treasury securities directly with the Fed.

Much like a $200 billion loan program the Fed announced last Tuesday, this program will essentially allow the government to hold as collateral a wide variety of investments that include hard-to-sell securities backed by mortgages. But Fed officials told reporters on Sunday night that the new program would have no limit on the amount of money that can be borrowed.

In a conference call with reporters on Sunday, the Federal Reserve chairman, Ben S. Bernanke, said the central bank was moving to provide money to financial institutions that need it.

“The Federal Reserve, in close consultation with the Treasury, is working to promote liquid, well-functioning financial markets, which are essential for economic growth,” he said. “These steps will provide financial institutions with greater assurance of access to funds.”

On Monday, the Bank of England also moved to ease bank lending, making available $10 billion in three-day loans.

In his comments Monday morning, President Bush praised Treasury Secretary Henry M. Paulson Jr. for his role in the Bear rescue, saying, “You’ve shown the country and the world that the United States is on top of the situation.”

Affirming that “our financial institutions are strong and that our capital markets are functioning efficiently and effectively,” Mr. Bush added: “In the long run, our economy is going to be fine. Right now we’re dealing with a difficult situation.”

Mr. Paulson, the Treasury secretary, vigorously endorsed the Fed’s rescue efforts on Sunday and made it clear he was much less worried about the “moral hazard” of bailing out a Wall Street firm than he was about a chain reaction of defaults if Bear Stearns were to abruptly collapse.

“The right decision here, I am convinced, was the decision that the Fed made, which was to do things, work with market participants to minimize the disruptions,” Mr. Paulson said on “This Week With George Stephanopoulos” on ABC.

It was unclear just how much risk the Federal Reserve was taking on, especially in the bailout of Bear Stearns. But analysts said it was clear that JPMorgan Chase was getting an extraordinary bargain, buying Bear Stearns at a tiny fraction of its market value just one week ago, and with the Fed shielding it from much of the risk.

Fed officials said they would take control of the investment holdings of Bear Stearns in order to maximize their value and minimize disruptions as a result of a cash squeeze. Without providing details, Fed officials insisted that the $30 billion loan was covered by even the most conservative estimates of the Bear Stearns holdings.

Mr. Bernanke spent much of the weekend in his office in Washington, staying in constant telephone contact with officials at the New York Fed, which led the negotiations with JPMorgan Chase. Mr. Bernanke and board officials in Washington set the overall parameters for how much risk the central bank was willing to shoulder, and they consulted closely with the Treasury Department and its Office of the Comptroller of the Currency.

But Mr. Bernanke had already been worrying for some time about the collapse of a major Wall Street bank, and Bear Stearns had been high on its watch list.

Last Tuesday, the central bank announced a $200 billion loan program that would allow the nation’s biggest banks to borrow Treasury securities and post mortgage-backed securities as collateral. The financing gave 20 top investment banks 28-day loans at what amounted to wholesale rates — at or slightly below the Fed’s benchmark rate on overnight loans between banks.

But the program did little to rejuvenate the credit markets, which have been paralyzed by fears about even conservative short-term-debt securities. On Wall Street, rumors about a possible collapse of Bear Stearns, which had been a leader in packaging mortgage-backed securities, gained gale-force strength.

Monetary policy experts said they were stunned by the sweeping nature of the Fed’s efforts, which they said were unprecedented in a host of different ways. But some were doubtful about whether the moves would solve the underlying problem of huge losses from bad lending practices.

“Emergency provision of loans is necessary but not sufficient,” said Lawrence H. Summers, who was a Treasury secretary under President Bill Clinton. “There is a fundamental issue, which is that the financial system is short of capital and is under pressure to contract.”

Mr. Paulson and two top deputies, Robert Steel and Anthony W. Ryan, stayed in Washington rather than take part in person with the talks under way in New York. But Treasury officials said they stayed in constant telephone contact with the New York Fed and with Wall Street executives.

The New York Fed, which runs the Fed’s daily market operation and has long been the Federal Reserve’s primary channel for dealing with Wall Street, led the negotiations with JPMorgan Chase.

The principal issue, according to officials, was how much insurance the Fed was willing to provide to JPMorgan Chase in exchange for taking over Bear Stearns and its hard-to-quantify assets.

Fed officials were racing to announce an agreement of some sort before financial markets opened in Asia, which meant reaching a deal on Sunday night. But even as they worked to engineer a takeover of Bear Stearns, Fed officials were canvassing executives at other Wall Street firms that might be in trouble as well.

As rumors about problems at Bear Stearns swept across Wall Street last week, Fed and Treasury officials became convinced that they needed more weapons to help struggling investment banks. Although stock investors initially cheered the announcement Tuesday of the $200 billion lending program, the credit markets showed little reaction — an indication that investors were still dubious about the mountain of mortgage-backed securities that companies like Bear Stearns were holding.

    Fed Acts to Rescue Financial Markets, NYT, 17.3.2008, http://www.nytimes.com/2008/03/17/business/17cnd-fed.html?hp






Fed Chief Shifts Path, Inventing Policy in Crisis


March 16, 2008
The New York Times


WASHINGTON — As chairman of the Federal Reserve, Ben S. Bernanke has long argued that a central bank should base its policies as much as possible on consistent principles rather than seat-of-the-pants judgment.

But now, as the meltdown in credit markets threatens major institutions on Wall Street and a recession appears inevitable, Mr. Bernanke is inventing policy on the fly.

“Modern monetary policy-making puts a lot of weight on rules, but there is no rule book for an economic crisis,” said Douglas W. Elmendorf, a senior fellow at the Brookings Institution and a former Fed economist.

On Friday, the Federal Reserve seemed to toss out the rule book altogether when it assumed the role of white knight, temporarily bailing out Bear Stearns, one of Wall Street’s biggest firms, with a short-term loan to help avoid a collapse that might send other dominoes falling.

That move came just days after the Fed announced a $200 billion lending program for investment banks and a $100 billion credit line for banks and thrifts. In a move that would have been unthinkable until recently, the central bank agreed to accept potentially risky mortgage-backed securities as collateral.

On Tuesday, the central bank is expected to reduce short-term interest rates for the sixth time since September. The Fed has already lowered its benchmark federal funds rate to 3 percent from 5.25 percent, and investors are betting that it will cut the rate to just 2.25 percent on Tuesday.

The mounting crisis has forced Mr. Bernanke, a former professor of economics, to discard the sanguine view of the nation’s economic health that he expressed last summer. He has also abandoned his skepticism about the need to calm financial markets and set aside his concerns about the “moral hazard” of bailing out big financial institutions.

In Washington and in New York, Fed officials were expected to work through the weekend, analyzing the books of Bear Stearns and trying to prevent its troubles from setting off a chain reaction of failures among its lenders and trading partners.

It was just 10 months ago that Mr. Bernanke, in discussing his reluctance to regulate the booming market for arcane credit instruments, declared: “Central banks and other regulators should resist the temptation to devise ad hoc rules for each new type of financial instrument or financial institution.”

As recently as last summer, Wall Street executives grumbled privately that Mr. Bernanke was too disengaged from the real world, too slow to understand the plight caused by bad mortgages and too hesitant about lowering interest rates.

But Mr. Bernanke has become Wall Street’s most important and most powerful friend. Executives are praising him for his creativity and willingness to act boldly.

Beyond trying to lower borrowing costs by reducing the federal funds rate, the Fed has adopted a widening array of unconventional tools to infuse money into the banking system.

The question now is whether the Fed is already too late and whether it has enough power to stabilize the markets without starting a new round of inflation. With oil and gold prices soaring to new highs and the dollar falling to new lows, investors already appear to be worrying about higher inflation.

Officially, the Fed continues to predict that the United States can narrowly escape a recession. But Mr. Bernanke has made it clear that the economy is in perilous shape, plagued by a continuing plunge in the housing market, rising job losses, rising energy prices and a paralysis in credit markets as banks and financial institutions sell off even high-quality mortgage-related securities at fire-sale prices.

Most private forecasters contend that a recession is already under way, and even the dwindling numbers of optimists warn that growth will be almost stagnant for the first half of this year.

“The self-feeding downturn now in place shows signs of becoming deeply entrenched,” economists at Citigroup wrote Friday, predicting that the Federal Reserve would cut its benchmark federal funds rate a full percentage point on Tuesday to 2 percent. Citigroup itself has already booked huge losses from its holdings of mortgage-backed securities, and it could face additional losses if Bear Stearns were to fail.

The evolution of Ben Bernanke, who took office in February 2006, began in early August, as credit markets were beginning to freeze up in panic over losses from subprime mortgages. The Fed stunned investors by refusing to lower interest rates and even refusing to change its view that rising inflation posed a bigger risk than slowing growth.

The Fed’s rigidity aggravated fears, and investors suddenly became reluctant to finance a wide variety of short-term commercial debt, known as asset-backed commercial paper. It is used to finance mortgages, credit card debt, automobile loans and business loans.

With stock markets plunging and credit availability disappearing, the Fed, along with European central banks, began injecting billions of dollars into financial markets through open-market operations — the buying and selling of Treasury securities.

On Aug. 17, 10 days after the Fed refused to lower its key rate, the central bank held an unscheduled emergency meeting and announced that it would cut the rate at which banks could take out short-term loans from its “discount window,” a program normally used by banks in trouble, and it said banks would be able to pledge mortgages as collateral.

It was the Fed’s first step in what quickly became a major course reversal. The central bank signaled that it would probably lower its most important interest rate, the federal funds rate, but the Fed also took its first step toward addressing a cash shortage by lending cash or Treasury securities, backed up by packages of mortgages.

Fed officials say they have not changed their basic principles. Rather, they say, they have changed their view of the economy’s prospects. Throughout the spring, Mr. Bernanke hoped that the economy’s problems would be limited to the housing market and that the financial sector’s problems would be confined to subprime loans.

But by late August, Mr. Bernanke had immersed himself in the structural plumbing of financial markets, from inscrutable mortgage securities like “collateralized debt obligations” to the proliferation of “structured investment vehicles” that permitted investors to borrow at short-term rates to buy long-term debt securities like mortgages.

Mr. Bernanke, working closely with a group of other prominent officials, including Timothy F. Geithner, president of the Federal Reserve Bank of New York, began looking for new tools, beyond interest rates, that the Fed could use to provide relief.

Still, Fed officials found themselves repeatedly startled by the persistence of acute stress in the credit markets. After the Fed lowered the federal funds rate in September and October, the panic appeared to subside as investors lowered the risk premiums they were demanding on debt securities.

But the panic returned in December and again in January. When Fed officials met Dec. 11 and lowered their key rate another quarter-point, the stock market plunged amid widespread disappointment that the central bank had not done more.

Fed officials hastily telegraphed that they were planning other measures and the next morning announced a new lending program called the “Term Auction Facility.”

The program was open to any bank or depository institution, which would be allowed to bid for up to $20 billion in one-month loans. The twist was that banks could pledge mortgage-backed securities as collateral —including securities that could not be traded and had no current market price.

Fed officials expanded the program to $60 billion a month in January and $100 billion a month in March.

Mr. Bernanke did not stop there. On March 7, the Fed said it would infuse an extra $100 billion into the financial system through its open-market operations. And on Tuesday, it created an additional $200 billion lending program that would permit a select list of big investment banks to borrow money and post mortgage-backed securities as collateral.

“They have been very creative in what they’ve been doing,” said Richard Berner, chief economist at Morgan Stanley. “The key issue is whether the traditional tools of monetary policy — lowering the federal funds rate — is enough to address the financial crisis. These tools don’t solve the credit problem, but they do provide liquidity to the market.”

But by Friday morning, it became clear that more tools would be necessary. Bear Stearns, which had been one of the most aggressive financiers of subprime mortgages, was on the brink of collapse largely because of the sinking value of its own assets.

Hoping to avoid the collapse of a major trading firm that might set off a chain reaction at other firms, the Fed officials helped work out a deal under which Bear Stearns would borrow money long enough to keep from defaulting on its obligations and either be restructured or sold to its rivals.

The bailout had officially begun.

    Fed Chief Shifts Path, Inventing Policy in Crisis, NYT, 16.3.2008, http://www.nytimes.com/2008/03/16/business/16bernanke.html?hp






News Analysis

A Wall Street Domino Theory


March 15, 2008
The New York Times


The Federal Reserve’s unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system.

Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism.

The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted.

“In a trading firm, trust is everything,” said Richard Sylla, a financial historian at New York University. “The person at the other end of the phone or the trading screen has to believe that you will make good on any deal that you make.”

Commercial banks, mutual fund companies and other big financial firms with deep pockets would presumably weather such turmoil. Firms that traded extensively with Bear Stearns could be at great risk if the bank failed.

For individual customers, the Federal Deposit Insurance Corporation insures deposits up to $100,000. Furthermore, when a Wall Street firm fails, the Securities Investor Protection Corporation steps in to take over customer accounts.

The Fed’s action was intended simply to keep the financial markets functioning. Since various trading markets seized up in August, credit conditions have steadily worsened, and interest rate cuts, the main tool central bankers use to bolster the economy, have become less effective.

Policy makers anticipated some of the problems now affecting the financial world. In 2006 and 2007, Timothy F. Geithner, president of the Federal Reserve Bank of New York, asked major Wall Street institutions to gauge the impact on their portfolios if a large bank failed.

The volume of financial contracts that are not traded on any major exchanges has ballooned in recent years after the bailout of a big hedge fund, Long-Term Capital Management, in 1998. Now, much of the trading in derivative contracts tied to stocks and bonds takes place in unregulated transactions between financial institutions.Policy makers have been wrestling with questions about when and how they should provide assistance since the last major bailout of a tottering bank, Continental Illinois, in 1984. At the time, Continental was considered too big to fail without sending waves of losses through the financial system.

Regulators are facing an unprecedented and widespread deterioration in many markets. Last summer, the value of risky and exotic securities plummeted in value. Now, even top-rated securities once deemed as safe as Treasuries have hit the skids. Financial firms have written down more than $150 billion of their assets. Some analysts are predicting that losses in various credit markets will reach $600 billion.

Bear Stearns was one of the first firms to experience a direct blow from the subprime mortgage crisis when two of its hedge funds collapsed because of the declining value of mortgage-backed securities.

It is also among the biggest firms in the prime brokerage business, or the financing of hedge funds. In recent weeks, nervous fund managers have scrambled to protect themselves. Robert Sloan, who is the managing partner at S3 Partners, a financing specialist that works with hedge funds, has shifted $25 billion out of Bear Stearns accounts in the last two months, he said.

“The problem is the financing of the hedge fund industry is very concentrated and very brittle,” Mr. Sloan said. “If they go under, you will have thousands of funds frozen out,” he said, adding that everyone might then have to wait for a court to name a receiver before business could resume.

Hedge funds rely on Wall Street for a range of services from the humdrum, like holding their securities, to the critical, like providing loans they use to increase their bets. As Wall Street has buckled under multibillion-dollar write-downs, the firms have cut financing to hedge funds and asked the funds to put up more assets to back their borrowing, forcing managers to sell en masse.

This has caused a series of hedge fund blowups, including Carlyle Capital, an affiliate of the powerful private equity firm Carlyle Group; Peloton Partners, a hedge fund founded by former Goldman Sachs traders; and Drake Capital, a blue-chip fund that has been struggling.

A manager at one hedge fund that uses Bear Stearns as its prime broker said his firm had been nervously watching the situation. The manager, speaking on the condition that he or his fund not be identified, said the fund had lined up backup firms that could clear its trades and keep its portfolio, though as of Friday afternoon it had not left Bear Stearns.

Customer accounts at financial institutions are kept separate from banks’ and dealers’ own holdings to protect those funds if the broker has to seek bankruptcy protection.

But the bigger worry for hedge funds and others that do business with Bear Stearns is whether the firm will be able to honor its trades. Of particular concern are the insurance contracts known as credit default swaps in which one party agrees to guarantee interest and principal payments in case an issuer defaults on its bonds. Investors in such contracts with Bear Stearns are closely studying whether they can get out of them or have them transferred to a more stable firm.

Compounding the problem, some big investment banks this week stopped accepting trades that would expose them to Bear Stearns. Money market funds also reduced their holdings of short-term debt issued by Bear, according to industry officials.

“You get to where people can’t trade with each other,” said James L. Melcher, president of Balestra Capital, a hedge fund based in New York. “If the Fed hadn’t acted this morning and Bear did default on its obligations, then that could have triggered a very widespread panic and potentially a collapse of the financial system.”

Already, investors are considering whether another firm might face financial problems. The price for insuring Lehman Brothers’ debt jumped to $478 per $10,000 in bonds on Friday afternoon, from $385 in the morning, according to Thomson Financial. The cost for Bear debt was up to $830, from $530.

    A Wall Street Domino Theory, NYT, 15.3.2008, http://www.nytimes.com/2008/03/15/business/15risk.html?hp






Avoid Overcorrecting Economy, Bush Warns


March 15, 2008
Filed at 2:11 p.m. ET
The New York Times


WASHINGTON (AP) -- President Bush on Saturday said the government must guard against going too far in trying to fix the troubled economy, cautioning that ''one of the worst things you can do is overcorrect.'' Democrats said Bush was relying on inaction to solve the problem.

Bush, in his weekly radio address, said the recently passed program of tax rebates for families and businesses should begin to lift the economy in the second quarter of the year and have an even stronger impact in the third quarter. But he urged caution about doing more, particularly about the crisis in the housing market where prices are tumbling and home foreclosures have soared to an all-time high.

''If we were to pursue some of the sweeping government solutions that we hear about in Washington, we would make a complicated problem even worse -- and end up hurting far more homeowners than we help,'' the president said.

The economy has surpassed the Iraq war as the No. 1 concern among voters in this presidential election year amid big job losses, soaring fuel costs, a credit crisis and turmoil on Wall Street.

''In the long run, we can be confident that our economy will continue to grow, but in the short run, it is clear that growth has slowed,'' Bush said. He was spending the weekend at the Camp David presidential retreat in Maryland's Catoctin Mountains after delivering a speech in New York about the economy and helping raise $1.4 million for the national Republican Party.

Democrats said they would try to strengthen the economy with measures dealing with housing, energy efficiency and renewable energy.

''The president continues to convince himself that inaction is the cure-all for the economic problems hurting hardworking Americans,'' Senate Majority Leader Harry Reid said in a written statement. ''But Democrats know that wait-and-see is not a responsible strategy for an economy that is teetering on the brink of recession.''

''Wages and home values are down,'' Reid said, ''but prices for everything from health care to tuition to energy are up. Just this week, oil and gas prices reached record highs while the value of the dollar reached historic lows. I hope the president, who has been slow to acknowledge this problem, joins us in recognizing how urgently we need a solution.''

Bush said he opposed several measures pending on Capitol Hill to deal with the housing crisis. They included proposals to allocate $400 billion to purchase foreclosed-upon and now-abandoned homes, to change the bankruptcy code to allow judges to adjust mortgage rates and to artificially prop up home prices.

''Many young couples trying to buy their first home have been priced out of the market because of inflated prices,'' the president said. ''The market now is in the process of correcting itself, and delaying that correction would only prolong the problem.''

Bush said his administration has offered steps offering flexibility for refinancing to homeowners with good credit histories yet are having trouble paying their mortgage. He cited other measures which he said would streamline the process for refinancing and modify many mortgages.

He said there were steps Congress could take, as well.

''As we take decisive action, we will keep this in mind: When you are steering a car in a rough patch, one of the worst things you can do is overcorrect,'' the president said.

''That often results in losing control and can end up with the car in a ditch,'' Bush said. ''Steering through a rough patch requires a steady hand on the wheel and your eyes up on the horizon. And that's exactly what we're going to do.''

    Avoid Overcorrecting Economy, Bush Warns, NYT, 15.3.2008, http://www.nytimes.com/aponline/us/AP-Bush.html






Bush Acknowledges Economic Troubles


March 14, 2008
The New York Times


President Bush made his most striking acknowledgment yet of the country’s economic troubles on Friday, even as he defended his administration’s responses so far and warned against more drastic steps by the government to intervene.

Speaking to the Economic Club of New York at a midtown Manhattan hotel, Mr. Bush said that the economy was now having “a tough time.”

At the same time, however, he compared the government’s reaction to driving through a “rough patch” of road.

“If you ever get stuck in a situation like that, you know it’s important not to overcorrect,” Mr. Bush said. “If you overcorrect, you end up in a ditch.”

Mr. Bush spoke only moments after the Federal Reserve intervened to help the investment bank Bear Stearns secure financing to stave off collapse. A day earlier Mr. Bush’s Treasury Secretary, Henry M. Paulson Jr., announced a series of regulatory steps to tighten rules for credit agencies, mortgage brokers and banks — limited steps that Mr. Bush on Friday said were an appropriate response to the economic turmoil.

“Today’s actions are fasting moving,” he said, “but the chairman of the Federal Reserve and the secretary of the treasury are on top of them and will take the appropriate steps to promote stability in our markets.”

Mr. Bush seemed more sensitive than usual to the economic news battering the country.

“Interesting moment,” he said as he opened his remarks, appearing to refer to the latest news about Bear Stearns.

Mr. Bush, who only last month said he was unaware of reports suggesting that gasoline prices could reach $4 a gallon, seemed eager both to recognize the worries many Americans face about rising prices, foreclosures, jobs lost to free-trade and investments in American companies by foreign government’s sovereign wealth funds — and to put them at ease.

In the case of the wealth funds, many of them from oil-rich nations, Mr. Bush said that the United States should be confident enough not to succumb to any temptation to block foreign investments. “It’s our money anyway,” he said, drawing laughter.

The administration’s handling of the economy has become an issue that, at least for now, has now overtaken Iraq and even terrorism, threatening to loom large during Mr. Bush’s last year in office.

Even so, he offered few legislative promises and starkly suggested that much of what was happening was part of the natural cycles of market economies. And that relief could come after broader changes that could take years. In the case of gasoline, for example, he said the country needed to find alternative sources of energy. “There’s no quick fix,” he said.

Mr. Bush cited the economic stimulus package that he and Congress adopted last month as an appropriate response to an economic slowdown, saying that the tax rebates and credits would be mailed during the second week of May.

He also cited a series of more modest steps by his administration to address the crisis in mortgage markets. In Washington, the Department of Housing and Urban Development announced a new one on Friday that would require lenders to make more thorough disclosures of the terms of loans.

But he also rejected more aggressive measures, including ones being considered in Congress to allow state and local governments to buy up abandoned or foreclosed homes and to allow bankruptcy judges to force changes in mortgage terms. Such moves, he said, would be counterproductive.

    Bush Acknowledges Economic Troubles, NYT, 14.3.2008, http://www.nytimes.com/2008/03/14/washington/14cnd-webbush.html?hp






Prices Held Steady in February


March 14, 2008
The New York Times


Consumer prices held steady in February as the cost of gasoline declined, an unexpected dose of good economic data that opens the door for more aggressive rate cuts by the Federal Reserve.

But the relief may be short-lived: oil prices soared to record levels in early March, putting more pressure on consumers’ pocketbooks as they muddle through the economic downturn.

“It’s a temporary respite,” said John Lonski, chief economist at Moody’s Investors Service. “The renewed ascent of gasoline prices, if nothing else, promises a faster rate of inflation for March.”

Still, the flat reading on the Consumer Price Index was a welcome development after several months of steadily building price pressures. Consumer prices, seasonally adjusted, were unchanged in February, and the closely watched core index, which excludes the prices of volatile food and energy products, also stayed flat.

With the economy in a significant downturn, and possibly a recession, some had feared a repeat of 1970s-style stagflation. The inflation rate was 0.4 percent in January and December, and economists had been bracing for another uptick last month.

Instead, the Labor Department report showed price declines across a broad range of consumer products, including clothing, personal computers and automobiles. The easing came despite a record-low dollar and a rise in the price of imports.

But the biggest surprise was a 2 percent dip in the price of gasoline, which raised red flags for more than a few economists.

“As everybody knows, gasoline prices are up pretty substantially,” said Richard Moody, chief economist at Mission Residential in Austin, Tex. Crude oil passed its inflation-adjusted record last week after a temporary lull.

Prices are likely to rise again this month, said Joseph Brusuelas, chief United States economist at the research firm IdeaGlobal. The March report “will capture the extraordinary surge in oil, food, and commodity prices that we’ve seen over the last few weeks,” he said. “This quite unexpected gift will be completely reversed.”

Lower inflation may open the door for the Fed to lower interest rates more aggressively at its next scheduled meeting, on Tuesday. Rate cuts promote growth but push prices higher, and the Fed has struggled to balance its efforts to stave off a recession with the brisk pace of inflation. “They’re fighting a two headed monster right now,” Mr. Moody said.

And for the year, inflation is still running high. Compared with a year ago, consumer prices were up 4 percent in February, and the core index rose 2.3 percent, higher than the Fed’s comfort level.

Consumers are also facing steep costs for the products they need most. The cost of food and beverages remained elevated, ticking up 0.4 percent last month after a 0.7 percent rise in January. Over the last 12 months, the cost of food has risen 4.6 percent.

That has contributed to a wave of glum sentiment. Consumer confidence has fallen this month, though not as much as some economists had feared. An index by Reuters and the University of Michigan dropped to 70.5 in March from 70.8 in February.

More optimistic economists predict inflation will taper off over the next few months, as economic problems weigh on consumers’ ability to spend. That would lower incentives for businesses to raise prices, keeping inflation in check.

    Prices Held Steady in February, NYT, 14.3.2008, http://www.nytimes.com/2008/03/14/business/14cnd-econ.html?hp






Stocks Tumble on Bank’s Troubles


March 14, 2008
The New York Times


Stocks took a sharp dive on Friday after an emergency bailout for Bear Stearns, the troubled investment bank, rocked Wall Street’s confidence in the fragile credit market.

Though the rumors that Bear was in trouble had swirled for days, the announcement that JPMorgan Chase and the Federal Reserve would step in to prop up the bank seemed to catch Wall Street by surprise. Faced with fresh evidence that even the nation’s biggest banks remain vulnerable to the credit crisis, investors scurried for safety, sending the Dow Jones industrials down more than 300 points by mid-afternoon.

The blue-chip index finished down 194 points, or 1.6 percent, at 11,951.09, erasing nearly all its gains for the week.

The Standard & Poor’s 500-stock index, a broader measure of the stock market, lost 2.1 percent after following a similar trajectory, and the Nasdaq composite index shed 2.2 percent.

Concerns about credit have played havoc with the markets in recent weeks, leading the Dow to three triple-digit sell-offs in the last week alone. Market watchers are worried that banks will be less willing to lend to businesses, consumers, and other financial institutions, blocking up the bloodstream of the nation’s economy.

Early in the day, the Fed issued a statement that it would “continue to provide liquidity as necessary” to keep the wheels of the financial system turning. But investors seemed to take little solace in the pledge.

“It’s a little like that saying about the fire truck in front of your house,” said Brian Gendreau, a strategist at ING Investment Management in New York.

“The good news is that the fire truck’s here. The bad news is your house is on fire.”

The news from Bear Stearns came after the bank had insisted for days that its finances were in adequate shape. But its chief executive said the bank’s liquidity had “significantly deteriorated” since Thursday. “We took this important step to restore confidence in us in the marketplace,” the executive, Alan Schwartz, said in a statement.

But that confidence remained elusive. Bear Stearns’s stock price lost nearly half of its value, plunging 47 percent to $30 a share, after falling as low as $26.85, its lowest level in a decade.

Shares of JPMorgan lost 4 percent. Financial services firms took a direct hit, losing the most of any sector in the S.&P. 500. The yield on Treasury bonds fell and the dollar declined again against the euro. Volatility reached its highest level since January.

The broad-based stock sell-off came just three days after the markets enjoyed their best session in five years.

The Bear bailout also overshadowed some good economic data: a surprisingly upbeat report on inflation from the Labor Department. The closely watched Consumer Price Index stayed flat in February after a dip in energy prices, opening the door for more aggressive interest rate cuts by the Fed.

Some investors now expect the Fed to lower rates by a full percentage point when the central bank meets on Tuesday. Futures contracts for a full-point cut shot up on Friday, though many economist still predict a cut of half or three-quarters of a point.

    Stocks Tumble on Bank’s Troubles, NYT, 14.3.2008, http://www.nytimes.com/2008/03/14/business/14cnd-stox.html?hp






JPMorgan and Fed Move to Bail Out Bear Stearns


March 14, 2008
The New York Times


Bear Stearns, facing a grave liquidity crisis, reached out to JPMorgan on Friday for a short-term financial lifeline and now faces the prospect of the end of its 85-year run as an independent investment bank.

With the support of the Federal Reserve Bank of New York, JPMorgan said in a statement that it had “agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days.”

For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.

“JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company,” JPMorgan said in its statement.

The rescue plan represents a devastating if not ultimately final blow for Bear Stearns, a scrappy and until now resilient investment bank that carved out a niche for itself by mastering the intricacies of the United States mortgage market.

But after two of its hedge funds that specialized in the subprime mortgage market collapsed last summer, Bear’s expertise became its Achilles’ heel as the plummeting market for complex securities tied to subprime mortgages severely damaged its core business.

In recent days, Bear’s stock has plummeted more than 20 percent as investors as well as clients and broker dealers have shied away from the firm, fearing that their continued exposure to plunging real estate assets threatened their solvency.

The announcement on Friday did little to prevent wholesale selling in the firm’s stock, which was down more than 40 percent, to $32.15 a share, shortly after 3 p.m., after falling as low as $26.85, its lowest level in nearly a decade.

On Wednesday, Bear’s chief executive, Alan Schwartz, said in an interview on CNBC that his firm had ample liquidity, but his words have not been enough to prevent what seem to be a classic run on the bank.

In a statement issued on Friday, he said: “Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

While Bear may have some degree of short-term cash on hand, it is by no means sufficient if all its creditors demand to be paid at once. It has some valuable businesses like its hedge fund servicing and back office unit, as well as aspects of its real estate operations, but in light of the current market conditions it is unlikely to command a high price, especially from JPMorgan, which has said repeatedly that it is not in the market for an investment bank.

In a conference call on Friday, Mr. Schwartz, who just succeeded James E. Cayne as chief executive late last year, struck a frustrated tone as he described the run on Bear’s bank over the last 24 hours, raising the possibility that the firm’s days as an independent bank are numbered. He reiterated that Bear Stearns had started the week with sufficient capital. But four days’ worth of speculation had so rattled customers and lenders that by late Thursday they sought to cash out.

“As we got through the day, we recognized that at the pace things were going, there could be continued liquidity demands that would outstrip our resources,” he said.

Standard & Poor’s confirmed that situation after it cut its long-term credit rating on the company to BBB from A and said more downgrades were likely.

“Bear has been experiencing significant stress in the past week because of concerns regarding its liquidity position,” S.& P. said in a statement. “Although the firm’s liquidity, at the beginning of the week, held steady with excess cash of $18 billion, ongoing pressure and anxiety in the markets resulted in significant cash outflows toward the week’s end, leaving Bear with a significantly deteriorated liquidity position at end of business on Thursday.”

Mr. Schwartz confirmed on the conference call that the firm is working with the investment bank Lazard to consider strategic alternatives, a stock financial phrase that often signifies a potential sale. Though Lazard, Bear Stearns approached JPMorgan about securing a credit facility.

“This is a bridge to a more permanent solution and it will allow us to look at strategic alternative that can run the gamut,” he said. “Investors will be able to see the facts instead of the fiction. We will look for any alternative that serves our customers as well as maximizes shareholder value.”

Michael J. de la Merced contributed reporting.

    JPMorgan and Fed Move to Bail Out Bear Stearns, NYT, 14.3.2008, http://www.nytimes.com/2008/03/14/business/14cnd-bear.html?hp






Bush Acknowledges Economic Troubles


March 14, 2008
The New York Times


President Bush made his most striking acknowledgment yet of the country’s economic troubles on Friday, even as he defended his administration’s responses so far and warned against more drastic steps by the government to intervene.

Speaking to the Economic Club of New York at a midtown Manhattan hotel, Mr. Bush said that the economy was now having “a tough time.”

At the same time, however, he compared the government’s reaction to driving through a “rough patch” of road.

“If you ever get stuck in a situation like that, you know it’s important not to overcorrect,” Mr. Bush said. “If you overcorrect, you end up in a ditch.”

Mr. Bush spoke only moments after the Federal Reserve intervened to help the investment bank Bear Stearns secure financing to stave off collapse. A day earlier Mr. Bush’s Treasury Secretary, Henry M. Paulson Jr., announced a series of regulatory steps to tighten rules for credit agencies, mortgage brokers and banks — limited steps that Mr. Bush on Friday said were an appropriate response to the economic turmoil.

“Today’s actions are fasting moving,” he said, “but the chairman of the Federal Reserve and the secretary of the treasury are on top of them and will take the appropriate steps to promote stability in our markets.”

Mr. Bush seemed more sensitive than usual to the economic news battering the country.

“Interesting moment,” he said as he opened his remarks, appearing to refer to the latest news about Bear Stearns.

Mr. Bush, who only last month said he was unaware of reports suggesting that gasoline prices could reach $4 a gallon, seemed eager both to recognize the worries many Americans face about rising prices, foreclosures, jobs lost to free-trade and investments in American companies by foreign government’s sovereign wealth funds — and to put them at ease.

In the case of the wealth funds, many of them from oil-rich nations, Mr. Bush said that the United States should be confident enough not to succumb to any temptation to block foreign investments. “It’s our money anyway,” he said, drawing laughter.

The administration’s handling of the economy has become an issue that, at least for now, has now overtaken Iraq and even terrorism, threatening to loom large during Mr. Bush’s last year in office.

Even so, he offered few legislative promises and starkly suggested that much of what was happening was part of the natural cycles of market economies. And that relief could come after broader changes that could take years. In the case of gasoline, for example, he said the country needed to find alternative sources of energy. “There’s no quick fix,” he said.

Mr. Bush cited the economic stimulus package that he and Congress adopted last month as an appropriate response to an economic slowdown, saying that the tax rebates and credits would be mailed during the second week of May.

He also cited a series of more modest steps by his administration to address the crisis in mortgage markets. In Washington, the Department of Housing and Urban Development announced a new one on Friday that would require lenders to make more thorough disclosures of the terms of loans.

But he also rejected more aggressive measures, including ones being considered in Congress to allow state and local governments to buy up abandoned or foreclosed homes and to allow bankruptcy judges to force changes in mortgage terms. Such moves, he said, would be counterproductive.

    Bush Acknowledges Economic Troubles, NYT, 14.3.2008, http://www.nytimes.com/2008/03/14/washington/14cnd-webbush.html?hp






Fed Chief Warns Anew on Foreclosures


March 14, 2008
The New York Times


Ben S. Bernanke, the Federal Reserve chairman, added fresh warnings on Friday about a gathering wave of home foreclosures bearing down on American communities, while pledging new regulations to limit the impact and crack down on predatory mortgage lending.

“Mortgage delinquency and foreclosure rates have increased substantially over the past year and a half,” Mr. Bernanke said during a speech in Washington. “Behind these disturbing statistics are families facing personal and financial hardship and neighborhoods that may be destabilized by clusters of foreclosures.”

“These realities challenge to find ways to prevent unnecessary foreclosures,” and “ensure a regulatory environment that promotes responsible lending,” he added.

The chairman’s words before the annual meeting of the National Community Reinvestment Coalition were perhaps most notable for what they left unsaid: At a time of grave concern about a recession that many economists believe has already begun, Mr. Bernanke offered no clues as to whether another cut in interest rates is in the offing when Fed governors convene on Tuesday.

Nor did Mr. Bernanke touch on intensifying fears about the global credit shortage spawned by the unraveling of American mortgage markets. The severity of that crisis was brought home with stunning clarity by the morning’s news that Bear Stearns, the venerable Wall Street investment bank, was leaning on emergency financing from JPMorgan Chase and the New York Federal Reserve.

That news triggered a fierce sell off on Wall Street, where the Dow Jones industrial average was down about 170 points shortly before 1 p.m.

Even before the public distress call from Bear Stearns, markets had already assumed the Fed would drop the federal funds rate by at least half a point and probably three-fourths of a point at next week’s meeting.

In aggressively lowering the rate on what banks charge each other for overnight loans in recent months, the Fed has been seeking to stir economic activity: Lower rates make it easier for banks to get their hands on cash, which traditionally makes them more likely to lend, giving businesses the wherewithal to invest and hire workers.

But lower interest rates also tend to increase inflation, because more easily flowing money leads to more buying, which pushes prices up.

As it has dropped rates, the Fed has acknowledged longer-term concerns that this easing could ultimately worsen inflation, even while concluding that the immediate threats to the economy — tight credit, plummeting home prices and a deteriorating jobs market — demand freer credit at once.

Data released by the government on Friday morning appeared to give the Fed a little extra room to tilt further toward stimulating the economy while worrying less about inflation: The Consumer Price Index showed that inflation was essentially flat in February. That lent some credence to the argument that as the economy slows, this will diminish demand for goods, and that will automatically apply the brakes to price increases.

Many analysts, however, argue that the February figure was an aberration. Gasoline and food prices have been rising sharply, and this should be reflected in the data for March, removing whatever cushion Friday’s numbers appeared to provide.

None of this occupied Mr. Bernanke’s time at the podium in Washington. Instead, the Fed chairman focused on the widening crisis in American real estate, while advertising the merits of a set of proposed new regulations he introduced in December.

Those proposals include barring lenders from making loans that borrowers cannot reasonably be expected to repay, and demanding that lenders verify the incomes of borrowers rather than rely on their assurances.

The Fed also proposed barring lenders from marketing their mortgages as “fixed rate,” without specifying the time the rate remains in place. That measure is a reaction to the growing number of homeowners who have landed in trouble after their low promotional rates expire, inflicting them with much higher monthly payments.

Some 1.5 million subprime mortgages with adjustable rates are set to adjust upward this year, Mr. Bernanke said.

The Fed will take public comment on these proposed measures through April 8 before issuing final rules.

In making his case for the changes, Mr. Bernanke noted that more than half of the roughly 1.5 million foreclosure proceedings initiated last year involved subprime mortgages — those extended to those with troubled credit, often in low-income areas.

“Far too much of the lending in recent years was neither responsible nor prudent,” he said. “The terms of some subprime mortgages permitted home buyers and investors to purchase properties beyond their means, often with little or no equity. In addition, abusive, unfair or deceptive lending practices led some borrowers into mortgages that they would not have chosen knowingly.”

But Mr. Bernanke noted that the mortgage crisis now extends far beyond subprime loans.

“In 2007, about 45 percent of foreclosures were on prime, near-prime, or government-backed mortgages,” he said.

    Fed Chief Warns Anew on Foreclosures, NYT, 14.3.2008, http://www.nytimes.com/2008/03/14/business/14cnd-fed.html?ref=business

    Related > http://www.federalreserve.gov/newsevents/speech/bernanke20080314a.htm






Stronger Rules for Mortgages Are Proposed


March 13, 2008
The New York Times


WASHINGTON — The nation’s top economic policymakers, hoping to prevent a repeat of the excesses that led to the mortgage bubble and bust, on Thursday proposed a broad series of reforms aimed at tightening oversight of financial institutions.

The changes include tougher disclosure requirements for banks and Wall Street firms, a nationwide licensing system for mortgage brokers and new rules for credit rating agencies, which have been widely criticized for failing to recognize major problems with mortgage-backed securities and for having potential conflicts of interest.

“This effort is not about finding excuses or scapegoats,” said Treasury Secretary Henry M. Paulson Jr., who outlined the proposals in a speech here on Thursday morning. “But poor judgment and poor market practices led to mistakes by all participants.”

The recommendations were developed by the President’s Working Group on Financial Markets, a group that includes the Treasury Secretary, the chairman of the Federal Reserve and the government’s top financial regulators.

Mr. Paulson said the government was going to demand greater “transparency” from banks and Wall Street firms, stronger risk management and capital management and a better trading system for complex financial derivatives, such as collateralized debt obligations, that managed to transform risky subprime mortgages into securities with Triple-A ratings.

Echoing measures that Congressional Democrats have been drafting, the presidential group called for tougher state and federal regulation of mortgage lenders and a nationwide set of licensing and registration standards for mortgage brokers.

That reflects a widespread criticism by many experts and policymakers, who have argued that millions of mortgages were originated by independent mortgage brokers who often had no concern about credit quality because they simply passed the mortgages to finance companies that in turn resold them to Wall Street firms and ultimately investors around the world.

Mr. Paulson took particular aim at credit-rating agencies, such as Moody’s, Standard & Poor’s and Fitch, which gave AAA ratings to billions of dollars in mortgage-backed securities that turned out to be filled with delinquent loans.

Mr. Paulson said the rating agencies would have enforce policies about disclosing their conflicts of interest, an allusion to criticisms that the agencies were typically paid for their ratings by the investment banks who only paid once they had sold their securities to investors.

In addition, Mr. Paulson said the president’s group would push the rating agencies to “clearly differentiate” between the ratings for complicated structured investment products, which investors may not have understood, and the ratings for more conventional corporate bonds and municipal securities.

Issuers of mortgage-backed securities, in turn, would be required to disclose “more granular information” about the quality of the underlying loans and their procedures for verifying the information in those loans.

Mr. Paulson offered few details on how the rules might work and some of his recommendations amounted to little more than demands that investors and financial institutions take greater care in analyzing and managing their risks,

“No silver bullet exists to prevent past excesses from recurring,” Mr. Paulson said, adding that the recommendations were a “good start” and that the administration would release a “regulatory blueprint” in the next few weeks.

    Stronger Rules for Mortgages Are Proposed, NYT, 13.3.2008, http://www.nytimes.com/2008/03/13/business/13cnd-paulson.html?hp






As Gold Hits $1,000, Stocks Take a Tumble


March 13, 2008
The New York Times


Stock markets dropped sharply on Thursday, extending Wall Street’s losses for a second day, as investors grappled with a precipitous decline in the dollar, poor retail sales, and an uneasy milestone: $1,000 gold.

The bad batch of economic news underscored concerns about a recession. The Standard & Poor’s 500-stock index shed 1.7 percent within minutes of the opening bell, and the Dow Jones industrials lost more than 200 points, as investors fled to commodities and government bonds.

By late morning, the markets had climbed back somewhat with the Dow off about a 77 points, and the Standard & Poor’s 500 down about 7 points.

Thursday’s exodus from equities — spurred by fears of inflation — nudged gold to its highest-ever nominal price: $1,000 per Troy ounce.

The millennium mark for gold offered an aesthetic thrill, although the price is barely half the inflation-adjusted record high set nearly 30 years ago.

But as gold rose, the dollar fell. After struggling for months in the face of lower interest rates and a tightening of the credit market, the dollar tumbled to another record low against the euro, trading at $1.5605 early Thursday. Overnight, the dollar dropped below 100 yen for the first time since 1995.

Adding to the anxiety, import prices rose last month, fanning fears of domestic inflation. The Commerce Department said on Thursday that import prices in February were 13.6 percent higher than they were a year ago — one of the highest annual rates on record — putting more pressure on Americans consumers.

The price increases could not come at a worse time. Sales at retail stores dropped sharply in February, the Commerce Department said, a sign that consumer spending has significantly slowed. Spending accounts for 70 percent of gross domestic product, and economists at ING Bank suggested that the poor retail report was “the final nail in the coffin” for the American economy.

The ailing credit market took its share of hits on Thursday, too. A prominent investment fund, Carlyle Capital, is on the brink of collapse in the wake of missed margin calls. Its assets are expected to be seized and the fund liquidated, a sign that even high-profile funds with large-scale capitalizations are facing foreclosure.

Investors on Wall Street were also reacting to a painful overnight sell-off in the European and Asian markets. A highly touted plan by the Federal Reserve to inject $200 billion into the financial markets had been met with skepticism from foreign investors, who are also reeling from credit concerns.

In Asia, the Tokyo benchmark Nikkei 225 stock average fell 3.3 percent, the Hang Seng index in Hong Kong dropped 4.8 percent, and the Australian S&P/ASX 200 index in Sydney slid 2.3 percent.

By late afternoon in Europe, the DJ Euro Stoxx 50 index was down 2.9 percent. The pan-European blue-chip index has lost nearly a fifth of this total value this year alone. The CAC 40 in Paris fell 2.9 percent, as did the DAX in Frankfurt. The FTSE in London was 2.5 percent lower.

Ten-year and short-term Treasury bonds rose, and the price of crude oil was running flat at $109.90 a barrel.

    As Gold Hits $1,000, Stocks Take a Tumble, NYT, 13.3.2008, http://www.nytimes.com/2008/03/13/business/worldbusiness/13cnd-stox.html?hp






Buyout Industry Staggers Under Weight of Debt


March 11, 2008
The New York Times


With their big paydays and bigger egos, private equity moguls came to symbolize an era of hyper-wealth on Wall Street.

Now their fortunes are plummeting.

Celebrated buyout firms like the Blackstone Group and Kohlberg Kravis Roberts & Company, hailed only a year ago for their deal-making prowess, are seeing their profits collapse as the credit crisis spreads through the financial markets.

Investors fear that some of the companies that these firms bought on credit could, like millions of American homeowners, begin to buckle under their heavy debts now that a recession seems almost certain. The buyout lords themselves suddenly confront gaping multibillion-dollar losses on their investments.

On a day in which the stock market tumbled to its lowest point in two years and rumors flew that a major Wall Street firm might be in trouble, Blackstone said Monday that its profit had plunged.

The firm said earnings tumbled 89 percent in the final three months of 2007 and warned that the deep freeze in the credit markets — and, by extension, in the private equity industry — was unlikely to thaw soon.

“They see the handwriting on the wall,” said Martin S. Fridson, a leading expert on junk bonds, said of buyout firms. “They’re staring into the jaws of hell.”

It is a major turn of events for Blackstone and its chief executive, Stephen A. Schwarzman, who took the firm public last year at the height of the buyout binge. On paper, Mr. Schwarzman has personally lost $3.9 billion as the price of Blackstone’s stock sank.

Even so, Mr. Schwarzman is still worth billions, more than rich enough to pledge $100 million to the New York Public Library, as he plans to do Tuesday.

In recent years private equity firms have bought thousands of companies, mostly with borrowed money.

Blackstone and others argue they can run these businesses more efficiently — and therefore more profitably — than they could as public companies. Now, the bankers and investors who financed the boom in corporate takeovers are running for the exits. Loans and junk bonds that deal makers used to pay for the acquisitions — debts that must be repaid by the companies, not the deal makers — are sinking in value.

The speed and ferocity of the industry’s reversal have taken even Wall Street by surprise. On Monday, Carlyle Capital, a highly leveraged fund linked to another buyout firm, the Washington-based Carlyle Group, confronted the prospect of insolvency. Carlyle’s troubles, along with rumors that Bear Stearns might be running short of cash, helped drive stocks lower. Bear Stearns denied the rumors.

But companies far from Wall Street are feeling the pain of the private equity crisis. In 2006, for example, Freescale Semiconductor, which makes computer chips, found itself the object of private equity’s affection and the subject of the biggest buyout battle of all time in the technology industry.

Two groups of private equity firms vied for the microchip manufacturer, a spinoff of Motorola that builds most of the computer chips for that company’s cellphones. Ultimately, the winning group, led by Blackstone, paid a staggering $17.6 billion, most of that with borrowed money.

That was then. Now Freescale is plagued by falling demand from Motorola and billions of dollars in debt related to its takeover. It replaced its chief executive nearly three weeks ago, and its junk bonds recently traded at levels that suggest the company might be unable to pay its debts. The company has said that while times are challenging, it can meet its debts.

“No one saw this kind of outcome,” Michael Holland, chairman of the New York investment firm Holland & Company, and a former Blackstone executive, said of the buyout industry’s troubles.

Freescale is far from alone, as the private equity industry reels from the shocks to the credit markets and the broader economy. Since last summer, financing for the multibillion dollars deals has withered, depriving buyout firms of the headlines and, more important, the returns to which they had grown accustomed.

Bonds and loans of newly private companies as diverse as the Realogy Corporation, a Minneapolis-based real estate company, and OSI Restaurant Partners, which owns the Outback Steakhouse chain, have plunged so far in value that bankers consider the debt distressed.

While these and many other companies are current on their debts, their bonds now trade at 70 or 80 cents on the dollar, suggesting investors are worried about these businesses’ financial health. Some bonds are selling at even lower prices, and a few companies have gone bankrupt.

As a financial firm, Blackstone is just one of many that have suffered over the past eight months. But unlike banks and mortgage lenders, Blackstone is the only major American buyout firm that is publicly traded. Its stumbles are more clearly tracked than any of its peers, as shown by a stock price that has dropped more than 50 percent since its debut.

On Monday, Blackstone reported soft results in its private equity and corporate real estate businesses, its two biggest divisions. Stripped of the cheap debt that girds its deal making, Blackstone said it will now focus on smaller transactions. Yet the firm has not struck any deal over $2 billion since last July, when it announced a $25 billion takeover of Hilton Hotels. Since then, it has failed to complete two buyouts, those of PHH, a mortgage lender, and Alliance Data Systems, a credit card processor.

Blackstone also took an accounting charge related to its investment in the Financial Guaranty Investment Corporation, a troubled bond insurance company.

But private equity firms’ problems now extend well beyond themselves. Banks, for example, are saddled with billions of dollars of buyout-related debt they cannot sell, serving as the next possible wave of write-downs after the subprime mortgage debacle. Citigroup, Goldman Sachs and Lehman Brothers are currently holding what some analysts estimate is $130 billion in leveraged loans, or those supporting private equity deals.

And the companies that private equity firms have acquired may be the next to suffer. Emboldened by the availability of cheap debt, private equity firms borrowed more and more as they paid higher prices to strike more deals. That has left many companies like Freescale to cope with more debt to pay off.

Surveying junk debt offerings since 2002, Mr. Fridson found that companies taken private tended to suffer more distress than their peers. According to his firm, FridsonVision, Blackstone had the fourth most-distressed companies of major private equity firms, with nearly 34.8 percent of its holdings falling into that category compared with the average of 27.7 percent.

Calling a bottom to the industry’s problems is a notoriously difficult task, even for sophisticated investors like Blackstone. Executives from the firm argue that these are times to buy things cheaply, be they stakes in companies or real estate properties.

Blackstone recently raised $1.4 billion from investors for a fund devoted to buying bonds and loans at fire sale prices. But in a conference call on Monday, Hamilton E. James, the firm’s president, said the fund is “100 percent dry powder” and so far has not been tapped for investments. “Our view is that things will get worse before they get better,” Mr. James said.

    Buyout Industry Staggers Under Weight of Debt, NYT, 13.1.2008, http://www.nytimes.com/2008/03/11/business/11equity.html?hp






Unemployment rate rises in 27 states in January


Tue Mar 11, 2008
12:10pm EDT


WASHINGTON (Reuters) - Michigan again recorded the highest unemployment rate in January, followed by Alaska, with most states recording little change in the measure, the Labor Department said on Tuesday.

It was the tenth consecutive month that Michigan, with its heavy auto industry concentration, posted the highest jobless rate, at 7.1 percent, down from 7.4 percent in December. Alaska's rate was 6.5 percent, up from December's 6.3 percent.

Across the country, 27 states and the District of Columbia said their jobless rates rose in January. Six states and the District of Columbia recorded rates significantly higher than the national rate of 5.0 percent, which was the highest in two years.

At the same time, the number of jobs increased in 30 states in January, the department said, and decreased in 18 states and the District of Columbia.

California lost the most jobs, at 20,300, followed by New Jersey, at 9,500.

Texas and Illinois recorded the largest gains in payrolls, at 28,000 and 21,900 jobs respectively.

Worried about a recession, some members of Congress have proposed providing more unemployment assistance to boost the economy. Others are weighing giving aid to the states.

(Reporting by Ayesha Rascoe; Editing by Dan Grebler)

    Unemployment rate rises in 27 states in January, R, 11.3.2008, http://www.reuters.com/article/domesticNews/idUSN1159076820080311






Foreclosure crisis has ripple effect


11 March 2008
USA Today
By Haya El Nasser


The mortgage foreclosure crisis has caused a drop in cities' revenues, a spike in crime, more homelessness and an increase in vacant properties, a survey of elected local officials out today shows.

About two-thirds of 211 officials surveyed by the National League of Cities reported an increase in foreclosures in their cities in the past year, according to the online and e-mail questionnaire. A third of them reported a drop in revenues and an increase in abandoned and vacant properties and urban blight.

"There's a reduction in revenues at the same time that more services are needed," says Cynthia McCollum, president of the National League of Cities and councilwoman in Madison, Ala., a suburb of Huntsville. "Because of foreclosures, people are stealing, crime is on the rise and we don't have more money for cops on the street."

More than a fifth of city officials responding said homelessness and the need for temporary and emergency housing increased in the past year.

The ills of foreclosures are dominating the agenda of the league's meeting with congressional lawmakers in Washington, D.C., this week to secure federal funding for local initiatives.

"The American dream for individuals has now become the nightmare for cities," says James Mitchell, a Charlotte councilman and head of the group's National Black Caucus of Local Elected Officials.

Foreclosed homes are the target of vandalism, he says, and there's been an increase in police calls.

In Peachtree Hills, one of the many neighborhoods of starter homes that sprouted around Charlotte this decade, 115 of the 123 homes are in foreclosure, Mitchell says.

"The 12 residents left there can't sell their homes and now their property values have decreased," Mitchell says. "It's starting to be a symbol of what we don't want to happen to Charlotte."

Many of the buyers were African-Americans who were enticed by zero-down mortgages on moderately priced homes. The survey shows that lower-income families, single parents, seniors and people of color are disproportionately affected by the housing crisis.

Foreclosures create ramifications even in cities that have been spared the worst of the crisis.

Riverside, Calif., is at the heart of the state's Inland Empire, an area that has attracted people in droves from costlier coastal areas but now ranks fourth nationally in foreclosures. Most of the housing boom, however, did not occur in the city but in communities to the east where foreclosures are mounting.

"It's having a ripple effect on our budget and city finances," says Riverside Mayor Ronald Loveridge. "Housing industry is not simply building homes. There's less money being spent for new cars. … That's had a powerful effect on the economy of our region."

California cities rely heavily on sales tax revenues since the 1978 passage of Proposition 13, which caps real estate taxes. Riverside faces a $12 million deficit this fiscal year.

"We handle that by essentially not filling positions," Loveridge says.

Riverside is adjusting the payment schedule of development fees to encourage construction and passed an ordinance requiring the upkeep of homes — even when in foreclosures.

Charlotte is working with the Department of Housing and Urban Development on a program that allows firefighters, police officers and teachers to purchase foreclosed homes at 50% of their listed price.

    Foreclosure crisis has ripple effect, UT, 11.3.2008, http://www.usatoday.com/news/nation/2008-03-11-foreclosures_N.htm






Fed to Lend $200 Billion More to Ease Market Strain


March 11, 2008
The New York Times


Scrambling to ease the strain on the credit market, the Federal Reserve announced a $200 billion program on Tuesday that would allow financial institutions, including the nation’s major investment banks, to borrow ultra-safe Treasury money by using some of their riskiest investments as collateral. Wall Street responded with a rally, with the Dow Jones industrials surging 150 points.

This was the central bank’s second effort in a week to unfreeze the nation’s panicky credit markets, where investors have become too frightened to finance even conservative debt offerings, which in turn has caused a cash squeeze at seemingly solid financial institutions.

Stock markets soared after the announcement, with the Dow Jones industrials gaining 260 points before falling back to 11,925.85, a 185-point gain, at 12:30 p.m. as brightened investors snapped a three-day losing streak. The Standard & Poor’s 500-stock index was up 1.4 percent, and the Nasdaq composite index gained 1.5 percent.

The Fed normally lends Treasury securities to banks for just a few hours. Under the new program, money will be lent for 28 days and the central bank will accept nongovernment mortgage-backed securities — the source of the current crisis in the credit markets — as collateral. The Fed will require that the assets, which are linked to soured home loans, have a premium credit rating.

The new program, dubbed the Term Securities Lending Facility, will effectively allow strapped financial institutions to hand over potentially damaged securities to the government in exchange for either cash or easily traded Treasury securities, some of the safest in the market.

“If these institutions are able to extend out more credit as a result of this, it may take more pressure of the housing market and mortgage quality,” said Mark Zandi, chief economist at Moody’s Economy.com.

But Mr. Zandi said he was skeptical that the Fed’s actions would address the root of the current problems in the credit market.

“I don’t think it helps determine the appropriate price for these securities,” he said. “It doesn’t solve the underlying problem of mortgage delinquencies and defaults, which could at some time threaten the Triple-A securities.”

The Fed will lend the Treasuries through weekly auctions that begin March 27. The government will also accept mortgage-backed securities issued by government-sponsored companies like Fannie Mae and Freddie Mac.

Last week, the central bank said it would offer up to $100 billion through a new auction program that allows financial firms to take out loans at wholesale rates.

On Tuesday, the Fed also increased currency swap lines with the European Central Bank and the Swiss National Bank, to $30 billion and $6 billion. That is an increase of $10 billion for the European Central Bank and $2 billion for the Swiss bank.

Edmund L. Andrews contributed reporting.

    Fed to Lend $200 Billion More to Ease Market Strain, NYT, 11.3.2008, http://www.nytimes.com/2008/03/11/business/11cnd-fed.html?hp






FACTBOX-Fed actions to boost liquidity


Tue Mar 11, 2008
9:53am EDT


WASHINGTON (Reuters) - The Federal Reserve said on Tuesday it would accept a broader range of collateral, including home mortgages, in an expanded securities lending program meant to foster greater liquidity in financial markets.

The U.S. central bank said it would lend up to $200 billion to primary dealers, secured for 28 days. It agreed to accept collateral including federal agency home mortgage-backed securities and highly rated private mortgage-backed securities.

The move was one of a number of steps by the Fed and other central banks aimed at easing tight credit market conditions. Following are previous steps the Fed has taken since August:

March 7: The Fed says it will boost funding for its Term Auction Facility auctions of short-term cash to $100 billion in March from $60 billion and launch a series of repurchase agreements expected to be worth $100 billion.

The central bank also says it will continue to conduct TAF auctions for at least the next six months unless market conditions render them unnecessary, and would increase auction sizes further if conditions warrant.

February 29: Fed announces two TAF auctions of $30 billion each in March. It says it intends to conduct auctions for as long as necessary to address elevated pressures in short-term funding markets.

February 1: Fed announces it will continue biweekly TAF auctions in February, holding the amount in each auction steady at $30 billion. The central bank lowers the minimum bid size to $5 million from $10 million to include smaller institutions.

January 3: The Fed raises TAF auction amounts to $30 billion from $20 billion for each of the two auctions in January. The European Central Bank and the Swiss National Bank also offer dollar funds in conjunction with the Fed auctions.

December 12, 2007: As part of a global coordinated central bank effort, the Fed establishes the TAF to provide funds over a longer period to all depository institutions that are able to borrow under the discount window.

The Fed also establishes foreign exchange swap lines with the European Central Bank and the Swiss National Bank. The arrangements will provide dollars in amounts of up to $20 billion for the ECB and $4 billion for the SNB. The swap lines will exist for up to six months.

November 26, 2007: The New York Federal Reserve Bank says it will conduct a series of term repurchase agreements extending into the new year to alleviate year-end funding pressures.

It says it will also provide sufficient reserves to stem upward pressure on the federal funds rate.

August 17, 2007: The Fed cuts the discount rate by 50 basis points, narrowing the spread between that and the federal funds rate to 50 basis points from its previous 100 basis points. It also announces a change to allow borrowing at the discount window for up to 30 days, renewable by the borrower.

August 10, 2007: In a rare statement, The Fed says banks were experiencing unusual funding needs because of dislocations in money and credit markets and that it would provide funds as needed. The central bank also says the discount window is available as a source of funding.

The Fed's open market desk provides $38 billion via temporary repurchase agreements that day, flooding the markets with liquidity that brought the federal funds rate down to zero at one point.

(Reporting by Mark Felsenthal, Tamawa Kadoya and Emily Kaiser)

    FACTBOX-Fed actions to boost liquidity, R, 11.3.2008, http://www.reuters.com/article/topNews/idUSN1155795620080311?virtualBrandChannel=10005






Trade Deficit Up as Imports Hit Record


March 11, 2008
Filed at 11:27 a.m. ET
The New York Times


WASHINGTON (AP) -- The United States' trade deficit grew larger in January as imports -- including crude-oil prices -- zoomed to all-time highs.

The latest snapshot of trade activity, reported by the Commerce Department on Tuesday, showed that the country's trade gap increased to $58.2 billion. That was up from a trade shortfall of $57.9 billion in December and was the highest since November.

Imports of goods and services climbed to a record high of $206.4 billion in January. The United States' voracious appetite for imported crude oil, where prices skyrocketed to the loftiest on record, figured into the increasing demand for overall imports.

The trade gap widened even as exports of U.S.-made goods and services totaled a record high of $148.2 billion in January. The declining value of the U.S. dollar, relative to other currencies such as the euro, is helping to make U.S.-made goods cheaper and thus more attractive to foreign buyers.

Economists were expecting the trade deficit in January to be a bit larger -- growing to around $59 billion.

Still, rising energy prices are aggravating the nation's trade situation.

The average price of imported crude oil soared to a record $84.09 a barrel in January. That pushed the country's imported crude-oil bill to an all-time high of $27.1 billion in January.

The country's trade deficit with oil producing nations, including Saudi Arabia, Venezuela and Nigeria, grew to $15.5 billion in January, from $12.6 billion in December.

Meanwhile, the United States' politically sensitive trade deficit with China widened to $20.3 billion in January, up from $18.8 billion in the previous month.

The Bush administration says free-trade policies that also make it easier for U.S. companies to do business in other countries is the best way to deal with the country's trade deficits. Democrats, however, blame the president's trade policies for the trade gap and the loss of millions of U.S. factory jobs as U.S. companies moved production to low-wage countries such as China.

Trade tensions with China over the last few years have intensified on a number of fronts. Beijing's currency policies have strained relationships. So have the recalls of Chinese-made goods -- from toys with lead paint to defective tired and tainted toothpaste -- which have raised questions about the safety of Chinese goods flowing into the United States.

Critics contend that China is engaging in what they believe are unfair trade practices such as keeping the value of its currency artificially low against the dollar. That makes Chinese-made goods less expensive to buyers in the United States and makes U.S.-made goods more expensive in China. The administration has been prodding China to do more to let its currency rise in value.

The United States' trade deficit with Japan decreased slightly to $6.592 billion in January, from $6.593 billion in December. The trade deficit with Canada, however, increased to $5.9 billion, up from $4.7 billion.

    Trade Deficit Up as Imports Hit Record, NYT, 11.3.2008, http://www.nytimes.com/aponline/us/AP-Economy.html






Gas Prices Near Record; Oil Hits $107


March 10, 2008
Filed at 12:17 p.m. ET
The New York Times


NEW YORK (AP) -- Gasoline prices were poised Monday to set a new record at the pump, having surged to within half a cent of their record high of $3.227 a gallon. Oil prices, meanwhile, surged to $107, a new inflation-adjusted record and their fifth new high in the last six sessions on an upbeat report on wholesale inventories.

The national average price of a gallon of gas rose 0.7 cent overnight to $3.222 a gallon, 69 cents higher than one year ago, according to AAA and the Oil Price Information Service. Last May, prices peaked at $3.227 as surging demand and a string of refinery outages raised concerns about supplies.

That record will likely be left in the dust soon as gas prices accelerate toward levels that could approach $4 a gallon, though most analysts believe prices will peak below that psychologically significant mark. In its last forecast, released last month, the Energy Department said prices will likely peak around $3.40 a gallon this spring; a new forecast is due Tuesday.

Retail gas prices are following crude oil, jumped 24 percent in a month on its way to setting new inflation-adjusted records four times last week. On Monday, crude prices surged to yet another record after the Commerce Department said wholesale sales jumped by 2.7 percent in January, their biggest increase in four years, according to Dow Jones Newswires.

The strong sales report suggested to oil traders that the struggling economy may be doing better than thought.

Light, sweet crude for April delivery rose $1.55 to $106.70 on the New York Mercantile Exchange after earlier setting a new trading record of $107.

Energy investors shrugged off a relative stabilization of the dollar and a cooling in tensions between Venezuela and its neighbors Colombia and Ecuador.

Many analysts believe speculative investing attracted by the weak dollar is the primary reason oil has risen so far so fast in recent months. 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 dollar is falling.

''We've got a Fed(eral Reserve) meeting on the 18th that could see a sizeable rate cut,'' said Brad Samples, an analyst with Summit Energy Services Inc., in Louisville, Ky. ''So, it's not over.''

Indeed, while the dollar fluctuated against the euro on Monday, many investors believe the greenback is likely to keep falling as the Fed continues to cut rates. Many analysts believe the rise in crude prices is not supported by the market's underlying fundamentals, noting that supplies are generally rising while demand is falling.

''By gobbling up everything in sight, (investors) are pushing food and fuel prices to ruinously high levels,'' said Peter Beutel, president of the energy risk management firm Cameron Hanover, in a research note.

Investors shrugged off a weekend cooling of tensions in South America, where Venezuela said Sunday it was restoring full diplomatic ties with Colombia after they were broken off following a cross-border Colombian attack on a leftist rebel camp in Ecuador.

Last week, rebels shut down a Colombian oil pipeline in retaliation for the Colombian raid into Ecuador. Venezuela threatened to slash trade and nationalize Colombian-owned businesses, and Venezuela and Ecuador briefly sent troops to their borders with Colombia.

The potential for conflict involving Venezuela, an OPEC member and major U.S. oil supplier, helped push oil higher last week.

''The Venezuelan production was at risk there,'' Samples said.

Other energy futures were mixed Monday. April heating oil futures rose 1.58 cents to $2.9628 a gallon while April gasoline futures fell 0.48 cent to $2.6895 a gallon.

April natural gas futures slid 4.5 cents to $9.724 per 1,000 cubic feet.

In London, Brent crude futures rose 50 cents to $102.88 a barrel on the ICE Futures exchange.


Associated Press writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report.

    Gas Prices Near Record; Oil Hits $107, NYT, 10.3.2008, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html






Downturn Tests the Fed’s Ability to Avert a Crisis


March 9, 2008
The New York Times


In the last seven months, policy makers have cut interest rates, injected money into the banking system and approved a fiscal stimulus package in an effort to keep the economy from slipping into a recession. Often, the moves seemed to work at first, only to be overtaken by more bad news.

The failure of any of the usual fiscal and monetary policy tools so far raises questions about what the Federal Reserve and federal government can do in the near term to counter the forces that have battered housing prices and pushed down the stock market and are now causing a hiring slowdown.

“There are times when there is only so much the Fed can do,” said Barry Ritholtz, chief executive of FusionIQ, an investment firm in New York. “It can smooth out the business cycle a little bit, but last I checked, we haven’t done away with the business cycle.”

One of the main problems now is a deepening crisis of confidence that is compounding the ill effects from the housing downturn. As lenders and businesses become more cautious about whom they lend to and hire, they are slowing an already weakened economy.

If the housing boom was a manifestation of irrational exuberance, some say it has swung too far in the other direction, to irrational despondency.

“Banks went from giving money away like drunken sailors to not lending to the most credit-worthy borrowers,” Mr. Ritholtz, who writes the popular economics blog The Big Picture, said.

The latest signs of panic in the markets came last week. Banks began calling in loans they had made to hedge funds, mortgage companies and others, forcing them to sell billions of bonds. The moves prompted concern about securities backed by Fannie Mae and Freddie Mac, the large government-chartered buyers of mortgages that many investors believe have the implicit backing of the federal government.

When big investors are forced to quickly dump billions of dollars in securities, trading can seize up, especially when buyers are scarce, as they are now. Just a few weeks earlier, a similar bout of forced selling drove down the prices of municipal bonds issued by states and cities.

In mid-January, the Fed moved to arrest the crisis in the financial system after markets plunged around the world and a French bank announced a big trading loss; markets in the United States were closed because of a holiday. The Fed cut interest rates three-quarters of a point and cut them another half-point a week later at a scheduled meeting.

With the exception of a few days, the market rallied those two weeks, and investors even drove down mortgage interest rates, sending millions of homeowners shopping for new loans.

But the relief was short-lived. Mortgage interest rates headed back up almost immediately, and by early February the stock market was falling again after reports showed a drop in employment and a slackening in the service sector.

“The Fed rate cuts aren’t doing anything for my clients except confuse them,” Steve Walsh, a mortgage broker in the Phoenix area, wrote in an e-mail message at the end of January.

Fed officials would say that mortgage rates would be higher still had they done nothing. But given the shortcomings of the response so far, the Fed and members of Congress are working on more aggressive tactics.

The Fed is expected to cut rates further when its policy-making committee meets next week. It will also increase the money it lends to banks in periodic auctions to $100 billion, from $30 billion.

Fed officials have been meeting with aides to Representative Barney Frank, Democrat from Massachusetts, who is chairman of the House Financial Services Committee and has argued for more government intervention. The Fed supports some of the ideas Mr. Frank has been discussing, including having onerous mortgages refinanced and guaranteed through the Federal Housing Administration. But the central bank, at least so far, opposes the purchase of troubled loans by the federal government, an idea suggested by Mr. Frank and other Democrats.

Much of the focus will remain on housing, because policy makers and analysts think banks and investors will not regain confidence until the real estate market stabilizes. Uncertainty about how far home prices will fall has made banks less willing to lend and consumers reluctant to buy.

Banks are also unwilling to lend because they are worried they will not be paid back. Nearly 7.9 percent of home loans were in foreclosure or past due at the end of last year, and most economists expect that more borrowers will encounter trouble.

Some lenders are also trying to preserve their capital because they expect to have more losses. Last week, Citibank said it would reduce its holdings of home loans by 20 percent.

“Lenders can’t lend in this environment because they fear they are not going to get paid back,” said Daniel Alpert, a managing director at Westwood Capital, an investment bank in New York. “And guys who own homes have no value left to hock.”

The interest rate on 30-year fixed mortgages is back above 6 percent, still historically low, after falling below 5.5 percent in December. Banks are demanding bigger down payments and cutting off home equity lines of credit to borrowers, especially those who live in states where home prices are falling fastest.

Mr. Alpert and others see a parallel between the credit problems today in the United States and the economic crisis in Japan in the 1990s. In both cases, reckless lending and a bubble in real estate contributed to enormous losses and tightening of loans.

There are significant differences, however. American banks have been quick to recognize losses, and policy makers have moved to contain the damage and protect the broader economy. In Japan, many lenders did not write off bad loans and the central bank was much slower to respond. The 1990s is broadly seen as a “lost decade” for that country.

Mr. Alpert, who bought troubled loans from Japanese banks for pennies on the dollar, said that while American financial institutions are moving fast, policy makers should encourage or even force them to write down and restructure bad mortgages faster so they can get back to lending.

“If you fail to clean up the problem and take aggressive action, you are going to have years and years of stagnation as Japan did,” he said.

There are signs that the logjam in some markets is loosening as bargain hunters move in to take advantage of the turmoil. When enough investors step in to buy beaten-down securities, it can restore confidence and make banks willing to lend more freely.

In the municipal bond market, for instance, prices rose steadily last week as retail investors and mutual funds bought bonds that distressed hedge funds were selling at deep discounts, said Douglas A. Dachille, the chief executive of First Principles Capital Management, a firm that specializes in bonds. Prices on one index compiled by The Bond Buyer, a trade publication, rose 5.7 percent last week after falling 6.2 percent in the last week of February.

That “problem was solved,” Mr. Dachille said Friday. “By the end of this week, the muni market is functioning well again.”

    Downturn Tests the Fed’s Ability to Avert a Crisis, NYT, 9.3.2008, http://www.nytimes.com/2008/03/09/business/09econ.html?hp






Tight Credit, Tough Times for Buyout Lords


March 8, 2008
The New York Times


Just over a year ago, William E. Conway Jr., a founding partner of the Carlyle Group, celebrated the riches that easy credit were bringing to the kings of Wall Street.

“I know that this liquidity environment cannot go on forever,” Mr. Conway wrote in a memo to colleagues at Carlyle, one of the world’s biggest buyout firms. “And I know that the longer it lasts, the worse it will be when it ends.”

Was he ever right.

On Friday, Carlyle Capital, a highly leveraged investment fund linked to Mr. Conway’s firm, teetered on the brink of insolvency as banks began calling in its loans. Yet another spasm of panic gripped credit markets, sending stocks tumbling and prompting the Federal Reserve to take new steps to pump money into the economy, which seems certain to sink into a recession.

The Ides of March has arrived early for the buyout lords of Wall Street, as the intensifying credit crisis humbles some of the industry’s once-celebrated deal makers.

David M. Rubenstein, the Carlyle co-founder who is the public face of the firm, is struggling to contain the damage to his reputation. Henry R. Kravis, a co-founder of Kohlberg Kravis Roberts & Company, has looked on as K.K.R.’s publicly traded investment fund has plummeted 52 percent in the last year.

And Stephen A. Schwarzman, chief executive of the Blackstone Group — feted just a year ago for his investment prowess and glorious lifestyle — is watching his celebrated buyout firm wizen in the stock market. Reflecting a bruising seven-month decline, Blackstone’s shares sank 3.1 percent to a record low of $14.58 Friday. The stock has plunged 53 percent since Blackstone went public amid great fanfare last summer.

Throughout the financial industry, liquidity — the river of capital on which companies and markets depend — is running dry. Like Carlyle’s fund, Thornburg Mortgage, the troubled home mortgage lender, was struggling for survival Friday after worried banks demanded that the company put up more money against its loans.

“Quite simply, the panic that has gripped the mortgage financing market is irrational and has no basis in investment reality,” Larry A. Goldstone, the chief executive of Thornburg, said in a statement.

But on Wall Street, the collapse of stocks so closely tied to the names of famous buyout artists like Mr. Rubenstein, Mr. Kravis and Mr. Schwarzman underscores how quickly the markets have turned.

Carlyle Capital said Friday that it was “considering all available options” after it received additional margin calls, prompting some analysts to warn that more funds could struggle to meet increasingly tighter financial requirements. The shares were suspended from trading on the Amsterdam stock exchange after plunging 58 percent the day before.

Carlyle Capital employed enormous leverage, borrowing 30 times the value of its assets to invest in mortgage securities issued by Fannie Mae and Freddie Mac, the government-chartered home loan giants. Its parent company has extended a $150 million line of credit, but as the credit markets deteriorate, the possibility remains that the investment company will not survive.

Carlyle executives own 15 percent of the company, and while they admit that such a result would be embarrassing, they emphasize that the group itself remains in good health. It is unclear whether Carlyle will be pressed to inject some liquidity in the fund, which is run by John C. Stomber, a former executive at the investment firm Cerberus.

“David has worked on his Carlyle reputation for 20 years,” a spokesman, Christopher Ullman, said. “We are innovative and we are successful, but in this situation there are challenges.” He would not disclose Mr. Rubenstein’s exact position in the fund.

Carlyle Capital has unraveled with remarkable speed. The fund said on Thursday that it had missed four of seven margin calls worth a total of $37 million and said it expected to receive at least one more default notice.

On Friday it said it had subsequently received additional margin calls and was told by lenders that further calls and “increased collateral requirements would be significant and well in excess of the margin calls it received.” Such additional requirements “could quickly deplete its liquidity and impair its capital,” it said.

For the time being, the increasing panic in the credit markets has stanched what was once a rush of easy capital that financed some of the largest private equity deals of a generation.

In February 2007, Mr. Schwarzman celebrated his 60th birthday in fin de siècle style. Also last year, Mr. Rubenstein mused about the inevitability of a $100 billion private equity deal.

While the market rout is a blight on their reputations, to some, a good reputation is like any other tradable asset — to be sold when the market is rising. That is what Mr. Schwarzman, Mr. Rubenstein and Mr. Kravis did when raising funds from investors. But, like beaten-down stocks or bonds, reputations can quickly recover.

“The whole point of acquiring a good reputation is to deplete it for gain,” said Frank Partnoy, a professor of finance at the University of San Diego Law School and a former investment banker at Morgan Stanley. “You expand your investor base and find the less sophisticated investor. But you can rebuild your reputation, too. Now is bad, but the memory of financial markets can be measured in days.”

Significant differences do exist among the three investments. The Carlyle and K.K.R. vehicles were created expressly to profit from the flush liquidity cycle of the time by borrowing short-term funds, then investing in longer term, riskier debt. (KKR Financial has subsequently shifted its focus to corporate debt.)

While this was a business embraced by commercial banks, it was new territory for private equity firms, which tend to invest with a longer-term framework and primarily in companies.

Unlike Carlyle, KKR Financial, while experiencing a sharp decline in its stock, has no solvency problems and has $1.4 billion in cash. This summer, KKR Financial wrote off its remaining mortgage exposure and is now invested 100 percent in corporate debt. The company expects to pay out at least a $2-a-share dividend this year.

K.K.R. executives own 12 percent of KKR Financial, according to a person with knowledge of the company who would not disclose what Mr. Kravis’s stake in the entity is. Mr. Kravis, through a spokeswoman, declined to comment on the decline of KKR Financial.

Mr. Schwarzman, on the other hand, retains a 23 percent stake in Blackstone, having taken out $677 million during the public offering. In China, newspapers publish the daily, frequently declining share price of Blackstone, a rebuke to the China Investment Corporation’s decision to buy a 10 percent stake in a company held out to be the purest symbol of smart American money.

Through a spokesman, Mr. Schwarzman declined to comment on Blackstone’s stock. The company is to report fourth-quarter earnings Monday. But people close to Mr. Schwarzman say he has been keeping up a relentless work schedule, raising what the firm hopes will be $15 billion for a new private equity fund and recently closing a $10 billion real estate fund.

“The crowds are smaller at cocktail parties, the aura is stained, but there still is the letter B, as in billionaire, next to their name,” said Andy Kessler, a former hedge fund executive who has written books about Wall Street. “They may still have halls named after them at universities, but the idea that these guys are the kings of investing, that time has passed.”

Julia Werdigier contributed reporting from London.

    Tight Credit, Tough Times for Buyout Lords, NYT, 8.3.2008, http://www.nytimes.com/2008/03/08/business/08mogul.html






Sharp Drop in Jobs Adds to Grim Economic Picture


March 8, 2008
The New York Times


WASHINGTON — The worst fears of consumers, investors and Washington officials were confirmed on Friday, as deepening paralysis on Wall Street collided with stark new evidence of falling employment and a likely recession.

In a report that was far worse than most analysts had expected, the Labor Department estimated that the nation lost 63,000 jobs in February. It was the second consecutive monthly decline, and the third straight drop for private-sector jobs.

Even before the bad news on jobs emerged, the Federal Reserve was already racing to ease the latest crisis in the credit markets, where seemingly rock-solid companies have been caught short because the markets are devaluing the collateral they had posted to back billions of dollars in loans. Much of that collateral consists of mortgages.

In a surprise announcement early Friday, the Federal Reserve said it would inject about $200 billion into the nation’s banking system this month — with more to come after that — by offering banks one-month loans at low rates and in return letting them pledge mortgage-backed bonds and even riskier assets as collateral.

Though monthly payroll data are notoriously volatile and subject to revision, the jobs report was so bleak that many of the few remaining optimists on Wall Street threw in the towel and conceded that the United States was already in a recession.

“Godot has arrived,” wrote Edward Yardeni, who had been one of Wall Street’s most relentlessly upbeat forecasters. “I’ve been rooting for the muddling through scenario. However, the credit crisis continues to worsen and has become a full-blown credit crunch, which is depressing the real economy.”

The convulsions in the credit markets were spurred in part when Thornburg Mortgage, one of the nation’s biggest independent mortgage lenders, and Carlyle Capital, the offspring of one of the country’s largest private equity firms, failed to meet demands by lenders to post more cash or pledge other assets, also known as margin calls, on debts that had been backed by packages of mortgages.

Fed officials said Friday that they were not pumping money into the system in response to the poor jobs data but rather to the growing unwillingness or inability of investors to finance even routine business deals. Fed officials have long feared that anxiety about credit losses would create a “negative feedback loop,” or self-perpetuating spiral of rising unemployment, more home foreclosures and yet more credit losses.

“You have big credit losses that make it harder to get new credit, which means the economy starts to slow down and foreclosures go up,” said Nigel Gault, a senior economist at Global Insight, a forecasting firm. “Then you get even bigger credit losses, which makes banks even less willing to lend and you keep spiraling down.”

The Fed’s problem is that its main weapons against a downturn — lower interest rates and easier money — are ill suited to a crisis that stems from collapsing confidence about credit quality.

Even though the central bank sharply cut short-term interest rates twice in January and clearly signaled that it would cut them again on March 18, rates for home mortgages have risen and rates for many forms of commercial loans have jumped sharply.

“There has been a tug of war under way between deteriorating credit conditions and monetary policy,” wrote Laurence H. Meyer, a former Fed governor and now a forecaster at Macroeconomic Advisers. As a result, he said, credit conditions have remained almost as tight as ever.

The darkening economic outlook, coming just nine months before presidential elections, puts enormous pressure on President Bush and could pose a problem for Senator John McCain, the presumptive Republican nominee for president. Typically, the party in power has not been able to hold onto the White House when the economy is in a recession in an election year.

President Bush, in a hastily arranged appearance before television cameras on Friday afternoon, acknowledged that the economy had slowed but predicted that it would get a lift this summer from the $168 billion stimulus package of tax rebates and temporary tax cuts that Congress recently passed.

“Losing a job is painful, and I know Americans are concerned about the economy,” Mr. Bush said.

“The good news is, we anticipated this and took decisive action to bolster the economy, by passing a growth package that will put money into the hands of American workers and businesses.”

Edward P. Lazear, chairman of President Bush’s Council of Economic Advisers, said the White House had downgraded its earlier forecasts but still believed that the tax rebates of up to $1,200 for many families will help the economy escape a recession.

“There is no denying that when you get negative job numbers, realistically the economy is less strong than we had hoped it would be,” Mr. Lazear said. “The question is how quickly will it pick up. We think it will pick up — as I mentioned, we think it will pick up by the summer.”

Few private forecasters were so buoyant. Many firms had already concluded that a recession was under way. Within minutes of the new report on employment, many in the dwindling pool of optimists changed their positions.

Mr. Yardeni was hardly alone. Just one minute after the Labor Department published its report at 8:30 a.m., JPMorgan Chase reversed its stance, declaring that a recession appeared to have begun. Lehman Brothers switched its position as well.

Unemployment typically starts to rise only after a recession has started, and it keeps climbing for many months after the economy has hit bottom and begun to recover.

Paul Ashworth, an economist at Capital Economics, noted that private-sector payroll employment has now declined by an average of 47,000 a month — a decline that has been followed by a recession every time it has happened in the last 50 years. In each of those recessions, Mr. Ashworth added, the job market recovered only after monthly job losses peaked at 200,000 jobs.

Ben S. Bernanke, chairman of the Federal Reserve, had already sent clear signals in recent weeks that the central bank was ready to reduce the overnight federal funds rate when policy makers meet on March 18.

Since August, the Fed has sharply cut overnight rates five times, to 3 percent from 5.25 percent, and investors have been all but assuming that the central bank would reduce them by at least another half a percentage point, and perhaps three-quarters of a point, at the next meeting.

But by Thursday, Fed officials had become increasingly alarmed that rates for many kinds of lending were skyrocketing as investors demanded steep risk premiums that are normally associated with a serious economic recession.

What particularly alarmed Fed officials was that the margin calls on Carlyle Capital and Thornburg Mortgage had stemmed from plunging confidence about the value of highly conservative mortgages that were guaranteed by Fannie Mae and Freddie Mac, the giant government-sponsored mortgage companies.

If investors lose confidence in Fannie Mae and Freddie Mac, which have become the only major remaining source of mortgage financing in recent months, Fed officials fear that home sales and housing prices could plunge further and foreclosures could climb even higher than they already have.

On Thursday, the Mortgage Bankers Association reported that about 7.9 percent of all loans — a record high — were past due or in foreclosure. Until the third quarter of last year, the rate had not climbed above 7 percent since 1979.

Home prices are falling in almost every part of the country, a phenomenon that Fed officials and many other experts until recently thought was all but impossible, and some analysts now predict that average home prices will ultimately fall 20 percent from their peak in 2006.

The effect is reducing household wealth. According to data this week from the Fed, net household wealth declined by $900 billion in the fourth quarter of last year.

Indeed, the ratio of homeowners’ equity to the value of their homes fell below 50 percent for the first time in history last year, according to the Fed. Far more alarming, however, is that about 30 percent of all homes bought in 2005 and 2006 are “under water,” meaning they have mortgages that are higher than their resale value.

“We’re at the beginning of the bursting of the housing bubble,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research organization in Washington. “The rate of foreclosures is just going to increase as time goes on.”

Eric S. Rosengren, president of the Federal Reserve Bank of Boston, noted that the housing calamity thus far has occurred even though unemployment is still low, at just 4.8 percent. But a surge in joblessness would almost certainly lead to more foreclosures and more downward pressure on home prices.

“A downside risk that we do need to consider is whether a rising unemployment rate generated by slow growth will force some people to sell their houses, creating further downward pressure on housing prices,” Mr. Rosengren said in an interview.

In opening up its monetary spigots on Friday, the central bank left little doubt that it wanted to increase the money for mortgage lending.

Its first move was to offer up to $100 billion through the Term Auction Facility, a program created in December that allows any bank or savings and loan to bid for loans at what amounts to wholesale rates and allows them to pledge a wide variety of securities — including mortgage-backed securities that are not tradable at the moment — as collateral.

The central bank’s other new initiative is to lend an additional $100 billion in March through its open-market operations. That money is available only to primary dealers, a few dozen major investment banks, but the loans can be secured by certain mortgage-backed securities, like those issued by Fannie Mae or Freddie Mac.

Fed officials said they were prepared to infuse even bigger sums of money into the financial system if they see a need, and the central bank said it was in “close consultation with foreign central bank counterparts” — a hint that it might seek support from other central banks if the credit problems persist.

    Sharp Drop in Jobs Adds to Grim Economic Picture, NYT, 8.3.2008, http://www.nytimes.com/2008/03/08/business/08econ.html






Congress Questions Executives on Compensation


March 7, 2008
The New York Times


WASHINGTON — Three prominent financial executives were summoned before Congress on Friday to face questions about the huge paydays that they earned from the subprime mortgage boom, even as their companies have lost billions of dollars and thousands of borrowers have lost their homes.

Two of the three lost their jobs last fall after the collapse of the subprime market — E. Stanley O’Neal, Merrill Lynch’s chairman and chief executive, and Charles O. Prince III, his counterpart at Citigroup — but left with sizable pay packages. The other, Angelo R. Mozilo, the founder and chief executive of Countrywide Financial, presided over the demise of a once high-flying company that is now being acquired by Bank of America.

They are appearing at a hearing of the House Committee on Oversight and Investigations, which, with its inquiry into supersized ballplayers winding down, once again turned its attention to supersized pay.

Along with the three executives, the chairmen of the compensation committees at all three companies were also scheduled to testify, along with a panel of academics, governance advocates and state and municipal officials.

Executive compensation has emerged as a hot topic in Washington in recent years. Surveys show that Americans, regardless of their income or political leanings, overwhelmingly believe that their business leaders are overpaid.

“There seem to be two economic realities operating in our country today," Representative Henry Waxman, Democrat of California, the committee chairman, said as the hearing opened Friday morning. “Most Americans live in a world where economic security is precarious and there are real economic consequences for failure. But our nation’s top executives seem to live by a different set of rules.”

The question before the committee, he said, was this: “When companies fail to perform, should they give millions of dollars to their senior executives?”

The discussion is expected to shed some light on how Wall Street’s compensation philosophy may have contributed to the mortgage boom. Corporate boards and compensation committees agreed to lucrative bonus plans that gave their leaders strong incentives to take big risks. Executives aggressively pushed their companies into lucrative businesses, like underwriting subprime mortgages and packaging the loans into complex securities. Then, as the housing and credit markets plummeted, those profits turned into enormous losses for shareholders. Wall Street’s top executives still kept their pay.

“With executive compensation you get what you pay for and you pay for what you get,” Nell Minow, editor of the Corporate Library, an independent research firm specializing in corporate governance, said in testimony prepared for the hearing. “If you make compensation all upside and no downside, that will affect the executives assessment of risk. It will make it clear to him that he can easily offload the risk onto shareholders. It’s heads they win, tails we lose.”

Mr. Mozilo’s pay drew the most scrutiny from members of Congress. He has taken home more than $410 million since becoming chief executive in 1999, including several stock sales made under an automatic plan while the company was buying back shares.

Federal securities regulators have been scrutinizing those trades. And in a report released Thursday, Congressional investigators found that the use of a flawed peer group and easy bonus targets helped inflate his pay. He also had been entitled to a $37.5 million severance package, though he forfeited that in January, shortly after Congress requested that he testify.

Mr. O’Neal and Mr. Prince each landed a windfall when they resigned.

Mr. O’Neal retained more than $161 million after he was ousted in October on top of the $70 million he took home during his four-year tenure. The bulk of the exit pay was linked to previously earned benefits and stock since his departure was deemed a retirement; he did not receive any severance pay. Merrill Lynch, meanwhile, has announced write-offs totaling more than $10.3 billion and watched its stock price fall sharply.

Mr. Prince collected $110 million while presiding over the evaporation of roughly $64 billion in market value. He left Citigroup in November with an exit package worth $68 million, including $29.5 million in accumulated stock, a $1.7 million pension, an office and assistant, and a car and driver. Citigroup’s board also awarded him a cash bonus for 2007, largely based on his performance in 2006 when the bank’s results were better, worth about $10 million. Citigroup has announced write-offs worth roughly $20 billion and seen its share plummet over 60 percent from last year’s high.

“From a shareholder perspective, it is not possible to justify that payment,” Ms. Minow said of the $10 million bonus to Mr. Prince, though she added, “His sins were so much smaller than the other people we’re talking about.”

In his prepared testimony, Mr. Prince focused on his humble beginnings, as the first member of his family to go to college, and the plaudits that Citigroup received for improving corporate governance on his watch.

“Last fall, it became apparent that the risk models which Citigroup, the various rating agencies and the rest of the financial community used to assess certain mortgage backed securities were wrong,” he said. “As C.E.O., I was ultimately responsible for the actions of the company, including risk models that eventually proved inadequate.”

Since his resignation, he said, “some have raised questions about my compensation, and much of the information reported in the media is incomplete or inaccurate."

Mr. O’Neal, too, said reports about his compensation package were inaccurate. “The reality is that I received no severance package,” he said in prepared testimony.

Emphasizing that the compensation process at Merrill was “appropriate” and “independent,” he said: “It is true that top executives at public companies in the United States, especially in the financial services industry, are highly compensated. But a great percentage of that compensation, certainly for me, was and is at risk. When the business does well, all shareholders do well. But if the businesses does not do well, the value of that compensation can plummet."

And Mr. Mozilo, noting that “our stock price appreciated over 23,000 percent” from 1982 to 2007, said he received performance-based bonuses approved by shareholders and exercised options as he prepared for retirement. “In short, as our company did well, I did well,” he said.

Other executives at financial companies could collect similarly lavish parachutes. James E. Cayne will retire with stock and options worth $560 million when he steps down from Bear Stearns, according to a severance analysis in late February by James F. Reda & Associates, an independent compensation-consulting firm in New York. It found that Kerry K. Killinger, Washington Mutual’s chief executive, might get worth $58 million and $74 million if the company is sold. John J. Mack, Morgan Stanley’s chairman and chief executive, might walk away with as much as $148 million, largely from previously earned stock.

Regulators are focusing on the link between solid pay practices and sound risk management. At a conference in New York last month, Randall S. Kroszner, a Federal Reserve Board governor, urged financial institutions to consider altering their compensation policies to include some types of deferred pay. He also suggested that any new risk management guidelines for the industry touch on incentive compensation.

“It is up to financial institutions themselves not bank supervisors to decide how compensation should be structured,” he said. “But managers and boards of directors should understand the consequence of providing too many short-term and one-sided incentives.”

Meanwhile, a recent Internal Revenue Service rule reversal will lead many companies eliminate guaranteed bonuses and equity awards in severance contracts.

Starting next year, the agency said it would no longer allow companies to receive a tax deduction for any performance-based bonus, restricted stock, or other incentive payout if it would automatically be paid out if a top executive was terminated. Senator Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee, has floated the idea of eliminating that tax deduction altogether.

Jenny Anderson reported from Washington, and Eric Dash from New York.

    Congress Questions Executives on Compensation, NYT, 7.3.2008, http://www.nytimes.com/2008/03/07/business/07cnd-pay.html?hp






Economy Lost 63,000 Jobs in February


March 7, 2008
The New York Times


The economy shed 63,000 jobs in February, the government said on Friday, the fastest falloff in five years and the strongest evidence yet that the nation is headed toward — or may already be in — a recession.

Manufacturers and construction companies, reeling from the worst housing slump in decades, led the declines in payrolls. But the losses were spread across a broad range of businesses — including department stores, offices and retail outlets — putting increased pressure on consumers’ pocketbooks.

The unexpected decline raised anticipation on Wall Street that the Federal Reserve will lower interest rates again later this month, perhaps by as much as a full percentage point, as the central bank scrambles to stave off a steep economic slowdown.

“I haven’t seen a job report this recessionary since the last recession,” said Jared Bernstein, an economist at the Economic Policy Institute in Washington. “This is a picture of a labor market becoming clearly infected by the contagion from the rest of the economy.”

Stock markets dropped after the opening bell, and Wall Street spent the morning fluctuating in and out of negative territory. At noon, the Dow Jones industrials was down nearly 100 points, and the Standard & Poor’s 500-stock index had lost more than 0.5 percent, as Wall Street weighed the bad economic news with the prospect of lower interest rates.

Before the jobs report was released, the Fed announced that it would increase the amount of money it makes available to banks in a larger effort to unlock a panic in the credit market. As part of the plan, the Fed will release $100 billion in through a series of auctions intended to make it easier for banks to borrow money from the government.

But the focus on Friday was squarely on the jobs report, which revealed widespread cracks in the nation’s labor market.

The private sector lost 101,000 jobs last month, the biggest dropoff in five years. Retail stores shed 34,000 jobs, while the manufacturing sector lost 52,000 workers and construction firm payrolls shrank by 39,000 jobs.

The loss in February was the second consecutive monthly decline in the labor market; economists had predicted a slight increase. The government also revised down its estimate for January to a loss of 22,000 jobs — the first decline in four years — and cut in half its estimate for job growth in December.

“One month you can dismiss,” said Ethan Harris, chief United States economist at Lehman Brothers. “Two months is a lot harder.”

In an interview, Mr. Harris sounded discouraged, a feeling shared by the growing number of Americans who are out of a job. Fewer Americans looked for work in February, and the size of the nation’s overall labor force declined.

Those developments sent the unemployment rate down to 4.8 percent last month from 4.9 percent in January. “Had the 450,000 people who left the labor force last month been counted among the unemployed, the jobless rate would have been 5.1 percent instead of 4.8 percent,” said Mr. Bernstein of the Economic Policy Institute.

Wages stayed stagnant in February, further depressing the outlook for consumer spending over the next few months. Among rank-and-file workers — more than 80 percent of the work force — average pay grew just 0.3 percent to $17.20 an hour. Wages are effectively running flat when adjusted for inflation.

The White House took immediate steps to impose a measure of calm in the aftermath of the dismal report, announcing that President Bush would make a statement about the economy soon after 2 p.m. at the White House. Meanwhile, the White House released a “fact sheet” asserting that the economy remains “structurally sound for the long term,” even though growth has slowed.

Despite the latest report, the White House insisted that, over all, job growth has been encouraging in recent months. “Our economy has added about 860,000 jobs over the last 12 months — an average of 72,000 jobs per month — and more than 8.1 million since August 2003,” the White House said.

The White House pointed to recent steps to aid “responsible homeowners,” as opposed to irresponsible speculators, with their mortgages, and it called on Congress again to modernize the Federal Housing Administration to help out even more people.

The Fed has signaled it will focus on stimulating growth when it meets on March 18, and the weak jobs report raised expectations among investors that the central bank will continue cutting interest rates. Futures markets have begun to price in a full percentage point cut, though the majority of investors who bet on the Fed’s actions think the central bank will lower rates by three-quarters of a point.

Earlier on Friday, the Fed announced two actions intended to keep supplying extra money to the economy for at least the next six months and, if necessary, to lend out even larger amounts in the future.

In its first move, the Fed will increase its lending through the “Term Auction Facility,” a program it started in December to help relieve what was already a deepening credit squeeze. Starting on Monday, the Fed will increase the amount available to $100 billion a month and either continue or increase that pace in the months ahead.

In its second move, the Fed will buy about $100 billion in securities ranging from Treasury securities to mortgage-backed securities issued by the Federal Housing Administration, Fannie Mae or Freddie Mac.

The big uncertainty is whether the infusion of fresh money from the Fed will address the real fear that is paralyzing financial markets: bad credit quality on what had seemed to be safe debt. Senior Fed officials said their decision to inject an extra $200 billion into the banking system was based on the substantial deterioration in credit markets over the last several days and was not influenced by the job loss announced on friday.

But Fed officials said their moves represented a sizable increase in the amount of money that they were making available. The Fed said it would provide the additional liquidity through two separate auctions; in both instances financial institutions will be able to borrow money from the Fed for 28 days at low interest rates.

As part of the plan, banks will be able to pledge collateral that includes mortgage-backed securities, the soured assets that led to the recent market tumult. Though Fed officials said they would discount the value of those securities based on the riskiness of their underlying assets, the moves mean that the central bank will take on some of the risk that has spooked investors.

Fed officials said their goal was simply to address general liquidity problems in the credit markets, but they predicted that the result was likely to be an increase in the central bank’s holdings of mortgage-backed securities.

Edmund L. Andrews contributed reporting.

    Economy Lost 63,000 Jobs in February, NYT, 7.3.2008, http://www.nytimes.com/2008/03/07/business/07cnd-econ.html?hp






Wall Street Falls on Credit Market Concerns


March 6, 2008
Filed at 10:11 a.m. ET
The New York Times


NEW YORK (AP) -- Wall Street pulled back sharply Thursday after renewed concerns about the credit markets and another dose of disappointing housing numbers intensified the market's worries about the sagging economy.

The Dow Jones industrials fell more than 120 points after two reports were issued about the housing industry. The Mortgage Bankers Association reported that home foreclosures hit an all-time high in the fourth quarter, while the National Association of Realtors said pending home sales were again sluggish last month.

Credit concerns continued to plague the market after lender Thornburg Mortgage Inc. (NYSE:TMA) and investment management firm Carlyle Capital Corp. (OOTC:CARYF) both said they missed margin calls. Both companies have significant mortgage-backed securities holdings, which has collapsed since the subprime crisis began during the summer.

In midmorning trading, the Dow fell 122.28, or 1.00 percent, to 12,132.71.

Broader indexes also retreated. The Standard & Poor's (NYSE:MHP) 500 index fell 14.83, or 1.11 percent, to 1,318.87; and the Nasdaq composite shed 12.08, or 0.53 percent, to 2,260.73.

    Wall Street Falls on Credit Market Concerns, NYT, 6.3.2008, http://www.nytimes.com/aponline/business/AP-WallStreet.html






Foreclosures Hit Record,

Group Says


March 6, 2008
Filed at 11:26 a.m. ET
The New York Times


WASHINGTON (AP) -- Home foreclosures soared to an all-time high in the final quarter of last year, underscoring the suffering of distressed homeowners and the growing danger the housing meltdown poses for the economy.

The Mortgage Bankers Association, in a quarterly snapshot of the mortgage market released Thursday, said the proportion of all mortgages nationwide that fell into foreclosure shot up to a record high of 0.83 percent in the October-to-December quarter. That surpassed the previous high of 0.78 percent set in the prior quarter.

''Clearly it's the worst it's been,'' chief association economist Doug Duncan said in an interview with The Associated Press.

More homeowners -- at the same time -- fell behind on their monthly payments.

The delinquency rate for all mortgages climbed to 5.82 percent in the fourth quarter. That was up from the 5.59 percent in the third quarter and was the highest since 1985. Payments are considered delinquent if they are 30 or more days past due.

Homeowners with tarnished credit who have subprime adjustable-rate loans were the hardest hit. Foreclosures and late payments for these borrowers also swelled to all-time highs in the fourth quarter.

The percentage of subprime adjustable-rate mortgages that entered the foreclosure process soared to a record of 5.29 percent in the fourth quarter. That was up from 4.72 percent in the prior quarter, which had marked the previous high. Late payments skyrocketed to a record high of 20.02 percent in the fourth quarter, up from 18.81 percent -- the previous high -- in the third quarter.

The association's survey covers almost 46 million home loans nationwide.

''Mortgage credit quality is deteriorating fast,'' said Mike Larson, a real-estate analyst at Weiss Research.

The worsening foreclosure and late payment figures come as fears grow that the country is teetering on the edge of a recession or in one already.

The wave of foreclosures threatens to deepen the already severely depressed housing market. The homes people are forced out of add to the big glut of unsold homes already on the market. That forces even more cutbacks by homebuilders, taking a big bite out of national economic activity. Harder-to-get credit, meanwhile, has thwarted would-be home buyers, aggravating problems in the housing market.

Homeowners with spotty credit histories or low incomes who took out higher-risk subprime adjustable-rate mortgages have suffered the most distress as the housing market went from boom to bust. Initially low interest rates that reset to much higher rates have clobbered these borrowers. With home values dragged down by the slump, many borrowers were left with mortgages that eclipsed the value of their homes.

''Declining home prices are clearly the driving factor behind foreclosures, but the reasons and magnitude of the declines differ from state to state,'' Duncan said.

Even with relief efforts under way by industry and the government, Federal Reserve Chairman Ben Bernanke, earlier this week, warned that foreclosures and late payments on home mortgages are likely to rise ''for a while longer.''

The MBA's Duncan agreed. ''We expect some increases in the next couple of quarters,'' he said. The economic slowdown, harder-to-get credit and lofty energy prices are adding to the strains, he said.

Against this backdrop, Bernanke called for additional relief and urged lenders to help distressed owners by lowering the amount of their loans. ''This situation calls for a vigorous response,'' Bernanke said in a speech Tuesday.

Bernanke's recommendation for lenders to reduce the amount owed on troubled home loans goes beyond the position staked out by the Bush administration. The Fed chief, however, didn't go as far as to endorse some proposals embraced by Democrats on Capitol Hill.

Among the initiatives promoted by the administration is allowing some homeowners with certain subprime home loans to freeze their interest rate for five years.

California and Florida continued to represent a disproportionate share of the country's new foreclosures. The two states accounted for 30 percent of mortgages starting the foreclosure process, the association said. ''In states like California, Florida, Nevada and Arizona, overbuilding of new homes created a surplus that will take some time to work through,'' Duncan said. That glut has pushed down house prices, he said.

    Foreclosures Hit Record, Group Says, NYT, 6.3.2008, http://www.nytimes.com/aponline/us/AP-Home-Foreclosures.html?hp






Economic Scene

Unemployed, and Skewing the Picture


March 5, 2008
The New York Times


(UPDATED March 7, 9:55 a.m.) This month's jobs report is a great example of how misleading the unemployment rate can be. In February, the economy shed 63,000 jobs, which is a strong indication a recession may be at hand. But the unemployment rate actually fell, to 4.8 percent from 4.9 percent.

How could this be?

The government's definition of the unemployed includes only those people actively looking for work. And last month, the number of people in that category fell significantly. It seems that more of the jobless gave up looking for work. So the unofficial number of unemployed fell, even as the labor market worsened.

My column this week, which appears below, explains the history behind the government's definition of unemployment.

In 1878, Carroll D. Wright set out to do something that nobody in the United States had apparently ever done before. He tried to count the number of unemployed.

As is the case today, the 1870s were a time of economic anxiety, with a financial crisis — the panic of 1873 — having spread into the broader economy. But Wright, then the chief of the Massachusetts Bureau of the Statistics of Labor, thought there weren’t nearly as many people out of work as commonly believed. He lamented the “industrial hypochondria” then making the rounds, and to combat it, he created the first survey of unemployment.

The survey asked town assessors to estimate the number of local people out of work. Wright, however, added a crucial qualification. He wanted the assessors to count only adult men who “really want employment,” according to the historian Alexander Keyssar. By doing this, Wright said he understood that he was excluding a large number of men who would have liked to work if they could have found a job that paid as much as they had been earning before.

Just as Wright hoped, his results were encouraging. Officially, there were only 22,000 unemployed in Massachusetts, less than one-tenth as many as one widely circulated (and patently wrong) guess had suggested. Wright announced that his “intelligent canvas” had proven the “croakers” wrong.

From Massachusetts, he went to Washington, where he served as the inaugural director of the federal government’s Bureau of Labor Statistics and later as the head of the United States Census. His method for counting — and not counting — the unemployed became the basis for Census tallies of the jobless and, eventually, for the monthly employment report put out by the Bureau of Labor Statistics. Wright is the father of the modern unemployment rate.

This Friday, the government will release the latest employment report, which will help clarify whether the economy is slipping into a recession. Wall Street forecasters are predicting that the February unemployment rate will have inched up to 5 percent, from 4.9 percent in January.

Whatever the survey ends up showing, however, you can be sure of one thing: Politicians will be quick to point out that joblessness remains low by historical standards. “Five percent is still a low unemployment rate,” Ed Lazear, the chairman of President Bush’s Council of Economic Advisers, said recently. “It’s below the average for the last three decades.”

The president and Senator John McCain also recently noted that unemployment remained low. Senators Judd Gregg of New Hampshire and Johnny Isakson of Georgia, both Republicans, have said the economy continues to be at “full employment.” Two Democratic governors, Christine Gregoire of Washington and Joe Manchin III of West Virginia, have bragged that their states recently recorded their lowest unemployment rates in history.

Statistically, all this is true enough. But it’s also deeply misleading.

Over the last few decades, there has been an enormous increase in the number of people who fall into the no man’s land of the labor market that Carroll Wright created 130 years ago. These people are not employed, but they also don’t fit the government’s definition of the unemployed — those who “do not have a job, have actively looked for work in the prior four weeks, and are currently available for work.”

Consider this: the average unemployment rate in this decade, just above 5 percent, has been lower than in any decade since the 1960s. Yet the percentage of prime-age men (those 25 to 54 years old) who are not working has been higher than in any decade since World War II. In January, almost 13 percent of prime-age men did not hold a job, up from 11 percent in 1998, 11 percent in 1988, 9 percent in 1978 and just 6 percent in 1968.

Even prime-age women, who flooded into the work force in the 1970s and 1980s, aren’t working at quite the same rate they were when this decade began. About 27 percent of them don’t hold a job today, up from 25 percent in early 2000.

There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed. They include retirees, as well as stay-at-home parents, people caring for aging parents and others doing unpaid work.

If growth in this group were the reason for the confusing statistics, we wouldn’t need to worry. It would be perfectly fair to say that unemployment was historically low.

The second possible explanation — a jump in the number of people who aren’t working, who aren’t actively looking but who would, in fact, like to find a good job — is less comforting. It also appears to be the more accurate explanation.

Various studies have shown that the new nonemployed are not mainly dot-com millionaires or stay-at-home dads. (Men who have dropped out of the labor force actually do less housework on average than working women, according to Harley Frazis and Jay Stewart of the Bureau of Labor Statistics.)

Instead, these nonemployed workers tend to be those who have been left behind by the economic changes of the last generation. Their jobs have been replaced by technology or have gone overseas, and they can no longer find work that pays as well. West Virginia, a mining state, is a great example. It may have a record-low unemployment rate, but it has also had an enormous rise in the number of out-of-work men.

These nonemployed remain a distinct minority of the population. But the growth in their numbers is one reason that overall wage growth has been so weak lately. With such a large pool of people who aren’t employed — but willing to work for the right price — those who do have jobs find themselves with less bargaining power. Since 2003, total compensation, including the value of health insurance and other benefits, has failed to keep pace with inflation for most workers, according to Jared Bernstein of the Economic Policy Institute.

I’m not suggesting that the government change its definition of the unemployment rate after all these years. (The government has tried to come up with various alternate measures of joblessness, which are broader but not especially useful.) I’m also not suggesting that the Bureau of Labor Statistics somehow cooks the books. Both Republican and Democratic economists praise the bureau as a model of professional nonpartisanship.

Yet there is no doubt that the unemployment rate is a less telling measure than it once was. It’s simply no longer the best barometer of the country’s economic health. A truer picture can be found elsewhere, by looking at compensation growth, for instance, or to changes in the percentage of the employed.

No less than Tom Nardone — who, as the economist overseeing the unemployment survey, might reasonably be considered the Carroll Wright of today — made a similar point to me the other day.

“Just saying the unemployment rate is 5 percent, without any other context, really doesn’t tell you much,” Mr. Nardone said. “It’s far more complicated than that.”

    Unemployed, and Skewing the Picture, NYT, 5.3.2008, http://www.nytimes.com/2008/03/05/business/05leonhardt.html






Service Sector Report Lifts Stocks


March 5, 2008
Filed at 12:09 p.m. ET
The New York Times


NEW YORK (AP) -- Stocks showed broad gains Wednesday after a stronger-than-expected reading on the health of the service sector and figures on worker productivity calmed some fears about the frailty of the economy.

The Institute for Supply Management reported that activity in the service sector declined in February though the decrease wasn't as steep as Wall Street had feared. The ISM index of non-manufacturing activity came in at 49.3. Analysts had expected a reading of 46.5, according to Dow Jones Newswires.

The ISM report was particularly gratifying to Wall Street after a stunning drop in the January service sector index had sent stocks plunging when it was released a month ago.

The service sector findings offset some unease about a Labor Department report that showed labor costs rose at a 2.6 percent annual pace in the fourth quarter. Rising costs often draw concern from investors because the increases can make it harder for the inflation-weary Federal Reserve to justify cutting interest rates to boost the economy.

However, the report also found that productivity -- the amount than a worker produces for every hour on the job -- rose at an annual pace of 1.9 percent.

Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams, pinned the market's rally to a follow-through from a recovery Tuesday as well as the economic figures, such as the productivity number, that offered investors some reason for relief.

Still, he remains cautious. ''I still think you should sell into the rallies,'' he said.

In late morning trading, the Dow Jones industrial average rose 82.47, or 0.68 percent, to 12,296.27.

Broader stock indicators also carved gains. The Standard & Poor's 500 index rose 10.32, or 0.78 percent, to 1,337.07, while the Nasdaq composite index rose 20.16, or 0.89 percent, to 2,280.44.

The move higher comes a day after uncertainty about the economy prompted erratic trading. Stocks recovered from a sell-off to finish mixed following reassuring comments from Cisco Systems Inc. about its business and amid rumors that plans to help bond insurer Ambac Financial Group Inc. are moving ahead.

Bond prices fell Wednesday as stocks rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.68 percent from 3.63 percent late Tuesday.

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

Light, sweet crude rose $2.05 to $101.57 on the New York Mercantile Exchange.

In corporate news, Pfizer Inc. affirmed its 2008 sales and profit forecasts and said it plans to outsource more drug manufacturing and reduce its global real estate holdings to lower costs. The drug maker, one of the 30 stocks that make up the Dow industrials, is cutting costs ahead of generic competition for its blockbuster cholesterol drug, Lipitor. Pfizer slipped 5 cents to $22.20.

BJ's Wholesale Club Inc. jumped $2.82, or 8.5 percent, to $36.10 after saying it expects first-quarter same-store sales, or sales at stores open at least a year, will rise 4 percent to 6 percent excluding gas sales.

Saks Inc., parent of the high-end Saks Fifth Avenue department store chain, said its fiscal fourth-quarter profit rose 83 percent to $39.5 million from $21.5 million a year earlier. Saks rose 41 cents, or 2.7 percent, to $15.90.

Advancing issues outnumbered decliners by more than 2 to 1 on the New York Stock Exchange, where volume came to 430.7 million shares.

The Russell 2000 index of smaller companies rose 4.86, or 0.71 percent, to 685.84.

Overseas, Japan's Nikkei stock average closed down 0.16 percent. In afternoon trading, Britain's FTSE 100 rose 1.29 percent, Germany's DAX index rose 1.93 percent, and France's CAC-40 advanced 1.54 percent.


On the Net:

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

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

    Service Sector Report Lifts Stocks, NYT, 5.3.2008, http://www.nytimes.com/aponline/business/AP-Wall-Street.html






Factory Orders Fall in Sign of Chill


March 5, 2008
The New York Times


WASHINGTON (AP) — American factories saw demand for their products drop sharply, fresh evidence of an economy hobbled by housing and credit crises, the government said Wednesday. Another report showed the country’s service sector continuing to contract, but by less than economists expected.

The Commerce Department reported that new orders for manufactured goods fell 2.5 percent in January from the previous month. That marked a deterioration from December’s 2 percent increase and was the biggest decline in five months.

Meanwhile, activity in the nation’s service sector shrank in February for the second straight month.

The Institute for Supply Management’s service sector index clocked in at 49.3, with a reading below 50 indicating a contraction. The latest figure is above the 47.5 forecast from economists surveyed by Thomson Financial/IFR, and higher than January’s reading of 44.6, when the survey surprised Wall Street by falling to its lowest level in more than six years.

Manufacturers, service providers and other companies are feeling the sting of the economic slowdown. Persisting problems in the housing and credit markets are causing both people and businesses alike to be more cautious in their spending and investing. Galloping energy prices also are adding to the strains.

The latest snapshot of manufacturing activity was on target with economists’ predictions. The weakness was mostly concentrated in demand for costly “durable” goods, merchandise expected to last at least three years. These orders — including cars, airplanes, machinery and computers — dropped 5.1 percent in January, compared with a 4.4 percent increase in December.

Demand for “nondurables,” such as food and clothing, edged up 0.3 percent in January, an improvement from a 0.4 percent decline in the previous month.

In other economic news, worker productivity slowed sharply in the final three months of last year as the economy lost momentum.

The Labor Department reported that productivity — the amount an employee produces for every hour on the job — increased at an annual rate of just 1.9 percent in the October-to-December quarter. This key measure of workplace efficiency was down considerably from the third quarter’s brisk, 6.3 percent growth rate and was the slowest pace since the first quarter of last year.

As productivity growth slowed, labor costs went up.

Employers’ unit labor costs rose at a 2.6 percent clip in the fourth quarter. That compared with an annualized decline of 2.7 percent in the third quarter. It marked the largest increase in labor costs since the first quarter of last year. Unit labor costs is a measure of how much companies pay workers for every unit of output they produce.

The revised reading on fourth-quarter productivity was slightly better than the 1.8 percent growth rate initially reported by the government. Economists were expecting no change in that initial estimate.

The productivity report included annual revisions based on more complete data.

For all of 2007, for instance, productivity rose 1.8 percent, up from a 1 percent gain in 2006. Labor costs, meanwhile, rose faster — growing by 3.1 percent last year. In 2006, labor costs rose 2.9 percent.

Efficiency gains are important to the economy’s long-term vitality. They can help blunt inflation. The gains can allow companies to pay workers more without raising prices, which would cut into paychecks.

For now, the No. 1 mission of the Federal Reserve chairman, Ben S. Bernanke, is to help bolster overall economic growth. Many fear the United States is on the brink of a recession or already in one.

The economy nearly stalled in the final quarter of last year, growing at a pace of just 0.6 percent. Economists think growth could be even slower in the current quarter. Some believe the economy is actually shrinking now.

The Federal Reserve, which started cutting a key interest rate in September, recently ramped up reductions to shore up the economy. It slashed rates by an aggressive 1.25 percentage points in the span of just eight days in January. Mr. Bernanke last week signaled the central bank stands ready to lower rates again at its next meeting on March 18.

Even as the Fed fights to keep the economy going, it is keeping a sharp eye on inflation. Galloping energy prices, rising food costs and high prices elsewhere are straining pocketbooks and putting a further damper on economic growth.

Some worry that the country could be headed for a bout of stagflation — a dangerous mix of stagnant economic activity and stubborn inflation. But Mr. Bernanke, in his congressional appearance last week, said he didn’t believe that was the case.

    Factory Orders Fall in Sign of Chill, NYT, 5.3.2008, http://www.nytimes.com/2008/03/05/business/apee-econ.html?hp






Step by Step,

Bush and Fed Move

on Mortgage Rescue


March 5, 2008
The New York Times


WASHINGTON — However much they might oppose it on ideological grounds, the Bush administration and the Federal Reserve are inching closer toward a government rescue of distressed homeowners and mortgage lenders.

Ben S. Bernanke, the Fed chairman, told a group of bankers in Florida on Tuesday that “more can and should be done” to help millions of people with mortgages that are often bigger than the value of their homes.

Though Mr. Bernanke stopped well short of calling for a government bailout, he used his bully pulpit to try to push the banking industry into forgiving portions of many mortgages and signaled his concern that market forces would not be enough to prevent a broader economic calamity.

He also suggested that the Federal Housing Administration expand its insurance program to let more people switch from expensive subprime mortgages to federally insured loans.

And he urged the two government-sponsored mortgage companies, Fannie Mae and Freddie Mac, to raise more capital so they could buy more mortgages. The companies already guarantee or hold as investments about $1.5 trillion in mortgages.

Similarly, the Bush administration, despite its public opposition to bailouts, has set the stage for a bigger government role.

One month ago, President Bush signed an economic stimulus bill that greatly increased the size of loans the F.H.A. can insure, while allowing Fannie Mae and Freddie Mac to purchase significantly larger mortgages from lenders and guarantee them against default by homeowners.

The move, which administration officials had previously opposed, increases the limits on F.H.A., Freddie Mac and Fannie Mae mortgages from $417,000 to as much as $729,750.

Historically, the F.H.A. and the mortgage companies have focused on conservative mortgages for people borrowing relatively modest sums. But they are now being encouraged to finance much bigger mortgages, in some cases to people who put almost no money down.

Last week, the administration went further by removing limits on the volume of mortgages that Fannie Mae and Freddie Mac can hold in their own portfolios. That means the two companies could buy up billions of dollars in mortgages that other investors have been too frightened to touch.

In theory, the change should not cost taxpayers. But because the companies are chartered by Congress, investors have assumed that Congress would bail them out if needed. Fannie Mae and Freddie Mac can borrow money more cheaply than private banks largely because of the assumed government backing.

The Fed has been offering its own resources to soften the credit squeeze that began when investors started to panic about subprime loans. In addition to sharply cutting interest rates, the Fed has lent more than $160 billion to banks since mid-December through a new program, the Term Auction Facility.

Under the program, banks have been able to borrow money for up to a month or so, pledging collateral that includes mortgage-backed securities, even if the securities are not tradable in today’s markets.

In Congress, Democratic lawmakers pounced on Mr. Bernanke’s comments in Orlando, Fla., to bolster their arguments for much costlier rescue plans.

“It is now clear that we will not be able to avert a more serious and prolonged economic slowdown if we don’t address the problem of increasing mortgage foreclosures,” Representative Barney Frank, chairman of the House Financial Services Committtee, said on Tuesday.

Mr. Frank, who praised the Fed chairman’s “willingness to work with us,” proposed legislation last week to allow the F.H.A. to insure up to $20 billion in troubled mortgages if the lenders first agree to forgive a big part of the original loan amounts.

But even without new legislation, the Federal Housing Administration has been active. It has insured 110,000 mortgage refinancings worth $15 billion since it started a program, F.H.A. Secure, in October. It is hard to know how many of the loans would have come to the agency because of the mortgage crisis, but officials estimate as many as 90 percent of the borrowers were previously in subprime loans.

The F.H.A. figures prominently in the proposals being put forth by regulators and lawmakers. The agency insures mortgage loans made by approved lenders.

A longstanding bill to modernize the program would lower the down payment needed for F.H.A. loans to 1.5 percent of a home’s value, from 3 percent. The bill would also let the agency price insurance based on each loan’s risks. The F.H.A. now charges everyone the same premium.

“We will not back loans that do not make sense and cost taxpayers money,” said D. J. Nordquist, a spokeswoman for the Department of Housing and Urban Development, which runs the F.H.A.

But skeptics worry that the plans to expand the scope of the F.H.A. will put taxpayers at risk. They note that home prices are likely to fall further. If the government moves to insure or buy mortgages now, it might help arrest the price decline — but only temporarily.

“The reality is, prices will fall; there is no way to keep them up,” said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal group in Washington. “If we have the government get in, either as the owner of the debt or the guarantor of the debt, a lot of the decline will be shouldered by the taxpayer.”

Created during the Depression to support the mortgage market, the F.H.A. has played a critical role in the housing industry in the past, though in recent years it lost ground to subprime lenders.

Administration officials say the program was meant to step in during tumultuous times like these. They further note that its conservative underwriting standards will ensure that the F.H.A. program’s losses will be within its traditional range.

Congress and the Bush administration are also hoping to soften the mortgage debacle through Fannie Mae and Freddie Mac.

Even before President Bush signed legislation allowing the two government-sponsored companies to guarantee mortgages as big as $729,750 in high-cost markets, Fannie Mae had begun offering personal loans to some borrowers who were behind on their house payments. Known as HomeSaver Advance, the loans could help Fannie Mae keep mortgages current for borrowers who have a temporary setback.

The two companies are now trying to decide how to guarantee the bigger and potentially riskier mortgages. Both want to exclude “no-documentation” loans, but Congress authorized them to buy up big mortgages going back to last July — when a high percentage of such loans were approved without verification of the borrower’s income. As a result, company executives are debating whether to buy up at least some “no-doc” loans made last year.

“One could argue that these things are steps on the bailout continuum, although they are baby steps,” said Karen Weaver, head of securitization research at Deutsche Bank.

Democratic leaders in Congress are pushing for bolder action. The House speaker, Nancy Pelosi, will hold a closed meeting on Wednesday with some of the leading advocates for more extensive rescue measures.

Administration officials remain opposed, but some are at least discussing such ideas.

“Whether government intervention is necessary is something we should all be thinking about,” Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, said at a hearing of the Senate Banking Committee on Tuesday. “But I don’t think we are there yet.”

    Step by Step, Bush and Fed Move on Mortgage Rescue, NYT, 5.3.2008, http://www.nytimes.com/2008/03/05/business/05housing.html?hp






Ford to lay off some 2,500 workers


Mon Mar 3, 2008
9:57pm EST
By Kevin Krolicki


DETROIT (Reuters) - Ford Motor Co said on Monday it would eliminate shifts at four U.S. plants and lay off some 2,500 workers -- or almost 5 percent of its remaining work force -- as part of an effort to cut costs and return to profitability next year.

The layoffs come at a time when the No. 2 U.S. automaker is offering buyouts and early retirement incentives to all 54,000 of its U.S. factory workers as it attempts to recover from a $2.7 billion loss in 2007.

Ford said it would run its Chicago and Louisville, Kentucky, assembly plants on one shift rather than the current two shifts starting this summer.

Ford's Chicago plant builds its Ford Taurus and is readying to ramp up production for the all-new Lincoln MKS luxury sedan slated to go on sale starting this summer.

The Louisville plant builds the Ford Explorer and Mercury Mountaineer sport utility vehicles. Taken together the two plants employ about 4,500 workers represented by the United Auto Workers union.

In addition, Ford said it would cut a shift of workers at its Cleveland Engine Plant No. 2 in April. That plant makes a 3.0-liter engine. Plans to restart production at Cleveland Engine Plant No. 1, which makes a larger 3.5-liter engine, have been pushed back to the fourth quarter from the spring.

Ford said it expected to be able to maintain planned production volumes at the four plants by keeping them running more consistently on a single shift and reducing down time.

Ford, which is aiming to return to profitability in 2009, has offered all of its U.S. factory workers buyouts and early retirement incentives with one-time payouts of up to $140,000.

An earlier round of buyouts cut almost 34,000 workers from Ford's payroll in 2006. This time, as part of a deal with the UAW, Ford is offering richer terms for the roughly 12,000 remaining workers eligible to take retirement packages.

Later on Monday, Ford is set to release February U.S. sales results that are expected to show a sharp decline from year-earlier levels.

Analysts expect industry-wide 2008 U.S. auto sales to extend a downturn that began to accelerate in the second half of last year reflecting a slumping housing market, higher gas prices and tighter credit.

(Reporting by Kevin Krolicki, editing by Dave Zimmeman)

    Ford to lay off some 2,500 workers, R, 3.3.2008, http://www.reuters.com/article/domesticNews/idUSN0335572120080304






Consumer bankruptcies

leap in February


Mon Mar 3, 2008
5:27pm EST
By Julie Vorman


WASHINGTON (Reuters) - American consumers' bankruptcy filings jumped 15 percent in February from the previous month and a steeper rise is looming because of the subprime mortgage crisis, the American Bankruptcy Institute said on Monday.

Consumer bankruptcy filings in February totaled 76,120, up from 66,050 recorded in January, the non-partisan bankruptcy research group said.

The February number was 37 percent higher than in the same month a year ago, according to the institute.

"February's bankruptcy spike -- the highest single month since the 2005 (bankruptcy) law changes -- forecasts the start of more to come for the balance of 2008," said Samuel Gerdano, ABI executive director.

"It is probably too early to attribute the current trend to the mortgage crisis. But if it continues -- as it is certainly expected to with adjustable rate mortgages resetting -- it could add to the bankruptcy rate," Gerdano said in an interview.

The institute is forecasting more than 1 million consumer bankruptcies in 2008, compared with about 800,000 in 2007, due mostly to heavy household debt. But the 2008 estimate could go even higher "if this contagion affecting the home mortgage market continues," Gerdano said.

Last week, Senate Republicans blocked a Democratic-written bill that would change federal bankruptcy laws to curb rising home foreclosures.

The legislation, which lawmakers said might be reconsidered in coming days, would let bankruptcy judges reduce mortgage amounts to reflect the current fair value of the home in Chapter 13 bankruptcy proceedings. The White House threatened to veto the bill, calling it too costly.

In a Chapter 13 bankruptcy, a consumer typically must budget some future earnings to repay unsecured creditors. However, secured debt -- such as a home mortgage -- cannot be modified under current Chapter 13 law, Gerdano said.

The institute is also seeing an increase in business bankruptcies, which account for a tiny percentage of overall bankruptcies.

"Here the scenario is a restriction in the flow of credit to troubled businesses," Gerdano said. "In recent years, there was almost excess liquidity, which propped up a number of businesses and let them stave off a day of reckoning."

(Reporting by Julie Vorman; Editing by Jan Paschal)

    Consumer bankruptcies leap in February, R, 3.4.2008, http://www.reuters.com/article/domesticNews/idUSN0338898320080303






Bundled Mortgages

and Dubious Fees

Complicate Foreclosure Cases


March 4, 2008
The New York Times


When Ohioans head to the polls Tuesday to vote in one of the nation’s most scrutinized presidential primaries, Mark and Gina Wellman of Circleville, Ohio, will be watching another vote — what buyers are bidding for the house they built themselves when it goes on the sheriff’s auction block.

The auction is scheduled, even though the lender forcing the sale was not the owner of the note underlying the mortgage when the lender began foreclosure proceedings in 2002.

The Wellmans may lose their home even though their accountant testified to the court in 2006 that the lender had levied improper charges on the borrower of about $40,000, or almost 13 percent of what the bank said the Wellmans owed at the time.

Every home foreclosure is different, of course. But the Wellmans’ case shows the uphill battle facing many troubled borrowers who believe that they are losing their homes for questionable reasons, like onerous fees.

One problem is ascertaining who actually owns the note underlying each home loan. This seemingly simple task has turned difficult as more home mortgages have been packaged by the thousands into securitization trusts.

Katherine M. Porter, an associate professor of law at the University of Iowa, conducted a recent study of 1,733 foreclosures that began in 2006. The study found that 40 percent of creditors foreclosing on borrowers did not show proof of ownership, what is often called “proper assignment” of the note or security interest in the property.

Dubious fees charged by lenders have also emerged as a rising problem. Ms. Porter’s study found that questionable fees had been added to almost half of the loans she examined. Last year, the United States Trustee, charged with overseeing the integrity of the nation’s bankruptcy courts, said it would move against lenders that file false or inaccurate claims or assess unreasonable fees.

The Wellmans are not suffering alone. Ohio’s foreclosure rate is the sixth highest in the nation, according to RealtyTrac, with 1.8 percent of the state’s households in some stage of foreclosure in 2007. Total foreclosure filings in Ohio reached 153,196 last year, an increase of almost 90 percent over 2006, RealtyTrac said.

Homeowners naturally look to judges to stop banks and mortgage lenders from seizing troubled borrowers’ homes without supplying proof that they actually owned the note when they began foreclosure proceedings. And with foreclosures soaring, some judges are sympathetic.

Courts in Ohio have recently dismissed cases where ownership of the note underlying the mortgage has not been proved by lenders seeking foreclosure. Last October, Christopher A. Boyko, a federal judge in Cleveland, dismissed 14 such cases.

Judge Boyko wrote: “There is no doubt every decision made by a financial institution in the foreclosure process is driven by money. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns.” Judge Boyko left open the possibility that the lenders could refile.

But P. Randall Knece, the judge overseeing the Wellmans’ case in Pickaway County, has refused to stop the auction, even though ownership of the note at the time of foreclosure was not assigned to National City Mortgage, which is forcing the sale.

The lender, a unit of the National City Corporation of Cleveland, was cited for failure to comply with rules on loan origination and quality control and agreed to change some practices.

Mr. Wellman, 51, is a former truck driver who has lived on the same road all his life. He said the 11-year battle to keep his home had taken over his existence.

“It feels like you got knocked down in a hole and you’re handcuffed and you work your way up to the top and there is someone there to kick you back down,” he said.

The Wellmans first got into trouble on their mortgage in 1996 after Mr. Wellman lost his job. Since then, as many desperate borrowers do, the Wellmans filed for bankruptcy to try to keep their home from being auctioned. They have filed five times.

Mrs. Wellman works at a Gap Inc. warehouse nearby; Mr. Wellman has designed a heat pump that he said he was trying to patent. They made payments on their mortgage until 2004.

Mr. Wellman said he built the brick home himself. He started it in 1990 on a two-acre plot and finished it two years later.

Over the years, National City has agreed on several occasions to give the Wellmans more time to make up for late payments.

Kristen Baird Adams, a spokeswoman for the bank, said that it tried to work with the Wellmans but had exhausted all possible remedies. She also said that the bank was pleased that the judge overseeing the case ruled for National City allowing the foreclosure to proceed.

The Wellmans appear to have equity in their home, even after including the bank’s charges. The local tax assessor recently valued the home at around $375,000, which is $30,000 more than the amount the bank said was owed on the mortgage, including late fees, interest and other charges.

In March 2002, National City filed foreclosure papers against the Wellmans. But in subsequent court filings, lawyers for National City acknowledged that it had not been assigned proper ownership of the note at that time.

The lender had taken over the assignment after it filed foreclosure, and when challenged by the Wellmans’ lawyer on its legal standing to sue for foreclosure stated: “The late filing of the assignment does not affect the validity of the mortgage, nor the plaintiff’s interest, and as such, has no effect upon the defendants.”

National City’s spokeswoman said that it viewed the Wellman case as different from those in Judge Boyko’s ruling.

Allegations of questionable fees levied by lenders, like those claimed by the Wellmans against National City, have also begun cropping up in courts nationwide.

In 2003, the Wellmans signed a forbearance agreement with National City. In it they agreed with the bank on the amount it said they owed. But in 2004, Mr. Wellman said he suspected the bank had overcharged him and he asked for an accounting of what he had paid on his loan.

Plugging the bank’s figures into a Quicken program confirmed his fears, he said. A local accountant, Steve Helwagen, scrutinized the bank’s numbers and testified to the court that National City’s accounting was off by $38,612 in its favor. Mr. Wellman stopped paying on the mortgage and hired a lawyer to try to recover those fees from the bank.

Included in the questionable charges, Mr. Helwagen said, were bank attorney fees, foreclosure fees and those covering hazard insurance. “The bank’s records were horrendous, they just jumped all over the place,” he said. “I’ve never seen anything like it in my life.”

Ms. Baird Adams said that National City Mortgage had done a thorough analysis of the charges on the Wellman loan and found them to be accurate. And Judge Knece found that the Wellmans were bound by the agreement they signed in 2003.

Roy Huffer, a lawyer in Circleville representing the Wellmans, said that both the trial court and appellate court have ignored the Wellmans’ allegations of problems in National City’s charges and its ownership of the note.

Having worked on the Wellman case for more than three years without pay, he said he laughed at a mass mailing last month from the Ohio Supreme Court, sent to all active lawyers in the state, asking them to represent, pro bono, borrowers in foreclosures. “That’s what I have been doing on this case for the past three years,” he said.

    Bundled Mortgages and Dubious Fees Complicate Foreclosure Cases, NYT, 4.3.2008, http://www.nytimes.com/2008/03/04/business/04auction.html






Companies Are Piling Up Cash


March 4, 2008
The New York Times


At least someone knows how to fill a piggy bank.

Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts.

That should be good news in an economy unsettled by rising energy prices, tightening credit, gyrating stock prices and declining values for the dollar and the family homestead. Indeed, the Federal Reserve chairman, Ben S. Bernanke, cited strong corporate balance sheets as a bright spot in the darkening forecast he presented to Congress last week.

Some analysts also speculate that these cash-rich companies may start sharing their wealth with investors through special dividends, providing welcome stimulus for the economy.

Corporate spending on equipment and other capital expenditures has declined as savings have soared, suggesting that companies could stimulate the economy now by going on a hiring and spending spree. But that raises worries among some analysts that companies will spend their cash unwisely, making them more vulnerable in the future.

The increase over the last decade in the amount of cash, as a percent of total assets, for the companies in the Standard & Poor’s 500-stock index has been steep. One study shows that the average cash ratio doubled from 1998 to 2004 and the median ratio more than tripled, while debt levels fell. According to S.& P., the total cash held by companies in its industrial index exceeded $600 billion in February, up from about $203 billion in 1998.

René M. Stulz, who holds the Reese chair in banking and monetary economics at the Fisher College of Business at Ohio State University, said research he conducted with two other professors on corporate cash levels since 1980 indicated that growing cash holdings over that period most likely reflected the simple fact that the world became a much riskier place for business.

“Companies responded to those rising risks by saving more,” said Professor Stulz, whose study excluded utilities and financial companies because their cash reserves are monitored by regulators.

An even longer savings trend was spotted by Jason DeSena Trennert, managing partner and chief investment strategist at Strategas Research Partners in New York, who said his own rough examination of corporate balance sheets shows that “cash, as a percent of total assets, is as high as it’s been since the 1960s.”

The ledgers of many individual companies bear out these findings. For example, the cash ratio at Paychex — cash and short-term investments as a percent of total assets — has more than doubled, from less than 30 percent in 1988 to more than 70 percent by last summer. Over the same period, Apple’s cash ratio grew to more than 60 percent, from just over 38 percent.

The cash ratio at Avon Products, just under 3 percent in 1988, was nearly 17 percent by last December. And Microsoft’s savings account is so large that its chief financial officer has observed that the company could, if it wished, cover most of the $20 billion cash component of its pending $44.6 billion offer for Yahoo from its own reserves.

This cash-saving trend may have a downside, though. Because companies can spend from their own account without scrutiny from the investment bankers or commercial bankers who might otherwise lend them money, corporate executives can do some really dumb things with their cash, said Amy Dittmar, an assistant professor at the Ross School of Business at the University of Michigan, who has studied corporate spending habits in the United States and abroad.

“There is a subtle line between having enough money to do what you have to do versus having enough money to do anything you want to do,” Professor Dittmar said.

Manny Weintraub, a former managing director and top-performing money manager for Neuberger Berman who formed his own investment advisory firm in late 2003, agreed. “Like your mother told you, the rule should be that if you don’t have anything nice to buy, don’t buy anything,” he said.

The Stulz team’s study showed that this trend of rising cash ratios was not limited to very large corporations — indeed, the average increase is more pronounced among firms below the top one-fifth of the sample.

Over the same time, the study found, one measure of corporate debt — the net debt ratio, or debt minus cash as a percent of total assets — fell so sharply that, by 2004, it was below zero, where it stayed at least through 2006.

“In other words,” the researchers noted, “on average, firms could have paid off their debt with their cash holdings.”

Those who study corporate balance sheets suggest that several factors have contributed to this change in corporate savings patterns.

In the last 25 years, the speed and scale of globalization have increased sharply. That shift to worldwide markets confronted companies with increased currency risks, political risks and new competition — all adding to the overall risk of doing business.

During the same period, conglomerates and similarly diversified companies fell out of favor, as Wall Street looked for “pure plays” and companies narrowed their focus to a few core businesses — in effect, putting more of their eggs in fewer baskets.

That left those companies more vulnerable to any event that shook those baskets, Professor Dittmar explained. “When firms become less diverse and more focused, they become more volatile,” she said. And when that happens, they need cash to cushion the bumps.

While rising risks may explain most of these changing patterns, other business trends may also have had an impact.

For example, the Stulz team’s paper shows that rising cash levels were, to some degree, influenced by a drop in capital spending on hard assets, which can be used as collateral for borrowing. Similarly, the study found, as companies increased their focus on research and development investments, which are not as useful for borrowing purposes, cash levels rose.

Moreover, cash has traditionally been just one component of “working capital,” along with inventories and accounts receivable. But innovations like “just in time” supply chains and faster payment systems have reduced the role of inventories and accounts receivable and, conversely, raised the role of cash on corporate balance sheets, Professor Dittmar said.

Adding to that, the corporate universe now contains a higher percentage of the companies that have traditionally held lots of cash, notably technology companies. These companies now make up about 45 percent of the economy, up from less than 30 percent in 1980. That would inevitably increase the overall averages for cash ratios.

The study by the Stulz team, however, specifically allowed for that change — and found that even among technology companies, the ratio of cash on the balance sheets has grown sharply over that period.

According to Mr. Trennert, the cash ratios at technology companies have doubled since 2000.

With cash levels this high, Mr. Trennert said he expected that some companies — those that also have high levels of insider ownership — may elect to pay a special dividend in the coming year, ahead of any future change in the favorable tax treatment those dividends now receive. “If I were a C.E.O.’s tax lawyer, that would certainly be my advice,” he said.

As the Stulz team noted, this trend is in many ways paradoxical and unexpected. In the last 25 years there has been an explosion in financial products intended to help companies manage risk — from currency devaluations to commodity shortages.

“We would expect improvements in financial technology to reduce cash holdings,” the researchers noted.

And yet, corporations have continued to cope with risk the old-fashioned way: by saving for a rainy day. That suggests that either corporations are not making sufficient use of risk-management tools, or that the tools themselves — while helpful — are inadequate to cope with the increased levels of risk that companies now confront, Professor Stulz said.

Some veteran investors also suggest another factor that may have encouraged the growth in cash ratios. Mr. Weintraub, the money manager, pointed out that in the years examined in the Stulz team’s study, Wall Street started giving greater weight to balance-sheet strength.

Though that focus clearly faltered during the technology stock bubble of the late 1990s, it is coming back into vogue in today’s uncertain times, said Quincy Krosby, an economist and chief investment strategist at the Hartford, an insurance and financial services company.

With the markets so unsteady, companies with soft stock prices and solid balance sheets are attracting attention from institutional investors, she said, in part because the companies, especially in the technology realm, have enough cash to expand their market share through acquisitions.

But won’t big cash cushions turn these companies into sitting ducks for leveraged-buyout firms or foreign buyers spending today’s remarkably cheap dollars?

Maybe not — or, at least, maybe not yet.

Professor Dittmar noted that the credit squeeze has made it less likely that highly leveraged private equity funds can go gunning for cash-rich companies, as they have in the past.

Political pressures, meanwhile, are likely to protect American companies from hostile foreign buyers — certainly through an election year, and even longer if the Democrats take the White House and make gains in Congress, Mr. Weintraub noted.

But, with the debt-burdened American consumer cutting back, wouldn’t the risk of a recession decline if companies with overstuffed wallets took their cash out and spent it?

Emphatically not, said Professor Stulz. Research strongly suggests that companies are holding more cash because they need it to operate more safely in a risky environment, he said.

“If they spend it, they will become more fragile,” he added. “And an increase in the number of fragile firms is not in the best interests of the economy.”

    Companies Are Piling Up Cash, NYT, 4.3.2008, http://www.nytimes.com/2008/03/04/business/04cash.html?hp






Construction Spending

Dives in January


March 3, 2008
Filed at 10:45 a.m. ET
The New York Times


WASHINGTON (AP) -- Construction spending took its biggest nosedive in 14 years and manufacturing activity contracted, fresh trouble signs for a struggling economy.

The Commerce Department reported Monday that construction spending plunged by 1.7 percent in January. Builders slashed spending on residential projects, but the weakness spread beyond that ailing sector. There were cutbacks in spending on, among other things, hotels and motels, highways and various projects by state and local governments.

Another report showed fallout from housing and credit problems cutting deeper into manufacturing.

The Institute for Supply Management 's manufacturing index clocked in at 48.3 in February. That was the weakest reading in nearly five years. A reading above 50 indicates expansion. Anything below that shows contraction. Still, the reading was a bit better than the 48.1 that economists were forecasting.

The latest showing on construction activity was worse than economists were expecting. They were forecasting a smaller decline of around 0.8 percent.

The 1.7 percent plunge in total construction spending came after a 1.3 percent decline in December. It was the largest drop since January 1994, when construction spending plummeted by 3.6 percent.

The one-two punch of the housing and credit crises is threatening to push the country into a recession or possibly has done so already.

Harder-to-get credit has thwarted some would-be home buyers, adding to the glut of unsold homes and aggravating the housing industry's woes.

Spreading problems are slowing other sectors of the economy and causing employers to restrain hiring.

To bolster the economy, the Federal Reserve has been cutting a key interest rate since September. It recently turned more forceful, slashing rates by an aggressive 1.25 percentage points over the span of just eight days in January. Fed Chairman Ben Bernanke has signaled another reduction when the Fed meets next on March 18.

The economy's troubles are making people and businesses more cautious in their spending and investing, thus weakening the economy.

The economy barely grew in the final three months of this year -- logging growth at a pace of just 0.6 percent. Many economists believe growth will be even slower in the Janaury-to-March quarter. And, a growing number of analysts think the economy contracted during this period. Under one rule, the country is considered to be in a recession if economic activity shrinks for six straight months.

Monday's report showed that private builders cut spending on housing projects by 3 percent in January, the most since October.

Spending by private builders on a range of commercial construction projects, including transportation facilities, communications facilities, hotels and motels, dropped by 1.2 percent in January. That was the largest decline since June 2005.

Government spending on public works projects dipped 0.2 percent in January. All that weakness, however, represented cutbacks in spending by state and local governments. The federal government boosted spending.

    Construction Spending Dives in January, NYT, 3.3.2008, http://www.nytimes.com/aponline/us/AP-Economy.html






Oil Prices Pass

Inflation-Adjusted Record


March 3, 2008
The New York Times


Setting an all-time record, oil prices rose to nearly $104 a barrel on Monday morning, exceeding their inflation-adjusted high reached in the early 1980s during the second oil shock.

Oil futures rose as much as $2.11 to $103.95 on the New York Mercantile Exchange. That level tops the record set in April 1980 of $39.50 a barrel, which would translate to $103.76 a barrel in today’s money.

The latest surge in oil prices is taking place as investors seek refuge in commodities to offset a slowing economy and declines in the dollar, as well as to hedge against inflation.

The dollar fell to its lowest level in three years against the yen on Monday. It also dropped to a record $1.5274 in early New York trading against the euro following steep declines last week.

Today’s record oil prices are markedly different from the energy crises of the 1970s and 1980s, which were brought about by sudden interruptions in oil supplies.

Since the year 2000, oil prices have more than quadrupled as strong growth in demand from the United States and Asia outstripped the ability of oil producers to increase their output.

Other energy futures also rallied on Monday. Heating oil futures jumped 6.06 cents to $2.8675 a gallon, while gasoline futures rose 5.65 cents to $2.7264 a gallon. Natural gas gained 20 cents to $9.566 per thousand cubic feet.

In London, Brent crude futures rose $2.07 to $102.17 a barrel on the ICE Futures exchange.

The OPEC oil cartel meets on Wednesday and is expected to leave its production levels unchanged. The oil producing group had suggested last month that it might curb production soon to make up for a seasonal decline in oil demand.

But with oil prices at their current levels, analysts said members of the Organization of the Petroleum Exporting Countries will find it politically difficult to curb their output at this time.

    Oil Prices Pass Inflation-Adjusted Record, NYT, 3.3.2008, http://www.nytimes.com/2008/03/03/business/worldbusiness/03cnd-oil.html






Oil Jumps to New Record

on Dollar's Fall


March 3, 2008
Filed at 10:19 a.m. ET
The New York Times


NEW YORK (AP) -- Oil prices surged to a new record high Monday as the dollar weakened to another low against the euro.

Light, sweet crude for April delivery rose $1.93 to $103.77 on the New York Mercantile Exchange after earlier rising as high as $103.95. That's higher than the price of $103.76 that many analysts believe oil hit in 1980, when adjusted for inflation into 2008 dollars.

Oil's most recent run into record territory has been driven by the greenback's slump against other world currencies. 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 dollar is falling.

Oil isn't the only commodity rising on the dollar's weakness -- gold, copper and wheat are among the other commodities that have rallied in recent weeks as the dollar has fallen.

''It's coming down to another commodity price rally,'' said Phil Flynn, an analyst at Alaron Trading Corp., in Chicago.

Other energy futures also rallied Monday. In other Nymex trading, April heating oil futures jumped 6.06 cents to $2.8675 a gallon, and April gasoline futures rose 5.65 cents to $2.7264 a gallon. April natural gas futures gained 20 cents to $9.566 per 1,000 cubic feet.

In London, Brent crude futures rose $2.07 to $102.17 a barrel on the ICE Futures exchange.

    Oil Jumps to New Record on Dollar's Fall, NYT, 3.3.2008, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html?hp






Credit Crisis Seen

As Economic Threat


March 3, 2008
Filed at 3:23 a.m. ET
The New  York Times


WASHINGTON (AP) -- The cascading fallout from the subprime loan crisis, barely a cloud on the horizon a year ago, is now viewed by experts as the economy's gravest threat.

In a survey being released Monday, 34 percent of the members of the National Association for Business Economics ranked the financial market turmoil from those loan defaults as the No. 1 threat to the economy over the next two years.

That compares with 18 percent from an August survey, when the most serious threat was seen by 20 percent of the economists as terrorism and the conflicts in the Middle East.

A year ago, the credit crisis did not even register as a chief threat.

The latest survey found that 18 percent of association members listed excessive debt held by households and businesses as the top problem.

The questioning of 259 economists took place during the first two weeks of February. Events since then have underscored the credit crisis problems.

On Friday, the Dow Jones industrial average plunged by 315.79 points. The decline resulted from a combination of grim economic news, including a new estimate from UBS Securities analysts that the financial system losses from securities backed by mortgages and other debt would total $600 billion. That far surpassed the $400 billion that many economists projected until recently.

At the heart of financial institutions' problems are securities backed by subprime mortgages. They have gone into default at record rates because of the housing market's steep slump. These loans were extended to borrowers with weak credit histories.

A separate 49-member NABE forecasting panel recently raised its expectations of a recession, with close to half thinking a downturn will start before year's end.

But 55 percent of the forecasting panel still thinks a downturn can be avoided with the help of an $168 billion economic aid plan and aggressive interest rate cuts by the Federal Reserve.

But the policy survey highlighted the bind the Fed finds itself in. Some 10 percent of respondents said inflation was the No. 1 economic problem, a rating that put it behind worries about subprime mortgages and debt.

The Fed has taken on the credit crisis and the accompanying weak economic growth by cutting interest rates. But to fight inflation, the Fed would have to raise rates. It cannot battle both threats at the same time.

In congressional testimony this past week, Fed Chairman Ben Bernanke signaled that the central bank believes weak growth is the biggest threat at the present, boosting chances of an additional rate cut when the Fed next meets, March 18.

The new NABE policy survey found that only 48 percent of those questioned believed the Fed's policies were ''about right.'' That was the lowest reading in the past two years. It compares with 72 percent who felt the Fed was doing a good job in the August survey, taken before the Fed started cutting interest rates.

Of those unhappy with Fed policy, 34 percent felt the central bank was lowering rates too much; some 13 percent felt it was still being too restrictive and not cutting rates fast enough.

The new survey was taken after the Fed's January cuts in the federal funds rate of 1.25 percentage points, the biggest one-month reduction in a quarter-century.

Ellen Hughes-Cromwick, the president of NABE and the chief economist for Ford Motor Co., noted that the 34 percent who believe the Fed is being too stimulative and thus raising inflation risks had more than tripled from the past survey.

She said this reflected the concerns many economists have about the threat inflation poses, with crude oil prices hitting records above $102 per barrel and food costs rising. Both consumer prices and wholesale prices jumped sharply in January.

In his testimony last week, Bernanke said Fed officials were watching inflation developments closely but still believed that the slowing economy would dampen inflation in the months ahead.

On other topics, the NABE survey found only 35 percent of respondents ranked the government's budget policies as ''about right,'' compared with 45 percent in August. That probably reflects projections that the budget deficit could hit all-time highs this year and next.

Economists retained their support for free trade: 79 percent said they viewed greater flows of goods and capital as having a net positive impact over the next decade. But 62 percent felt that sovereign wealth funds, government-controlled investment vehicles, should be more open about their operations.


On the Net:

National Association for Business Economics: http://www.nabe.com

    Credit Crisis Seen As Economic Threat, NYT, 3.3.2008, http://www.nytimes.com/aponline/business/AP-Economic-Threats.html






States and Cities Start

Rebelling on Bond Ratings


March 3, 2008
The New York Times


Does Wall Street underrate Main Street?

A growing number of states and cities say yes. If they are right, billions of taxpayers’ dollars — money that could be used to build schools, pave roads and repair bridges — are being siphoned off in the financial markets, where the recent tumult has driven up borrowing costs for many communities.

A complex system of credit ratings and insurance policies that Wall Street uses to set prices for municipal bonds makes borrowing needlessly expensive for many localities, some officials say. States and cities have begun to fight back, saying they can no longer afford the status quo given the slackening economy and recent market turmoil.

Municipal bonds, often considered among the safest investments, sank along with stocks last week, darkening the already grim mood in the markets. Several big hedge funds unloaded bonds as banks further tightened credit to contain the damage from mounting losses on home mortgages and other loans.

States and cities rarely dishonor their debts. The bonds they sell to investors are generally tax-free and much safer than those issued by corporations. But some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations. Taxpayers ultimately pay the price, the officials say, in the form of higher fees and interest costs on public debt.

“Taxpayers are paying billions of dollars in increased costs because of the dual standard used by the rating bureaus,” said Bill Lockyer, treasurer of California, who is leading a nationwide campaign to change the way the bonds are rated. California, one of the largest issuers of municipal bonds, is rated A; Mr. Lockyer said the state should be triple A.

The state is soliciting support from other municipalities for a letter it intends to send to the ratings agencies, arguing that municipal bonds should be rated on the same scale as the one used for corporate bonds.

Because of their relatively weak credit scores, more than half of all municipal borrowers buy insurance policies that safeguard their bonds in the unlikely event that they fail to pay the debt. California, for instance, paid $102 million to insure more than $9 billion in general obligation debt between 2003 and 2007.

Ratings agencies like Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are paid a second time to evaluate the insured bonds.

Officials at ratings firms and bond insurance companies defend the system, saying it gives investors the information they need to buy bonds with confidence. The recent turmoil, they say, highlights the need for insurance. They further add that rating municipal bonds like corporate debt would not save taxpayers much money, if any.

The outcry in the municipal market comes at a difficult time for the ratings firms and bond insurers. S.& P., Moody’s and Fitch Ratings have drawn criticism for assigning their highest grades to securities tied to subprime mortgages, only to downgrade them later as defaults surged and the investments tumbled in value.

The plunging fortunes of bond guarantors, meantime, have cast doubt over the value of the insurance policies municipalities buy.

“We are learning essentially that the emperor may have no clothes, that there is no real reason to require these towns to have insurance in many instances,” said Richard Blumenthal, the attorney general of Connecticut, who is investigating the ratings firms on antitrust grounds. “And it simply serves the bottom lines of the ratings agencies, the insurers or both.”

The House Financial Services Committee plans to examine how municipal bonds are rated at a hearing on March 12.

At every rating, municipal bonds default less often than similarly rated corporate bonds, according to Moody’s. In fact, since 1970, A-rated municipal bonds have defaulted far less frequently than corporate bonds with top triple-A ratings. Furthermore, when municipalities do default, investors usually receive some — or even all — of their money back, unlike in most corporate bankruptcies.

But critics like Mr. Lockyer and Mr. Blumenthal face an uphill battle to change the Wall Street system. Upgrading municipal ratings would dramatically alter the landscape of the $2.6 trillion market; Moody’s estimates that more than half of the market would be rated triple A or double A using the corporate scale. Triple-A securities are considered nearly as safe as Treasury bonds issued by the federal government.

Moreover, some bond specialists caution that this is the wrong time to rerate municipal bonds. The slowing economy and faltering housing market are squeezing state and city tax revenue. At the same time, public pension liabilities keep rising. Facing budget shortfalls, states like California, New Jersey and Arizona are cutting services.

Ratings firms, bond insurance companies and some bond investors defend the separate ratings scales, arguing that it allows investors to make distinctions among various debt and, ultimately, set appropriate interest rates. Defenders of the current system say that sophisticated investors understand that the letter grades assigned to corporate bonds and municipal debt mean different things.

Gail Sussman, the Moody’s executive in charge of public finance ratings, likened the firm’s dual ratings scale to a ruler that measures in inches on one side and centimeters on the other.

“The distance between point A and point B is the same” whether it is measured in inches of centimeters, Ms. Sussman said.

Moody’s says it is willing to discuss changing its scale; so far few local and state officials have asked for a change, Ms. Sussman said. And when Moody’s asked for comments on the issue several years ago, investors, bankers and insurers overwhelmingly favored the status quo, she said.

Executives at S.& P., however, say they use a single global rating scale to measure all kinds of debt. Colleen Woodell, chief quality officer for public finance, acknowledged that municipal debt had defaulted at lower rates than corporate issues, but she noted that the data covered a relatively benign 20-year period.

Ms. Woodell said the disparity was “within a tolerable band” and would diminish over time. She said the firm upgraded a number of municipalities after it finished its first default study in 2000. (Data on S.& P.-rated municipal and corporate debt from the early 1980s to 2006 show similar differences in default rates as those rated by Moody’s.)

Some sophisticated bond investors say that if municipalities were rated on the same scale as corporations, it would be harder to distinguish the relative riskiness of various cities, states and school districts, and mutual fund companies would have to evaluate bonds issue by issue.

“If you rate 95 percent of the issues the same, the ratings cease to be useful, and investors need and utilize these ratings to differentiate credits,” said John Miller, chief investment officer at Nuveen Asset Management in Chicago, which manages about $65 billion in mostly tax-exempt bonds.

But local and state officials counter that a universal rating system would emphasize the relative safety of their debt against other bonds, arguably attracting more investors. In periods of stress like now more ready buyers would help reduce instability and help keep borrowing costs low.

So far, Mr. Lockyer has won support for his plan from half a dozen states, including Connecticut, Oregon and Washington, as well as from numerous cities and local authorities. They plan to send a letter to the three ratings agencies early this week calling for action.

Other public finance officials, including those for New York City, said that while they agreed municipal bonds were underrated, they would not sign the letter. New York City’s bond rating is double A.

The Government Finance Officers Association of the United States and Canada, which represents 17,200 local and state governments, is weighing whether it wants to take a stand on the issue before its annual conference in June.

The debate is not new. It has been pushed to the forefront because of the recent concern about the strength of bond insurance companies like MBIA and the Ambac Financial Group, which together guarantee interest and principal payments on $733 billion in municipal debt.

The insurers are themselves rated triple A — on the corporate scale — by Moody’s and S.& P., and essentially transfer those gilt-edged ratings to municipal issuers through the policies they sell. Municipal issuers with lower ratings paid $2.5 billion in premiums for bond insurance last year alone. In exchange, they typically pay lower interest rates on their debt than they would without the insurance.

Robert G. Shoback, a senior managing director of public finance at Ambac, said bond insurance lowered the cost of borrowing money, especially for smaller municipalities and school districts that might not be well known on Wall Street. Investors have relied on insurance for “comfort, confidence and stability,” he said.

But this year investors effectively stripped away the premium they placed on insured municipal bonds because they feared the bond insurers would lose their top ratings and, as a result, the bonds those companies insured would be downgraded, too.

“The industry is at a significant point now in how it views itself, how it interprets risk and how it will use insurance going forward,” said Thomas Doe, chief executive of Municipal Market Advisors, a research firm.

Mr. Blumenthal, the Connecticut attorney general, said the recent turmoil had allowed municipalities to voice long-held frustrations that they did not feel comfortable expressing earlier, fearful that ratings firms would refuse to rate them or give them low ratings.

The California group and other municipalities say there may be some middle ground where the two sides could compromise. Investors could still have finer delineations among bonds if rating agencies added suffixes to the newly triple-A-rated bonds, like Aaa1, Aaa2, and so on, said Roger L. Anderson, executive director for the New Jersey Education Facilities Authority, who has agreed to sign California’s letter.

Ms. Sussman, of Moody’s, said the firm would be wary about adding qualifiers to triple-A ratings, which the company regards as “gilt-edged.”

States and Cities Start Rebelling on Bond Ratings, NYT, 3.3.2008, http://www.nytimes.com/2008/03/03/business/03bond.html




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