History > 2007 > USA > Economy (III)

Economy Grew 3.9% in 3rd Quarter

October 31, 2007
Filed at 9:14 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The economy picked up speed in the summer, growing at a brisk 3.9 percent pace, the fastest in 1 1/2 years and an impressive performance even as a credit crunch plunged the housing market deeper into turmoil.

The latest snapshot of the country's economic health, released by the Commerce Department on Wednesday, suggested that the economy is demonstrating much resilience and thus far holding up well to the strains in the housing and credit markets, which had intensified during the third quarter and rocked Wall Street.

Individuals ratcheted up their spending. U.S. businesses sold more goods abroad and boosted some investment at home. Those were some of the main factors helping to push up overall economic activity in the July-to-September quarter.

The third quarter's growth rate was up slightly from a 3.8 percent pace logged in the second quarter. It marked the strongest showing since the first quarter of last year.

The increase in third quarter gross domestic product exceeded analysts' forecasts for a 3.1 percent growth rate for the period. Gross domestic product is the value of all goods and services produced within the United States and is considered the best barometer of the country's economic fitness.

The strong performance came despite the worsening housing slump.

Builders slashed investment in housing projects by 20.1 percent, on an annualized basis, in the third quarter, the largest drop in a year. That was even deeper than the 11.8 percent annualized cut made in the second quarter and provided stark evidence of the problems in the housing market.

The new figures on the economy come as the Federal Reserve meets for a second day Wednesday to weigh whether it needs to lower a key interest rate to protect the economy down the road from the ill effects of the ailing housing market. Wall Street investors are betting on a smaller, one-quarter percentage point cut. That would follow up on a bolder half-percentage point reduction ordered in September, the first rate cut in more than four years.

The ill effects of the housing slump and credit crunch, however, didn't deter consumers.

Consumers, whose spending is an important ingredient for the economy's good health, actually rediscovered their appetite to spend in the third quarter. Their spending rose at a 3 percent pace, a considerable improvement from the second quarter's rather weak 1.4 percent growth rate.

One of the reasons why people are continuing to spend is because the nation's employment climate has managed to stay fairly sturdy through all the problems.

Wage and job gains have served as shock absorbers for some of the negative forces of an ailing housing market, weaker home prices and more restrictive credit.

In other economic news, the Labor Department reported that employers' costs to hire and retain workers rose by 0.8 percent in the July-to-September quarter. That was down a bit from a 0.9 percent increase posted in the second quarter but marked a solid showing.

Still, the carnage in the housing meltdown has been painfully felt, especially in the area of higher-risk ''subprime'' mortgages made to people with spotty credit. Home foreclosures have soared. Lenders have been forced out of business. And, financial institutions have wracked up huge losses.

Businesses, meanwhile, increased their spending on equipment and software at a 5.9 percent pace in the third quarter, up from a 4.7 percent growth rate in the prior period. They also boosted their investment in inventories, another factor that added to GDP.

Strong sales of U.S. exports to foreign buyers was another big factor in the good third-quarter showing. Exports of goods and services grew by 16.2 percent, on an annualized basis, during the quarter. That was the biggest increase since the final quarter of 2003.

Business investment in commercial structures, such as office buildings and factories, grew at a 12.3 percent pace in the third quarter, a good showing but down from a sizzling 26.2 percent growth rate in the second quarter.

Government spending also contributed to third quarter GDP growth. Such spending rose at a rate of 3.7 percent, following a 4.1 percent pace in the second quarter.

As the economy picked up a bit of speed, so did inflation, although the rise wasn't seen as worrisome..

An inflation gauge closely watched by the Federal Reserve showed ''core'' prices -- excluding food and energy -- rose at a rate of 1.8 percent in the third quarter. Although that was up from a 1.4 percent pace in the second quarter, it was still within the Fed's ''comfort zone.''

Still, skyrocketing oil prices, which have reached record highs in recent days, may pose a risk to the economy. If it causes prices of other goods and services to rise, inflation could spread. If more expensive energy prices chill consumer spending, it could add to the forces threatening to slow economic activity.

The meltdown in the mortgage market has made it harder for people to obtain financing to buy homes. That's aggravating problems in the housing market and leading to a mounting pileup of unsold homes. Given that, the housing slump is expected to drag on well into next year.

The Fed's overriding worry is that problems in housing and harder-to-get credit could seriously crimp spending and investing by people and businesses, dealing a dangerous blow to the national economy. Many analysts are hopeful the economy can avoid a recession. Growth in the current October-to-December quarter is expected to slow to a pace of around 2 percent or less.

Economy Grew 3.9% in 3rd Quarter, NYT, 31.10.2007, http://www.nytimes.com/aponline/business/AP-Economy.html

MasterCard Profit Soars 63%

October 31, 2007
Filed at 9:44 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- MasterCard Inc., the world's No. 2 credit card processor, said Wednesday that increased cardholder spending, particularly overseas, boosted its profit by 63 percent in the third quarter.

Its shares soared more than 11 percent in morning trading to a new all-time high.

The Purchase, N.Y.-based company said profit in the July to September period was $314 million, or $2.31 a share, up from $193 million, or $1.42 a share, a year ago.

The latest results include after-tax gains from the partial sale of its investment in Redecard SA, a company that signs up merchants in Brazil.

Excluding that gain, profit came to $1.80 per share.

Revenue rose 20 percent to a record $1.08 billion from $902 million a year ago.

The results beat estimates. Analysts polled by Thomson Financial predicted earnings of $1.42 per share on revenue of $1.03 billion.

''We continue to benefit from positive secular trends and outstanding growth in international and emerging markets,'' said Robert W. Selander, MasterCard's president and chief executive officer, in a statement.

MasterCard shares climbed $18.20, or 11.6 percent, to $175.35 in morning trading Wednesday after rising to a new all-time high of $179.40. It had priced its initial public offering in May 2006 at $39 a share.

Companies in the financial sector, particularly banks and brokerages, have posted dismal third-quarter results this year due to defaulting home loans and tightening credit markets.

The card business, however, has not seen much credit deterioration -- and furthermore, MasterCard is a payment processor, meaning it makes its money through branding and fees. The debt risk is held by the 25,000 banks in more than 200 countries that issue its cards.

MasterCard's results did reflect a slowdown in the United States, but that softness was offset by significant gains in Latin America, South Asia, the Middle East, Africa and Europe.

U.S. credit and charge programs saw a decline, but abroad, those programs posted growth. And while debit programs in the United States rose only moderately, they increased sharply overseas.

Total gross dollar volume gained 12.8 percent to $577 billion, and the number of total transactions processed rose13.3 percent to 4.8 billion.

Cross-border transactions rose 20.6 percent in the most recent quarter.

Worldwide purchase volume rose 14.1 percent to $430 billion.

Total operating expenses rose 16.3 percent to $730 million.

The weakening dollar contributed to 2.3 percent of MasterCard's quarterly revenue growth and 1.6 percent of operating expenses, the company said. The dollar has been tumbling to new lows this year against the euro.

    MasterCard Profit Soars 63%, NYT, 31.10.2007, http://www.nytimes.com/aponline/business/AP-Earns-MasterCard.html

Kellogg’s Posts Higher Net and Raises Outlook

October 29, 2007
Filed at 9:46 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

GRAND RAPIDS, Mich. (AP) -- Cereal and snack maker Kellogg Co. reported Monday its third-quarter earnings rose 9 percent, but warned that 2008 earnings will not meet Wall Street's expectations.

Its shares fell about 3.6 percent in morning trading Monday.

The world's leading cereal producer earned $305 million, or 76 cents per share, in the July-September period, up from $281 million, or 70 cents per share, a year earlier.

The company's performance beat the average estimate of analysts polled by Thomson Financial by 3 cents per share.

Kellogg reported sales of $3 billion in the latest quarter, up 6 percent from $2.8 billion a year ago.

For the first nine months of 2007, the company reported net earnings of $927 million, or $2.31 per share, up from $822 million, or $2.06 per share, a year ago. Nine-month sales rose to $9 billion from $8.3 billion a year ago.

''We achieved our goals by remaining focused on our game plan,'' David Mackay, Kellogg's chief executive, said in a statement. ''We continue to lay the groundwork for future growth and reinvest into the business.

''Our third-quarter advertising investment rose at a double-digit rate and we're planning another increase in the fourth quarter. This investment gives us the confidence to once again raise our 2007 earnings guidance.''

The company raised its full-year guidance by a penny, to a range of $2.72-$2.75 per share. But the guidance is still below the $2.77 per share, on average, forecast by analysts.

Kellogg also gave preliminary guidance for 2008 of $2.92 to $2.97 per share, less than the average of $3.04 that analysts predict.

In addition to cereals like Apple Jacks and Special K, Battle Creek-based Kellogg is a top maker of snacks and convenience foods. Its brands include Pop-Tarts toaster pastries, Eggo frozen waffles and Keebler cookies and crackers.

Its shares fell $1.94 to $52.50 in morning trading.

    Kellogg’s Posts Higher Net and Raises Outlook, NYT, 29.10.2007, http://www.nytimes.com/aponline/business/AP-Earns-Kellogg.html

Workers at Chrysler Approve Contract

October 28, 2007
The New York Times
By MICHELINE MAYNARD

DETROIT, Oct. 27 — Members of the United Automobile Workers union narrowly approved a four-year contract with Chrysler, the union said Saturday, clearing the way for talks to move forward at the Ford Motor Company.

Approval of the Chrysler contract came after one of the most tumultuous votes in recent memory. Some local union officials opposed the agreement, reached on Oct. 10 after a six-hour strike. It looked to be in danger when workers at four assembly plants rejected the contract in votes last weekend.

Opponents voiced concerns that the contract did not provide as many guarantees of future work as a similar contract approved by workers at General Motors earlier this month, after a two-day strike.

Still, the Chrysler contract gained support at smaller plants as well as four big factories in Detroit. On Saturday, the union said 56 percent of hourly workers and 51 percent of skilled trades workers approved the agreement.

The last plant to vote on the contract was Chrysler’s factory in Belvidere, Ill., which defeated the agreement by a vote of 55 percent no to 45 percent yes. But the contract’s margin of victory before the Belvidere vote was enough for it to pass.

Union leaders acknowledged the close vote. “Our members had to face some tough choices, and we had a solid, democratic debate about this contract,” the union’s president, Ron Gettelfinger, said in a statement.

In a statement, Chrysler’s co-president, Thomas W. LaSorda, said the company was “pleased that our U.A.W. employees recognize that the new agreement meets the needs of the company and its employees by providing a framework to improve our long-term manufacturing competitiveness.”

Mr. Gettelfinger and the union’s vice president for Chrysler, General Holiefield, made an intense push for ratification over the last few days. Several local leaders credited Mr. Holiefield’s efforts, in particular, for the contract’s approval.

There has not been a defeat of a contract at a Detroit auto company since 1982, when Chrysler workers rejected a deal that did not fully restore concessions they granted when the company was close to bankruptcy in 1979.

“There’s no question this was a difficult set of negotiations during difficult times for the U.S. auto industry,” Mr. Holiefield said in the union’s statement.

The most difficult times, however, may be at Ford, the last company that will negotiate a new deal with the union.

Ford had pushed hard to go first in the negotiations, which would have given it the most leverage to devise a contract according to its needs. Instead, the company will now face pressure to accept the terms of the agreements at G.M. and Chrysler, a practice called “pattern bargaining.”

Ford is expected to follow the “essence of the pattern,” said David L. Gregory, a professor of labor law at St. John’s University in Queens. However, “there’s going to have to be more flexibility because of Ford’s predicament,” he said.

Ford is in the worst shape of the Detroit auto companies. It lost $12.6 billion in 2006 and does not expect to earn money in North America until 2009. It is in the midst of a revamping plan called the Way Forward, which will include closing plants and eliminating 30,000 jobs.

Last year, Ford borrowed $23 billion by pledging virtually all of its assets, including plants, divisions and even its blue-oval logo as collateral. It has also put its Jaguar and Land Rover divisions up for sale, and is expected to receive bids for them by Tuesday.

That money is meant to pay for its reorganization as well as the development of new products.

Even so, Ford officials say they can afford the contract’s primary feature, a health care trust that will assume responsibility for the company’s liability for current and retired workers’ benefits.

However, Ford officials are said to be reluctant to make the same guarantees for future investments that G.M. made in its contract, especially since it has not named all the plants it will shut as part of its makeover.

Chrysler also was reluctant to give specific assurances, and it saw its contract voted down at plants like its St. Louis South factory, where no decision has been made about future work.

In order to avoid the same turbulence, “the company may have to make extravagant promises that it really can’t fulfill,” Mr. Gregory said.

Still, the union goes to Ford on familiar terms. Mr. Gettelfinger came up through Ford’s ranks, starting with his first job at the company’s Louisville truck plant. He ran the union’s Ford department before becoming the union’s president.

The union’s chief bargainer, Bob King, was president of its biggest local in Dearborn, Mich., which includes the sprawling Rouge complex as well as the Dearborn assembly plant.

Given what happened at Chrysler, the leaders will move quickly to persuade Ford workers to support a deal, said Richard Block, acting director of the School of Labor and Industrial Relations at Michigan State University.

“They won’t make the same mistake twice,” he said.
 

Nick Bunkley and Mary M. Chapman contributed reporting.

    Workers at Chrysler Approve Contract, NYT, 28.10.2007, http://www.nytimes.com/2007/10/28/business/28auto.html?hp

Microsoft beats Google to Facebook stake

Wed Oct 24, 2007
8:30pm EDT
Reuters
By Daisuke Wakabayashi

SEATTLE (Reuters) - Microsoft Corp beat out Google Inc on Wednesday in a battle to invest in socializing Web site Facebook, agreeing to pay $240 million for a 1.6 percent stake in the Web phenomenon.

Microsoft also clinched exclusive rights to sell ads on Facebook outside of the United States as part of the investment that valued Facebook at $15 billion -- on par with the market capitalizations of retailer Gap Inc and hotel chain Marriott International Inc.

Analysts said Microsoft paid a steep price on a bet that the three-year-old company would be able to transform itself into a hub for all sorts of Web activity.

"The only way this works is if Facebook becomes sort of the users' operating system on the Internet -- everyone logs into Facebook every day to get in contact with their friends and use a multitude of future applications that will be developed for it," said Morningstar analyst Toan Tran.

Facebook, a social network that lets friends share information, allows outside developers to create games and other applications for its site.

The popularity and depth of knowledge Facebook has about its users makes it valuable to companies like Microsoft and Google which want to sell advertising targeted to individual preferences.

Founded in 2004 by Harvard student Mark Zuckerberg, Facebook said it registers 250,000 new users a day, 60 percent of whom come from outside the United States.

Kevin Johnson, president of Microsoft's platform and services division, said the $15 billion price tag for Facebook is based on Microsoft's belief that the site could eventually reach 300 million users, who can be targeted for advertising. It has nearly 50 million today.

"You combine the number of users with the monetization opportunities and you can figure out a fairly modest average revenue per user per year and you can very quickly get to this level of valuation," Johnson said in a conference call with analysts and reporters.

Microsoft has stepped up efforts to be a player in the $40 billion market for online advertising, which the company expects to double in size within three years. It paid $6 billion to acquire digital advertising firm aQuantive in August.

Under the Facebook deal, Microsoft would be the exclusive third-party advertising platform for Facebook extending a previous deal for Microsoft to sell banner advertising next to Facebook member profiles in the U.S. until 2011.

GOOGLE VS. MICROSOFT

Google and Microsoft, now rivals for Internet-based audiences and applications, have butted heads before for Internet properties. Google beat Microsoft with a $1.65 billion acquisition of online video sharing site YouTube last year.

Forrester Research analyst Charlene Li said that Microsoft was a better strategic fit for Facebook, since it knew how to work with software developers and build computing environments -- such as its Windows operating system.

"Microsoft is a company that knows how to build platforms, knows how to develop relationships with developers. Microsoft developed the network that is the biggest, most vibrant one out there," she said. "Google didn't bring as much to the deal."

Facebook opened its doors to users beyond an original base of college students a year ago. It also opened the doors to outside developers and there are tens of thousands of developers writing Facebook applications, the company said.

Microsoft was one of many suitors looking to participate in its latest round of financing, said Facebook Vice President Owen Van Natta. The funds will go toward doubling the company's staff over the next year and other growth initiatives.

Google Co-founder Sergey Brin told a meeting with Wall Street analysts at the company's Silicon Valley headquarters that his company could partner with important Web sites.

"We don't feel, at a higher level, that we need to own every successful company on the Internet," said Brin, who later told reporters that Microsoft may have overbid.

Google has a multiyear deal with MySpace, the largest social network, to provide search and advertising alongside MySpace's 110 million user profiles.

Eric Schmidt, Google's CEO, told reporters that its pact with MySpace is performing better than originally expected.

Shares of Microsoft rose slightly to $31.60 from a Nasdaq close of $31.25, while Google ticked down to $675.30 from a close of $675.82.
 

(Additional reporting by Eric Auchard in San Francisco, Paul Thomasch in New York)

    Microsoft beats Google to Facebook stake, R, 25.10.2007, http://www.reuters.com/article/newsOne/idUSN2424560420071025

Existing home sales fall in September

24 October 2007
USA Today
By Martin Crutsinger, AP Economics Writer

WASHINGTON — Sales of existing homes plunged by a record amount in September as turmoil in mortgage markets added more problems to a housing industry in its worst slump in 16 years.

The National Association of Realtors reported Wednesday that sales of existing homes fell 8% in September from the previous month, the largest decline to show up in records dating to 1999. The seasonally adjusted annual sales rate of 5.04 million existing homes was also the slowest pace on record and was down 19.1% from a year ago.

The weakness in sales translated into further pressure on prices. The median price — the point at which half the homes sold for more and half for less — fell to $211,700 in September, down 4.2% from the sales price a year ago. It marked the 13th time out of the past 14 months that the year-over-year sales price has decreased.

The 8% decline in sales was bigger than the 4.5% decline that had been expected.

Analysts blamed the bigger-than-expected slump on the turmoil that hit credit markets and mortgage markets in August as worries increased over rising mortgage foreclosures.

Those worries resulted in a drying up of the availability of so-called jumbo mortgages, loans over $417,000, which are particularly important in high-cost areas such as California.

"Mortgage problems were peaking back in August when many of the September closings were being negotiated and that slowed sales notably in higher priced areas that rely more on jumbo loans," said Lawrence Yun, senior economist for the Realtors.

By region of the country sales were down 10% in the Northeast, 9.9% in the West, 7% in the Midwest and 6% in the South.

    Existing home sales fall in September, UT, 24.10.2007, http://www.usatoday.com/money/economy/housing/2007-10-24-existing-homes_N.htm

For Now, G.M. Regains Title of Top Automaker

October 23, 2007
The New York Times
By THE ASSOCIATED PRESS

TOKYO (AP) — Toyota said today that it sold 2.34 million vehicles globally in the third quarter, fewer than General Motors’ tally, as its American rival regained the lead in the race to be the world’s top automaker.

The worldwide vehicle sales for Toyota for the first nine months — at 7.05 million vehicles — also fell short of G.M.’s sales of 7.06 million vehicles for the same period.

But the numbers Toyota released today show the Japanese automaker running neck-and-neck against General Motors, which sold 2.38 million vehicles in the third quarter.

Toyota beat GM in global vehicle sales in the first half of the year, riding on its reputation for high quality, low-mileage small cars such as the Camry, Corolla and gas-electric hybrid Prius.

Toyota’s global vehicle sales for the latest quarter grew 4 percent from the same period a year ago, while sales for the first nine months of the year grew 7 percent.

“With oil prices rising, Toyota has the advantage in the long run,” said Yoshihiro Okumura, auto analyst at Chibagin Asset Management. “Toyota is making a dash to the top.”

Toyota has been in a slight lapse in introducing new models, but its momentum for growth is picking up as it comes out with new offerings, Mr. Okumura said. New models tend to increase sales, and some drivers hold off on purchases until a product gets remodeled.

In August, Toyota set a global sales target of 10.4 million vehicles for 2009 — a number that would put it far ahead of the current industry record of 9.55 million vehicles sold by GM in 1978.

G.M. is fighting back y bolstering overseas sales. G.M. has worn the industry crown of No. 1 automaker for 76 years.

Soaring gas prices have helped to lift Toyota’s sales, but it saw its American sales dip slightly last month, partly because of a record set in the same month a year earlier. Toyota is lowering its sales target in Japan for this year because of a stagnant market.

G.M., which has been trimming jobs and cutting costs, reported last week that third-quarter global sales rose 4 percent to 2.38 million cars and trucks, led by increases in emerging markets outside the United States.

Toyota reported selling 4.72 million vehicles during the first half of the year compared with G.M.’s 4.67 million.

G.M. still led Toyota in vehicles produced worldwide during the first half of the year. Toyota and its group companies produced 4.71 million vehicles in the first half, inching up to G.M.’s 4.75 million vehicles.

    For Now, G.M. Regains Title of Top Automaker, NYT, 23.10.2007, http://www.nytimes.com/aponline/business/22apauto.html

Markets Down as Credit Fears Linger

October 22, 2007
The New York Times
By WAYNE ARNOLD and MICHAEL M. GRYNBAUM

Stock markets around the world fell today as lingering fears over a tight credit market and poor corporate profits continue to worry investors.

The Dow Jones industrials dropped over 100 points at the opening bell, then crawled back in early trading. At 12:15 p.m., the benchmark index was down about 50 points, or 0.4 percent, after losing 2.6 percent of its value in a sharp sell-off on Friday, the 20th anniversary of the 1987 “Black Monday” crash.

The Standard and Poor’s 500-stock index was down about 0.3 percent. The technology-heavy Nasdaq composite index, resisting the trend, was up 0.2 percent.

Crude oil prices dropped more than a dollar in early trading, offering some respite to investors weary of spiking energy costs. Light, sweet crude flirted with the $90 mark last week and is currently at $86.64 a barrel.

Last week’s battery of poor earnings reports, particularly in the financial industry, sent the Dow to its worst weekly performance since late July, as investors worried that the housing slump and problems in the credit market would dramatically slow fourth quarter growth.

The Dow is now down more than 4 percent from its record high, which it hit on Oct. 9. American markets are at their lowest levels in a month.

Friday’s dramatic decline in United States stock prices renewed concerns about the health of the American economy and sent Asian and European stocks sharply lower today, as foreign investors worried that the United States mortgage crisis would crimp demand among American consumers for Asia’s exports.

Hong Kong’s benchmark index of share prices fell by almost 3.3 percent, while in Japan the benchmark Nikkei 225 Stock Average dropped by more than 2.2 percent. South Korean stocks fell by 3.25 percent. Asia’s smaller markets were also hard hit: stocks in the Philippines slid by roughly 4 percent.

In Europe, London’s FTSE 100 fell about 1 percent. The German DAX stock market index was down 1.1 percent, and the Paris market had fallen by around 1.4 percent.

In Asia, the declines rekindled what analysts have been referring to as a “flight from risk,” a phenomenon that hit Asian and emerging markets after the subprime mortgage crisis erupted in late July.

“There’s going to be credit rationing and risk aversion,” said Alastair Newton, managing director and senior political analyst at Lehman Brothers. Investors, he said, “were hypnotized by returns and oblivious to risk.”

Along with a retreat from relatively risky Asian stocks, Asian currencies fell against the dollar, while the dollar dropped against major currencies such as the Japanese yen and the euro. Gold, which has been spiraling higher in recent weeks on fears of rising global inflation and a falling dollar, fell along with other commodities.

Financial shares such as Mizuho Financial Group led the declines after an announcement of lower profits by Wachovia heightened concerns that the fallout from the subprime problems in the United States were spreading. A rising yen also hit Japanese exporters like Canon.

Gold’s decline along with the dollar was somewhat paradoxical considering its traditional role as a hedge against the currency’s depreciation.

Analysts said that demand from fast-growing India, where the popularity of gold jewelry makes it one of the world’s largest consumers of the precious metal, had become a new force in the market. Any fears that India’s economy might slow or that demand for gold jewelry might suffer could also push down global prices for gold, despite a falling dollar.

Concerns that a slowing American economy would crimp demand for bulk commodities such as copper sent other commodity prices down today. But analysts said the long-term demand remained robust thanks to strong economic growth and demand for building materials in China and India. “The general outlook for commodities is quite positive,” said Andrew Pedler, senior resources analyst at the investment group Wilson HTM in Brisbane, Australia.

    Markets Down as Credit Fears Linger, NYT, 22.10.2007, http://www.nytimes.com/2007/10/22/business/22cnd-stox.html?hp

Markets Slide as Wall Street Sees Signs of Trouble

October 20, 2007
The New York Times
By MICHAEL M. GRYNBAUM

Call it Gray Friday.

Stocks plunged to their lowest level in a month yesterday, with the Dow Jones industrials dropping more than 360 points.

The steep drop happened on the 20th anniversary of the one-day plunge that came to be known as Black Monday. And it capped a week in which the market was hit with a battery of poor earnings reports, particularly from large banks.

It also served to remind investors of the economy’s broader problems: the housing slowdown and the tight credit markets.

Yesterday’s slide began with reports of disappointing performances from Wachovia Bank and Caterpillar, the machinery manufacturer. Wachovia’s report of a 10 percent drop in income and $1.3 billion in losses and write-downs followed similar announcements this week from Citigroup and Bank of America.

The Dow, which had its worst week since late July, has fallen more than 4 percent from the record high it set 10 days ago. It closed at 13,522.02, down 366.94 for the day, or 2.6 percent.

“We’re like a bunch of adolescents right now,” Jerry Webman, chief economist at Oppenheimer Funds, said of investors. “Last week we got some good news, and we’re happy. Now we’re all sullen and down in the dumps.”

It was the worst one-day loss for the Dow since Aug. 9, when it lost 387.18 point, though the average remains up 8.5 percent for the year.

The Dow’s decline yesterday was mirrored in the broader Standard & Poor’s 500-stock index and the Nasdaq composite.

Crude oil prices also retreated, falling from the record they reached Thursday. Oil closed down 87 cents, at $88.60. And the dollar hit record lows against the euro.

David Kelly, an economist at Putnam Investments, the mutual fund company in Boston, warned against seeing the market plunge as a bellwether. “What may seem like tough times on Wall Street isn’t so tough for the economy as a whole,” he said.

But a prominent figure in the hedge fund industry, Julian H. Robertson Jr., said yesterday that the economy was heading for a “doozy of a recession.”

“I think the credit situation is worse than anybody realizes,” he said on CNBC. “I don’t think any of the normal indicators you would look at in the economy are really very strong. As a matter of fact, they are weak, and not really getting any better.”

Yesterday’s steep sell-off was reminiscent of the Oct. 19, 1987, decline, though not nearly as harsh. That day brought the Dow’s worst single-session decline ever, a loss of 508 points, or 22.6 percent.

Still, yesterday’s losses were unnerving to investors shaken by a week of write-offs at major banks and the surging price of crude oil.

Wachovia’s report came after Bank of America’s announcement on Thursday that its third-quarter earnings plunged 32 percent, in part because of heavy losses in consumer banking.

“All these financial companies reporting on their earnings is contributing to the sourness of the mood,” Mr. Kelly said. “It’s putting a big focus on a big problem, and I think that’s scaring people on Wall Street who are close to all of these problems.”

Bank of America joined Citigroup and JPMorgan Chase this week in planning an ambitious fund to stave off further problems in the credit markets, though investors seem ambivalent about the safety net. The plan is intended to relieve the pricing pressure on mortgage-backed securities held by institutions and known as structured investment vehicles.

Two such entities in Europe —run by Cheyne Capital Management of London and IKB Deutsche Industriebank of Düsseldorf, Germany — defaulted yesterday on more than $7 billion of debt.

But in the United States, it was clear that investors’ concerns went beyond the financial sector. Earnings reports from Caterpillar and Honeywell International, both part of the Dow industrials, did not meet expectations, and that was seen as a sign that the credit troubles were clouding the broader economy.

Caterpillar posted a 21 percent gain in quarterly profit but fell short of analysts’ estimates. The company cut its full-year profit forecast, sending its stock down 5.3 percent, to $73.57.

Net income at Honeywell, the manufacturer based in New Jersey, climbed 14 percent, and the company raised its yearly sales expectations. But the stock still fell nearly 4 percent, to $58.32.

Shares of 3M, another Dow component, plunged 8.6 percent, to $86.62, even after the company raised its profit forecast and posted a 7.4 percent increase in third-quarter profit. 3M lowered revenue expectations and said it would be forced to cut prices.

The disappointing reports, coupled with a week of mixed economic data, underscore investors’ concerns over the fourth-quarter outlook.

The Fed’s beige book, a report based on surveys of business leaders across the country, said companies expected a “modest” and “mixed” economy in coming months, as prices start to rise and the labor sector weakens.

Yesterday was the 44th day in 2007 when the market moved more than 1 percent, according to Howard Silverblatt, senior index analyst at Standard & Poor’s. In 2006, the market had only 29 such days, he said, suggesting increased jitters among investors.

“What the market hates more than anything else is uncertainty,” said William Rhodes, chief investment strategist at Rhodes Analytics. Yet Mr. Rhodes himself sounded rather uncertain.

“Is this the beginning of a bear market?” he asked. “I have to say right now, I don’t think it is. Ask me in another week, and I might have a different opinion.”

    Markets Slide as Wall Street Sees Signs of Trouble, NYT, 20.10.2007, http://www.nytimes.com/2007/10/20/business/20markets.html?hp

Google 3Q Profit Soars 46 Percent

October 19, 2007
Filed at 10:34 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

SAN FRANCISCO (AP) -- Less than two weeks after its stock price smashed through $600 for the first time, Google Inc. showed why it might not be long before the Internet search leader's shares are flirting with $700.

Even with more people enjoying the summer weather instead of surfing the Web, Google churned out another quarter of astounding earnings and revenue growth likely to propel its stock to new heights Friday.

The third-quarter results, released Thursday, surpassed analyst expectations and demonstrated why Google has emerged as Silicon Valley's most prized company with a market value of more than $200 billion after just nine years in business.

''We're strong and getting stronger,'' Google Chairman Eric Schmidt said in an interview Thursday. ''What I am most pleased about is our model works.''

Investors are happy too. Google shares surged to a new high of $658.49 in Friday's morning trading before dropping back to $646.57, up $6.95.

The healthy boost thrust the Mountain View-based company's market value even further ahead of Cisco Systems Inc.'s in Silicon Valley's pecking order.

Microsoft Corp., which started when Google co-founders Larry Page and Sergey Brin were still toddlers, is now the only high-tech company worth more than the Internet search leader.

As it has been for several years, Google reaped the benefits of running the Internet's most popular advertising network as more marketing dollars shift to the Web from television, radio, newspapers and magazines.

Meanwhile, long-established media are suffering. For instance, third-quarter advertising revenue at three major newspaper publishers -- Gannett Co., McClatchy Co. and Dow Jones & Co. -- declined by a combined $125 million, or 6 percent, from the same period last year.

Chris Winfield, who runs the search engine ad firm 10e20, says Google has become the Internet's equivalent of the Beatles during that rock group's heyday in the 1960s. ''It's pretty amazing. It's almost like they are in control of the world.''

In the third quarter, Google earned $1.07 billion, or $3.38 per share, for the three months ended in September. That was up from net income of $733.4 million, or $2.36 per share, at the same time last year.

If not for the cost of awarding stock to its steadily expanding work force, Google said it would have earned $3.91 per share. That topped the average estimate of $3.78 per share among analysts surveyed by Thomson Financial.

Revenue for the period totaled $4.23 billion, a 57 percent increase from $2.69 billion last year.

After subtracting commissions paid to its thousands of advertising partners, Google's revenue stood at $3.01 billion -- about $70 million above the average analyst estimate.

The performance represented a return to form for Google after its second-quarter earnings disappointed Wall Street. The company has surpassed analyst estimates in all but two of the 13 quarters since its August 2004 initial public offering. As a result, Google's stock price has increased more than sevenfold since the IPO.

RBC Capital Markets analyst Jordan Rohan is among those who still sees plenty of upside in stock. After digesting Google's third-quarter results, he raised his price target for the stock to $725, up from $690 previously.

''At a high level, Google remains the company with the strongest fundamentals in the Internet,'' Rohan wrote in a research note Friday.

Although it relies on complex technology, Google's business formula is fairly simple. As it processes a search request, Google also scans its database for text-based ads related to the same topic as the query and displays the commercial messages along the side and top of the results page.

Google gets paid when someone clicks on an ad on its pages or on one of its partners' sites.

There's ample opportunity to display ads, with Google fielding about 1.2 billion search requests worldwide per day, based on the latest data from comScore Inc. That's more than quadruple the number of requests handled by Yahoo Inc., which runs the second-largest search engine.

While becoming even more dominant in search, Google also is branching in new directions that are creating new ways to sell ads and opening up potential new revenue channels in the software applications market.

In the past few months, Google unveiled a way to show text-based ads across the bottom of videos supplied by its YouTube subsidiary and also began distributing ads within ''widgets'' -- the interactive capsules that are becoming Internet staples.

In a sign of its ambitious expansion plans, Google added another 2,130 employees in the third quarter -- more than in any three-month period in its history. Management said the summer additions included about 1,000 hires right out of college and 300 employees inherited in its $625 million acquisition of e-mail specialist Postini Inc.

Schmidt assured analysts that Google is closely monitoring the size of its work force and indicated the hiring will be more modest in the current quarter.

As of Sept. 30, the company's payroll totaled 15,916 people, including hundreds who have become millionaires.

    Google 3Q Profit Soars 46 Percent, NYT, 19.10.2007, http://www.nytimes.com/aponline/technology/AP-Earns-Google.html

Earnings Fall 32 Percent at Bank of America

October 18, 2007
The New York Times
By ERIC DASH

Bank of America’s third-quarter earnings dropped 32 percent, badly hurt by a spike in consumer credit costs and the poor performance of an investment banking unit that has clamored for respect on Wall Street.

The bank’s big consumer division absorbed heavy losses as it bolstered its reserves by $865 million, or 52 percent, in anticipation of higher losses across all businesses. Meanwhile, the investment bank was hurt badly by the credit market turmoil, as the dismal performance in virtually all of its fixed-income activities caused profit to drop 93 percent.

Net income in the third quarter was $3.7 billion, or 82 cents a share, compared with $5.42 billion, or $1.18 a share, a year ago. Revenue declined 12 percent, to $16.3 billion.

Without a profit warning, the results caught Wall Street off-guard today and suggested the extent to which the bank is under stress from the downturn in the housing market and a slowdown in the consumer economy. The heavy trading losses raise questions about its risk management practices.

As the third consecutive quarter that Bank of America has failed to significantly grow revenue, the results call into question its ability to transform itself from a deal machine to an internal growth powerhouse under pressure from a federal deposit cap.

The bank’s chairman and chief executive, Kenneth D. Lewis, said the performance was not acceptable. He vowed to aggressively cut expenses as the economy’s growth prospects slow and promised changes in its investment bank.

“While the significant dislocations in the capital markets have hurt most participants, we are still very disappointed in our third-quarter performance,” he said during a conference call with analysts and investors.

He suggested that Bank of America would be able to muddle through in the fourth quarter, when it will recognize a large mark-to-market gain on its investment in a big Chinese bank. But Mr. Lewis said that the company now expected gross domestic product to be 2 percent going forward, not 3 percent as it had forecast in July.

Still, the earnings drop comes as Bank of America had been showcasing its swagger. In July, it took a $2 billion stake in Countrywide Financial, giving it an immediate paper profit and an option to buy the troubled mortgage giant if it was ever put up for sale. More recently, it took over La Salle Bank to expand its presence in Chicago, outmaneuvering rivals in an intense bidding war. Still, it has struggled to find ways to grow.

Just as the results of the Wall Street investment houses were all over the map, there was wide separation in the performance of the country’s three biggest banks. J.P. Morgan’s earnings rose 2 percent as the strong performance of its asset management division and credit card group offset the poor results of its investment bank. Citigroup, meanwhile, saw its profits plummet 57 percent as virtually all of its businesses suffered heavy blows.

Bank of America’s small investment banking unit was hit particularly hard, weathering trading losses the same size as larger peers. Profit fell 93 percent to $100 million from $1.43 billion a year ago.

The decline stemmed from nearly all of its fixed-income operations, contributing to a $717 million loss. It absorbed a $607 million loss from bad trading bets. Its business package complex mortgage bonds and other asset-backed securities lost $527 million, largely from trading declines, poorly hedged positions and lower investment banking fees. That included a $247 million hit after its leveraged loans dropped in value.

Bank of America’s investment banking business has been plagued by constant turnover and the head of its capital markets group was ousted earlier this year.

Mr. Lewis said his team was in the middle of assessing the investment bank’s severe underperformance.

“I can’t say we stay the course and go forward as we have, given what happened in the third quarter,” he said, examining both at both businesses and personnel. His early assessment: the bank did a “pretty good job” managing its leverage loan portfolio, avoiding several bad deals.

“That was about one-third luck, but it was about two-thirds being smart about being luck,” he said. But he said its trading performance was related to one-third to tough markets and two-thirds related to bad judgment and mistakes.

“We clearly bear a lot of blame, much more so than market conditions,” he said.

Just as the results of the Wall Street investment houses were all over the map, there was wide separation in the performance of the country’s three biggest banks. J.P. Morgan’s earnings rose 2 percent as the strong performance of its asset management division and credit card group offset the poor results of its investment bank. Citigroup, meanwhile, saw its profits plummet 57 percent as virtually all of its businesses suffered heavy blows.

Market speculation has had Bank of America forming a joint venture or acquiring Bear Stearns, which has suffered from the housing crunch. But Mr. Lewis appeared to rule out an acquisition of a major investment bank.

“I have had all the fun I can stand in investment banking,” he said. “To get bigger in it is not something I want to do.”

Bank of America’s large consumer engine was unable to offset the dismal results after it took heavy losses when it added to reserves. While revenues grew slightly to nearly $12 billion, third quarter profit fell 16 percent, to 2.45 billion.

The bank said it would set aside an additional $865 million to reflect higher expected. About half the increase can be attributed to expected losses in its small business loan portfolio; about 30 percent of the increase can be linked to the deterioration of home equity loans. The company also set aside more money to guard against losses from construction loans in light of the steep housing market downturn. Credit card losses reached $2 billion, up from $1.81 billion in the second quarter as personal bankruptcies have risen after being at record low level after the bankruptcy code was revised in late 2005.

Bank of America’s wealth management division increased 17 percent from a year ago, to $599 million. However, about 10 percent of that increase was related to its acquisition of U.S. Trust, which was completed in July. Bank of America shares dropped about 4 percent in early trading.

    Earnings Fall 32 Percent at Bank of America, NYT, 18.10.2007, http://www.nytimes.com/2007/10/18/business/18cnd-bank.html?hp

Housing Construction Plunges

October 17, 2007
Filed at 11:14 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Problems in the housing industry intensified last month with construction of new homes plunging to the lowest level in 14 years. Consumer prices, meanwhile, rose at the fastest pace in four months, reflecting higher energy and food costs.

The Commerce Department reported Wednesday that construction of new homes fell 10.2 percent last month, compared to August, to a seasonally adjusted annual rate of 1.191 million units. That was the slowest building pace since March 1993 and was far bigger than the 4.2 percent decline that economists had been expecting.

Meanwhile, the Labor Department reported that consumer prices rose by 0.3 percent in September, slightly more than the 0.2 percent analysts had been expecting as energy prices rose after three straight declines and food costs shot up at the fastest pace since June.

Core inflation, excluding energy and food, remained tame, however, rising by 0.2 percent, in line with expectations.

Analysts said the bigger-than-expected drop in housing construction could be signaling that the housing downturn, already the worst in 16 years, may be headed for bigger troubles. Housing activity is now 30.8 percent below the level of a year ago.

''The contraction in housing is transitioning from an average downturn to among the worst in the post-World War II history. As the current downturn probes deeper depths, the risk of an outright recession will mount,'' said Michael Gregory, an economist with BMO Capital Markets.

Housing sales, which had set records for five straight years, have been slumping since 2006. That decline has intensified in recent months as mortgage lenders have tightened standards for giving loans in response to soaring defaults. The higher defaults and the inability of prospective buyers to qualify for mortgages have contributed to record high levels of unsold new and existing homes.

Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson warned this week that the housing downturn was likely to persist longer than had been expected.

The National Association of Homebuilders reported Tuesday that its index of builder confidence fell for the eighth consecutive month in October, pushing the index to a record-low of 18 from a reading of 20 in September.

Many economists believe that housing will trim economic growth by more than a percentage point in the current quarter. However, they also think the country will avoid a recession because they believe the Federal Reserve will cut interest rates further should there be more signs that the housing downturn is effecting the overall economy

Applications for building permits, considered a good sign for future activity, also fell sharply in September, dropping by 7.3 percent to 1.226 million units, also the weakest pace in 14 years.

Only the Northeast showed construction gains in September with activity rising by 45.4 percent in that region. Construction starts fell by 10.1 percent in the West, 11.7 percent in the South and 28.4 percent in the Midwest.

The 0.3 percent increase in consumer prices in September was the largest rise since a 0.7 percent surge last May, when energy prices were soaring.

Energy costs were up 0.3 percent in September following three straight monthly declines. Gasoline costs rose 0.4 percent, the biggest increase since May, while heating oil costs were up 0.9 percent. Analysts are forecast that energy prices will rise even further in the months ahead, reflecting the fact that oil prices have been trading at record highs above $88 per barrel.

Food costs jumped by 0.5 percent last month, the largest increase since a similar rise in June. The higher prices were led by a 13.1 percent surge in the cost of dairy products and a 7.2 percent increase in poultry prices. The cost of fresh fruits, beef and pork were also up. Vegetable prices, however, fell by 4 percent in September.

The 0.2 percent increase in core inflation, which excludes energy and food, matched the gains of the past three months.

Airline ticket prices rose 1.1 percent in August, while clothing costs were up by 0.3 percent. However, new car prices fell by 0.3 percent.

So far this year, consumer inflation is rising at an annual rate of 3.6 percent. That compares with an increase of 2.5 percent for all of 2006.

    Housing Construction Plunges, NYT, 17.10.2007, http://www.nytimes.com/aponline/us/AP-Economy.html

IBM 3Q Earnings Beat Street Forecast

October 17, 2007
Filed at 9:43 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

BOSTON (AP) -- Because of a hiccup in its hardware unit, IBM Corp. stock took a hit even though the technology bellwether reported a 6 percent rise in earnings and exceeded Wall Street forecasts. Investors were also sorting out how much IBM is exposed to woes in the financial industry.

IBM shares fell 1.7 percent at the open of trading Wednesday after the company reported late Tuesday that its third-quarter profit was $2.36 billion, or $1.68 per share. That surpassed the profit of $2.22 billion and $1.45 per share that IBM posted in the same quarter of 2006.

Revenue rose 7 percent to $24.1 billion from $22.6 billion a year ago, though that growth would have been just 3 percent if not for the weak dollar. With dips in the greenback, deals done in other currencies translate into more dollars for big exporters like IBM.

Analysts' consensus forecast was for earnings of $1.67 per share on a shade under $24.1 billion in revenue, according to Thomson Financial.

As in several previous quarters, IBM leveraged stock repurchases to achieve hefty gains in earnings per share even with revenue growth in single-digit percentages. In a conference call with analysts, Chief Financial Officer Mark Loughridge noted that earnings per share have risen 16 percent this year, which puts the company ahead of its previous guidance of a 14 percent to 15 percent rise in 2007.

The brightest spot this time was IBM's services division, where IBM has worked hard to lower expenses in what has traditionally been a labor-intensive field.

Services revenue booked in the third quarter rose 14 percent to $13.7 billion, the best such gain in four years. The increase would have been 10 percent if not for the weak dollar. Most importantly, services posted a 27 percent increase in pretax profits.

IBM also signed $11.8 billion in services contracts in the third quarter, up from $10.5 billion a year ago. That revenue will flow into IBM over the next few years.

Where investors found signs of trouble was in hardware, where revenue fell 10 percent to $4.9 billion. That drop would have been 13 percent without the benefit of currency fluctuations.

Part of the decline could be attributed to IBM's recent sell-off of its printing division. But other key segments showed declines, and the group's overall profit fell 14 percent. Mainframe revenue -- a vital category for IBM because those huge computers require lots of specialized software and services -- was down 31 percent, and chip sales were off 15 percent.

Loughridge blamed the mainframes' steep drop on an unusually strong quarter a year ago, when IBM had recently released a new model. Loughridge said IBM expected the hardware group to return to growth in the first quarter of 2008.

Software, IBM's most profitable segment, grew its revenue 7 percent to $4.7 billion. The increase would have been 3 percent without shifts in the dollar. Pretax profit in software slipped 1 percent, largely because of the costs of acquisitions, Loughridge said.

Before the report, some analysts had worried that recent problems in credit markets would hurt IBM, because the financial services industry is IBM's largest customer segment. Financial companies account for half of all mainframe sales.

Indeed, Loughridge indicated that those troubles may be to blame for hardware and software deals that IBM failed to seal in the third quarter and saw slip into the current quarter. IBM's sales to financial services companies rose 5 percent -- but that would have been 1 percent in constant dollar values.

Annex Research analyst Bob Djurdjevic said the fourth quarter -- traditionally IBM's best -- will be especially important now because it will reveal whether the credit crunch's effect on IBM ''was a blip or a longer trend.''

In the first nine months of the year, IBM earned $6.47 billion, or $4.42 per share, with revenue of $69.9 billion. Those figures all rose from the first three quarters of 2007, when IBM made $5.95 billion, or $3.81 per share, on revenue of $65.2 billion.

IBM announced its results after markets closed Tuesday. IBM shares fell $2.07 to $117.53 at the open of trading Wednesday.

    IBM 3Q Earnings Beat Street Forecast, NYT, 17.10.2007, http://www.nytimes.com/aponline/technology/AP-Earns-IBM.html

Intel 3Q Beat, Optimism Boosts Stock

October 17, 2007
Filed at 9:50 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

SAN JOSE, Calif. (AP) -- Intel Corp.'s soaring sales of microprocessors helped the company overcome flat prices for those chips and reap a 43 percent boost in profits in the third quarter.

Now analysts are turning their focus to whether demand for Intel's chips will hold up in the holiday season. They are debating whether PC makers overestimated their needs and bought too many chips, which could lead to a backlog and then a slowdown. Some say the market is cranking along as well as Intel believes and the chip maker's sales will continue to be robust, driven by strong PC sales worldwide.

Intel's microprocessors act as the brains of those computers.

Investors liked Intel's upbeat outlook and sent shares of the Santa Clara-based chip maker up $1, or nearly 4 percent, to $26.48 in Wednesday morning trading on the third-quarter financial results, which were reported after the market close on Tuesday.

Bolstered by the swelling demand and its own lower costs following a massive restructuring, Intel glided past Wall Street's already-bullish expectations.

Intel said it earned $1.86 billion, or 31 cents per share, in the three months ended in September. That beat by a penny the average estimate of analysts surveyed by Thomson Financial, and it's 43 percent higher than the $1.3 billion, or 22 cents per share, Intel earned in the year-ago period.

On a conference call to discuss the earnings report, management dismissed concerns about a potential slowdown and said demand justified their higher financial targets.

Intel also announced a management shake-up Tuesday, appointing Chief Financial Officer Andy Bryant to the position of chief administrative officer, effective immediately. His replacement as CFO is Stacy Smith, an Intel employee since 1988 whose latest job was assistant CFO.

Intel's revenues for the quarter were $10.09 billion, a 15 percent jump from the $8.74 billion in sales rung up a year ago.

The sales surprise helped jolt Intel's stock. Analysts were expecting $9.62 billion in revenues, a figure already boosted by a surprise financial update from Intel last month on the same day rival Advanced Micro Devices Inc. launched its highly touted new Opteron server chip.

While it's competing fiercely for market share with its smaller rival, Intel has also been aggressively cutting costs, including the elimination of 10,500 jobs, about 10 percent of its work force, announced in September last year, to save about $3 billion annually by 2008. Intel said in April that it had completed the restructuring but would continue to look for ways to cut costs.

On the conference call, management said Intel is now shrinking its work force by another 2,000 employees and aims to exit the fourth quarter with 86,000 workers worldwide.

''We've made remarkable improvement,'' Bryant said in an interview after the report was released. ''All things are going pretty well right now.''

Sales in the fourth quarter are expected to be between $10.5 billion and $11.1 billion, topping analysts' prediction of $10.42 billion.

They were also heartened by improvements in Intel's gross profit margin, a key figure scrutinized by analysts to gauge how well a company is managing its pricing and manufacturing costs. Intel's gross margin is expected to rise from 52 percent of revenues in the third quarter to about 57 percent, plus or minus a couple of percentage points, in the fourth quarter.

    Intel 3Q Beat, Optimism Boosts Stock, NYT, 17.10.2007, http://www.nytimes.com/aponline/technology/AP-Earns-Intel.html

Coca-Cola Profit Rises 13 Percent

October 17, 2007
Filed at 9:57 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

ATLANTA (AP) -- The Coca-Cola Co., the world's largest beverage maker, reported Wednesday a 13 percent increase in third-quarter profit on a double-digit increase in sales.

The results beat Wall Street expectations.

For the three months ending Sept. 28, Atlanta-based Coca-Cola said it earned $1.65 billion, or 71 cents a share, compared to a profit of $1.46 billion, or 62 cents a share, for the same period a year ago.

The latest quarter's results included a 3 cents per share charge primarily related to restructuring, which was offset by a 3 cents per share gain primarily related to the sale of a portion of the company's investment in Coca-Cola Amatil Ltd.

Analysts surveyed by Thomson Financial were expecting earnings of 68 cents per share in the third quarter.

Revenue in the quarter rose 19 percent to $7.69 billion, compared to $6.45 billion a year ago.

Coca-Cola shares rose 95 cents, or 1.6 percent, to $58.71 in morning trading Wednesday.

For the first nine months of the year, Coca-Cola said it earned $4.77 billion, or $2.05 a share, compared to a profit of $4.40 billion, or $1.87 a share, for the same period a year earlier. Nine-month revenue rose 19 percent to $21.53 billion from $18.16 billion a year earlier.

Coca-Cola said that companywide, total unit case volume increased 6 percent in the third quarter. International operations delivered 8 percent unit case volume growth in the quarter. In Coca-Cola's key North America unit, the company recorded 1 percent unit case volume growth, which Coca-Cola said showed improved performance and the benefit of acquisitions.

Sales were strong in Africa and India in the quarter, but weak in parts of Europe. Coca-Cola said unit case volume in its European Union Group decreased 2 percent in the quarter, compared to 10 percent growth in the prior-year quarter. In particular, unit case volume in Germany decreased 9 percent in the quarter. Coca-Cola cited industry softness and unfavorable summer weather.

The company believes performance will improve in Germany over time because of changes it has made there. In September, the company completed the consolidation of its German bottling system.

------

On the Net:

The Coca-Cola Co.: http://www.coca-cola.com 

    Coca-Cola Profit Rises 13 Percent, NYT, 17.10.2007, http://www.nytimes.com/aponline/business/AP-Earns-Coca-Cola.html

Treasury Chief Urges Action on Housing Slump

October 16, 2007
Filed at 12:40 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Treasury Secretary Henry Paulson called Tuesday for an aggressive response to deal with an unfolding housing crisis that he said presents a significant risk to the economy.

In the administration's most detailed reaction to the steepest housing slump in 16 years, Paulson said that government and the financial industry should provide immediate help for homeowners trying to refinance current mortgages before they reset at much higher rates.

He also called for an overhaul of laws and regulations governing mortgage lending to halt abusive practices that contributed to the current crisis.

''Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy,'' Paulson said in a speech delivered at Georgetown University's law school. ''The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth.''

In his most somber assessment of the crisis to date, Paulson said that the housing correction is ''not ending as quickly'' as it had appeared it would and that ''it now looks like it will continue to adversely impact our economy, our capital markets and many homeowners for some time yet.''

Paulson spoke a day after officials from the nation's three biggest banks announced the creation of a fund with up to $100 billion in resources to buy troubled assets such as mortgage-backed securities.

Treasury Department officials participated in the behind-the-scenes discussions that led to creation of the fund, but no government resources have been pledged to the effort.

Paulson said that the government must balance the need to help homeowners stay in their homes against the threat that government action can encourage investors to make risky decisions in the future.

''We must help as many able homeowners as possible stay in their homes,'' Paulson said. ''Foreclosures are costly and painful for homeowners.''

But Paulson also stated, ''When investors are relieved of the cost of bad decisions, they are more likely to repeat their mistakes. I have no interest in bailing out lenders or property speculators.''

Federal Reserve Chairman Ben Bernanke said Monday that the housing problem would be a ''significant drag'' on economic growth into next year and that it would take time for Wall Street to fully recover from a significant credit crunch.

In August, financial markets around the world were roiled by the worst credit crisis in nearly a decade as investors became worried about rising defaults in the mortgage market, causing credit to dry up in a number of markets including the market for commercial paper, short-term loans used extensively by businesses.

At the time, Paulson insisted that the country would be able to work through the problems without any lingering adverse effects. However, as the extent of the troubles in subprime mortgages has grown and the housing slump has deepened, the administration has worked to increase its efforts.

Democrats have also been critical of many of the administration's proposals so far, saying they will offer too little help in the face of the prospect that 2 million mortgages homeowners obtained with low introductory ''teaser'' rates will reset at much higher rates in the coming 18 months.

Paulson said in his speech that it was crucial for more mortgage companies to join in an industrywide effort dubbed Hope Now to boost the number of homeowners who can be reached with credit counseling and help to refinance to mortgages they can afford.

In remarks aimed at lenders, Paulson said, ''We have an immediate need to see more loan modifications and refinancing and other flexibility. For many families, this will be the only viable solution. The current process is not working well. This is not about finger-pointing; it is about putting an aggressive plan together and moving forward.''

    Treasury Chief Urges Action on Housing Slump, NYT, 16.10.2007, http://www.nytimes.com/aponline/us/AP-Paulson-Housing.html?hp

3 Major Banks Offer Plan to Calm Debts in Housing

October 16, 2007
The New York Times
By FLOYD NORRIS

The biggest banks in the United States, with active encouragement from the Treasury Department, unveiled a plan yesterday to keep the housing-related debt crisis from worsening.

The plan calls for the banks to create a new financing vehicle to try to restore confidence and reduce the risk of a market meltdown by propping up an important part of the debt markets. But the banks hope to take minimal risk and avoid actually investing any of their own money.

Although credit markets have calmed in recent weeks, and the stock market remains near record highs, some securities are almost impossible to sell anywhere near their previous prices. There is fear that allowing those securities to plunge in price could disrupt credit markets, alarm investors in everything from hedge funds to money market funds, and perhaps make it harder to borrow money, making a recession more likely.

If the banks’ initiative works as planned, many investors that helped to finance risky loans — including supposedly safe money market funds — will be spared distress. And the banks will collect fees for little more than promising to make loans if no one else will.

“The idea is to avoid a fire sale of assets,” said one banker involved in the initiative, who asked not to be identified because negotiations on its terms are continuing.

The new entity, called a Master Liquidity Enhancement Conduit, or M-LEC, could raise as much as $200 billion or more through the issuance of its own securities, and use the money to buy securities that otherwise might be dumped on the market.

The announcement by Citigroup, JPMorgan Chase and Bank of America came on the same day that Citigroup reported a sharp fall in third-quarter profits, with write-offs on troubled securities that were substantially larger than it had forecast just two weeks ago. Other financial institutions, including Merrill Lynch, have also had to take substantial write-offs.

Though yesterday’s move was meant to reassure the markets, investors reacted with doubt. The Dow Jones industrial average fell 108 points, and financial stocks were among the worst hit.

“I don’t really see that this is going to make a significant difference,” said Jan Hatzius, chief United States economist at Goldman Sachs. “It seems a little more like a P.R. move, frankly.”

Mr. Hatzius said he wondered “why this is going on when previously the official word was that things were getting better.”

The market upheaval that took hold in July arose from securities that were supposed to be safe — and were certified as such by bond rating agencies — even though they financed risky mortgages. Those securities would not default unless a large portion of the underlying loans went bad, and that was deemed unlikely. But in the wake of the subprime mortgage crisis, questions have arisen about whether the rating agencies were too optimistic.

The conduit could work brilliantly if it turns out that the collapse in the market value of the securities represents market panic rather than an accurate assessment of the likelihood of eventual default. If this is the case, then prices will eventually return to normal and this new creation will have bought time for that to happen.

In the meantime, it is hoped that what amount to bank guarantees of some debt — coupled with the fact the Federal Reserve is the lender of last resort for banks — will persuade investors like money market funds to buy securities issued by the new conduit.

If they will not buy, or if the securities really do not prove to be worth face value, however, little will have been changed.

Details remained in flux yesterday, but some were not persuaded that the new structure would really do much. Josh Rosner, an expert in mortgage-backed securities at Graham Fisher, an independent research firm in New York, questioned why the banks needed to establish such a vehicle.

“If they really believe these are good assets being mispriced in the market,” he said, the banks could just buy them and wait for the asset values to recover. “This raises the question of whether the banks are doing this just to avoid taking their losses.”

But some hailed the move as a way of preventing a crisis without directly involving the government, and said it reduced the so-called moral hazard that comes when the government bails out those who made risky bets, thus encouraging more foolish bets in the future. In this case, the Treasury encouraged the talks, but neither offered to put up money nor dictated the agreement.

“I don’t see this as a bailout,” said James Paulsen, chief investment officer at Wells Capital Management. “There is no public money involved in this. The government’s role here is facilitating discussion among private players to take care of this themselves. If the private players can find a way to help alleviate this, then why shouldn’t they?”

At issue is a borrowing crisis facing a group of institutions known as structured investment vehicles, or SIVs, that were little known even to many on Wall Street until the credit crisis erupted this year. These vehicles essentially are private banks, albeit ones without the benefits of deposit insurance or the right to borrow from the Federal Reserve. They lend long term, and borrow short term. If they cannot borrow money, they are in trouble.

The vehicles, often started by banks like Citigroup, were financed by issuing commercial paper, a form of short-term credit, for 90 percent or more of the value of their securities. The expectation was that the cushion of 10 percent or less would be enough so that the commercial paper could readily be sold at low interest rates, often to money market funds. Because commercial paper usually matures within months, not years, it is necessary to sell new commercial paper as the old paper is paid off.

Now, however, it is practically impossible to sell such paper, and the SIVs are faced with the threat of having to sell many of their securities into a market with few buyers. “It is in nobody’s interest to see a disorderly sale of assets by the SIVs,” said Nazareth Festekjian, a Citigroup managing director who was involved in planning the conduit.

The proposal came about from discussions among the banks and the Treasury Department, in which one idea considered was for the banks to just purchase the commercial paper issued by the SIVs. But that was rejected by some bankers, a person involved in the talks said, and the conduit idea was developed.

The new conduit will offer to buy many of the securities owned by SIVs, but at a cost to those vehicles. First they will have to pay a fee for the right to sell anything to the conduit, and part of that fee will be passed on to the banks, increasing their profits.

Most of the proceeds will be paid to the conduits in cash, which they can use to redeem commercial paper. But a part of the payment, perhaps 5 percent of it, will instead be in junior securities issued by the conduit.

Because those securities would bear the first losses suffered by the conduit, it is the SIVs, as a group, that will take the first risk that the securities turn out to be worth less than the conduit pays.

“The same folks who brought you the SIV in the first place are now repackaging them in yet another conduit," said Ed Yardeni, president of Yardeni Research. “I guess they figured there’s strength in numbers.”

The conduit would raise money by selling what it calls senior securities to investors who would be assured of payment unless losses grew so large that the junior securities were wiped out. The rest of the money would come from selling commercial paper, with the banks promising to buy that paper if no one else would.

Gretchen Morgenson and Michael M. Grynbaum contributed reporting.

    3 Major Banks Offer Plan to Calm Debts in Housing, NYT, 16.10.2007, http://www.nytimes.com/2007/10/16/business/16fund.html

3 Americans to Share Nobel Prize in Economics

October 15, 2007
The New York Times
By GRAHAM BOWLEY

The Nobel Prize in economics was awarded today to three Americans for their work in mechanism design theory, a branch of economics that looks at the design of institutions in situations where markets do not work properly.

Leonid Hurwicz of the University of Minnesota, Eric S. Maskin of the Institute for Advanced Study in Princeton, New Jersey, and Roger B. Myerson of the University of Chicago shared the award for “having laid the foundations of mechanism design theory,” the Royal Swedish Academy of Sciences said.

Their work addresses situations in which markets work imperfectly, such as when competition is not completely free, consumers are not fully informed or people hold back private information. In such cases — for example, when people refuse to divulge how much they are willing to pay for a good — trade can break down.

Their work also addresses cases where transactions do not take place openly in public markets, but within companies, in private bargaining between individuals or between interest groups.

The prize winners’ groundbreaking work has been pivotal in assessing how institutions perform under such conditions, and in designing the best mechanism to make sure that goals, such as optimal social welfare or maximum private profit, are reached, the academy said. The winners’ work has helped determine whether government regulation may sometimes be necessary.

Mechanism design theory today plays a central role in many areas of economics and parts of political science, the academy said.

“The theory allows us to distinguish situations in which markets work well from those in which they do not,” the academy said in a statement. “It has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures.”

The three economists will share the prize of 10 million Swedish krona, or $1.56 million.

Last week, former Vice President Al Gore and the Intergovernmental Panel on Climate Change, a United Nations network of scientists, were awarded the 2007 Nobel Peace Prize, for their work on man-made climate change.

Also last week, Doris Lessing, the Persian-born, Rhodesian-raised, and London-residing novelist, won the 2007 Nobel Prize in Literature.

Mr. Hurwicz, 90, who was born in Moscow, is Regents Professor Emeritus of Economics at the University of Minnesota. He pioneered the development of the field, and was followed later by Mr. Maskin and Mr. Myerson.

In a conference call with reporters today, Mr. Maskin was quoted by The Associated Press as saying of Mr. Hurwicz: “Many of us had hoped for many years that he would win. He is 90 years old now, and we thought time was running out. It is a tremendous honor to have the opportunity to share the prize with him and with Roger Myerson."

Mr. Maskin, 56, was born in New York City. He has been the Albert O. Hirschman Professor of Social Science at the Institute for Advanced Study in Princeton since 2000. Mr. Myerson, 56, was born in Boston. He is the Glen A. Lloyd Distinguished Service Professor at the University of Chicago.

"There were a lot of us working in this area in the late 1970s," Mr. Myerson told the A.P., describing his work as investigating “How does information get used in society to allocate resources.”

Last year, the Nobel Memorial Prize in Economic Science was won by Edmund S. Phelps, a Columbia University professor, for his contribution to macroeconomics, in particular his sophisticated explanation of how wages, unemployment and inflation interact with one another. His explanation held, in essence, that wages and inflation tend to rise in tandem, one pushing up the other, until the unemployment rate reaches an “equilibrium” or “natural” level at which prices no longer rise.

    3 Americans to Share Nobel Prize in Economics, NYT, 15.10.2007, http://www.nytimes.com/2007/10/15/world/16nobel.html?hp

As Its Stock Tops $600, Google Faces Growing Risks

October 13, 2007
The New York Times
By STEVE LOHR

Can anything stop the ascent of Google’s stock?

When the company’s shares pierced $600 for the first time last Monday, Wall Street analysts scrambled to jack up their price targets, most to about $700. Jim Cramer, the high-decibel CNBC talk-show host, told his audience on Wednesday night “never to take financial advice from anyone who doesn’t recommend Google.”

Google closed the week at $637.39, more than 50 times its earnings, giving it a market capitalization that nearly equals the total value of the three largest traditional media companies: Time Warner, Walt Disney and the News Corporation. Even at Google’s current stock price, 34 of the 38 analysts following the company have buy recommendations, according to Thomson Financial.

Fred Hickey, editor of The High-Tech Strategist newsletter in Nashua, N.H., is one of the few willing to call Google’s stock surge “insanity.” But even he isn’t predicting when it might end. He has placed a tiny bet against Google, but no more. “You cannot short a mania,” he said.

What could reset expectations about Google? What are the risk factors — short term and longer range — that could dim the aura of inevitable success that surrounds the company? What could slow the Google juggernaut?

The potential threats, according to industry analysts, fall into three broad categories: those from inside the company, those from rivals, and public policy challenges that could bring regulatory controls and tarnish Google’s reputation and brand.

Any big, fast-growing company confronts the “law of large numbers” — that is, growth rates naturally tend to slow as a company gets bigger. That should not be a real issue for Google, analysts say, until it gets to be about twice its current size.

In 2007, the company’s revenue is projected to reach $11.5 billion, a 58 percent annual increase. Google, they say, is riding a tidal shift in advertising onto the Web that is just getting under way. Today, only 5 to 10 percent of advertising budgets are spent online, even though most Americans now spend as much time on the Web as watching television.

But in the short term, the number to really watch is Google’s spending. Last quarter, expenses that came in higher than anticipated surprised Wall Street and temporarily hit Google’s stock price. “The biggest challenge to Google’s stock is going to be if it gets the rap of being an overspender and not rewarding shareholders fully,” said Scott Cleland, an analyst at the Precursor Group.

Google is hiring at a torrid pace. The company keeps doubling the number of engineers it hires each year, adding 4,000 last year. “You simply can’t maintain the quality at 4,000 hires that you had at 250 or 500 or 1,000,” said Edward Lazowska, a professor of computer science at the University of Washington.

Larry Page, a Google co-founder, said at a conference last week that hiring was a big concern. “We never have enough people to do what we want,” he said. “We always need to hire. But there are limitations to how fast you can recruit people.”

Google is hiring so aggressively to support its ambitious strategy, which now extends well beyond its core business in search and online ads.

It has begun offering Web-based software like word processing and spreadsheets — areas where Microsoft is the dominant supplier. Its coming mobile phone software will put Google in competition with telecommunications companies. With YouTube, which it bought for $1.65 billion last year, Google has become a major distributor of entertainment, which could put it in conflict with cable TV companies.

These moves are assaults on huge businesses that have entrenched competitors. Google’s management style, geared to nurture individual innovation, may not be suited to the task, analysts say.

“Google needs to make sure that its management culture is in sync with the strategy,” said Thomas R. Eisenmann, an associate professor at the Harvard Business School. “I’m not sure the bottom-up approach will do it.”

Competitors

“The great risk to Google is that someday it will face real competition in search,” said Jordan Rohan, an analyst at RBC Capital Markets.

Google looks so strong today in part because of the stumbles of its principal rivals, Yahoo and Microsoft. Both have invested heavily to catch up in search and online ad auctions, but without success so far. In September, Google’s share of Web searches in the United States was 67 percent, up from 54 percent a year earlier, reports Compete.com, a Web analytics firm. The Yahoo share was 19 percent, compared with 29 percent a year earlier. And Microsoft had 9 percent, up slightly from a year ago.

The company’s market lead is so large that advertisers tailor their technology to work best on Google ad networks, and Web publishers design their sites to best pull in more Google users.

Jim Lanzone, chief executive of Ask.com, the fourth-largest search engine with about 4 percent share, sees no “silver bullet” that could greatly shift market share. Ask.com is acknowledged as an innovator in using graphics, audio and video in its results. The search market, he said, is so large that Ask.com can thrive by gradually inching forward.

But Silicon Valley start-ups and venture capitalists are betting that there is room for major innovation in search. Powerset and Haika are two well-financed start-ups working on natural-language search, where a user types a question instead of keywords.

Google, too, is apparently pursuing disruptive new search technologies. Narayanan Shivakumar, a computer scientist who heads Google’s Seattle office, is being given 100 engineers over the next three years to try to come up with search technology that beats its current offering, according to an industry consultant told of the project.

Google’s rising market power could also slow it. George F. Colony, chief executive of Forrester Research, was visiting corporate clients across Europe this week. “Nearly every company I meet here, as in the U.S., sees Google as an enemy or a potential enemy,” he said from Paris. “That could close doors for Google and make it harder to do deals with potential partners.”

Regulation

Not only Google’s market power, but also its reach and influence on how millions of people navigate their digital lives invite scrutiny. Privacy advocates say Google’s dominance and practice of keeping search histories of users raise many dangers. Google’s vast databases and search tracking, they say, raise the prospect of a corporate Big Brother.

Google’s motto is “Don’t be evil.” But Privacy International, a London-based organization, ranked Google last among Internet companies and called it “an endemic threat to privacy.”

Search engines like Google identify the searches done using a particular computer, rather than actually knowing who is at the keyboard. Yet privacy advocates say that unless rules are in place to limit what kinds of personal data can be collected and how long it can be stored, Google can effectively know who you are without knowing your name.

The privacy issue, they say, will only increase as Google grows and extends into new markets. “Google underestimates how strongly people care about privacy and underestimates governments’ willingness to take action,” said Marc Rotenberg, executive director of the Electronic Privacy Information Center, a privacy rights group.

That group and others have urged the Federal Trade Commission and European authorities to block Google’s planned $3.1 billion purchase of the online advertising company DoubleClick, or to make privacy protections a condition of the deal.

History’s Pull

In technology, dominant companies look invincible for years until they are unseated by the next wave of previously unforeseen innovation. I.B.M. ruled the mainframe era and Microsoft the personal computer boom. Google has emerged as a power of the Internet economy. Huge profits and market power are the rewards for being a keystone company in each era. It is no surprise, then, that I.B.M. and Microsoft were the targets of landmark federal antitrust suits.

What the next technology wave might be is anyone’s guess. But what Wall Street will be looking for is a turn, a shift in momentum. One such shift, analysts suggest, could be a combination of slowing growth and declining profit margins. Google’s ad revenue comes mainly from two sources: text ads from its own search results and ads it places on the Web sites of other companies. On the latter, it pays 80 cents or so of each dollar to the Web site and keeps the rest. Increased competition in ad networks, especially from Microsoft, will drive the payouts higher, nibbling away at Google’s profits.


Miguel Helft contributed reporting.

    As Its Stock Tops $600, Google Faces Growing Risks, NYT, 13.10.2007, http://www.nytimes.com/2007/10/13/technology/13google.html?hp

US Budget Deficit Drops to 5 - Year Low

October 11, 2007
By THE ASSOCIATED PRESS
Filed at 12:00 p.m. ET
The New York Times

WASHINGTON (AP) -- The Bush administration reported Thursday that the federal budget deficit fell to $162.8 billion in the just-completed budget year, the lowest amount of red ink in five years.

The administration credited the president's tax cuts for helping generate record-breaking revenues but warned of an approaching ''fiscal train wreck'' unless Congress deals with unsustainable growth in Social Security, Medicare and Medicaid.

The deficit for the 2007 budget year that ended on Sept. 30 was 34.4 percent lower than the $248.2 billion deficit recorded in 2006, reflecting faster growth in revenues than in government spending.

    US Budget Deficit Drops to 5 - Year Low, NYT, 11.10.2007, http://www.nytimes.com/aponline/us/AP-Budget-Deficit.html

Trade Deficit Narrows in August

October 11, 2007
The New York Times
By MICHAEL M. GRYNBAUM

The trade deficit narrowed in August to its lowest level since January as a weaker dollar bolstered export sales to record levels and the cost of nonenergy imports dipped, the government reported today.

The gap between what Americans import and export shrank 2.4 percent in August, to $57.6 billion, beating analysts’ expectations, the Commerce Department said. The July deficit was revised lower, to $59 billion, a drop of about $250 million.

“Short term, it’s good news,” said Gregory Miller, the chief economist at Suntrust Banks. “We have an improving trade deficit, and exports continue to provide underlying strength for economic growth.”

But in the long term, Mr. Miller said, strong export sales could suggest that producers are selling products overseas because domestic sales are weakening. “Our underlying domestic growth is weakening relative to overseas growth,” he said.

A separate report from the Labor Department showed that import prices rose 1 percent in September, led by a 5.4 percent jump in petroleum costs and modest gains in industrial and food imports. But the price of American agricultural and food products rose, and demand for exports appeared strong as foreign buyers took advantage of a weakened dollar.

In August, exports jumped 0.4 percent, to $138.3 billion, led by food, beverage, and industrial supply sales. American food exports are up 29 percent from a year ago, though automobile exports fell by 8.4 percent.

Meanwhile, imports fell 0.4 percent, to $195.9 billion, as Americans purchased more apparel, crude oil and semiconductors.

An unemployment report also released today showed a labor market that is continuing to weather the subprime storm. The number of Americans who filed first-time claims for unemployment fell 12,000, or 3.8 percent, in the week ended Saturday, the Labor Department said. Continuing claim levels fell by 15,000, or 0.6 percent, for the week ended Sept. 29.

    Trade Deficit Narrows in August, NYT, 11.10.2007, http://www.nytimes.com/2007/10/11/business/11cnd-subecon.html?hp

A 6-hour Strike by Auto Workers Against Chrysler

October 11, 2007
The New York Times
By MICHELINE MAYNARD

DETROIT, Oct. 10 — A new expression is making the rounds here in the nation’s automotive capital: “Hollywood strike,” as in, “just for show.”

That saying is likely to gain currency after the United Automobile Workers reached a tentative agreement Wednesday with Chrysler, only six hours after union leaders sent Chrysler’s 45,000 workers to the picket lines.

Just last month, the U.A.W. struck General Motors and settled two days later, despite the union’s declaring at the outset of the strike that the two sides were far apart on fundamental issues.

The brief walkouts appear to have emerged as a way for both union leaders and company managers, at a time of deep troubles in their industry, to prove to their constituents that they got the best deal they could under the circumstances, without the damage of an all-out war.

Given the industry’s financial woes, neither side can afford a drawn-out battle. “It isn’t the time to have a life-or-death struggle,” said John Paul MacDuffie, a professor of management at the Wharton School of the University of Pennsylvania.

In the G.M. settlement, both sides made concessions and claimed victory. The U.A.W. won job guarantees for its members, for example, while G.M. was able to offload its enormous health care liability into a separate trust.

Full details of the Chrysler agreement were not immediately available, but it was expected to echo the G.M. contract.

The likely duration of the strike at Chrysler was particularly uncertain because of its new owner: Cerberus Capital Management, the private equity firm that bought the company this year and vowed to make it operate more flexibly.

Such short national walkouts are an unusual tactic in the auto industry. Historically, strikes have lasted for months, inflicting deep financial pain on both workers and their companies. Both sides could dig in, when the industry was relatively healthy.

In 1998, for example, G.M. workers went on strike in Flint, Mich., for seven weeks in a walkout that crippled production nationwide and cost G.M. market share that it never recovered. And in 1950, Chrysler workers were off the job for 104 days in a dispute over pension benefits.

On Wednesday, by contrast, it was possible for a worker to march in the picket line at lunch and hear about the settlement on the evening news.

Rod Hartsfield, 46, a union steward at Chrysler’s stamping plant in Sterling Heights, Mich., said Wednesday night that he was glad to be headed back to work. “A long, drawn-out strike doesn’t help anybody,” he said.

The Chrysler strike did not have the impact it might have had last week, before the company announced layoffs at five factories. As a result, about 12,000 workers, or more than a quarter of Chrysler union members, did not take part in the strike, because their plants were temporarily closed to adjust inventories of unsold cars and trucks.

The union’s president, Ron Gettelfinger, described the settlement as a victory. “This agreement was made possible because U.A.W. workers made it clear to Chrysler that we needed an agreement that rewards the contributions they have made to the success of this company,” he said in a statement.

But Mr. Gettelfinger had limited options, given the billions of dollars in losses and thousands of jobs cut by Detroit automakers in recent years.

“He has such a weak hand to play,” said Nelson Lichtenstein, author of “The Most Dangerous Man in Detroit,” a 1995 biography of Walter Reuther, the union’s legendary president. “Frankly, I’m not sure he could do otherwise, considering the circumstance.”

From Mr. Gettelfinger’s perspective, the strike sent “a signal to the Cerberus new management that he expects a fair relationship and that he wouldn’t be afraid to go out,” said David L. Gregory, a labor relations expert at the St. John’s University School of Law in New York.

But some workers questioned whether the two sides were as far apart as a strike suggests. “I think what he’s doing with these strikes is kind of suspicious,” Paul Wohlfarth, a 30-year Chrysler veteran who works at a Jeep plant in Toledo, Ohio, said of Mr. Gettelfinger. The short strikes could be meant to make workers “think that this deal was the best he could get,” he added.

G.M. workers approved their agreement Wednesday, the union said in a separate statement. Among production workers, the tally was 66 percent in favor, while 64 percent of the skilled trades workers voted for the contract.

With talks complete at Chrysler, the union will next go to Ford Motor, which will be under pressure to match the terms of the other two agreements. But Ford is considered to be the weakest of the three Detroit companies, and it has not finished listing all the plants it plans to shut under a restructuring plan called The Way Forward. While officials support a health care trust, they, like officials at Chrysler, could balk at providing job guarantees.

Chrysler officials said their agreement included a memorandum of understanding to create a health care trust, similar to the one at G.M. Such a trust would assume Chrysler’s $18 billion liability for medical benefits for current and retired workers and their families.

“The national agreement is consistent with the economic pattern and balances the needs of our employees and company by providing a framework to improve our long-term manufacturing competitiveness,” Chrysler’s co-president, Thomas W. LaSorda, said in a statement.

The G.M. contract created a voluntary employee benefit association, or VEBA, to take over G.M.’s $55 billion liability for health care benefits. G.M. agreed to invest $29.9 billion to start the trust. If Chrysler invests an equivalent amount, based on its relative size, it would total about $10 billion.

As it did at G.M., the U.A.W. said it was recessing the strike, and it told workers to report for their next shift. Union leaders will get a look at the details later this week, and they must approve it before a ratification vote is scheduled.

Workers at Chrysler began leaving plants shortly before 11 a.m. Eastern time, a deadline set by the union over the weekend when talks moved slowly.

The union had told workers to begin walking off the job unless they were instructed otherwise. They would have received strike pay of $200 a week, about one-fourth their normal take-home pay.

Since the strike was so short, workers are unlikely to tap the fund, which stands well above $800 million and could have financed a walkout at Chrysler for months.

There had not been a major strike at Chrysler since 1985, when 80,000 North American workers walked off the job for 12 days.

Cerberus Capital Management, which bought 80.1 percent of Chrysler on Aug. 3 from its former German parent, DaimlerChrysler, for $7.4 billion, appeared willing to withstand a walkout. In particular, Chrysler was reluctant to make a commitment to the number of new products that would be built in American plants and to guarantee how many jobs would remain at the company, which is in the midst of a restructuring program.

Chrysler officials were said to be seeking flexibility to import vehicles from outside the United States, to take advantage of cheaper labor costs. Chrysler is set to begin selling Chinese-built small cars at the end of the decade, making it the first American company to use China as an export source for the United States.

Company officials were “weighing the cost of a strike versus the cost after a strike,” said Gary N. Chaison, a professor of labor relations at Clark University in Worcester, Mass.

For some Chrysler workers, the strike was worthwhile, even if it was brief.

“A line has to be drawn,” said Tim Kahanak, 53, who walked a picket line outside Chrysler’s metal stamping plant in Warren, Mich. “The companies are cutting back, and somebody’s got to start fighting,"

Mr. Kahanak, who is pursuing a degree in labor studies at Wayne State University in Detroit, said he supported the U.A.W. but shared some members’ concern that union leaders had given too much help to the struggling companies. “We’ve cooperated ourselves out of a lot of jobs,” he said.

Nick Bunkley contributed reporting from Auburn Hills, Mich., and Mary M. Chapman from Detroit.

    A 6-hour Strike by Auto Workers Against Chrysler, NYT, 11.10.2007, http://www.nytimes.com/2007/10/11/business/11auto.html?hp

Forecasts for home sales get gloomier

10 October 2007
USA Today

WASHINGTON (AP) — The decline in 2007 sales of existing homes will be steeper than previously anticipated, a trade group for real estate agents said Wednesday.

The eighth straight downwardly revised forecast from the National Association of Realtors calls for U.S. existing home sales to be 10.8% lower than last year as housing market struggles persist.

In its October report, the association predicts 5.78 million existing homes will be sold in 2007, down from 6.48 million last year. Last month, the association predicted an 8.6% drop.

This year's sales would be the lowest since 2002, when sales hit 5.63 million.

The national median sales price for existing homes should decline 1.3% to $219,000 this year. In September, the trade group saw a 1.7% decline in existing home values for 2007.

Next year, the trade group expects existing home sales to climb to 6.12 million, down 2.4% from last month's prediction for 2008 sales.

New-home sales are projected to fall to 805,000 this year, down 23% from last year. Next year they are projected to fall to 752,000.

The median new-home price is expected to fall 2.1% to $241,400 this year and then increase 0.1% in 2008, the Realtors said.

The trade group's projection for 2007 homes sales has grown more pessimistic through the year as the housing market's troubles became more evident. Back in February, it was projecting only a decline in sales of only 0.6% from last year.

Still, the group maintains an optimistic message. It's senior economist, Lawrence Yun, noted in a statement that markets including Austin, Texas, Salt Lake City and Raleigh, N.C., are showing price growth and 2007's home sales will be the fifth-highest on record.

"The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains," Yun said.

Contributing: Reuters

    Forecasts for home sales get gloomier, UT, 10.10.2007, http://www.usatoday.com/money/economy/housing/2007-10-10-housing-forecasts_N.htm

Chrysler autoworkers start to walk out


10 October 2007
By Tim Higgins, Detroit Free Press
USA Today

DETROIT — Without the announcement of a new labor agreement between Chrysler and the UAW, Chrysler union workers took to the picket lines at 11 a.m. Wednesday.
It's the second strike against a Detroit automaker in the past two-and-half weeks by the UAW and the first strike against Chrysler in recent history.

Chrysler UAW workers — around 49,000 people — across the nation had been instructed by UAW President Ron Gettelfinger to walk off the job if they were not instructed to do otherwise.

Chrysler has 24 manufacturing facilities across the nation, though one UAW facility in Toledo is not represented under the national agreement and it was not immediately clear if the local union would join the picket line.

As the UAW-imposed deadline loomed Wednesday, the automaker and union kept negotiating, pushing through with talks that have lasted approximately 24 hours straight.

UAW President Ron Gettelfinger Monday told his members that if "unless we have achieved the basis for a tentative agreement" by 11 a.m. the union "will be left with no choice but to commence a strike at all UAW Chrysler facilities."

Tom LaSorda, a Chrysler president and vice chairman, was leading the automaker's negotiations with Gettelfinger at the Chrysler's Auburn Hills headquarters.

The talks kept LaSorda from joining other top executives at a meeting with Chrysler dealers in Las Vegas, people familiar with his plans said.

A person familiar with the talks said Wednesday that progress was made overnight, but that some sticking points remain.

The talks at Chrysler also come after an ownership change that gave a controlling stake to private equity firm Cerberus Capital Management, adding even more uncertainty to the negotiating process.

A strike against General Motors (GM), from Sept. 24 to Sept. 26, resulted in a new 4-year labor agreement that's believed to be the template for the union as it negotiates contracts with Chrysler and Ford Motor (F).

GM's 74,000 UAW members have been voting on their agreement for the last week and totals were expected Wednesday.
 

Contributing: Associated Press

    Chrysler autoworkers start to walk out, UT, 10.10.2007, http://www.usatoday.com/money/autos/2007-10-10-uaw-chrysler-talks_N.htm

Google's stock tops $600 for first time

8 October 2007
By Michael Liedtke, Associated Press
USA Today

SAN FRANCISCO — Google's stock price sailed past $600 for the first time Monday, extending a rally that has elevated the Internet search leader's market value by about $25 billion in the past month.

The Mountain View-based company's shares traded as high as $601.45 before slipping back to $597.13 in morning trading. It marked the sixth time in the past 12 trading sessions that the stock has reached a new peak climbing on the lofty expectations for Google's third-quarter earnings. The results are scheduled to be released Oct. 18.

The latest milestone served as yet another reminder of the immense wealth created since the company went public in August 2004.

Google shares have increased more than sevenfold from their initial public offering price of $85, leaving the 9-year-old company with a market value of $187 billion — worth more than bigger, more mature businesses like Wal-Mart Stores, Coca-Cola, Hewlett-Packard. and IBM.

It took slightly more than 10 months for Google's stock to make the leap from $500 to $600. By comparison, the journey from $400 to $500 required more than a year to complete. The shares hurdled $300 in June 2005 after passing the $100 and $200 thresholds in 2004.

Analysts began predicting Google's stock would reach $600 at the start of 2006 when the shares were still hovering around $420. Some analysts already are advising investors that Google's stock will hit $700 within the next year. The average target price for the stock is $606.61 among 28 analysts polled by Thomson Financial.

The biggest beneficiaries of Google's co-founders have been Larry Page and Sergey Brin, who began developing a new approach to online search, then called "BackRub," in a Stanford University dorm room in 1996. Page and Brin, both 34, now rank among the world's wealthiest men with fortunes approaching $20 billion apiece.

Google's chief executive, Eric Schmidt, and top sales executive, Omid Kordestani, also have accumulated enough stock in the company to become multibillionaires.

Hundreds of other Google employees are millionaires.

Google's stock has reigned as one of the hottest commodities on Wall Street because its search engine has turned into a moneymaking machine as advertisers spend more on the Internet to connect with consumers who are increasingly shunning television, radio and traditional print media. Google's search engine is the hub of the Web's most lucrative ad network.

If it gets its way, Google could become an even more powerful through its proposed $3.1 billion acquisition of ad distributor DoubleClick The deal is being held up while federal antitrust regulators review complaints that the acquisition would give Google too much control over online ad prices and personal information collected from consumers.

The recent enthusiasm surrounding Google's stock contrasts with the mood less than two months ago. Dragged down by a second-quarter earnings report that lagged analyst projections, Google's stock dipped below $500 in mid-August.

But the bulls stampeded back to Google's stock as it became more apparent the company had widened its already formidable lead over Yahoo Inc. and Microsoft in the battle to process the search requests that trigger revenue-generating advertisements.

The more positive sentiment has driven a 15% increase in Google's stock since Sept. 7. For the year, the shares have climbed by 30%, outstripping the stock market's major indexes.

    Google's stock tops $600 for first time, UT, 8.10.2007, http://www.usatoday.com/tech/techinvestor/stocknews/2007-10-08-google-stock_N.htm

Editorial

The American Dream in Reverse

October 8, 2007
The New York Times
 

For the first time since the Carter administration, homeownership in the United States is set to decline over a president’s tenure. When President Bush took office in 2001, homeownership stood at 67.6 percent. It rose as the mortgage bubble inflated but is projected to fall to 67 percent by early 2009, which would come to 700,000 fewer homeowners than when Mr. Bush started. The decline, calculated by Moody’s Economy.com, is inexorable unless the government launches a heroic effort to help hundreds of thousands of defaulting borrowers stay in their homes.

These days, modest relief efforts are in short supply, let alone heroic ones. Some officials seem to think that assistance would violate the tenet of personal responsibility that borrowers should not take out loans they cannot afford. That is simplistic.

The foreclosure crisis is rooted in reckless — and shamefully underregulated — mortgage lending. Many homeowners — mainly subprime borrowers with low incomes and poor credit — are now stuck in adjustable-rate loans that have become unaffordable as monthly payments have spiked upward. Their predicament is not entirely of their own making, and even if it were they would need to be bailed out because mass foreclosures would wreak unacceptable damage on the economic and social life of the nation.

The relief efforts so far have been too little, too late. In August, the White House established a program to allow an additional 80,000 borrowers to refinance their loans through the Federal Housing Administration — on top of 160,000 who were already eligible. That’s not enough. Foreclosure filings soared to nearly 244,000 in August alone.

Federal regulators and Treasury officials are urging mortgage lenders and mortgage servicers to do their utmost to modify loan terms for at-risk borrowers, but saying “please” hasn’t worked. To be effective, modifications must reduce a loan’s interest rate or balance or extend its term, or some combination of the three. Gretchen Morgenson reported recently in The Times that a survey of 16 top subprime servicers by Moody’s Investors Service found that in the first half of the year, modifications were made to an average of only 1 percent of loans on which monthly payments had increased.

What’s missing is executive leadership to bring together many players, including lenders, servicers, bankers and various investors. All of them are affected differently depending on whether and how a borrower is rescued, which makes it difficult to agree on a rescue plan. But all of them also made megaprofits during the mortgage bubble. Under firm leadership, they could come up with a way to modify many loans that are now at risk.

Democratic Congressional leaders have called on the Bush administration to appoint one senior official to lead a foreclosure relief effort. The White House dismissed the idea, saying, in effect, that it’s doing enough.

Congress should move forward on other remedies. The most important is to mend an egregious flaw in the current bankruptcy law that prohibits the courts from modifying repayment terms of most mortgages on a primary home. Two bills, one in the House and one in the Senate, would treat a mortgage like other secured debt, allowing a bankruptcy court to restructure it so that it’s affordable for the borrower. That would give defaulting homeowners and their advocates much needed leverage in dealing with lenders and servicers. Creditors would presumably prefer to cut a deal with a borrower rather than be subject to the decision of a bankruptcy judge.

The administration and Congress should work to avoid mass foreclosures. Meanwhile, bankruptcy reform would give borrowers a shot at keeping their homes.

    The American Dream in Reverse, NYT, 8.10.2007, http://www.nytimes.com/2007/10/08/opinion/08mon1.html

Unemployment Applications Up

October 4, 2007
Filed at 8:35 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The number of newly laid off workers filing claims for unemployment benefits shot up last week by the biggest amount in four months.

The Labor Department reported a total of 317,000 applications for unemployment benefits last week, an increase of 16,000 from the previous week. It was the biggest gain since jobless claims rose by 18,000 during the week of May 9.

The rise was bigger than analysts had been expecting and could be a further sign that the labor market is slowing under the impact of the worst slump in housing in 16 years and a severe credit crunch that roiled global markets in August.

Labor Department analysts said that the two-day auto strike involving General Motors Corp. did not appear to have a significant impact on the claims figures last week, according to preliminary information from the states.

The increase in claims last week followed two weeks of declines. The four-week average for claims totaled 312,750, up only slightly from the previous week.

Analysts believe the unemployment rate probably rose in September to 4.7 percent, up from 4.6 percent in August, although they are expecting that businesses added 100,000 jobs to their payrolls.

That would be an improvement from the net loss of 4,000 jobs in August, which had been the first monthly job loss in four years. The employment data for September will be released on Friday.

The unemployment report is being closely followed by Wall Street, where investors believe it will provide the key piece of data the Federal Reserve will need to decide whether to cut interest rates further.

    Unemployment Applications Up, NYT, 4.10.2007, http://www.nytimes.com/aponline/us/AP-Economy.html

Sudden Surplus Arises as Threat to Ethanol Boom

September 30, 2007
The New York Times
By CLIFFORD KRAUSS

NEVADA, Iowa, Sept. 24 — The ethanol boom of recent years — which spurred a frenzy of distillery construction, record corn prices, rising food prices and hopes of a new future for rural America — may be fading.

Only last year, farmers here spoke of a biofuel gold rush, and they rejoiced as prices for ethanol and the corn used to produce it set records.

But companies and farm cooperatives have built so many distilleries so quickly that the ethanol market is suddenly plagued by a glut, in part because the means to distribute it has not kept pace. The average national ethanol price on the spot market has plunged 30 percent since May, with the decline escalating sharply in the last few weeks.

“The end of the ethanol boom is possibly in sight and may already be here,” said Neil E. Harl, an economics professor emeritus at Iowa State University who lectures on ethanol and is a consultant for producers. “This is a dangerous time for people who are making investments.”

While generous government support is expected to keep the output of ethanol fuel growing, the poorly planned overexpansion of the industry raises questions about its ability to fulfill the hopes of President Bush and other policy makers to serve as a serious antidote to the nation’s heavy reliance on foreign oil.

And if the bust becomes worse, candidates for president could be put on the spot to pledge even more federal support for the industry, particularly here in Iowa, whose caucus in January is the first contest in the presidential nominating process.

Many industry experts say the worst problems are temporary and have been intensified by transportation bottlenecks in getting ethanol from the heartland to the coasts, where it is needed most. And even if some farmers who invested in the plants lose money, most of them are reaping a separate bounty from higher prices for corn and other commodities, which are expected to remain elevated for some time.

Even so, companies are already shelving plans for expansion and canceling new plant construction. If prices fall more, as many analysts predict, there is likely to be a sweeping consolidation of the industry, and some smaller companies could go out of business.

The falling price of ethanol comes in sharp contrast to the rise in crude oil prices. Lower ethanol prices help reduce gasoline prices at the pump, where ethanol is available, but because it constitutes 10 percent or less in most blends, the impact for the consumer is marginal.

Congress essentially legislated the industry’s expansion by requiring steadily higher quantities of ethanol as a gasoline blend, a kick-start that was further spurred by the proliferation of bans on a competing fuel additive used to help curb air pollution.

But the ethanol industry, which is also heavily subsidized by federal tax incentives, got far ahead of the requirements of the law, rapidly building scores of plants and snapping up a rising share of the corn harvest. Many of those plants have gone into operation in recent months, and many more are scheduled for completion by the end of next year.

The resulting ethanol oversupply is buffeting the market. Here in northern Iowa, deep in the corn belt, newly cautious farmers and ethanol executives are figuring out how to cut costs and weighing their options should the situation get worse.

“We don’t know what, ultimately, the marketplace will price ethanol at,” said Rick Brehm, president and chief executive of Lincolnway Energy, a midsize distillery here. “It could go lower.”

Since construction crews broke ground on the Lincolnway plant in 2005, the price of ethanol on the local market has fallen to $1.55 a gallon from about $2, Mr. Brehm said. Over the same period, the price of corn, representing 70 percent of production costs, has risen to $3.27 a bushel from $1.60. “We’re trapped between two commodities,” he said.

Lincolnway was once virtually alone in the region, but now a handful of new competing distilleries are operating and pouring even more ethanol onto the market, offering blenders more options to negotiate lower prices and driving up demand for corn.

“Obviously, I’m concerned about where we’re going,” said Bill Couser, chairman of Lincolnway Energy, though he added that his company is still making money and he is optimistic about the future.

The ethanol boom was set off when Congress enacted an energy law in 2005 that included a national mandate for the use of renewable fuel in gasoline, obliging the market to consume 7.5 billion gallons a year by 2012, compared with 3.5 billion gallons in 2004.

Already, ethanol producers are poised to outpace that mandate, with capacity expected to reach 7.8 million gallons by the end of 2007 and 11.5 billion gallons by 2009, although some in the industry are now predicting that the expansion could slow.

The number of ethanol plants in the country has increased to 129 today from 81 in January 2005, according to the Renewable Fuels Association, while plants under construction or expanding have mushroomed to about 80 from 16 during the same period.

“As ethanol supply increases over the next 12 months, the challenge will be to find a home for it,” said Mark Flannery, head of energy equity research at Credit Suisse. “The ethanol surplus is here already.”

Because ethanol is corrosive and soaks up water and impurities, it cannot be shipped through the country’s fuel pipeline network. So it must be transported by train, truck and barge, a more expensive transportation network that is suddenly finding it hard to keep up with the surge in ethanol production.

There is a long backlog in orders for specialized ethanol rail cars to ship the surplus production. Many rail terminals at the ethanol plants do not have spurs large enough to accommodate the long trains that ethanol promoters like to call “virtual pipelines.” And pumps from the storage tanks to the rail cars at the terminals often do not have sufficient capacity to load trains quickly and efficiently.

Phillip C. Baumel, economics professor emeritus at Iowa State University, said that in many cases ethanol producers ramped up their production so rapidly that they gave “inadequate attention to meeting transportation and distribution needs.”

Gasoline wholesale marketers have been slow to gear up ethanol blending terminals, in part because they had to invest simultaneously in equipment to manage low sulfur diesel and tougher product specifications.

Prices of ethanol range widely around the country, even differing from one county to the next in the same state on a daily basis. [The average rack, or wholesale, price reported by the DTN Ethanol Center on Tuesday was $2.42 a gallon in New York and $1.77 in Iowa.] Generally, prices are highest in states farthest away from the Midwest farm belt and in ones that have federal or state clean-air requirements that encourage the use of ethanol.

In a new study, the Agriculture Department warned of “several supply chain issues that could inhibit growth in the ethanol industry,” including a backlog in rail tank car orders that grew to 36,166 rail cars by the end of the first quarter in 2007 from about 10,000 in the third quarter of 2005.

“You just can’t scale it up overnight,” said Chuck Baker, vice president and executive director of the National Railroad Construction and Maintenance Association.

Stiff blending regulations in some southern states like Florida have also been an impediment to ethanol. And so far, only about 1,000 of the 179,000 pumps at gasoline stations around the country offer E-85, a fuel that is 85 percent ethanol and 15 percent gasoline, intended for the five million flex-fuel vehicles on the road that can run on high ethanol blends.

Major ethanol producers and lobbyists describe the developing gulf between production output and transport capacity as a temporary growing pain that will be alleviated over time.

“We have an industry that has doubled in size in just the past couple of years,” said Bob Dinneen, president of the Renewable Fuels Association. “It is going to take a little time for the infrastructure to catch up.”

Some analysts outside the industry think the current market upheaval may be more than simply a hiccup.

Aaron Brady, a director at the consulting firm Cambridge Energy Research Associates, said the current market problems could worsen if combined with other “unintended consequences that may be lurking” from increased ethanol production. He said pressure on corn and other food prices, water shortages, soil and fertilizer runoff could hurt political support for the industry.

“If Congress doesn’t substantially raise the renewable fuel standard,” Mr. Brady said, “then this is not just a short term problem but a long term issue, and there will be more of a shakeout in the industry.”

The Senate has approved a bill that would require gasoline producers to blend 36 billion gallons of ethanol into gasoline by 2022, an increase from the current standard of 7.5 billion gallons by 2012. The House did not include such a provision in the version it passed, and it is uncertain whether any final legislation will emerge this year and what it will say about ethanol if it does.

Ethanol proponents say a new energy law is virtually inevitable at some point, and that even if it does not pass this year, lower ethanol prices will provide an incentive for refiners to blend more ethanol into expensive gasoline. A higher renewable fuels standard would force refiners and blenders to work faster to process increased amounts.

A strong energy law would also increase investment and research into ethanol production from nonfood sources, like switch grass, and persuade auto companies to make more cars that run on blends well beyond the standard low percentage ethanol mixture, ethanol proponents argue.

“This is an industry that is going to continue to grow,” said Bruce Rastetter, chief executive of Hawkeye Renewables, a private company based in nearby Ames that has two distilleries and two more under construction. “Once you see an energy bill, I think you will see the industry respond again.” (Still, he has dropped plans to build a fifth plant and take Hawkeye public.)

    Sudden Surplus Arises as Threat to Ethanol Boom, NYT, 30.9.2007, http://www.nytimes.com/2007/09/30/business/30ethanol.html?hp

What Plunge? Stocks Back Near Highs Hit in July

September 29, 2007
The New York Times
By VIKAS BAJAJ

After a tumultuous and brutal August, the stock market has regained its footing and is within striking distance of the record highs it set in July.

The surge began building before the Federal Reserve cut interest rates last week and has come at a time when news from the housing market remains bleak.

Conditions in the debt markets have eased somewhat, but specialists say they remain much tighter than they were earlier this year.

Since Aug. 15, when the stock market hit its lowest point in five months, the Standard & Poor’s 500-stock index is up 8.5 percent and the Dow Jones industrial average 8 percent. The increase has erased much of the decline from late July and early August and left the indexes up modestly for the third quarter, which ended yesterday.

“It’s kind of amazing how well equities have held up,” said Douglas M. Peta, chief market strategist at J. W. Seligman & Company, an investment firm in New York.

“If you went away sometime in July and came back about now, you might say, ‘Nothing happened while I was gone,’” he said.

In yesterday’s trading, the main indexes fell slightly, with the S.& P. 500 down 4.63 points, or 0.3 percent, to 1,526.75. The Dow slipped 17.31 points, or 0.12 percent, to 13,895.63, and the Nasdaq fell 8.09 points, or 0.30 percent, to 2,701.50.

That still left the Dow and the Nasdaq with gains of more than 11 percent this year, and the S.&P. up 7.7 percent for the year.

The market appears to be buoyed by a belief that the problems in the housing and credit markets will not pull the broader economy into a recession and that growth in Asia and Europe will help offset those ill effects. The optimism is most vividly manifest in the performance of foreign markets, particularly in the fast-developing countries like China and India.

A widely followed Morgan Stanley index that tracks emerging markets is up 26 percent since Aug. 16, when it hit a low. Markets in developed countries excluding the United States are up nearly 12 percent in the same period.

Even in the United States, the market’s return has been led by sectors like energy, industrials, materials and technology, which investors believe are best positioned to take advantage of the growth abroad.

The financial and consumer discretionary sectors have lagged; they are seen as having the most to lose from a declining housing market and slowing consumer spending domestically.

Indeed, investors in September poured $1.1 billion into mutual funds that specialize in emerging markets, while they withdrew about $3.2 billion from domestic equity funds, according to AMG Data Services, a research firm.

Expectations that the rest of the world will outperform the United States are also reflected in the depreciating dollar, which dropped yesterday to $1.4265 against the euro, a new low. The dollar has fallen 2.8 percent against the euro since Sept. 14, when the Fed cut rates and is down 8 percent for the year. Gold prices rose 1.4 percent, to $742.80 a troy ounce, the highest since 1980.

Currency traders, and others in the financial markets, are operating under the assumption that central bankers in Washington have taken a more activist and accommodating stance.

That view started to take hold in mid-August when the Fed cut the discount rate — what it charges banks to borrow directly from it. Investors became even more convinced last week when the Fed cut its benchmark rate by half a point, to 4.75 percent, rather than the expected quarter point.

The futures market is now predicting that the Fed will cut rates at least once more, to 4.5 percent, at its meeting on Oct. 30 and 31.

But one Fed official, William Poole, said yesterday that “it would be a mistake for markets to bake into the cake the assumption of ongoing rate cuts,” according to Bloomberg News.

Mr. Poole, president of the Federal Reserve Bank of St. Louis, responding to a question after a speech in New York, said he was expressing his own views and not speaking for the Fed.

In the credit market, the Fed’s rate cutting and its lending at the discount rate and through open market operations have eased the logjam somewhat.

This week, banks raising money for the private equity buyout of the First Data Corporation, a credit card processor, were able to sell more debt than they had planned.

Still some of the roughly $300 billion debt backlog that needs to be sold may never be worked off. The private equity acquisitions that are falling apart or being withdrawn include the purchases of the student loan provider Sallie Mae and Harman International Industries, a maker of high-end audio speakers.

“You still have a big overhang of supply out there,” said Eric G. Takaha, director of corporate and high-yield debt at Franklin Templeton, the investment company. “But the path has become a little clearer.”

One mortgage company, Thornburg Mortgage, said the market for “jumbo” home loans — those with a face value of more than $417,000 — appeared to be improving. In recent weeks, investors have been more willing to buy bonds backed by pools of the mortgages, but are demanding higher returns and more safeguards against default.

Home buyers searching for jumbo loans will notice a slight drop in interest rates but will have to shop around, said Larry A. Goldstone, president and chief operating officer at Thornburg, based in Santa Fe, N.M.

“The market has improved modestly and it is certainly not deteriorating,” Mr. Goldstone said. “I think it has a ways to go before it’s back to functioning in a completely normal way.”

    What Plunge? Stocks Back Near Highs Hit in July, NYT, 29.9.2007, http://www.nytimes.com/2007/09/29/business/29markets.html

Consumer Spending Surpasses Forecasts

September 29, 2007
The New York Times
By MICHAEL M. GRYNBAUM

Americans made more purchases than expected in August and a crucial inflation indicator cooled, the Commerce Department said yesterday, two indications that the economy is still somewhat insulated from turmoil in the residential housing market.

But lagging consumer confidence and uncertainty in the labor sector could point toward sluggish growth in the coming months, analysts warned as a tumultuous third quarter came to a close.

Consumer spending rose a better-than-forecast 0.6 percent last month, the largest uptick since April, led by strong sales of durable goods. Income increased 0.3 percent, down from a 0.5 percent rise in July but in line with Wall Street forecasts. The rate of wage increases was also slightly down from July.

Separately, construction spending increased 0.2 percent in August after a 0.5 percent decline the month before, surprising many analysts who had predicted another drop. Nonresidential construction offset a decline in home building.

American business growth expanded in September as prices paid by producers dipped to the lowest level since January, according to the Chicago arm of the National Association of Purchasing Management, whose benchmark index of business activity rose to 54.2 this month, from 53.8 in August.

“There’s a huge divergence in performance in this economy between the home-building sector, which is terrible, and everything else, which seems to be doing O.K.,” said David Kelly, an economic adviser at Putnam Investments. “Strong consumer spending for August, and the strong construction spending now, really tell us that outside of home building there is plenty of demand in the economy.”

Consumers also caught a break on rising prices in August. A closely watched inflation gauge, the core personal consumption expenditure deflator, posted its smallest year-over-year gain since February 2004. The core deflator index, which excludes food and energy prices, rose 1.8 percent on an annual basis, continuing a downward trend that stretches back to February.

A sign of easing inflation could give the Federal Reserve, which lowered interest rates last week, more leeway for further cuts in the fourth quarter, a move some analysts say they believe is necessary to lessen the current credit squeeze. The economists who set monetary policy at the Fed typically like to see the index rise no more than 2 percent on an annual basis.

While this morning’s reports were good news for a troubled economy, some analysts warned that the seasonal factors might be making the numbers misleading.

“I think there’s no chance of getting similar numbers for September, and a fair chance that this August increase will actually reverse,” said Ian C. Shepherdson, the chief United States economist for High Frequency Economics, referring to the consumer spending and income reports.

Mr. Shepherdson attributed the spending increase to a rise in purchases of durable goods, automobiles and weather-related services. “We know the manufacturers offered pretty big incentives in August and boosted car sales because they’re trying to get rid of the ’07 models,” he said.

Stuart G. Hoffman, the chief economist at PNC Financial, said the inflation and spending numbers were encouraging in light of the summer’s subprime troubles. “There’s probably going to be some leakage from the really weak and shattered housing market to consumer spending. But it doesn’t look as though it’s going to get flooded,” he said.

Other analysts said that a weakening job market could start to curb consumer income and spending in the months ahead.

Faced with conflicting indicators — home sales dropped sharply last month even as consumer spending increased — many market watchers are turning their attention to next Friday’s employment report, which they say will provide a clearer view of the impact of the mortgage crisis on the economy. Employers cut 4,000 jobs in August, the first monthly loss in four years.

    Consumer Spending Surpasses Forecasts, NYT, 29.9.2007, http://www.nytimes.com/2007/09/29/business/29econ.html

As Prices Soar, U.S. Food Aid Buys Less

September 29, 2007
The New York Times
By CELIA W. DUGGER

Soaring food prices, driven in part by demand for ethanol made from corn, have helped slash the amount of food aid the government buys to its lowest level in a decade, possibly resulting in more hungry people around the world this year.

The United States, the world’s dominant donor, has purchased less than half the amount of food aid this year that it did in 2000, according to new data from the Department of Agriculture.

“The people who are starving and have to rely on food aid, they will suffer,” Jean Ziegler, who reports to the United Nations on hunger and food issues, said in an interview this week.

Corn prices have fallen in recent months, but are still far higher than they were a year ago. Demand for ethanol has also indirectly driven the rising price of soybeans, as land that had been planted with soybeans shifted to corn. And wheat prices have skyrocketed, in large part because drought hurt production in Australia, a major producer, economists say.

The higher food prices have not only reduced the amount of American food aid for the hungry, but are also making it harder for the poorest people to buy food for themselves, economists and advocates for the hungry say.

“We fear the steady rise of food prices will hit those on the front lines of hunger the hardest,” said Josette Sheeran, executive director of the United Nations World Food Program. The United States is the biggest contributor to the agency.

She warned that food aid spending would have to rise just to keep feeding the same number of people. But the appropriations bill for the coming year now moving through Congress does not promise any significant increases in the food aid budget.

The impact of rising food prices on food aid is part of a broader debate about the long-term impact on the world’s poorest people of using food crops to make ethanol and other biofuels, a strategy that rich countries like the United States hope will eventually reduce dependence on Middle Eastern oil.

Some advocates for the poor say rising food prices could benefit poor farmers in developing countries, providing them with markets and decent prices for their crops. But others warn that the growing use of food crops to make fuel, especially if stoked by large subsidies in rich countries, could substantially increase food prices. That could push hundreds of millions more poor people into hunger, especially landless laborers and subsistence farmers, according to a recent article in Foreign Affairs magazine. The authors were Benjamin Senauer and C. Ford Runge, food policy analysts and professors at the University of Minnesota.

Production of food crops to make biofuels will also tend to favor growers with plenty of capital and large land holdings, they say, rather than small-scale, impoverished farmers lacking modern grain storage facilities in poor countries. “The policies put in place are going to be crucial to whether the small producer and the people who live where hunger is concentrated can benefit,” Mr. Senauer said.

But for now food aid is suffering, as are poor people in poor countries, economists say. And their situation may get even tougher next year, relief agencies warn. The United Nations Food and Agriculture Organization is projecting that low-income countries reliant on food imports, including most of sub-Saharan Africa, will see the amount they pay to import cereals rise 14 percent.

The world’s ability to absorb fresh price shocks has shrunk along with food stocks. “We’re very worried,” said Henri Josserand, who heads the organization’s global information and early warning system. “World food stocks are much smaller than they used to be.”

The food aid declines may also continue. Catholic Relief Services, a major distributor of American food aid, has projected substantial increases in what the federal government pays for food aid next year, based on an analysis of the futures market for the wheat, corn and soybean products that are mainstays of aid. “It’s bad news and it’s not just going to affect U.S. food aid, but food aid from every source,” said Frank Orzechowski, a retired commodity trader who now advises Catholic Relief Services.

This year’s decline in food aid follows a period when the sharply escalating costs of shipping American-grown food aid to Africa and Asia already reduced the tonnage supplied. The United States Government Accountability Officementnd this year that the number of people being fed by American food aid had declined to 70 million in 2006 from 105 million in 2002, mainly because of rising transportation and logistical costs.

Now food prices are also playing a role. New data from the Department of Agriculture show that the cost of food for the federal government’s main food aid program, Food for Peace, rose 35 percent over the past two years.

The amount of food bought for American food aid programs has fallen to 2.4 million metric tons this year from 4 million metric tons in 2005 and 5.3 million metric tons in 2000. Thomas Melito, who supervised the Government Accountability Office’s food aid investigation this year, called the escalating costs of food aid “frightening.”

“In a situation where there are 850 million hungry people in the world and the program was only providing enough for 70 million people in 2006, the new totals will be even lower,” he said.

Congress is considering changes to the food aid program as part of the omnibus farm bill that some economists and advocates for the hungry say would improve the efficiency of the program and allow it to feed more people. They point to a Bush administration proposal that would allow the government to use up to $300 million of the food aid budget to buy food in African countries close to hunger emergencies rather than shipping it from the United States on mainly American-flagged vessels as current law requires.

In his speech to the United Nations this week, President Bush said the proposal would speed delivery and help provide a market for poor farmers in developing countries.

The House version of the farm bill includes no such provision. The Senate Agriculture Committee has not produced a farm bill.

“To my mind, that’s the way out of this pincer,” said Emmy Simmons, an agricultural economist and retired senior manager at the United States Agency for International Development.

“But the shipping guys are hanging tough,” she added. “They’re defending that little chunk of revenue. They aren’t super concerned whether you feed less people.”

Groups representing shipping companies and agribusiness interests have opposed using the budget of the main food aid program to buy food in developing countries instead of relying on American food shipped overseas.

Gloria Tosi, who represents most of the American ship owners involved in the food aid system, said buying commodities abroad would erode domestic political support for the program and lead to lower food aid budgets from Congress. She said it was “politically naïve” to think the food commodity groups and ship owners that have for decades supported food aid in Congress would favor buying commodities abroad.

“None of us will be working toward that,” she said.

    As Prices Soar, U.S. Food Aid Buys Less, NYT, 29.9.2007, http://www.nytimes.com/2007/09/29/world/29food.html?hp

Growing number of complaints allege unfair treatment in housing market

28 September 2007
USA Today
By Deborah Barfield Berry and Robert Benincasa, Gannett News Service

WASHINGTON — Nearly 40 years after a national law banned housing discrimination, an increasing number of complaints are alleging unfair treatment of minorities, the disabled, families and other groups.

The Department of Housing and Urban Development and housing assistance agencies logged 10,328 complaints last year, a 12% jump from 2005. That's the highest number since HUD started keeping track in 1990, when it included complaints from the disabled and families with children.

"Some people want to say these are things that happened in the old days," said Kim Kendrick, assistant secretary for HUD's Office of Fair Housing and Equal Opportunity. "It doesn't happen in the old days. It happens today."

A Gannett News Service analysis of 44,000 housing discrimination complaints filed between 2002 and 2006 with HUD and its contract agencies shows allegations of unfair treatment are widely dispersed across the nation.

In St. Louis, a mother complained a landlord told her he wouldn't rent to families with pets or children.

In Worcester, Mass., a man with kidney disease said a landlord refused to rent to him because his disability was "too much baggage."

In San Jose, Calif., Hispanic families complained their apartment manager spoke disparagingly of Mexicans and gave their repair requests lower priority.

In Chesterfield, Va., a black woman said a white property owner told her the house she was interested in "will not be sold to coloreds."

"It was like he had just punched me," said Nealie Pitts, 59, whose eyes still fill with tears when she talks about the 2002 incident.

Between 2002 and 2006, seven states and the District of Columbia averaged more than 10 housing discrimination complaints per 100,000 housing units, according to the GNS analysis. The average state rate was 7.6 complaints per 100,000 units.

The highest was Nebraska with 17, followed by Kansas, Iowa, Missouri, North Dakota, Hawaii and Wyoming. According to officials in some of those states, the reasons range from aggressive work by fair housing groups to longstanding racial tensions to an influx of immigrants.

Nebraska has a history of racial divisiveness and now faces a growing immigrant population, according to housing officials and lawmakers there.

"These things are part of the reality of the community we're in," said Gary Fischer, general counsel for Family Housing Advisory Services Inc. in Omaha. "They didn't get that way overnight. I do not think Nebraska is unique. That's the fabric here, but that's the fabric in many places."

States with the lowest average complaint rates were Alaska, Minnesota, West Virginia and Wisconsin. All had fewer than four complaints per 100,000 units.

The 1968 Fair Housing Act, amended in 1988, bans discrimination in the housing market based on disability, race, sex, national origin, religion, skin color or whether a family has children. The law covers rentals, purchases and financing.

Reasons for the growing number of discrimination complaints vary, housing officials say. Some areas are dealing with new waves of immigrants. Others have old houses that aren't readily accessible to the disabled.

Last year's record number of complaints also could result from stepped-up enforcement and efforts by HUD and other agencies to make people aware of their rights, housing officials say.

Agency's performance criticized

But critics of HUD say the agency is too slow to investigate complaints. And they note federal housing officials filed a civil discrimination charge in only 1% of the complaints they received last year.

HUD officials say the law requires them to work with both parties in a case to try and reach a settlement. Last year, 36% of the complaints to HUD were settled.

Federal officials and fair housing advocates say it's difficult to know whether housing discrimination is on the rise in a particular area. But they agree the problem is more pervasive than the number of complaints suggests.

Many victims believe filing a complaint isn't worth the trouble or don't know where to go, government studies show. And although the Fair Housing Act protects illegal immigrants, they're unlikely to complain for fear of being deported, civil rights groups say.

Private housing groups also get complaints that aren't included in the data.

The GNS analysis also found that:

• Counties in the top 20% for housing discrimination complaint rates over the last five years tend to be less racially and ethnically diverse than counties in the bottom 20%.

• Race-related complaints were most common in the South, where they accounted for nearly half of complaints last year. Race-related complaints made up 44% of cases in the Midwest, 32% in the North and 28% in the West.

• In almost one third of counties, no housing discrimination complaints were filed with HUD or its contract agencies between 2002 and 2006. Most of those counties had fewer than 10,000 households.

• Housing discrimination complaints related to disability are as common as those related to race.

Nationally, disability-related cases accounted for 40% of complaints filed with HUD and its contract agencies last year. Race-related complaints accounted for 39%.

Housing experts expect disability complaints to climb as the nation's population ages and older Americans better understand their housing rights.

Peter Raimondi, a 79-year-old polio victim who uses crutches, filed a housing discrimination complaint four years ago after his condominium board in Bel Air, Md., refused to let him install a curb cut and ramp near his condo.

A judge recently sided with Raimondi. The case is on appeal.

"I don't think people do it out of malice," Raimondi said of discrimination against the disabled. "I think they don't know."

Discrimination more subtle today

Even when complaints are filed, proving them can be difficult. Last year, HUD dismissed 40% of complaints, citing lack of evidence. One reason may be that housing discrimination today can be subtler.

"The days are gone when people say, 'We don't rent to you people,'" said John Simonson, who in 1977 led the first national study on racial discrimination in housing. "In rentals they treat you nicely. They just don't give you the unit."

Still, some housing advocates say federal officials aren't doing enough to deter homeowners, real estate agents, landlords and others from breaking the law.

HUD must investigate discrimination complaints within 100 days. But a 2005 report by the Government Accountability Office found the agency missed that deadline in more than a third of cases.

HUD officials say they have boosted training to improve response time.

In addition, the agency has launched 15 high-profile investigations in the last two years, including two in Louisiana linked to events after Hurricane Katrina.

After the 2005 hurricane, New Orleans officials complained to HUD about websites that were offering emergency housing for "whites only."

"We all thought that kind of issue was over with," said James Perry, executive director of the Greater New Orleans Fair Housing Action Center. "It means we have a lot more work to do."

    Growing number of complaints allege unfair treatment in housing market, UT, 28.9.2007, http://www.usatoday.com/news/nation/2007-09-28-housing-main_N.htm

New Home Sales Off Sharply in August

September 27, 2007
The New York Times
By MICHAEL M. GRYNBAUM

New home sales in August plunged to their lowest rate in over seven years, as tighter credit and rising inventories continued to cripple a national housing industry that was booming only a year ago.

Purchases of new homes fell to an annual rate of 795,000, an 8.3 percent decline from July, as inventory levels rose to their highest level since March. The median price for a new home was down 7.5 percent from a year ago, to $225,700, the Commerce Department said this morning.

The sales figures were released as KB Home, a major home builder, reported a $35.6 million loss in the third quarter, or 46 cents a share, compared to net profits of $153.2 million a year earlier. KB Home, based in Los Angeles, had a 32 percent drop in revenue from the same period last year.

KB was forced to write down almost $800 million in inventory and goodwill value after the subprime mortgage crisis caused turmoil in the credit market and high rates of foreclosure. Those losses outpaced the company’s gains from selling its 49 percent stake in a French subsidiary. The company’s stock was up 0.54 percent, to $24.22, in early trading.

The latest data gave a fuller picture of the distress in the housing sector. This morning’s news comes on the heels of a 4.3 percent drop in existing home sales and a dismal third-quarter report from Lennar, another large home builder that recorded the largest quarterly loss in its history. New home sales are now down over 21 percent from a year ago.

“Our third quarter results reflect the seriously challenging market conditions that prevail for home builders across most of the nation,” KB’s chief executive, Jeffrey Mezger, said in a statement. “At this time, we see no signs that the housing market is stabilizing and believe it will be some time before a recovery begins.”

Analysts concurred, predicting that the disappointing numbers were only the start of a continued decline in the housing sector that could stretch across multiple quarters.

“Anybody that’s expecting a turnaround in housing anytime soon is going to be disappointed,” said Mike Schenk, a senior economist at the Credit Union National Association. “It’s going to be a long, slow process.”

In a spot of sunlight for the economy, the number of new unemployment claims filed last week dipped to 298,000, its lowest level since early May. The figure, a 15,000 decrease from the week ended Sept. 14, beat analysts’ expectations, though some analysts warned against extrapolating a trend from a single week’s data.

    New Home Sales Off Sharply in August, NYT, 27.9.2007, http://www.nytimes.com/2007/09/27/business/27cnd-econ.html?hp

The Mideast Money Flows

September 27, 2007
The New York Times
By ANDREW ROSS SORKIN

As head of the Carlyle Group, David M. Rubenstein is a regular at power lunches along the New York-Washington corridor.

But he recently had his midday meal in Dubai, in the United Arab Emirates, 6,847 miles from the Washington headquarters of his private equity firm, with the Persian Gulf on one side and a desert on the other.

Mr. Rubenstein and other American financiers have long traveled to the Middle East in search of energy dollars to finance deals in the United States. Carlyle, in fact, has been one of the more aggressive in courting Mideast investors.

These days, as Dubai and its neighbors have begun to invest aggressively outside the Persian Gulf, American investors, in turn, have begun investing in the region — and some of the money is coming from American pension funds.

Buyout managers and Wall Street bankers are setting up shop so they can invest in transportation projects and real estate developments and privatizations of state-owned companies. Their use of pension fund money, however, could complicate America’s already sensitive relations with the region.

The investment attention on the Middle East comes at a particularly delicate moment. Lawmakers in the United States have increasingly questioned the public-policy implications of pension fund investments. On Monday, Gov. Arnold Schwarzenegger of California pledged to sign legislation forcing the state’s two pension funds to shed holdings of all companies that have energy or military-related business in Iran. Seventeen other states, including Florida and Texas, have either passed or are considering similar legislation.

Pension funds have become a crucial source of money for buyout firms as they the funds have increasingly allocated more to private equity and hedge funds in search of higher returns.

And the political tensions extend beyond pensions. When Halliburton, the military contractor based in Houston, announced in March that it was moving its headquarters to Dubai, some lawmakers expressed outrage.

The politics has not stopped the buyout firms. Carlyle, which owns Dunkin’ Donuts, is raising $1 billion for a fund for acquisitions in countries like Egypt, Jordan, Kuwait and Saudi Arabia. Ripplewood Holdings, a New York private equity firm that owns Reader’s Digest, spent $200 million for a controlling stake in Egypt’s largest bank. And Colony Capital, a property buyout firm, has bought control of Libya’s largest oil company.

Private equity funds devoted to investing in the Middle East and North Africa grew to $5.2 billion in 2006, from $316 million in 2004, according to Zawya Private Equity Monitor.

Calpers, the California Public Employees’ Retirement System, among other pension funds, is planning to invest in Carlyle’s Middle East fund and is also an investor in Ripplewood. The pension fund opposed Governor Schwarzenegger’s pledge. To comply, the fund expects to sell nearly $2 billion in investments in 10 companies and has estimated it will cost $17 million in transaction fees.

“We don’t have political strains,” said Patricia K. Macht, a spokeswoman for Calpers. “We are agnostic where specific investments are made.”

Some in Washington are not so willing to put politics aside completely. “Public pension funds are public and should respond to democratic forces,” said Representative Brad Sherman, Democrat of California. While he is “not for boycotting the entire Middle East,” he does have concerns about investments in certain countries.

“Syria would not make me happy,” Mr. Sherman said. “We should be trying to change Saudi behavior.”

While Syria or Iran may not be reflective of the rest of the Middle East, buyout chiefs still need to sell investors and politicians on the merits of a region that is politically fraught and, in some cases, still better known to some for terrorism than capitalism.

“I was on the phone with my mother last night and told her I was in Dubai,” said Mr. Rubenstein, a white-haired 58-year-old with large tortoise-shell-rim glasses, explaining the challenge he faces. “Of course, she asks, ‘Is it safe? There’s always bombs going off and wars,’” he recounted, rolling his eyes for effect. “I told her Dubai is probably a lot safer than Florida.”

Mr. Rubenstein may be helped by the billions of dollars that Middle Eastern countries are investing in the United States and Europe. The region has spent $64 billion so far this year on investments abroad, according to Dealogic, compared with $30.8 billion in all of 2006.

Last week, the Borse Dubai, the government-controlled exchange, agreed to take a 19.9 percent stake in the Nasdaq and buy Nasdaq’s 28 percent stake in the London Stock Exchange. And the Qatar Investment Fund said it had acquired 20 percent of the London exchange. On top of that, Abu Dhabi government bought a 7.5 percent stake in Carlyle. And in July, Istithmar, an arm of the Dubai government, bought one of fashion’s crown jewels: Barneys New York.

Some deals have already caused friction. Last year, the proposed sale of some American ports to a Dubai firm set off a firestorm in Congress that abated only after alternative buyers were found.

Still, these crosscurrents of investment are increasing the economic ties between the Persian Gulf countries and the United States — ties that have been strained after Sept. 11. Indeed, 9/11 was a turning point in the flow of capital into the region.

“Post-9/11 shook up the politics in the West,” said Arif Naqvi, chief executive of Abraaj Capital, a buyout firm in Dubai. “It was a watershed event because it made us realize that there were a lot of opportunities at home. The days of the Middle East just being a source of capital are over — it’s become a destination.”

Not all private equity executives are rushing in. Joseph Rice, a founder of Clayton, Dubilier & Rice, which owns Hertz, said his firm was still “years away” from investing in the region. Nonetheless, he has been traveling to the region to raise money.

“We’re here for fund-raising,” he said, overlooking the Burj Al Arab, a hotel that towers over Dubai’s beachfront.

Mr. Rubenstein defended his firm’s Middle East fund. “People see that there’s going to be a lot of economic activity here and a lot of value creation.” Still, he acknowledged, “it doesn’t hurt” with fund-raising that the firm has shown a commitment to the region.

For Carlyle, the decision to wade into the Middle East is particularly delicate. For the last five years, the firm has tried to distance itself from what was seen as Middle East ties and its political connections.

Former President George H. W. Bush and former Secretary of State James A. Baker III had been advisers, which opened up relationships for the firm to raise money in the 1990s. As a result, however, the firm collected money from the bin Laden family. The firm has spent six years trying to rid itself of the image that created..

Then last week’s announcement that the Abu Dhabi government would take a minority stake in Carlyle resurrected old ghosts, and bloggers surfaced with new conspiracy theories.

One other potential source of controversy for Carlyle: the fund will not invest in Israel. Mr. Rubenstein refused to discuss why certain countries were included or excluded, but people involved in the fund-raising said it would make it difficult politically to raise money from most Middle Eastern countries if Israel were included.

Of course, the big question is whether there are promising investment opportunities in a region already sloshing with money and at a time when the dollar is at its weakest.

Mr. Naqvi said of Carlyle’s entrance into the market: “I think their timing is a little off. There’s already too much liquidity. A donkey can raise money. You can’t just ride in here in a Rolls-Royce.” Still, he added: “Carlyle is at our doorstep and we love it.”

    The Mideast Money Flows, NYT, 27.9.2007, http://www.nytimes.com/2007/09/27/business/worldbusiness/27dubai.html?hp

Demand for Durable Goods Plummets

September 26, 2007
By THE ASSOCIATED PRESS
Filed at 10:49 a.m. ET
The New York Times

WASHINGTON (AP) -- Demand for big-ticket manufactured goods plunged in August by the largest amount in seven months, with widespread weakness signaling a slowdown in the nation's industrial sector.

The Commerce Department reported Wednesday that orders for durable goods, everything from commercial jetliners to home appliances, fell by 4.9 percent in August, the biggest decline since a 6.1 percent fall in January.

It was far larger than the 3.5 percent drop that economists had been expecting and resulted from across-the-board decreases in a number of categories. The concern is that the steep downturn in housing and turbulence in financial markets could start to affect the economy more broadly, raising the risks of a full-blown recession.

The Federal Reserve last week cut a key interest rate by a bigger-than-expected half-point, hoping to avert a slump. Analysts believe further rate cuts are likely at the Fed's final two meetings of the year in October and December.

In a favorable development for the economy, the United Auto Workers and General Motors Corp., agreed early Wednesday to a tentative contract that ends a two-day national strike. A lengthy strike against the nation's largest automaker could have had ripple effects that would have dragged business growth down even further.

Many analysts believe the overall economy, after racing ahead at a 4 percent annual rate in the spring, slowed in the summer to growth in the gross domestic product of around 2.5 percent. They also believe this growth rate will slow to around 2 percent in the final three months of the year. Some put the chance of a recession as high as 50-50.

The 4.9 percent fall in orders for durable goods, items expected to last three or more years, followed a big gain of 6.1 percent in July. That increase reflected in part a jump in orders for autos as dealers tried to stockpile inventory in advance of a threatened strike.

For August, orders for transportation equipment fell 11.2 percent, the biggest setback since January. The weakness was led by a 41 percent drop in demand for commercial aircraft. Boeing Co. reported fewer orders in August after a big surge in July.

Orders for motor vehicles and parts dropped 6.2 percent after having surged by 10.5 percent in July. Offsetting the weakness somewhat was a 43.2 percent surge in demand for military aircraft.

Excluding the volatile transportation category, orders would have still been down by 1.8 percent after a 3.4 percent rise in orders outside of transportation in July.

Orders fell in a large number of categories including primary metals such as steel, machinery and communications equipment. Demand was up for computers and electrical equipment.

    Demand for Durable Goods Plummets, NYT, 26.9.2007, http://www.nytimes.com/aponline/business/AP-Economy.html?hp

Existing Home Sales Fall for 6th Straight Month

September 25, 2007
By THE ASSOCIATED PRESS
Filed at 10:40 a.m. ET
The New York Times

WASHINGTON (AP) --Sales of existing homes, depressed by turmoil in credit markets, fell for a sixth straight month in August, pushing activity to the lowest point in five years.

The National Association of Realtors said that sales of existing single-family homes dropped by 4.3 percent in August, compared to July. Sales at a seasonally adjusted annual rate dropped to 5.5 million units, the slowest pace since August 2002.

The housing market has been battered by the steepest downturn in 16 years. Those problems were exacerbated in August by turmoil in credit markets, reflecting new worries about rising defaults in subprime mortgages.

The median price of an existing home -- the point where half sold for more and half for less -- edged up slightly in August to $224,500, an increase of 0.2 percent from August 2006. It marked the first year-over-year price increase after a record 12 straight months of declining prices.

However, many analysts believe that sales and prices will fall further as the housing market receives additional blows from rising default rates that are dumping more homes on an already glutted market and causing lenders to tighten standards. These factors have made it harder for potential borrowers to qualify for loans.

A separate report on housing prices done by Case-Shiller showed home prices fell by 3.9 percent in July in its 20-city index. Economists said that decline was probably a better reflection of where the market is right now.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, predicted ''worse to come thanks to tighter credit conditions.''

The Federal Reserve responded last week to fears that all the problems in housing and credit markets could cause a recession by cutting a key interest rate by a bigger-than-expected half point.

Many economists believe that if the Fed continues to cut rates for the rest of the year that should be enough to keep the country out of a recession.

Sales were down in all parts of the country in August. The West saw the biggest drop, a decline of 9.8 percent, followed by declines of 5.2 percent in the Midwest, 2.7 percent in the South and 2 percent in the Northeast.

The fall in sales pushed the inventory of unsold homes to a record 4.58 million in August. That means it would take 10 months to exhaust the inventory of homes on the market at the August sales pace, also a record figure.

Analysts said that the credit crunch in August, which sent stock prices plunging around the globe, had a significant impact on the availability and interest rate levels for so-called jumbo mortgages, loans above $417,000.

''The unusual disruptions in the mortgage market, including a significant rise in jumbo loan rates, resulted in a fairly high number of postponed or cancelled sales, with many buyers having to search for other financing when loan commitments fell through,'' said Lawrence Yun, senior economist for the Realtors.

''Once we get through these disruptions, we'll get a better sense of where the actual market is in late fall as conditions begin to normalize,'' Yun said.

However, other private economists are forecasting that sales of both existing and new homes will not stabilize until mid-2008 because they believe it will take that long for prices to fall far enough to reduce the large number of unsold homes.

    Existing Home Sales Fall for 6th Straight Month, NYT, 25.9.2007, http://www.nytimes.com/aponline/business/AP-Home-Sales.html

Consumer Confidence Drops in September

September 25, 2007
By THE ASSOCIATED PRESS
Filed at 10:12 a.m. ET
The New York Times

NEW YORK (AP) -- Worries about jobs and the overall economy flared in September, driving a key barometer of consumer sentiment to its lowest level in nearly two years, a private research group said Tuesday.

The New York-based Conference Board said its Consumer Confidence Index fell to 99.8, an almost 6-point drop from the revised 105.6 in August. The reading was below the 104.5 that analysts had expected.

It marked its lowest level since a 98.3 reading in November 2005, when gas and oil prices soared after hurricanes Katrina and Rita devastated the Gulf Coast.

''Weaker business conditions combined with a less favorable job market continue to cast a cloud over consumers and heighten their sense of uncertainty and concern,'' said Lynn Franco, director of The Conference Board Consumer Research Center, in a statement. ''Looking ahead, little economic improvement is expected, and with the holiday season around the corner, this is not welcome news.''

The Present Situation Index, which measures how shoppers feel now about the economy, declined to 121.7 from 130.1 in August. The Expectations Index, which measures shoppers' outlook over the next six months, declined to 85.2 from 89.2.

Economists closely monitor confidence since consumer spending accounts for two-thirds of U.S. economic activity.

Tuesday's report showing a confidence slump does not bode well for retailers, who are already bracing for a challenging holiday season. Merchants have seen spending slow all year amid falling home prices and higher gas and food bills. The financial turmoil in August and escalating problems in the credit market have made economists and retailers more nervous about the prospects for a decent holiday shopping season.

While The Federal Reserve's decision last week to cut its interest rate by half a point was meant to soften the impact of the housing woes on the overall economy, economists say it won't do much to help spending this holiday.

A big issue is the job market, which saw its first drop in job creation in four years in August. Economists expect the job market to add 100,000 jobs in September when the Labor department reports its data on Oct. 5. Meanwhile, the unemployment rate is expected to inch up to 4.7 percent from 4.6 percent in July.

    Consumer Confidence Drops in September, NYT, 25.9.2007, http://www.nytimes.com/aponline/business/AP-Economy.html

UAW Calls National Strike Against GM

September 24, 2007
By THE ASSOCIATED PRESS
Filed at 12:42 p.m. ET
The New York Times

DETROIT (AP) -- Thousands of United Auto Workers walked off the job at GM plants around the country Monday in the first nationwide strike during auto contract negotiations since 1976.

UAW President Ron Gettelfinger said that job security was one of the major unresolved issues, but that the talks did not stumble over a groundbreaking provision establishing a UAW-managed trust that will administer GM's retiree health care obligations. Gettelfinger complained about ''one-sided negotiations.''

''It was going to be General Motors' way at the expense of the workers,'' Gettelfinger said at a news conference. ''The company walked right up to the deadline like they really didn't care.''

Gettelfinger added that the union and GM's management would return to the table Monday.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

DETROIT (AP) -- Thousands of United Auto Workers walked off the job at GM plants around the country Monday, in the first nationwide strike during auto contract negotiations since 1976.

GM spokesman Dan Flores said the union launched a national strike after the late morning UAW strike deadline passed without agreement on a new contract, which would include a groundbreaking provision establishing a UAW-managed trust that will administer GM's retiree health care obligations.

Workers began picketing outside GM plants.

The UAW has 73,000 members who work for GM at 82 U.S. facilities, including assembly and parts plants and warehouses.

It remained to be seen what effect the strike would have on the automaker and consumers. The company has sufficient stocks of just about every product to withstand a short strike, according to Tom Libby, senior director of industry analysis for J.D. Power and Associates.

Charlie Coppinger, who has worked at GM's powertrain plant in Warren for 31 years, walked the picket line along with a handful of others shortly after the deadline passed.

The 51-year-old Rochester Hills resident said he hoped a strike could be settled quickly, but that union members were on the line to back the union and its bargainers.

''We're just here to support them,'' said Coppinger, who said leaflets were passed out indicating that the strike was on.

Flores said the automaker is disappointed in the UAW's decision to call a national strike.

''The bargaining involves complex, difficult issues that affect the job security of our U.S. work force and the long-term viability of the company. We remain fully committed to working with the UAW to develop solutions together to address the competitive challenges facing GM,'' Flores said.

GM had been pushing hard for the health care trust -- known as a Voluntary Employees Beneficiary Association, or VEBA -- so it could move $51 billion in unfunded retiree health costs off its books. GM has nearly 339,000 retirees and surviving spouses.

Worker Anita Ahrens burst into tears as hundreds of United Auto Workers streamed out of a GM plant in Janesville, Wis.

''Oh my God, here they come,'' said Ahrens, 39. ''This is unreal.''

Ahrens has seven years at the plant, where she works nights installing speakers in sport utility vehicles. She waited outside the building Monday for her husband, Ron Ahrens, who has worked there for 21 years.

The couple has three children, including a college freshman, and Ahrens worried about how they would pay their bills.

''This is horrible, but we're die-hard union, so we have to,'' Ahrens said. ''We got a mortgage, two car payments and tons of freaking bills.''

More than a thousand UAW workers streamed out of GM's Delta Township plant near Lansing at 11 a.m. UAW members were handing out picket signs that say: ''UAW On Strike.'' ''I don't think it's a win for either side. It's too bad it's come to this, but we have given up a lot already,'' said Pat Haley, 50, from Dimondale, a quality control specialist who has been with GM for 31 years.

He said he didn't have a big problem with the VEBA, but he opposes a possible $5 an hour wage cut and restrictions on vacation time.

While GM has enough cars and trucks to withstand a short strike -- the automaker had about a 65-day supply of cars and trucks as September began, according to Paul Taylor, chief economist for the National Automobile Dealers Association -- it still would be costly for the company.

The UAW last struck GM in 1998. In that strike, workers at two GM parts plants walked out for 54 days, costing the automaker $2.2 billion. The strike, which occurred between years when national negotiations were held, was over work rules and GM's plans to eliminate jobs.

    UAW Calls National Strike Against GM, NYT, 24.9.2007, http://www.nytimes.com/aponline/us/AP-Auto-Talks.html

Microsoft CEO's Pay Valued at $1.3M

September 21, 2007
By THE ASSOCIATED PRESS
Filed at 8:05 p.m. ET
The New York Times

SEATTLE (AP) -- Microsoft Corp. Chief Executive Officer Steve Ballmer received a pay package valued about $1.3 million for fiscal 2007, a year in which profit at the world's largest software maker topped $14 billion, according to documents filed Friday.

For the year ended June 30, Ballmer received $620,000 in salary and a $650,000 bonus. Unlike some technology companies that spend millions on executive security, travel and other perquisites, Microsoft gave Ballmer a modest $6,750 in matches to his 401K retirement plan and approximately $3,000 worth of life insurance and athletic club memberships.

Ballmer, who owns about 4.3 percent of Microsoft's shares, received no equity compensation. He didn't exercise any stock options or vest any stock awards during the year, the company said in the Securities and Exchange Commission filing.

Microsoft's compensation committee ''believes that Mr. Ballmer is underpaid for his role and performance,'' according to the filing. Ballmer's compensation added up to just a sliver of the $61.2 million package Oracle Corp. gave CEO Larry Ellison in fiscal 2007. It seemed on par with the $1.28 million package Amazon.com Inc. gave CEO Jeff Bezos -- except for the fact that personal security accounted for more than $1 million of Bezos' package.

Microsoft did not say what Bill Gates, the software maker's chairman, was paid in salary and bonus during the year. Gates, who owns about 9.3 percent of Microsoft shares, did not receive any stock-based compensation. The SEC requires companies to report the compensation details for a handful of highest-paid executives, and Microsoft said Gates' salary and bonus fell below those of Ballmer, Chief Financial Officer Christopher Liddell and three other executives.

At the annual meeting scheduled for Nov. 13, Microsoft shareholders will have the opportunity to vote on two shareholder proposals, also disclosed in Friday's filing.

One, brought by the New York City's comptroller, William Thompson, asked Microsoft to change its business practices in countries he described as ''authoritarian.'' His proposal asks Microsoft to stop keeping data that can identify individual users who live in China, Iran, Saudi Arabia and other countries, and to refrain from giving equipment or training to government agencies in countries he identified as restrictive.

The other proposal asked Microsoft to establish a board committee on human rights.

Microsoft's board recommended shareholders vote against both proposals, citing existing efforts in both areas.

Shares of Microsoft added 23 cents to close at $28.65.

    Microsoft CEO's Pay Valued at $1.3M, NYT, 21.9.2007, http://www.nytimes.com/aponline/technology/AP-Microsoft-Executive-Compensation.html

Google's Stock Price Soars to New High

September 21, 2007
By THE ASSOCIATED PRESS
Filed at 12:15 p.m. ET
The New York Times

SAN FRANCISCO (AP) -- Google Inc.'s stock reached a new high Friday, reflecting Wall Street's renewed faith in the Internet search leader as it introduces new ways for advertisers to reach its steadily expanding online audience.

The shares climbed to $560.55 in midday trading, eclipsing the previous peak of $558.58 attained in mid-July, just days before the Mountain View-based company disillusioned investors with a second-quarter profit that fell below analyst estimates.

Google shares settled back to $560.29, up $7.51. That left the 9-year-old company with a market value of almost $175 billion, more than long-established technology bellwethers like Hewlett-Packard Co. and IBM Corp.

The latest run-up in Google's stock represents a turnaround from a little over a month ago when the shares briefly dipped below $500 amid the stock market turmoil triggered by a home mortgage meltdown that raised fears about a recession.

Those worries have lessened because of the Federal Reserve Bank's decision to lower short-term interest rates by 0.5 percentage point in a move expected to free up more money for consumers and businesses to spend.

Google stands to benefit because it runs the largest advertising network on the world's hottest marketing medium, the Internet.

Despite aggressive challenges by rivals like Yahoo Inc. and Microsoft Corp., Google has been able to widen its lead in search -- the activity that triggers the text-based ad links that have become a huge moneymaker.

In August, Google handled 54 percent of all U.S. search requests, up 50 percent at the same time last year, according to the research firm Nielsen/NetRatings Inc. Yahoo lagged well behind at 20 percent followed by Microsoft at 13 percent.

The formidable lead enabled Google to earn $1.9 billion on $7.5 billion in revenue during the first half of the year. The company usually makes even more money during the second half because of the advertising blitz that accompanies the holiday shopping season.

Google already is trying to boost its profits by rolling out other marketing options besides staid advertising links.

Last month, Google began showing video ads on its subsidiary, YouTube, the Web's most popular video channel. Earlier this week, Google dramatically increased the number of ads distributed to mobile phones and unveiled a system for displaying ads on ''widgets'' -- mini-applications that are embedded on Web pages.

Investors are betting Google's dominance, coupled with its expansion efforts, will yield the robust earnings growth needed to support its rich valuation. Google's price-to-earnings multiple -- a widely used yardstick for appraising publicly held companies -- now stands at 37 times its estimated earnings for this year. By comparison, Microsoft's price-to-earnings multiple is hovering around 17.

Several industry analysts already are forecasting Google shares will soon surpass $600. The stock eclipsed $500 for the first time 10 months ago.

    Google's Stock Price Soars to New High, NYT, 21.9.2007, http://www.nytimes.com/aponline/technology/AP-Google-Stock.html

Morgan Stanley Profit Tumbles 17%

September 19, 2007
By THE ASSOCIATED PRESS
Filed at 10:05 a.m. ET
The New York Times

NEW YORK (AP) -- Morgan Stanley on Wednesday reported third-quarter profit sank 17 percent, as the No. 2 U.S. investment bank was hurt by a global credit crisis and spun off its credit-card unit Discover.

Morgan Stanley, like others on Wall Street, was squeezed during the quarter as borrowers with poor credit histories defaulted on home-loan payments at a rising rate. This curbed investor appetite for everything from mortgage-backed bonds to loans for corporate buyouts, and triggered volatile conditions for stocks.

John Mack, Morgan Stanley's chairman and chief executive, pinned the quarter's poor performance on the ''impact of the severe market disruption on some areas of the firm.''

Profit for the three months ended Aug. 31 fell to $1.54 billion, or $1.44 per share, from $1.85 billion, or $1.75 per share, in the year ago period. This year's third quarter included only one month of results from Discover Financial Services, which split from Morgan Stanley in June.

Stripping out profit from the credit-card unit, profit fell 7 percent to $1.47 billion, or $1.38 per share, from $1.59 billion, or $1.50 per share.

Stronger investment banking fees, largely from deals announced well before the third quarter, helped drive revenue up 13 percent to $7.96 billion from $7.06 billion a year earlier.

However, that still was not enough to beat Wall Street projections for a profit of $1.54 per share on $8.35 billion of revenue, according to analysts polled by Thomson Financial.

The company said it saw losses of $940 million in the quarter from the decreased market value of loans on its books as well as other financing commitments. Those losses cut 33 cents per share off of its bottom-line results.

Quantitative investments, which use computer models to automatically decide when to buy and sell stocks, were also a problem across Wall Street this summer. Morgan Stanley pegged its quantitative trading losses at $480 million during the quarter.

Investment banking was among the bright spots; revenue from the business surged 45 percent to $1.4 billion.

Morgan Stanley shares rose 89 to $69.40 at the open of trading Wednesday. The stock has tumbled 24 percent since the end of the second quarter, as financial services firms were squeezed by defaults in mortgage positions and a tightening credit environment.

It is the second of four investment banks to report results this week. On Tuesday, Lehman posted a decline in profits that was smaller than had been expected. Goldman Sachs and Bear Stearns report their results on Thursday.

Mack, who returned as CEO in mid-2005, was given a mandate to help put the investment bank on track after languishing just a few years ago. Among his biggest objectives was to increase the company's prime brokerage and asset management business, and expand investment banking operations both in the U.S. and overseas.

This was Mack's first quarter since coming back where profit fell, though asset management recorded its fourth consecutive quarter of inflows and its global wealth management business delivered its sixth consecutive quarter of improved performance.

    Morgan Stanley Profit Tumbles 17%, NYT, 19.9.2007, http://www.nytimes.com/aponline/business/AP-Earns-Morgan-Stanley.html

Wall Street Extends Rally After Fed Move

September 20, 2007
The New York Times
By MICHAEL M. GRYNBAUM and DONALD GREENLEES

Stocks extended their rally on Wall Street today after Asian and European markets rose sharply in the wake of the Federal Reserve’s decision on Tuesday to cut interest rates by half a percentage point.

At 10:30 a.m., the Dow Jones industrial average was up about 90 points, or 0.7 percent. The Standard & Poor’s 500-stock index and the Nasdaq composite index were up slightly more.

Stocks soared on Tuesday after the Fed’s action, with the Dow and the S.& P. 500 both posting their biggest single-day gains since early 2003. That momentum carried over into Asia, where leading indexes were pushed to their highest levels in more than a month, with the Hang Seng Index in Hong Kong rising 4 percent to a record close of 25,554.64.

In Europe, the FTSE 100 surged 2.7 percent, to 6,453.70 in morning trading, while the Dax gained 2.2 percent to 7,739.02 and the CAC 40 jumped 3 percent, to 5,718.88. Commodity stocks also surged thanks to higher metal and oil prices.

Particularly strong were banking shares, which were recently battered on worries about their exposure to the mortgage market crisis in the United States. Shares in British home builders rose sharply as well, with Persimmon up 5.7 percent and Barratt Developments gaining 5.4 percent.

In Asia, the rate cut is seen as particularly benefiting exporters of cars and electronic goods that rely heavily on the United States market. The Toyota Motor Corporation had its biggest gain in more than three years on the Tokyo Stock Exchange, adding 4.9 percent.

In Seoul, Samsung Electronics and the Hyundai Motor Company, both heavily reliant on the United States market, were up 1.9 percent and 4.6 percent respectively, leading a surge in the share prices for exporters.

But the enthusiasm to cash in the American rate cut was tempered by a discomforting message implicit in the decision to drop the benchmark interest rate to 4.75 percent.

“I don’t think anyone can feel comfortable that all is well,” said Edmund Harriss, the investment director with Guinness Atkinson Investment Managers, which has $370 million in assets in three Asia-focused funds. On one hand, the move signifies that the Fed is “prepared to act as needed,” Mr. Harriss said, but on the other, the United States economy may be “looking weaker than we thought.”

The aggressive rate cut by the Fed has signaled to many economists the depth of concern about a possible United States recession brought on by a credit squeeze and declining consumer consumption.

But what effect will that have on Asia? Just two days before the Fed’s announcement, the Manila-based Asian Development Bank issued its annual economic outlook report for Asia, forecasting average growth in the region of 8.3 percent for 2007. This upgraded its earlier estimate of 7.6 percent. Growth for 2008 was forecast to be 8.2 percent.

One of the bank’s key messages was that Asia is well placed to manage any slowdown in the United States, although the comment came with the caveat that the outlook for the region in 2008 is “hazy” because of uncertainty in global financial markets and the health of the world’s biggest economy.

“Developing Asia’s defenses against external shocks are solid and it can weather a slowdown in the United States,” the bank said. “The region’s growth prospects will continue to depend on how well the countries address their internal challenges.”

At a conference in Manila today, Haruhiko Kuroda, the president of the bank, said the Fed rate cut would help stabilize financial markets and give a timely boost to the United States economy.

“It would definitely improve the prospect of sustained strong economic growth in the United States, which could be also very beneficial particularly for emerging economies in Asia,” Mr. Kuroda said. “So, I would say that the decision would be greatly appreciated by many economies, financial sectors in the region.”

Still, other analysts were less sanguine about the effect of the rate cut. Christopher Lingle, a research scholar at the Centre for Civil Society, a think tank in New Delhi, said the Federal Reserve had “decided to refill the punch bowl,” encouraging loose lending practices.

“I think it’s a stupid idea, done by stupid people, to be polite,” Mr. Lingle said. “The Federal Reserve system has been engaged in one of the most ruinous monetary policies of the last century, starting with Alan Greenspan.”

Before Tuesday’s rate cut “some of the excess liquidity was trying to dry up, bankers were realizing that the party should be over and getting out before the hangover started,” Mr. Lingle added.

For Asia’s central banks there is sufficient uncertainty about the global economy that they are widely expected by economists to take a wait-and-see approach to any interest rate changes of their own.

The Bank of Japan decided today to leave rates unchanged, despite favoring a policy of incremental increases. Other central banks, like the Bank of Korea, are also likely to be cautious about going ahead with forecast rate rises, say analysts.

Toshihiko Fukui, the bank governor, said the decision to keep rates on hold was influenced by the downside risk for the United States economy and the potential effect on the state of the global economy, despite Japanese rates being low compared with the strength of the domestic economy.

“‘Uncertainty over the world economy has grown,” he said, according to Reuters. “We will make an appropriate policy judgment looking at economic data and risk, both at home and abroad.”

Mr. Harriss, the investment director with Guinness, said the rate cut might offer only a temporary reprieve. “Once the dust has settled, the concerns that have been there for a while still remain,” he said.

    Wall Street Extends Rally After Fed Move, NYT, 20.9.2007, http://www.nytimes.com/2007/09/20/business/19cnd-substocks.html?hp

Home foreclosures soar in August, up 36% from July

18 September 2007
By Alex Veiga, Associated Press
USA Today

LOS ANGELES — The number of foreclosure filings in the U.S. last month more than doubled from August 2006 and jumped 36% from July, a trend that signals many homeowners are increasingly unable to make timely payments on their mortgages or sell their homes.
Once again, Ohio was among the states with the highest foreclosure rates.

Nationwide, 243,947 foreclosure filings were reported in August, up 115% from 113,300 in the same month a year ago, RealtyTrac of Irvine, Calif., said Tuesday.

There were 179,599 foreclosure filings reported in July.

The filings include default notices, auction sale notices and bank repossessions. Some properties might have received more than one notice if the owners have multiple mortgages.

August's total represents the highest number of foreclosure filings in a single month since the company began tracking filings two years ago.

The national foreclosure rate last month was one filing for every 510 households, the company said.

"The jump in foreclosure filings this month might be the beginning of the next wave of increased foreclosure activity, as a large number of subprime adjustable rate loans are beginning to reset now," RealtyTrac Chief Executive James J. Saccacio said.

The mortgage industry has been rocked by a surge in defaults, particularly among borrowers with subprime loans and adjustable-rate mortgages that initially had attractive "teaser" interest rates but then adjust upward.

Many of the loans, some of which adjust in as little as two years, were issued in 2005 and 2006, at the height of the housing boom.

Lagging home sales and flat or falling home prices have also left homeowners hard-pressed to find buyers.

The latest figures also reflect an increase in the number of homes going into foreclosure that are not being picked up in estate sales and are ending up going back to lenders.

The number of bank repossessions jumped to 42,789 in August, compared with 20,116 a year earlier, the RealtyTrac said. In July, there were 26,842 bank repossessions.

Nevada, California and Florida had the highest foreclosure rates in the country last month, the firm said.

Nevada reported one foreclosure filing for every 165 households — more than three times the national average. The state had 6,197 filings in August, up 21% from July and more than triple the year-ago figure.

California's foreclosure rate was one filing for every 224 households. The state reported the most foreclosure filings of any single state, with 57,875, up 48% from July and more than 300% above August 2006.

Florida had one foreclosure filing for every 243 households. The state reported 33,932 foreclosure filings, up 77% from July and more than twice the year-ago total.

Georgia, Ohio, Michigan, Arizona, Colorado, Texas and Indiana rounded out the 10 states with the highest foreclosure rates.

    Home foreclosures soar in August, up 36% from July, UT, 18.9.2007, http://www.usatoday.com/money/economy/housing/2007-09-18-foreclosures_N.htm

Bold cut means savings for consumers

18 September 2007
USA Today
By Sue Kirchhoff, John Waggoner and Barbara Hagenbaugh

WASHINGTON — The Federal Reserve's unanimous decision to slash a key interest rate Tuesday is a dramatic statement that the central bank will do whatever it takes to prevent turmoil in the financial markets and a steep downturn in the housing sector from pulling the country into recession.
By cutting rates so sharply, the Fed indicated it hopes to put a floor under the plunging housing market, steady business hiring and investment, and keep the economy growing as it has for the last six years. A less tangible, but equally important, goal is to restore confidence in the financial markets. Investors got at least a short-term boost after the Fed's announcement, as the stock market posted its biggest one-day point rally since 2002.

Rate cuts take months to fully work their way through the economy, but consumers and businesses could quickly feel some impacts from Tuesday's cut in the federal funds rate to 4.75% from 5.25%. The fed funds rate is what banks charge each other for overnight loans.

After the Fed announced its first rate cut in more than four years, big lenders such as Wachovia, (WB) Wells Fargo (WFC) and KeyCorp. (KEY) cut the prime rate for their best customers by a half-point, to 7.75%. The prime rate also is the benchmark for the rate on many home-equity loans and credit cards. It often takes one to three monthly billing cycles for lenders to lower rates. Borrowers who take out new loans now, however, will benefit from new, lower rates.

U.S. consumers owe about $800 billion in credit card debt, and a drop of half a percentage point in interest represents about $4 billion in savings for a year's interest, says Robert McKinley, CEO of website CardTrak, which tracks credit card statistics and trends.

"That comes out to about $30 a household per month," he says.

Tuesday's action by the Fed also could lower interest rates on car loans and some mortgages, helping buyers. But savers and investors could feel a pinch as yields on bank certificates of deposit, money market accounts and money market mutual funds fall.

Yields on bank CDs and money market accounts should dip, but probably not by the full amount of the Fed's half-point cut, says Greg McBride, senior financial analyst at Bankrate.com. (RATE) Banks still need the money from consumer deposits to fund loans, which means they will compete by offering slightly higher rates on such accounts.

Tuesday's move represents a dramatic turnaround for Fed Chairman Ben Bernanke, the Fed bank presidents and Fed board governors who voted 10-0 for the rate cut. The Fed had voted as recently as Aug. 7 to hold the federal funds rate at 5.25%.

At that time, the central bank called inflation the main threat to the economy. In later speeches, Fed officials, including Bernanke, made it clear that they were not inclined to cut interest rates to help bail out well-heeled market investors who had made bad business bets.

But Fed officials emphasized that they would act if problems in the financial market were infecting the broader economy. As it became clear in recent days that tightening credit had the potential to exacerbate the housing slump and affect consumer and business spending, the Fed responded.

"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise," the Fed said in its statement announcing the rate cut.

Another rate cut coming?

The central bank said it would closely monitor financial conditions and "act as needed" to promote steady economic growth and stable inflation. It did not give a clear indication whether another rate cut is in the offing, but many economists expect it.

"Bold action was needed … and bold action is what the Fed delivered," says Brian Bethune of economic consulting firm Global Insight, who predicts the Fed will cut rates again when it next meets Oct. 30-31.

The central bank also cut its discount rate, which is what it charges banks for direct loans, by a half-percentage point to 5.25%. The Fed has now cut the discount rate twice since Aug. 17 in an effort to get credit flowing in financial markets.

Aside from the two discount rate cuts, the Fed in recent weeks has taken several other actions to try to stabilize financial markets, including injecting larger-than-usual amounts of money into the financial system to help banks.

Not everyone approves

The Fed's move provides evidence that Bernanke — in office since February 2006 when he replaced legendary chairman Alan Greenspan — is not afraid to take strong action and is able to forge consensus on the board at a time when the outlook is unclear.

The decision was not without controversy. Some economists called it too sweeping, saying conditions in the financial markets are not as dire as the Fed indicates. Exports have been steady, and the unemployment rate is a low 4.6%, despite the unexpected loss of 4,000 jobs in August.

The critics say that although the inflation rate has fallen in recent months, cutting interest rates too much now could overstimulate economic activity over the long run, raising the threat of higher prices — and higher interest rates.

First Trust Advisors chief economist Brian Wesbury says the Fed used a "very broad tool to try to fix a specific problem," namely issues with higher-cost subprime mortgages to those with poor credit. Homeowners' inability to repay such loans has led to record levels of foreclosure and helped to drive down home prices.

"This is a move to try and calm market fears, but it is a move that will have little effect on the economy and, in fact, will lead to further rate hikes and potential problems with inflation down the road," Wesbury says.

The inflation rate has come down as growth has slowed, including a dip in wholesale prices in August. Still, the Fed can't relax completely. Oil prices closed at a record $81.51 a barrel on Tuesday, though they have been higher on an inflation-adjusted basis. Retail food inflation is up more than 4% in the past year.

A big worry in the bond market is that the Fed's rate cut will fuel inflation, which erodes the value of a bond's interest payments. After the Fed's announcement Tuesday, the yield on the benchmark 30-year Treasury bond rose to 4.75% from 4.71%.

The financial markets also displayed inflation worries by driving up the price of gold, a traditional hedge against inflation, to a 27-year high of $732.70 an ounce in the futures market.

The dollar fell against the euro — to $1.397, a new low — as investors shifted their money to Europe, where interest rates are higher.

Two big problems

In addressing problems in the financial markets, the Fed faces two related issues.

One is turmoil in credit markets, which began with the rising foreclosures among homeowners with subprime mortgages. The Fed also is mindful that 2 million adjustable-rate subprime loans will reset to higher interest rates by the end of next year, potentially pushing foreclosures far higher.

Many subprime loans were repackaged into bonds that were sold to investors worldwide. Some major banks and hedge funds that bought the bonds have taken major financial hits. That has mushroomed into a broader lack of confidence about many financial products.

The upshot is tighter credit, with some banks now forced to hold more loans, making them less willing and able to lend. That has driven up borrowing costs for consumers.

Those with good credit are finding it harder to get financing, and those with shaky credit have dwindling options.

Tighter credit reinforces problems in the housing market, where new home construction is down more than 20% from last year, and builders are holding huge inventories.

Credit problems also make it more difficult for consumers to refinance their mortgages or take out home-equity loans, harder for builders to sell homes and easier for home prices to keep falling.

The Fed's move could affect housing markets in several ways. First, it should help strapped builders, many of whom have construction and development loans tied to prime rates.

As they have been forced to hang on to houses longer, their costs have risen, says Dave Seiders, chief economist for the National Association of Home Builders.

Jumbo-loan market tightens

Some borrowers with good credit had seen a slight reduction in mortgage rates in recent weeks as investors fled to safer Treasury bills, a move that pushed down long-term rates. Rates for conventional 30-year, fixed-rate mortgages were about 6.31% last week, according to mortgage giant Freddie Mac, (FRE) down from 6.43% a year ago.

But the benefits aren't being felt in the market for "jumbo" loans — those for more than the $417,000 limit that Fannie Mae (FNM) and Freddie Mac can buy and repackage into mortgage-backed bonds.

The secondary market for jumbo mortgages has tightened, so interest rates on such loans are significantly higher.

Tuesday's rate cut "will start the process of the liquidity problems coming to an end," says David Berson, Fannie Mae's chief economist. "In a small way, some (lenders) will be more willing to hold jumbo mortgages, for example."

But mortgage rates typically follow the 10-year Treasury note yield, which rose slightly after the Fed's rate cut but closed unchanged.

Borrowers with adjustable-rate loans could be getting some relief, McBride says. "Their rates will adjust higher but not as high as they would have, and that's significant for some. It could be the difference between keeping their home and losing it."

About half of all adjustable-rate mortgages use short-term Treasury securities as the benchmark for resetting rates, says Keith Gumbinger, vice president of HSH Associates, which tracks mortgage rates. Those rates have fallen sharply in the past few weeks as investors have snapped them up in search of a haven. But roughly half of adjustable-rate mortgages — and most subprime mortgages — are pegged to the London Interbank Offered Rate, or LIBOR, which has remained stubbornly high because banks have become more reluctant to lend.

Even a deeper rate cut by the Fed might not solve the problems of many homeowners with adjustable-rate subprime mortgages.

The problems in the subprime market are not just the cost of the credit, but the fact that many lenders approved loans that borrowers could not repay — with provisions such as escalating interest rates and penalties for early repayment.

Thursday, Bernanke will appear at a hearing on Capitol Hill concerning White House plans to help stressed subprime borrowers.

Some of those most likely to be helped by the Fed move thought the central bank went too far.

"I would have done a quarter (of a percentage point) instead of a half because this sends a message we're in deep doo-doo," says Robert Toll, CEO of luxury-home builder Toll Bros., (TOL) who adds that the cut won't do much to help the subprime market.

Will consumers curb spending?

A related issue is whether falling home prices will limit consumer spending, as homeowners are less able to borrow against the equity in their homes. Economists are split on the issue.

A rate cut has other effects. It can make the USA a less attractive place for foreign investment and push down the value of the dollar against other currencies. A falling dollar helps exports, which have been a bright spot for the economy, but makes imports more costly.

Dan Meckstroth, chief economist at Manufacturers Alliance/MAPI, says the full effect of the rate move will be gradual.

"Interest rates … take a long time to filter in. It's not an overnight turnaround," he says.

Contributing: Noelle Knox

    Bold cut means savings for consumers, UT, 18.9.2007, http://www.usatoday.com/money/economy/2007-09-18-fed-half-point_N.htm

Oil, Gold Prices Jump Following Rate Cut

September 18, 2007
By THE ASSOCIATED PRESS
Filed at 2:48 p.m. ET
The New York Times

NEW YORK (AP) -- Oil prices jumped to an all-time high and precious metals rallied Tuesday after the Federal Reserve cut its benchmark interest rate by a half percentage point.

The central bank trimmed the federal funds rate to 4.75 percent from 5.25 percent on Tuesday, effectively lowering borrowing costs for investors.

Lower interest rates can rouse sluggish economic activity and raise demand for raw materials; oil and gold prices climbed in the wake of the decision. The reduced rate could also further undermine the U.S. dollar and raise the appeal of commodities, particularly to foreign buyers.

The dollar, which traded lower throughout the day, dropped sharply against the euro, British pound and other major currencies.

Light, sweet crude for October delivery rose 75 cents to $81.32 on the New York Mercantile Exchange, after popping to a record $81.90 a barrel after the Fed's mid-afternoon decision. October gasoline futures added 0.75 cent to $2.0517 a gallon.

In electronic aftermarket trading, gold and silver prices jumped after the decision. Gold jumped $7.40 to $731.20 an ounce in aftermarket activity. The December contract settled down 10 cents at $723.70 an ounce on the Nymex. December silver added 9 cents to $12.99 an ounce in aftermarket trading.

Investors had been hankering for a rate cut ever since rising defaults on subprime mortgages led to tighter credit conditions and stirred more volatility in the stock market. Commodities suffered a broad liquidation in August as investors cashed out to cover losses elsewhere, but most markets have since recovered to tally new highs.

    Oil, Gold Prices Jump Following Rate Cut, NYT, 18.9.2007, http://www.nytimes.com/aponline/business/AP-Commodities-Review.html

Treasury Prices Fall Sharply on Rate Cut

September 18, 2007
By THE ASSOCIATED PRESS
Filed at 2:53 p.m. ET
The New York Times

NEW YORK (AP) -- Treasury prices fell sharply Tuesday as investors celebrating the Federal Reserve's half-point cut in interest rates yanked their money out of bonds and shifted it to the stock market.

Treasurys initially rallied on the news of the cut in the federal funds rate to 4.75 percent from 5.25 percent, but they later came under pressure as investors, no longer wanting the safe haven of the government bond market, gleefully bought equities.

The Fed said the cut was needed to forestall adverse effects from the severe downturn in the housing and credit markets. The central bank also said tighter credit may cause further deterioration in the housing market.

It was the first rate reduction by the Fed in more than a year. And the aggressively large size of the cut may fuel investors hopes for more rate reductions.

The benchmark 10-year Treasury note was 18/32 lower at 101 23/32 with a yield of 4.54 percent, up from 4.49 percent yield before the news and 4.47 percent at Monday's close.

The Fed decision assumed more importance than usual this month because a summer of chaos in the housing and corporate credit markets convinced many investors that the broader economy is in danger and requires stimulation.

    Treasury Prices Fall Sharply on Rate Cut, NYT, 18.9.2007, http://www.nytimes.com/aponline/business/AP-Bonds.html

Stocks Soar After Big Fed Rate Drop

September 18, 2007
By THE ASSOCIATED PRESS
Filed at 2:46 p.m. ET
The New York Times

NEW YORK (AP) -- A jubilant Wall Street barreled higher Wednesday after the Federal Reserve cut its benchmark interest rate by a larger-than-expected half a percentage point. The Dow Jones industrial average surged more than 250 points after the Fed announced its move.

Although some investors hoped for a large rate cut, most were betting on a smaller quarter percentage cut in the federal funds rate. The Fed responded to the spreading impact of credit market problems on the rest of the economy by saying, ''the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally.''

The Fed cut the benchmark federal runds rate to 4.75 percent after keeping it unchanged for more than a year. It has not lowered this rate since 2003. It also reduced the discount rate -- what it charges banks borrowing from its discount window -- by half a percentage point to 5.25 percent. On Aug. 17, the central bank lowered the discount rate by a half-point to help keep U.S. banks liquid.

The central bank's decision and the wording of its accompanying economic assessment gratified a market that plunged during August amid fears that credit market problems, spawned by a continuum of mortgage defaults, would send the economy toward recession.

There was no direct signal in the Fed's statement that it would make further rate cuts. It said ''some inflation risks remain'' and that it will keep monitoring inflation developments. Still, it did not call inflation its ''predominant policy concern'' as it did after holding rates steady in early August.

''What it says to me is you had a major shift in the last couple of months from a Fed that was very concerned about inflation to one that is concerned about the health of the financial markets, the availability of liquidity,'' said Jerry Webman, chief economist at Oppenheimer Funds Inc.

The Dow soared 251.35, or 1.88 percent, at 13,654.77.

The Standard & Poor's 500 index rose 32.57, or 2.21 percent, to 1,509.22, while the Nasdaq composite index gained 54.87, or 2.13 percent, to 2,636.53.

Bonds extended their declines after the announcement as investors pulled their money out of safe haven Treasurys and shifted it into stocks. The yield on the benchmark 10-year Treasury note rose to 4.52 percent from 4.47 percent late Monday. Bond prices move opposite their yields.

The Russell 2000 index of smaller companies rose 23.22, or 2.99 percent, to 799.03.

Advancing issues outnumbered decliners by about 7 to 1 on the New York Stock Exchange, where volume came to 934.6 million shares.

The central bank's decision came as a welcome surprise after an already strong day that saw economic and corporate data come in better than expected.

Lehman Brothers Holdings Inc., the nation's fourth-largest investment bank, posted a smaller-than-anticipated 3 percent decline in its third-quarter profits compared with a year ago. Lehman is the first of the major U.S. brokerages to report earnings from the most recent, tumultuous quarter. Other banks are due to report later in the week.

Meanwhile, the Labor Department's August producer price index was also more favorable than the market predicted. Wholesale prices fell 1.4 percent last month, the biggest decline in 10 months and led by a 6.6 percent drop in energy costs. Core inflation, which eliminates often volatile food and energy prices, rose by a mild 0.2 percent, as expected.

In European trading, Britain's FTSE 100 closed up 1.63 percent, Germany's DAX index rose 1.27 percent and France's CAC-40 rose 2.02 percent.

In Asia, Japan's Nikkei index fell 2.02 percent and Hong Kong's Hang Seng Index fell 0.09 percent.

    Stocks Soar After Big Fed Rate Drop, NYT, 18.9.2007, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

Fed Cuts Key Interest Rates by a Half Point

September 18, 2007
The New York Times
By EDMUND L. ANDREWS and JEREMY W. PETERS

WASHINGTON, Sept. 18 ­-- The Federal Reserve today lowered interest rates by a half point, a forceful policy shift intended to limit the damage to the economy from the recent disorder in the housing and credit markets.

While an interest rate cut was widely expected, it had been uncertain whether the Fed would opt for a half-point or a quarter-point reduction.

In its statement, the Fed said it would continue to monitor the effects of the market upheaval and would act as needed.

Many on Wall Street had been clamoring for weeks for a half-point cut, and the Fed’s announcement today buoyed investors.

Stocks immediately soared. The Dow Jones industrial average had been up about 75 points shortly before the announcement at 2:15 p.m., and within minutes it was up more than 200 points for the day.

For consumers, the Fed’s move could mean lower borrowing costs on major loans like mortgages, home equity credit lines and auto loans.

This was the Federal Reserve’s first rate cut in four years, and its most abrupt reversal of course since January 2001, when it suddenly slashed rates at an unscheduled emergency meeting because of signs that the economy was slipping into a recession.

As recently as six weeks ago, the central bank was still predicting “modest” growth for the economy and warning that inflation remained its “predominant concern.” As in 2001, the Fed’s move today came after a panic in financial markets and the collapse of a speculative bubble. This time, the panic is in credit markets spooked by dubious mortgages on inflated housing prices. Back then, it was the stock market that crashed, initially because the air went out of inflated dot-com stocks.

In the jargon of economists, the turmoil in both cases represented a sudden “repricing” of risk.

By today, it seemed clear that Fed policy makers were no longer debating whether to reduce rates but how much to lower them. Despite the seemingly narrow debate — whether to lower the overnight federal funds rate by one-quarter of a percent or by one-half of a percent — the uncertainty about this policy meeting was higher than any other in the past four years.

The debate within the Fed was all about risk probabilities: what were the odds the twin meltdowns in housing and mortgage markets would tip the overall economy into a recession later this year? If policy makers cut rates too cautiously, they risked a recession; if they cut them too much or too early, they risked stoking inflation.

Ben S. Bernanke, chairman of the Federal Reserve, had made it clear over the past month that the Fed did not simply want to rescue Wall Street investors who made bad bets or real estate speculators who bought properties on the assumption that prices would keep skyrocketing.

But Mr. Bernanke also pledged that the Fed would act if the dislocation in financial markets or the downturn in housing threatened to derail overall growth.

Just a few hours before the central bank announced its decision, new statistics indicated that the pace of home foreclosures is accelerating. RealtyTrac of Irvine, Calif., reported that foreclosure filings — from default notices and auction sales to bank repossessions — were 36 percent higher in August than in July and 115 percent higher than one year ago.

The Labor Department also reported today that producer prices fell by 1.4 percent in August — much more than expected — because of slumping energy prices. That was positive news on inflation, but analysts said it was unlikely to have much influence on the Fed because the "core” measure excluding energy and food prices increased 0.2 percent, slightly more than expected.

Except for the housing downturn, which Fed officials admit is much more severe than they had expected, the evidence of a recession in the real economy is ambiguous. Global economic growth is much stronger than in 2001, and American exports have climbed about 14 percent over the last year.

Instead of the United States’ being the world’s engine of growth, the global economy could now become the engine of American growth.

For the last four years, the Federal Reserve has telegraphed its intentions months in advance as it pursued a gradualist approach of slow but steady adjustments in monetary policy. It advertised its intention to raise rates gradually many months before it actually did so in June 2004, and then raised rates in well-signaled increments at each policy meeting over the next two years.

By contrast, Wall Street analysts were sharply divided as of early today about how much the Fed would cut rates and what it would say in its statement about the economic outlook.

A smaller rate reduction posed a risk of moving too slowly if the economy was indeed in danger of stalling. But a bigger rate reduction could have been taken as a sign of Fed panic, and it added to the risk of stoking inflationary pressures that the central bank had just begun to tamp down.

But the evidence so far is inconclusive. In August, for the first time in four years, the Labor Department estimated that the number of jobs declined slightly. It also reduced its estimates of job growth in June and July, suggesting that the labor market weakened even before credit markets froze up in early August.

But other indicators — on consumer spending, consumer confidence and export growth — point to a continuation of modest growth.

Right or wrong, today’s decision will be a defining moment for Mr. Bernanke, the former economics scholar at Princeton who became Fed chairman in February 2006.

Many Wall Street economists place the odds of a recession at about one in three or somewhat higher. Alan Greenspan, who preceded Mr. Bernanke as Fed chairman, puts the odds at somewhat more than the one-in-three that he estimated earlier this year.

The Fed’s course change has been under way since early August, when fears about huge losses on subprime mortgage loans and continued downturn in housing caused a much broader panic in credit markets.

The resulting credit crunch has now affected all but the safest home mortgages, and also greatly reduced the ability of private equity funds and hedge funds to borrow money at low rates. Many banks, which had been planning to resell their loans into the giant market for tradable commercial debt securities, are now being forced to absorb loans that the securities markets will no longer take.

On Aug. 17, the Federal Reserve moved to ease the liquidity crisis by encouraging banks to borrow money through its “discount window,” a program originally created as an emergency source of overnight funding for banks in a cash squeeze.

But by most accounts, the turmoil in credit markets has abated very little. The market for subprime mortgages has all but disappeared, and demand for all forms of “asset-backed commercial paper,” which are securities backed by mortgages, credit card debt, company receivables, remains very weak.

    Fed Cuts Key Interest Rates by a Half Point, NYT, 18.9.2007, http://www.nytimes.com/2007/09/18/business/18cnd-fed.html?hp

Text of Federal Reserve Policy Statement

September 18, 2007
By THE ASSOCIATED PRESS
Filed at 2:43 p.m. ET
The New York Times

Text of Federal Reserve statements Tuesday:

------

Print Press Release

Release Date: September 18, 2007

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Developments in financial markets since the Committee's last regular meeting have increased the uncertainty surrounding the economic outlook. The Committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; Eric Rosengren; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 5-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, St. Louis, Minneapolis, Kansas City, and San Francisco.

2007 Monetary Policy Releases

    Text of Federal Reserve Policy Statement, NYT, 18.9.2007, http://www.nytimes.com/aponline/business/AP-Fed-Text.html

Oil Hits New Record Ahead of Fed Meeting

September 18, 2007
By THE ASSOCIATED PRESS
Filed at 1:29 p.m. ET
The New York Times

NEW YORK (AP) -- Oil futures jumped to new records Tuesday as traders bet that a Federal Reserve interest rate cut could stimulate economic growth and increase demand at a time when crude oil and gasoline inventories are tight.

An attack on an oil pipeline in Iraq also supported prices, analysts said.

Oil investors are pricing a quarter-point decrease into the market, part of the reason oil futures have surged to new records in recent days, said Brad Samples, a commodities analyst at Summit Energy Services Inc. in Louisville, Ky. A half-point cut could spur even more buying, he said.

''The whole market is kind of poised on the brink, waiting to see what the Fed will do,'' Samples said.

Moreover, many analysts see a weaker dollar as a natural side effect of lower rates, and that could promote buying of oil contracts by foreign investors.

Beyond the Fed decision, energy investors are looking ahead to Wednesday's inventory report by the Energy Department's Energy Information Administration, expected to show inventories and refinery activity declined last week.

A bomb attack on a pipeline near the northern Iraqi city of Beiji on Tuesday, which caused crude oil to spill into the Tigris River, contributed to Tuesday's advance.

Light, sweet crude for October delivery rose 82 cents to $81.39 a barrel on the New York Mercantile Exchange after fluctuating between gains and losses and then rising to a record $81.80 earlier. The contract rose to settle at a record $80.57 on Monday.

October gasoline rose 0.03 cent to $2.0445 a gallon on the Nymex, while heating oil futures fell 0.18 cent to $2.2269 a gallon.

October natural gas fell 19.8 cents to $6.445 per 1,000 cubic feet. Natural gas prices have been volatile in recent days as tropical weather threats to critical gas and oil infrastructure in the Gulf of Mexico have grown or subsided. On Tuesday, the National Hurricane Center was watching two storm systems, one just east of Florida and the other in the central Atlantic. Futures pared earlier losses after updated forecasts said the Florida system could develop in strength over the next couple of days.

In London, October Brent crude rose 30 cents to $77.28 a barrel on the ICE Futures exchange.

At the pump, meanwhile, gas prices slipped 0.1 cent overnight to a national average of $2.787 a gallon, according to AAA and the Oil Price Information Service. Retail prices, which typically lag the futures market, peaked at $3.227 a gallon in late May.

Early in the year, gas prices led the energy complex higher as an unusual number of refinery outages kept supplies low. With the end of summer driving season, energy investors have been far less focused on gasoline inventories and refinery activity than they once were.

In its Wednesday report, analysts surveyed by Dow Jones Newswires expect the EIA to show that crude inventories fell by 1.5 million barrels, on average, in the week ended Sept. 14, while gasoline supplies fell by 1.3 million barrels.

Refinery utilization likely fell by 0.5 percentage point to 90 percent of capacity, the analysts forecast, and distillate inventories, which include heating oil and diesel fuel, likely rose by 1.1 million barrels.

Crude oil's recent rise into record territory has been driven in part by a belief that supplies are not keeping pace with robust global demand. Last week, for instance, prices rose despite OPEC's decision to boost production by 500,000 barrels a day this fall. Many analysts and investors saw that increase as too little.

Earlier Tuesday, oil prices drew support from new comments by Organization of Petroleum Exporting Countries officials that suggested the oil cartel won't increase production to push oil prices below $80 a barrel.

''OPEC has done what it can,'' said Abdullah bin Hamad Al Attiyah, Qatar's oil minister. ''I see no need for additional oil supply that the market won't absorb.''

------

Associated Press Writers Pablo Gorondi in Budapest and Gillian Wong in Singapore contributed to this report.

    Oil Hits New Record Ahead of Fed Meeting, NYT, 18.9.2007, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html

Fed Interest Rate Cut Seen This Week

September 16, 2007
By THE ASSOCIATED PRESS
Filed at 12:21 p.m. ET
The New York Times

WASHINGTON (AP) -- For the first time in more than four years, the Federal Reserve appears ready to lower interest rates to prevent a housing meltdown and a painful credit crunch from driving the economy into a recession.

A rate cut would affect millions of borrowers, with the intention of getting them to spend and invest more, which would revitalize the economy.

In one of their most important and anxiously awaited decisions, Fed Chairman Ben Bernanke and his central bank colleagues meet Tuesday to determine their next move on interest rates. Those policymakers are widely expected to cut an important rate, now at 5.25 percent, by at least one-quarter of percentage point. Some analysts predict a bolder step, a half-point reduction.

If the Fed drops the rate, then the prime lending rate that commercial banks charge many individuals and businesses would fall by a corresponding amount. It now is at 8.25 percent.

''It's no longer a debate over whether they will ease but by how much,'' said Mark Zandi, chief economist at Moody's Economy.com. ''The economy is soft and getting softer,'' and the Fed has come under economic and political pressure to act.

Should the Fed go with a quarter-point cut, analysts expect policymakers will lower the rate again in October and in December, their final meeting of the year.

Fed action would mean that borrowers who can obtain credit would see rates drop on a variety of loans. It would become less expensive for people to finance certain credit card debt and for homeowners to take out popular home equity lines of credit, which often are used to pay for education, home improvements or medical bills.

Also, it should help some homeowners whose adjustable-rate mortgages reset in the fall.

''Borrowers facing a rate reset Oct. 1 might see their ARM rates adjust to 6.7 percent, for example, rather than the 7.5 percent that a borrower whose loan adjusted back on July 1 experienced,'' said Greg McBride, senior financial analyst for Bankrate.com. ''Still a big increase, but not the knockout punch it could have been,'' he said.

Less immediate would be relief for the country's economic health. An expected series of rate decreases could take three months to nine month before rippling through the economy and bolstering activity.

''It's like taking an antibiotic. After you take the first dose, you don't feel immediately better. But after a series of dosages accumulate, there will be a more positive effect,'' explained Stuart Hoffman, chief economist at PNC Financial Services Group.

Over the short term, a rate cut would provide an important psychological boost. It could make investors, businesses and others less inclined to clamp down or make drastic changes in their behavior that would hurt the economy.

Fears that the deepening housing slump and a spreading credit crisis could short-circuit the six-year-old economic expansion have shaken Wall Street over the past few months. Stocks have swung wildly, with sharp drops reflecting investors' bouts of panic.

A recent government report showing that the economy lost jobs for the first time in four years delivered a fresh jolt. The biggest fear is that individuals and businesses will cut back on spending, throwing the economy into a tailspin.

By Zandi's odds, there now is a 40 percent chance the economy will fall into a recession -- the highest probability since the last recession, in 2001. Just two months earlier, Zandi believed there was only a 12 percent chance.

So far, though, consumers have not cracked. Retail sales rose a modest 0.3 percent in August, after a 0.5 percent gain in July, the government reported Friday.

Problems have been most pronounced in housing.

But, Fed Governor Frederic Mishkin said recently, ''economic activity could be affected more severely in other sectors should heightened uncertainty lead to a broader pullback in household and businesses spending.''

He added, ''That scenario cannot, in my view, be ruled out, and I believe it poses an important downside risk to economic activity.''

Analysts expect the economy will slow to a rate of about 2 percent in the current quarter, from July through September. That would be just half the rate of the three previous months. Growth in the final three months of this year could turn out even weaker.

The employment climate is starting to deteriorate. Employers eliminated 4,000 jobs in August, intensifying calls by politicians and others for the Fed to cut rates. The unemployment rate, now at 4.6 percent, is expected to climb close to 5 percent by the year's end.

The weakness in employment was troubling because job and wage growth have served as shock absorbers for people coping with the housing slump.

After a five-year boom, the housing market went bust more than a year ago. Higher interest rates and weaker home values clobbered homeowners, particularly ''subprime'' borrowers with spotty credit histories or low incomes. Foreclosures set records and late payments spiked. Lenders were forced out of business. Hedge funds and other investors in subprime-related mortgage securities took a huge financial hit.

A credit crisis ensued, spreading beyond the subprime market to more creditworthy borrowers.

''If current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy,'' Fed Governor Randall Kroszner said in a recent speech.

The situation for the Fed, though, could become even more complicated. Oil prices recently surged past $80 a barrel, a record. Persistent increases could rekindle inflation worries.

Much has changed since the Fed's previous meeting on Aug. 7, when it held its key rate steady. But days later, the Fed was forced to begin pumping billions of dollars into the financial system to stem worsening credit problems and market turbulence.

Then on Aug. 17, the Fed slashed its lending rate to banks and issued a more grim assessment of the economic climate.

Bernanke repeatedly has pledged in recent weeks to ''act as needed'' to keep the housing and credit mess from sinking the economy.

''It seemed like the Fed was behind the curve. Now it is going to bring out the big gun'' on Tuesday and cut its most important rate, the federal funds rate, said Scott Anderson, economist at Wells Fargo.

The last time the funds rate, which is the interest that banks charge each other, was lowered was in late June 2003. The rate is the Fed's main tool for influencing the economy.

''The cut is really needed to improve the cost and availability of credit for the average business and consumer,'' he said.

------

On the Net:

Federal Reserve: http://www.federalreserve.gov/

    Fed Interest Rate Cut Seen This Week, NYT, 16.9.2007, http://www.nytimes.com/aponline/us/AP-Fed-Interest-Rates.html

Countrywide Caught in Mortgage Spiral

September 16, 2007
By THE ASSOCIATED PRESS
Filed at 2:23 a.m. ET
The New York Times

LOS ANGELES (AP) -- Countrywide Financial Corp. grew from a two-man startup in 1969 to become the nation's leading mortgage lender by deftly riding out housing boom-and-bust cycles. This time around, however, the ride has been a lot rougher, leaving the company in a scramble to regain its footing as the housing market has turned from boom to bust.

To survive, it's been forced to borrow billions of dollars, announce thousands of job cuts and dramatically restructure its lending practices to nearly eliminate risky subprime loans to borrowers with shaky credit that have led to massive foreclosures and defaults wracking the housing market.

''In an absolute level sense, this is the biggest challenge'' Countrywide has ever faced, said Frederick Cannon, an analyst with Keefe, Bruyette & Woods Inc.

Several analysts believe Countrywide will survive the crisis, based on the strength of its retail banking operation, track record in the industry and operating changes made in recent weeks.

But they said it could see deeper cutbacks and lose ground to competitors while weathering a housing crisis expected to last at least 18 more months.

''At the end of the day, in this environment, Countrywide is not in as strong a position as its biggest competitor, Wells Fargo,'' Cannon said.

Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, said Countrywide will face intense competition as big and small lenders move to focus on prime loans, a sector once dominated by Countrywide.

''It's going to take time, and I think their cutbacks are going to be greater than perhaps we anticipate,'' Ross said.

Countrywide dominated the industry when interest rates began to plummet at the start of the decade and competitors rushed to make subprime loans.

The company didn't lead the charge to make those loans, ''but as an industry leader, they were right there,'' said Robert Napoli, an analyst with Piper Jaffray.

''They have an effect on the market. They have to, being the biggest,'' he said.

The Calabasas, Calif.-based company's loan production last year totaled $468 billion and it accounted for more than 13 percent of the loan servicing market as of June 30, according to the mortgage industry publication Inside Mortgage Finance.

Countrywide and the rest of the mortgage industry also got caught up in the frenzy to make nontraditional loans then resell the mortgages for hefty profits to Wall Street banks.

Fortunes dove when demand for those loan packages plummeted amid rising defaults. The resulting credit crunch that tore through the markets has left Countrywide and others holding loans they couldn't sell and hurting for cash to keep funding new ones.

''The market changed very quickly on them ... they just underestimated how rapidly the market changed,'' Napoli added.

A report in The New York Times cited unnamed former Countrywide employees saying the company used financial incentives to encourage employees to steer borrowers into subprime loans to boost profits.

The allegations prompted North Carolina Treasurer Richard Moore to send a letter dated Tuesday to Countrywide asking for an explanation. Moore is the trustee of a pension fund that holds more than $11 million in Countrywide shares.

''Countrywide has sacrificed long-term sustainability for short-term profits,'' Moore wrote. ''As an investor, I expect assurances that these practices have ceased and that the company is returning to a business model that both respects consumers and protects shareholder value.''

Countrywide has strongly refuted the report, noting its business processes are designed to prohibit pushing customers who qualify for prime loans into subprime loans, and that its loan officers do not receive higher commissions for selling subprime loans.

During a conference call with Wall Street analysts in January, Countrywide Chairman and Chief Executive Angelo Mozilo said the company expected rising delinquencies and a weak housing market but was ''well positioned and extremely optimistic about our prospects to continue generating growth and superior returns over future cycles.''

Since then, Countrywide stock has dropped about 60 percent and is now trading around $19 a share.

In a recent letter to employees announcing as many as 12,000 layoffs, he characterized the current housing market cycle as ''the most severe in the contemporary history of our industry.''

Countrywide didn't return calls seeking an interview with Mozilo.

The son of a butcher, he has guided Countrywide through a number of housing cycles.

He co-founded the company nearly four decades ago with fellow New Yorker David Loeb, taking the fledgling company public only six months after it launched.

Trading at less than $1 a share, the startup failed to generate much investment capital, so Mozilo and Loeb headed West in the fall of 1969 and set up shop in suburban Los Angeles, a housing hotbed.

Its rise was part of a broader trend in which banks and traditional savings and loans lost market share as borrowers turned to more market-savvy mortgage firms offering a wider variety of loan programs.

Countrywide's expansion was also fueled by its move to sell conventional mortgage loans that were then resold to government-sponsored mortgage companies the Federal National Mortgage Association, also known as Fannie Mae, and the Federal Home Loan Mortgage Corp, or Freddie Mac.

The strategy helped Countrywide weather the crash of the high-flying housing market at the end of the 1980s. In 1990 the company reported its loan production totaled more than $3 billion.

The interest rate upheaval during the 1990s had a mixed impact on the company. Low rates at the start of the decade helped boost business amid a surge in refinancing.

But when rates eventually kicked back up, the company and other mortgage lenders saw loan production fall off.

Countrywide coped with that downturn by diversifying into more financial services, eventually opening its retail bank.

When interest rates began to plunge at the start of this decade, Countrywide joined the rest of the industry in rushing to feed an unprecedented demand on Wall Street for home loans.

Last fall, Wall Street investors began to sour on mortgage loans, particularly subprime loans.

While Countrywide was less exposed to subprime loans than the rest of the market, it had stepped up high-yield loan products such as pay option loans, which give borrowers the option to make a lower payment but can result in the unpaid portion being added to the principal balance.

In recent weeks, the company has drawn down on an $11.5 billion line of credit and raised $2 billion by selling a stake to Bank of America.

This week, it boosted its borrowing capacity by another $12 billion through new or existing credit agreements.

To further help reassure investors of the company's stability, management has implemented layoffs and shifted its loan production through its banking arm.

It's also closed the door to all subprime loans except for those it can sell back to U.S. government-backed lenders.

''Countrywide is quickly adjusting to market conditions and ... now has the breathing room to do so,'' said Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm. ''One sees glimmers of hope.''

    Countrywide Caught in Mortgage Spiral, NYT, 16.9.2007, http://www.nytimes.com/aponline/business/AP-Countrywide-in-Crisis.html

Consumer Confidence Tumbles in September

September 14, 2007
By THE ASSOCIATED PRESS
Filed at 3:39 p.m. ET
The New York Times

WASHINGTON (AP) -- Shaken by housing and credit woes, peoples' confidence in the economy sank to its lowest point in nearly 1 1/2 years, raising fresh worries about their appetite to spend in the months ahead.

The RBC Cash Index showed consumer confidence clocking in at 71.1 in September, a sharp drop from August's reading of 89.3. It marked the worst showing since May 2006. The index is based on the results of international polling firm Ipsos.

''Consumers are rattled to the bone, '' Richard Yamarone, economist at Argus Research, said of the latest confidence reading.

The deterioration comes as Wall Street has been suffering through a mood swing of its own, sending stock prices careering wildly. The deeper consumer angst also comes after troubling news last week that the economy lost jobs for the first time in four years.

Against this backdrop, analysts say the chance the economy might fall into a recession is growing.

Still many are counting on the Federal Reserve to cut interest rates next week.

Such a move could give people and companies an important psychological boost. It also might make them more inclined to spend and invest, which could help energize economic activity.

Economists keep close tabs on confidence barometers for any clues about consumers' willingness to spend. Consumer spending accounts for a big slice of overall economic activity.

In August, consumers spent moderately; it was also a month when their confidence had gone up. A government report Friday showed retail sales rose 0.3 percent last month, down from 0.5 percent in July. August's gain, however, was smaller than analysts had expected.

The overriding worry, though, is that consumers will cut back on their spending, dealing a blow to the economy.

''There are definite risks if people get sufficiently spooked,'' said Bill Cheney, chief economist at John Hancock Financial Services Group. ''If you believe the only thing we have to fear is fear itself, well, we got the fear, so we better fear it,'' he said.

A measure looking at peoples' attitudes about investing, including their comfort in making major purchases, fell to 88.3 in September, from 97.9 in August.

Individuals' feelings about the economy's prospects and their own financial fortunes over the next six months plunged to 14.4, compared with 43.9 in August. The new reading was the fourth weakest showing on record.

Peoples' feelings about current economic conditions, meanwhile, slid to 90.5 in September, from 105.6 in August.

Credit problems in mortgage and other markets make it likely the worst housing slump in 16 years will persist well into 2008. Foreclosures and late payments are spiking. Lenders have been forced out of business. The carnage -- especially in the ''subprime'' mortgage market involving borrowers with spotty credit histories -- has wreaked havoc on Wall Street.

Economic growth in the current July-to-September quarter is expected to slow to an annual rate of around 2 percent. That would be half the pace logged in the April-to-June period and would constitute a subpar performance. With growth cooling, the job market -- and wage growth -- also could lose ground.

The first major crack appeared in what had been a mostly sturdy employment environment when the government reported last week that employers cut 4,000 jobs in August. It was the first monthly decline in national payrolls in four years.

A measure tracking consumers' sentiments about employment conditions dropped to 113.6 in September, the weakest reading in nearly 1 1/2 years.

President Bush, meanwhile, is continuing to get low marks for his economic stewardship. Just 37 percent approve of his handling of the economy in September, down from 41 percent in August, according to a separate AP-Ipsos poll. Only a third of the public is satisfied with the president's overall job performance, the poll found.

The overall confidence index is benchmarked to a reading of 100 in January 2002, when Ipsos started the survey.

The RBC consumer confidence index was based on responses from 1,000 adults surveyed Monday through Wednesday about their attitudes on personal finance and the economy. Results of the survey had a margin of sampling error of plus or minus 3 percentage points.

    Consumer Confidence Tumbles in September, NYT, 14.9.2007, http://www.nytimes.com/aponline/us/AP-Ipsos-Consumer-Confidence.html

Powerball Win: Fantasy or Nightmare?

September 13, 2007
By THE ASSOCIATED PRESS
Filed at 2:49 p.m. ET
The New York Times

MOUNT HOPE, W.Va. (AP) -- In his darkest moments, Jack Whittaker has sometimes wondered if winning the nearly $315 million Powerball game was really worth it.

The jackpot that was the stuff of dreams turned into a nightmare: His wife left him and his drug-addicted granddaughter -- his protege and heir -- died. He endured constant requests for money.

Almost five years later, Whittaker is left with things money can't cure: His daughter's cancer, a long list of indiscretions documented in newspapers and court records, and an inability to trust others.

''I don't have any friends,'' he said in lengthy interview with The Associated Press. ''Every friend that I've had, practically, has wanted to borrow money or something and of course, once they borrow money from you, you can't be friends anymore.''

Whittaker was a self-made millionaire long before he became a lottery winner, having built a pipeline business worth $17 million. Then he hit the Powerball in December 2002. It was then the largest-single jackpot ever.

The prize was worth $314.9. Whittaker opted for the lump-sum payout of $170 million -- $93 million after taxes.

He still has plenty of money. And instead of retiring, the 59-year-old starts his day at 5 a.m., juggling ventures in construction, real estate, used-cars, even movies. Work is the last remnant of his old life.

''Nothing else is normal,'' he said, sounding simultaneously gruff and sad.

His appearance has changed little. His blue eyes still twinkle when he tells a joke, his cowboy boots are worn from wear, and his grin remains toothless. He's too busy, he says, to pay attention to looks.

Whittaker began working part-time for his father at age 10, pouring cement. At 14, he dropped out of school to work full time. He's owned some kind of business ever since.

''I was accustomed to making big money and making my own money, and I never could get interested in school again after that.''

By his own estimate, he's brought water and sewer service to some 100,000 homes and still does some good by providing 200 high-paying jobs.

''Probably the lowest-paid man in my construction company is, I'd say, $36 an hour,'' he said. ''That's a good wage for any part of West Virginia.''

Whittaker's family never wanted for anything, and he admits they have long been accustomed to a lifestyle most would consider lavish.

With every change of the seasons, new wardrobes filled their closets. The paint job on one of his granddaughter's many cars cost $16,000. Even the family's marble mausoleum towers over nearby grave markers in the hilltop cemetery in Jumping Branch.

But winning the Powerball was a different kind of wealth that brought instant celebrity status.

Whittaker's struggles with drinking, gambling and philandering became public, and tales of his transgressions were retold with relish.

His home and car were repeatedly burglarized. At a strip club, thieves broke into his Lincoln Navigator and stole a briefcase stuffed with $245,000 in $100 bills and three $100,000 cashiers checks. The briefcase was later found, with the money.

Whittaker was charged twice with driving while under the influence and sued repeatedly, once by three female casino employees who accused him of assault.

In all, Whittaker says, he's been involved in 460 legal actions since winning. He recently settled a lawsuit that alleged his bank failed to catch $50,000 in counterfeit checks cashed from his accounts.

Whittaker believes he has been unfairly demonized by the media, which he says exaggerated his problems and helped drive his wife away.

Jack fell in love with Jewell when he was in eighth grade and she was in seventh. The couple filed divorce papers three years ago but have yet to sign them.

''I don't know any normal person who could have a marriage with everything that's been written about me that's not true,'' Whittaker said.

The couple's daughter, Ginger McMahan, has battled cancer for years. The disease is in remission, though she remains in poor health. Before Powerball, Whittaker and his wife went to church together. These days, he seldom does.

''It's just aggravating, you know. People come up and ask you for money all the time, tell you some kind of a sob story.''

Whittaker says he hasn't been stingy. The Jack Whittaker Foundation has spent $23 million building two churches. His family donates food, clothing and college scholarships to local students, ''but all the big work with the foundation is completed,'' he said.

Whittaker is also done with boozing -- which, on his worst days, involved a fifth of vodka. He says he drank in part because he was worried about granddaughter Brandi Bragg, who shared his independent, headstrong personality and knew from a young age she wanted to run her Paw Paw's businesses.

''She was going to inherit everything,'' Whittaker said. ''Everything that we have was built in a way that it went to her on her 21st birthday.''

She never saw that day, dying at 17 after struggling with drug addiction.

Only 14 when Whittaker hit the Powerball, Bragg was in rehab a year later for Oxycontin addiction. Whittaker blames her problems on a kidnapping threat, which led to home schooling, and her decision to run with an older crowd.

He says he hired sheriff's deputies to track Bragg, personally hunted down and reported her drug dealers, and repeatedly sent her to rehab.

''It wasn't two or three months before she was right back on again, same drugs,'' he said.

He remembers their last conversation, when she was packing up to move to his Virginia home. ''I told her, 'I'll come and get ya. I'll come and get ya right now if you're ready to come.'''

But she wasn't. Her body was found two weeks later wrapped in a sheet and plastic tarp, hidden in a yard by a boyfriend who panicked when he found her dead.

The state's autopsy found Bragg had pills and a syringe tucked into her bra, and died with cocaine and methadone in her system. But the manner of her death is officially listed as ''undetermined.''

''If it would bring my granddaughter back, I'd give it all back,'' Whittaker said of his jackpot. ''But I can't get her back, so might as well keep the money, I guess.''

He remains devoted to his employees, despite 11 indictments charging his staff with embezzling from his companies.

''Jack is an incredible man,'' said Kathy Shepherd, Whittaker's administrative assistant for the past year. ''People who don't know him have a lot of negative things to say about him, but if they knew him, they wouldn't.''

Whittaker has little doubt as to his own legacy.

''I'm only going to be remembered as the lunatic who won the lottery,'' he said. ''I'm not proud of that. I wanted to be remembered as someone who helped a lot of people.''

    Powerball Win: Fantasy or Nightmare?, NYT, 13.9.2007, http://www.nytimes.com/aponline/us/AP-Powerball-Nightmare.html

Federal Deficit Running Lower This Year

September 13, 2007
By THE ASSOCIATED PRESS
Filed at 2:01 p.m. ET
The New York Times

WASHINGTON (AP) -- The federal deficit is running sharply lower than last year even though spending in August set an all-time high, the government reported Thursday.

The Treasury Department said that the deficit through the first 11 months of this budget year totaled $274.4 billion, down 9.8 percent from the same period a year ago.

Analysts believe the deficit for all of 2007 will actually be even lower because they are forecasting a sizable surplus in the final month, reflecting in part timing issues that caused about $44 billion in Social Security and Medicare payments that normally would have been made in September to be shifted into August.

The Congressional Budget Office is forecasting that when this budget year wraps up on Sept. 30, the deficit will total $158 billion, down by 36.2 percent from last year's $248.2 billion deficit.

The government's books have been helped this year by record flows of tax receipts, which have continued even though economic growth has been reduced by a serious slump in housing.

    Federal Deficit Running Lower This Year, NYT, 13.9.2007, http://www.nytimes.com/aponline/us/AP-Federal-Budget.html

4-Year Growth in Jobs Ends; Stocks Plunge

September 7, 2007
The New York Times
By JEREMY W. PETERS

Employers eliminated 4,000 jobs in August, the Labor Department said today, bringing an end to four years of uninterrupted job growth.

Economists said the report provides the Federal Reserve with ample justification to lower its key interest rate at least a quarter point when it meets Sept. 18. But the numbers also raised fresh fears of a recession and suggested that the damage from the recent turmoil in financial markets could be spreading.

“If the economy is not headed toward recession, it is very close to one,” said Mark Zandi, chief economist at Moody’s Economy.com.

At the start of trading on the New York Stock Exchange, stocks dropped 1 percent within minutes. And losses only deepened throughout the day. At 1:30 p.m., the Dow was off about 180 points, or 1.3 percent. The broader Standard & Poor’s 500-stock index was down a bit less and the Nasdaq composite index was off slightly more, as were European markets.

If the jobs report had been merely lackluster, it might have been welcomed by investors as a sign that fears of inflation had abated sufficiently to make the prospect of a Fed rate cut all but certain. The reversal in job growth, however, went far beyond expectations, raising fears that corporate profits will weaken as the market upheaval moves beyond the housing and financial sectors and casts a chill on the broader economy.

“That it was down 4,000 really is eye-catching,” said John Shin, an economist for Lehman Brothers. “What the payroll number confirms is that you may be seeing the damage spread across the rest of the economy.”

Investors flocked to safe haven investments like gold and government bonds. Gold prices jumped, and the yield on the 10-year Treasury note — a key benchmark for the bond market that moves in the opposite direction from its price — fell to 4.38 percent, its lowest level in more than a year and a half. Yesterday evening, the yield was at 4.51 percent.

The dollar fell against most major world currencies on anticipation of a rate cut and weakening economic conditions in the United States.

Not only did today’s report show that there was no job growth last month, but it also found that the job market was significantly weaker in June and July than the government first reported. Revisions to earlier jobs reports showed that 81,000 fewer jobs were created than initially estimated.

Construction and manufacturing were the hardest-hit industries, losing a combined 68,000 jobs. That offset hiring in education services, health and retail. About 28,000 government positions were eliminated as well.

The national unemployment rate, taken from a separate survey of American households, was unchanged at 4.6 percent.

Some economists noted that while the report was undeniably weak, it only represented only one month.

“There’s really no silver lining in it,” said Mickey Levy, chief economist with Bank of America. “However, one month does not make a trend.” Mr. Levy said a combination of factors, including strong economic growth overseas and interest rates that are low by historic standards, should help prevent a recession. He said his forecast for a one-in-three chance of a recession was unchanged.

“The financial turmoil and extend problems in housing put the risks for the economy clearly to the downside — no question,” he added. “But there are also factors that suggest a longer period of slower growth, but not recession.”

One of those positive factors is solid wage growth. Average hourly earnings for most American workers last month increased 3.9 percent from the same month last year, to $17.50, showing no decline from July.

Wall Street had eagerly awaited the jobs report because it is the most significant economic data released since financial markets began to tumble in early August. The surveys that make up the Labor Department’s August employment report measured conditions from Aug. 12 to Aug. 18, when the credit squeeze and subsequent stock market turmoil began unfolding in force.

Investors and economists are widely expecting the Fed to lower its benchmark interest rate by a quarter-point, to 5 percent, at its next meeting. Some economists said the August employment report raises the chances of a second rate cut this year, or a half-point reduction at the next meeting. And traders in the futures market are predicting that the Fed will cut the rate to 4.5 percent by the end of the year.

“If there was any doubt over whether the Fed would be cutting interest rates on Sept. 18, this report should remove it,” Nigel Gault, an economist with Global Insight, said in a research note today. “The question now is whether the Fed should be more aggressive.”

Vikas Bajaj contributed reporting.

    4-Year Growth in Jobs Ends; Stocks Plunge, NYT, 7.9.2007, http://www.nytimes.com/2007/09/07/business/07cnd-econ.html?hp

Homeowners get foreclosure notices at record high

6 September 2007
USA Today

WASHINGTON (AP) — The number of homeowners receiving foreclosure notices hit a record high in the spring, driven by problems with subprime mortgages.

The Mortgage Bankers Association reported Thursday that mortgage-holders starting the foreclosure process in the April-June quarter reached 0.65%, marking the third consecutive quarter that this figure has set an all-time high, 7 basis points higher than the previous quarter and up 22 basis points from a year ago. A basis point is one-hundredth of a percentage point.

The delinquency rate of subprime borrowers who were late making payments but not yet in foreclosure, rose to 14.82% in the second quarter of the year from 13.77% at the end of the first three months.

The overall delinquency rate was also up sharply during the spring, to 5.12% of all loans, up nearly three-fourths of a percentage point from a year ago.

Doug Duncan, the MBA's chief economist, said the worsening performance was driven by two factors — heavy job losses in the Midwest states of Ohio, Michigan and Indiana, and the collapse of previously booming housing markets in California, Florida, Nevada and Arizona.

The Midwest has been hit hard by a heavy loss of jobs in manufacturing, especially in autos and related industries.

"The percent of mortgages in Ohio that are 90 days or more past due or in foreclosure is still more than twice the national average and 1% of all the mortgages in Michigan had foreclosure actions started on them during the last quarter," Duncan said.

He said there were also significant problems in the neighboring states of Indiana, Illinois, Kentucky, Tennessee and Pennsylvania.

Analysts said the problems in the formerly red-hot housing markets of California, Florida, Nevada and Arizona reflected in part speculators walking away from mortgages they can no longer afford.

Duncan also noted that loans to strong borrowers in a fixed-rate mortgage continue to perform well even as subprime and adjustable-rate loans slide.

"The seriously delinquent rate for prime fixed-rate loans was essentially unchanged from the first quarter of the year to the second," Duncan said in a statement.

In that time, the rate of seriously delinquent subprime loans rose 277 basis points.

During a five-year housing boom, the prices in these areas surged, creating what many analysts have described as a speculative bubble as investors bid up the price of homes hoping to quickly resell them for a profit.

Now with home sales falling, the inventory of unsold homes rising and prices stagnant, some speculators are choosing to default on their mortgages.

Another big problem is that an estimated 2 million adjustable rate mortgages are scheduled to reset this year at sharply higher interest rates, which will cause monthly payments in some cases to double or even triple, a problem that is especially severe in the market for subprime mortgages, loans offered to borrowers with weak credit histories.

Contributing: Reuters

    Homeowners get foreclosure notices at record high, UT, 6.9.2007, http://www.usatoday.com/money/economy/housing/2007-09-06-foreclosures_N.htm

Can the Mortgage Crisis Swallow a Town?

September 2, 2007
The New York Times
By NELSON D. SCHWARTZ

Maple Heights, Ohio

TAMMI and Charles Eggleston never took out a risky mortgage, never borrowed more than they could afford and never missed a monthly payment on their neat, three-bedroom colonial in the Cleveland suburbs. But that hasn’t prevented them from getting caught in the undertow of the subprime mortgage mess now submerging this town.

Over the last 18 months, the Egglestons have watched one house after another on their street, Gardenview Drive, end up foreclosed and vacant. Although lawns are still tidy and empty homes are not boarded up and stripped as they are in inner-city Cleveland, the Egglestons say Maple Heights no longer feels safe after dark. Nor do they have the confidence they had when they moved in a decade ago that this is the ideal place to raise their 6-year-old twin girls, Sydney and Shelby. So, in May 2006, they put their home on the market in order to move closer to Mrs. Eggleston’s parents in another middle-class Cleveland suburb, Richmond Heights.

They have had no takers. Although they lowered the asking price to $99,000 from $109,000, no one has even come to look at it in more than six weeks. “My heart panics every time I drive down the street and I see another for-sale sign,” says Mrs. Eggleston, pointing past the placards in front of her porch to others that dot surrounding yards like lawn furniture. “Some people on the street couldn’t pay, so they just left. The competition to sell is just ridiculous.”

It is a scene being repeated in cities and towns across America as loans that were made to borrowers with little or no credit history, many of whom could not even afford a down payment, fail in ever-growing numbers. It is also a story of how local economic trends are intersecting with national politics, with local foreclosures drawing the attention of Democratic presidential candidates, including John Edwards and Representative Dennis J. Kucinich of Ohio.

On the Republican side, President Bush announced on Friday several steps aimed at alleviating the impact of the subprime crisis on homeowners. In a Rose Garden appearance, he ruled out a federal bailout, citing both “excesses in the lending industry” and unduly optimistic homeowners who took out “loans larger than they could afford,” as reasons for the mortgage woes.

Indeed, what was once a problem confined mostly to economically struggling areas is quickly becoming a national phenomenon. Last year, there were 1.2 million foreclosure filings in the United States, up 42 percent from 2005, according to RealtyTrac, a firm that analyzes such data. At current rates so far this year, RealtyTrac expects foreclosure filings to hit two million in 2007, or roughly one per 62 American households — a rate approaching heights not seen since the Great Depression.

Analysts also say that the fallout from mortgages gone bad is spreading well beyond borrowers now in default. It has begun to engulf middle-class communities like Maple Heights, where nearly 10 percent of the houses — or 910 properties — have been seized by banks in the last two years. And it foreshadows what could lie in store if mortgage holders default on what the Federal Reserve conservatively estimates to be $100 billion in risky subprime loans. Many of these loans were made in 2005 and early 2006, when standards were at their most lax and cities like this were blanketed with aggressive pitches from mortgage providers.

“I don’t think we’ve hit bottom,” says Michael G. Ciaravino, the mayor of Maple Heights. “My fear is that foreclosure rates could go to double where they are today.”

IN terms of the subprime mortgage meltdown, Ohio has been among the hardest-hit states, according to the Mortgage Bankers Association. In Cuyahoga County, which includes Cleveland and surrounding suburbs, roughly 30 percent of subprime mortgages are either delinquent or in foreclosure, says Jim Rokakis, the county treasurer.

But this leafy community of bungalows and small family homes built after World War II could be described as its epicenter. Already, Maple Heights, with a population of 27,000, ranks No. 1 in Cuyahoga County in foreclosures per capita, according to Policy Matters Ohio, a nonprofit research group. Ranked by ZIP code, the number of foreclosures here puts Maple Heights in the top one-half of 1 percent nationally, RealtyTrac says.

Mayor Ciaravino has already had to shut his town’s two swimming pools, cut the ranks of police officers and firefighters and eliminate services like free plowing for senior citizens with snow-covered driveways.

With so many houses vacant, says Michael H. Slocum, the finance director of Maple Heights, “it puts a big question mark out there; historical collection patterns for taxes are becoming less reliable.”

In fact, when the town made its annual assessment on homes for garbage collection last month, receipts came in 15 percent below projections, forcing a 50 percent rate increase.

“There is truly a cascading effect,” says Mr. Ciaravino, 43, who grew up in Maple Heights and was a local prosecutor before being elected mayor four years ago. Sitting in his 1950s-style wood-paneled office in City Hall, he says that “the folks living next to these empty homes get discouraged, and middle-class people are leaving.”

For a mayor presiding over a town in crisis, Mr. Ciaravino doesn’t seem angry, but beneath an affable exterior is barely concealed frustration that the danger of subprime debt became a national issue only after Wall Street began to wake up to the threat this summer. “We’ve been warning of problems for years,” he says. “I’m just a small-town mayor. Where was the foresight?”

That same question is echoing among politicians with constituencies far larger than Mr. Ciaravino’s. In July, Mr. Edwards came to Cleveland to tour a neighborhood hammered by foreclosures. Two months earlier, Mr. Kucinich took reporters on a walking tour of the neighborhood where he spent part of his childhood, Slavic Village, pointing out boarded homes and criticizing what he called “predatory lenders.”

What’s more, Cleveland is key in a crucial battleground state in the next presidential election, so it is a good bet that more candidates from both parties will be here touring neighborhoods dotted with foreclosed homes, much the way Ronald Reagan went to the South Bronx in 1980 to highlight what he called the failure of Jimmy Carter’s economic policies.

“There’s plenty of blame to go around,” warns Mr. Ciaravino.

TWICE a week, the East Side Organizing Project, an advocacy group in an industrial neighborhood midway between downtown Cleveland and Maple Heights, is host to what its executive director, Mark Seifert, calls “the cattle call.” The group helps mortgage holders keep their homes, and these afternoon sessions are when new clients first go over their cases.

Until this year, he says, about 80 percent of the people who came for help lived in the city, with the balance from close-in suburbs like Maple Heights. Today, the mix is split evenly between city and suburb.

So, in a windowless conference room in late August, as ceiling fans buzz overhead, James Jones, an intake specialist, tells newcomers: “We’re in the business of trying to save your home. The information we get from you is what we use to negotiate.”

The group uses other resources, too — like a bit of street theater to coax recalcitrant banks into renegotiating loans going sour. Mr. Seifert and his colleagues have scattered plastic sharks on the lawns of regional Countrywide Financial Corporation managers, and organized protests outside their offices. “We have cellphone numbers of the folks in the ivory tower making decisions, and we can call them at 1 a.m.,” Mr. Jones promises the group.

It usually doesn’t come to that. The project holds conference calls with Countrywide, CitiFinancial and others, mediating between the lender and individual mortgage holders. In successful renegotiations — which happen in about 85 percent of the cases the project handles — Mr. Seifert and his team persuade lenders to accept lower interest rates, or even a reduction in the total value of the loan, instead of foreclosing.

Lenders have incentives to negotiate. In addition to the plastic sharks and bad publicity, Mr. Seifert says, they can avoid the loss that comes with the seizure of a property. “Let’s say the loan is for $100,000,” he explains. “The banks know that if the house ends up getting foreclosed, they’ll only walk away with $50,000 or $60,000.”

If foreclosures ultimately harm underlying property values and cause losses to both lender and borrower, why are they still so prevalent?

“Some lenders understand; others don’t,” Mr. Seifert says. “Countrywide doesn’t.” Out of 120 recent mortgages cases with Countrywide, Mr. Seifert says, 15 have resulted in work-out deals, only two of which he said were “very good.”

One of those loans belonged to Audrey Sweet, a Maple Heights resident and a first-time home buyer who borrowed $118,000 from Countrywide in late 2004 without putting any money down. Because of Mrs. Sweet’s poor credit history and lack of assets, the adjustable loan’s rate was 10.25 percent, but she says she was told that if the couple “just proved themselves,” they could quickly refinance at a lower rate.

Mrs. Sweet says Countrywide advised her that the monthly property tax bill would be $100, but it turned out to be $230 and the Sweets quickly fell behind. Countrywide stepped in and paid $3,493 in back taxes in March 2007, and the next month raised the Sweets’ monthly mortgage bill to $1,713 from $1,055.

That was far beyond the budget of the couple, so Mrs. Sweet turned to the East Side group in April. She says Countrywide finally budged in late July, the day before she testified before Congress at a Joint Economic Committee hearing about her experiences with Countrywide. Working with a local lender, Third Federal Savings and Loan, the Sweets managed to refinance the loan at a fixed rate of 7.2 percent, and the original $1,055 monthly payment now covers the property taxes the Sweets couldn’t afford before.

Countrywide says it has tried to work with East Side but “has been met with nothing but derision and grandstanding,” adding that it does not believe “these efforts help to save anyone’s home from foreclosure.” Nationally, Countrywide has completed 35,000 successful renegotiations so far this year, including 50 in Cleveland in a two-day period last week, according to Rick Simon, a Countrywide spokesman.

“We have made a tremendous effort to avoid foreclosures and work with customers,” he says.

It is also clear that the Sweets bear some responsibility for their predicament. “I do blame myself a little bit,” Mrs. Sweet acknowledges. “I feel dumb.” She explains that she was focused on the monthly payment when she borrowed from Countrywide, not the interest rate or taxes due. “Once we got the loan documents at the closing, I just came home and stuck them in a drawer.”

Although the Sweets’ story has a happy ending, some neighbors have not been nearly as lucky. Three houses on their street have gone through foreclosure, including one home three doors down, where their neighbor’s possessions were dumped onto the lawn. “And I live on the better end of town,” Mrs. Sweet says.

AS he drives through the Slavic Village neighborhood, passing homes stripped of aluminum siding, copper pipes and other remnants, Marc A. Stefanski says, “There are still S.& L.’s and banks that lend with a conscience, but, man, you got to find them.”

Mr. Stefanski should know: as the chief executive of Third Federal Savings and Loan, a Cleveland thrift that his parents founded in 1938, he has an unusual perspective on the mortgage mess. Unlike most of his competitors, Mr. Stefanski resisted the urge to cash in on the subprime lending boom.

His bank never offered no-money-down loans, piggyback mortgages, exploding adjustable-rate mortgages or the other financial exotica that ultimately tripped up the Sweets and millions like them. Third Federal pays its loan officers salaries, rather than commissions, so there is no incentive to go for volume. Even more remarkable is that Third Federal holds onto a sizable portion of its mortgages and keeps them on the books, rather than selling them to Wall Street to be sliced and diced into asset-backed securities owned by investors on the other side of the globe.

The result is that unlike many other mortgage lenders, Third Federal has a vested interest in making sure its loans do not go bad, so foreclosure is a last resort.

“The model has shifted,” says Mr. Stefanski. “It became very lucrative. But it was totally irresponsible for the sake of greed.” Not that Mr. Stefanski didn’t notice the profits to be had. “Absolutely, we were tempted,” he acknowledges. “We arm-wrestled and talked, but we decided not to change the model. We felt it wasn’t the right thing to do.”

Mr. Stefanski is no social worker. He lives in an affluent suburb of Cleveland and earned nearly $2 million last year. But he does not hide his feelings about just what went wrong in places like Maple Heights. “The whole system was based on raping the public,” he says, matter-of-factly. “Not everyone should own a home — just those who can afford it.”

Third Federal has a branch in Maple Heights, Mr. Stefanski says, and in the past, “we owned Maple Heights.” But in recent years, he says, “The predators just jumped on it.”

Third Federal’s share of the mortgage market in northeastern Ohio fell to a low of about 11 percent by 2001 from more than 30 percent in the early 1990s.

Tammi Eggleston also watched the more aggressive lenders move in, albeit from a different vantage point. “They were canvassing the neighborhood,” she recalls. “Letters in the mail, knocking on the door, calling on the phone. They were everywhere.”

Now, with other lenders pulling back and some fighting to stay in business, Third Federal has increased its share of the mortgage market to 24 percent, picking up mortgages like that of the Sweets and earning praise from community activists like Mr. Seifert. Perhaps even more significantly, Third Federal has created a program for more risky borrowers like the Sweets, with required classes so that mortgage holders understand exactly how their loans work and what they will owe.

WHY has the impact of the subprime meltdown been so much more severe in communities like Maple Heights than in other parts of the country? Mr. Rokakis suggests that it is a combination of Cleveland’s underlying economic problems and a lack of the steadily appreciating housing prices that other areas enjoyed. That shut off a crucial safety valve — in other regions, overwhelmed borrowers could often turn around and sell their homes for at least a slight profit.

In Maple Heights, the situation is now reversed: with so many properties on the market, home values are dropping, and some delinquent mortgage holders owe more than their homes could now fetch in a sale. “The tax base is eroding,” says Mr. Ciaravino, the mayor. He warns that property values may soon have to be reassessed downward, further crimping tax revenue and raising the heat on Maple Heights’ remaining property owners. “This has affected virtually every aspect of community life, like increasing the rate of transient students in the schools,” he says.

All of these factors are reasons the Egglestons want to move, but they are not sure they will be able to do so anytime soon. “We’re torn,” says Mrs. Eggleston, who works as an executive assistant at a Cleveland nonprofit organization. “You can see and feel the change in the neighborhood. We’re really not sure what to do.”

Mr. Ciaravino is torn, too. He understands the Egglestons’ fears but needs middle-class families like them to stay if Maple Heights is to have a decent future. “We’re not giving up the fight here,” he says, with a trace of weariness in his voice. “It’s frustrating because this could have been avoided. We as a nation are capable of much better than this.”

    Can the Mortgage Crisis Swallow a Town?, NYT, 2.9.2007, http://www.nytimes.com/2007/09/02/business/yourmoney/02village.html

Bush Plans a Limited Intervention on Mortgages

September 1, 2007
The New York Times
By STEVEN R. WEISMAN

WASHINGTON, Aug. 31 — Democrats praised President Bush’s proposals to help low-income homeowners on Friday but indicated they would continue to press measures opposed by the administration to expand the federal role in housing, making it likely that the issue will set off partisan battles this year and next.

Mr. Bush, in formally announcing administration proposals that had been outlined the day before for a handful of news organizations, said the measures were intended to help families keep their homes through a mixture of actions, legislation and persuasion. But he said the administration would not bail out “speculators” in the housing industry.

“The government has got a role to play, but it is limited,” Mr. Bush said. “A federal bailout of lenders would only encourage a recurrence of the problem. It’s not the government’s job to bail out speculators, or those who made the decision to buy a home they knew they could never afford.”

Administration officials said that Mr. Bush’s statement reflected the president’s determination to oppose Democratic proposals for the federal government to help set up trust funds or use Fannie Mae and Freddie Mac, the government-sponsored housing companies, to rescue families in danger of losing their homes.

The administration initiatives formally announced Friday included steps to make it easier for low-income homeowners to get federal mortgage insurance and plans for federal “jawboning” of private mortgage lenders to persuade them not to foreclose on homeowners without giving the borrowers a chance to renegotiate payments.

Several of the administration’s proposals were endorsements of existing Democratic measures, including a proposal to reduce taxes for homeowners whose debt is forgiven. Ordinarily, the amount of a loan that is forgiven is taxed as income. A chorus of prominent Democrats who have called for more federal action welcomed Mr. Bush’s initiative, some of them saying that it represented the first sign that the administration was willing to engage in a bipartisan approach on a major budget or economic issue.

Representative Barney Frank, Democrat of Massachusetts and the chairman of the House Financial Services Committee, said Mr. Bush and Ben S. Bernanke, the Federal Reserve chairman, had adopted a more pragmatic approach on housing. In a speech in Wyoming on Friday, Mr. Bernanke said the Fed would take a more aggressive approach on the regulation of mortgages to discourage predatory practices.

“I think it’s a major step by them,” Mr. Frank said. “They are basically acknowledging that they have been insufficiently aware of the need for more of a regulatory and institutional response to this situation.”

Senator Charles E. Schumer, Democrat of New York, went further, saying that Mr. Bush sounded a little bit like a Democrat. “The best point of all here is that the president has gotten out of his ideological straitjacket,” the senator said.

But Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the Senate Banking Committee, said Mr. Bush still needed to “get serious about this problem” and go further.

Democrats say the plight of the estimated two million homeowners who face higher costs because payments on their adjustable-rate mortgages are expected to rise has become a potent political issue. They intend to keep it an issue as the 2008 election heats up, just as they have continued to assail the administration’s response to Hurricane Katrina, even two years after the storm.

But the administration says that it is one thing to help people caught between falling home prices and rising interest rates, and another to bail out speculators who find themselves unable to make a quick profit.

An administration official who asked not to be identified said there would be no single solution for the problems facing lenders and borrowers.

This official estimated that of the two million mortgage holders facing new interest rates, 500,000 are at risk of foreclosure because of missed payments.

The administration’s announcement Friday will affect only 80,000 homeowners through actions that it can take through the Federal Housing Administration, without Congressional participation. How many would be helped by future legislation was not clear to administration officials or others.

    Bush Plans a Limited Intervention on Mortgages, NYT, 1.9.2007, http://www.nytimes.com/2007/09/01/business/01home.html

Bush Offers Relief for Some on Home Loans

August 31, 2007
The New York Times
By STEVEN R. WEISMAN

WASHINGTON, Aug. 31 — President Bush, in his first response to families hit by the subprime mortgage crisis, announced several steps today to help Americans who have credit problems meet the rising cost of their housing loans.

In remarks this morning at the White House, Mr. Bush said he would work to “modernize and improve” the Federal Housing Administration “by lowering down payment requirements, by increasing loan limits, and providing more flexibility in pricing.”

Administration officials said in advance of Mr. Bush’s appearance that the goal would be to change its federal mortgage insurance program in a way that would let an additional 80,000 homeowners with spotty credit records sign up, beyond the 160,000 likely to use it this year and next.

“It’s not the government’s job to bail out speculators or those who made the decision to buy a home they knew they could never afford,” Mr. Bush said. “Yet there are many American homeowners who can get through this difficult time with a little flexibility from their lenders or little help from their government.”

The administration is offering his plan, which will include what one official called jawboning of lenders to persuade them not to foreclose on some borrowers, at a time of growing attacks on Mr. Bush from Democrats who say he has remained on the sidelines amid increasing anxiety over whether millions of Americans could end up losing their homes. Other elements of the plan would need legislative action, requiring Mr. Bush to win over the Democratic leadership in Congress.

He called for Congress to act quickly.

“The recent disturbances in the subprime mortgage industry are modest — they’re modest in relation to the size of our economy,” Mr. Bush said this morning. “But if your family is — if your family’s one of those having trouble making the monthly payments, this problem doesn’t seem modest at all.”

The main objective of the package, one senior official said, is not to affect the stock markets but to help low-income homeowners, many of them concentrated in certain neighborhoods in several distressed areas of the country, such as Ohio and Michigan.

“The primary focus is to help individuals who have an opportunity to stay in their homes to stay in their homes,” this official said. “The subprime mortgage situation is having a crushing effect on a lot of communities right now.”

Administration officials, who asked not to be identified, briefed a handful of news organizations on the proposals on Thursday evening. Despite the assertion that affecting the markets is not the goal, one administration official said concern about Wall Street’s reaction did affect the timing of the briefing. He said there was a fear that if the White House announced in the morning that Mr. Bush would be making an announcement on housing, there could be confusion as buyers and sellers of mortgage securities guessed what the announcement would be.

But secondarily, this official said, helping homeowners keep their homes and refinance or renegotiate the terms of the mortgages could have a stabilizing effect on the financial institutions that have these mortgages in their portfolios, and help them write down the value of the mortgages or sell them off at a loss.

“You can’t solve the problems in the financial markets unless you can make some progress on the retail end of it,” said this official. “This is also a step to get banks to start loaning again.”

Another factor in the decision to disclose details ahead of time was that Ben S. Bernanke, the chairman of the Federal Reserve, was planning to give a speech on housing this morning at the Fed’s annual conference in Jackson Hole, Wyo., and that speculation about his comments would also unsettle the markets.

As they put together the proposals, top administration officials consulted with financial institutions, some members of Congress, housing counseling groups, academic specialists, and also with Mr. Bernanke.

Several other steps the administration plans to announce involve seeking legislative changes. Mr. Bush, for example, is expected to endorse proposals backed by Democrats in Congress that would raise the ceiling on the amount of a mortgage that can be refinanced with federal insurance.

He is also expected to support legislation that would provide tax breaks to homeowners whose mortgage debt is forgiven, in whole or in part, by lenders. The federal government currently collects taxes on the amount of a loan that is forgiven.

Democratic presidential candidates and Congressional leaders have hammered the administration in recent weeks, charging Mr. Bush with indifference to the plight of an estimated two million homeowners whose mortgage costs are expected to go up in the next year and a half.

These two million mortgages, all held by homeowners with credit problems and with homes that are declining in value, are valued at $500 billion to $600 billion, administration officials said. The total value of American mortgages is about $10 trillion.

Many of these homeowners are lower-income families caught in the squeeze of variable-rate mortgages whose cost is expected to soar in coming weeks and months. With their home values declining, many are considered likely to default, possibly adding to the global turmoil in the financial markets. The administration officials who briefed reporters sought to underscore Mr. Bush’s willingness to work with Democrats, an unusual display of bipartisanship from an administration that has tangled with Democrats on many economic and budget issues.

The administration’s legislative proposals are likely to be similar to bills that Congressional Democrats have proposed, but there is still room for considerable argument over details. In general, the administration wants home buyers to pay for any measure that might help them, and Democrats want measures that provide extra help to people with low or moderate incomes.

But administration officials said they would continue to oppose one measure that Democrats strongly endorse: an increase in the total dollar value of mortgages that Fannie Mae and Freddie Mac, the government-sponsored housing-finance companies, can hold in their investment portfolios.

Until now, Mr. Bush and his top economic advisers, particularly Treasury Secretary Henry M. Paulson Jr., have focused on the broad prospects of the American and global economies and the disarray in financial markets.

Two weeks ago, when asked about the problems of mortgage holders, Mr. Bush said that many Americans struggling with their mortgages had failed to read the fine print on the loans.

But some in the administration and some Republicans are also concerned that there has not been enough talk from Mr. Bush about lower-income homeowners. These Republicans have said the administration’s response so far is reminiscent of its initial delays in relief after Hurricane Katrina two years ago.

The plans to be outlined by Mr. Bush are to be in the form of administrative actions taken unilaterally and proposals for enactment by Congress, many of them already in various bills sponsored by leading Democrats.

Among the Democrats with such proposals are Representative Barney Frank of Massachusetts, who is chairman of the House Financial Services Committee; Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee; and Senator Charles E. Schumer of New York, chairman of the Joint Economic Committee.

One senior official said, however, that the administration would encourage Fannie Mae and Freddie Mac to help low-income holders of subprime mortgages refinance or renegotiate the loans, rather than lifting the companies’ investment limits.

Mr. Frank has said that the administration is ideologically opposed to letting the two mortgage agencies play a role in assisting homeowners in the current crisis, but the administration official said that was a misconception.

Mr. Bush also plans to enlist Mr. Paulson and Alphonso R. Jackson, the secretary of housing and urban development, to consider regulating home-lending practices in the future to crack down on predatory practices. In addition, they are to study the role of credit-rating agencies, some of which have been accused of giving unrealistically positive ratings to packages of mortgages, which were then acquired by hedge funds and other institutions.

One official said the administration’s proposals would not include a bailout of institutions that bought mortgages that have plummeted in value.

“We are not using the b-word,” he said, referring to the talk of bailing out lenders.

One economist said the efforts seem well intentioned. The F.H.A. can help provide another option to homeowners who need to refinance, and the government should do what it can to encourage mortgage companies to modify loans, rather than foreclosing on them.

The administration could also help homeowners in higher-priced markets by temporarily raising the $417,000 limit on loans that Fannie Mae and Freddie Mac can buy from mortgage companies, said the economist, Thomas Davidoff, an assistant professor at the Haas School of Business at the University of California, Berkeley.

But he noted all the efforts would likely only have a limited impact, given the number of loans resetting to higher interest rates in the coming months.

“This is helpful. But you had millions of people taking loans they should not have been taking, and investors lending money at too low interest rates,” Mr. Davidoff said. “Nothing is going to make those bad decisions go away.”

Vikas Bajaj contributed reporting from San Francisco.

    Bush Offers Relief for Some on Home Loans, NYT, 31.8.2007, http://www.nytimes.com/2007/08/31/business/31home.html?hp

Editorial

A Sobering Census Report: Americans’ Meager Income Gains

August 29, 2007
The New York Times

The economic party is winding down and most working Americans never even got near the punch bowl.

The Census Bureau reported yesterday that median household income rose 0.7 percent last year — it’s second annual increase in a row— to $48,201. The share of households living in poverty fell to 12.3 percent from 12.6 percent in 2005. This seems like welcome news, but a deeper look at the belated improvement in these numbers — more than five years after the end of the last recession — underscores how the gains from economic growth have failed to benefit most of the population.

The median household income last year was still about $1,000 less than in 2000, before the onset of the last recession. In 2006, 36.5 million Americans were living in poverty — 5 million more than six years before, when the poverty rate fell to 11.3 percent.

And what is perhaps most disturbing is that it appears this is as good as it’s going to get.

Sputtering under the weight of the credit crisis and the associated drop in the housing market, the economic expansion that started in 2001 looks like it might enter history books with the dubious distinction of being the only sustained expansion on record in which the incomes of typical American households never reached the peak of the previous cycle. It seems that ordinary working families are going to have to wait — at the very minimum — until the next cycle to make up the losses they suffered in this one. There’s no guarantee they will.

The gains against poverty last year were remarkably narrow. The poverty rate declined among the elderly, but it remained unchanged for people under 65. Analyzed by race, only Hispanics saw poverty decline on average while other groups experienced no gains.

The fortunes of middle-class, working Americans also appear less upbeat on closer consideration of the data. Indeed, earnings of men and women working full time actually fell more than 1 percent last year.

This suggests that when household incomes rose, it was because more members of the household went to work, not because anybody got a bigger paycheck. The median income of working-age households, those headed by somebody younger than 65, remained more than 2 percent lower than in 2001, the year of the recession.

Over all, the new data on incomes and poverty mesh consistently with the pattern of the last five years, in which the spoils of the nation’s economic growth have flowed almost exclusively to the wealthy and the extremely wealthy, leaving little for everybody else.

Standard measures of inequality did not increase last year, according to the new census data. But over a longer period, the trend becomes crystal clear: the only group for which earnings in 2006 exceeded those of 2000 were the households in the top five percent of the earnings distribution. For everybody else, they were lower.

This stilted distribution of rewards underscores how economic growth alone has been insufficient to provide better living standards for most American families. What are needed are policies to help spread benefits broadly — be it more progressive taxation, or policies to strengthen public education and increase access to affordable health care.

Unfortunately, these policies are unlikely to come from the current White House. This administration prefers tax cuts for the lucky ones in the top five percent.

    A Sobering Census Report: Americans’ Meager Income Gains, NYT, 29.8.2007, http://www.nytimes.com/2007/08/29/opinion/29wed1.html

Census Shows a Modest Rise in U.S. Income

August 29, 2007
The New York Times
By ABBY GOODNOUGH

The nation’s median household income grew modestly in 2006, the Census Bureau reported yesterday, even as the percentage of people without health insurance hit a high.

Experts said the rise in income was mainly a reflection of an increase in the number of family members entering the workplace or working longer hours. Average wages for men and women actually declined for the third consecutive year.

“There’s lots of evidence that more people are working,” said Jared Bernstein, a senior economist at the Economic Policy Institute, a liberal policy group in Washington. “The important theme going on here is a labor market that’s definitely offering people more work and more hours, but at lower wages.”

The slight improvements in household income and a drop in the poverty rate came during a period of job growth, particularly toward the end of 2006, and declining inflation as a result of falling oil prices. But in 2007, the economy has begun weakening because of the national housing slump, and inflation has jumped. The average wage peaked at $17.52 an hour in February and has since fallen, according to Labor Department data.

Some Republicans seized on the new data as evidence that Bush administration policies had been good for people’s pocketbooks. In a statement, President Bush said the news was a sign that Congress should not raise taxes. The data, he said, confirmed “that more of our citizens are doing better in this economy, with continued rising incomes and more Americans pulling themselves out of poverty.”

But others saw a mixed picture, with household incomes still below their peak before the last recession in 2001.

“Too many low- and middle-income families are not sharing in the gains,” said Robert Greenstein, executive director of the Center on Budget and Policy Priorities, another liberal research group. “These figures are inconsistent with claims that the policies of recent years have produced an outstanding economic track record.”

And the new data on the rise in the number of those uninsured prompted advocates for the poor to step up their call for Congress to reauthorize the State Children’s Health Insurance Program, which provides subsidized insurance to children of the working poor. Mr. Bush has threatened to veto measures proposed by the House and Senate.

Changes in economic circumstances varied regionally and by race and age.

Although median household income rose by seven-tenths of a 1 percent over all, the only statistically significant increase was in white households. It was the first real increase for white households, after adjusting for inflation, since 1999, census officials said.

In the meantime, the poverty rate fell in 2006 for the first time this decade. But Hispanics were the only ethnic group with a statistically significant drop, to 20.6 percent from 21.8. The number of whites, blacks and Asians living in poverty was virtually unchanged.

About 24 percent of blacks lived in poverty in 2006, compared with 8.2 percent of whites and 10.3 percent of Asians.

Elderly people appeared to have gained the most. Their poverty rate was the lowest since 1959, when the government began collecting such data. Some experts predicted that this trend would continue as hundreds of thousands of affluent baby boomers age in the next few decades.

Over all, the nation’s median household income rose to $48,201 in 2006, from $47,845 in 2005. It was the second consecutive year in which income rose slightly faster than inflation, after five years of decline.

Douglas J. Besharov, a resident scholar at the American Enterprise Institute, a conservative research group, said that while the year-to-year increase in household income was small, the broader picture over the last few decades was more promising and more important.

“Over all,” Mr. Besharov said, “a lot of groups have done better over the last 40 years.”

The West was the only region to experience a drop in the number and percentage of people in poverty last year. The South continued to have the highest poverty rate, at 13.8 percent, versus 12.3 percent nationally, and the lowest median household income, $43,884.

Among large cities, Plano, Tex., a Dallas suburb, had the highest median household income in 2006, while Cleveland, Miami, Buffalo and Detroit had the lowest. Among smaller cities, Youngstown, Ohio, and Syracuse had some of the lowest incomes.

Census officials attributed the rise in the uninsured — to 47 million from 44.8 million in 2005 — mostly to people losing employer-provided or privately purchased health insurance. The percentage of people who received health benefits through an employer declined to 59.7 percent in 2006, from 60.2 percent in 2005.

The percentage of people with government-provided health insurance also dropped, to 27 percent from 27.3 percent.

“While the employer-based system slowly unravels,” Mr. Bernstein of the Economic Policy Institute said, “the public system isn’t quite stepping up to the plate to pick up the slack, and therein lies the problem.”

Mr. Besharov agreed, but said, as many critics do, that census figures did not accurately count the number of uninsured. He also said it was important to remember that employers were struggling with major increases in the cost of providing health benefits.

“Employers are really feeling a bite here,” Mr. Besharov said, “and so as much as possible, they’re trying to limit these increases and push them onto the employees. That means a lot of people drop their coverage.”

The number of uninsured children increased to 8.7 million, or 11.7 percent, in 2006, from 8 million, or 10.9 percent, in 2005.

Texas had the highest percentage of uninsured residents in 2006, 24.1, while Minnesota had the lowest, at 8.5 percent.

Just over half of household income was concentrated in the top 20 percent of Americans in 2006, about the same as in 2005. Households in the lowest 20 percent, on the other hand, accounted for only 3.4 percent of the nation’s household income.

Manhattan had the greatest income disparity between rich and poor residents outside Puerto Rico, according to an analysis of the data conducted for The New York Times by the sociology department of Queens College. It was followed by Apache County, Ariz., which is rural and largely American Indian, and the District of Columbia.

Mr. Bernstein attributed the drop in wages to the waning bargaining power of workers, and said it was disappointing, given that 2006 was the fifth year of economic recovery since the recession of 2001.

But Mr. Besharov said immigration could be to blame. "Wages are pretty weak,” he said, “not the least because we have a lot of immigrants in this country willing to work a little more than everyone else.”

    Census Shows a Modest Rise in U.S. Income, NYT, 29.8.2007, http://www.nytimes.com/2007/08/29/us/29census.html?hp

Census: New York Region Has Widest Income Gap

August 28, 2007, 4:36 pm
The New York Times
The City Room
By Sam Roberts


The rich grew richer in New York and the poor over all remained poor, according to census figures released today, resulting in the widest income gap of any major metropolitan area in the country.

The top fifth of earners in 2005 made nearly 20 times what the bottom fifth earned in the New York, New Jersey and Connecticut metropolitan region. In Manhattan, the disparity was a chasm, with the wealthiest making nearly 40 times more than the poorest — $351,333 compared to $8,855, or a bigger gap than in any county in the county.

Even so, Manhattan’s most wealthy were surpassed by residents of suburban Fairfield County in Connecticut. There, the top fifth made $362,103 and the top 5 percent made $746,726. That compared to $710,116 for the top 5 percent in Manhattan and $415,442 for the top 5 percent in the New York region also, the highest of any major metropolitan area.

Estimates of the income gap have been made before, but this was the first time that the Census Bureau released its own figures.

Nationally, the poverty rate fell for the first time this decade but the percentage of Americans without health insurance coverage reached a record high.

In New York City, median income rose slightly from 2005 to 2006, but the number of people living in poverty also increased. The poverty rate remained stubbornly resistant at about one person in five, failing to mirror a national decline that appeared to be driven by a shrinking pool of foreign-born poor people.

Analysts as diverse as Steve Malanga of the Manhattan Institute, a conservative think-tank, and David R. Jones of the Community Service Society, a liberal research and advocacy group, agreed that fierce competition for low-wage jobs in the city, many of them filled by immigrants, depressed their income.

“We haven’t seen much movement at all in terns of diminishing poverty,” Mr. Jones, the society’s president, said.
Mr. Malanga, a senior fellow at the institute, cited some declines in the rate for families, to 16.3 percent in 2006 from 16.7 percent the year before, and among households headed by women, to 30.4 percent from 31.2 percent. But he agreed, that the city’s “economic rebound has tended to be at the high end and our poverty levels are not going down as fast as at the national level.”

The number of people in poverty has increased since 2000 in every borough except Manhattan. In Brooklyn, the borough with the most poor people, the number increased by 85,000, rising from 475,905 in 2002 to 561,548 in 2006.

“It is clear that low and middle-income New Yorkers are being priced out of Manhattan and that poor people are being driven to the outer boroughs and the suburbs,” said Joel Berg, executive director of the New York City Coalition Against Hunger.

The census data recorded New York City’s poverty rate as 19.2 percent in 2006, virtually unchanged from 19.1 percent in 2005.

Bronx remained the poorest borough in 2006, with a poverty rate of 29.1 percent, followed by Brooklyn (22.6 percent, Manhattan (18.3 percent), Queens (12.2 percent) and Staten Island (9.2 percent).

In 2005, the poverty rates by borough were 29.2 percent in the Bronx, 22.4 percent in Brooklyn, 17.9 percent in Manhattan, 11.9 percent in Queens and 11 percent on Staten Island.

Sewell Chan contributed reporting

    Census: New York Region Has Widest Income Gap, NYT > The City Room, August 28, 2007, 4:36 pm, http://cityroom.blogs.nytimes.com/2007/08/28/census-new-york-region-has-widest-income-gap/index.html

Inside the Countrywide Lending Spree

August 26, 2007
The New York Times
By GRETCHEN MORGENSON

ON its way to becoming the nation’s largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied. “I want to be sure you are getting the best loan possible,” the sales representatives would say.

But providing “the best loan possible” to customers wasn’t always the bank’s main goal, say some former employees. Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide’s smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.

Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided. One document, for instance, shows that until last September the computer system in the company’s subprime unit excluded borrowers’ cash reserves, which had the effect of steering them away from lower-cost loans to those that were more expensive to homeowners and more profitable to Countrywide.

Now, with the entire mortgage business on tenterhooks and industry practices under scrutiny by securities regulators and banking industry overseers, Countrywide’s money machine is sputtering. So far this year, fearful investors have cut its stock in half. About two weeks ago, the company was forced to draw down its entire $11.5 billion credit line from a consortium of banks because it could no longer sell or borrow against home loans it has made. And last week, Bank of America invested $2 billion for a 16 percent stake in Countrywide, a move that came amid speculation that Countrywide’s survival was in question and that it had become a takeover target — notions that Countrywide publicly disputed.

Homeowners, meanwhile, drawn in by Countrywide sales scripts assuring “the best loan possible,” are behind on their mortgages in record numbers. As of June 30, almost one in four subprime loans that Countrywide services was delinquent, up from 15 percent in the same period last year, according to company filings. Almost 10 percent were delinquent by 90 days or more, compared with last year’s rate of 5.35 percent.

Many of these loans had interest rates that recently reset from low teaser levels to double digits; others carry prohibitive prepayment penalties that have made refinancing impossibly expensive, even before this month’s upheaval in the mortgage markets.

To be sure, Countrywide was not the only lender that sold questionable loans with enormous fees during the housing bubble. And as real estate prices soared, borrowers themselves proved all too eager to participate, even if it meant paying high costs or signing up for a loan with an interest rate that would jump in coming years.

But few companies benefited more from the mortgage mania than Countrywide, among the most aggressive home lenders in the nation. As such, the company is Exhibit A for the lax and, until recently, highly lucrative lending that has turned a once-hot business ice cold and has touched off a housing crisis of historic proportions.

“In terms of being unresponsive to what was happening, to sticking it out the longest, and continuing to justify the garbage they were selling, Countrywide was the worst lender,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “And anytime states tried to pass responsible lending laws, Countrywide was fighting it tooth and nail.”

Started as Countrywide Credit Industries in New York 38 years ago by Angelo R. Mozilo, a butcher’s son from the Bronx, and David Loeb, a founder of a mortgage banking firm in New York, who died in 2003, the company has become a $500 billion home loan machine with 62,000 employees, 900 offices and assets of $200 billion. Countrywide’s stock price was up 561 percent over the 10 years ended last December.

Mr. Mozilo has ridden this remarkable wave to immense riches, thanks to generous annual stock option grants. Rarely a buyer of Countrywide shares — he has not bought a share since 1987, according to Securities and Exchange Commission filings — he has been a huge seller in recent years. Since the company listed its shares on the New York Stock Exchange in 1984, he has reaped $406 million selling Countrywide stock.

As the subprime mortgage debacle began to unfold this year, Mr. Mozilo’s selling accelerated. Filings show that he made $129 million from stock sales during the last 12 months, or almost one-third of the entire amount he has reaped over the last 23 years. He still holds 1.4 million shares in Countrywide, a 0.24 percent stake that is worth $29.4 million.

“Mr. Mozilo has stated publicly that his current plan recognizes his personal need to diversify some of his assets as he approaches retirement,” said Rick Simon, a Countrywide spokesman. “His personal wealth remains heavily weighted in Countrywide shares, and he is, by far, the leading individual shareholder in the company.”

Mr. Simon said that Mr. Mozilo and other top Countrywide executives were not available for interviews. The spokesman declined to answer a list of questions, saying that he and his staff were too busy.

A former sales representative and several brokers interviewed for this article were granted anonymity because they feared retribution from Countrywide.

AMONG Countrywide’s operations are a bank, overseen by the Office of Thrift Supervision; a broker-dealer that trades United States government securities and sells mortgage-backed securities; a mortgage servicing arm; a real estate closing services company; an insurance company; and three special-purpose vehicles that issue short-term commercial paper backed by Countrywide mortgages.

Last year, Countrywide had revenue of $11.4 billion and pretax income of $4.3 billion. Mortgage banking contributed mightily in 2006, generating $2.06 billion before taxes. In the last 12 months, Countrywide financed almost $500 billion in loans, or around $41 billion a month. It financed 177,000 to 240,000 loans a month during the last 12 months.

Countrywide lends to both prime borrowers — those with sterling credit — and so-called subprime, or riskier, borrowers. Among the $470 billion in loans that Countrywide made last year, 45 percent were conventional nonconforming loans, those that are too big to be sold to government-sponsored enterprises like Fannie Mae or Freddie Mac. Home equity lines of credit given to prime borrowers accounted for 10.2 percent of the total, while subprime loans were 8.7 percent.

Regulatory filings show that, as of last year, 45 percent of Countrywide’s loans carried adjustable rates — the kind of loans that are set to reprice this fall and later, and which are causing so much anxiety among borrowers and investors alike. Countrywide has a huge presence in California: 46 percent of the loans it holds on its books were made there, and 28 percent of the loans it services are there. Countrywide packages most of its loans into securities pools that it sells to investors.

Another big business for Countrywide is loan servicing, the collection of monthly principal and interest payments from borrowers and the disbursement of them to investors. Countrywide serviced 8.2 million loans as of the end of the year; in June the portfolio totaled $1.4 trillion. In addition to the enormous profits this business generates — $660 million in 2006, or 25 percent of its overall earnings — customers of the Countrywide servicing unit are a huge source of leads for its mortgage sales staff, say former employees.

In a mid-March interview on CNBC, Mr. Mozilo said Countrywide was poised to benefit from the spreading crisis in the mortgage lending industry. “This will be great for Countrywide,” he said, “because at the end of the day, all of the irrational competitors will be gone.”

But Countrywide documents show that it, too, was a lax lender. For example, it wasn’t until March 16 that Countrywide eliminated so-called piggyback loans from its product list, loans that permitted borrowers to buy a house without putting down any of their own money. And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95 percent of a home’s appraised value and required no documentation of a borrower’s income.

As recently as July 27, Countrywide’s product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade. As long as the loan represented no more than 70 percent of the underlying property’s value, Countrywide would lend to a borrower even if the person had a credit score as low as 500. (The top score is 850.)

The company would lend even if the borrower had been 90 days late on a current mortgage payment twice in the last 12 months, if the borrower had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on his or her property.

Such loans were made, former employees say, because they were so lucrative — to Countrywide. The company harvested a steady stream of fees or payments on such loans and busily repackaged them as securities to sell to investors. As long as housing prices kept rising, everyone — borrowers, lenders and investors — appeared to be winners.

One former employee provided documents indicating Countrywide’s minimum profit margins on subprime loans of different sizes. These ranged from 5 percent on small loans of $100,000 to $200,000 to 3 percent on loans of $350,000 to $500,000. But on subprime loans that imposed heavy burdens on borrowers, like high prepayment penalties that persisted for three years, Countrywide’s margins could reach 15 percent of the loan, the former employee said.

Regulatory filings show how much more profitable subprime loans are for Countrywide than higher-quality prime loans. Last year, for example, the profit margins Countrywide generated on subprime loans that it sold to investors were 1.84 percent, versus 1.07 percent on prime loans. A year earlier, when the subprime machine was really cranking, sales of these mortgages produced profits of 2 percent, versus 0.82 percent from prime mortgages. And in 2004, subprime loans produced gains of 3.64 percent, versus 0.93 percent for prime loans.

One reason these loans were so lucrative for Countrywide is that investors who bought securities backed by the mortgages were willing to pay more for loans with prepayment penalties and those whose interest rates were going to reset at higher levels. Investors ponied up because pools of subprime loans were likely to generate a larger cash flow than prime loans that carried lower fixed rates.

As a result, former employees said, the company’s commission structure rewarded sales representatives for making risky, high-cost loans. For example, according to another mortgage sales representative affiliated with Countrywide, adding a three-year prepayment penalty to a loan would generate an extra 1 percent of the loan’s value in a commission. While mortgage brokers’ commissions would vary on loans that reset after a short period with a low teaser rate, the higher the rate at reset, the greater the commission earned, these people said.

Persuading someone to add a home equity line of credit to a loan carried extra commissions of 0.25 percent, according to a former sales representative.

“The whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary market,” the former sales representative said.

CONSIDER an example provided by a former mortgage broker. Say that a borrower was persuaded to take on a $1 million adjustable-rate loan that required the person to pay only a tiny fraction of the real interest rate and no principal during the first year — a loan known in the trade as a pay option adjustable-rate mortgage. If the loan carried a three-year prepayment penalty requiring the borrower to pay six months’ worth of interest at the much higher reset rate of 3 percentage points over the prevailing market rate, Countrywide would pay the broker a $30,000 commission.

When borrowers tried to reduce their mortgage debt, Countrywide cashed in: prepayment penalties generated significant revenue for the company — $268 million last year, up from $212 million in 2005. When borrowers had difficulty making payments, Countrywide cashed in again: late charges produced even more in 2006 — some $285 million.

The company’s incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan’s value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A, former brokers said. For years, a software system in Countrywide’s subprime unit that sales representatives used to calculate the loan type that a borrower qualified for did not allow the input of a borrower’s cash reserves, a former employee said.

A borrower who has more assets poses less risk to a lender, and will typically get a better rate on a loan as a result. But, this sales representative said, Countrywide’s software prevented the input of cash reserves so borrowers would have to be pitched on pricier loans. It was not until last September that the company changed this practice, as part of what was called in an internal memo the “Do the Right Thing” campaign.

According to the former sales representative, Countrywide’s big subprime unit also avoided offering borrowers Federal Housing Administration loans, which are backed by the United States government and are less risky. But these loans, well suited to low-income or first-time home buyers, do not generate the high fees that Countrywide encouraged its sales force to pursue.

A few weeks ago, the former sales representative priced a $275,000 loan with a 30-year term and a fixed rate for a borrower putting down 10 percent, with fully documented income, and a credit score of 620. While a F.H.A. loan on the same terms would have carried a 7 percent rate and 0.125 percentage points, Countrywide’s subprime loan for the same borrower carried a rate of 9.875 percent and three additional percentage points.

The monthly payment on the F.H.A. loan would have been $1,829, while Countrywide’s subprime loan generated a $2,387 monthly payment. That amounts to a difference of $558 a month, or $6,696 a year — no small sum for a low-income homeowner.

“F.H.A. loans are the best source of financing for low-income borrowers,” the former sales representative said. So Countrywide’s subprime lending program “is not living up to the promise of providing the best loan programs to its clients,” he said.

Mr. Simon of Countrywide said that Federal Housing Administration loans were becoming a bigger part of the company’s business.

“While they are very useful to some borrowers, F.H.A./V.A. mortgages are extremely difficult to originate in markets with above-average home prices, because the maximum loan amount is so low,” he said. “Countrywide believes F.H.A./V.A. loans are an increasingly important part of its product menu, particularly for the homeownership hopes of low- to moderate-income and minority borrowers we have concentrated on reaching and serving.”

WORKDAYS at Countrywide’s mortgage lending units centered on an intense telemarketing effort, former employees said. It involved chasing down sales leads and hewing to carefully prepared scripts during telephone calls with prospects.

One marketing manual used in Countrywide’s subprime unit during 2005, for example, walks sales representatives through the steps of a successful call. “Step 3, Borrower Information, is where the Account Executive gets on the Oasis of Rapport,” the manual states. “The Oasis of Rapport is the time spent with the client building rapport and gathering information. At this point in the sales cycle, rates, points, and fees are not discussed. The immediate objective is for the Account Executive to get to know the client and look for points of common interest. Use first names with clients as it facilitates a friendly, helpful tone.”

If clients proved to be uninterested, the script provided ways for sales representatives to be more persuasive. Account executives encountering prospective customers who said their mortgage had been paid off, for instance, were advised to ask about a home equity loan. “Don’t you want the equity in your home to work for you?” the script said. “You can use your equity for your advantage and pay bills or get cash out. How does that sound?”

Other documents from the subprime unit also show that Countrywide was willing to underwrite loans that left little disposable income for borrowers’ food, clothing and other living expenses. A different manual states that loans could be written for borrowers even if, in a family of four, they had just $1,000 in disposable income after paying their mortgage bill. A loan to a single borrower could be made even if the person had just $550 left each month to live on, the manual said.

Independent brokers who have worked with Countrywide also say the company does not provide records of their compensation to the Internal Revenue Service on a Form 1099, as the law requires. These brokers say that all other home lenders they have worked with submitted 1099s disclosing income earned from their associations.

One broker who worked with Countrywide for seven years said she never got a 1099.

“When I got ready to do my first year’s taxes I had received 1099s from everybody but Countrywide,” she said. “I called my rep and he said, ‘We’re too big. There’s too many. We don’t do it.’ ”

A different broker supplied an e-mail message from a Countrywide official stating that it was not company practice to submit 1099s. It is unclear why Countrywide apparently chooses not to provide the documents. Countrywide boasts that it is the No. 1 lender to minorities, providing those borrowers with their piece of the American homeownership dream. But it has run into problems with state regulators in New York, who contended that the company overcharged such borrowers for loans. Last December, Countrywide struck an agreement with Eliot Spitzer, then the state attorney general, to compensate black and Latino borrowers to whom it had improperly given high-cost loans in 2004. Under the agreement, Countrywide, which cooperated with the attorney general, agreed to improve its fair-lending monitoring activities and set up a $3 million consumer education program.

But few borrowers of any sort, even the most creditworthy, appear to escape Countrywide’s fee machine. When borrowers close on their loans, they pay fees for flood and tax certifications, appraisals, document preparation, even charges associated with e-mailing documents or using FedEx to send or receive paperwork, according to Countrywide documents. It’s a big business: During the last 12 months, Countrywide did 3.5 million flood certifications, conducted 10.8 million credit checks and 1.3 million appraisals, its filings show. Many of the fees go to its loan closing services subsidiary, LandSafe Inc.

According to dozens of loan documents, LandSafe routinely charges tax service fees of $60, far above what other lenders charge, for information about any outstanding tax obligations of the borrowers. Credit checks can cost $36 at LandSafe, double what others levy. Some Countrywide loans even included fees of $100 to e-mail documents or $45 to ship them overnight. LandSafe also charges borrowers $26 for flood certifications, for which other companies typically charge $12 to $14, according to sales representatives and brokers familiar with the fees.

LAST April, Countrywide customers in Los Angeles filed suit against the company in California state court, contending that it overcharged borrowers by collecting unearned fees in relation to tax service fees and flood certification charges. These markups were not disclosed to borrowers, the lawsuit said.

Appraisals are another profit center for Countrywide, brokers said, because it often requires more than one appraisal on properties, especially if borrowers initially choose not to use the company’s own internal firm. Appraisal fees at Countrywide totaled $137 million in 2006, up from $110 million in the previous year. Credit report fees were $74 million last year, down slightly from 2005.

All of those fees may soon be part of what Countrywide comes to consider the good old days. The mortgage market has cooled, and so have the company’s fortunes. Mr. Mozilo remains undaunted, however.

In an interview with CNBC on Thursday, he conceded that Countrywide’s balance sheet had to be strengthened. “But at the end of the day we could be doing very substantial volumes for high-quality loans,” he said, “because there is nobody else in town.”

    Inside the Countrywide Lending Spree, NYT, 26.8.2007, http://www.nytimes.com/2007/08/26/business/yourmoney/26country.html

Drop Foreseen

in Median Price of U.S. Homes

August 26, 2007
The New York Times
By DAVID LEONHARDT and VIKAS BAJAJ

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.

The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.

While the housing slump has already rattled financial markets, it has so far had only a modest effect on consumer spending and economic growth. But forecasters now believe that its impact will lead to a slowdown over the next year or two.

“For most people, this is not a disaster,” said Nigel Gault, an economist with Global Insight, a research firm in Waltham, Mass. “But it’s enough to cause them to pull back.”

In recent years, many families used their homes as a kind of piggy bank, borrowing against their equity and increasing their spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said that the rise in home prices was the primary reason that consumer borrowing has soared since 2001.

Now, however, that financial cushion is disappearing for many families. “We are having to start from scratch and rebuild for a down payment,” said Kenneth Schauf, who expects to lose money on a condominium in Chicago he and his wife bought in 2004 and have been trying to sell since last summer. “We figured that a home is the place to build your wealth, and now it’s going on three years and we are back to square one.”

On an inflation-adjusted basis, the national median price — the level at which half of all homes are more expensive and half are less — is not likely to return to its 2007 peak for more than a decade, according to Moody’s Economy.com, a research firm.

Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade. And for many families who do not plan to move, the year-to-year value of their house matters little. The drop is, of course, good news for home buyers.

It does, however, contradict the widely held notion that there is no such thing as a nationwide housing slump. A 2004 report jointly written by the top economists at five organizations — the industry groups for real estate agents, home builders and community bankers, as well as Fannie Mae and Freddie Mac, the large government-sponsored backers of home mortgages — was typical. It said that “there is little possibility of a widespread national decline since there is no national housing market.”

Top government officials were more circumspect but still doubted that the prices would decline nationally. Alan Greenspan, the former Fed chairman, said the housing market was not susceptible to bubbles, in part because every local market is different.

In 2005, Ben S. Bernanke, then an adviser to President Bush and now the Fed chairman, said “strong fundamentals” were the main force behind the rise in prices. “We’ve never had a decline in housing prices on a nationwide basis,” he added.

But Global Insight, the research firm, estimates that the home-price index to be released Thursday by the Office of Federal Housing Enterprise Oversight, a regulatory agency, will show a decline of about 1 percent between the first and second quarter of this year. Other forecasters predict that the index will rise slightly in the second quarter before falling later this year.

In all, Global Insight expects a decline of 4 percent, or roughly 10 percent in inflation-adjusted terms, between the peak earlier this year and the projected low point in 2009. In California, prices are expected to decline 16 percent — or about 20 percent after taking inflation into account.

The government’s index, which compares the sales price of individual homes over time, is intended to describe the actual value of a typical house. Since the index began in 1975, it has slipped from one quarter to the next on a few occasions, but it has never fallen over a full year.

Another index dating back to 1950, calculated by Freddie Mac, has also never shown an annual decline. Price data published by the National Association of Realtors, based on the prices of houses sold in a given year, have also never declined. According to the association, the median home price is now about $220,000.

Mr. Schauf and his wife, Leslie Suarez, put their condo in the Sheridan Park neighborhood of Chicago up for sale shortly before moving to Texas last year so he could take a new job. They bought the two-bedroom unit in September 2004 for $255,000, with a 5 percent down payment. They redid the floors, installed new window treatments and repainted the walls.

They said they expected the condo to sell quickly. Instead, they have cut the price several times and have yet to receive an offer. The current list price is $279,000, though they expect to settle for less.

Without the money for a new down payment, they are renting an apartment in Austin. They also expect the monthly payment on their adjustable-rate mortgage to go up $200 in October.

Ms. Suarez, who grew up in the Dallas-Fort Worth area, says she is not as surprised because she remembers home prices falling after the oil bust in the late 1980s. “Growing up in Texas, real estate has never been a windfall,” she said. “For me, I always just wanted to break even.”

Housing prices have previously declined for long stretches in various regions. Most recently, prices fell in California and in the Northeast during the recession of the early 1990s.

The current slump is different from that one, though, in both depth and breadth. In fact, the national median price rose only slightly faster than inflation from 1950 to the mid-1990s.

But as interest rates fell and lending standards became looser, prices started rising rapidly in the late 1990s, even in places like Chicago, which had rarely seen a real estate boom. The result was a “euphoric popular delusion” that real estate was a can’t-miss investment, said Edward W. Gjertsen II, president of the Financial Planners Association of Illinois. “That’s just human nature.”

Many families, of course, are richer because of the boom. In the Old Town neighborhood of Chicago, the town house that Ian R. Perschke, a technology consultant, and Jennifer Worstell, a lawyer, bought in late 2004 has appreciated more than 30 percent, they estimated. The gain was big enough to allow them to take out a larger mortgage and renovate two rental units in the house. But Mr. Perschke said he understood that he was “not going to see that appreciation over the next three years.”

Prices in Chicago peaked in September 2006 and have since dipped 1.7 percent, according to the Case-Shiller home-price index, which is tabulated by MacroMarkets, a research firm.

For all the attention that the uninterrupted growth in national house prices received, some economists argue that it was misplaced. The Case-Shiller index, which many experts consider more accurate than the government measure, did show a drop in prices in the early 1990s. (Unlike the government’s measure, it includes mortgages of more than $417,000, which are not held by Fannie Mae or Freddie Mac.)

After adjusting for inflation — the most meaningful way to look at any price, economists say — even the government’s measure showed a drop in the early 1990s.

Dean Baker, an economist in Washington who has been arguing for the last five years that houses were overvalued, said the idea that house prices could go only up had fed the bubble.

“It was very misleading,” said Mr. Baker, co-director of the Center for Economic and Policy Research, a liberal research group. There are a lot of people, he said, who bought “homes at hugely inflated prices who are going to take a hit. You also have a lot of people who borrowed against those inflated prices.”

Perhaps the most prominent housing booster was David Lereah, the chief economist at the National Association of Realtors until April. In 2005, he published a book titled, “Are You Missing the Real Estate Boom?” In 2006, it was updated and rereleased as “Why the Real Estate Boom Will Not Bust.” This year, Mr. Lereah published a new book, “All Real Estate Is Local.”

In an interview, Mr. Lereah, now an executive at Move Inc., which operates a real estate Web site, acknowledged he had gotten it wrong, saying he did not fully realize how loose lending standards had become and how quickly they would tighten up again this summer. But he argued that many of his critics have also been proved wrong, because they were bearish as early as 2002.

“The bears were bears way too early, and the bulls were bulls too late,” he said. “You need to know when you are straying from fundamentals. It’s hard, when you are in the middle of the storm, to know.”

    Drop Foreseen in Median Price of U.S. Homes, NYT, 26.8.2007, http://www.nytimes.com/2007/08/26/business/26housing.html?hp

As Woes Grow,

Mortgage Ads Keep Up Pitch

August 25, 2007
The New York Times
By LOUISE STORY and VIKAS BAJAJ

Wall Street may have soured on the mortgage business. But on television, radio and the Internet, the industry is as ebullient as ever.

For example, Quicken Loans, no longer affiliated with the makers of Quicken software but the nation’s 25th-biggest lender, continues to run its signature spot on radio stations. “This is a rate alert,” the advertisement starts off, sounding much like a newscast. “Slower economic growth has caused the Fed to keep interest rates flat, and the market has responded with some of the lowest mortgage rates in years.”

As more homeowners fall behind on mortgage payments and investors abandon the industry in droves, mortgage companies are facing greater scrutiny over their lending practices and disclosures to borrowers.

One area where regulators are paying closer attention is advertising that promises tantalizingly low payments without clearly disclosing the myriad strings that accompany the debts. It is a tactic that has been widely used — and, critics say, abused — by lenders trying to lure new customers.

Mortgage lenders have spent more than $3 billion since 2000 on advertising on television, on radio and in print, said Nielsen Monitor-Plus, which tracks ad spending.

That figure does not include direct mail and Internet advertising, which are increasingly popular vehicles for the industry. Nielsen/NetRatings estimates that mortgage companies spent $378 million in the first six months of this year on Internet display ads, and many companies also buy search advertising.

LowerMyBills.com, a site owned by the credit agency Experian that funnels borrowers to mortgage lenders, has become a prolific advertiser on the Web with its impossible-to-miss ads that feature dancing cowboys and a video of a woman jumping and screaming with joy, presumably after being approved for a loan.

The Federal Trade Commission and attorneys general in states like Ohio and New York are looking into the ads as part of more comprehensive reviews of lending practices during the housing boom. In June, federal banking regulators ranked advertising as one of three areas where mortgage lenders need to be more judicious.

The Ohio attorney general, Marc Dann, said his staff was investigating direct-mail advertising that appears to be a solicitation from a homeowner’s bank or from the federal government. Many ads appear to aim at low-income and minority neighborhoods. Mr. Dann said his office has sent letters asking 30 lenders to substantiate their claims..

As the mortgage market shrinks and defaults rise, he said, lenders “are becoming more desperate, and consumers are becoming more desperate.”

Consumer advocates say many ads are at best misleading and at worst steer consumers into risky loans with promises of low introductory rates that do not make clear that they could pay significantly more in a few months or years.

“The advertising was a drumbeat to consumers, saying: ‘Don’t worry, you can qualify for a loan. We will approve it,’ ” said Patricia A. McCoy, a law professor at the University of Connecticut who has studied mortgage advertising. “It was push marketing to reach out to these people on the sidelines who have doubts about their ability to pay a mortgage and lure them in.”

Even when consumers do find out about higher rates before closing on a house, by that time they are often “psychologically committed” to buying, Ms. McCoy said.

Quicken Loans was one of the many mortgage companies that benefited during the housing boom. The company, based in Livonia, Mich., near Detroit, wrote $18 billion in loans last year, up from $4.6 billion in 2001.

Even during the tough market this year, Quicken Loans expects to make more than $20 billion in loans. Not coincidentally, Quicken Loans also pumped money into its advertising over that period — increasing it to $51 million last year from about $3.5 million in 2002, according to estimates from Nielsen Monitor-Plus.

Through June, Quicken Loans spent $37 million on mortgage ads — second only to GMAC, which spent $46 million. Quicken Loans would not confirm how much it spends on advertising but executives acknowledged that such spending had significantly increased.

The chief marketing officer of Quicken Loans, Bryan Stapp, said that the ads were not misleading and that spending had increased as the company had grown.

“While the advertising may’ve caused some to pick up the phone or go online, they still have to go through the process of talking to a banker,” Mr. Stapp said. “Anyone who was attracted to whatever advertising we had would then have a better picture of what program they could qualify for.’ Quicken Loans has not been identified as being under investigation by the F.T.C. or any regulatory agency.

Quicken Loans has found that 40 percent of its business come from referrals or returning customers, Mr. Stapp said. The remaining 60 percent depend on new people picking up the phone or clicking on its Web site. The company also provides free videos and articles about the mortgage and real estate market for use by any Web site and many Realtors, bloggers and others post the information — along with a link to Quicken Loan’s site.

The company does not plan to cut back on advertising for the rest of the year, Mr. Stapp said. That will be a relief to media companies, which have benefited from the influx of spending.

But Countrywide Financial, the nation’s biggest mortgage company and a leading advertiser, recently said it would cut back on many popular loans because of its financial troubles. Some advertising executives expect mortgage ad revenue at Web sites will drop significantly.

Housing analysts said the increase in home prices may have been propelled by ads from companies like Quicken Loans, which ran TV spots with pitches like: “Your payment can be lower than you ever imagined.”

In its ads, Quicken Loans suggested that consumers could pay off credit card bills, remodel their homes and lower their monthly payment if they got a Secure Advantage mortgage, which allowed homeowners to roll what they would have paid in interest into the amount they owe.

Many critics consider such mortgages, known as payment-option loans, dangerous for all but the most sophisticated borrowers, because many homeowners do not realize that making just the minimum payment will mean they owe more on their house with each passing month.

The company says it no longer offers that mortgage. But Quicken Loans posted one of the ads on YouTube and it was up as recently as Aug. 7. The radio version of the ads has run several times this month, according to Competitrack, a company in New York that tracks advertising.

Quicken Loans says that even when it was advertising Secure Advantage, it did not make many payment-option loans. The company also said it made few loans to subprime borrowers — homeowners who have weak or blemished credit records.

Steve Walsh, a mortgage broker in Scottsdale, Ariz., said he spends a lot of time counseling clients against taking out loans that promise a deceptively low payment rate. “These guys say your payment will be $500 a month, but nowhere do they say that your actual payment is $3,000 a month,” Mr. Walsh said referring to the payments consumers would need to make to pay off their loan on a 30-year schedule. “It should be criminal. The disclosures are usually complicated, and people don’t know what hit them.”

The other thing that surprises consumers is that some mortgage companies do not return the mortgage application fees if the mortgage is not approved, but others, like Quicken Loans, say they return money if the mortgage is not used.

Some states require lenders to disclose the annual percentage rate on any loans they advertise. But legal specialists say it can be hard to enforce these and other consumer protection statutes. Companies simply withdraw ads when they receive cease-and-desist letters, but the ads often immediately pop up elsewhere.

“You do get an immediate positive feedback,” said James E. Tierney, director of the national state attorneys general program at Columbia Law School in New York and a former attorney general. “But it’s hard to make it a sustainable success since there are so many lenders and ads.”

    As Woes Grow, Mortgage Ads Keep Up Pitch, NYT, 25.8.2007, http://www.nytimes.com/2007/08/25/business/25mortgage.html

Dow Jones Deal

Gives Murdoch a Coveted Prize

August 1, 2007
The New York Times
By RICHARD PÉREZ-PEÑA and ANDREW ROSS SORKIN

Rupert Murdoch finally won his long-coveted prize yesterday, gaining enough support from the deeply divided Bancroft family to buy Dow Jones & Company, publisher of The Wall Street Journal and one of the world’s most respected news sources, for $5 billion.

For Mr. Murdoch, the verdict represents the pinnacle of his long career building the News Corporation into a $70 billion media empire that already includes more than 100 newspapers worldwide, satellite broadcast operations, the Fox television network, the online social networking site MySpace and many other parts.

Combined with the planned beginning of the Fox business news channel in October, the purchase of Dow Jones makes Mr. Murdoch the most formidable figure in business news coverage in this country, perhaps worldwide.

It also gives a larger voice in national affairs to an owner whose properties often mirror his own conservative politics.

The boards of both companies voted last night to approve the deal.

The decision signals the end of an era for Dow Jones and the Bancroft family, an intensely private clan that for generations had allowed The Journal to operate independently and become one of the nation’s most prominent and trusted newspapers, even as its finances deteriorated.

For four months, some three dozen members of the family engaged in an intense, sometimes tearful debate about The Journal’s future, at times pitting siblings against one another and children against their parents.

The final decision was in doubt well past the 5 p.m. Monday deadline set for the family. In a twist in already tortured negotiations, some family trustees demanded that the News Corporation pay the fees for the family’s bankers and lawyers — which could reach $40 million — in return for their support. After an exhausting night of conferences calls, the deal was made.

James B. Lee of JPMorgan Chase & Company, who has represented clients in some of the biggest deals in history, said of Mr. Murdoch, “nobody else I have ever banked could have pulled it off.”

For the rest of the industry, the deal, which follows the recent sale of Knight Ridder and the pending sale of the Tribune Company, again raises the question of whether newspapers can exist independently of giant media conglomerates, as advertising dollars migrate to the Web and readers have access to vast new sources of online information.

Mr. Murdoch has talked of pumping money into The Journal, bolstering its coverage of national affairs and its European and Asian editions, which could pose a serious challenge to competitors like The Financial Times and The New York Times. That could mean losing money in the short run, something Mr. Murdoch has always been willing to do to attract readers and gain influence.

Some Dow Jones employees see having such a wealthy, engaged owner as an improvement after years of uncertainty. Still, there was no official announcement at The Journal’s newsrooms, where some reporters mourned the loss of independence.

“It’s sad,” said a veteran reporter at one of the domestic bureaus, who did not want to be named because of concerns over his career. “We held a wake. We stood around a pile of Journals and drank whiskey.”

News reports of the deal initiated an outpouring of comments on The Journal’s own Web site, many critical of the News Corporation, and some regrets from other shareholders.

“It’s a bad thing for Dow Jones and American journalism that the Bancroft family could not resist Rupert Murdoch’s generous offer,” James H. Ottaway Jr., a former Dow Jones executive and a major shareholder, said yesterday. “I hope Rupert Murdoch, and whoever follows him at News Corporation, will keep his promises to protect and invest in the unique quality and integrity of The Wall Street Journal, Barron’s and all the Dow Jones electronic news services.”

It will most likely take three to four months for the transition in ownership to take effect. At the family’s insistence, the News Corporation has agreed to retain the top editors at Dow Jones, including Marcus W. Brauchli, the managing editor of The Journal and Paul Gigot, The Journal’s editorial page editor, and has accepted limits on its ability to remove or replace people in those posts.

The Bancrofts hope the arrangement, which they negotiated before the final deal, will restrict Mr. Murdoch’s ability to influence content, particularly in The Journal, but many media experts have said he has circumvented similar agreements in the past.

Mr. Murdoch first made his offer to Dow Jones’s chief executive, Richard F. Zannino, over breakfast on March 29, and made a formal written bid to the board on April 17, but the news did not surface until May 1.

On May 2, Mr. Zannino made a presentation to the Dow Jones board that made it seem to many of them that the company’s prospects on its own were poor and that he favored a sale. He later insisted that he had not meant to give those impressions, but even so, the presentation had a sobering effect, and most of the board clearly thought that the company should accept Mr. Murdoch’s $60-a-share offer.

That breakfast with Mr. Murdoch set in motion a four-month struggle among the Bancrofts. The family, which has owned Dow Jones since 1902, holds 64 percent of the shareholder vote, with most of the stock held in dozens of trusts with some three dozen beneficiaries. But the bulk of the voting power rests with a handful of the family’s oldest generation, and with longtime family lawyers, who are the primary trustees.

Some argued vociferously that Mr. Murdoch would damage the newspaper’s credibility, while others said that his $60-a-share offer — for a stock that was trading around $36 in April — was too good to pass up at a time when the newspaper industry was struggling.

At the outset, most of the elders opposed a sale, and were bolstered by newsroom employees who wrote letters arguing that Mr. Murdoch would wreck The Journal, and by the advice of longtime associates like Peter R. Kann, the recently retired former chairman and chief executive of the company, and Mr. Ottaway.

But many of their children, less wealthy and less steeped in the notion of Dow Jones as a family legacy, were more open to selling. A family Dow Jones stake that had been valued at about $750 million and generated about $20 million a year in dividends, mostly for the older generation, stands to become more than $1 billion even after taxes and could produce several times as much income.

Late last week, it appeared that the family might reject the deal, but then two pivotal family elders who had argued against the deal, Jane Cox MacElree and her brother, William C. Cox Jr., shifted positions; she relinquished voting control of some shares, and he switched sides and decided to support the sale, people close to the family said. That left things too close to call.

While the weeks after May 2 had been spent arguing over principles, the last few days were spent haggling over money. Before the deal had a clear majority in support, a lawyer for the family, Lynn Hendrix, based in Denver, who controlled trusts with 9 percent of the overall vote, insisted that those trusts would oppose the deal unless the News Corporation agreed to pay a premium for the supervoting shares that are mostly owned by the Bancrofts.

On Sunday night, David F. DeVoe, the News Corporation’s chief financial officer and a board member, called Mr. Hendrix, a partner at the firm Holme, Roberts & Owen, to draw a line in the sand.

Referring to the $60 price, Mr. DeVoe said, “I can six-zero-point-zero-zero,” a person briefed on the conversation said, “not six-zero-point-zero-one.”

When Mr. Hendrix kept pushing for more money, Mr. DeVoe made an unusual offer: the News Corporation would consider paying the fees and expenses of the bankers and lawyers advising the trusts. That amounted to an indirect way of sweetening the offer for the supervoting shares without adding much to the cost of the deal. Dow Jones, after consulting with the News Corporation, had already agreed to cover some of the costs of paying Merrill Lynch, the family’s primary financial advisers.

After a marathon series of conference calls that night that ran through Monday, involving Mr. Devoe; Mr. Hendrix; Michael B. Elefante, the family’s primary lawyer and trustee; and Richard Beattie, a lawyer advising the Dow Jones board, a deal was brokered that would allow the Denver trust to vote in favor. The News Corporation agreed to pay advisory expenses for all of the family trusts, a figure that people involved in the talks said could reach $40 million, which translates to about an additional $2 a share for the Bancrofts.

The largest share, perhaps as much as $18.5 million, will be paid to Merrill Lynch, people briefed on the matter said. Another payment of as much as $10 million is expected to be paid to Wachtell, Lipton, Rosen & Katz, a law firm representing the family. Morgan Stanley, which advised the Denver trusts, and a series of law firms are expected to split the rest.

The issue of the News Corporation and Dow Jones paying the family’s advisers has raised questions in some circles — including among some family members, people close to them say — about the advice’s impartiality. Merrill Lynch, in particular, was viewed as an early supporter of the deal and was responsible in large part for making presentations to the family about the current and future health of Dow Jones.

The deal is also a windfall for an army of Mr. Murdoch’s bankers and lawyers. Mr. Murdoch was advised by Mr. Lee, who had helped Mr. Murdoch when he explored a bid for Dow Jones in 2001 and had set up Mr. Murdoch’s first introduction to Mr. Zannino.

Blair Effron, a former banker at UBS who started his own boutique firm, Centerview Partners, spent many nights holed up at Mr. Murdoch’s headquarters, as did Stanley S. Shuman of Allen & Co., the media investment bank.

By late yesterday, people involved in the negotiations said family trusts and family members representing about 40 percent of the total shareholder vote had committed, at least verbally, to support the deal, more than enough to put it over the top in a shareholder vote. Neither Dow Jones nor the News Corporation would officially confirm that, heading into a 7 p.m. Dow Jones board meeting.

To the last, people inside and outside Dow Jones who opposed the sale were trying to arrange alternative deals that would allow some Bancroft family members to sell and others to keep control of the company.

Yesterday, Leslie Hill, a family member and trustee who became something of a patron saint within the Journal’s newsroom for her opposition to the deal, resigned from the company’s board.

Dow Jones Deal Gives Murdoch a Coveted Prize, NYT, 1.8.2007, http://www.nytimes.com/2007/08/01/business/media/01dow.html