History > 2007 > USA > Economy (V)

The Debt Crisis,

Where It’s Least Expected

December 30, 2007
The New York Times
By GRETCHEN MORGENSON

THE Indiana Children’s Wish Fund, which grants wishes to children and teenagers with life-threatening illnesses, got an early Christmas gift nine days ago. Morgan Keegan, a brokerage firm in Memphis, made an undisclosed payment to the charity to settle an arbitration claim; the Wish Fund said it had lost $48,000 in a mutual fund from Morgan Keegan that had invested heavily in dicey mortgage securities.

Coming less than two months after the charity filed its claim, and as a reporter was inquiring about its status, the settlement is a rare consolation for an investor amid all the pain still being generated by the turmoil in the once-bustling mortgage securities market. Before the Wish Fund reached its settlement, its mortgage-related losses meant that nine children’s wishes would go ungranted.

Against the backdrop of all the gigantic numbers defining the subprime debacle, the Wish Fund’s losses look like small potatoes. The crisis has generated almost $100 billion in losses or write-offs at the world’s largest financial institutions, cost a couple of Fortune 100 chief executives their jobs, wiped out billions of dollars in stock market value and hammered the reputations of the nation’s top credit rating agencies. Reports of the devastation that foreclosures are wreaking on borrowers also bring home the effects of this remarkable financial mess.

Still, the Wish Fund’s experience is instructive because so little has emerged about the losses that investors have incurred in these securities, perhaps because few holders have wanted to disclose them. Some investors may still not know how much they have been hurt by the crisis.

As this debacle unfolds, accounts of investor losses in mortgage securities will come to light. And Wall Street’s role as the great enabler — providing capital to aggressive lenders and then selling the questionable securities to investors — will be front and center.

Richard Culley, a blind lawyer in Indianapolis, founded the Wish Fund in 1984; since then, it has granted 1,800 wishes to children ages 3 to 18. The fund has roughly $1 million in assets and is not affiliated with the national Make-A-Wish Foundation. Local medical centers submit names for potential recipients.

The Wish Fund’s foray into mortgage securities began in June, when Terry Ceaser-Hudson, the executive director, consulted her local banker, Steve Perius, about certificates of deposit coming due in the charity’s account. She said the banker, with whom she had done business for 20 years, suggested that she invest the money in a bond fund offered by Morgan Keegan. The firm is an affiliate of her banker’s employer, Regions Bank.

Ms. Ceaser-Hudson’s banker put her in contact with a Morgan Keegan broker to help her make a decision. Mr. Perius did not return a phone call seeking comment.

“I thought I was making a lateral move from the C.D.’s into this fund,” Ms. Ceaser-Hudson said. “The broker said he’d put some thought into this and he had something perfect for the Wish Fund that was extremely safe.”

That broker was Christopher Herrmann, and when Ms. Ceaser-Hudson met him at her banker’s office, she quizzed him about the risks in the Regions Morgan Keegan Select Intermediate Bond fund, which he recommended.

“The first thing I said to him when I sat down was, ‘I want to make sure that I understand this: you’re telling me that this is as safe as a money market or C.D., because we cannot afford to lose one single penny,’” she recalled. “He said, ‘This has been good for years,’ so I thought, ‘O.K.’”

On June 26, the Wish Fund put almost $223,000 into the Morgan Keegan fund. The charity’s timing could not have been worse. That same week, two Bear Stearns hedge funds, with heavy exposure to mortgages, were collapsing. Turmoil in the mortgage market, which had been percolating since late winter, was about to explode.

AT the helm of the Morgan Keegan fund was James C. Kelsoe Jr., a money manager at the brokerage firm’s asset management unit, based in Birmingham, Ala. A longtime bull on mortgage securities, Mr. Kelsoe rode that wave and earned a reputation as a hotshot money manager. As of June 30, he also oversaw six other Morgan Keegan bond funds, which included about $4.5 billion in assets.

One of Mr. Kelsoe’s major suppliers of mortgage securities was John Devaney, 37, a flashy mortgage trader and founder of United Capital Markets, a brokerage firm in Key Biscayne, Fla. During the mortgage boom, Mr. Devaney built up a net worth of $250 million, he told The New York Times in an interview early this year.

However much both men initially prospered from doing business together, some investors who wound up holding Morgan Keegan’s mortgage securities were less fortunate — the Wish Fund, for example.

More than two weeks after Ms. Ceaser-Hudson invested in the Morgan Keegan fund, she received her first brokerage statement. She said she was stunned to learn that within days of its initial investment in the bond portfolio, the Wish Fund had lost $5,000. By late September, with the credit markets frozen and the net asset value of the bond fund plummeting, Ms. Ceaser-Hudson ordered the stake to be sold. She received about $174,000, representing a loss of 22 percent within 90 days.

On Nov. 2, she filed an arbitration case against Morgan Keegan, contending that Mr. Herrmann’s investment recommendation was unsuitable for the Wish Fund and that he had breached his duty to it. A spokeswoman for Morgan Keegan said that neither Mr. Kelsoe nor Mr. Herrmann would comment for this article. “Jim Kelsoe is fully focused on managing his fund portfolios during these volatile market conditions,” said the spokeswoman, Kathy Ridley.

The Morgan Keegan fund, which had assets of about $1 billion in March, is down almost 50 percent this year. It was weighted with risky and illiquid mortgage-related securities.

For example, at the end of September, the intermediate fund in which Ms. Ceaser-Hudson invested had almost 17 percent of its assets in mortgage-related securities — including collateralized mortgage obligations, home equity loans and pools of mortgages that were again combined into collateralized debt obligations. Mortgage exposure in the six other portfolios that Mr. Kelsoe manages ranged recently from 5 percent to 14 percent.

For several years, Mr. Kelsoe’s embrace of mortgage securities paid off for his clients. His fund was started in March 1999 and generated positive returns each year until 2007. Through the end of 2006, it had an average annual return of about 4.5 percent, after taxes.

Mr. Kelsoe’s love affair with mortgage debt paralleled that of Mr. Devaney, one of those colorful and cocky Wall Street figures who appear during market booms only to sink from sight in the ensuing busts.

Living in a home on the Intracoastal Waterway, Mr. Devaney surrounded himself and his family with Renoirs and Cézannes. Outside floated his 142-foot yacht called Positive Carry, a reference to borrowing money at a lower rate than you receive on your investment. He also owned the house that was used as the setting for the Al Pacino film “Scarface.”

In addition to running United Capital, Mr. Devaney also oversaw United Real Estate Ventures and several hedge funds with roughly $650 million under management as of early this summer. In July, he halted redemptions in the hedge funds as the market swooned for his favorite mortgage securities.

A 2004 profile of Mr. Devaney in US Credit magazine said that he considered Mr. Kelsoe one of his most valued customers. United Capital Markets, the article said, was most often a buyer of bonds from Wall Street and mortgage issuers; the firm had far fewer clients to whom it sold those securities. One of the biggest buyers was Mr. Kelsoe and his mutual funds.

“I have found John to be very aggressive in his ability to find interesting trading ideas,” Mr. Kelsoe was quoted as saying of Mr. Devaney in the profile.

Mr. Devaney did not return a phone call seeking comment.

Thomas A. Hargett, a lawyer at Maddox Hargett & Caruso in Indianapolis, represented the Wish Fund in its arbitration claim against Morgan Keegan. He declined to discuss the settlement struck by the firm and its former client. But he did say that “at the end of the day, your everyday broker and many investment professionals did not understand the risk associated with these complex derivative mortgage investments.”

The independent directors who served on the Regions Morgan Keegan mutual funds’ board also may have misjudged the risk.

The board includes Jack R. Blair, nonexecutive chairman of DJO Inc., an orthopedic equipment company; Albert C. Johnson, an independent financial consultant; W. Randall Pittman, chief financial officer of Emageon Inc., a health care information systems company; Mary S. Stone, a certified public accountant and University of Alabama professor; and Archie W. Willis III, a former first vice president at Morgan Keegan who is president of Community Capital, a financial advisory and real estate development company.

Another director, James Stillman R. McFadden, is chief manager of McFadden Communications, a commercial printing concern that does work for Regions Bank, government filings show. Between 2005 and June 30, 2007, Mr. McFadden’s firm received $2.46 million in revenue from the relationship, or 5 percent of his company’s sales during the period.

Because most of the directors did not own shares in the devastated bond funds, they have not been hurt by their sharp decline. Among the six independent directors, only two owned shares in the funds as of last September: Mr. McFadden owned between $1 and $10,000 worth, while Mr. Willis owned between $10,001 and $50,000 worth, according to regulatory filings.

The Morgan Keegan spokeswoman said that none of the directors would be available to discuss their oversight or ownership of the funds.

Now that the Wish Fund’s complaint has been settled, Ms. Ceaser-Hudson can carry on the organization’s work.

Among the wishes that the charity recently granted were a family trip to Yellowstone National Park for an 8-year-old girl, Mary Ann, and her family and a meeting earlier this month between 14-year-old Samantha and Miley Cyrus, the Disney television star who plays Hannah Montana. (The Wish Fund did not release last names of recipients.)

In mid-December, Ms. Ceaser-Hudson set up a shopping spree, complete with limousine transportation, for Sabe, a 3 1/2-year-old handicapped boy with leukemia. Last April, Andrew, 17, got his wish to meet Peyton Manning, the Indianapolis Colts quarterback, and to attend a team practice. The teenager, who had cancer, died a week after his wish was granted.

“What we do try to do is make every single wish a quality wish, no matter what the cost,” Ms. Ceaser-Hudson said. “We try to make it something the family and child will always remember.”

The Debt Crisis, Where It’s Least Expected, NYT, 30.12.2007, http://www.nytimes.com/2007/12/30/business/30loan.html

Sales of New Homes

Worse Than Expected

December 29, 2007
Filed at 7:28 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The housing market plunged deeper into despair last month, with sales of new homes plummeting to their lowest level in more than 12 years.

The slump worsened even more than most analysts expected, heightening fears that the country might be thrust into a recession.

New-home sales tumbled 9 percent in November from October to a seasonally adjusted annual sales pace of 647,000, the Commerce Department reported Friday. That was the worst sales pace since April 1995.

''It was ugly,'' declared Richard Yamarone, economist at Argus Research. ''It is the one sector of the economy that doesn't show any signs of life. It doesn't look like there is any resuscitation in store for housing over the next year,'' he said.

The housing picture turned out to be more grim than most anticipated. Many economists were predicting sales to decline by 1.8 percent to a pace of 715,000.

By region, sales fell in all parts of the country, except for the West.

In the Midwest, new-home sales plunged 27.6 percent in November from October. Sales dropped 19.3 percent in the Northeast and fell 6.4 percent in the South. In the West, however, sales rose 4 percent.

Over the last 12 months, new-home sales nationwide have tumbled by 34.4 percent, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.

''I think you can classify what we are seeing in the housing market as a crash,'' said Mark Zandi, chief economist at Moody's Economy.com. ''Sales and home prices are in a free fall. The downturn is intensifying.''

The median sales price of a new home dipped to $239,100 in November. That is 0.4 percent lower than a year ago. The median price is where half sell for more and half for less.

On Wall Street, the Dow Jones industrials, after an erratic session, managed to squeeze out a small gain even as the grim home sales report added to some investors' angst. The Dow closed up 6.26 points at 13,365.87.

Would-be home buyers have found it more difficult to secure financing, especially for ''jumbo'' mortgages -- those exceeding $417,000. The tighter credit situation is deepening the housing slump. Unsold homes have piled up, which will force builders to cut back even more on construction and look for ways to sweeten the pot to lure prospective buyers.

''A lot of borrowers are being disqualified for loans. If you can't qualify for a mortgage the game is over. For those who do qualify, it takes longer to get loans,'' said Brian Bethune, economist at Global Insight.

The housing market has been suffering through a severe slump following five years of record-breaking activity from 2001 through 2005. Sales turned weak as did home prices. The boom-to-bust situation has increased dangers to the economy as a whole and has been especially hard on some homeowners.

Foreclosures have soared to record highs and probably will keep rising. A drop in home prices left some people stuck with balances on their home mortgages that eclipsed the worth of their home. Other home buyers were clobbered as low introductory rates on their mortgages jumped to much higher rates, which they couldn't afford.

Problems in housing are expected to persist well into 2008 -- a major election year.

The housing and mortgage meltdowns have raised the odds that the country will fall into a recession. And, the situation has given Democrat and Republican politicians-- including those who want to be the next president -- plenty of opportunities to spread blame around.

The economy's growth is expected to have slowed sharply to a pace of just 1.5 percent or less in the final three months of this year. Former Federal Reserve Chairman Alan Greenspan recently warned that the economy is ''getting close to stall speed.'' The big worry is that the housing and credit troubles will force individuals to cut back on spending and businesses to cut back on hiring and capital investment, throwing the economy into a tailspin.

To help bolster the economy, the Federal Reserve has sliced a key interest rate three times this year. Its latest rate cut, on Dec. 11, dropped the Fed's key rate to 4.25 percent, a two-year low. Many economists are predicting the Fed will lower rates again when they meet in late January.

''The risks are as high as they've ever been during this expansion that started in late 2001 that the economy will fall into a recession,'' said Bethune. ''The odds are now nudging up close to the 50 percent mark.''

------

On the Net:

New-home sales report: https://www.esa.doc.gov/ei.cfm

Sales of New Homes Worse Than Expected, NYT, 29.12.2007, http://www.nytimes.com/aponline/business/AP-Economy.html

Bush:

I resolve to help economy,

restrain taxes

29 December 2007
USA Today

CRAWFORD, Texas (AP) — President Bush tried Saturday to assure many families that he knows they are struggling to pay bills, even as he again defended the economy's strength.

"Some of you worry about your ability to afford health care coverage for your families," Bush said in his weekly radio address, recorded at his Texas ranch.

"Some of you are concerned about meeting your monthly mortgage payments," Bush said. "Some of you worry about the impact of rising energy costs on fueling your cars and heating your homes. You expect your elected leaders in Washington to address these pressures."

Bush said he and Congress recently came to terms on some ways to help, including an energy bill and a measure to help families avoid a tax hit when they refinance a mortgage.

But he also chided lawmakers again for slipping an estimated 9,800 pet projects, known in Washington lingo as earmarks, into a massive spending bill at the end of their session. Bush signed the bill this week.

"Among the earmarks Congress approved was one for a prison museum and another for a sailing school," Bush said. "In the last election, congressional leaders ran on a promise that they would reform earmarks. They made some progress, but not nearly enough."

Bush has asked his budget director to review what the White House can do about the special-project spending, although its options are limited. Meanwhile, in his final radio address of the year, the president spun the economic theme into a personal resolution.

"My resolution for the New Year is this: to work with Congress to keep our economy growing, to keep your tax burden low, and to ensure that the money you send to Washington is spent wisely — or not at all," Bush said.

As the economy has been battered by a mortgage crisis, a credit crunch and low consumer confidence, Bush has sought to show he is in touch with the typical family's concerns. He also has cited a range of indicators — such as export numbers and unemployment rates — to back up his view that the underlying economy is strong and resilient.

"Economic statistics are important indicators," Bush said. "Yet it is more important to remember that behind all these numbers are real people."

Democratic leaders suggest Bush has been in denial about the economy, offering an overly rosy portrait while many families deal with soaring costs.

Delivering the Democratic radio address, Rep. Kirsten Gillibrand of New York said that her party has delivered results for working families during its year in charge of Congress.

"We have a vision for strengthening the economy by supporting hard-working Americans and their families," she said. "We have fixed the alternative minimum tax to protect middle-class families, raised the minimum wage, and funded small business tax cuts to address the pressures of high fuel prices, increasing health care costs, and rising property taxes."

Bush is spending the final days of 2007 vacationing at his Texas ranch without any scheduled public appearances. He returns to Washington on New Year's Day.

    Bush: I resolve to help economy, restrain taxes, UT, 29.12.2007, http://www.usatoday.com/news/washington/2007-12-29-bush-address_N.htm

Editorial

Cash-Strapped Consumers

December 29, 2007
The New York Times

During the holiday shopping season, Americans bought fewer gifts while paying more for necessities. From Thanksgiving to Christmas, spending rose only 3.6 percent over the same period last year, the weakest performance in at least four years, according to early tallies from MasterCard Advisors, a unit of the credit card company. One-third of that increase was for gas purchases.

That’s bad news for an economy that is dependent on free-spending shoppers for growth. When consumers pull back, the economy slows. Employers respond by delaying hiring plans, reducing work hours and, if problems persist, laying off workers. Once a downturn starts, it is always hard to reverse, and especially now, with the White House unwilling to acknowledge that six years of debt-fueled growth is proving unsustainable and with most candidates for president only beginning to talk about how they would fix the economy.

Of course, one season does not a trend make. And after-Christmas bargain hunters have yet to spend their last penny. But the preliminary results are not likely to change much. Earlier this month, the government reported that personal spending surged in November, but the boost was mostly due to higher outlays for food and gasoline. More troubling, the rise in spending far outstripped the rise in Americans’ income, with the mismatch covered, in part, by a significant drain on savings.

All of that portends economic pain for families, even if growth, over all, does not contract — the general definition of a recession. That’s because even optimistic growth forecasts — about 1.5 percent for this quarter and next — are too tepid to counter recessionlike conditions in which job growth slows, unemployment rises and paychecks shrink or disappear. If inflation continues, rising prices will only feed the pain.

To make matters worse, many Americans are ill-prepared for tougher times.

Since the end of 2001, the economy has posted positive growth every month. That is a performance much trumpeted by President Bush and his aides. There is another aspect of that performance that they don’t talk about. With the Bush-era expansion apparently bottoming out, it may well become the first in which median family income, after inflation, never makes it back up to its level at the peak of the previous business cycle.

A new study by the Economic Policy Institute uses Census data to trace the dismal trajectory. Economic growth during the Clinton administration peaked in 2000, followed by a brief recession. Growth resumed at the end of 2001, the beginning of the Bush-era expansion, but real family income continued to fall through 2004. It has turned up since then, but as of the end of 2006, it was still about $1,000 below its peak in 2000.

Even if that difference is made up this year (and it’s still too early to tell if that will happen) Americans would be merely breaking even. That would be a pathetic outcome after six years of strong labor productivity.

Dismal income growth is no accident. It is the result of misguided tax, labor and social policies — including government disregard of the downsides of globalization for many Americans — that have concentrated income in the hands of the few.

The ease of borrowing has made it possible for many people to live beyond their means. But, the end of easy money is now exposing Americans’ vulnerability. Today’s stingy shopper may be tomorrow’s angry voter. To deserve those votes, a candidate must articulate a plan not only for restoring growth, but for ensuring that in the next upswing, the benefits are shared.

    Cash-Strapped Consumers, NYT, 29.12.2007, http://www.nytimes.com/2007/12/29/opinion/29sat1.html

New-Home Sales Fell to 12-Year Low in November

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

Home builders are sharply curtailing construction and cutting prices across the country as they struggle to break out of the worst housing slump since the early 1990s. But buyers remain scarce, and analysts say the market may not bottom out until well into next year or even later.

Sales of new homes plunged to a 12-year low in November, an annual pace of just 647,000, the government said Friday. That is the slowest pace since April 1995, when sales ran at a pace of 621,000.

New-home purchases are down 34.4 percent from a year earlier, the biggest year-over-year drop since January 1991. That leaves a large, if shrinking, inventory of unsold homes to be worked off before the glut can be dissipated.

Americans appear to be holding out for real estate prices to drop even further in 2008.

“Right now there is a huge gulf between what buyers are willing to pay for a house and what sellers are willing to take for it,” said Mark Vitner, senior economist at Wachovia.

Even as new homes become more affordable, the Friday report from the Commerce Department underscores the challenges facing the residential construction industry as tighter credit and the fear of further declines in values continue to shrink the pool of potential buyers. Rising foreclosures and a wave of cancellations have crippled the nation’s biggest home builders and sent their stock prices into a steep decline.

Shares of KB Home and D. R. Horton both fell more than 4 percent in trading on Friday.

“People are sitting on the sidelines for a good reason,” said Patrick Newport, an economist at Global Insight, an economic research firm in Lexington, Mass. “You’re taking a big risk because the asset you are buying may depreciate a lot between now and a year from now.”

Mr. Newport said builders would have to keep cutting prices to entice buyers back into the market. Until then, they face a supply surplus of nine months’ worth of unsold homes. While groundbreakings have slowed, Friday’s report suggests the backlog is still damping demand.

“Sales are dropping at such a pace that the pullback in new home building remains insufficient to make any headway in clearing out the sizable inventories of new homes for sales,” Richard Moody, chief economist at Mission Residential, wrote in a research note.

Analysts say home sales could bottom out as early as the middle of 2008 but any recovery will be gradual. “The laws of supply and demand will work,” Mr. Vitner said. “We built around 800,000 more units of housing than the market needed. It’s going to take us a couple of years of reduced home construction in order to clear up its excess.”

Statistically, the size of the slump is staggering. In the summer of 2005, annual sales of new single-family homes hit a high of 1.39 million. They have since dropped to an annual rate of 647,000 — a loss of 53.4 percent.

The current decline is the steepest peak-to-trough drop since the 1982 housing bust, said Michael T. Darda, chief economist at MKM Partners, and it could grow steeper if sales continue to flag. Still, he took a slightly more optimistic view of the data.

“With prices going down and income continuing to grow, that’s helped to push up affordability,” he said, adding that the industry appeared to be coming closer to “the lows of this cycle.”

The decline in the housing market, while long predicted by many economists, caught many home builders by surprise. In 2006, companies like Toll Brothers were predicting they could easily ride out any slowdown. And Donald J. Tomnitz, the chief executive of D. R. Horton, predicted that his company, the largest home builder in the nation, “can earn our way through any economic cycle, except one like the Great Depression.”

The biggest change occurred after the subprime market collapsed in the spring, which led to a temporary freeze in the lending and mortgage markets this summer. Buyers vanished; new-home sales have dropped nearly 25 percent since April.

There was one mildly hopeful sign for builders in Friday’s report. The number of unsold new homes on the market has gradually fallen over the last year, and it dropped another 1.8 percent in November.

Previously reported sales for August, September and October, however, were revised downward by the Commerce Department. Sales dipped from October to November in every region of the country except the West, which had a 4 percent rise. The steepest drop occurred in the Midwest, at 27.6 percent. Northeastern sales fell 19.3 percent and sales in the South fell 6.4 percent.

The median price of a new single-family home dropped in November to $239,100, a 0.4 percent decline from a year earlier.

That number masks the real fall in prices: more expensive homes are the ones most likely to sell because the remaining buyers are likely to be affluent, and builders have been offering increasingly costly hidden incentives to encourage buyers to take their completed homes off their hands.

    New-Home Sales Fell to 12-Year Low in November, NYT, 29.12.2007, http://www.nytimes.com/2007/12/29/business/29econ.html?hp

Holiday Online Receipts Are Strong, but Reflect a Decline in Rate of Growth

December 28, 2007
The New York Times
By MATT RICHTEL

SAN FRANCISCO — The latest mixed-bag of news for retailers hails from cyberspace: holiday e-commerce sales were robust, but showed their slowest-ever growth, industry analysts projected.

The sales growth of 19 percent, while enviable for traditional retailers, was down sharply from the 25 percent to 30 percent growth rates of recent years. Retail industry analysts said the deceleration underscored a tight economy, but also reflected changing consumer and retailing habits.

And it is consistent with a broader slowdown in the growth rates for Internet retailing — making the holidays of 2007 a vivid example of the changing growth curve for online sales.

When the receipts are tallied from this holiday, American consumers will have spent around $29.5 billion at Internet shops, according to projections published by comScore, a market research firm. “The growth rates for previous years were clearly much higher,” said Andrew Lipsman, spokesman for comScore. The research firm did not have growth rates before 2003, but Mr. Lipsman suspected that they were 25 percent or more.

It also is far higher than the rate of growth in offline sales, according to preliminary projections. This week, MasterCard Advisors, a division of the credit card company, estimated that sales grew 3.6 percent from Thanksgiving to Christmas, compared with growth rates of 6.6 percent in 2006 and 8.7 percent in 2007.

Scott Silverman, executive director of the online shopping affiliate of the National Retail Federation called shop.org, said that given the size of the Internet retail market, the industry would be hard-pressed to maintain its past growth rates. Shop.org is projecting that Internet sales will be up 18 percent over all in 2007, compared with around 25 percent in recent years.

Analysts said that Internet retailing was so large — projected to be more than $120 billion this year — that it would be difficult to maintain the high growth rates. Indeed, analysts said, the e-commerce engine continues to set a torrid pace, taking shares from brick-and-mortar stores.

The 19 percent growth clip for online sales is around five times the rate of growth for the offline stores; a year ago, the online world was growing around four times more quickly.

Robert A. Bowman, chief executive of mlb.com, the online division of Major League Baseball, said, “The multiple is holding. It will continue to do so,” adding that “it will continue to take share for at least the next five years” from the offline world.

Mr. Silverman characterized the holiday e-commerce season as healthy.

“The season met expectations,” he said. “It’s important to take into consideration that 19 percent growth, while it’s not 25 percent, is still a lot stronger and healthier than overall retail growth.”

According to the Nielsen Online Holiday Survey for December, traditional gift categories fared well among online shoppers. Its survey taken from Dec. 13 to Dec. 17, found that 43 percent had purchased clothing or shoes, 35 percent had bought books, 34 percent movies, and 28 percent toys or nonelectronic games.

Amazon.com, which declared that it had its best holiday selling season, said that particularly popular items included the Nintendo Wii game console, DVD players, digital cameras and G.P.S. devices. Popular DVDs included “Harry Potter and the Order of the Phoenix,” and “Pirates of the Caribbean: At World’s End.”

Consistent with broader Internet retailing data, Amazon.com said that its biggest shopping day had been Dec. 10. And it said that Amazon.com customers had ordered more than 5.4 million items, which was 62.5 items a second on that day. Bonnie Toriello, co-owner of the Spoonsisters.com, a boutique gift Web site, said that sales had risen 31 percent from a year ago, and she said that the hot-selling items appeared to be those that were both fun and functional. “People are going more for price point and they want functionality. It’s not frivolous right now,” she said.

She said that popular items included $20 wristbands for carpenters or household tinkerers that include a magnet that is used to holds nuts, bolts and screws. She said the company had sold about 3,000 of them. Also popular, she said, were holders for mobile phone chargers, and a $7 melamine plastic serving spoon bearing a happy face.

Marshal Cohen, chief retail analyst with the NPD Group, a market research firm, said that retailers historically saved the steepest discounts for their brick-and-mortar stores as a way of attracting shoppers. This year, many sacrificed that opportunity.

Discounts came both from traditional retailers with online stores and from online-only merchants. Among the promotions offered on Nov. 26 — the so-called Cyber-Monday, when holiday online retail sales are expected to start in earnest after Thanksgiving — the online jeweler Diamonds.com offered 20 percent off much of its merchandise, the book retailer barnesandnoble.com gave a free travel bag with any $75 purchase and Meijer.com offered 40 percent off rugs, and 30 percent off G.P.S. devices.

Meijer, a general merchandiser in the Midwest, said electronics continued to be a preference for many online shoppers. In addition to game systems, MP3 players and player accessories, customers are becoming more comfortable buying larger items such as liquid-crystal display, or L.C.D., televisions online.

In the last several days, online retailers have begun sending out a new round of promotions that mirror the inventory clearance sales at brick-and-mortar retailers.

Another primary price-cutting tactic used by online retailers was to offer shipping discounts. This season, 68 percent of retailers offered free upgrades for express shipping, up from 49 percent a year ago, according to shop.org.

ComScore, which tracks transaction and browsing patterns of a million Internet users in the United States, found that consumers spent 12 percent less on Cyber Monday this year than they did a year ago, though the number of buyers was up 38 percent. Mr. Lipsman, the spokesman for comScore, said the company did not yet have an absolute dollar figures from the day.

He said the slowdown in growth rates for Internet spending appeared to represent a tipping point — one driven in part by a tough economy. “Economic factors also have dampened spending this season, and e-commerce was certainly not immune from those effects,” he said.

Mr. Silverman, from shop.org, said that Internet retailing had gotten so big and its demographic reach so broad that it was bound to both influence — and be influenced by — macro-economic trends.

He said that in years past, Internet shoppers tended to be wealthier but that “online buying populations every year look more and more like the regular U.S. population.” But others in the industry are not so sure that Internet commerce is tracking macro-economic conditions. William Lynch, executive vice president and general manager of hsn.com, the online arm of the Home Shopping Network, said that it was not clear yet to him whether macro-economic trends took a toll on the growth of online shopping.

“I don’t know that the fact that there was a slight decrease in the growth rate of online retail was a function of the economy so much as it was the slight maturing of online retail,” he said. “The jury is out on that.”

But other retailers and analysts said they expected the growth rate for Internet sales would continue to slow down. “It’s a large-numbers law,” said Mark S. Mahaney, director for Internet research at Citigroup Investment Research.

    Holiday Online Receipts Are Strong, but Reflect a Decline in Rate of Growth, NYT, 28.12.2007, http://www.nytimes.com/2007/12/28/business/28web.html

Stocks Pare Gains After Housing Data

December 28, 2007
Filed at 10:51 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Stocks gave up much of an early rally Friday after the government reported sales of new homes fell in November to their lowest level in more than 12 years, stirring concerns that nervous consumers might tamp down their spending.

The Commerce Department report that new home sales fell 9 percent from October to a seasonally adjusted annual rate of 647,000 stirred investor concerns that consumers worried about falling housing prices could further slow the nation's economic growth.

The market had shown early gains after a pullback Thursday that followed the assassination of Pakistani opposition leader Benazir Bhutto and a weak reading on big-ticket manufactured items. The major indexes each lost more than 1 percent, including the Dow Jones industrial average, which dropped nearly 200 points.

While stocks came off their highs Friday amid concerns about housing, the major indexes still managed to show modest gains. The Chicago purchasing managers' index perhaps helped buoy investor sentiment after registering a stronger-than-expected increase for December manufacturing activity in the Midwest.

Wall Street is closely following the economic data to try to determine whether weakness in the housing and financial sectors is undercutting the overall economy, possibly leading to a recession.

In midmorning trading, the Dow Jones industrial average rose 26.17, or 0.20 percent, to 13,385.78. The Dow had risen more than 91 points before the arrival of the housing data.

Broader stock indicators also rose. The Standard & Poor's 500 index increased 4.52, or 0.31 percent, to 1,480.79, and the Nasdaq composite index rose 10.40, or 0.39 percent, to 2,687.19.

Bond prices rose. The yield on the 10-year Treasury note, which moves opposite its price, fell to 4.12 percent from 4.19 percent late Thursday. The dollar was mixed against other major currencies, while gold prices rose.

Light, sweet crude moved up $1.07 to $97.69 per barrel on the New York Mercantile Exchange. The rise in recent days has renewed talk of the psychological benchmark of $100. Oil saw its peak of $99.29 on Nov. 21.

With Friday marking Wall Street's second-to-last trading session of the year, many investors were likely looking to square their positions ahead of the new year. Many market veterans discount the moves seen in the final weeks of the year when thin volume can exaggerate the market's moves.

The economic readings arriving Friday painted a mixed picture.

The pace of sales of new homes in November proved much weaker than economists had been expecting. Wall Street had predicted sales would drop about 1.8 percent to a pace of 715,000.

In a bright spot, the purchasing managers index, considered a precursor of the national Institute for Supply Management report being released Wednesday, rose to 56.6 from 52.9 in November. Economists, on average, had been expecting a showing of 52.0, according to Dow Jones Newswires.

In one sign of weakness, the PMI's December employment index fell to 49.0 from 54.4 in the prior month. Wall Street regards solid employment as the crucial underpinning of the economy's well-being because it feeds consumer spending, which accounts for more than two-thirds of U.S. economic activity.

In corporate news, Checkpoint Systems Inc. rose $2.62, or 11.5 percent, to $25.33 after the company late Thursday named a new chief executive. Analysts praised the latest change at the maker of security devices as likely to bring about stronger sales and earnings.

Genesco Inc. jumped $4.48, or 13.6 percent, to $37.54 after a judge ruled The Finish Line Inc. cannot back out of its $1.5 billion purchase of Genesco. Finish Line fell 78 cents, or 26 percent, to $2.27.

Advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange, where volume came to 197.9 million shares.

The Russell 2000 index of smaller companies rose 5.91, or 0.76 percent, to 779.42.

Overseas, Japan's Nikkei stock average fell 1.65 percent. In afternoon trading, Britain's FTSE 100 fell 0.65 percent, Germany's DAX index rose 0.36 percent, and France's CAC-40 slipped 0.27 percent.

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On the Net:

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

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

    Stocks Pare Gains After Housing Data, NYT, 28.12.2007, http://www.nytimes.com/aponline/business/AP-Wall-Street.html

New-Home Sales Fall; Biggest Drop Since 1995

December 28, 2007
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — Sales of new homes plunged last month to their lowest level in more than 12 years, a grim testament to the problems plaguing the housing sector.

The Commerce Department reported Friday that new-home sales tumbled 9 percent in November from October to a seasonally adjusted annual rate of 647,000. That was the worst showing since April 1995, when the pace of sales was 621,000.

The sales pace for November was much weaker than economists were expecting. They were predicting sales in the weakest sector of the economy to drop by around 1.8 percent, to a pace of 715,000.

The markets, which were seeing a strong gain Friday morning, quickly fell on the news.

The median sales price of a new home dipped to $239,100 in November. That is 0.4 percent lower than a year ago. The median price is where half sell for more and half for less.

By region, sales fell in all parts of the country, except for the West, where they rose.

New-home sales dropped 19.3 percent in the Northeast. They plunged 27.6 percent in the Midwest and they fell 6.4 percent in the South. However, sales increased 4 percent in the West.

Over the last 12 months, new-home sales nationwide have tumbled 34.4 percent, the biggest annual slide since early 1991, and stark evidence of the painful collapse in the once high-flying housing market.

That market has been suffering through a slump after five years of record-breaking activity from 2001 through 2005. Sales turned weak as did home prices. The boom-to-bust situation has increased dangers to the economy as a whole and has been especially hard on some homeowners.

Foreclosures have soared to record highs and probably will keep rising. A drop in home prices left some people stuck with balances on their home mortgages that eclipsed the worth of their home. Other home buyers were clobbered as low introductory rates on their mortgages jumped to much higher rates, which they couldn’t afford.

With credit now harder to get to finance a home purchase, the problems in housing have grown worse. Unsold homes have piled up. The problems are expected to persist well into next year.

    New-Home Sales Fall; Biggest Drop Since 1995, NYT, 28.12.2007, http://www.nytimes.com/aponline/business/28aphome-web.html

High & Low Finance

Credit Crisis? Just Wait for a Replay

December 28, 2007
The New York Times
By FLOYD NORRIS

What if it’s not just subprime?

As 2007 ends, it seems that the financial world shakes every time a company reveals some new exposure to the disastrous world of subprime mortgage lending.

But just how different was subprime lending from other lending in the days of easy money that prevailed until this summer? The smug confidence that nothing could go wrong, and that credit quality did not matter, could be seen in the many other markets as well.

That was particularly true in the corporate loan market. Loans were cheap, and anyone worried about losses could buy insurance for almost nothing. It was not an environment that encouraged careful lending.

“The severity of the subprime debacle may be only a prologue to the main act, a tragedy on the grand stage in the corporate credit markets,” Ted Seides, the director of investments at Protégé Partners, a hedge fund of funds, wrote in Economics & Portfolio Strategy.

“Over the past decade, the exponential growth of credit derivatives has created unprecedented amounts of financial leverage on corporate credit,” he added. “Similar to the growth of subprime mortgages, the rapid rise of credit products required ideal economic conditions and disconnected the assessors of risk from those bearing it.”

There are differences, of course, and they may be critical in averting a crisis. To start, there are virtually no defaults in corporate lending now, and even if Moody’s is accurate in its forecast that defaults will quadruple in 2008, the default rate on speculative loans and bonds would still be below the long-term average. That hardly sounds like a crisis.

And there is no reason to think that fraud was a big factor in the corporate loan market, as it seems to have been in subprime.

But the history of junk bonds provides a warning that defaults start to rise a few years after credit gets very easy. By that standard, says Martin Fridson of the research firm FridsonVision, a new wave of defaults is overdue. Already, even without defaults, he says, about a tenth of high-yield bonds are trading at distress levels — levels that provide yields of at least 10 percentage points more than Treasuries.

If a recession does occur, one can easily foresee a wave of defaults in junk bonds and their bank-loan cousins, leveraged loans. With highly leveraged structures supported by some of those loans, the surprises could be greater. It is sobering to realize that the issuing of leveraged loans set a record in 2007, even though the market contracted sharply late in the year.

If this was the year that many readers — not to mention financial reporters — learned what C.D.O., M.B.S. and SIV stood for, 2008 could be the year of C.D.S. and C.L.O. (For those who came in late, those abbreviations from 2007 are shorthand for collateralized debt obligations, mortgage-backed securities and structured investment vehicles. The new ones are credit default swaps and collateralized loan obligations — a special kind of C.D.O. backed by corporate loans.)

We have learned in the last month that credit insurers took big risks in backing C.D.O.’s and other exotic things. Some are scrambling to raise more capital to stay in business. One, ACA, may well go out of business.

But if the credit insurers turn out to have had inadequate reserves, what are we to make of the credit default swap market? Mr. Seides calls it “an insurance market with no loss reserves,” and points out that $45 trillion in such swaps are now outstanding. That is, he notes, almost five times the United States national debt.

Many of those swaps cancel each other out — or will if everyone meets their obligations. The big banks say they run balanced books, in which they sell insurance to one customer and buy insurance on the same borrower from another customer. But if some customers cannot pay what they owe, this could be another shock for bank investors. As it is, financial stocks have underperformed other stocks by record amounts this year.

One of the more remarkable facts about the subprime crisis is that total losses to the financial system may be about equal to the amount of subprime loans that were issued. On the face of it, that appears absurd, since many such loans will be paid off, and those that default will not be total losses. But, Mr. Seides said in an interview, “the financial leverage placed on the underlying assets was so high” that the losses multiplied, as the profits did when times were good.

“When there is more leverage” and things go wrong, he said, “there are more losses.”

The corporate credit market is vastly larger than the subprime market, and there are plenty of dubious loans outstanding that probably could not be refinanced in the current market. If some of those companies run into problems, defaults could soar and fears about C.L.O. valuations and C.D.S. defaults could spread long before there are large actual losses on loans.

There are other areas of potential weakness in 2008. Commercial real estate is one area where some see disaster looming. Others worry that some emerging markets could run into big problems because many borrowers there have taken out loans denominated in foreign currency and could be devastated if local currencies lose value.

It was the greatest credit party in history, made possible by a new financial architecture that moved much of the activities out of regulated institutions and into financial instruments that emphasized leverage over safety. The next year may be the one when we learn whether the subprime crisis was a relatively isolated problem in that system, or just the first indication of a systemic crisis.

   

Meet Floyd Norris at nytimes.com/norris.

    Credit Crisis? Just Wait for a Replay, NYT, 28.12.2007, http://www.nytimes.com/2007/12/28/business/28norris.html?hp

30 - Year Mortgages Rates Climb

December 27, 2007
Filed at 2:57 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Rates on 30-year and one-year mortgages climbed this week, while rates on some other home loans didn't budge.

Freddie Mac, the mortgage company, reported Thursday that 30-year, fixed-rate mortgages averaged 6.17 percent this week. That was up from 6.14 percent last week and was the highest since the week of Nov. 21, when 30-year rates stood at 6.20 percent.

Just three weeks ago, 30-year rates had dipped below 6 percent, edging down to 5.96 percent, the lowest level in more than two years.

Rates on one-year adjustable-rate mortgages rose to 5.53 percent this week, compared with 5.51 percent last week.

Analysts blamed the rise in these rates on worries about inflation. Economic reports last week showed both a big jump in consumer spending and a big pickup in inflation for November.

That ''caused long-term bond yields to inch up over the end of last week and beginning of this week, with mortgage rates following,'' said Frank Nothaft, chief economist at Freddie Mac. Looking ahead, Nothaft predicted consumer spending ''will likely slow'' given the problems in the housing and credit markets.

Other mortgage rates, meanwhile, held steady. .

Rates on 15-year fixed-rate mortgages, a popular choice for refinancing, averaged 5.79 percent this week, unchanged from last week. And, rates on five-year adjustable-rate mortgages, rates stood at 5.90 percent this week, also the same as last week.

Harder-to-get credit has made it more difficult for some would-be home buyers to secure financing for home and other big-ticket purchases. The more restrictive credit situation has deepened the housing slump, which is weighing heavily on national economic activity.

The mortgage rates do not include add-on fees known as points. Thirty-year, 15-year and five-year mortgages each carried a nationwide average fee of 0.5 point. One-year adjustable-rate mortgages had a fee of 0.7 point.

A year ago, 30-year mortgages stood at 6.18 percent. Rates on 15-year mortgages were at 5.93 percent a year ago, while five-year adjustable-rate mortgages averaged 5.98 percent and one-year adjustable-rate mortgages were at 5.47 percent.

The housing market has been suffering through a severe slump, following five years of heady activity. Sales turned weak as did home prices. The boom-to-bust situation has been especially hard on some homeowners. Foreclosures have climbed to record highs and probably will keep rising. The problems in housing are expected to persist well into next year.

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On the Net:

Freddie Mac: http://www.freddiemac.com

    30 - Year Mortgages Rates Climb, NYT, 27.12.2007, http://www.nytimes.com/aponline/us/AP-Mortgage-Rates.html

Holiday Spending Is Weak, as Retailers Expected

December 26, 2007
The New York Times
By MICHAEL BARBARO

American consumers, uneasy about the economy and unimpressed by the merchandise in stores, delivered the bleak holiday shopping season retailers had expected, if not feared, according to one early but influential projection.

Spending from Thanksgiving to Christmas rose just 3.6 percent over last year, the weakest performance in at least four years, according to MasterCard Advisors, a division of the credit card company. By comparison, sales grew 6.6 percent in 2006 and 8.7 percent in 2005.

“There was not a recipe for a pickup in sales growth,” said Michael McNamara, vice president for research and analysis at MasterCard Advisors, citing higher gas prices, a slowing housing market and a tight credit market.

Strong demand at the start of the season for a handful of must-have electronics, like digital frames and portable G.P.S. navigation systems, trailed off in December. And robust sales of luxury products could not make up for sluggish sales of jewelry and women’s clothing.

What did eventually sell was generally marked down — once, if not twice — which could hurt retailers’ profits in the final three months of year. “Stores are buying those sales at a cost,” said Sherif Mityas, a partner at the consulting firm A. T. Kearney, who specializes in retailing.

MasterCard’s SpendingPulse data, scheduled to be released Wednesday, cover the 32-day period from Nov. 23 to Dec. 24. It is based on purchases made by more than 300 million MasterCard debit and credit card users and broader estimates of spending with cash and checks. It encompasses sales at stores and on the Internet, and of gift cards, gasoline and meals at restaurants, but is not adjusted for inflation.

Excluding gas purchases, overall holiday sales rose a lackluster 2.4 percent, the credit card company said.

The final numbers are at the low end of MasterCard’s already modest expectations, which were reduced in the middle of the season. So retail analysts and economists, who scrutinize holiday spending for clues about the health of the American economy, are unlikely to be impressed by the results.

Eboni Jones, 32, of Windsor, Conn., epitomized the problem for stores.

A phone company manager, she waited until Christmas Eve to make a single purchase at a major chain store this season, favoring Web retailers and designer outlet stores offering deep bargains.

“I am on a tighter budget than I’ve ever been,” said Ms. Jones, who walked into the Macy’s at Westfarms Mall in Farmington, Conn., on Monday morning to take advantage of a sale.

In the past, she easily spent $100 each on her six nieces and nephews. This year, it was more like $50. “If it’s not on sale, I won’t buy it,” Ms. Jones said.

MasterCard found that online spending rose 22.4 percent, a strong showing, given fears that Web purchases would slow after a decade of impressive growth.

Clothing sales rose a meager 1.4 percent, but there was a stark split between genders. Sales for women’s apparel dropped 2.4 percent. Sales for men’s apparel rose 2.3 percent. Analysts said women complained of dreary fashions.

“Even when the dust settles, women’s clothing is likely to be one of the weakest categories in retail this season,” said John D. Morris, senior retail analyst at Wachovia Securities.

Luxury purchases rose 7.1 percent, as the well-heeled splurged on $600 Marc Jacobs trench coats and $800 Christian Louboutin shoes. Footwear, at all prices, proved a bright spot for the clothing industry, with sales surging 6 percent.

Weak sales of clothing left retailers jostling for the deepest discounts during the last weekend to drum up interest from consumers. Martin & Osa knocked 50 percent off women’s wool sweaters. Gymboree issued $25 coupons to shoppers who spent $50 on its children’s clothing. Even the markdown-averse Abercrombie & Fitch dusted off its clearance signs, selling down coats with faux fur trim for $79, reduced from $99.

The American consumer has perplexed analysts this season. Retail experts confidently predicted that shoppers, uncertain about the economy, would trade down from midprice chains, like Macy’s and Nordstrom, to discounters with steeper discounts.

To a certain degree, they did, mobbing low-price chains like T. J. Maxx, and Marshalls. But the discount retailer Target has struggled this season. On Monday, it said its sales could fall by 1 percent in December compared with last year, an anomaly for a retailer accustomed to at least 4 percent monthly sales growth over the last three years.

In the end, analysts said, the biggest winners are likely to be Wal-Mart, which emerged as the undisputed low-price leader this season, and Best Buy, which became the destination for competitively priced electronics.

Much of this season’s action appeared to unfold on the Web, which spared consumers a $3-a-gallon drive to the mall. Like MasterCard, ComScore, a research firm, found that online spending rose steadily to $26.3 billion.

ComScore measured spending during the 51 days from Nov. 1 to Dec. 21. The biggest day for online shopping was Monday, Dec. 10 ($881 million), not the Monday after Thanksgiving ($733 million), known as Cyber Monday in the retail world, because consumers typically flock to the Web at work after a holiday weekend of store browsing.

Unsatisfied with sales so far, dozens of retailers, from the high-end to the low, will start slashing prices Wednesday morning. Kohl’s is scheduled to hold a sale with 60 to 70 percent discounts; Macy’s is knocking down prices by 50 to 70 percent, and dangling a $10 coupon for purchases of $25 or more; some clothing will be 50 percent off at Saks Fifth Avenue from 8 a.m. to noon; and Toys “R” Us is offering a buy-one-get-one-half-off promotion.

MasterCard Advisors predicts that shoppers will spend up to $60 billion over the next seven days, as they redeem gift cards and exchange unwanted ties and sweaters for the items they truly want.

    Holiday Spending Is Weak, as Retailers Expected, NYT, 26.12.2007, http://www.nytimes.com/2007/12/26/business/26shop.html

Home Prices Fall for 10th Straight Month

December 26, 2007
The New York Times
By THE ASSOCIATED PRESS

Home prices in the United States fell in October for the 10th consecutive month, declining a record 6.7 percent compared with a year ago, according to the Standard & Poor’s/Case-Shiller home price index.

“No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim,” said Robert Shiller, who helped create the index, in a statement Wednesday.

The previous record decline was a drop of 6.3 percent, recorded in April 1991.

Home prices fell 1.4 percent in October compared with the previous month.

The S&P/Case-Shiller home price index tracks prices of existing single-family homes in 10 metropolitan areas compared with a year earlier. A broader index of 20 metropolitan areas fell 6.1 percent. Among the 20 metropolitan areas used in the broader index, 11 posted record monthly declines.

Miami posted the largest loss among the 20 markets reviewed. Home prices in the Miami metropolitan area declined 12.4 percent in October compared with the same month a year ago.

Only three areas — Charlotte, N.C., Portland, Ore. and Seattle — posted year-over-year home price appreciation in October, with Charlotte posting the largest gains at 4.3 percent.

    Home Prices Fall for 10th Straight Month, NYT, 26.12.2007, http://www.nytimes.com/aponline/business/26cnd-home.html?hp

Officials Say They Are Falling Behind on Mortgage Fraud Cases

December 25, 2007
The New York Times
By JOHN LELAND

The number of mortgage fraud cases has grown so fast that government agencies that investigate and prosecute them cannot keep up, lenders and law enforcement officials have said.

Reports of suspected mortgage fraud have doubled since 2005 and increased eightfold since 2002. Banks filed 47,717 reports this year, up from 21,994 two years ago, according to statistics from the Federal Bureau of Investigation and the Financial Crimes Enforcement Network of the Treasury Department. In 2002, banks filed 5,623 reports.

“I don’t think any law enforcement agency can keep up with mortgage fraud, because it’s such a growth industry,” said Chuck Cross, vice president of mortgage regulatory policy for the conference of state bank supervisors, an organization of regulators and bankers. “There’s too many cases, not enough agents.”

Mortgage fraud covers crimes like false statements on mortgage applications and elaborate “flipping” schemes that involve multiple properties and corrupt appraisers, title companies and straw buyers.

In one common flipping plot, someone buys a house, has it appraised for more than its true value and sells it to a straw buyer for the inflated price, pocketing the difference. The straw buyer lets the house fall into foreclosure, leaving the bank with the loss.

The cases coming into view reflect the recent boom in mortgages with limited borrower documentation and lax scrutiny.

Law enforcement agencies say they are overwhelmed, especially because investigating and prosecuting fraud can be complex and time consuming. The officials say career criminals and organized-crime rings have increasingly turned from other crimes to mortgage fraud because it offers lower risks and high profits.

“I could hire a dozen investigators and a dozen prosecutors and only scratch the surface,” said David McLaughlin, a senior assistant attorney general in Georgia who coordinates prosecutions of mortgage fraud.

Losses involving federally insured banks totaled $813 million in the 2007 fiscal year, more than double the $293 million lost in the 2002 fiscal year.

These figures most likely represent “the tip of the iceberg,” said the Mortgage Bankers Association, an industry group, because they do not cover mortgage brokers, who arrange more than half of new mortgages. The industry estimates the total loss this year at $4 billion.

Mortgage fraud can damage whole neighborhoods. Derrick Duckworth, a real estate broker in southwestern Atlanta, has watched “about 40 percent” of the houses in his neighborhood, Adair, become vacant as a result of mortgage fraud. The remaining residents cannot sell their houses because of the abandoned buildings and the neighborhood’s reputation for fraud, he said.

“The other day, someone broke into my neighbor’s crawl space and stole her copper plumbing,” he said. “Last week, we had an 18-year-old shot on the street.”

Fraud is especially common with subprime mortgages, the high-price loans for borrowers with poor credit. Lenders and investigators trace part of the foreclosure crisis to mortgage fraud.

For local law enforcement agencies, fraud is increasing as regulatory budgets are tight and other crimes seem more pressing, said Tom Levanti, a fraud investigator in New York.

“You only have a certain amount of resources,” Mr. Levanti said, “and in New York, you need to spend them on counterterrorism, protecting citizens, reducing violent crime. Mortgage fraud cases are long and time consuming, and the victims are usually financial institutions that can write off the loss. So as a police department, return on investment has to be thought about.”

Lenders say they have good relationships with investigating and prosecuting agencies.

“But law enforcement is just absolutely overwhelmed,” said Corey Carlisle, senior director for government affairs for the Mortgage Bankers Association, which has lobbied for more money to fight fraud. “Lenders say they have to market their cases to law enforcement,” meaning showing extraordinarily high sums or multiple criminals.

John Arterberry, executive deputy chief of the fraud section in the Justice Department, said federal prosecutors and the F.B.I. had made progress on mortgage fraud. Mr. Arterberry cited sweeps in 2004 and 2005 that resulted in more than 150 defendants charged in each sweep.

The bureau has 1,210 open mortgage fraud inquiries, up from 436 in 2003. Last year, those cases led to 204 convictions.

“We have limited resources and have to put them where they do the most good,” Mr. Arterberry said. “We’re able to zero in on hot spots and organized efforts.”

This progress is too slow for Kristine Baugh, who said her neighborhood in Dallas had not recovered from a mortgage fraud that left in six vacant houses on her block. Ms. Baugh, a real estate broker, said she discovered what she believed was a fraud scheme in 2005, when six properties sold for far more than she felt they were worth and remained vacant until being foreclosed.

Suspecting fraudulent appraisals, she gathered documents on the sales and took them to the F.B.I., the district attorney and local officials. With neighbors, she sued an investor who she said was behind the fraud.

Years later, there have been no arrests in the case. The residents ran out of money and dropped their civil suit after the investor filed a countersuit. “Our neighborhood is still in shambles,” Ms. Baugh said. “The properties deteriorated and have to be kept up by the city. They’re a health hazard.”

The swimming pools at the vacant sites are breeding grounds for mosquitoes and potential West Nile virus sources, she said.

Such cases are likely to multiply, said Constance Wilson, executive vice president of Interthinx, which develops fraud detection tools for the lending industry.

“The cases we’re seeing today are from 18, 24, 36 months ago, when the market was still good,” Ms. Wilson said. “Now we’re going to see an increase in mortgage fraud, because all those loan officers, brokers and appraisers who were making six-figure incomes, now their back is against the wall. If that loan doesn’t close, they can’t make their home payment.

“So you have a desperation cycle,” she said. “There’s a lot of push for them originate volume.

“The consequences are that people are getting away with it. It’s damaging the entire real estate market. It’s devastating to victims. Not just lenders but consumers. It’s devastating to entire communities.

“When it’s this prolific,” she said, “we just don’t have enough law enforcement or enough prosecutors for all the cases out there.”

    Officials Say They Are Falling Behind on Mortgage Fraud Cases, NYT, 25.12.2007, http://www.nytimes.com/2007/12/25/us/25fraud.html

Op-Ed Columnist

Nightmare Before Christmas

December 22, 2007
The New York Times
By BOB HERBERT

Christmastime is bonus time on Wall Street, and the Gucci set has been blessed with another record harvest.

Forget the turbulence in the financial markets and the subprime debacle. Forget the dark clouds of a possible recession. Bloomberg News tells us that the top securities firms are handing out nearly $38 billion in seasonal bonuses, the highest total ever.

But there’s a reason to temper the celebration, if only out of respect for an old friend who’s not doing too well. Even as the Wall Streeters are high-fiving and ordering up record shipments of Champagne and caviar, the American dream is on life-support.

I had a conversation the other day with Andrew Stern, president of the Service Employees International Union. He mentioned a poll of working families that had shown that their belief in that mythical dream that has sustained so many generations for so long is fading faster than sunlight on a December afternoon.

The poll, conducted by Lake Research Partners for the Change to Win labor federation, found that only 16 percent of respondents believed that their children’s generation would be better off financially than their own. While some respondents believed that the next generation would fare roughly the same as this one, nearly 50 percent held the exceedingly gloomy view that today’s children would be “worse off” when the time comes for them to enter the world of work and raise their own families.

That absence of optimism is positively un-American.

“These are parents who cannot see where the jobs of the future are that will allow their kids to have a better life than they had,” said Mr. Stern. “And they’re not wrong. That’s the problem.”

Record bonuses on Wall Street at a time when ordinary working Americans are filled with anxiety about their economic future are signs that the trickle-down phenomenon that was supposed to have benefited everyone never happened.

The rich, boosted by the not-so-invisible hand of the corporate ideologues in government, have done astonishingly well in recent decades, while the rest of the population has tended to tread water economically, or drown.

A study released last month by the Pew Charitable Trusts noted that “for most Americans, seeing that one’s children are better off than oneself is the essence of living the American dream.” But for the past 40 years, men in their 30s, prime family-raising age, have found it difficult to outdistance their dads economically.

As the Pew study put it: “Earnings of men in their 30s have remained surprisingly flat over the past four decades.” Family incomes have improved during that time largely because of the wholesale entrance of women into the work force.

For the very wealthy, of course, it’s been a different story. According to the Congressional Budget Office, the after-tax income of the top 1 percent rose 228 percent from 1979 through 2005.

What seems to be happening now is that working Americans, and that includes the middle class, have exhausted much of their capacity to tread water. Wives and mothers are already working. Mortgages have been refinanced and tremendous amounts of home equity drained. And families have taken on debt loads — for cars, for college tuition, for medical treatment — that would buckle the knees of the strongest pack animals.

According to Demos, a policy research group in New York, “American families are using credit cards to bridge the gaps created by stagnant wages and higher costs of living.” Americans owe nearly $900 billion on their credit cards.

We’re running out of smoke and mirrors. The fundamental problem, the problem that is destroying the dream, is the extreme inequality pounded into the system by the corporate crowd and its handmaidens in government.

As Mr. Stern said: “To me, the issue in America is not a question of wealth or growth, it’s a question of distribution.”

When such an overwhelming portion of the economic benefits are skewed toward a tiny portion of the population — as has happened in the U.S. over the past few decades — it’s impossible for the society as a whole not to suffer.

Americans work extremely hard and are amazingly productive. But without the clout of a strong union movement, and arrayed against the mighty power of the corporations and the federal government, they don’t receive even a reasonably fair share of the economic benefits from their hard work or productivity.

Instead of celebrating bonuses this Christmas season, too many American workers are looking with dread toward 2008, worried about their rising levels of debt, or whether they will be able to hang on to a job with few or no benefits or how to tell their kids that they won’t be able to help with the cost of college.

It’s not the stuff of which dreams are made.
 

Gail Collins is off today.

    Nightmare Before Christmas, NYT, 22.12.2007, http://www.nytimes.com/2007/12/22/opinion/22herbert.html?ref=opinion

Not a Jolly Season for 2 Top Bankers

December 21, 2007
The New York Times
By LANDON THOMAS Jr.

James E. Cayne and John J. Mack have a lot in common. The chiefs of both Bear Stearns and Morgan Stanley have presided over announcements of steep losses this week and have forgone bonuses.

And, despite a year that they would certainly admit to being among the worst in their firm’s long histories, both are holding tight to their perches of power.

Mr. Cayne, who is 74, has rebuffed any suggestion that he cede his chief executive title, even as Bear Stearns, battered by $1.9 billion from subprime-linked charges, reported its worst quarter ever on Thursday. And Mr. Mack, 63, who pushed his traders to take the kind of risks that eventually led to $11 billion in losses, has persuaded his board for now that he is still the person to lead Morgan Stanley.

As losses from the spreading mortgage crisis mount on Wall Street, the question of whether chief executives should stay or go has become a sensitive issue for boards and the executives themselves.

“This is a tough call,” said Michael Useem, a professor of management and corporate governance at the Wharton School. “Directors have to judge whether the company is better off without Mr. Mack and Mr. Cayne than it is with them. It’s a judgment on leadership.”

And the pressures that outside investors can bring to bear on a board, even one that strongly supports its chief executive, can be withering. Charles O. Prince III of Citigroup and E. Stanley O’Neal of Merrill Lynch have already lost their jobs, hurt by their lack of popularity and escalating subprime losses that will surpass those of Morgan Stanley and Bear Stearns. So far there has been no public outcry from investors or internal revolts at Bear Stearns and Morgan over the fact that Mr. Cayne and Mr. Mack are staying on.

Partly this is because Mr. Cayne and Mr. Mack, who both started their Wall Street careers as fast-talking municipal bond salesmen, are throwbacks to an earlier era of Wall Street partnerships tightly controlled by the towering will and stubborn dictates of their managing partners. Brassy, often profane and steeped in the culture of their respective firms, Mr. Cayne and Mr. Mack are able to tap deep pools of support.

Like all the old partnerships, Bear Stearns and Morgan Stanley have shunned that cozy model for the larger ambitions of public ownership, more capital and higher-risk trades which, for now at least, have led to debilitating losses.

“It is a clash of the old and new on Wall Street, the partnership model versus the risk-taking model,” said Charles R. Geisst, a Wall Street historian at Manhattan College. “In the old days you would not take on such risk, because capital was too small. And if you lost it, you were not going to raise it in China or Abu Dhabi; you would have to find new partners.”

While giving up a bonus may seem like a humiliation, for a chief executive looking to soothe employees who themselves are facing lower pay packages, such a move can be an adroit one.

“There is no ignominy here; it says you are a leader,” said Ari Kiev, a psychiatrist who counsels financial executives. It can make it easier for a board to give a chief executive a second chance and not ask him to step down under pressure, an outcome that is anathema to hard-charging executives like Mr. Cayne and Mr. Mack. “Now falling on your sword, that is much more difficult, Mr. Kiev added.

By most accounts, the prevailing mood on Wall Street is that a stronger case can be made that Mr. Cayne should step down. Not only has he seen his firm’s profits for the year plunge, he must also confront state and federal investigations into this summer’s collapse of two hedge funds that invested in subprime mortgages and lost $1.5 billion in investor funds. The time that he devotes to his two passions of bridge and golf has also come under scrutiny.

For Bear Stearns, the immediate prospects do not seem promising. The firm’s core mortgage bond business will remain weak. Morgan Stanley, on the other hand, is a more diversified firm and can rely on areas like investment banking, hedge fund servicing and equities trading that are doing very well.

Unlike Mr. Mack, Mr. Cayne has a ready and respected successor: Alan D. Schwartz, the president of the firm. A number of investors have suggested that he hand over the executive reins to Mr. Schwartz and keep the chairman’s title for himself, just as his predecessor Alan C. Greenberg did in 1993.

“Investors are telling me that he should go,” said Richard X. Bove, a securities analyst at Punk Ziegel. “He has a mind-blowing loss that is his fault, and he should take responsibility for it.”

Mr. Cayne’s defenders say that while his year may have been a terrible one — he has described the hedge fund collapse as one of the most painful events in the firm’s history — he should be given a chance to right matters.

Bear Stearns, more than Morgan Stanley, still operates as a partnership, and Mr. Cayne, like Mr. Mack, is a constant presence at the firm, haunting the hallways and trading floors.

“Jimmy is a tough guy and throwing in the towel is the antithesis of his makeup,” said Alexandra Lebenthal, the former chief executive of Lebenthal & Company, who has known Mr. Cayne for many years.

Mr. Mack would seem to be on surer footing, although the losses have been a blow to his reputation. His speed in disclosing the subprime trading errors and holding top executives accountable, as well as the reluctance of the board to subject Morgan Stanley to a second leadership change in little more than two years, should help him survive.

The strong performance of Morgan Stanley’s shares — they are up 3 percent in the last two days — suggests that investors agree. “I think John Mack is solid. No one I talk to wants to see him removed,” Mr. Bove said.

    Not a Jolly Season for 2 Top Bankers, NYT, 21.12.2007, http://www.nytimes.com/2007/12/21/business/21wall.html?hp

Stores desperately seeking shoppers on Super Saturday

Fri Dec 21, 2007
11:27am EST
Reuters
By Nicole Maestri

NEW YORK (Reuters) - U.S. shoppers, come out, come out, wherever you are. "Super Saturday," the last Saturday before Christmas, is often the biggest shopping day of the holiday season, according to the National Retail Federation.

This year, the day may be busier than ever as procrastinating shoppers seek deeper discounts closer to Christmas.

According to a survey last week for Discover Financial Services, 42 percent of those questioned said they had either not started their holiday shopping, or had completed some -- but not much -- gift buying.

Getting shoppers into stores for the final days of the season is crucial for retailers. According to ShopperTrak, December 21-24 last year accounted for 13.6 percent of holiday sales.

"Fasten your seat belt because it's going to be busy, it's going to be deep discounts, and it's going to be mayhem," said Marshal Cohen, chief industry analyst at research firm NPD Group.

HOW SUPER?

Retailers have been on edge, worried that shoppers will pare budgets in the face of soaring gas prices, a slumping housing market and a credit crunch.

Retailers have cut inventories and started advertising holiday discounts earlier than ever -- running online-only sales on Thanksgiving day.

The emphasis on deep discounts have worked -- consumers came out in droves for the Thanksgiving weekend, drawn by eye-popping, limited-time deals on "Black Friday."

But as the deals faded, so too did budget-conscious shoppers, betting that prices would drop later in the season.

"We believe the holiday season has been challenging with sales deteriorating more than we anticipated following a relatively strong Black Friday weekend," wrote Stifel, Nicolaus analyst Richard Jaffe.

"In our opinion, a difficult macro environment and adverse weather in the past two weeks (snow storms throughout the Midwest and Northeast, which resulted in an estimated one day of missed sales) have held back sales during the important holiday season."

Traffic to U.S. stores for the week ended December 15 fell 8.9 percent compared with last year, according to ShopperTrak.

NPD's Cohen said some of the decline was due to indecision.

Besides popular electronics like Nintendo Co Ltd's Wii game console and Activision Inc's, Guitar Hero video game, he said shoppers are unsure of what buy.

"They're walking around like lost puppies," he said.

Meanwhile, retailers, worried about protecting their bottom line, did not cut prices as extensively as shoppers wanted after the Thanksgiving weekend.

"Retailers are holding back on giving the big discounts that consumers want this year," said America's Research Group Chairman Britt Beemer, "and as a result retail sales are very weak."

FINAL PUSH

Stores are making a final push this weekend.

Macy's Inc is keeping seven high-traffic stores in the New York area open around the clock starting December 21 until 6 p.m. on Christmas Eve. One busy Macy's store in Queens began operating around-the-clock on December 20.

Kmart, owned by Sears Holdings Corp, will hold a 64-hour sale, starting at 6 a.m. on December 22 and ending at 10 p.m. on Christmas Eve.

J.C. Penney Co Inc is advertising in-store "doorbusters" for Friday night and Saturday morning.

Web sites are playing a big role in the push, offering free shipping and advertising special sales.

Handbag maker Coach Inc allows shoppers to purchase items on its Web site, then pick them up in its stores three hours later.

But many consumers, unsure of what to buy or running out of time, are expected to snap up gift cards this weekend.

That will make it hard to get a full reading on the strength of the holiday season until January, when shoppers return to stores to redeem the cards and retailers are able to record the revenue.

Cohen and other analysts say they will likely have to wait until the third week of January to get a better reading on holiday 2007.

(Editing by Jeffrey Benkoe)

    Stores desperately seeking shoppers on Super Saturday, R, 21.12.2007, http://www.reuters.com/article/domesticNews/idUSN2057514820071221

Tent city in suburbs is cost of home crisis

Fri Dec 21, 2007
8:18am EST
Reuters
By Dana Ford

ONTARIO, California (Reuters) - Between railroad tracks and beneath the roar of departing planes sits "tent city," a terminus for homeless people. It is not, as might be expected, in a blighted city center, but in the once-booming suburbia of Southern California.

The noisy, dusty camp sprang up in July with 20 residents and now numbers 200 people, including several children, growing as this region east of Los Angeles has been hit by the U.S. housing crisis.

The unraveling of the region known as the Inland Empire reads like a 21st century version of "The Grapes of Wrath," John Steinbeck's novel about families driven from their lands by the Great Depression.

As more families throw in the towel and head to foreclosure here and across the nation, the social costs of collapse are adding up in the form of higher rates of homelessness, crime and even disease.

While no current residents claim to be victims of foreclosure, all agree that tent city is a symptom of the wider economic downturn. And it's just a matter of time before foreclosed families end up at tent city, local housing experts say.

"They don't hit the streets immediately," said activist Jane Mercer. Most families can find transitional housing in a motel or with friends before turning to charity or the streets. "They only hit tent city when they really bottom out."

Steve, 50, who declined to give his last name, moved to tent city four months ago. He gets social security payments, but cannot work and said rents are too high.

"House prices are going down, but the rentals are sky-high," said Steve. "If it wasn't for here, I wouldn't have a place to go."

'SQUATTING IN VACANT HOUSES'

Nationally, foreclosures are at an all-time high. Filings are up nearly 100 percent from a year ago, according to the data firm RealtyTrac. Officials say that as many as half a million people could lose their homes as adjustable mortgage rates rise over the next two years.

California ranks second in the nation for foreclosure filings -- one per 88 households last quarter. Within California, San Bernardino county in the Inland Empire is worse -- one filing for every 43 households, according to RealtyTrac.

Maryanne Hernandez bought her dream house in San Bernardino in 2003 and now risks losing it after falling four months behind on mortgage payments.

"It's not just us. It's all over," said Hernandez, who lives in a neighborhood where most families are struggling to meet payments and many have lost their homes.

She has noticed an increase in crime since the foreclosures started. Her house was robbed, her kids' bikes were stolen and she worries about what type of message empty houses send.

The pattern is cropping up in communities across the country, like Cleveland, Ohio, where Mark Wiseman, director of the Cuyahoga County Foreclosure Prevention Program, said there are entire blocks of homes in Cleveland where 60 or 70 percent of houses are boarded up.

"I don't think there are enough police to go after criminals holed up in those houses, squatting or doing drug deals or whatever," Wiseman said.

"And it's not just a problem of a neighborhood filled with people squatting in the vacant houses, it's the people left behind, who have to worry about people taking siding off your home or breaking into your house while you're sleeping."

Health risks are also on the rise. All those empty swimming pools in California's Inland Empire have become breeding grounds for mosquitoes, which can transmit the sometimes deadly West Nile virus, Riverside County officials say.

'TRICKLE-DOWN EFFECT'

But it is not just homeowners who are hit by the foreclosure wave. People who rent now find themselves in a tighter, more expensive market as demand rises from families who lost homes, said Jean Beil, senior vice president for programs and services at Catholic Charities USA.

"Folks who would have been in a house before are now in an apartment and folks that would have been in an apartment, now can't afford it," said Beil. "It has a trickle-down effect."

For cities, foreclosures can trigger a range of short-term costs, like added policing, inspection and code enforcement. These expenses can be significant, said Lt. Scott Patterson with the San Bernardino Police Department, but the larger concern is that vacant properties lower home values and in the long-run, decrease tax revenues.

And it all comes at a time when municipalities are ill-equipped to respond. High foreclosure rates and declining home values are sapping property tax revenues, a key source of local funding to tackle such problems.

Earlier this month, U.S. President George W. Bush rolled out a plan to slow foreclosures by freezing the interest rates on some loans. But for many in these parts, the intervention is too little and too late.

Ken Sawa, CEO of Catholic Charities in San Bernardino and Riverside counties, said his organization is overwhelmed and ill-equipped to handle the volume of people seeking help.

"We feel helpless," said Sawa. "Obviously, it's a local problem because it's in our backyard, but the solution is not local."

(Additional reporting by Andrea Hopkins in Ohio; Editing by Mary Milliken and Eddie Evans)

    Tent city in suburbs is cost of home crisis, R, 21.12.2007, http://www.reuters.com/article/domesticNews/idUSN1850682120071221

Consumer Spending and Inflation Up

December 21, 2007
The New York Times
By MICHAEL M. GRYNBAUM

Inflation grew in November at its fastest pace in two years, as sky-high oil prices pushed up the costs of other products, the Commerce Department said on Friday.

But consumer purchases rose a bigger-than-expected 1.1 percent, suggesting that the economy may not slow this quarter as much as some analysts had feared.

The rise in prices could make it harder for the Federal Reserve to cut interest rates at its next meeting. The Fed will likely focus on the annualized 2.2 percent rise in its preferred inflation index, which excludes the volatile costs of food and energy. Central bankers are said to prefer that the index, known as the P.C.E. deflator, remain below 2 percent.

Over all, inflation has risen 3.6 percent over the last 12 months, reflecting a sharp rise in prices since the summer.

The inflation bubble throws a curveball to the Fed, which has lowered interest rates three times this year as it seeks to avert a recession. There is little doubt the economy is gradually slowing, but lower interest rates can cause a flare-up in prices. The Fed now faces an economic landscape where its two goals — price stability and economic growth — may stand at odds with each other.

Despite a difficult decision ahead, central bankers could take some comfort in November’s strong spending figures. Consumer spending registered its largest increase in three years, compared with a 0.4 percent gain in October, though the uptick may only reflect the pre-holiday shopping rush.

“The demise of the U.S. consumer has been exaggerated,” wrote Marc Chandler, head of currency strategy at Brown Brothers Harriman, in a research note, though another analyst suggested Americans are “buying on fumes.”

Spending rose 0.5 percent in November when adjusted for inflation. Income levels also ticked up, 0.4 percent.

    Consumer Spending and Inflation Up, NYT, 21.12.2007, http://www.nytimes.com/2007/12/21/business/21cnd-econ.html?hp

Economy Grew at 4.9% Pace in Summer

December 20, 2007
Filed at 10:49 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The economy sprinted ahead at its fastest pace in four years during the summer, although it is expected to limp through the final three months of this year as the housing and credit debacles weigh on individuals and businesses alike.

The Commerce Department reported Thursday that gross domestic product grew at a 4.9 percent pace in the July-to-September quarter, unchanged from an estimate made a month ago. The performance was especially impressive given that the housing market plunged deeper into despair. Builders slashed spending on housing projects in the third quarter at an annualized rate of 20.5 percent, the most in 16 years.

Economic growth in October through December is expected to have slowed to a pace of just 1.5 percent or less. Gross domestic product measures the value of all goods and services produced within the United States.

''The economy is slowing down so fast this quarter you can see the skid marks as it slams on the brakes,'' said Stuart Hoffman, chief economist at PNC Financial Services Group.

The big worry is that individuals will cut back on their spending and throw the economy into a recession. Former Federal Reserve Chairman Alan Greenspan and others say the odds of that happening have grown this year. Greenspan recently warned that the economy is ''getting close to stall speed.''

To rescue the economy, Fed Chairman Ben Bernanke and his colleagues have sliced a key interest rate three times this year; those moves dropped that key rate down to 4.25 percent, a two-year low. Still, Bernanke has been criticized for not moving more quickly and aggressively to deal with the problems.

The collapse of the once high-flying housing market, a mortgage meltdown and a painful credit crunch, have propelled home foreclosures to record numbers. The problems have forced banks and other financial companies to rack up multibillion-dollar losses, have unnerved Wall Street and have the Bush administration and the Democrat-controlled Congress accusing each other of not doing enough to stem the crisis and scrambling for solutions to curb the fallout.

Credit problems have made it harder for people to get financing to buy a home, aggravating the housing slump. The inventory of unsold homes continues to pile up, forcing builders to cut back even deeper on construction projects. Home foreclosures and late payments are expected to get worse. The troubles in housing are expected to drag on well into next year, acting as a weight on national economic activity.

In the third quarter, the housing slump lopped a sizable 1.08 percentage point off GDP. Analysts expect the ailing housing market to bite into economic activity in the coming quarters.

Whether the economy manages to avoid a recession or not will hinge largely on how consumers and the nation's employment situation hold up.

Another report showed that more people signed up for unemployment benefits last week, suggesting that the job market is softening.

The Labor Department reported that new applications filed for jobless benefits rose by 12,000 to 346,000. It was a larger increase than economists were expecting. They were forecasting claims to rise to 335,000 last week.

Consumer spending grew at a lukewarm pace of 2.8 percent in the third quarter, just a tad better than the 2.7 percent reported a month ago. Consumer spending, however, is expected to get a lot cooler in the final three months of this year, economists say.

So far, the nation's job market, while slowing down, hasn't fallen to pieces. New job creation and wage gains have helped to support consumer spending and offset some of the negative forces from the housing and credit problems.

The unemployment rate, now at 4.7 percent, is expected to climb to 5 percent by early next year as the economy loses speed. Should the job market abruptly lose momentum, consumers could be spooked and snap shut their wallets and pocketbooks, sending the economy into a tailspin.

''The last major pillar supporting economic growth -- consumer spending -- may soon start to buckle,'' warned Bernard Baumohl, managing director of the Economic Outlook Group.

Businesses, however, largely carried the economy in the third quarter. Sales of U.S. exports abroad powered growth. Exports grew by 19.1 percent, on an annualized basis, the most in four years, and even better than previously estimated. Those sales were aided by the falling value of the U.S. dollar, which makes U.S. goods cheaper to buy on foreign markets.

A separate GDP-related gauge of inflation showed that ''core'' prices -- excluding food and energy -- increased at a rate of 2 percent in the third quarter, up sharply from a 1.4 percent pace in the second quarter. The new third-quarter core inflation reading was higher than a 1.8 percent growth rate estimated a month ago. The 2 percent reading was at the upper bound of the Fed's comfort zone for inflation.

That pickup suggested that high energy prices are pushing up the prices of other goods and services. High energy prices are a double-edged sword. They can put a damper on growth and also stoke inflation, which would be a dangerous combination for the economy.

The situation could complicate the Fed's job of trying to keep the economy growing, while making sure that inflation is under control. The central bank's bracing tonic for weakening economic growth is lowering its key interest rate, while the remedy for inflation is raising its key rate.

One of the reasons Bernanke and his colleagues opted to slice the Fed's key rate by just one-quarter percentage point on Dec. 11 was because of concerns about a possible inflation flare up. The modest cut disappointed Wall Street, which wanted a bolder, half-point rate reduction. That investor disappointment caused stocks to tumble.

    Economy Grew at 4.9% Pace in Summer, NYT, 20.12.2007, http://www.nytimes.com/aponline/business/AP-Economy.html

Slave labour that shames America

Migrant workers chained beaten and forced into debt, exposing the human cost of producing cheap food

Published: 19 December 2007
The Independent
By Leonard Doyle in Immokalee, Floride

Three Florida fruit-pickers, held captive and brutalised by their employer for more than a year, finally broke free of their bonds by punching their way through the ventilator hatch of the van in which they were imprisoned. Once outside, they dashed for freedom.

When they found sanctuary one recent Sunday morning, all bore the marks of heavy beatings to the head and body. One of the pickers had a nasty, untreated knife wound on his arm. Police would learn later that another man had his hands chained behind his back every night to prevent him escaping, leaving his wrists swollen.

The migrants were not only forced to work in sub-human conditions but mistreated and forced into debt. They were locked up at night and had to pay for sub-standard food. If they took a shower with a garden hose or bucket, it cost them $5.

Their story of slavery and abuse in the fruit fields of sub-tropical Florida threatens to lift the lid on some appalling human rights abuses in America today.

Between December and May, Florida produces virtually the entire US crop of field-grown fresh tomatoes. Fruit picked here in the winter months ends up on the shelves of supermarkets and is also served in the country's top restaurants and in tens of thousands of fast-food outlets.

But conditions in the state's fruit-picking industry range from straightforward exploitation to forced labour. Tens of thousands of men, women and children – excluded from the protection of America's employment laws and banned from unionising – work their fingers to the bone for rates of pay which have hardly budged in 30 years.

Until now, even appeals from the former president Jimmy Carter to help raise the wages of fruit-pickers have gone unheeded. However, with Florida looming as a key battleground during the the next presidential election, there is hope that their cause will be raised by the Democratic candidates Barack Obama and John Edwards.

Fruit-pickers, who typically earn about $200 (£100) a week, are part of an unregulated system designed to keep food prices low and the plates of America's overweight families piled high. The migrants, largely Hispanic and with many of them from Mexico, are the last wretched link in a long chain of exploitation and abuse. They are paid 45 cents (22p) for every 32-pound bucket of tomatoes collected. A worker has to pick nearly two-and-a-half tons of tomatoes – a near impossibility – in order to reach minimum wage. So bad are their working and living conditions that the US Department of Labour, which is not known for its sympathy to the underdog, has called it "a labour force in considerable distress".

A week after the escapees managed to emerge from the van in which they had been locked up for the night, police discovered that a forced labour operation was supplying fruit-pickers to local growers. Court papers describe how migrant workers were forced into debt and beaten into going to work on farms in Florida, as well as in North and South Carolina. Detectives found another 11 men who were being kept against their will in the grounds of a Florida house shaded by palm trees. The bungalow stood abandoned this week, a Cadillac in the driveway alongside a black and chrome pick-up truck with a cowboy hat on the dashboard. The entire operation was being run by the Navarettes, a family well known in the area.

Also near by was the removals van from which Mariano Lucas, one of the first to escape, punched his way through a ventilation hatch to freedom in the early hours of 18 November. With him were Jose Velasquez, who had bruises on his face and ribs and a cut forearm, and Jose Hari. The men told police they had to relieve themselves inside the van. Other migrant workers were kept in other vehicles and sheds scattered around the garden.

Enslaved by the Navarettes for more than a year, the men had been working in blisteringly hot conditions, sometimes for seven days a week. Despite their hard work, they were mired in debt because of the punitive charges imposed by their employer, who is being held on minor charges while a grand jury investigates his alleged involvement in human trafficking.

The men had to pay to live in the back of vans and for food. Their entire pay cheques went to the Navarettes and they were still in debt. They slept in decrepit sheds and vehicles in a yard littered with rubbish. When one man did not want to go to work because he was sick, he was allegedly pushed and kicked by the Navarettes. "They physically loaded him in the van and made him go to work that day. Cesar, Geovanni and Martin Navarette beat him up and as a result he was bleeding in his mouth," a grand jury was told.

The complaint reveals that the men were forced to pay rent of $20 (£10) a week to sleep in a locked furniture van where they had no option but to urinate and defecate in a corner. They had to pay $50 a week for meals – mostly rice and beans with meat perhaps twice a week if they were lucky. The fruit-pickers' caravans, which they share with up to 15 other men, rent for $2,400 a month – more per square foot than a New York apartment – and are less than 10 minutes' walk from the hiring fair where the men show up before sunrise. At least half those who come looking for work are not taken on.

Florida has a long history of exploiting migrant workers. Farm labourers have no protection under US law and can be fired at will. Conditions have barely changed since 1960 when the journalist Edward R Murrow shocked Americans with Harvest Of Shame, a television broadcast about the bleak and underpaid lives of the workers who put food on their tables. "We used to own our slaves but now we just rent them," Murrow said, in a phrase that still resonates in Immokalee today.

For several years, a campaign has been under way to improve the workers' conditions. After years of talks, a scheme to pay the tomato pickers a penny extra per pound has been signed off by McDonald's, the world's biggest restaurant chain, and by Yum!, which owns 35,000 restaurants including KFC, Pizza Hut and Taco Bell. But Burger King, which also buys its tomatoes in Immokalee, has so far refused to participate, threatening the entire scheme.

"We see no legal way of paying these workers," said Steve Grover, the vice-president of Burger King. He complained that a local human rights group, the Coalition of Immokalee Workers "has gone after us because we are a known brand". But he added: "At the end of the day, we don't employ the farmworkers so how can we pay them?"

Burger King will not pay the extra penny a pound that the tomato-pickers are demanding he said. "If we agreed to the penny per pound, Burger King would pay about $250,000 annually, or $100 per worker. How does that solve exploitation and poverty?" he asked.

Burger King is not the only buyer digging in its heels. Whole Foods Market, which recently expanded into Britain with a store in London's upmarket suburb of Kensington, has been discovered stocking tomatoes from one of the most notorious Florida sweatshop producers. Whole Foods ignored an appeal by the Coalition of Immokalee Workers to pay an extra penny a pound for its tomatoes.

In a statement Whole Foods said it was "committed to supporting and promoting economically, environmentally, and socially sustainable agriculture" and supports "the right of all workers to be treated fairly and humanely."

The Democratic candidates for the presidency do not often talk about exploited migrant workers, but there are hints that Barack Obama will visit the Immokalee fruit pickers sometime before Florida's primary election on 5 February.

Jimmy Carter recently joined the campaign to improve the lot of fruit-pickers, appealing to Burger King and the growers "to restore the dignity of Florida's tomato industry". His appeal fell on deaf ears but 100 church groups, including the Catholic bishop of Miami, joined him.

    Slave labour that shames America, I, 19.12.2007, http://news.independent.co.uk/world/americas/article3263500.ece

The exploited: 'You work so hard to end up earning hardly anything'

Published: 19 December 2007
The Independent
By Leonard Doyle

All her life Francisca Cortes has been on the move.

The daughter of a migrant fruit-picker, and a fruit-picker herself from childhood, she and her family travelled with the seasons from southern Florida to North and South Carolina, following the tomato, watermelon and orange crops ripening in the subtropical climate.

Now, at 25, she works full-time for the small human rights organisation, the Coalition of Immokalee Workers (CIW). She broadcasts nightly on a community radio show, telling migrants about their rights and news of the CIW's campaign against exploitation.

"There are very few women who work in the fields and the work is extremely hard," she says. "First, you have to get up quite early – 4am, 5am – cook your lunch, go out to try your best to find work. The workday starts at dawn or before, but you don't get to the fields until maybe 7am, and even then you have to wait two hours for the dew to dry on the fruit before you can start picking."

Always fearful of the arrival of La Migra (as the immigration officers are known) and instant deportation, they are compliant and hardworking. There are also hundreds of thousands of migrant children working as hired hands in dangerous conditions on America's farms. They put in 12-hour days for little pay.

The tomato-pickers in Immokalee (it rhymes with broccoli) get a little ticket that has a 45-cent value for every bucket picked, she explains. "You have to run and pick quickly, the most that you possibly can. You must be bent over all day long. It starts to get even more difficult as the heat rises and grows stronger at work.

"You must run to throw each bucket up to the truck. This part is particularly difficult for women, because it all has to be done at top speed because you can't lose any time. You have to suffer thirst and just keep on working, because if you stop to go to the bathroom or drink water every once in a while, that is lost time. You don't leave the fields until 6 or 7 at night.

"You have to walk home to your trailer, and get in line to shower and cook because you have to share a trailer with 11 to 12 people. By then it's 10pm, and you have to sleep a few hours before getting up early again. And that's the way it is, seven days a week, you have to work. And you work a great deal to end up earning hardly anything."

    The exploited: 'You work so hard to end up earning hardly anything', I, 19.12.2007, http://news.independent.co.uk/world/americas/article3263501.ece

In Reversal, Fed Approves Plan to Curb Risky Lending

December 19, 2007
The New York Times
By EDMUND L. ANDREWS

WASHINGTON — The Federal Reserve, acknowledging that home mortgage lenders aggressively sold deceptive loans to borrowers who had little chance of repaying them, proposed a broad set of restrictions Tuesday on exotic mortgages and high-cost loans for people with weak credit.

The new rules would force mortgage companies to show that customers can realistically afford their mortgages. They would also require lenders to disclose the hidden sales fees often rolled into interest payments, and they would prohibit certain types of advertising.

Borrowers would be able to sue their lenders if they violated the new rules, though home buyers would be allowed to seek only a limited amount in compensation.

“Unfair and deceptive acts and practices hurt not just borrowers and their families,” said Ben S. Bernanke, chairman of the Federal Reserve, “but entire communities, and, indeed, the economy as a whole.”

The new regulations, expected to be approved in close to their proposed form after a three-month period for public comment, amount to a sharp reversal from the Fed’s longstanding reluctance to rein in dubious lending practices before the subprime market collapsed this summer.

The proposed changes, which do not apply to standard mortgages for borrowers with good credit, stopped short of banning all heavily criticized practices in subprime lending and did not go as far as many consumer groups had sought. But they won praise as worthwhile steps from some industry critics who had long complained that the Federal Reserve under its former chairman, Alan Greenspan, persistently ignored signs of trouble.

“Reading these proposals today is almost painful,” said Dean Baker, co-director of the Center for Economic Policy Research, a liberal research group in Washington. “These are all just simple, common sense regulation. Why couldn’t Greenspan have done this seven years ago?”

If the measures had been in place earlier, they would have applied to as many as 30 percent of all mortgages made in 2006.

Some advocacy groups that had warned for years about reckless practices said the Fed’s move was too little and too late.

“The Federal Reserve’s proposed guidance is riddled with loopholes and exceptions that will undermine its effectiveness,” said Deborah Goldstein, executive vice president of the Center for Responsible Lending, a nonprofit group in Durham, N.C. “The proposals fall far short of what was needed, and in some ways fall short of where the industry was already headed.”

The new rules would do nothing to help the hundreds of thousands of people who are either already defaulting on subprime mortgages or are likely to lose their homes when their introductory teaser rates expire and their monthly payments jump by 30 percent or more.

Soaring default rates among subprime borrowers have already caused a crisis on Wall Street, all but shutting down the subprime mortgage market since August because lenders could no longer raise the cash to make new loans. The Bush administration has pushed for voluntary agreements aimed at avoiding some, but far from all, of the foreclosures expected next year.

The American Banking Association praised the Fed’s action as “an important proposal that would make a significant difference in protecting mortgage borrowers.” But the industry group warned that some provisions might go too far. “We worry that replacing important lending flexibility with rigid formulas might also limit lending to some creditworthy borrowers.”

In Congress, leading Democratic lawmakers said the Fed had been too cautious.

Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, said the central bank showed it was "not a strong advocate for consumers." Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, called the proposal a "step backward."

The House recently passed a bill last month that would impose even tougher restrictions on many subprime practices that the Fed addressed on Tuesday. The Senate has not acted on a bill, but Mr. Dodd recently introduced a measure with many of the same goals as the House bill.

Despite their limitations, the central bank’s new proposals would nonetheless cut a wide swath across the nation’s fragmented mortgage system. They would govern practices for all mortgage lenders, regardless of whether they are banks, thrift institutions or independent mortgage companies. And they would apply regardless of whether a lender is supervised by federal or state regulators.

The most important indicator that the Fed wanted to throw down the gauntlet is in how it defined the mortgages that would be subject to special consumer protection.

Under its existing rules, based on the Home Ownership Equity Protection Act of 1994, the Fed’s extra protections applied to less than 1 percent of all mortgages — those with interest rates at least eight percentage points above prevailing rates on Treasury securities.

The new rules, by contrast, invoked broader legal authority to apply to any mortgage with an interest rate three percentage points or more above Treasury rates. Fed officials said that would cover all subprime loans, which accounted for about 25 percent of all mortgages last year, as well as many exotic mortgages — known in the industry as “Alt-A” loans — made to people with relatively good credit scores.

Under the new rules, such borrowers would have to document their incomes, supply tax returns, earnings statements, bank records or other evidence. Lenders would not be allowed to qualify a person based only on their ability to pay the initial teaser rate.

The proposal would essentially end the practice of allowing those with poor credit to apply for “stated income” loans, often known as “liar’s loans,” which do not require borrowers to provide evidence of their incomes and assets. And it would restrict mortgages with future monthly payments beyond those that could be justified by a borrower’s projected earnings.

The Fed proposal would still leave some room for flexibility. Lenders would have to provide “reasonably reliable evidence” of a person’s income, a definition that Fed officials said would allow small business owners and others whose income may be erratic or difficult to confirm to arrange a subprime mortgage.

The Fed also refused to prohibit the much-criticized subprime lending practice of big prepayment penalties. Prepayment penalties, which can cost thousands of dollars, often block people from switching to a cheaper mortgage for two years or longer.

Mortgage lenders argue that prepayment penalties are often essential, because they provide investors with assurance of earning more than just the low teaser rates. But consumer groups have argued that the penalties can trap borrowers in expensive loans and that many home buyers do not properly understand them.

Under the Fed proposal, lenders would still be allowed to demand prepayment penalties, but the penalties would have to expire at least 60 days before a loan’s introductory rate was scheduled to reset at a higher level.

The new rules would also make it more difficult for lenders to include hidden sales fees, which are usually paid to the mortgage broker. Many subprime lenders tell borrowers they will not have to pay any fees, or even any costs for services like appraisals, but include those fees in what is called a “yield-spread premium” on the interest rate.

The Fed proposal would not prohibit yield-spread premiums but would require that a lender disclose the exact amount of the fees and have the borrower agree to the fees in writing.

John Taylor, president of the National Community Reinvestment Coalition, a housing advocacy group, said simply disclosing the fees was not enough because home buyers were already inundated with a blizzard of disclosure forms to sign and can easily miss the significance of what they are approving.

Borrowers “shouldn’t need to be a lawyer or financial expert,” Mr. Taylor said, “to protect themselves from unfair and deceptive lending.”

    In Reversal, Fed Approves Plan to Curb Risky Lending, NYT, 19.12.2007, http://www.nytimes.com/2007/12/19/business/19subprime.html?hp

A Crisis Long Foretold

December 19, 2007
The New York Times

A truism of crisis management is that most seemingly out-of-the-blue disasters could have been prevented if someone had paid attention.

An article in The Times on Tuesday by Edmund L. Andrews leaves no doubt that the twin crises of the subprime lending mess — mass foreclosures at one end of the economic scale and a credit squeeze afflicting the financial system — are rooted in the willful failure of federal regulators to heed numerous warnings.

The Federal Reserve is especially blameworthy. Starting as early as 2000, former Fed Chairman Alan Greenspan brushed aside warnings from another Fed governor, Edward M. Gramlich, about subprime lenders who were luring borrowers into risky loans. Mr. Greenspan’s insistence, to this day, that the Fed did not have the power to rein in such lending is nonsense.

In 1994, Congress passed a law requiring the Fed to regulate all mortgage lending. The language is crystal clear: the Fed “by regulation or order, shall prohibit acts or practices in connection with A) mortgage loans that the board finds to be unfair, deceptive, or designed to evade the provisions of this section; and B) refinancing of mortgage loans that the board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower.”

Yet, the Fed did nothing as junk lending proliferated — including loans that were unsustainable unless house prices rose in perpetuity, riddled with hidden fees and made to borrowers who could not repay. Mr. Greenspan has said that the law was too vague about the meaning of “unfair” and “deceptive” to warrant action.

The Fed has also disappointed since the current chairman, Ben Bernanke, took over in early 2006. It was not until the end of June 2007 — after the damage was done — that the Fed and other federal regulators issued official subprime guidance. On Tuesday, the Fed issued another set of proposals. Among those, subprime lenders would have to verify a borrower’s ability to repay and include mandatory tax and insurance costs in the monthly payment. In at least one key respect — enforcing the ability-to-repay standard — the proposal is weaker than earlier Fed guidance. Congress is considering other protections that are stronger in many ways.

When all the truth is out, the Fed will have company in the hall of shame. The Office of the Comptroller of the Currency, for example, blocked states from investigating local affiliates of national banks for abusive lending.

If the regulators had done their jobs, there might have been no lending boom and no extraordinary riches for the lenders and investors who profited from unfettered subprime lending. Neither would there be mass foreclosures, a credit crunch and a looming recession.

This crisis didn’t appear unexpectedly. And it won’t go quickly away. Congress and the next administration will have a lot of work ahead to clean up the subprime mess — once and for all.

    A Crisis Long Foretold, NYT, 19.12.2007, http://www.nytimes.com/2007/12/19/opinion/19wed1.html

Canadians Snapping Up American Homes

December 15, 2007
Filed at 3:21 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

CHANDLER, Ariz. (AP) -- Two hours after his flight landed in Phoenix, Calgary resident Doug Farley already was cruising the city's vast stuccoed suburbs in search of the one attraction Canadians can't seem to get enough of these days, cheap homes.

There are thousands of them here: almost new, unoccupied and dropping in value. The mortgage meltdown, combined with a surging Canadian currency, has Farley -- and many of his countrymen -- dreaming of winter golf on grass that's always green.

''My dollar's the same as your dollar, finally,'' Farley said, grinning as he peered through a pool fence at a sparsely populated condominium complex in Chandler, a Phoenix suburb.

For moderate-income Canadians like Farley, the race is on to take advantage of the ''loonie,'' which in September reached parity with the U.S. dollar for the first time since 1976. Many are combing the Internet for anxious American home sellers and looking with an investor's eye at the condos they rented while on vacation in sunbelt states.

''Now it's more than just the snowbird coming down and staying in a condo. It's people looking for business opportunity,'' said Frank Nero, president of the Beacon Council, Miami-Dade County's economic development arm in south Florida.

Canadian condo-builder Solterra Group of Companies also is riding the surge in the Canadian economy as it plans to snatch large chunks of land in Las Vegas. Michael Bosa, the company's vice president for development and acquisition, said the loonie has bolstered his company's bids.

''We're looking now aggressively,'' Bosa said. ''We think we'll see more opportunities in the next six to eight months.''

In Arizona, Jason Sirockman of Edmonton, Alberta, said he watched as home owners flooded the market with 58,000 homes, more than twice the amount in 2005 when home values peaked.

Now's the time to buy, he said. Alberta, a three-and-a-half-hour flight from Phoenix, is experiencing a modern-day gold rush from booming work in its vast oil sands.

''Fifteen of my friends are on buying trips down here, and we're all cheap,'' Sirockman said. He brought his family to Scottsdale this month while he submitted a lowball all-cash offer for a three-bedroom home.

''I don't want to take advantage of a guy who's having trouble in the market and is losing his shorts,'' Sirockman said. ''But I have no problem with a guy from California who bought on spec and has five houses in Arizona and never lived in them.''

Single family homes and condos in the Phoenix metro area now sit an average of 99 days before getting sold. That's three times the wait for homes and four times the wait for condos compared with two years ago, according to the Arizona Regional Multiple Listing Service.

The market has shifted totally in the buyer's favor, especially those offering cash, said Jeff Russell of Alberta. Last month, Russell snapped up a patio home next to a golf course in Scottsdale with a $299,000 check. It was listed at $463,000.

''I was actually going to come down here and buy a seven-series BMW because cars are ridiculously cheap here,'' he said. ''But I discovered that, forget cars, houses are on deep discount. I could never get anything on a golf course as nice in Canada for this type of money.''

Real estate agents in Phoenix, especially those with Canadian ties, are hustling to reach potential buyers up north while the American housing market and the U.S. dollar continue to slump.

Rick Morielli, a former real estate broker from Toronto, received his green card in November, posted a Canadian realty Web site, took out some newspaper ads in Canada, and already he has about a dozen clients looking for homes.

''There's a real 'Wow' factor here for Canadians,'' said Morielli, who now lives in Phoenix.

''When I take them to a brand new subdivision, and for $210,000 can get them four bedrooms, 2,000 square feet, all appliances, brand new, that's something they haven't been able to buy in Canada for 10 or 15 years. In my opinion, everyone should be buying now.''

Mark Dziedzic, a former financial planner from Toronto, now sells homes full time in Arizona and holds seminars in Canada to push the American housing market on fellow Canucks. Dziedzic said he's had to hire more staff at his office to keep up with the influx of Canadian investors.

''When (the Canadian dollar) hit a dollar ten, it really created a real buzz for Canadians, not only those looking to buy second homes but we're also seeing it from buying purely from an investment standpoint,'' Dziedzic said.

Still, with so many homes on the market, the interest by Canadians isn't about to fix the housing slump in Arizona, real estate consultant Elliott D. Pollack said.

''You have a massive oversupply in the face of a lower demand,'' Pollack said. ''And you're going to have to work off those excess units. And to do that you'll need two or three years.''

That's fine with investors like Farley, who are still learning the neighborhoods.

As he searched for his new winter home, Farley kept an eye out for condos near a pool. When it got cold in Calgary, that's where his family would be.

''I just want the ability to go outside, you know, the ability to go for a walk,'' Farley said. He left for Calgary with a few strong choices, but he didn't bid on anything.

Sirockman also returned to Canada without a house after the owner of the Scottsdale home turned down his offer. No worries. Sirockman told the seller there were a thousand other homes like his on the market, and someone was going to deal.

As he was about to get on the flight back to Edmonton, Sirockman called his friends, and they told him it's 28 below zero back home.

''That's what I'm flying into,'' he said with a sigh. ''I brought a big down-filled jacket with me. I'm looking like an idiot getting onto the plane.''

------

AP Business Writer Adrian Sainz contributed to this story.

    Canadians Snapping Up American Homes, NYT, 15.12.2007, http://www.nytimes.com/aponline/business/AP-Housing-Slump-Canadians.html

Gold Slides Below $800 an Ounce

December 14, 2007
Filed at 11:47 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Gold prices tumbled Friday as the dollar strengthened on expectations that rising inflation will keep the Federal Reserve from lowering interest rates further, despite an economic slowdown.

The dollar bounced against a basket of currencies, rising to its highest level in more than two months and putting pressure on commodities prices including oil, gasoline, copper and gold.

Inflation rose dramatically in November for both consumers and producers. The Labor Department on Friday said consumer inflation climbed last month by the largest amount in more than two years amid higher gasoline prices and rising food costs. Meanwhile, high gas prices helped drive wholesale inflation to the highest level in more than 30 years.

The Labor Department's consumer price index rose 0.8 percent last month, the biggest one-month increase since a 1.2 percent surge in September 2005. On Thursday, the agency said its producer price index, which measures wholesale inflation, rose by 3.2 percent in November.

With the economy slowing, there is a growing fear that stagflation could take hold -- an unfavorable combination of sluggish economic growth and rising inflation that could make it harder for the Fed to cut rates.

The Fed lowered rates Tuesday for the third time this year. Lower rates can stimulate business growth, but they also can undercut the dollar and exacerbate inflation.

February gold lost $7.50 to $796.50 an ounce at midday on the New York Mercantile Exchange, following a nearly $15 per ounce drop a day earlier. March silver fell 27.2 cents to $13.965 an ounce.

''I think that fear is out there right now of a slowing economy with inflationary concerns,'' said Stuart Kaufman, senior market strategist with Lind-Waldock, a division of MF Global. ''I think that's what is permeating the markets right now.

The dollar is trading at its highest since early October, Kaufman said.

The euro slid to $1.4441 from $1.4624 late Thursday.

Oil prices fell amid concerns that rising inflation could put the squeeze on consumers and crimp energy demand. The Labor Department's report showed gas prices at the pump surged 9 percent in November.

Light, sweet crude for January fell 90 cents to $91.35 a barrel on the Nymex.

Gasoline futures shed 1.02 cents to $2.3642 a gallon, while heating oil futures edged up 0.77 cent to $2.6224 a gallon.

Agricultural futures were mixed on the Chicago Board of Trade, with corn and soybeans up slightly while wheat prices fell.

Industrial metals also traded in a mixed range. Nickel and copper rose on the London Metal Exchange, while lead prices slipped.

March copper rose 0.4 cent to $2.965 a pound on the Nymex.

    Gold Slides Below $800 an Ounce, NYT, 14.12.2007, http://www.nytimes.com/aponline/business/AP-Commodities-Review.html

Consumer Prices Rise 0.8% in November

December 14, 2007
The New York Times
By MICHAEL M. GRYNBAUM

Inflation, which has remained tame even as oil prices soared in recent months, may finally be on the rise.

Consumers paid 0.8 percent more for a host of common retail goods in November, the biggest monthly increase since Hurricane Katrina, the government reported on Friday. A less volatile measure of the Consumer Price Index, which excludes food and energy costs, ticked up 0.3 percent, suggesting that price increases are bleeding into the broader economy.

A pick-up in prices will complicate efforts by the Federal Reserve as it tries to stave off a substantial slowdown in economic growth. Central bankers may be more reluctant to lower interest rates, a key economic stimulus, out of concern that inflation will flare up.

“It’s certainly getting ugly out there,” wrote Bernard Buhmohl, managing director of the Economic Outlook Group, in a research note this morning. “The rise in the core inflation will likely prevent the Fed from being generous with future interest rate cuts.”

Over the last 12 months, prices have risen 4.3 percent, the fastest pace since last summer, the Labor Department said. A report yesterday showed prices at the producer level rose in November at their fastest rate since in nearly 35 years, a signal that cost pressures will only increase in the months ahead.

For the Fed, a rise in consumer costs throws yet another wrinkle into the current economic puzzle.

Problems in the credit and housing markets have plagued the lending industry while an ailing dollar and sky-high oil costs continue to curb consumers’ spending power. The central bank has lowered its benchmark interest rate by a full percentage point since September, but further cuts could be offset by bubbling inflation, which some bankers see as a greater risk to growth.

A separate inflation gauge, the personal consumption expenditures core price index, has stayed near 2 percent, at the high end of the Fed’s so-called comfort zone. The November report will be released next Friday.

Surging energy costs accounted for much of last month’s gain, as consumers faced a 9.3 percent markup at the gasoline pump after a 1.4 percent increase in October. Food costs held steady but the price of clothing rose.

    Consumer Prices Rise 0.8% in November, NYT, 14.12.2007, http://www.nytimes.com/2007/12/14/business/14cnd-econ.html?hp

Fed Joins Central Banks in Loan Plan

December 12, 2007
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — The Federal Reserve announced Wednesday it is coordinating with other central banks to deal with the global credit crunch.

The central bank said it had reached an agreement with the European Central Bank as well as the Bank of England, the Bank of Canada and the Swiss National Bank to address what it termed “elevated pressures” in credit markets.

The Fed said that it was creating a temporary auction facility to make funds available to banks and was also setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.

The Fed said that commercial banks would be able to bid at auction for funds that would be drawn from the Temporary Auction Facility. The money would be intended to help cash-strapped banks raise money needed to keep making loans to businesses and consumers.

The action represented another step by the Fed to deal with a serious credit crunch stemming from the tightening of bank lending standards in the wake of multibillion dollar losses from a rising tide of defaults on mortgage loans.

The Fed’s announcement came a day after it cut a key interest rate for the third time this year. That quarter-point rate cut disappointed Wall Street, which pushed the Dow Jones industrial average down by 294 points. Investors had hoped for a bolder response to the growing housing and mortgage crisis in the United States.

The Fed said all banks judged to be in generally sound financial condition by their Fed regional bank would be eligible to participate in the auctions for funds.

The first auction of $20 billion was scheduled for next Monday, followed by another auction of $20 billion on Dec. 20. The third and fourth auctions will be on Jan. 14 and 28.

The Fed said that the new auction process should “help promote the efficient dissemination of liquidity” when other lines of credit were “under stress.”

The experience gained from the four scheduled auctions would be “helpful in assessing the potential usefulness” of this new process to provide funds to U.S. banks, the central bank said.

It said that the temporary swap arrangements being set up would provide up to $20 billion in reserves for the European Central Bank and up to $4 billion for the Swiss National Bank. The reserves would be available for a period of up to six months.

Since the global credit crunch hit with force in August, other central banks as well as the Federal Reserve have been injecting massive amounts of money into the banking system in an effort to keep credit flowing.

However, those efforts have only been partially successful. Many businesses and consumers report rising trouble in obtaining loans as banks become more fearful about extending credit in the wake of a surge in bad loans stemming from the U.S. housing crisis.

    Fed Joins Central Banks in Loan Plan, NYT, 12.12.2007, http://www.nytimes.com/aponline/business/apee-subfed.html?hp

Slowing Job Growth Seen as Ominous Sign for Economy

December 8, 2007
The New York Times
By PETER S. GOODMAN and MICHAEL M. GRYNBAUM

The nation gained a modest 94,000 jobs in November, the Labor Department reported yesterday, pulling back considerably from the previous month in the clearest sign yet that the American economy was headed for a substantial slowdown.

But the jobs report, a much-anticipated indicator of the health of the economy, also provided some comfort that the United States had not slipped into a recession and might not be weakening as rapidly as some experts feared. With business leaders expressing uncertainty about the prospects for further growth, analysts said, a better view of the direction of the economy was not likely to emerge until next year.

“The expansion is intact, but increasingly frayed,” said Mark Zandi, chief economist at Moody’s Economy.com. The job creation numbers are “indicative of a very fragile economy that will come undone unless conditions improve soon.”

The unemployment rate held steady at 4.7 percent for the third consecutive month, as a survey of households found strong growth in the number of people saying they found new jobs last month.

On Wall Street, markets barely moved yesterday, absorbing the jobs data with ambivalence. The employment picture offered assurance that the economy was not plummeting and might continue to expand, sustaining corporate profits. But those very assurances sowed worry that the Federal Reserve would feel less pressure to ease interest rates aggressively when it convened on Tuesday.

A number of market participants have urged a half-point cut in the Fed’s key throttle control over the banking system, currently at 4.5 percent, but a stronger job market may make a quarter-point cut in the federal funds rate more likely.

Central bankers have signaled that they intend to try to avert a recession with looser credit, but remain wary of fueling inflation with an unnecessarily sharp cut in rates — particularly in a period of high oil costs and rising food prices.

“Financial markets can kiss goodbye any chance of a half-point cut,” said Ellen Zentner, United States macroeconomist at Bank of Tokyo-Mitsubishi in New York. “The kind of average jobs growth we’ve been getting, in the neighborhood of 100,000 per month, is like butter to the Fed, which looks to keep job creation going, but not so much so that wage inflation becomes a concern.”

Average hourly wages among rank-and-file workers — about four-fifths of the work force — rose 8 cents, to $17.63 last month, according to the jobs report. But the November wage came against a more pronounced backdrop pointing to a longer-term erosion of spending power for most American workers.

While many Americans at the top of the income ladder have done well, wage gains in the current economic expansion have been generally weak. The inflation-adjusted hourly wage for rank-and-file workers has risen by just a penny over the last four years, from $17.62 in November 2003. Over the last year, they have actually fallen.

“Workers are still very anxious about their economic security,” said Andrew Stettner, interim director of the National Employment Law Project in New York.

The biggest job losses were concentrated in housing, which has been hit hard this year by the collapse of the real estate bubble. But employment in services rose, with business and professional services up a healthy 30,000. Education and health gained jobs and retail payrolls broke a string of three consecutive losses to increase by more than 24,000.

All the figures are adjusted to take account of seasonal variations and include the Labor Department’s best estimate of jobs created by new firms, which makes them subject to potentially large revisions next year.

In Tucson, Sue Foust was sifting through options for new jobs yesterday, having been laid off from an AOL software testing site, where she worked for the last decade. Ms. Foust, 41, had been making about $65,000 a year as a software quality assurance engineer, she said. Comparable prospects seemed poor, and she was growing resigned to finding secretarial work.

“There’s plenty of jobs if you want to make $10 an hour,” Ms. Foust said. “I’ll probably wind up taking something that pays half of what I used to.”

A general sense of insecurity continues to gnaw at the economy, with consumer confidence dropping to its lowest level in more than two years, according to a survey released yesterday by the University of Michigan.

Consumer spending makes up 70 percent of the American economy. Economists worry that a weakening job market will translate into less spending, which could deliver a downward spiral: weaker investment as sales dry up, and less hiring.

Though yesterday’s report eased worries that such a spiral had already begun, it did little to mute concerns about the future.

“It tells you that we’re not in a recession now,” said Jan Hatzius, chief United States economist at Goldman Sachs. “There was a question about that before.”

The greatest concern continues to revolve around whether the real estate downturn and the subprime mortgage crisis will ripple out to inflict damage on the broader economy. Yesterday’s data lent credence to such fears.

A year ago, the number of American jobs in financial services and construction was holding roughly steady, according to Mr. Zandi. Yet by the middle of this year, those two areas were shedding about 25,000 jobs each month. In October, they lost 50,000 jobs. In November, the number had swelled to 75,000.

“These are high-paying jobs that are simply lost as the economy is losing steam,” said Brian Fabbri, chief economist at BNP Paribas in New York.

Just this week, another construction supply company, 84 Lumber Company, shut down two stores —one in Redding, Calif., the other in Manchester, Tenn. — laying off 14 people. The company had already laid off 75 people at its Pennsylvania headquarters, bringing its total work force down to about 9,000, about 200 fewer than a year ago.

“Certainly our sales are going to be off from a year ago,” Jeff Nobers, the company’s vice president for marketing, said. “There’s probably a little further drop coming. What we’ve tried to do is adjust to that now.”

Though the weak dollar has helped American exports grow, manufacturing jobs continued to shrink in November, down by 11,000.

Visteon, the auto parts maker, has been shifting work to Mexico. Yesterday, at a factory in Connersville, Ind., 195 workers clocked out for the last time, bringing to about 800 the number of people who have lost their jobs there this year. The last 100 workers are to be eliminated on Dec. 21, as Visteon shuts the plant down for good.

Yesterday’s jobs number was down markedly from the revised figure of 170,000 jobs created in October. It slightly topped recent expectations, though: Economists had raised their estimates for yesterday’s numbers after a separate tally, the ADP National Employment Report, showed an unexpected surge in November payrolls.

The Labor Department sharply dropped its estimate for job growth in September to 44,000, from an original estimate of 110,000 jobs. That makes September the worst month for job growth since early 2004.

Over all, the report reinforced a general downward slide in the labor market that has been unfolding for two years.

In 2005, the economy generated an average of 212,000 jobs each month. Last year, the pace slowed to 189,000. In the first 11 months of this year, the rate has dropped to 118,000 a month. Yesterday’s report nudged the figure down even more.

The picture becomes clearer after putting aside hiring by the government. The private sector added 64,000 jobs in November. Last year, the private sector was still creating 169,000 jobs a month.

“It’s the best we could hope for,” Ms. Zentner said. “At least the bottom has not dropped out of the labor market.”

David Leonhardt contributed reporting.

    Slowing Job Growth Seen as Ominous Sign for Economy, NYT, 8.12.2007, http://www.nytimes.com/2007/12/08/business/08econ.html

Employers Added 94,000 Jobs in November

December 7, 2007
The New York Times
By MICHAEL M. GRYNBAUM

The economy added 94,000 jobs last month, the Labor Department said today, a sign of resilience that may ease fears of a recession but open the door for more rate cuts from the Federal Reserve.

The rise in payrolls, after an upwardly revised 170,000 gain in October, was neither a disappointment nor exceptionally strong. It suggests the labor market is treading water even as the deteriorating housing sector continues to drag on construction and manufacturing jobs.

Economists had raised their estimates for today’s report after a separate employment survey showed an unexpected surge in November payrolls. But the Labor Department’s report, considered a bellwether for the broader economy, showed more modest gains, with a jump in service-sector and government jobs but declines in factory and construction payrolls.

The report reinforces investors’ expectations that the Fed will lower interest rates again at its meeting on Tuesday. Some market participants have called for an aggressive half-point cut, but continued strength in the job market may make a quarter-point cut more likely. Central bankers have said they intend to avert a recession, but several are wary of sparking inflation with an unnecessarily sharp cut.

Average hourly wages among rank-and-file workers — about four-fifths of the work force — ticked up 8 cents, to $17.63, keeping wage growth only slightly ahead of rising prices. After taking inflation into account, wages have fallen over the last year, from roughly $17.69 last November.

Wage gains in the current expansion have been weaker than in most expansions. Over the last four years, the inflation-adjusted hourly wage has risen by just a penny, from $17.62 in November 2003.

The unemployment rate held steady at 4.7 percent for the third consecutive month.

Though October’s payroll gain was revised up slightly, the Labor Department sharply dropped its estimate for job growth in September to 44,000, from an original estimate of 110,000 jobs. That makes September the worst month for job growth since early 2004.

    Employers Added 94,000 Jobs in November, NYT, 7.12.2007, http://www.nytimes.com/2007/12/07/business/07cnd-econ.html?hp

No Quick Fix for Subprime Mortgages

December 7, 2007
Filed at 11:14 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Be ready to wait if you want to get information from a toll-free hot line about freezing the interest rate on your subprime mortgage.

Minutes after President Bush outlined a plan to help strapped homeowners, callers were told to have patience until a counselor could answer their questions and ''devote as much time to you as necessary.''

But, once they do get through, homeowners may not find the answers they sought.

One caller to the hot line (1-888-995-HOPE) was told there would be ''lots of hoops to jump through'' to obtain the five-year freeze. The rate hold goes to the heart of the relief effort for people with subprime mortgages, which are loans offered to borrowers with tarnished credit or low incomes.

Even President Bush acknowledged the plan is ''no perfect solution.'' Treasury Secretary Henry Paulson said it was not a ''silver bullet.''

Only a fraction of the homeowners who face huge jumps in their mortgage payments appear likely to be helped by the plan, negotiated by the Bush administration, to freeze the low introductory rates on their subprime loans for five years. After that, they could be in the same position again.

Homeowners dialing up their mortgage company to get their current rate frozen could be disappointed. The White House plan does not force mortgage companies to give eligible homeowners a break. It is voluntary.

The White House on Friday defended the system and its eligibility requirements.

''I wouldn't call them `hoops,''' White House deputy press secretary Tony Fratto said. ''I think we are trying to make sure, as we outlined yesterday, that we're getting at the right population that can best be served by this program.''

Bush, announcing the initiative Thursday, said 1.2 million people could be eligible for relief. Aid includes the rate freeze and helping people refinance into more affordable mortgages. The Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending, estimates that just 145,000 families will qualify for the rate freeze. The criteria are too strict, it says.

The White House plan is aimed at stemming foreclosures, which have shot up to record highs as the housing market has gone from boom to bust.

Subprime borrowers have been hardest hit by the meltdown. Initially low interest rates that reset to much higher rates have clobbered those borrowers. Nearly 2 million adjustable-rate subprime mortgages will reset from introductory rates of around 7 percent to 8 percent to much higher rates this year and next. That raises the specter of even more people being forced out of their homes because they cannot keep up with their monthly payments.

Rising home foreclosures are a headache for politicians and a danger for the economy.

Bush tried to shift blame for the crisis to the Democratic-led Congress.

''The Congress has not sent me a single bill to help homeowners,'' Bush said.

One measure would give the Federal Housing Administration more flexibility; a second would change the tax laws temporarily to help people who have a portion of their mortgage forgiven by banks.

Sen. Charles Schumer, D-N.Y., complained the criteria for Bush's mortgage freeze are too narrow to help most distressed homeowners and worried that legal challenges by investors might stall the effort.

''While we certainly all hope this will be a shot in the arm for the housing slump, it is hardly a panacea,'' Schumer said. ''There are too many families who may be left out, too much left up to the voluntary willingness of the private sector and too little disclosure and transparency to ensure families who do qualify are being helped.''

Under the plan outlined Thursday, the rate freeze offer would be available only to people who have not missed any mortgage payments at their introductory interest rate. It also only would apply to loans taken out between 2005 and this past July 31 and scheduled to rise to higher rates in Jan. 1, 2008, and July 31, 2010. To make sure speculators don't get the break, the rate freeze offer applies only to people living in their homes.

The idea behind the administration-negotiated plan is that the five-year freeze will buy time for the housing sales and prices to start rising again. Such a rebound would enable homeowners to refinance their current adjustable rate mortgages into fixed-rate loans with more affordable monthly payments. But some people who want to buy homes and have been priced out of the market are upset that there's no help in sight for them.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association in the third quarter, a record, 18.81 percent of them were past due. A record, 4.72 percent of the loans entered into the foreclosure process during that period.

Meanwhile, there still is the possibility that investors, who were counting on bigger returns from the higher rate resets, will balk at extending the duration of the lower rate.

George Miller, executive director of the American Securitization Forum, whose members include investors, ratings agencies and other financial players, backed the White House's effort and developed streamlined procedures for lenders to follow when sorting through borrowers' requests for relief. He was hopeful lawsuits could be avoided, but he struck a note of caution.

''Certainly, there is no complete insulation from legal exposure,'' Miller said.

    No Quick Fix for Subprime Mortgages, NYT, 7.12.2007, http://www.nytimes.com/aponline/us/AP-Mortgage-Crisis.html

News Analysis

On Mortgage Relief, Who Gains the Most?

December 7, 2007
The New York Times
By EDMUND L. ANDREWS

WASHINGTON, Dec. 6 — At least one thing is clear about President Bush’s plan to help people trapped by the mortgage meltdown: it is an industry-led plan, not a government bailout.

Although Mr. Bush unveiled the plan at the White House on Thursday, its terms were set by the mortgage industry and Wall Street firms. The effort is voluntary and it leaves plenty of wiggle room for lenders. Moreover, it would affect only a small number of subprime borrowers.

The plan was the target of criticism from consumer advocates who said its scope was too narrow, and from investment firms, who said it went too far. Others warned that the plan, by letting some stretched homeowners off the hook, could encourage more reckless borrowing in the future.

“The approach announced today is not a silver bullet,” said Treasury Secretary Henry M. Paulson Jr., who hammered out the agreement. “We face a difficult problem for which there is no perfect solution.”

The heart of Mr. Bush’s plan is a cautious attempt to help troubled homeowners by persuading financiers to freeze mortgages at low introductory rates for five years, but without actually forcing the hands of lenders and investors who hold the mortgages.

One of the financial industry’s lead negotiators estimated that at most 20 percent of subprime borrowers whose payments will increase sharply over the next 18 months — 360,000 out of 1.8 million people — would qualify for rapid consideration of a special five-year freeze on interest rates.

The number of people who actually obtain help would be smaller, because each borrower would face tests aimed at weeding out those considered too hopelessly in debt and those who make too much money to justify relief.

In one curious twist, the plan could eliminate many who have good credit scores or managed to improve their credit scores, because the good ratings would be a sign they do not need help.

“Talk about moral hazard,” remarked Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “We’ve all told people, don’t go any more deeply into debt. Now we’re saying that people who go more deeply into debt will have an advantage over people who don’t go more deeply into debt.”

The administration’s theory is that there is a “sweet spot” in the market where it makes more financial sense for lenders to offer some relief than it does to foreclose on homeowners.

Most analysts agree there is a sweet spot of some sort. Investors typically lose 40 percent or 50 percent on homes that go into foreclosure, and the cost of shielding borrowers from a big jump in rates can be much less.

“I think there is a sweet spot,” said Bert Ely, a banking consultant in Alexandria, Va. “But I worry that the sweet spot is much smaller than people think it is. And as housing prices continue to decline and debts pile up, I fear the sweet spot will shrink.”

Administration officials estimate about 500,000 subprime borrowers are in danger of losing homes in the next 18 months as their low teaser rates expire and their monthly payments jump by 30 percent or more. Outside analysts warn the number of foreclosures could be much higher.

The Mortgage Bankers Association reported that the number of new foreclosure proceedings hit a record in the third quarter and that the delinquency rate on mortgages climbed to the highest level since 1986. The biggest problem, according to the survey, was in subprime loans, which are typically made at higher interest rates to people with shaky credit records or weak incomes.

But Mr. Paulson and the president’s other top economic advisers have remained staunchly opposed to anything that resembled a government-financed bailout for people who took out foolish mortgages or investors who bought the mortgages.

As a result, administration officials have walked a narrow line. They have held meetings bringing together mortgage-servicing companies and groups representing investors holding mortgages.

Instead of pressuring the industry to come up with specific relief, Mr. Paulson pushed the players to come up with a streamlined approach for deciding when to modify loan terms.

But Tom Deutsch, deputy director of the American Securitization Forum, which represented investment funds in the negotiations, made it clear that any rate freeze would be strictly voluntary and based on what investors decided was in their self-interest.

“This is not a government bailout program,” Mr. Deutsch said. “This is an industry-led framework for providing the best market standards and practices. There is no mandate here.”

President Bush and other top administration officials emphasized that the plan could help as many as 1.2 million subprime borrowers — about two-thirds of all people with subprime loans.

But that estimate covers hundreds of thousands of borrowers who are believed to qualify without any extra help for cheaper conventional mortgages, like those insured by the Federal Housing Administration.

Nonprofit housing groups that try to help troubled homeowners renegotiate mortgages were underwhelmed by Mr. Bush’s plan.

The Greenlining Institute, a housing advocacy group in California that began raising alarms about subprime loans nearly four years ago, estimated that only 12 percent of all subprime borrowers and only 5 percent of minority homeowners would benefit from the rate freeze. The Center for Responsible Lending, a nonprofit group that supports homeownership, said the freeze would help only about 145,000 people.

“This grossly inadequate plan is likely to harm the president’s desire to close the minority homeownership gap and create an ownership society,” said Robert Gnaizda, general counsel for the Greenlining Institute.

Some Wall Street analysts were equally unenthusiastic. “This plan only really amounts to a set of recommendations for lenders that is sure to meet some resistance from investors” in the mortgage-backed securities, wrote Paul Ashworth, an economist at Capital Economics.

Indeed, there were rumblings of rebellion among some institutional investors. “Why would anybody in his right financial mind agree to a five-year price freeze, especially when we’re staring in the face of possible inflation?” asked Roger W. Kirby, managing partner at Kirby McInerney, which has represented investors in class-action lawsuits over securities. “Mr. Paulson has overestimated the generosity of people on Wall Street.”

    On Mortgage Relief, Who Gains the Most?, NYT, 7.12.2007, http://www.nytimes.com/2007/12/07/business/07mortgage.html?hp

Some Needing Mortgage Aid Won’t Get It

December 7, 2007
The New York Times
By DAVID STREITFELD

When Jirina Koy heard that President Bush was announcing a freeze yesterday on mortgage interest rates, the Stockton, Calif., homeowner felt a flicker of hope.

It was quickly extinguished. After calling a nonprofit housing assistance center, Ms. Koy learned that her mortgage, for all the trouble it was causing her, was not likely to be one of those qualifying for relief.

Mortgage experts say there will be many borrowers like Ms. Koy. The exact guidelines of the rescue plan are still fuzzy, but it is clear that many of those who need aid the most will not get it. The number of households facing foreclosure in the next two years is estimated to exceed two million.

“I’m glad someone’s getting help, but I wish it were me,” said Ms. Koy, 46, who works in the state unemployment office.

She has a so-called option loan, which gives her the choice of how much to pay every month. Heavy in debt, she usually chooses the minimum. The unpaid interest and principal is added to her mortgage balance, which means her loan keeps getting bigger.

Ms. Koy’s woes were compounded by an ill-advised refinancing two years ago.

“I got all these calls from brokers all the time — ‘You could pay off debt, pay off the car loan, make extra money every month, blah blah,’ ” she said. She took out $60,000.

“The only way that would have made sense is if I had cut up my credit cards and nothing else had come up,” Ms. Koy said. “But something else always comes up.”

Ms. Koy’s husband is disabled and has not worked for a decade. The couple’s credit card debt is back up to $25,000, in part because of their daughter’s medical bills. Their three-bedroom house is worth about $250,000, but they owe much more on it.

Kimberley Williams, who owns a small bungalow in Los Angeles, might have a happier fate than Ms. Koy. She bought her home in February 2006, as the boom was peaking.

“I felt that if I didn’t get into the market, I wouldn’t be able to afford a house in California,” she said.

In November 2006, Ms. Williams refinanced. Like Ms. Koy, she got money to pay bills, including paying off her car. But her monthly mortgage payment rose to $3,011. Next December, it will jump by several hundred dollars.

Ms. Williams, a registered nurse, does not regret refinancing, but is worried about possibly being forced to sell in a declining market — or worse.

“Even people with good jobs making good money are facing foreclosure,” said Ms. Williams, 43. She plans to apply for the freeze.

While acknowledging that only a small number of stressed borrowers would be helped, Lori Gay, president of Los Angeles Neighborhood Housing Services, a nonprofit group, called the freeze “a great beginning.”

Michael Shea, executive director of Acorn Housing, another counseling agency, took a different view. “We’re disappointed that a year into this crisis the responses are so lacking in the bold leadership,” he said. “We really need an F.D.R.-like approach, and not Calvin Coolidge.”

Real estate agents in high-foreclosure areas had different opinions about whether the freeze would have an effect on queasy markets.

Jason Bosch, president of Home Center Realty in California’s hard-hit Riverside County, was pessimistic.

“We were selling $300,000 homes to people who could only afford $175,000 homes,” he said. “Even if you freeze their payments, they still can’t handle it.”

In Sarasota, Fla., a real estate agent, Jim Willig, was hopeful that at least the freeze would put a brake on some of the inventory flooding the area.

“That’s a benefit,” said Mr. Willig, who owns seven rental houses, all of them worth less than he paid.

Tom Gutierrez, bought his house in 2004, too early to qualify for the freeze.

Mr. Gutierrez, a school bus driver who lives in West Covina, Calif., is negotiating a new loan. “Many home buyers didn’t do our homework,” he said. “Maybe some kind of education will help as well.”

    Some Needing Mortgage Aid Won’t Get It, NYT, 7.12.2007, http://www.nytimes.com/2007/12/07/business/07home.html

Wall Street's sub-prime loss could soar as bond insurers face shortfall

December 6, 2007
From The Times
Tom Bawden in New York

The combined loss suffered by Wall Street banks on bonds backed by high-risk sub-prime mortgages could more than double to about $110 billion (£54 billion) after Moody’s, the ratings agency, gave warning that America’s biggest bond insurers were “somewhat likely” to run short of funds.

Moody’s is conducting a review of MBIA, Ambac and five of America’s other biggest securities insurers, which guarantee a mortgage bond’s interest payments in the event of a default on the home loans that back them.

In a development that will ricochet across the bond markets, the agency gave warning yesterday that the recent surge in defaults on sub-prime mortgages would probably leave some of America’s biggest bond insurers with insufficient funds to make good the payments that will be required on some of the bonds they insure.

Moody’s added that this probable funding shortfall threatened the AAA credit rating of bond insurers such as MBIA, Ambac, Security Capital Insurance and Financial Guaranty Insurance.

A decline in the bond insurers’ ratings would, in turn, wipe tens of billions of dollars off the value of the combined mortgage bond holdings of the Wall Street firms because it would send a clear signal to the market that their ability to guarantee interest payments had deteriorated.

These losses would be on top of both the $50 billion hit that they have already suffered as a result of declines in the value of the mortgage-backed securities that they own and the forecasts of further substantial losses on these portfolios next year.

Chris Whalen, of Institutional Risk Analytics, a risk-management consultancy, said that a one-notch downgrade in the credit rating of the biggest bond insurers, from AAA to AA, would wipe at least $30 billion from the value of collateralised debt obligations (CDOs) — pools of sub-prime mortgage-backed bonds — on their books.

Mr Whalen said: “Even a one-notch downgrade would be very serious because it would force everyone who owned the bonds they insured to reflect the downgrade on their books, to reflect the decline in the insurers’ ability to pay up. This would push down valuations straight away.”

The ratings downgrades would also further undermine already deteriorating confidence in the bond industry, putting additional downward pressure on bond prices, he added.

However, the total losses that Wall Street banks would suffer from a one-notch downgrade of America’s biggest mortgage bond insurers would be much higher — at about $60 billion — since CDOs make up only a portion of their home loan securities portfolios, according to Sean Egan, of Egan-Jones Ratings, a credit research consultancy.

The bulk of these additional losses would come from declines in the value of other mortgage-backed securities and structured investment vehicles (SIVs).

Although SIVs are set up as independent, self-financed entities, the banks are expected to absorb much of their forecast losses since the law dictates that the most closely related party — which they usually are — must bear ultimate responsibility for these funds.

Mr Egan said: “I don’t think the downgrades will stop at one notch. If you look at the capitalisation levels of the bond insurers and at the pipeline of expected losses from declining bond valuations, this is likely to go on and on.”

Nor would the losses from a ratings downgrade of any insurer be confined to mortgage-related securities, since they also insure corporate bonds and state and local government bonds.

In a sign of just how serious a downgrade would be, MBIA shares fell by 16 per cent, their biggest drop in more than 20 years, after the Moody’s announcement yesterday.

MBIA is America’s biggest bond insurer and a ratings downgrade would cast doubt over the ratings and value of the $653 billion of bonds that the company guarantees.

Between them, the bond insurers that Moody’s is reviewing guarantee $2.4 trillion of debt and their downgrades could cause total losses of about $200 billion across the bond market, according to Bloomberg data.

    Wall Street's sub-prime loss could soar as bond insurers face shortfall, Ts, 6.12.2007, http://business.timesonline.co.uk/tol/business/markets/united_states/article3007121.ece

Wary of Risk, Bankers Sold Shaky Mortgage Debt

December 6, 2007
The New York Times
By JENNY ANDERSON and VIKAS BAJAJ

As the subprime loan crisis deepens, Wall Street firms are increasingly coming under scrutiny for their role in selling risky mortgage-related securities to investors.

Many of the home loans tied to these investments quickly defaulted, resulting in billions of dollars of losses for investors. At the same time, many of the companies that sold these securities, concerned about a looming meltdown in the housing market, protected themselves from losses.

One big bank that saw the trouble coming, Goldman Sachs, began reducing its inventory of mortgages and mortgage securities late last year. Even so, Goldman went on to package and sell more than $6 billion of new securities backed by subprime mortgages during the first nine months of this year.

Of the loans backing the Goldman deals for which data is available, nearly 15 percent are already delinquent by more than 60 days, are in foreclosure or have resulted in the repossession of a home, according to data compiled by Bloomberg. The average default rate for subprime loans packaged in 2007 is 11 percent.

“There is a maxim that comes to mind: ‘If you work in the kitchen, you don’t eat the food,’” said Josh Rosner, a managing director of Graham Fisher, an independent consulting firm in New York.

The New York attorney general, Andrew M. Cuomo, has subpoenaed major Wall Street banks, including Deutsche Bank, Merrill Lynch and Morgan Stanley, seeking information about the packaging and selling of subprime mortgages. And the Securities and Exchange Commission is examining how Wall Street companies valued their own holdings of these complex investments.

The Wall Street banks that foresaw problems say they hedged their mortgage positions as part of their fiduciary duty to shareholders. Indeed, some other companies, particularly Citigroup, Merrill Lynch and UBS, apparently did not foresee the housing market collapse and lost billions of dollars, leading to forced resignations of their chief executives.

In any case, the bankers argue, buyers of such securities — institutional investors like pension funds, banks and hedge funds — are sophisticated and understand the risks.

Wall Street officials maintain that the system worked as it was supposed to. Underwriters, they say, did not pressure colleagues on trading desks or in research departments to promote securities blindly.

Nevertheless, the loans that many banks packaged are proving to be increasingly toxic. Almost a quarter of the subprime loans that were transformed into securities by Deutsche Bank, Barclays and Morgan Stanley last year are already in default, according to Bloomberg. About a fifth of the loans backing securities underwritten by Merrill Lynch are in trouble.

Data from another firm that tracks mortgage securities, Lewtan Technologies, shows similar trends. The banks declined to comment on the default rates.

The data raises questions about how closely Wall Street banks scrutinized these loans, many of them made at low teaser rates that will reset next year to higher levels.

The Bush administration is close to a plan to freeze mortgage rates temporarily for some homeowners who are threatened with foreclosure.

In recent years, Wall Street aggressively pushed into the complex, high-margin business of packaging mortgages. At the same time, banks expanded their roles to selling investments to clients while trying to make money on their own holdings. Now, with the collapse of the credit bubble, Wall Street’s risk management, as well as the multiple and often conflicting roles it plays, has been laid bare.

As early as January 2006, Greg Lippmann, Deutsche Bank’s global head of trading for asset-backed securities and collateralized debt obligations, and his team began advising hedge funds and other institutional investors to protect themselves from a coming decline in the housing market.

“He was really pounding the pavement,” said one hedge fund trader, who asked not to be identified because it could jeopardize his relationship with Wall Street banks.

Mr. Lippmann’s trade ideas — documented in a January 2006 presentation obtained by The New York Times — were not always popular inside Deutsche Bank, where the origination desk was busy selling mortgage securities. In the fall of 2006, Mr. Lippmann pitched bearish trades to the bank’s sales force at the same time the origination desk was bringing them mortgage deals to sell to clients.

Last year, Deutsche Bank underwrote $28.6 billion of subprime mortgage securities, according to Inside Mortgage Finance, an industry publication. In the first nine months of this year, the bank underwrote $12 billion.

Goldman Sachs also moved early to insulate itself from potential losses. Almost a year ago, on Dec. 14, 2006, David A. Viniar, Goldman’s chief financial officer, called a “mortgage risk” meeting. The investment bank’s mortgage desk was losing money, and Mr. Viniar, with various officials, reviewed every position in the bank’s portfolio.

The bank decided to reduce its stockpile of mortgages and mortgage-related securities and to buy expensive insurance as protection against further losses, said a person briefed on the meeting who was not authorized to speak about the situation publicly.

Goldman, however, did not stop selling subprime mortgage securities. The bank, like other firms, retains a piece of the securities it sells. A Goldman spokesman said the firm was not betting against the mortgage securities it underwrote in 2007.

Like Goldman, Lehman Brothers also started to hedge its huge inventory of home loans in the second quarter of this year, concerned about poor underwriting standards. But Lehman also continued to sell mortgage securities packed with shaky loans, underwriting $16.5 billion of new securities in the first nine months of 2007. About 15 percent of the loans backing these securities have defaulted.

At the center of the boom in mortgages for borrowers with weak credit was Wall Street’s once-lucrative partnership with subprime lenders. This relationship was a driving force behind the soaring home prices and the spread of exotic loans that are now defaulting in growing numbers. By buying and packaging mortgages, Wall Street enabled the lenders to extend credit even as the dangers grew in the housing market.

“There was fierce competition for these loans,” said Ronald F. Greenspan, a senior managing director at FTI Consulting, which has worked on the bankruptcies of many mortgage lenders. “They were a major source of revenues and perceived profits for both the originators and investment banks.”

The battle over these loans intensified in 2005 and 2006, as home prices approached their zenith. (Home sales peaked in mid-2005.) At the same time, buyers of these securities, which carry relatively high interest rates, were fueling demand. Lehman Brothers, the dominant Wall Street player in this field, underwrote $51.8 billion of subprime mortgage securities in 2006, followed by RBS Greenwich Capital, which arranged $47.6 billion of sales.

Not all banks continued to expand their subprime business. Credit Suisse, which had been a major player in 2005, pulled back aggressively, with its underwriting down 22 percent in 2006, compared with 2004.

But other Wall Street banks, pushing to catch these market leaders, reached out to subprime lenders. Morgan Stanley, which expanded its subprime underwriting business by 25 percent from 2004 to 2006, cultivated a relationship with New Century Financial, one of the largest subprime lenders. The firm agreed to pay above-market prices for loans in return for a steady supply of mortgages, according to a former New Century executive.

“Morgan would be aggressive and say, ‘We want to lock you in for $2 billion a month,’” said the executive, who asked not to be identified because he still works with Wall Street banks.

Loans made by New Century, which filed for bankruptcy protection in March, have some of the highest default rates in the industry — almost twice those of competitors like Wells Fargo and Ameriquest, according to data from Moody’s Investors Service.

Fremont General and ResMae, which also had high default rates, were big suppliers of loans to Deutsche Bank. Merrill Lynch had a close relationship with Ownit Mortgage Solutions, which filed for bankruptcy in December. Merrill also acquired another lender, First Franklin, for $1.7 billion in late 2006.

“The easiest way to grab market share was by paying more than your competitors,” said Jeffrey Kirsch, president of American Residential Equities, which buys home loans.

What is clear is that home loans were highly lucrative to Wall Street and its bankers. The average total compensation for managing directors in the mortgage divisions of investment banks was $2.52 million in 2006, compared with $1.75 million for managing directors in other areas, according to Johnson Associates, a compensation consulting firm. This year, mortgage officials will probably earn $1.01 million, while other managing directors are expected to earn $1.75 million.

    Wary of Risk, Bankers Sold Shaky Mortgage Debt, NYT, 6.12.2007, http://www.nytimes.com/2007/12/06/business/06hedge.html?hp

Productivity Surged in 3rd Quarter

December 5, 2007
Filed at 8:49 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Worker productivity roared ahead at the fastest pace in four years in the summer while wage pressures dropped sharply.

The Labor Department reported Wednesday that productivity, the amount of output per hour of work, was up at an annual rate of 6.3 percent in the third quarter, the best showing since the summer of 2003, and far bigger than had been expected.

Meanwhile, wage pressures slowed with unit labor costs dropping at a rate of 2 percent in the third quarter, the biggest decline in four years.

The combination of stronger productivity growth and fewer wage pressures should ease concerns about inflation at the Federal Reserve and help clear the way for another cut in interest rates next week to guard against the threat the economy could tumble into a recession.

Rising wages are good for workers. But if higher wages are not accompanied by strong productivity gains, they raise concerns among Fed policymakers about inflation.

The 6.3 percent increase in productivity was a significant upward revision from an initial estimate a month ago of a 4.9 percent increase, reflecting the fact that total output was revised higher.

Investor hopes have been rising in recent days that the Fed will cut interest rates for the third time since September when officials hold their last meeting of the year next Tuesday.

Those hopes were bolstered by comments last week from Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn. Both men noted that the economy is likely to slow considerably in the current quarter under the impact of such problems as renewed turbulence in financial markets.

While overall economic growth, as measured by the gross domestic product, roared ahead at a 4.9 percent rate in the third quarter, the fastest pace in four years, GDP is expected to slow to a barely discernible 1.5 percent or even less in the current quarter.

Growth at such a slow pace would increase the risks that the country could dip into a recession, felled by the multiple blows of a prolonged housing slump, a severe credit crunch, rising energy costs and faltering consumer confidence.

The Bush administration, seeking to limit the fallout from the housing bust, has been prodding the mortgage industry to freeze rates on a portion of the 2 million subprime mortgages that are due to reset to higher rates over the next two years.

The rate freeze program, which is expected to be announced on Thursday, would be offered to homeowners who have been able to keep current with their monthly payments at the lower introductory rates but are judged to be unable to meet the sharply higher payments when the rates reset.

    Productivity Surged in 3rd Quarter, NYT, 5.12.2007, http://www.nytimes.com/aponline/us/AP-Economy.html

Bush says economic fundamentals are good

Tue Dec 4, 2007
10:22pm EST
Reuters
By Alister Bull

WASHINGTON (Reuters) - U.S. President George W. Bush said on Tuesday the country's economic fundamentals were strong despite "headwinds" from a weaker housing market, and he voiced confidence in a plan to ease the subprime mortgage crisis.

"The basics in the economy are good," Bush told a news conference, citing low inflation, low interest rates, a solid labor market and rising exports as grounds for optimism, although he acknowledged there were also challenges.

"I recognize there are serious issues -- the credit crunch and the home-building industry," he said.

The U.S. economy grew nearly 5 percent on an annual basis in the third quarter, but it now appears to be slowing sharply as the downturn in the housing market deepens and many analysts are warning of a growing risk of recession.

With home prices falling and the cost of repaying home loans rising, hundreds of thousands of home-owners are finding it harder to refinance into cheaper mortgages and hang onto their homes.

"I am concerned about people who may not be able to stay in their homes," Bush said. "That is why we are taking the action we're taking."

The economy is a potent political theme and Democratic Party lawmakers on Tuesday urged the Bush administration to help as many cash-strapped homeowners as possible.

Interest rates on two million subprime mortgages, aimed at borrowers with spotty credit, are due to reset sharply higher in coming months and officials fear as many as 500,000 borrowers could lose their homes.

The Bush administration and banking regulators have been engaged in talks with mortgage industry representatives to nail down a plan that would temporarily freeze rates on many of these loans.

Treasury Secretary Paulson said on Monday he hoped a deal could be announced by week's end and Bush echoed this hope.

"I think they're making pretty good progress," Bush said.

Many subprime mortgages were repackaged as securities and sold to investors around the globe. As defaults began to mount, markets have become jittery and the flow of credit has slowed, threatening to further undermine the economy.

"We are addressing the current issues and home ownership is a current issue and no question it is a headwind. It is a part of why many people are saying the economy is slowing down," Bush said.

"Secretary Paulson is working with a more complex industry than we've had in the past and that is why it has taken a while," he said. "You've got people all around the world who now own U.S. mortgages."

Democratic Party lawmakers on Tuesday sent Paulson a letter asking that he push for rules that would allow as many homeowners as possible qualify for the rescue plan.

"It would be a sad irony if this attempt to correct the damage done by poor underwriting standards ... was undone by criteria that made loan modifications and workouts available to too few borrowers," the lawmakers wrote.

(Reporting by Alister Bull; Editing by James Dalgleish)

    Bush says economic fundamentals are good, R, 4.12.2007, http://www.reuters.com/article/politicsNews/idUSWBT00802120071205

Business Lobby Presses Agenda Before ’08 Vote

December 2, 2007
The New York Times
By ROBERT PEAR

WASHINGTON, Dec. 1 — Business lobbyists, nervously anticipating Democratic gains in next year’s elections, are racing to secure final approval for a wide range of health, safety, labor and economic rules, in the belief that they can get better deals from the Bush administration than from its successor.

Hoping to lock in policies backed by a pro-business administration, poultry farmers are seeking an exemption for the smelly fumes produced by tons of chicken manure. Businesses are lobbying the Bush administration to roll back rules that let employees take time off for family needs and medical problems. And electric power companies are pushing the government to relax pollution-control requirements.

“There’s a growing sense, a growing probability, that the next administration could be Democratic,” said Craig L. Fuller, executive vice president of Apco Worldwide, a lobbying and public relations firm, who was a White House official in the Reagan administration. “Corporate executives, trade associations and lobbying firms have begun to recalibrate their strategies.”

The Federal Register typically grows fat with regulations churned out in the final weeks of any administration. But the push for such rules has become unusually intense because of the possibility that Democrats in 2009 may consolidate control of the White House, the Senate and the House of Representatives for the first time in 14 years.

Even as they try to shape pending regulations, business lobbies are also looking beyond President Bush. Corporations and trade associations are recruiting Democratic lobbyists. And lobbyists, expecting battles over taxes and health care in 2009, are pouring money into the campaigns of Democratic candidates for Congress and the White House.

Randel K. Johnson, a vice president of the United States Chamber of Commerce, said, “I am beefing up my staff, putting more money aside for economic analysis of regulations that I foresee coming out of a possible new Democratic administration.”

At the Transportation Department, trucking companies are trying to get final approval for a rule increasing the maximum number of hours commercial truck drivers can work. And automakers are trying to persuade officials to set new standards for the strength of car roofs — standards far less stringent than what consumer advocates say is needed to protect riders in a rollover.

Business groups generally argue that federal regulations are onerous and needlessly add costs that are passed on to consumers, while their opponents accuse them of trying to whittle down regulations that are vital to safety and quality of life. Documents on file at several agencies show that business groups have stepped up lobbying in recent months, as they try to help the Bush administration finish work on rules that have been hotly debated and, in some cases, litigated for years.

At the Interior Department, coal companies are lobbying for a regulation that would allow them to dump rock and dirt from mountaintop mining operations into nearby streams and valleys. It would be prohibitively expensive to haul away the material, they say, and there are no waste sites in the area. Luke Popovich, a vice president of the National Mining Association, said that a Democratic president was more likely to side with “the greens.”

A coalition of environmental groups has condemned the proposed rule, saying it would accelerate “the destruction of mountains, forests and streams throughout Appalachia.”

A priority for many employers in 2008 is to secure changes in the rules for family and medical leave. Under a 1993 law, people who work for a company with 50 or more employees are generally entitled to 12 weeks of unpaid leave to care for newborn children or sick relatives or to tend to medical problems of their own. The Labor Department has signaled its interest in changes by soliciting public comments.

The National Association of Manufacturers said the law had been widely abused and had caused “a staggering loss of work hours” as employees took unscheduled, intermittent time off for health conditions that could not be verified. The use of such leave time tends to rise sharply before holiday weekends, on the day after Super Bowl Sunday and on the first day of the local hunting season, employers said.

Debra L. Ness, president of the National Partnership for Women and Families, an advocacy group, said she was “very concerned that the Bush administration will issue new rules that cut back on family and medical leave for those who need it.”

That could be done, for example, by narrowing the definition of a “serious health condition” or by establishing stricter requirements for taking intermittent leave for chronic conditions that flare up unexpectedly.

The Chamber of Commerce is seeking such changes. “We want to get this done before the election,” Mr. Johnson said. “The next White House may be less hospitable to our position.”

Indeed, most of the Democratic candidates for president have offered proposals to expand the 1993 law, to provide paid leave and to cover millions of additional workers. Senator Christopher J. Dodd of Connecticut was a principal author of the law. Senator Hillary Rodham Clinton of New York says it has been “enormously successful.” And Senator Barack Obama of Illinois says that more generous family leave is an essential part of his plan to “reclaim the American dream.”

Susan E. Dudley, administrator of the White House Office of Information and Regulatory Affairs, said, “Research suggests that regulatory activity increases in the final year of an administration, regardless of party.”

Whoever becomes the next president, Democrat or Republican, will find that it is not so easy to make immediate and sweeping changes. The Supreme Court has held that a new president cannot arbitrarily revoke final regulations that already have the force of law. To undo such rules, a new administration must provide a compelling justification and go through a formal rule-making process, which can take months or years.

Within hours of taking office in 2001, Mr. Bush slammed the brakes on scores of regulations issued just before he took office, so his administration could review them. A study in the Wake Forest Law Review found that one-fifth of those “midnight regulations” were amended or repealed by the Bush administration, while four-fifths survived.

Some of the biggest battles now involve rules affecting the quality of air, water and soil.

The National Chicken Council and the U.S. Poultry and Egg Association have petitioned for an exemption from laws and rules that require them to report emissions of ammonia exceeding 100 pounds a day. They argue that “emissions from poultry houses pose little or no risk to public health” because the ammonia disperses quickly in the air.

Perdue Farms, one of the nation’s largest poultry producers, said that it was “essentially impossible to provide an accurate estimate of any ammonia releases,” and that a reporting requirement would place “an undue and useless burden” on farmers.

But environmental groups told the Bush administration that “ammonia emissions from poultry operations pose great risk to public health.” And, they noted, a federal judge in Kentucky has found that farmers discharge ammonia from their barns, into the environment, so it will not sicken or kill the chickens.

On another issue, the Environmental Protection Agency is drafting final rules that would allow utility companies to modify coal-fired power plants and increase their emissions without installing new pollution-control equipment.

The Edison Electric Institute, the lobby for power companies, said the companies needed regulatory relief to meet the growing demand for “safe, reliable and affordable electricity.”

But John D. Walke, director of the clean air program at the Natural Resources Defense Council, said the rules would be “the Bush administration’s parting gift to the utility industry.”

If Democrats gain seats in Congress or win the White House, that could pose problems for all-Republican lobbying firms like Barbour, Griffith & Rogers, whose founders include Gov. Haley Barbour of Mississippi, a former chairman of the Republican National Committee.

Loren Monroe, chief operating officer of the Barbour firm, said: “If the right person came along, we might hire a Democrat. And it’s quite possible we could team up in an alliance with a Democratic firm.”

Two executive recruiters, Ivan H. Adler of the McCormick Group and Nels B. Olson of Korn/Ferry International, said they had seen a growing demand for Democratic lobbyists. “It’s a bull market for Democrats, especially those who have worked for the Congressional leadership” or a powerful committee, Mr. Adler said.

Few industries have more cause for concern than drug companies, which have been a favorite target of Democrats. Republicans run the Washington offices of most major drug companies, and a former Republican House member, Billy Tauzin, is president of their trade association, the Pharmaceutical Research and Manufacturers of America.

The association has hired three Democrats this year, so its lobbying team is split evenly between Republicans and Democrats.

Loren B. Thompson, a military analyst at the Lexington Institute, a policy research organization, said: “Defense contractors have not only begun to prepare for the next administration. They have begun to shape it. They’ve met with Hillary Clinton and other candidates.”

    Business Lobby Presses Agenda Before ’08 Vote, NYT, 2.12.2007, http://www.nytimes.com/2007/12/02/washington/02lobby.html?hp

Stocks' recovery turns on subprime plan

Sat Dec 1, 2007 10:54am EST
Reuters
By Kristina Cooke

NEW YORK (Reuters) - Wall Street's rebound from its first full-fledged correction in more than four years could continue if investors believe a plan to keep millions of Americans from losing their homes can work.

Treasury Secretary Henry Paulson is expected to announce as early as Wednesday details of the proposal to hold interest- rate payments steady for many subprime borrowers who are facing higher rates and possible foreclosure.

"The poor judgment of a few has had a ripple effect on the whole economy," said Ernest Csak, vice president at Knight Equity Markets in Jersey City, New Jersey. "If they can stem the bleeding and restore investor confidence, that will be good for the market."

After a beating in the first three weeks of November that sent the market more than 10 percent below its October closing highs, stocks rallied for three days on news that the Paulson plan was imminent and speculation there will be an interest-rate cut at the December 11 meeting.

Federal Reserve Chairman Ben Bernanke bolstered hopes for more rate cuts on Thursday, saying that a resurgence in financial strains in recent weeks had dimmed the outlook for the U.S. economy.

The speculation about interest rates will be a major factor for stocks next week, said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.

But instead of Wall Street trading floors being abuzz with speculation about whether the Fed will cut rates, the focus will be on how deep a potential cut could be, he said.

On Friday, bets on the December Fed meeting in options on fed funds futures were almost evenly split as to the size of a rate cut, according to Cleveland Fed analysts.

"A quarter point seems to me to be a given," said Craig Hester, chairman, president and CEO of Hester Capital Management. "I would not rule out a more substantial move just to help unlock the credit markets because they seem to be in a true state of paralysis."

Financial stocks will remain in focus, analysts said, as fallout from the beleaguered credit markets plays out.

In the last week of November, Abu Dhabi took a stake in Citigroup and Citadel Investment Group infused cash into online brokerage E*Trade (ETFC.O: Quote, Profile, Research). There could be similar deals to come in the weeks ahead, said Michael Sheldon, chief market strategist at New York brokerage Spencer Clarke.

At Friday's closing bell, stocks finished the week with gains -- an upbeat trend on the last day of a gloomy month for the market.

For the week, the Dow Jones industrial average .DJI climbed 3 percent, the S&P 500 gained 2.8 percent and the Nasdaq gained 2.5 percent.

For the month of November, stocks tumbled. The Dow declined 4 percent, the S&P 500 fell 4.4 percent, and the Nasdaq slid 6.9 percent, its worst monthly drop since July 2004, when it slumped 7.8 percent.

JOBS AND ISM DATA

Friday's monthly jobs report will be scoured for more clues on the health of the economy and for evidence to underscore the market's view that a rate cut is on the horizon, the analysts said.

Economists polled by Reuters expect U.S. employers to have added only 75,000 jobs in November -- sharply below the 166,000 jobs created in October.

The U.S. unemployment rate is projected to rise to 4.8 percent in November from 4.7 percent in October, while average hourly earnings are likely to have risen 0.3 percent in November, compared with a gain of 0.2 percent in October, the Reuters poll showed. The Fed closely watches average hourly earnings as an indicator of pressure on wages, which could contribute to inflation.

Apart from the jobs report, the week's economic data includes a pair of reports on the economy from the Institute for Supply Management. On Monday, the ISM's report on U.S. manufacturing conditions will be released. The median forecast of economists polled by Reuters for the ISM's manufacturing index is 50.5, down from 50.9 in October.

The ISM report on the service sector of the economy is scheduled for Wednesday, with economists expecting a reading of 55.0 in November, down from 55.8 in October.

Other economic data in the week will include domestic car and truck sales for November, factory orders for October, pending home sales for November, the ADP employment report for November, revised third-quarter productivity and unit labor cost data and a preliminary December reading on consumer sentiment from the Reuters/University of Michigan Surveys of Consumers.

Sam Rahman, portfolio manager at Baring Asset Management Inc. in Boston, said policy changes at central bank meetings in the UK and Europe will garner a lot of attention, as a rate cut from either would weaken their currencies against the dollar.

Economists polled by Reuters do not expect a change in European Central Bank rates from 4 percent, where they have been since June. UK rates are seen on hold in December, but economists gave a roughly one in three chance of a cut.
 

(Editing by Jan Paschal)

    Stocks' recovery turns on subprime plan, R, 1.12.2007, http://www.reuters.com/article/hotStocksNews/idUSN3031981520071201

News Analysis

Wall St. Sees Silver Lining in Economy

December 1, 2007
The New York Times
By PETER S. GOODMAN

As Wall Street rallied this week, it seemed that investors were taking comfort in the notion that the economy had become so imperiled by the crumbling housing market that it was forcing the government to finally mount an aggressive rescue effort.

Investors found reassurance yesterday in talk that the White House was brokering a deal with banks that could diminish a looming tidal wave of home foreclosures. Soothing words from the Federal Reserve earlier this week revived the hope that more interest rate cuts are on the way, drowning nervousness in a din of buying.

“The market now feels comfortable that the Fed has come to appreciate the severity of the situation,” said Robert Barbera, chief economist at the brokerage and advisory firm ITG. “The bad news gives you the blessing of lower interest rates.”

But even as investors took heart in palpable signs that the government was preparing to dole out more medicine for the ailing economy, a number of economists cautioned that the pain itself was still unfolding, with its ultimate magnitude far from known.

Signs point to a slowdown in the creation of jobs and investments by companies. Consumers are clutching their wallets more tightly. Banks are denying loans to many businesses, unwilling to bet scarce capital in a time of risk and uncertainty. A glut of unsold homes keeps prices falling and the construction industry in distress.

And even the sharp fall in the price of oil, which offered the comfort that higher energy costs might be easing, reflects a broader fear that global economic activity may slow as growth falters in the United States.

Looming large over the landscape is uncertainty about the size of losses still confronting banks and other financial institutions as they reckon with bad mortgages along with credit card debts, auto loans and the complex detritus of an era of loose money now over.

“It’s a sucker’s rally,” said Nouriel Roubini, a former Treasury official who runs an economic consultancy, RGE Monitor. “The market is essentially hoping the Fed can rescue the economy. But they are discounting the onslaught of really lousy economic news.”

The price of oil, which only last week threatened to break through $100 a barrel, closed yesterday at $88.71, completing its steepest weekly plunge in the last two years. Cheaper oil blunts the threat of inflation, adding to the sense that the Fed has room to take interest rates lower without worrying about setting off an upward price spiral.

But the lower price also reflects the view of investors who now expect a substantial American economic slowdown, which would ease the pressure of the rising demand for energy.

“The market is realizing how much of a train wreck the economy is right now," said John Kilduff, an energy analyst at MF Global in New York.

There are plenty of reasons, of course, to count on the economy’s inherent countervailing forces to ultimately help restore it to health. Lower interest rates should indeed spur more economic activity. A falling dollar has helped spur American exports and curb imports, contributing to a narrower trade deficit. And if the banks really do sign on to the deal the Bush administration is pushing to keep lower rates in place for subprime mortgages, that should keep a lot of people from losing their homes.

Yet many of the forces gnawing at the economy remain in place, and actually appear to be intensifying. The trajectory was reinforced by data released yesterday, which showed that Americans now have less money in their pockets and are less inclined to spend.

Personal income grew at a seasonally adjusted rate of 0.2 percent in October compared with September, the Commerce Department reported. That was only half the rate expected. Consumption grew a paltry 0.2 percent, dropping from the 0.3 percent increase registered in September. Construction spending plummeted at double the anticipated pace.

Perhaps more ominously, a government report released yesterday suggested that the number of jobs created in the spring was far smaller than previously assumed.

The economy generally needs about 125,000 new nonfarm jobs each month to absorb newcomers entering the labor force and employ those who have lost work, said Mark Zandi, chief economist at Moody’s Economy.com. In 2006, the economy was still creating about 200,000 positions a month, according to the Bureau of Labor Statistics. But in the first 10 months of this year, the number slipped to 125,000.

On Friday, the government is to disclose how many nonfarm jobs were created in November. Mr. Zandi and many economists expect the number to fall to about 75,000. “That will erode confidence in the economy,” he said. “It becomes self-reinforcing, and the economy will slide into recession.”

If the economy does land in recession, “that would mean we’re going to lose a million jobs over a two-year period,” predicted Alan D. Levenson, chief economist at T. Rowe Price Associates in Baltimore. Whether the economy can avoid that fate, Mr. Levenson suggested, may ride on whether the words of comfort the market heard this week turn out to be sincere.

The Fed has to drop rates enough to break the financial logjam and encourage businesses and households to borrow and spend anew. The White House has to deliver a deal that really will prevent millions of families from losing their homes, he said.

“If the president puts his seal on it, that would tell me the grown-ups are in charge,” Mr. Levenson said.

Floyd Norris and Jad Mouawad contributed reporting.

    Wall St. Sees Silver Lining in Economy, NYT, 1.12.2007, http://www.nytimes.com/2007/12/01/business/01econ.html?hp

Choppy Finish Likely for Wall Street

December 1, 2007
Filed at 3:09 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Wall Street was populated by optimists this past week after a big rebound gave investors the hope that stocks might actually enjoy a year-end rally -- one that might even thrust the volatile Dow Jones industrials back over 14,000.

Improving prospects for another interest rate cut and signs that financial companies were finding solutions to their credit problems sent buyers piling back into stocks. The results were dramatic: The Dow, which plunged 240 points on Monday, shot up 628 points over the next four days, ending the week at 13,371.72.

But market veterans would warn, don't get ahead of yourself. Wall Street, battered the first three weeks of November, must contend with the still-unfolding turmoil in the mortgage and credit markets that has pummeled banks, mortgage companies and investment houses.

''The biggest fear is not knowing what the banks have on their books, and that's bigger than any economic news that might come out,'' said Scott Wren, chief economist for A.G. Edwards.

Major global banks have written down some $80 billion of securities tied to the subprime mortgage crisis, and there's an overwhelming worry that more is to come next year. Millions of adjustable-rate mortgages will convert to higher rates next year, and that has Wall Street concerned that banks and lenders are in for more pain.

''What do these guys have left to write down, and will credit be difficult to obtain in this economy when banks are afraid to lend to each other, to companies and individuals?'' Wren said. ''That's going to rule.''

There was some hope this past week that the Bush administration is working with the financial industry on a plan to extend low introductory rates on some mortgages, heading off more defaults. Meanwhile, Federal Reserve Chairman Ben Bernanke hinted that another cut in the key interest federal funds rate is in the offing to keep the economy.

December is typically the second best month of the year on Wall Street, according to the Stock Trader's Almanac, and the fourth quarter is the year's best. The Standard & Poor's 500 index and the Dow have gained an average of 1.7 percent during the month since 1950. For the Nasdaq, December is the third best month.

But, following that pattern might prove difficult even if you strip out worries about the investment banks -- some of which begin reporting fourth-quarter results in a few weeks. The health of the economy is far from certain despite a robust gross domestic product report from the Commerce Department, which said Thursday that the broadest measure of the economy grew at an annual rate of 4.9 percent in the third quarter.

Consumer spending in the most recent data rose by only 2.7 percent. Expect that number to shrink as the housing slump continues, analysts said.

That could be troublesome, considering that consumers account for over two-thirds of GDP growth. But, it might be something the Fed can help out with at its rate-setting meeting on Dec. 11.

''You always want to give confidence back to the consumer, and that is usually a positive backdrop for equity prices,'' said Steven Goldman, chief market strategist for Weeden & Co. ''If you go back to those levels of lower growth, and no inflationary concerns, then they are good times to buy stocks. And, if you look through history, interest rate cuts have been a good penicillin for stocks.''

For the time being, investors should expect more volatility in the days ahead as institutional investors begin to position their portfolios for 2008. Big triple-digit swings in the Dow -- like the kind seen this past week -- are likely in store as Wall Street remains reactive to headlines.

Because of this, any year-end rally might be decided on two or three days worth of trading rather than a steady uptick.

''In no way, shape or form are we going to move higher in a straight line during December,'' Wren said. ''It's going to be choppy. ... I think we'll be climbing a wall of worry.''

Choppy Finish Likely for Wall Street, NYT, 1.12.2007, http://www.nytimes.com/aponline/business/AP-Wall--Main.html