History > 2008 > USA > Economy (Xb)

Larry Wright

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Detroit, Michigan

The Detroit News

17.10.2008

One in five homeowners with mortgages

underwater

Fri Oct 31, 2008
1:15pm EDT
Reuters
By Jonathan Stempel

NEW YORK (Reuters) - Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth, and the rate may soon approach one in four as housing prices fall and the economy weakens, a report on Friday shows.

About 7.63 million properties, or 18 percent, had negative equity in September, and another 2.1 million will follow if home prices fall another 5 percent, according to a report by First American CoreLogic.

The data, covering 43 states and Washington, D.C., includes borrowers nationwide, even those who took out mortgages before housing prices began to soar early this decade.

Seven hard-hit states -- Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio -- had 64 percent of all "underwater" borrowers, but just 41 percent of U.S. mortgages.

"This is very much a regional problem, and people tend to forget that," said David Wyss, chief economist at Standard & Poor's, who expects home prices nationwide to fall another 10 percent before bottoming late next year.

"Most of the country is not in bad shape," he continued. "Things seem to be stabilizing in Michigan, but the big bubble states -- Florida, California, Arizona and Nevada -- are still very overpriced."

About 68 percent of U.S. adults own their own homes, and about two-thirds of them have mortgages.

JPMorgan Chase & Co, one of the biggest mortgage lenders, on Friday offered to modify $70 billion of mortgages to keep a potential 400,000 homeowners out of foreclosure. Bank of America Corp, which bought Countrywide Financial Corp in July, also has a large loan modification program.

HOME PRICES, ECONOMY UNDER PRESSURE

U.S. home prices fell a record 16.6 percent in August from a year earlier, with declines in all 20 major metropolitan areas measured by the S&P/Case-Shiller Home Price Indices.

Foreclosure filings rose 71 percent in the third quarter to a record 765,558, according to RealtyTrac.

Meanwhile, the Commerce Department said gross domestic product fell at a 0.3 percent rate in the third quarter. Some experts expect the worst U.S. recession since the early 1980s.

Yet despite a series of expensive government programs to spur lending, mortgage rates are rising, making it tougher to borrow or refinance. The rate on a 30-year fixed-rate mortgage jumped this week to 6.46 percent from 6.04 percent a week earlier, Freddie Mac said.

Meanwhile, borrowing costs on hundreds of thousands of adjustable-rate mortgages are expected to reset higher in the coming months. The problem may be particularly serious for borrowers with rates tied to the London Interbank Offered Rate, or Libor, which is abnormally high relative to benchmark U.S. rates.

Last week, Wachovia Corp said borrowers with its "Pick-a-Pay" ARMs and living in or near Stockton and Merced, California, owed at least 55 percent more on their mortgages, on average, than their homes were worth. Wells Fargo & Co is buying Wachovia.

NEVADA HARD HIT, NEW YORK AT RISK

First American CoreLogic, an affiliate of title insurance and real estate services company First American Corp, said states with large numbers of homes with negative equity either had rapid price appreciation, many homes bought with subprime mortgages or as speculative investments, steep manufacturing declines, or a combination.

Nevada was hardest hit, where mortgage borrowers on average owed 89 percent of what their homes were worth, and 48 percent had negative equity. Michigan was second, with an 85 percent loan-to-value ratio and 39 percent of borrowers underwater.

New York fared best, with an average 48 percent loan-to-value ratio and just 4.4 percent of mortgage borrowers with negative equity.

But Wyss said this could change as financial market upheaval transforms Wall Street. This month, New York City Comptroller William Thompson estimated that the city alone might lose 165,000 jobs over two years.

"We're going to see home prices coming down pretty significantly in New York," Wyss said. "A lot of people are losing jobs, and won't be getting their usual bonuses, and that leaves less money for housing."

(Reporting by Jonathan Stempel; Additional reporting by Al Yoon; Editing by Brian Moss)

    One in five homeowners with mortgages underwater, R, 31.10.2008, http://www.reuters.com/article/newsOne/idUSTRE49S3Q520081031

Oil, down 36% in Oct., heads for worst month ever on Nymex

31 October 2008
USA Today
By Stevenson Jacobs, AP Business Writer

NEW YORK — Oil prices kept falling Friday, heading for their biggest monthly drop since futures trading began 25 years ago on signs that a contracting U.S. economy will suppress energy demand well into 2009.

Oil's monumental collapse — prices are down 36% for the month and 56% from their July record — has stunned oil-producing countries while giving cash-strapped U.S. consumers a rare dose of relief. Pump prices have fallen by almost half since their summer peak above $4 a gallon — a huge drop that's expected to result in more than $100 billion in annual savings for American households.

"That's a pretty powerful stimulus to consumers," said Adam Sieminski, chief energy economist at Deutsche Bank Global Markets in Washington.

Friday's oil decline was tied to a significantly stronger U.S. dollar. Oil market traders often buy oil as a hedge against inflation when the dollar falls and sell those investors when the greenback rises. The dollar has rallied in recent weeks as the financial crisis begins hurting economies in Europe and elsewhere, prompting investors to shift funds into the greenback as a safe-haven.

Light, sweet crude for December delivery fell $1.35 to $64.61 a barrel on the New York Mercantile Exchange, after earlier falling as low as $63.12.

Prices closed at $100.64 a barrel on the last trading day in September. That gives oil the biggest monthly slide since the launch of the Nymex crude futures contract in 1983. The previous record was a 30% drop set in February 1986.

"We're seeing a huge paradigm shift," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "We went from $100 at the beginning of the month to around $65 today. It's quite a decline and shows how weak the demand picture really is."

Crude hit a record price of $147.27 set on July 11.

At the pump, a gallon of regular gasoline fell 4.3 cents overnight to a national average of $2.504, according to auto club AAA, the Oil Price Information Service and Wright Express. Gas prices hit a record $4.114 a gallon on July 17.

Cheaper gas has been a rare bit of good news for consumers rattled by huge drops in the stock market, rising mortgage payments and difficulty in obtaining credit. According to Deutsche Bank research, for every dollar that comes off pump prices, U.S. households save a $100 billion a year — money that can be spent on other goods and services to help jolt the economy.

Deutsche Bank estimates that the $100 billion would be worth 3 million new jobs.

But even with cheaper energy, Deutsche Bank's Sieminski predicts the weak global economy will weigh on fuel demand well into 2009 — bringing oil to a quarterly average of $50 a barrel for that year.

OPEC and international energy agencies earlier this year predicted oil demand would rise by 800,000 barrels a day next year, driven by growth from developing economies like China and India.

Given the widening economic downturn, Sieminski said those figures now seem wildly optimistic.

U.S. gross domestic product, the broadest barometer of a nation's economic health, shrank at a 0.3% annual rate in the July-September quarter, the Commerce Department said Thursday. It marked the worst showing for the world's largest economy since it contracted at a 1.4% pace in the third quarter of 2001.

"We believe there will be no growth in oil demand in 2009, and we may even see a decline," Sieminski said.

The drop in oil has come despite moves by OPEC to prop up prices. Last week, the Organization of the Petroleum Exporting Countries announced plans to cut 1.5 million barrels of production per day at an extraordinary meeting in Vienna.

Venezuela's Oil Minister Rafael Ramirez says OPEC, which controls about 40% of world crude oil production, will need to cut production by at least another 1 million barrels per day to boost falling prices.

Analyst believe oil price hawks like Venezuela and Iran need prices at near $100 a barrel to balance their national budgets, while Saudi Arabia and other members would like to see prices stabilize at around $80.

Opinion, however, is mixed on whether all members of the cartel will follow through on the cuts — or keep churning out as much crude as they can on fears that prices will plummet more.

"A further fall in the oil price cannot be ruled out. It is difficult to predict where the bottom could be," said David Moore, commodity strategist with Commonwealth Bank of Australia in Sydney. "An important factor over the next few months will be whether OPEC can achieve its output cuts. If it can that will certainly tighten market conditions."

In other Nymex trading, gasoline futures fell 3.95 cents to $1.4275 a gallon, while heating oil fell 2.22 cents to $1.9774 a gallon. Natural gas for December delivery was up 5.7 cents at $6.791 per 1,000 cubic feet.

In London, Brent crude fell $2 to $61.71 a barrel on the ICE Futures exchange.

AP writers By Louise Watt in London and Stephen Wright in Bangkok, Thailand contributed to this report.

    Oil, down 36% in Oct., heads for worst month ever on Nymex, UT, 31.10.2008, http://www.usatoday.com/money/industries/energy/2008-10-31-oil-oct_N.htm

Beaten Down,

American Consumers Burrow Deeper

October 31, 2008
Filed at 10:02 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Beaten down and watching their wealth shrink, Americans are cutting back sharply on their spending, trimming it in September by the largest amount in four years.

The Commerce Department reported Friday that consumer spending dropped by 0.3 percent in September, the biggest setback since June 2004. It followed two months in which spending was flat and left activity for the quarterly falling by the biggest amount in 28 years.

The weakness in consumer spending, which accounts for two-thirds of total economic activity, dragged the overall economy down in the third quarter. The gross domestic product, the broadest measure of economic health, also fell by 0.3 percent in the third quarter, the strongest signal yet that the country has fallen into a recession.

Many economists believe that economic activity will fall even more sharply in the current quarter, meeting the classic definition of a recession as at least two consecutive quarters of declining GDP.

In a separate report, the Labor Department on Friday said the wages and benefits of U.S. workers rose by a moderate 0.7 percent in the third quarter, the same increase as in the previous two quarters. The report provided more evidence that the weak economy is keeping a lid on wage pressures.

One of the biggest problems saddling the country is damage from the housing market's collapse. Mounting foreclosures, falling home prices and soured mortgage investments are taking their toll on both individuals and businesses alike.

Federal Reserve Chairman Ben Bernanke, who is scheduled to speak via satellite Friday at a Berkeley, Calif., conference on the mortgage meltdown, is likely to call on government officials and lawmakers to keep working on ways to provide more relief.

The Bush administration is considering a plan that would help around 3 million struggling homeowners avoid foreclosure by having the government guarantee billions of dollars worth of distressed mortgages. The plan also could include loan modifications that would lower interest rates for a five-year period.

Fallout from the housing meltdown has spurred the worst global credit and financial crisis in more than a half century. To combat the problems, the government has taken a number of bold steps. The Treasury Department is pouring $250 billion into banks in return for partial ownership and the Fed this week started buying mounds of debt from companies. It also slashed interest rates to 1 percent, a level seen only once before in the last half century.

All the grim news comes just days before the nation picks the next president. Either Democrat Barack Obama or Republican John McCain will inherit a deeply troubled economy and a record-high budget deficit that could cramp spending plans.

''I think it's very, very important not to hold out the prospect of silver bullets that will correct these crises,'' Lawrence Summers, a Treasury secretary in the Clinton administration, said in Boston on Thursday.

''One of the difficulties has been there's been a succession of silver bullets that turned out to be hollow,'' he said. ''So I think one just has to be really careful and sober about recognizing there are very serious risks in the situation ... and that the process of improvement will take time.''

--------

Associated Press Writers Martin Crutsinger and Christopher Rugaber in Washington and Jay Lindsay in Boston contributed to this report.

    Beaten Down, American Consumers Burrow Deeper, NYT, 31.10.2008, http://www.nytimes.com/aponline/washington/AP-Financial-Meltdown.html

Hope and Fear in Motown

October 31, 2008
The New York Times
By MICHELINE MAYNARD and NICK BUNKLEY

DETROIT — Fall in this city has always felt a bit like spring elsewhere. It is traditionally the season of fresh starts for the hometown industry, a time when the auto companies get a jump on the calendar and begin shipping next year’s models to dealers.

There were some new bright spots this fall, too — or at least brighter ones. The once-grand Book Cadillac Hotel, long a dilapidated eyesore in the heart of downtown, reopened after a $200 million renovation.

And the saga of Detroit’s scandal-plagued former mayor, Kwame M. Kilpatrick, finally ended Tuesday when he went to jail, providing relief to the city from an embarrassing run of headlines in the national media.

But even in a city that has always, of necessity, been able to cast a favorable light on the most difficult news, things could not look more bleak.

Detroit’s auto companies are reeling from higher gas prices, a softening economy and tight credit that has made it harder for dealers to close a sale, even with eager buyers. Waves of layoffs for white-collar and blue-collar workers have sent the city’s unemployment rate to a seasonally adjusted 8.9 percent, the second-highest rate for a United States metropolitan area, behind Riverside, Calif.

A recent headline in The Detroit Free Press captured the sense of hopelessness many people feel: “Auto workers fear worst could get worse.”

The dire prospects for the auto companies, as they burn through billions in cash each month, have prompted General Motors and Chrysler to consider a merger that would turn Detroit’s Big Three into two, a cultural shift that some people find hard to swallow.

“I would have never thought — being born and raised here — of one of the Big Three being gone,” said Tom Carpenter, an electrician, who was attending the football game Saturday between Michigan State University and the University of Michigan (U. of M. lost, and is off to its worst start since 1962).

“We’re all hurting,” Mr. Carpenter added. “It’s getting scary.”

The consulting firm Grant Thornton said Thursday that half of Chrysler’s 14 manufacturing plants might close in a merger and that hundreds of parts makers could go out of business.

The Michigan Economic Development Corporation has invited representatives from some cities and counties most likely to be affected by a merger to a meeting Friday near the G.M. technical center north of Detroit.

“No matter which way this goes, it’s going to result in thousands of jobs lost, and not just in Michigan,” said Richard E. Blouse Jr., president of the Detroit Regional Chamber. “It does not take long for the ripple effect from the auto industry to go nationwide.”

Even before its talks with Chrysler became public, G.M. sought help from city pension funds, suggesting they provide $250 million for half the mortgage on its downtown headquarters, the Renaissance Center.

Few people can remember when it was this gloomy, even a generation ago when it looked like Chrysler might go belly up without federal help. At least back then, Chrysler’s chief executive, Lee Iacocca, was around to provide the firepower needed to bolster the city’s spirits.

“It’s been a bad 20 years in Detroit, but this has been a very bad year and there’s not even a light at the end of the tunnel,” said Kevin Boyle, a Detroit native and professor of history at Ohio State University who has written extensively about the city.

The evidence is everywhere, from the mailboxes of city residents, where one in every 66 households has received a foreclosure notice, to restaurants, where many tables are empty by 9 o’clock on a weekend night.

Detroit’s pro sports teams, long a refuge to distract the city from dreary news, are hurting, too. The Detroit Lions, winless through Week 7 of the season, failed to sell out last weekend — a rare occurrence — so their game with the Washington Redskins was blacked out on local TV.

Eddie Smith, of Canton Township, Mich., who works as a salesman for a printing company, said his firm was feeling the effects of the downturn, even though it did not have ties to the automakers. He said he was glad to have followed the advice of his father, who worked for a parts company. “He told me, ‘Do not get into the auto industry.’ ”

With analysts predicting that 30,000 more Michigan jobs could be lost in a G.M.-Chrysler merger, the state’s governor, Jennifer M. Granholm, has been creating contingency plans aimed at softening the blow.

Steps may include job-training programs for workers laid off by the two carmakers, as well as home mortgage assistance so jobless residents do not have to move elsewhere. There also may be help for communities that lose tax revenue because one of the companies has closed a part of its operations.

“What we can do is look at the worst-case scenario and try to move back from that,” she said in an interview last week. “It’s so unthinkable, it’s hard to digest.”

Ms. Granholm joined five other governors Thursday in asking the Treasury Department and the Federal Reserve to take “immediate action” to aid the struggling automakers.

Even before the financial crisis, Governor Granholm and state lawmakers had been on a relentless drive to attract new investment to Michigan.

One new program offers generous incentives to entice film crews to Michigan. Movies have already started, including projects featuring Drew Barrymore and Michael Cera, who starred in “Juno.”

But Detroit’s dire straits have not escaped the attention of visiting celebrities. “I am in detroit michigan/where the recession is already the depression,” the actress and talk show host Rosie O’Donnell wrote on her blog last weekend. “Hard 2 believe/unless u see it/we must save this city.”

Michael Smith, director of the Walter P. Reuther Library at Wayne State University, expressed faint optimism that the city would bounce back, as it has from numerous past crises. “This town, in a couple years when all the financial issues get straightened out, is still going to be pretty viable,” he said. “But tell that to the guy in the streets who lost his job.”

No matter the outcome, said Governor Granholm, “I think we’ll be a different state.”

    Hope and Fear in Motown, NYT, 31.10.2008, http://www.nytimes.com/2008/10/31/business/31detroit.html

NYC

We’re All Bankers Now.

So Why’s the A.T.M. Still Charging Us $2?

October 31, 2008
The New York Times
By CLYDE HABERMAN

According to our math, not the most reliable of guides, each taxpayer in this country has a $1,785.71 ownership share in the banks of America.

This figure is based on the $250 billion that the Treasury Department is investing in banks to prod them to start lending again. We divided $250 billion by 140 million, which the Internal Revenue Service says is the number of individual tax returns filed last year. By our count, that gives every taxpayer a $1,785.71 stake in JPMorgan Chase, Citigroup, Wells Fargo, Bank of America and the rest.

(In that 140 million, we are not including Charles J. O’Byrne, who resigned under fire as Gov. David A. Paterson’s top lieutenant. We can’t be sure that Mr. O’Byrne has fully recovered from what his lawyer calls late-filing syndrome when it comes to his taxes. Also excluded is Joe the Publicity-Hungry Unlicensed Plumber. Public records have shown that Joe suffers from Sticky Fingers Syndrome in paying all that he owes.)

Far be it for us to tell Henry M. Paulson Jr., the treasury secretary, or Ben S. Bernanke, the Federal Reserve chairman, how to manage $250 billion. They’re the brains. And they’re doing a heck of a job. Thanks to all that brilliance in Washington and on Wall Street, the rest of us now know how to make a small fortune: by investing a large fortune.

But as shareholders, we have thoughts on aspects of banking that seem beyond the scope of Messrs. Paulson and Bernanke. Call them small-bore issues. But they affect ordinary people every day.

Let’s start with something really easy. Is it too much to ask that all banks have pens that work on the counters with the deposit and withdrawal slips? In too many places, the pens are useless. How can people feel confident that their money is being managed wisely if those in charge can’t even provide a functioning pen?

As shareholders, we were going to suggest that the top executives of the banks forgo end-of-year bonuses, but Andrew M. Cuomo, New York’s attorney general, was ahead of us. He sent a letter on Wednesday to nine big financial institutions asking for information about their plans in this regard. It doesn’t guarantee that mega-bonuses are finished. But, really, why should we give a dime to executives who had to come to us hat in hand? Better to give an extra buck or two to the guy in the subway with an outstretched plastic cup.

How about a moratorium on new bank branches in New York neighborhoods? The tanking economy will probably take care of that anyway. But an ironclad agreement by the banks to halt further expansion would delight New Yorkers. Many are infuriated as they watch cherished local stores die and give way to impersonal bank outlets, often located within yards of one another. Enough is enough.

Why not forbid any bank receiving taxpayer money to purchase naming rights to sports stadiums and arenas? Citigroup is handing the Mets something like $20 million a year to call their new stadium Citi Field. Surely, the Mets do not need Citigroup’s money — not to mention yours — to keep failing to make the playoffs.

Might we end the procedure by which banks stiff you when you deposit a large check? Often, you are initially credited with only part of the deposit, and must wait a few days to gain access to the rest. Meanwhile, the bank is using the withheld portion to pick up a few bucks for itself. Check-clearance times have been speeded up in recent years. But why shouldn’t depositors be able to get at their money immediately, all of it?

For that matter, why must bank customers pay several times to retrieve cash at an A.T.M. (known to some as short for Always Taking Money)? If you use an A.T.M. at a bank other than your own, that bank usually charges you a fee. Fair enough. But your own bank also charges you for the same transaction. So you pay twice for the privilege — no, make that the right — to withdraw your own money. How is that?

As long as we have $1,785.71 at stake, can’t we ask that banks have recognizable names?

A few years ago, something called Sovereign Bank began popping up all over town. We’d never heard of Sovereign. Now, just as we’ve been getting used to the name, we learn that Sovereign has had it.

A full-page advertisement in Thursday’s paper announced that Sovereign had been taken over by a company called Santander. What in the name of the Bailey Savings and Loan is Santander?

Turns out that the full name is Banco Santander, based in Spain. Want to bet that Santander left out “banco,” except in very small type at the bottom of the ad, so that few would see right away that another piece of America had been acquired by a foreign institution.

Sovereign, we hardly knew ye. But at least you didn’t go by a dopey moniker like WaMu. That’s what Washington Mutual called itself before it, too, flopped. The name WaMu will soon be gone, whammo!

Here’s hoping the same doesn’t happen to our $1,785.71.

    We’re All Bankers Now. So Why’s the A.T.M. Still Charging Us $2?, NYT, 31.10.2008, http://www.nytimes.com/2008/10/31/nyregion/31nyc.html

Op-Ed Columnist

When Consumers Capitulate

October 31, 2008
The New York Times
By PAUL KRUGMAN

The long-feared capitulation of American consumers has arrived. According to Thursday’s G.D.P. report, real consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

To appreciate the significance of these numbers, you need to know that American consumers almost never cut spending. Consumer demand kept rising right through the 2001 recession; the last time it fell even for a single quarter was in 1991, and there hasn’t been a decline this steep since 1980, when the economy was suffering from a severe recession combined with double-digit inflation.

Also, these numbers are from the third quarter — the months of July, August, and September. So these data are basically telling us what happened before confidence collapsed after the fall of Lehman Brothers in mid-September, not to mention before the Dow plunged below 10,000. Nor do the data show the full effects of the sharp cutback in the availability of consumer credit, which is still under way.

So this looks like the beginning of a very big change in consumer behavior. And it couldn’t have come at a worse time.

It’s true that American consumers have long been living beyond their means. In the mid-1980s Americans saved about 10 percent of their income. Lately, however, the savings rate has generally been below 2 percent — sometimes it has even been negative — and consumer debt has risen to 98 percent of G.D.P., twice its level a quarter-century ago.

Some economists told us not to worry because Americans were offsetting their growing debt with the ever-rising values of their homes and stock portfolios. Somehow, though, we’re not hearing that argument much lately.

Sooner or later, then, consumers were going to have to pull in their belts. But the timing of the new sobriety is deeply unfortunate. One is tempted to echo St. Augustine’s plea: “Grant me chastity and continence, but not yet.” For consumers are cutting back just as the U.S. economy has fallen into a liquidity trap — a situation in which the Federal Reserve has lost its grip on the economy.

Some background: one of the high points of the semester, if you’re a teacher of introductory macroeconomics, comes when you explain how individual virtue can be public vice, how attempts by consumers to do the right thing by saving more can leave everyone worse off. The point is that if consumers cut their spending, and nothing else takes the place of that spending, the economy will slide into a recession, reducing everyone’s income.

In fact, consumers’ income may actually fall more than their spending, so that their attempt to save more backfires — a possibility known as the paradox of thrift.

At this point, however, the instructor hastens to explain that virtue isn’t really vice: in practice, if consumers were to cut back, the Fed would respond by slashing interest rates, which would help the economy avoid recession and lead to a rise in investment. So virtue is virtue after all, unless for some reason the Fed can’t offset the fall in consumer spending.

I’ll bet you can guess what’s coming next.

For the fact is that we are in a liquidity trap right now: Fed policy has lost most of its traction. It’s true that Ben Bernanke hasn’t yet reduced interest rates all the way to zero, as the Japanese did in the 1990s. But it’s hard to believe that cutting the federal funds rate from 1 percent to nothing would have much positive effect on the economy. In particular, the financial crisis has made Fed policy largely irrelevant for much of the private sector: The Fed has been steadily cutting away, yet mortgage rates and the interest rates many businesses pay are higher than they were early this year.

The capitulation of the American consumer, then, is coming at a particularly bad time. But it’s no use whining. What we need is a policy response.

The ongoing efforts to bail out the financial system, even if they work, won’t do more than slightly mitigate the problem. Maybe some consumers will be able to keep their credit cards, but as we’ve seen, Americans were overextended even before banks started cutting them off.

No, what the economy needs now is something to take the place of retrenching consumers. That means a major fiscal stimulus. And this time the stimulus should take the form of actual government spending rather than rebate checks that consumers probably wouldn’t spend.

Let’s hope, then, that Congress gets to work on a package to rescue the economy as soon as the election is behind us. And let’s also hope that the lame-duck Bush administration doesn’t get in the way.

    When Consumers Capitulate, NYT, 31.10.2008, http://www.nytimes.com/2008/10/31/opinion/31krugman.html

Wall Street Rises After Report on Economy

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

Stocks on Wall Street were higher Thursday, swinging across a wide range as investors weighed a painful report on the nation’s economy against signs that the flow of credit had been restored.

The Dow Jones industrial average was about 100 points higher in the early afternoon, down from a 250-point climb in the opening minutes. The Standard & Poor’s 500-stock index was up about 1.2 percent, and it has swung across a nearly 4 percent range over the course of the day.

Investors appeared encouraged by efforts from central banks over the last 24 hours to inject more money into the world’s financial system, offering a buffer for loans and a backstop for the short-term financing market.

The Federal Reserve lowered its benchmark lending rate by half a point on Wednesday, and it introduced arrangements to enable several emerging-market economies to swap their currencies more easily for dollars. The International Monetary Fund also committed hundreds of billions of dollars in loans.

Borrowing rates among banks fell overnight, a sign of easing in the credit market. The benchmark Libor rate for overnight loans fell to an all-time low. Three-month Libor rates also declined sharply.

Buyers also returned to the market for commercial paper, short-term i.o.u.’s used by businesses to finance daily operations. The amount of outstanding commercial paper rose by more than $100 billion for the week that ended Wednesday, rising to $1.55 trillion. That was a major improvement from earlier in the month, when the market shrank. The Fed’s introduction of a program to buy short-term corporate debt directly was considered a direct cause for the improvement.

Investors in the United States were apparently unfazed by a Commerce Department report that showed the worst consumer spending in nearly three decades. Gross domestic product declined at a 0.3 percent annual rate from July to September, the first contraction since 2001.

The report was taken as confirmation that the economy is in recession. But the decline was slightly better than economists had expected. Investors may have been pricing in even darker results.

Stocks on Wall Street have not had two consecutive days with gains in more than a month. A rally on Wednesday fizzled in the final minutes of the session; some outlets attributed the sudden decline to an erroneous report published about General Electric that was later retracted. So far, though, stocks are having an encouraging week, with the Dow up about 690 points since Monday.

Indexes in London and Frankfurt closed slightly more than 1 percent higher after falling back from earlier gains. Paris stocks showed a modest gain.

The Hang Seng index in Hong Kong led an Asian rally, closing up 12.8 percent, and the Kospi index in Seoul also soared 12 percent.

In Tokyo, the Nikkei 225 rose 10 percent, giving it a three-day gain of about 25 percent, on speculation that the Bank of Japan would cut its main interest rate target at its policy meeting on Friday. Prime Minister Taro Aso also was expected to announce an economic stimulus package worth $50 billion.

The S.& P./ASX 200 index in Sydney closed the day 4 percent higher.

Asian stocks were helped by news that the South Korean government had established a $30 billion currency swap line with the Fed, a measure expected to ease pressure on local banks needing to refinance foreign debt.

Central banks in Hong Kong and Taiwan followed the Fed’s decision on Wednesday to slash interest rates by half a percentage point. The Hong Kong Monetary Authority eased its base rate by the same amount to 1.5 percent, and Taiwan cut its key rate by a quarter of a percent to 3 percent — its third cut in about a month. Before the Fed decision, the Chinese central bank cut banks’ benchmark lending and deposit rates by 0.27 percentage point on Wednesday, the third cut in six weeks.

The Norwegian central bank on Wednesday also cut its main rate by half a percent to 4.75 percent. The European Central Bank and the Bank of England are both expected to ease rates next week as well.

The Fed lowered its target rate for federal funds — the interest rate at which banks lend to each other overnight — to 1 percent, down to the near-record lows reached in 2003 and 2004, when the Fed was trying to encourage an economic recovery after the bursting of the Internet bubble. However, the de facto fed funds market is trading around 0.125 percent, as the central bank continues to flood the market with cash.

David Jolly, Bettina Wassener and Edmund L. Andrews contributed reporting.

    Wall Street Rises After Report on Economy, NYT, 31.10.2008, http://www.nytimes.com/2008/10/31/business/31markets.html?hp

U.S. colleges punished by financial crisis

Thu Oct 30, 2008
9:20am EDT
Reuters
By Andrew Stern

CHICAGO (Reuters) - Higher education has been a growth industry in the United States, evidenced by swelling enrollments, expanding campuses and growing endowments. But the global economic crisis has caught colleges and universities in a vice.

With their endowments shrinking along with stock markets, some schools may raise tuition more than usual, even as students complain it is already too expensive and struggle to get loans.

"This will definitely test many schools," said Ronald Watts, the finance chief of Oberlin College, an elite private school in Ohio whose endowment of nearly $750 million has shrunk by about 15 percent in the past four months.

To be sure, schools have proven resilient in past recessions, helped by rising student enrollment as people seek a leg-up in a bleak job market.

"It's not going to be as drastic as what corporations are doing," Watts said. "You don't just eliminate people and lay off faculty and expect not to destroy your academic program."

Nevertheless, a few schools have already announced fresh tuition hikes, and school officials said they were keeping a close eye on their finances. And, with schools under financial pressure, local economies all over the country are likely to suffer.

Tuition increases have outpaced inflation for years. Tuition and fees at public universities have risen 175 percent since 1992, while the consumer price index rose 48 percent.

At the University of Wisconsin in Madison, the school's $1.8 billion endowment has shrunk by 18 percent since the start of the year, Sandy Wilcox of the University of Wisconsin Foundation said. Dipping into the endowment to make a promised contribution to the school's budget only shrinks it further.

Wisconsin, like many schools with substantial endowments -- 400 have endowments over $100 million and 76 above $1 billion -- use a three-year averaging system to smooth out how much they pay out from earnings.

RAINY DAY FUND

The wealthiest schools have come to rely on endowments and there has been growing pressure from Congress to boost payouts, threatening to take away their nonprofit, tax-free status if they don't comply.

For most other schools, small endowments serve as a "rainy day fund" that can disappear quickly in tough times, said John Griswold of Commonfund, which manages money for nonprofits.

"Schools we're most concerned about are smaller, less well-endowed private colleges," said Roger Goodman, vice president at Moody's Investors Service, which assigns credit ratings to 500 schools. He said endowment balances have likely plummeted by 30 percent or more.

"You still need a college degree to be a full participant in the work force," he said. "What we may see is a shifting (of applicants) from the higher-priced, small, private colleges, to a lower-priced four-year university, and from the four-year universities to community colleges for a couple of years."

A survey of 2,500 prospective students by MeritAid.com found 57 percent were now considering less-expensive colleges due to the economic downturn.

Many prospective students encounter sticker shock when confronted by the $50,000 price tag at schools like Oberlin, Boston University and Bennington College in Vermont.

But financial aid and federal loans remain available, and families whose assets have declined qualify for more aid.

Boosting access to college is one plank of Democratic presidential hopeful Barack Obama's platform. This may add pressure on publicly-funded universities to boost enrollment, which has already climbed 10 percent since 2002.

Sticker prices at private colleges are usually much higher than pubic schools, but students rarely pay full price.

"Sometimes a small, liberal arts college will actually be better for a student and more affordable than in-state (public schools)," said Ken Himmelman, Bennington's dean of admissions.

Public universities, which educate roughly 75 percent of the 17.5 million U.S. students, are anticipating cuts in state appropriations, which cover a substantial chunk of their costs.

State tax receipts have declined due to the economic slowdown and the bursting of the housing bubble.

"They'll look to the university to cut. They don't want to cut prisons, or roads," Wisconsin's Wilcox said.

MAKING CUTS

Massachusetts' public universities have cut budgets by 5 percent as their part in covering a state-wide shortfall.

Some public and private schools have declared hiring freezes and made efforts to reduce expenses because of shrunken endowments, and actual or expected declines in gifts and government support.

The state of Arizona cut its contribution to the state university system by 4 percent this year and 5 percent next year -- with another mid-year cut possible, Its more than 118,000 university students may have to absorb a tuition hike next year of 10 percent or more.

Hawaii lowered its contribution 2 percent, though enrollment rose 6 percent. Pennsylvania's public universities will raise tuition 4 percent next year ahead of state cuts.

California sliced 1 percent off its $3 billion contribution to universities but more cuts are expected as tax revenues lag projections. This spring, New York reduced its contribution and warned another 30 percent cut may be in the offing.

The bursting of the housing bubble has dried up home equity loans many families have used to pay tuition. And the stock market drop has shrunk some families' savings for education.

Often, much of the media's focus is on wealthy private schools with multibillion-dollar endowments like Harvard and Yale, which have promised to cover costs for many of those fortunate enough to gain admission.

But at less well-heeled private schools, which make up most of the United States' unrivaled roster of 4,300 nonprofit institutions of higher learning, significant tuition increases may be unavoidable.

"If history repeats itself, you're going to have falling state support on a per-student basis, rising enrollments, and probably rises in tuition," said Paul Lingenfelter, president of State Higher Education Executive Officers.

Some schools may try to wring more out of their campuses. Professors may have to teach more courses, schools may rent out underutilized campus buildings, or even sell dormitories to hoteliers and lease them back, suggested Richard Vedder, who heads the Center for College Affordability and Productivity.

"Schools normally rely on tuition increases" to offset falls in government and donor support, Vedder said. "But as economic conditions worsen, students are going to be resistant, plus there is political pressure not to raise tuition. In dollar terms, budgets may be equal to last year, and some may be forced into some sort of austerity mode."

    U.S. colleges punished by financial crisis, R, 30.10.2008, http://www.reuters.com/article/lifestyleMolt/idUSTRE49T02E20081030

Commercial Paper Rises

for First Time in 7 Weeks

October 30, 2008
Filed at 2:12 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

NEW YORK (AP) -- The Federal Reserve says the amount of commercial paper in the market increased over the past week for the first time since the collapse of Lehman Brothers Holdings Inc.

The reversal arrives after the Fed started buying highly rated commercial paper on Monday.

Commercial paper outstanding rose by $100.5 billion to a seasonally adjusted $1.55 trillion in the week ended Wednesday. That is still down from $1.82 trillion seven weeks ago, and down from $2.2 trillion when the market peaked in the summer of 2007.

Commercial paper are short-term, unsecured loans companies get to finance their day-to-day operations.

    Commercial Paper Rises for First Time in 7 Weeks, NYT, 30.10.2008, http://www.nytimes.com/aponline/business/AP-Commercial-Paper.html

Families brace for holidays without a home

Thu Oct 30, 2008
7:54am EDT
Reuters
By Lisa Baertlein

THOUSAND OAKS, Calif (Reuters) - A memento with Depression-era humor helps Kristin Bertrand keep perspective as her family braces for a Christmas holiday without their home.

The small ceramic dish she keeps from her grandfather reads: "Cheer up, things could be worse." Then, in smaller type: "So I cheered up and sure enough things got worse."

Just a few years ago, Kristin and her husband Mike Bertrand, 36, were confident they owned their own piece of the American dream. They pulled in $140,000 a year, owned a house, two cars, a telescope and other gadgets, and had season tickets to Disneyland for their two kids.

But since they lost their home in May, the Bertrands live in a sparsely furnished rental in Thousand Oaks, California, and have cut expenses to the bone.

They've sold Kristin's set of wedding rings, given up a car and the Disneyland passes to get back on their feet. The dish, taken when Kristin's 90-year-old grandfather moved to a nursing home, sits on the mantel as a reminder.

"It's going to be a lean holiday for us," said Kristin, 36, who said the family has put plans to visit relatives in Idaho on the back burner. "I think this year we need to lay low."

Adding to their worries as the holidays approach, Mike just learned that his consulting contract, the family's main income, will not be renewed at the end of October.

The Bertrands' story will be played out in many versions across the United States this holiday season, where several hundred thousand people who lost their homes to foreclosure try to redefine how they celebrate with their families.

For the Bertrands, and others, past splurges for special occasions have already been cut out of the household budget.

The Bertrands have kept their 13-year-old daughter McKaylee and 10-year-old son Taylor in the loop about their financial troubles all along. The kids have long stopped asking for money for clothes or fund-raisers, they said.

While the family had once taken McKaylee and a friend to Disneyland to celebrate her birthday, her latest party was held at home with a borrowed karaoke machine and a jump rope that guests fashioned from glow-in-the-dark necklaces.
 

NOT JUST A NUMBER

More than one million U.S. homes were lost in foreclosure from the beginning of 2007 through the end of September this year, according to RealtyTrac. Credit Suisse estimates 6.5 million loans will fall into foreclosure over the next five years, with the peak coming this year.

Families who have already lived through the worst of their financial troubles -- due to inflated monthly mortgage payments, the plunge in U.S. home values, or layoffs -- have prepared for a low-key holiday.

But even people who have not fallen into dire straits expect to tone it down this year, frightened by a plunge in financial markets that has wiped out trillions of dollars of asset values and raised the prospect of a global recession.

Six times as many people say they will cut back on gift-buying as those who plan to spend more, according to a recent Reuters/Zogby poll. U.S. retailers are bracing for their most dismal holiday sales season in nearly two decades.

Virginia Washington, a 64-year-old grandmother to 10, is already planning a more frugal holiday as she struggles to make payments on the $207,000 loan on her dream retirement home in Tolleson, Arizona, which is now worth about $150,000.

"The spirit will be there, though many of the things you've gotten used to over the years may not be," she said.

Counselors who help people through the foreclosure process say that many families just aren't making holiday plans.

"They're not as concerned about what they're going to do for the holidays, it's more about what they're going to do to keep the home," said MaryEllen De Los Santos, a housing counseling coordinator with the Adams County Housing Authority in Commerce City, Colorado.

One outlier is Ann Neukomm, 57, a receptionist from Cape Coral, Florida, who filed for bankruptcy in May and now faces foreclosure on a mortgage she took out about two years ago.

She's thinking about using a small inheritance from her father to take her 17-year-old son on a holiday cruise.

"I'd like to do something with him because it's probably going to be the last time," Neukommm said, referring to her son's 18th birthday, a time when many American teenagers stop living with their parents.

De Los Santos, the housing counselor, said that in the past, families in trouble would pour into her office at the beginning of each year. Many of them could not make mortgage payments because they spent too much on the holidays.

Now she expects more people won't even make it to the holidays to overspend, and predicts a flood of cases starting in early December.

One question De Los Santos asks clients is: "Do you want to have this kind of Christmas, or to you want to spend next Christmas in your home?"

FINANCIAL SPIRAL

Archstone Consulting Chief Executive Todd Lavieri said his biggest concern is unemployment and job insecurity. The United States has lost more than 700,000 jobs since January and experts are bracing for massive layoffs ahead.

"Saving your money to save your house will have a direct impact on holiday spending, no question about it," said Lavieri, whose group expects this year's holiday sales to contract when adjusted for inflation.

The Bertrands' plight began when Mike lost his job in 2007. He has worked since, but always for lower pay.

"I was working, but I was making less money. I kept fighting and struggling to catch up," Mike said.

In February, he lost a second job. "That was pretty much the final nail in the coffin," said Mike.

"The fear was overwhelming," Kristin said of the foreclosure saga, which left her feeling guilty and helpless.

While the family was not required to make mortgage payments during the year that the Newbury Park house they bought in 2001 was in foreclosure, Mike and Kristin said nothing felt as good as making their first payment on their rental.

"It was the best therapy," said Mike.

The couple started a support group called Moving Forward (http://wearemovingforward.org/) to help others manage the emotional toll of foreclosure. They worry that the holidays will pile additional stress on families already struggling to keep their heads above water.

"We need to get through it without any casualties," Kristin said.

(Reporting by Lisa Baertlein; Additional reporting by Tim Gaynor in Phoenix and Tom Brown in Cape Coral, Florida; Editing by Michele Gershberg and Eddie Evans)

    Families brace for holidays without a home, R, 30.10.2008, http://www.reuters.com/article/domesticNews/idUSTRE49T01O20081030

Exxon Mobil Posts

Biggest US Quarterly Profit Ever

October 30, 2008
Filed at 9:01 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

HOUSTON (AP) -- Exxon Mobil Corp., the world's largest publicly traded oil company, reported income Thursday that shattered its own record for the biggest profit from operations by a U.S. corporation, earning $14.83 billion in the third quarter.

Bolstered by this summer's record crude prices, the Irving, Texas-based company said net income jumped nearly 58 percent to $2.86 a share in the July-September period. That compares with $9.41 billion, or $1.70 a share, a year ago.

The previous record for U.S. corporate profit was set in the last quarter, when Exxon Mobil earned $11.68 billion.

Revenue rose 35 percent to $137.7 billion.

On average, analysts expected the company to earn $2.39 per share in the latest quarter on revenue of $131.4 billion.

Exxon Mobil's results got a boost of $1.62 billion in the most-recent quarter from the sale of a natural gas transportation business in Germany. It also took a special, after-tax charge of $170 million related to a punitive damages award related to the 1989 Exxon Valdez oil spill.

Excluding those items, third-quarter earnings amounted to $13.38 billion -- nearly 15 percent above its previous profit record from the second quarter.

As expected, Exxon Mobil posted massive earnings at its exploration and production, or upstream, arm, where net income rose 48 percent to $9.35 billion. Higher oil and natural gas prices propelled results, even though production was down from the third quarter a year ago.

Oil producers are coming off a quarter during which crude prices reached an all-time high of $147.27 -- and their profits have reflected it. Crude prices, however, have quickly fallen 50 percent from the summer's highs, and the global economic malaise has raised questions about energy demand at least into 2009.

Some companies, especially smaller producers, are scaling back spending on new exploration and production projects because of the uncertainty, though analysts say that its less likely to happen at the well-heeled giants like Exxon Mobil.

Company shares rose 96 cents to $75.61 in premarket trading.

    Exxon Mobil Posts Biggest US Quarterly Profit Ever, NYT, 30.10.2008, http://www.nytimes.com/aponline/business/AP-Earns-Exxon-Mobil.html

Economy Shrank In Third Quarter

as Consumers Retreat

October 30, 2008
Filed at 9:02 a.m. ET
The New York Times
By REUTERS

WASHINGTON (Reuters) - The U.S. economy shrank at a 0.3 percent annual rate in the third quarter, its sharpest contraction in seven years as consumers cut spending and businesses reduced investment in the face of rising fears that recession was setting in.

The Commerce Department said the third-quarter contraction in gross domestic product was the steepest since the corresponding quarter in 2001 though it was slightly less than the 0.5 percent rate of reduction that Wall Street economists surveyed by Reuters had forecast.

The third-quarter contraction was a striking turnaround from the second quarter's relatively brisk 2.8 percent rate of growth. It occurred when financial market turmoil that has heightened concerns about a potentially lengthy U.S. recession.

Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter - the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods - items like food and paper products - dropped at the sharpest rate since late 1950.

Continuing job losses coupled with declining gains from stocks and other investments have put consumers under severe stress. The GDP report showed that disposable personal income dropped at an 8.7 percent rate in the third quarter - the steepest since quarterly records on this component were started in 1947 -- after rising 11.9 percent in the second quarter when most of economic stimulus payments still were flowing.

Consumers cut spending on durable goods like cars and furniture at a 14.1 percent annual rate in the third quarter, the biggest cut in this category of spending since the beginning of 1987. Car dealers have said that sales have virtually stalled, in part because tight credit makes it hard for even creditworthy buyers to get loans.

Businesses also were clearly wary about the future, cutting investments at a 1 percent rate after boosting them 2.5 percent in the second quarter. It was the first reduction in business investment since the end of 2006. Inventories of unsold goods backed up at a $38.5-billion rate in the third quarter after rising $50.6 billion in the second quarter.

Prices were still rising relatively strongly in the third quarter, with the personal consumption expenditures index up at a 5.4 percent annual rate, the sharpest since early 1990. Even excluding volatile food and energy items, core prices grew at a 2.9 percent rate, up from the second quarter's 2.2 percent rise.

However, many commodity prices in October have begun to ease and the Federal Reserve indicated on Wednesday when it slashed interest rates again that its concern for the future was focused more heavily on weak growth than on inflation.

(Reporting by Glenn Somerville, editing by Neil Stempleman)

    Economy Shrank In Third Quarter as Consumers Retreat, NYT, 30.10.2008, http://www.nytimes.com/reuters/business/business-us-usa-economy.html

Concerned Fed Trims Key Rate

by a Half Point

October 30, 2008
The New York Times
By EDMUND L. ANDREWS

WASHINGTON — The Federal Reserve lowered its benchmark interest rate by half a percentage point on Wednesday, its second big rate cut this month, as policy makers tried to fend off what could be the worst economic downturn in decades.

The move brought the target rate for federal funds — the interest rate at which banks lend to each other overnight — to 1 percent, down to the near-record lows reached in 2003 and 2004, when the Fed was trying to encourage an economic recovery after the bursting of the Internet bubble. The central bank left open the possibility of going still lower, warning “downside risks to growth remain.”

As the crisis that began in the mortgage market spreads through the economy, policy makers are redoubling their efforts to contain the damage. Even as the Fed reduced rates on Wednesday, the Bush administration was weighing a plan to slow the foreclosure epidemic in the nation’s housing market. Details of the initiative were in flux, but the plan could involve the government guaranteeing the mortgages of as many as three million at-risk homeowners, a step that could cost taxpayers tens of billions of dollars, people briefed on the plan said.

But neither the Fed’s move nor word of the possible mortgage rescue were enough to allay concern in the financial markets that the economy was in deep trouble. The stock market, which had rallied briefly after the rate cut was announced shortly after 2 p.m., tumbled in the final minutes of trading.

In a statement, the Fed acknowledged that the economy had lost steam on almost every front — consumer spending, business investment, financial markets and even exports, which had been the one bright spot recently. For the time being, infla-tion is of little concern.

“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” the central bank said. Industrial production and investment in new equipment have also slowed, it said, and slumping growth around the world has reduced demand for American exports.

The government has taken a series of extraordinary steps in recent weeks to get credit flowing again, but while the strains in the credit markets have eased somewhat in response, confidence remains fragile. The central bank left room for itself to drive short-term rates even lower, saying that it would “act as needed” to promote both sustainable growth and stable prices.

But analysts said lower interest rates were not likely to accomplish much at this point, because the economy’s biggest problem is the fear among banks and financial institutions about lending money.

“The difference between 1.5 percent and 1 percent is really pretty insignificant, particularly when the banking system is as weak as it is,” said Ethan Harris, a senior economist at Barclay’s Capital. “You have a big uncertainty shock. It’s not just that the markets have declined. People are uncertain about where the world is going.”

Indeed, the stock markets reacted chaotically, even though the rate cut was in line with what investors had been expecting. The Dow Jones industrial average plunged nearly 200 points in the first few minutes after the announcement at 2:15 p.m., then zigzagged before closing down 74.16 points at 8,990.96.

The Federal Reserve is within striking range of reducing the overnight lending rate to zero, a point that Japan reached in the 1990s and where it remained for years while struggling to revive its economy.

If the federal funds rate were to reach zero, the Fed would not be out of tools for stimulating the economy. But it would have to resort to unconventional approaches that it has never used before. Instead of trying to reduce rates on overnight loans between banks, for example, it might start buying longer-term Treasury securities.

If the Fed bought, for example, two-year Treasury notes, that demand would push prices up and yields down, and presumably would also push down the interest rates for consumer credit that tracks those Treasury securities.

The Fed’s biggest weakness at the moment is that the economy’s problems have less to do with interest rates than the reluctance of banks and financial institutions to lend money. Even though the Fed has lent almost $600 billion to financial institutions in the last month alone, banks are still reluctant to lend to businesses or consumers.

Since the credit crisis began in August 2007, the Fed has slashed the overnight lending rate from 5.25 percent. But interest rates for 30-year fixed-rate mortgages are about 6.3 percent, roughly where they were when the credit crisis began.

Many economists contend that the United States economy has already slipped into a recession that could well last longer and be more severe than any downturn since the early 1970s.

Macroeconomic Advisers, a forecasting firm in St. Louis, said the spate of discouraging economic data over the last four weeks has prompted it to mark down its estimate of third-quarter growth from a slight increase of 0.1 percent to a contraction of 0.7 percent.

“It’s unbelievable what has happened to all aspects of financial conditions in the past several weeks,” said Laurence H. Meyer, a former Fed governor and now vice chairman of Macroeconomic Advisers. “Everything has changed in such a dramatic way.”

Both consumers and businesses have ratcheted back spending. Major corporations from General Electric to Coca-Cola have announced layoffs, and Detroit’s automakers are struggling to survive.

Private forecasters expect that the Commerce Department, which will release its initial estimate of third-quarter growth on Thursday, will report that the economy contracted about one-half of 1 percent. But most forecasters expect the fourth quarter to be down by 2 percent or more.

The United States has shed more than 700,000 jobs so far this year, and the unemployment rate has climbed to 6.1 percent, from 5 percent in January. What makes that alarming to many analysts is that the job losses usually have come so early in the downturn.

Traditionally, companies have been cautious about laying off workers at the start of a downturn and equally cautious about adding workers after a recovery begins.

“The ground is moving from underneath us,” said Diane Swonk, chief economist at Mesirow Financial, an investment firm in Chicago.

Details of the administration’s plan to stem foreclosures were still under discussion on Wednesday, but people briefed on the effort said the government might guarantee $500 billion to $600 billion of home loans, or about 5 percent of all loans, for up to five years. The ultimate cost to taxpayers is uncertain and would ultimately depend on the course of the housing market and the economy. The government is expected to allocate up to $50 billion to the program, which assumes only a small portion of the homeowners will default on their loans and losses will be limited.

Officials from the White House, the Treasury Department and the Federal Deposit Insurance Corporation are working on the plan and an announcement could come in the next few days or weeks. Sheila C. Bair, the chairman of the Federal Deposit Insurance Corporation, has been the leading proponent of the plan and first discussed the idea publicly a week ago.

A spokeswoman for the Treasury, Jennifer Zuccarelli, said it would be premature to discuss a plan that policy makers are still working on. “As we said last week, the administration is going through the White House policy process too look at ways to reduce foreclosures, and that process is ongoing,” she said. “We have not decided on a particular approach."

The plan was authorized by Congress earlier this month as part of the $700 billion financial rescue package. Though the government would only allocate about $50 billion to the program, because the money serves as a reserve for losses, it could be used to back loans totaling between $500 billion to $600 billion.

Like with any other insurance company, the government would spend money when something bad happens. In this case, the Treasury or the F.D.I.C. would make a payment to investors or banks if borrowers with loans that have been modified fall behind on their new, lower payments. The government would only cover half of the losses on defaulted loans.

The program is intended to entice servicing companies that handle billing and collections to reduce payments for homeowners by lowering interest rates and writing down loan balances. At the end of June, nearly 1 in 10 mortgages was delinquent or in foreclosure.

Edmund L. Andrews reported from Washington and Vikas Bajaj from New York. Eric Dash contributed reporting from New York.

    Concerned Fed Trims Key Rate by a Half Point, NYT, 30.10.2008, http://www.nytimes.com/2008/10/30/business/economy/30fed.html

Op-Ed Contributor

Mortgage Justice Is Blind

October 30, 2008
The New York Times
By JOHN D. GEANAKOPLOS and SUSAN P. KONIAK

THE current American economic crisis, which began with a housing collapse that had devastating consequences for our financial system, now threatens the global economy. But while we are rushing around trying to pick up all the other falling dominos, the housing crisis continues, and must be addressed.

We start with this simple fact: Too many families are being thrown out of their homes when it makes more sense to let them stay by “reworking” their mortgages — adjusting terms to make it possible for the homeowners to meet their responsibilities. In many cases, adjusting loans would help the homeowners and the lenders: the new mortgages would have lower monthly payments that homeowners could afford to pay, and would end up giving the lenders more money than the 50 cents on the dollar that many foreclosure sales are bringing these days.

The presidential candidates have proposed plans to help some homeowners and mortgage-security holders by buying out loans or putting a moratorium on foreclosures. We have a plan that would be much less costly than buyouts and more comprehensive than a moratorium.

In the old days, a mortgage loan involved only two parties, a borrower and a bank. If the borrower ran into difficulty, it was in the bank’s interest to ease the homeowner’s burden and adjust the terms of the loan. When housing prices fell drastically, bankers renegotiated, helping to stabilize the market.

The world of securitization changed that, especially for subprime mortgages. There is no longer any equivalent of “the bank” that has an incentive to rework failing loans. The loans are pooled together, and the pooled mortgage payments are divided up among many securities according to complicated rules. A party called a “master servicer” manages the pools of loans. The security holders are effectively the lenders, but legally they are prohibited from contacting the homeowners.

In place of the bank lender, the master servicer now holds the power to rework the loans. And, as we have seen in the current crisis, these servicers aren’t doing that, as house after house goes into foreclosure.

Why are the master servicers not doing what an old-fashioned banker would do? Because a servicer has very different incentives. Most anything a master servicer does to rework a loan will create big winners but also some big losers among the security holders to whom the servicer holds equal duties. So the servicers feel safer doing nothing. By allowing foreclosures to proceed without much intervention, they avoid potentially huge lawsuits by injured security holders.

On top of the legal risks, reworking loans can be costly for master servicers. They need to document what new monthly payment a homeowner can afford and assess fluctuating property values to determine whether foreclosing would yield more or less than reworking. It’s costly just to track down the distressed homeowners, who are understandably inclined to ignore calls from master servicers that they sense may be all too eager to foreclose.

Yes, the master servicer is paid to oversee the mortgages, but those fees were agreed on during the housing boom, and were based on the notion that reworking mortgages would be a relatively small part of the job and would carry little litigation risk.

Last, some big master servicers are part of, or have now been bought out by, the very companies that own the securities that can be affected by the reworking or foreclosure decisions the master servicer makes. This conflict further increases the chances of litigation and contributes to inaction.

Thus it is no surprise that so few mortgages have been reworked, with devastating consequences for the economy. It is also no surprise that trading in the securities tied to the mortgage pools has drastically declined, because potential buyers cannot be sure what the servicers are going to do with the underlying loans.

To solve this problem, we propose legislation that moves the reworking function from the paralyzed master servicers and transfers it to community-based, government-appointed trustees. These trustees would be given no information about which securities are derived from which mortgages, or how those securities would be affected by the reworking and foreclosure decisions they make.

Instead of worrying about which securities might be harmed, the blind trustees would consider, loan by loan, whether a reworking would bring in more money than a foreclosure. The government expense would be limited to paying for the trustees — no small amount of money, but much cheaper than first paying off the security holders by buying out the loans, which would then have to be reworked anyway. Our plan would also be far more efficient than having judges attempt this role. The trustees would be hired from the ranks of community bankers, and thus have the expertise the judiciary lacks.

Americans have repeatedly been told that the distressed loans cannot be reworked because these mortgages can no longer be “put back together.” But that is not true. Our plan does not require that the loans be reassembled from the securities in which they are now divided, nor does it require the buying up of any loans or securities. It does require the transfer of the servicers’ duty to rework loans to government trustees. It requires that restrictions in some servicing contracts, like those on how many loans can be reworked in each pool, be eliminated when the duty to rework is transferred to the trustees.

Under our plan, servicers would provide the homeowner’s name and other relevant information on each loan to a central government clearing house, which would in turn give trustees the data on homes in their local area. Once the trustees have examined the loans — leaving some unchanged, reworking others and recommending foreclosure on the rest — they would pass those decisions to the government clearing house for transmittal back to the appropriate servicers.

The servicers would then do exactly the same work they do now, passing on the payments they collect from the reworked mortgages to the securities’ owners in each pool. The servicers would also foreclose on those properties the trustees had decided did not qualify for reworking. For performing those tasks, the servicers would continue to receive the fees due under their existing contracts.

The rules governing the trustees must ensure that only homeowners in true financial distress qualify to have their mortgages reworked, so that homeowners do not see the program as a free ride to a cheaper mortgage. Luckily, there is already a rough set of guidelines in place for making these sorts of loan-modification decisions, thanks to the Hope Now Alliance, a joint effort of the Treasury, the Department of Housing and Urban Development and private lenders.

Our plan would keep many more Americans in their homes, and put government money into local communities where it would make a difference. By clarifying the true value of each loan, it would also help clarify the value of securities associated with those mortgages, enabling investors to trade them again. Most important, our plan would help stabilize housing prices.

We need an innovative approach to overcome the gridlock that plagues our housing markets. Otherwise, we imperil millions of homeowners and — through the alchemy of derivatives — the American and global economy.

John D. Geanakoplos is a professor of economics at Yale and a partner in a hedge fund that trades in mortgage securities. Susan P. Koniak is a former law professor at Boston University.

    Mortgage Justice Is Blind, NYT, 30.10.2008, http://www.nytimes.com/2008/10/30/opinion/30geanakoplos.html

Manufacturing Orders Rebound in September

October 30, 2008
The New York Times
By MICHAEL M. GRYNBAUM

A report on Wednesday presented a mixed picture of business investment in September, with a surge in orders for aircraft and transportation equipment offsetting declines in the communications industry.

Over all, orders for durable goods — considered a useful, if volatile, gauge for longer-term business spending — were 0.8 percent higher in September than August, the fourth increase in five months. Orders for August were revised lower, to minus 5.5 percent, the Commerce Department said Wednesday.

The biggest gains came in a 30 percent surge in orders for civilian aircraft, a figure that is highly volatile from month to month. But businesses also invested in transportation equipment, including motor vehicle-related parts; capital goods; electronic equipment; and heavy machinery.

The gain is an encouraging sign for the manufacturing industry, which has suffered from a decline in export orders as the dollar strengthens against foreign currencies.

Still, a benchmark gauge for business spending declined 1.4 percent, adding to a 2.2 percent decline in August. This gauge measures orders of civilian capital goods outside of aircraft.

Orders for metal products fell, along with demand for computers, communications equipment and miscellaneous electronic products.

Outside of transportation, durable goods orders fell 1.1 percent. And excluding military equipment, orders dropped 0.6 percent.

“The trend in core capital goods orders is still broadly flat, but we are very nervous about the next few months,” Ian Shepherdson, an economist at High Frequency Economics, wrote in a note.

    Manufacturing Orders Rebound in September, NYT, 30.10.2008, http://www.nytimes.com/2008/10/30/business/economy/30econ.html

Sale Helps Kraft’s Profit Double

October 29, 2008
Filed at 1:33 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

MILWAUKEE (AP) -- Kraft Foods Inc. said Wednesday that its third-quarter profit more than doubled because of a one-time gain from the $2.6 billion sale of its Post cereals business.

On an ongoing basis, Kraft's profit fell 6 percent.

But including the proceeds from the Post sale, the maker of Oscar Mayer luncheon meat and Ritz crackers said it earned $1.4 billion, or 93 cents per share, in the quarter that ended Sept. 30. That compares to profit of $596 million, or 38 cents per share, a year ago.

Revenue rose nearly 20 percent to $10.46 billion. That gain includes a 0.9 percent drop in volume, though sales were helped by an 8.4 percent increase in pricing.

The company noted it was seeing significant gains from marketing the affordability of Kraft's macaroni and cheese lines and Jell-O dry packaged desserts. Irene Rosenfeld, Kraft's chairman and chief executive, said the company, with its trove of brands, is poised to grow well as consumers continue to look for value.

''Brands like Kool-Aid, like Mac and Cheese, like Jell-O are faring particularly well in the current environment and I see no sign that that will stop in the future,'' she told investors on a conference call.

Food companies have been increasing prices to recoup lost money due to high costs for key ingredients like corn and oil. Kraft said in the quarter, input costs were up $700 million and are expected to be up $2 billion this year over 2007. Input costs are coming down, though they'll still be above historic levels, and pricing is expected to remain in place, which will further pad profit margins.

The Post cereals sale added 57 cents to per-share profit, which was lower by 7 cents due to asset impairment and exit costs. Without these items, the company earned 44 cents per share, beating a Wall Street consensus by a penny.

Analysts polled by Thomson Reuters expected 43 cents per share and revenue of $10.5 billion.

The Northfield, Ill.-based company said it was making a conscious effort to do away with less profitable volume, which contributed to the volume drop in the quarter.

''In the near term, as absolute price points remain at historic highs we would expect volume pressure and difficult comparisons to persist,'' chief financial officer Tim McLevish told investors on a conference call.

As long as the company keeps its costs low and keeps pushing through price increases, Kraft will fare well in the long run because of the brands it carries, said Christopher Shanahan, a research analyst with Frost & Sullivan. The company is also poised to benefit as people eat at home more, even though some are shifting their buying to less expensive, off-brand products.

''They have very strong core brands that will grow despite the economy,'' Shanahan said. ''They have a strong brand loyalty when it comes to value.''

The company is continuing its efforts to add new types of products, which can sell at higher prices and saw volume growth in about half of its North American product segments, including beverages, convenient meals and grocery.

Volume slipped in the U.S. snack segment as revenue dropped in snack bars, due to removing some product from the market and weakness from higher pricing.

The company reiterated its estimates for full-year profit in 2008 and 2009. It said it would earn $1.88 per share this year, reflecting a lower tax rate, higher interest and less favorable foreign exchange rates. In 2009, the company predicted it would earn $2 per share.

Analysts expect Kraft to earn $1.90 per share in 2008 and $2.02 per share in 2009.

Shares rose 27 cents, less than 1 percent, to $29.15 in late morning trading Wednesday.

------

AP Business Writer Vinnee Tong in New York contributed to this report.

(This version CORRECTS SUBS 4th graf to correct pricing up 8.4 percent sted 8.9 percent.)

    Sale Helps Kraft’s Profit Double, NYT, 29.10.2008, http://www.nytimes.com/aponline/business/AP-Earns-Kraft.html

Consumers Feel the Next Crisis: It’s Credit Cards

October 29, 2008
The New York Times
By ERIC DASH

First came the mortgage crisis. Now comes the credit card crisis.

After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.

The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.

Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.

“If unemployment continues to increase, credit card net charge-offs could exceed historical norms,” Gary L. Crittenden, Citigroup’s chief financial officer, said.

Faced with sobering conditions, companies that issue MasterCard, Visa and other cards are rushing to stanch the bleeding, even as options once easily tapped by borrowers to pay off credit card obligations, like home equity lines or the ability to transfer balances to a new card, dry up.

Big lenders — like American Express, Bank of America, Citigroup and even the retailer Target — have begun tightening standards for applicants and are culling their portfolios of the riskiest customers. Capital One, another big issuer, for example, has aggressively shut down inactive accounts and reduced customer credit lines by 4.5 percent in the second quarter from the previous period, according to regulatory filings.

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.

The depth of the financial crisis has shocked a credit-hooked nation into rethinking its habits. Many families once content to buy now and pay later are eager to trim their reliance on credit cards. The Treasury Department, which is spending billions of dollars in taxpayer money to clean up an economic mess brought on in part by all sorts of easy credit, recently started an advertising campaign inviting consumers to check into the “Bad Credit Hotel,” an online game that teaches the basics of maintaining good credit.

At the same time, the fear factor among lenders has deepened just as the crisis makes it harder for some financially stretched consumers to wean themselves from credit cards for even basic needs, like gas and food.

“We are not going to say, ‘Yahoo, this is over,’ and extend credit like we did without fear,” Jamie Dimon, JPMorgan Chase’s chief executive, said in a recent conference call. “If you’re not fearful, you’re crazy.”

Even those with good credit ratings are not excepted. American Express, which traditionally catered to more upscale cardholders, said it would be increasing effective interest rates by 2 or 3 percentage points for some of its credit card holders — a move that could, for example, push a 15 percent rate up to 18 percent.

“We think it’s prudent given the nature of those products and the economic environment we face,” Daniel Henry, its chief financial officer, said in a recent conference call.

Some reward programs have also gotten stingier as lenders cut corners to save money. Card companies, for example, have taken to substituting cheaper brands for a Sony big-screen television as a way of lowering the cost of their redemption prizes.

For less creditworthy customers, issuers are pulling back on promotional offers that allowed borrowers to pay no interest for months as they try to get ahead of stiffer lending rules that have been proposed by federal banking regulators and Congress.

The regulations, while beneficial to consumers, will curb profits on card issuers’ riskiest customers. JPMorgan said that it was withdrawing some teaser-rate loans that were only marginally profitable. Discover Financial shortened the duration of its zero-balance offers.

And lenders, over all, are slowing the flood of mail offers to a trickle with moves that would translate for the average American household into about 13 fewer pieces of credit card junk mail a year than its peak in 2005. Mail offers to new and existing customers are on pace to drop below 8.4 billion pieces, the lowest level since 2004, according to Mintel Comperemedia, a direct marketing research firm.

Online credit card applications have fallen for the first time in five quarters, in part because customers are receiving fewer mail offers that drive them to the Web, according to data from comScore, an Internet marketing research firm.

“We used to get a couple of offers a week, but I haven’t seen a credit card offer in over a year,” said Brett Barry, who owns a real estate agency outside Phoenix and described his credit record as strong. “What blows me away is these companies are in the business of extending credit, but they don’t want to do it for me.”

Mr. Barry said that, without any notice, American Express had reduced the credit limit on his business and personal credit card at least four times in the last year, which he said had lowered his credit score. The moves have also made it difficult for him to manage his payroll and budget, he said.

“Credit card issuers have realized their market is shrinking and that there is no room for extra credit cards, so they have to scale back,” said Lisa Hronek, a research analyst at Mintel. “People are completely maxed out with mortgages, home equity lines and credit card debt.”

At the same time, credit card profit margins have been narrowing, largely because lenders’ own financing costs remain elevated as investors spurn credit card bonds, just as they did mortgages. Another factor is that the interest rates banks charge even creditworthy borrowers have come down after the emergency actions taken by the Federal Reserve to ease the credit crisis.

Meanwhile, bank executives say consumers are starting to curb their spending, to an extent that may become clearer Wednesday when Visa reports its third-quarter results.

In previous downturns, banks could make up the missing profits by raising fees. This time, there may be less room to maneuver.

“The last time credit costs spiked, the late fees were much lower, so card issuers could turn to that and reprice more nimbly,” a Morgan Stanley analyst, Betsy Graseck, said. “There is just more scrutiny now, and coming after the subprime mortgage crisis, the world is more sensitive to the way lenders behave.”

    Consumers Feel the Next Crisis: It’s Credit Cards, NYT, 29.10.2008, http://www.nytimes.com/2008/10/29/business/29credit.html?hp

Home Prices Tumbled in August

October 29, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The beleaguered housing market found little relief in August as home prices across the country dropped at yet another record pace, according to a closely watched survey released Tuesday.

Home prices in 20 cities fell 16.6 percent in August compared with a year ago, the biggest annual drop in the history of the Case-Shiller Home Price Index, released by Standard & Poor’s, the ratings agency.

Every city included in the survey experienced a drop in prices from a year earlier, a trend that has so far lasted five months. Phoenix and Las Vegas were hit hardest, with prices down 31 percent in both cities. Prices declined more than 25 percent in Los Angeles, Miami, San Diego and San Francisco.

Prices dropped a percentage point between August and July, a sign that the pace of the decline may be slowing slightly. Only two cities — Cleveland and Boston — had price increase for the month, compared with six in July. Prices were unchanged in Chicago and Denver.

“The downturn in residential real estate prices continued, with very few bright spots in the data,” David M. Blitzer, who oversees the survey, said in a statement.

A 10-city index fell 17.7 percent year-over-year.

The housing slump has continued unabated for months, and its consequences can be felt throughout the nation’s economy. It has led to the erosion of jobs, pain in a number of housing-related industries, and, in part, the credit crisis that caused the collapse of several Wall Street banks. Whirlpool, the appliance maker, announced more layoffs and additional plants closings on Tuesday, citing the housing slowdown. Households have also watched their home equity lines deteriorate.

Lower prices, however, are in some sense the key to recovery, economists said, although prices may need to fall further to lure buyers back into a market sagging with unsold inventory.

Sales also appeared to pick up slightly in September, according to reports from the Commerce Department and the private National Association of Realtors. Sales of both previously owned and newly reconstructed homes rose. But inventories remained elevated.

Housing woes are just one of the problems currently ailing the American consumer, a fact driven home by a disastrous reading on consumer confidence released on Tuesday by the Conference Board, a private group.

The confidence survey, which dates back decades, plunged to its lowest reading on record, hitting 38.0 in October from 61.4 in September. Expectations are also at an all-time low.

The enormous declines in the stock market last month appeared to have taken a dramatic toll on sentiment among Americans. Nearly half of the 5,000 consumers surveyed said they expected the job market to deteriorate further, and many appeared worried about their ability to make purchases over the next few months.

“These moves are likely to have at least partially been driven by the worrying news flow on the U.S. financial system, but it appears to be the labor market that is the source of the bulk of the worries,” James Knightley, an economist at ING Bank, wrote in a research note.

    Home Prices Tumbled in August, NYT, 29.10.2008, http://www.nytimes.com/2008/10/29/business/economy/29econ.html

States forced to cut health coverage for poor

28.10.2008
USA Today
By Julie Appleby

Economic troubles are forcing states to scale back safety-net health-coverage programs — even as they brace for more residents who will need help paying for care.

Many cuts affect Medicaid, which pays for health coverage for 50 million low-income adults and children nationwide, including nearly half of all nursing home care. The joint federal-state program is a target because it consumes an average 17% of state budgets — the second-biggest chunk of spending in most states, right behind education.

"Medicaid programs across the U.S. are going to be severely damaged," says Kenneth Raske, president of the Greater New York Hospital Association. He expects some hospitals nationwide may drop services and some hospitals and nursing homes may lay off employees.

Among the cuts:

• Hawaii this month halted funding for a 7-month-old program aimed at covering all the state's uninsured children.

• South Carolina Gov. Mark Sanford must decide by Thursday whether to sign a budget that would slash $160 million in health care, including an 8.1% cut to Medicaid and a 10.8% cut to the Department of Mental Health. Programs to help autistic children, the elderly who need prescription drugs and low-income workers may be hit.

• California in July cut payments to hospitals 10% under its Medicaid program, Medi-Cal. It had planned to restore 5% in March, but Gov. Arnold Schwarzenegger has called an emergency legislative session Nov. 5 to deal with lower-than-expected revenues.

Health care is a likely target, says Jan Emerson of the California Hospital Association, who expects more hospitals to drop out of Medi-Cal if extra cuts occur. Less than half the state's hospitals currently contract with Medi-Cal. They treat Medi-Cal patients in their ERs, but then transfer them to other hospitals.

• Massachusetts this month cut $293 million from its Medicaid budget, including $40 million from the Cambridge Health Alliance for care it already provided to low-income residents. The alliance, which runs three hospitals and dozens of clinics, says that cut plus other state cuts could total an amount equal to the cost of 650 full-time employees — or 20% of its workforce. "We can't absorb that without some serious re-evaluation of what we do," spokesman Doug Bailey says. "Everything is on the table."

The cuts follow several years of strong budgets and state efforts to bring health coverage to more low-income adults and children.

"When the economy goes down, states have increased pressure (from more uninsured), yet have to curtail plans to broaden coverage," says Diane Rowland, executive vice president of the Kaiser Family Foundation, a non-partisan think tank.

For every 1% jump in unemployment, about 1 million more people enroll in Medicaid, the group found in September.

Lawmakers in at least 27 states are facing budget gaps just months after dealing with some of the largest shortfalls since the recession in 2001, reports the Center on Budget and Policy Priorities, a Washington think tank. States can only make Medicaid cuts that affect people covered under optional state programs, such as children whose families earn slightly more than federal guidelines require.

"We're expecting budget gaps for the rest of this year and into fiscal 2010 to be about $100 billion," says Elizabeth McNichol, a senior fellow at the center. "Health care gets hit hard when states have to cut back."

    States forced to cut health coverage for poor, UT, 28.10.2008, http://www.usatoday.com/news/health/2008-10-28-health-cuts_N.htm

More companies may end 401(k) match

28 October 2008
USA Today
By Chris Woodyard

As the economic slump deepens, more companies are expected to join General Motors in suspending matches of contributions to their employees' 401(k) retirement accounts.

GM last week became only the latest on a list of well-known companies trying to conserve cash to weather the downturn by halting 401(k) account matches.

Also among them are Goodyear, Frontier Airlines, commercial real estate firm Cushman & Wakefield, broadcast group Entercom and rental car agency Dollar Thrifty Automotive Group.

Employers typically match a portion of workers' contributions as a way of encouraging them to sock away money for their retirement and as an alternative to funding a pension plan.

Some 2% of 248 employers surveyed this month by human-resources firm Watson Wyatt indicated they have cut back on 401(k) matches as a way of coping with the sinking economy. Another 4% said they may join them in coming months.

Those numbers might be even larger were it not for warnings from experts that cutting back on 401(k) contribution matches can be a morale killer.

"It's penalizing the folks who are doing the right thing (by) contributing to their retirement," says Alec Dike, a senior financial counselor for Watson Wyatt. And the suspensions could backfire on companies because "it suggests you are in worse financial straits than you really are."

But some say the 401(k) system — which has been steadily expanding as pension benefits decline and workers become more responsible for providing for their retirement income — was designed to provide just such flexibility to employers when their business is struggling.

The match is easy to junk because it is essentially a form of profit-sharing by a company, says Jack VanDerhei, research director of the Employee Benefit Research Institute, a Washington think tank.

Frontier, for instance, was kicking in 50 cents for every dollar an employee contributed to his 401(k) up to 10% of his pay, but stopped the matches June 1 after filing for a Chapter 11 bankruptcy reorganization.

For some, it's not the first time. GM's suspension of matches to its 401(k) plan last week for 32,000 eligible white-collar employees was the second time this decade that it has yanked its participation.

"I don't think anybody is happy about it, but people are pretty determined," says GM spokesman Tom Wilkinson.

Goodyear, which halted 401(k) matching in 2003, plans to resume starting Jan. 1.

"We're all excited it's coming back," says spokesman Scott Baughman.

    More companies may end 401(k) match, UT, 28.10.2008, http://www.usatoday.com/money/perfi/retirement/2008-10-28-pension-401k-match-ending_N.htm

Consumers Gloomiest Ever as Home Prices Plunge

October 28, 2008
Filed at 12:12 p.m. ET
The New York Times
By REUTERS

NEW YORK (Reuters) - U.S. consumer confidence dived to a record low in October as plunging home values and a severe financial crisis left Americans anxious about their jobs and pessimistic about the future.

The Conference Board said on Tuesday its index measuring consumer sentiment tumbled to 38.0 in October, down from 61.4 in September and the lowest reading since the index was first published back in 1967.

One factor depressing Americans was the rapidly declining value of their homes. U.S. single-family home prices dropped a record 16.6 percent in August from a year earlier and plummeted more than 30 percent in Las Vegas and Phoenix, Standard & Poor's said on Tuesday.

This was making consumers feel a lot less wealthy and dampening their spending, on which U.S. economic growth so keenly depends.

"Consumers are completely shut down at this point," said Lindsey Piegza, a market analyst at FTN Financial. "They see no end in sight even with all the actions that the government has taken."

The government has indeed done a lot. The Federal Reserve was expected to cut interest rates yet again this week to prop up the economy and try to stimulate lending, while the Treasury seemed to be trying to broaden its support of industry to include insurers and automakers.

Yet none of this has stopped the carnage in the stock market, which on Tuesday was struggling to hold in positive territory, and has already fallen nearly 25 percent in October alone.

The losses have also spread globally, with emerging markets showing an even more virulent reaction to the prospect of a global recession, and theories about a possible "decoupling" from the United States now shown to be largely implausible.

 

HOLE IN THE BUDGET

The frantic efforts of U.S. financial authorities to restore calm in the markets will also clearly come at a large long-term cost to taxpayers. Anthony Ryan, the Treasury's acting undersecretary for domestic finance, said on Tuesday the government faces huge borrowing needs this year to finance the multiple programs aimed at soothing investors' nerves.

Against this backdrop, it is not hard to see why consumers had grown so glum. In the Conference Board survey, the present situation index fell to 41.9, its lowest since December 1992, from 61.1 in September The expectations subindex plunged to a record low of 35.5 from an upwardly revised 61.5 last month and from 80.0 a year ago.

The number of respondents who said jobs are "hard to get" rose to 37.2 percent from 32.2, while those saying jobs were "plentiful" fell to 8.9 percent from 12.6.

Housing was another centerpiece of the economy's woes. According to S&P, home prices in its narrower index of 10 metropolitan areas declined 1.1 percent from July to August alone, and were down 17.7 percent from a year ago.

"The downturn in residential real estate prices continued, with very few bright spots in the data," David M. Blitzer, chairman of the Index Committee at Standard & Poor's, said in the statement.

(Reporting by Steven S. Johnson, Pedro Nicolaci da Costa and Julie Haviv; Editing by Andrea Ricci)

    Consumers Gloomiest Ever as Home Prices Plunge, NYT, 28.10.2008, http://www.nytimes.com/reuters/business/business-us-usa-economy.html

Treasury Predicts Huge Government Borrowing Needs

October 28, 2008
Filed at 12:00 p.m. ET
The New York Times
By THE ASSOCIATED PRESS
 

WASHINGTON (AP) -- The financial rescue operation will force the federal government to borrow an unprecedented amount of money as the budget deficit climbs to record heights, a top Treasury Department official said Tuesday.

Anthony Ryan, Treasury's acting undersecretary for domestic finance, said the administration back in July was forecasting that the deficit for the current budget year, which began on Oct. 1, would hit a record $482 billion. He said that forecast did not include all the government's efforts since then to deal with the worst financial crisis since the 1930s.

''This year's financing needs will be unprecedented,'' with all the rescue programs now in place, Ryan said.

Ryan said those borrowing efforts will need the address numerous government initiatives: The $700 billion rescue program passed by Congress on Oct. 3; efforts by the Federal Reserve to bolster banks' balance sheets which have required it to utilize Treasury's borrowing resources; and the need of the Federal Deposit Insurance Corp. for resources deal with a rising number of bank failures.

Speaking to the annual meeting of the Securities Industry and Financial Markets Association in New York, Ryan said the rising borrowing was occurring against the backdrop of a slowing economy. Many private economists believe the economy has already slipped into a recession because of the huge upheavals on Wall Street which have shaken consumer and business confidence.

''The potential for deterioration in economic conditions given the contraction in credit may also affect budget conditions this year,'' Ryan said in his remarks.

The federal deficit for the just completed 2008 budget year hit an all-time high of $454.8 billion, reflecting in part the $168 billion economic stimulus bill that Congress passed at the beginning of the year to jump-start the economy.

The administration in July projected a deficit of $482 billion for the current budget year. Private forecasters believe the red ink could rise to $700 billion or more given a looming recession and all the government programs being used to battle the financial crisis.

In his speech, Ryan told the Wall Street executives that Treasury was considering reviving the three-year note starting in November to help raise the money that will be needed to fund the rising deficits. He pledged Treasury would keep the markets informed of other financing changes that will be undertaken.

Treasury announced on Monday that agreements had been reached with the largest banks in the country, who will be receiving $125 billion in government assistance to bolster their balance sheets. In return, the government is getting ownership stakes in the banks through the purchase of preferred shares and warrants to buy common stock.

Ryan said the first payments to the nine major banks would be made today and that Treasury would soon be announcing stock purchases made to other banks.

    Treasury Predicts Huge Government Borrowing Needs, NYT, 28.10.2008, http://www.nytimes.com/aponline/business/AP-Meltdown-Treasury.html

Bargain hunting after losses boosts world stocks

Tue Oct 28, 2008
6:43am EDT
Reuters
By Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - World stocks rose solidly on Tuesday as investors indulged in a burst of bargain hunting after five straight trading sessions of steep losses.

The dollar and yen eased, also a reversal of recent trends.

MSCI's all-country world stock index was up 1.6 percent, but only after having fallen nearly 30 percent this month.

Similarly, the badly hit MSCI emerging market stock index gained nearly 3 percent on Tuesday. It has lost more than 40 percent so far this month.

"It's no real surprise that bargain-hunters are coming into these markets, despite the fact that expectations for the economy are tumbling and the outlook on the corporate front is gloomy," said Henk Potts, strategist at Barclays stockbrokers.

European shares broke a five-day losing streak, helped by a jump in shares of heavyweight oil group BP after its third-quarter earnings beat forecasts.

The FTSEurofirst 300 index of leading European shares was up 1.5 percent. The index has lost 23 percent in October, hurt by the credit crisis and recession worries.

The day marked a decided break in the recent trend which has seen investors move from crisis to crisis. The latest has been the need for hedge funds and others to cut their holdings of emerging market assets to raise cash for redemptions and to reduce the risk of further losses.

Earlier, Japan's Nikkei average closed up 6.4 percent, or 459.02 points, at 7,621.92. But trade was volatile with the benchmark briefly breaking below 7,000 for the first time in 26 years.

"An increasing number of investors have started seeing Japanese stocks as quite cheap and trade volume is picking up accordingly, even if it's only little by little," said Yoshinori Nagano, chief strategist at Daiwa Asset Management.

YEN SLIPS

One boost for Japanese stocks was a weaker yen. A flight from risk accompanying the credit crisis and global economic downturn has driven it up nearly 20 percent on a trade-weighted basis this month.

That move was enough to prompt the Group of Seven to warn on Monday that the surging currency posed a threat to financial and economic stability.

The yen was pulling away from a 13-year high against the dollar on Tuesday.

The dollar was up 2 percent against the yen at 94.71 yen. But the U.S. currency was slightly weaker against other currencies, against which it has recently risen.

It was at $1.2501 against the euro and at $1.5630 against the pound.

Euro zone government bond prices fell and yields rose.

Two-year paper yielded 2.646 percent, about 6 basis points more than in late Monday trade, while the 10-year Bund yield was 7 basis points up at 3.837 percent.

"Maybe this is the day things turn around ... Maybe we'll see profit taking for a couple of days. The Fed is the next focus," said a trader.

The U.S. Federal Reserve is expected to cut interest rates on Wednesday.

    Bargain hunting after losses boosts world stocks, R, 28.10.2008, http://www.reuters.com/article/newsOne/idUSTRE49R0JW20081028

15 Additional Banks Plan to Seek U.S. Aid

October 28, 2008
By REUTERS
The New York Times

At least 15 banks have signed up for the government’s offer of a cash injection, in addition to the 9 that joined the program initially. The injections are a bid to revive the sector, which has suffered since lending has dried up and many loans have gone bad.

The Treasury Department plans to provide funds for 20 to 22 lenders in the current round of a $250 billion bank recapitalization program.

Nine of the largest banks, including JPMorgan Chase & Company and Citigroup, received the first $125 billion of capital infusions two weeks ago.

The additional 14 banks that have announced they will use the government funds includes: PNC Financial Services Group, $7.7 billion; the Capital One Financial Corporation, $3.55 billion; the Regions Financial Corporation, $3.5 billion; SunTrust Banks, $3.5 billion; Fifth Third Bancorp, $3.4 billion; KeyCorp, $2.5 billion; Comerica, $2.25 billion; the State Street Corporation, $2.0 billion; the Northern Trust Corporation, $1.5 billion; Huntington Bancshares, $1.4 billion; the First Horizon National Corporation, $866 million; the City National Corporation, $395 million; Valley National Bancorp, $330 million; Washington Federal, $200 million; and First Niagara Financial Group, $186 million.

    15 Additional Banks Plan to Seek U.S. Aid, NYT, 28.10.2008, http://www.nytimes.com/2008/10/28/business/economy/28assist.html

Military families feel financial crisis

Tue Oct 28, 2008
3:45pm EDT
Reuters
By Ed Stoddard

DALLAS (Reuters) - Among those struggling in the worst financial crisis since the Great Depression are members of the U.S. armed forces and their families.

"I'm concerned about our savings. Everything has gone up. You can't save when gas has gone up and electricity bills have gone up," said army wife Jessica Phillips, 22.

Phillips was waiting at Dallas-Fort Worth airport last week for her husband, Christopher, flying in from Iraq for 18 days of leave. Phillips, who lives near Fort Polk in Louisiana and is studying psychology and criminal justice, said she relied on her husband's income as an Army specialist.

A daily charter flight brings soldiers home from Iraq and Afghanistan to Dallas-Fort Worth, and in interviews last week military families said they were feeling the effects of rising prices, mortgage trouble and debt.

Amber Fithian, 24, waiting with her 2-1/2 year old son for her husband Adam, said her family was feeling the strain of rising mortgage payments on their home near Fort Hood, Texas.

"Our mortgage keeps getting sold so our rates keep going up," said Fithian, a stay-at-home mom.

Financial strain is an added burden, on top of long deployments in wars in Iraq and Afghanistan.

"They should get paid more. They put their lives in danger for everybody else," said Brenda Davis as she waited for her 23-year-old daughter Leilani Manibusan, returning for leave in her second Iraq deployment.

According to the Department of Defense's military pay scales, a basic recruit starts at $1,347.00 a month. That puts them ahead though not by much of someone working for the national minimum wage of $6.55 an hour, who will make just over a $1,000 a month at 40 hours a week.

Senior non-commissioned officers can earn more than $5,000 a month or $60,000 a year after 14 years of service. Excluding senior commissioned officers, military pay puts personnel in middle class income groups that are vulnerable to the crisis.

But military compensation is higher when various benefits, such as housing allowances, are included. And, while deployed in a combat zone like Iraq or Afghanistan, troops' income is exempt from federal income tax.

Unlike most jobs in the current financial crisis, the military offers job security, and it is one of the only sectors where employment is expanding.

The military has also offered bonuses for staying in the ranks that can easily total more than $20,000 based on rank, time in service and specialty.

Not all of the family members who spoke with Reuters said they were suffering.

"I've never been so stable financially. There are great benefits," said Richard Brown, a 22-year-old specialist back for some leave from his second Iraq deployment.

"My wife is due to have a baby in two weeks and she'll have the baby at the military hospital. I'll have no hospital expenditures whatsoever," he said as he smoked a cigarette and waited for a bus outside the airport terminal.

The Fort Hood-based soldier added that the extra money he made from his deployment was paying for his wife's college tuition.

Shannon Hurley, 25, works 32 hours a week at the front desk of a hotel. Her army reservist husband is currently in Iraq and she comes once a week to DFW to greet the returning soldiers.

She said they were not feeling too pinched.

"We're able to put a little bit away in savings and I'm still shopping up a storm," she said.

Matthew Knighten, waiting for his brother, spent three years in the army but left for greener pastures because of the pay.

"I was an E-4 or corporal and with my pay grade I was making crew leader pay at McDonald's," he said. "I work for Chesapeake Energy now, it's much better money."
 

(Reporting by Ed Stoddard; Editing by Dan Whitcomb and Eddie Evans)

    Military families feel financial crisis, R, 28.10.2008, http://www.reuters.com/article/lifestyleMolt/idUSTRE49R12G20081028

Oil falls below $63 to 17-month low as investors eye falling demand

27 October 2008
USA Today

SINGAPORE (AP) — Growing evidence of a severe global economic slowdown drove oil prices to 17-month lows below $63 a barrel Monday, as investors brushed off a sizable OPEC output cut.

Traders were taking their cues from world markets, which slumped again Monday with the Nikkei index in Japan closing at its lowest in 26 years, down 6.4%. Hong Kong, and European markets followed suit, closing or trading substantially lower. The Dow Jones industrial average fell 3.6% Friday.

Light, sweet crude for December delivery declined $1.57 to $62.58 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe, the lowest since May 2007.

On Friday — even after the Organization of Petroleum Exporting Countries announced a 1.5 million barrel-a-day cut — oil fell $3.69 to settle at $64.15. Prices have plunged 57% from a record $147.27 on July 11.

"The mood is fairly negative reflecting worry about the international economic outlook," said David Moore, a commodity strategist at Commonwealth Bank of Australia in Sydney. "If there is further weak economic data in the U.S. or Europe, prices could come under more downward pressure."

Iran's OPEC governor Mohammad Ali Khatibi said Sunday a reduction in production "will be considered" at the group's next meeting in Algiers in December — a meeting that might even be held early if necessary.

"I thought the OPEC cut was a fairly decisive act, but concerns of recession in the major economies remain dominant," Moore said. "OPEC's cut does take a step toward tightening the market."

Vienna's JBC Energy said prices were out of OPEC's control — for now.

"Oil is currently being driven by the present financial crisis and not by OPEC cuts," said its research report. "As oil prices are being pressured by the credit squeeze and a lack of liquidity, they may stay largely detached from supply factors for several weeks to come. As a result, OPEC is currently struggling with factors beyond its control."

Investors have been paying close attention to signs that a slowing economy and higher gasoline prices earlier this year have hurt crude demand in the U.S., the world's largest oil consumer.

The U.S. Department of Transportation said Friday that Americans drove 5.6% less, or 15 billion fewer miles (24 billion fewer kilometers), in August compared with same month a year ago — the biggest single monthly decline since the data was first collected regularly in 1942.

"If we're looking a severe economic downturn, it's hard to say what the bottom of any commodity price will be," Moore said.

In other Nymex trading, gasoline futures fell more than 3 cents to $1.44 a gallon, while heating oil slipped by more than 4 cents to $1.91 a gallon. Natural gas for November delivery fell nearly 21 cents to $6.03 per 1,000 cubic feet.

In London, November Brent crude was down $1.75 to $60.30 a barrel on the ICE Futures exchange.

    Oil falls below $63 to 17-month low as investors eye falling demand, UT, 27.10.2008, http://www.usatoday.com/money/industries/energy/2008-10-27-oil-monday_N.htm

Americans losing sleep over financial crisis

Mon Oct 27, 2008
6:22pm EDT
Reuters

NEW YORK (Reuters) - If fellow workers seem groggier or grumpier than usual in the mornings, they are probably losing sleep over the global financial crisis, according to research released on Monday.

Ninety-two percent of respondents said the economic turmoil is keeping them awake at night, according to a survey by ComPsych Corp, a provider of employee assistance programs.

Of those, a third said their biggest worry was the cost of living, while another third cited their credit card debt.

One in six said their biggest worry was their mortgage payment, and another one in six cited concern over their retirement account.

Eight percent of those surveyed said they were not worried.

Chicago-based ComPsych conducted the online survey of 1,137 employed adults across the United States from October 6 through October 17. The margin of error was plus or minus 3 percentage points.

(Reporting by Ellen Wulfhorst; Editing by Eric Beech )

    Americans losing sleep over financial crisis, R, 27.10.2008, http://www.reuters.com/article/domesticNews/idUSTRE49Q7T720081027

Tight times boost public colleges

26 October 2008
USA Today
By Rick Hampson

NEW YORK — The faltering economy is forcing many high school seniors who were set on attending private colleges or universities to consider less expensive public ones.

"It's great for the public colleges," says Paul Kanarek, a vice president at the Princeton Review, the test preparation service. For years, he says, private schools usually got the top students, "based on the prominence of their brands and the size of their wallets. Now, the deck has been shuffled."

Because of the financial crisis, many students say they're dropping some big-ticket schools from their list of potential colleges and adding affordable ones.

Binghamton University, the most selective campus in the State University of New York system, says applications are running 50% ahead of last year. The 23-campus California State University system reports a 15% increase.

"The financial situation is leading more families to look at affordability," says Cheryl Brown, Binghamton's admissions director. Tuition, room, board and other fees will cost about $16,000 there next year, about half what the College Board says average private colleges charge.

The increased interest in public colleges comes as some states are being forced to cut higher-education funding amid budget squeezes. Florida, for example, plans a $130 million, 6% cut in funds for its university system. The University of Florida and Florida State University plan to cut enrollment by 1,000 and 1,500 students respectively.

An online survey of more than 2,500 prospective college students released this month by MeritAid .com, an Internet service providing information on colleges and scholarships, found that 57% of its users are considering less-expensive colleges.

"Private colleges are very nervous," says Bill McClintick, a guidance counselor at Mercersburg Academy in Pennsylvania and a former college admissions officer.

Rachel Resnik of Manhattan, who plans to study theater in college, has added the State University of New York's campus at Purchase (around $16,000 a year) to a list that includes Carnegie Mellon and the University of Southern California (both more than $46,000).

She says that while she and her parents have yet to hash out the issue, "it's definitely in the air. … The money is definitely a factor."

Students won't have to decide where they'll go until spring.

Ann McDermott, director of admissions at Holy Cross in Worcester, Mass., says that students aren't writing off relatively expensive colleges such as the Jesuit school. "We're monitoring every contact to see which way this is going — college fairs, school visits, campus tours, interviews," she says. "So far it feels like a typical fall." We're as busy as ever. We're not hearing, 'I can't afford you.' "

Kanarek says the richest, most selective schools, such as Harvard, Yale and Princeton, will be largely unaffected — their endowments are so large that, even with lower investment returns, they can add or maintain financial aid and attract top students.

    Tight times boost public colleges, UT, 26.10.2008, http://www.usatoday.com/news/nation/2008-10-26-college-enrollment_N.htm

Spending Stalls and Businesses Slash U.S. Jobs

October 26, 2008
The New York Times
By LOUIS UCHITELLE

As the financial crisis crimps demand for American goods and services, the workers who produce them are losing their jobs by the tens of thousands.

Layoffs have arrived in force, like a wrenching second act in the unfolding crisis. In just the last two weeks, the list of companies announcing their intention to cut workers has read like a Who’s Who of corporate America: Merck, Yahoo, General Electric, Xerox, Pratt & Whitney, Goldman Sachs, Whirlpool, Bank of America, Alcoa, Coca-Cola, the Detroit automakers and nearly all the airlines.

When October’s job losses are announced on Nov. 7, three days after the presidential election, many economists expect the number to exceed 200,000. The current unemployment rate of 6.1 percent is likely to rise, perhaps significantly.

“My view is that it will be near 8 or 8.5 percent by the end of next year,” said Nigel Gault, chief domestic economist at Global Insight, offering a forecast others share. That would be the highest unemployment rate since the deep recession of the early 1980s.

Companies are laying off workers to cut production as consumers, struggling with their own finances, scale back spending. Employers had tried for months to cut expenses through hiring freezes and by cutting back hours. That has turned out not to be enough, and with earnings down sharply in the third quarter, corporate America has turned to layoffs.

“People have grown very nervous,” said Harry Holzer, a labor economist at Georgetown University and the Urban Institute, tracing cause and effect. “They have seen a lot of their wealth wiped out and as they cut back their spending, companies are responding with layoffs, which hurts consumption even more.”

The unemployment is widespread, with Rhode Island the hardest hit.

For Dwight and Rochelle Stokes of Phenix City, Ala., the layoffs are a family event. He lost his job two weeks ago as an aviation mechanic at the Pratt & Whitney jet engine facility near his home — a few days after his wife lost hers as a cosmetologist at Great Clips, a family-owned barbershop and beauty salon.

“It got really slow in July and August,” Ms. Stokes said. “I would sit there for two hours, and some days we had only 10 clients, four of us for 10 clients.”

The broadening layoffs are most pronounced on Wall Street, in the auto industry, in construction, in the airlines and in retailing. The steel mills, big suppliers to many sectors of the economy, are shutting 17 of the nation’s 29 blast furnaces — a startling indicator of how quickly output is declining as corporate America struggles to adjust to the spreading crisis.

“We have seen a softening order book in the most dramatic ways in the last week,” said Tom Conway, a vice president of the United Steelworkers of America, adding that layoffs in the industry “are just starting now.”

In September alone, 2,269 employers each laid off 50 people or more, the Bureau of Labor Statistics reported, up sharply from the spring and summer months, and the highest number since September 2001, when the aftermath of the 9/11 attacks coincided with a recession to spook employers. A spike in 2005 was related to Hurricane Katrina.

The financial services industry has been cutting jobs since last summer, when the credit crisis took hold. By some estimates, 300,000 jobs will disappear from banks, mutual fund groups, hedge funds and other financial services companies before the crisis subsides — 35,000 of them in New York.

Goldman Sachs alone, among the best performers on Wall Street, has announced plans to cut 10 percent of its work force, which stood at 32,594 at the end of last month.

The current unemployment rate, 6.1 percent — up more than a percentage point since April — is still relatively mild by post-World War II standards. The highest level since the Great Depression, 10.8 percent, came in November and December of 1982 as the economy was shaking off a severe recession.

The unemployment rate hit 9 percent during the mid-1970s recession, and 7.8 percent in the 1990-1991 downturn. The next peak, 6.3 percent, occurred in June 2003, during a long jobless recovery in the aftermath of the 2001 recession.

Dwight and Rochelle Stokes, both in their late 20s, have just joined the layoff rolls. So has Mr. Stokes’s father, Warren, 48, who lost a $30-an-hour job this month on the assembly line of the Chrysler truck plant in Fenton, Mo., near St. Louis., where the father had worked for 12 years. “They just cut back,” the son said.

Just a year ago, he and Rochelle, and their two very young children, moved to Phenix City from Fenton so he could take the mechanic job at the Pratt & Whitney plant in nearby Columbus, Ga. Airlines send engines there for periodic overhauls, and when Mr. Stokes arrived 400 workers were tearing down and rebuilding 15 engines a month.

But as the airlines reduced their flights — and announced 36,000 job cuts, nearly all of them taking place in the current fourth quarter — that number fell to three engines this month and “it was going to be worse for November, just one or two,” Mr. Stokes said.

“We came in on Monday morning and our supervisor told us not to touch an engine, and we knew there would be layoffs,” he said. By lunchtime, Mr. Stokes and 100 others had been escorted out of the building, with four weeks’ pay as severance, along with four weeks of health insurance and a $1,000 departure check.

As a starting mechanic, Mr. Stokes’s pay, $11.50 an hour, was just over half of what he had earned as the manager of a chain of pawn shops in Missouri. But he took the job anyway, moving with his family, because Pratt & Whitney offered full college tuition. Mr. Stokes immediately enrolled in Embry-Riddle Aeronautical University to pursue a bachelor’s degree in management and a minor in engineering sciences.

Using all his spare time, he had earned half the necessary credits when the layoff came. The severance included extended tuition, and Mr. Stokes, piling on course work, hopes to earn his degree by early summer. But he will do so by correspondence course; the family is returning to Missouri, moving in rent free with Mr. Stokes’s sister in Fenton.

“I am going to take seven or eight courses and hurry up and get my degree, and my wife will go back to cutting hair,” Mr. Stokes said, “and when I have my degree in June, I’ll apply for a management position. Even though things are bad, I hear there are openings in St. Louis requiring a bachelor’s degree.”

Micheline Maynard and Ben White contributed reporting.

    Spending Stalls and Businesses Slash U.S. Jobs, NYT, 26.10.2008, http://www.nytimes.com/2008/10/26/business/26layoffs.html?hp

More governments coming to evicted renters' rescue

26 October 2008
USA Today
By Alan Gomez

Governments from California to Ohio are beginning to pass new laws to protect a quiet victim of the nationwide economic slide: renters getting blindsided by foreclosures against their landlords.

The issue made international news this month when a Chicago sheriff temporarily halted all evictions in Cook County to draw attention to the problem.

Governments have been taking notice and are starting to pass and consider laws to protect renters who have no idea their landlords have defaulted on their mortgages until they receive an eviction notice.

"These are the folks who are innocent victims," said Ohio state Rep. Mike Foley, a Cleveland Democrat who is co-sponsoring a bill to help renters. "They're the ones who are paying their rent and the first they hear about the foreclosure is when the sheriff is at the door."

Foreclosures remain a problem around the country.

According to RealtyTrac, a real estate database website, there were 53% more foreclosures in the first eight months of the year than there were over the same period in 2007. At least 589,190 properties were in some stage of foreclosure proceedings as of last week. Of those, about 31% — or 181,569 — were not occupied by the owner, indicating that they are investment properties or rentals.

When Cook County Sheriff Tom Dart halted all evictions this month, he said banks were foreclosing on property owners and obtaining eviction orders for the owners. However, when deputies showed up, they found that renters were living there instead.

Dart resumed evictions last week after meeting with judges to ensure that renters are given the 120-day grace period before moving required under state law.

Others are taking action:

The California Legislature passed a law this summer giving renters 60 days' notice prior to being evicted from their foreclosed property.

In Chicago, an ordinance will go into effect Nov. 5 that requires all tenants to be informed within seven days of the beginning of foreclosure proceedings — a process that can take months and gives renters time to look for a new place.

Groups working outside of government are also helping.

The Cleveland Tenants Organization began sending letters last month to renters once their building was foreclosed, executive director Mike Piepsny said.

Some saw problems with Dart's move. The Illinois Mortgage Bankers Association has said lenders may be unwilling to give out new loans if they aren't certain they can reclaim the property if it goes into foreclosure.

Dustin Hobbs of the California Mortgage Bankers Association said that the group's members have worked with notification requirements for years and that the laws have not stopped banks from giving loans. "The sky hasn't fallen here," Hobbs said.

    More governments coming to evicted renters' rescue, UT, 26.10.2008, http://www.usatoday.com/money/economy/housing/2008-10-26-Evictions_N.htm

It's a hard time to be a charity

26 October 2008
USA Today
By Kevin McCoy and Oren Dorell

Every year for the last decade, the Child and Family Network Centers, a small, Virginia-based non-profit, submitted a fundraising request to the Freddie Mac Foundation.

And every year, the charitable arm of the mortgage-finance giant contributed thousands of dollars that helped the non-profit provide education and support to hundreds of needy children.

But this year's $350,000 request went to the foundation in early September — days before the federal government took over Freddie Mac and mortgage sibling Fannie Mae amid rising losses. Now, both firms' charitable grants, questioned by some as politically motivated, are on hold pending a Federal Housing Finance Agency review.

"We are in deep trouble if we don't hear something soon," says Barbara Fox Mason, the non-profit's executive director. "That's the money we count on to carry us through to the holidays," when other contributions arrive.

FHFA Director James Lockhart wrote on Oct. 2 "it is envisioned" that Fannie and Freddie "will continue to make charitable contributions." Corinne Russell, an FHFA spokeswoman, said Friday no final funding decisions have been made.

"If it doesn't come through at all, we'll have to cut families," says Mason.

The economic crisis threatening the nation with the worst recession in decades has set off tremors among non-profits and charities large and small that rely on donations from Wall Street, industry and average Americans.

The potential impact is just now taking shape, because 2009 grants from many philanthropic foundations are still being set and the end-of-year holiday giving season is opening. Although it's difficult to draw broad conclusions from reports by individual charities, many non-profits say they are feeling an economic pinch.

"This is the worst fundraising environment I've ever worked in," says Jeffrey Towers, chief development officer for the American Red Cross, which won promises of $100 million from Congress this month after 2008's hurricanes, tornadoes and floods depleted the group's disaster-relief reserves.

The Red Cross is suffering as much as a 30% drop in responses and contributions from new donors, and corporate donations are "coming in at lower amounts" at the halfway point of a campaign to raise $100 million by Dec. 31, Towers says.

Across the nation, philanthropic organizations report similar omens, some tied directly to this fall's credit crisis and plunge of financial markets.

Lehman Bros.' September filing for bankruptcy court protection could take a financial toll on non-profits as disparate as Doctors Without Borders, an international group that supplies emergency medical aid, and the Grand Street Settlement, an organization that provides education and social services on Manhattan's Lower East Side.

Since 2005, Lehman's charitable foundation gave more than $1.5 million to fund Doctors Without Borders' relief efforts for the Asian tsunami and other disasters. The foundation also gave thousands of dollars to Grand Street's College and Career Discovery Center, which carries the Lehman name.

Jennifer Tierney, development director for Doctors Without Borders, awaits word on whether Lehman's bankruptcy filing will affect a pending application for additional funding. "We really don't know what the implications will be," she says.

The Lehman Foundation notified Grand Street last year that it would "rotate out" as main sponsor of the college program, says Allen Payne, the non-profit's director of development. "We had a plan to go back to them" for one more year of funding, says Payne, "but now that's not going to happen."

A freeze on spending

Even without any official funding cut, last month's federal takeover of Fannie Mae dealt a financial blow to N Street Village, a Washington, D.C., non-profit that provides services to homeless and low-income women. The government action induced some potential donors to believe — incorrectly — that the Nov. 22 walk-athon fundraiser sponsored by Fannie Mae had been canceled.

"We budgeted $325,000 for the walk-athon this year, and we're not even halfway there yet," says Mary Funke, N Street's executive director. "Corporations that normally sponsored us for this kind of event stopped. And many individuals have either not registered, or they registered for a lower amount."

She also worries that Freddie Mac sponsorship for an annual fundraising gala won't materialize. In all, that could face N Street with what Funke calls a "worst-case scenario (fundraising) deficit of about $500,000." With an eye on the slumping economy, the non-profit froze all hiring and halted spending on all but core program services as of Oct. 1.

The next, unwanted, cut, says Funke, could be month-long salary furloughs, "starting with me."

Trouble in Michigan

The foundering fortunes of the nation's automakers have similarly triggered spinoff financial concerns at a range of charities. Last year, the Big 3 — GM, Ford and Chrysler — accounted for roughly 40% of overall giving through workplace fundraising pledges to the United Way for Southeastern Michigan, says Doug Plant, the non-profit's vice president of fund development. This year, as the pledge season gets into full swing, the goal's been cut to 35%.

"The Big 3 have been the biggest contributors, both corporate and individual employees. Both of these sides have really been impacted by the economy," Plant says.

United Way's local 211 assistance line has logged about 25,000 phone calls for housing aid this year, five times the 2007 volume, says Bill Sullivan, director of the southeastern Michigan program.

Numbers tell a similar story at the United Way of Central Ohio. There, demand for groceries at local food banks is up 14% this year, says Kermit Whitfield, a spokesman for the non-profit. Calls to a 211 line that links the needy with food banks and other services are up 21% just since July, he says.

However, the overall outlook for charitable giving isn't necessarily as gloomy as recent economic gyrations might suggest, says Steven Lawrence, senior research director for the Foundation Center, a key information source about U.S. philanthropy.

Total giving by foundations declined from $30.5 billion in 2001 to $30.3 billion in 2003, during the last national economic slump, Lawrence wrote in an analysis this month. Even so, he wrote, many foundations dug deeper to cover previously approved funding commitments, and some "even increased their payout rate … to the communities and organizations they had long supported."

Foundation giving to non-profits actually increased slightly during four of five U.S. recessionary periods dating to 1980, Lawrence says. Overall charitable giving dipped little more than an inflation-adjusted 1% in most of the eight recessionary years since 1971, according to research conducted by the Center on Philanthropy at Indiana University for the Giving USA Foundation.

"If there is a very substantial erosion in giving, it would be the first time in our post-World War II history," says Reynold Levy, president of Lincoln Center for the Performing Arts in New York.

But that doesn't mean a given charity won't suffer. Nearly two-thirds of 100 grant-giving officers surveyed this month by the Wall Street-based Committee Encouraging Corporate Philanthropy said they did not feel their 2009 contribution budgets were necessarily secure.

And the percentage of fundraisers who reported a negative economic impact rose in a national survey the Indiana University center released in July. "Clearly, all of the signals have worsened since then," says Patrick Rooney, the center's interim executive director.

Officials at a range of well-known and highly regarded philanthropies agree:

• Catholic Charities USA reports that January-to October contributions fell to $7.6 million, down 4% or $300,000 from the same period last year.

• The Meals on Wheels Association of America says roughly two-thirds of its members surveyed recently reported drops in both corporate and individual donations. Programs in Texas, Minnesota and California were forced to close this year.

• The Salvation Army reports its western territory suffered a 9% drop in overall fundraising since August alone. Data for the organization's other territories weren't available.

• Goodwill Industries International says public support from cash donations, bequests and special events fell 2.3% for the first eight months of 2008 in comparison with the same period last year.

"Many charities are between a rock and a hard place, being asked to do more with less," says Ken Berger, president and CEO of Charity Navigator, a large independent U.S. charity evaluator.

If there's any so-called bright side, he says, it's that the economic crisis could force redundant, inefficient or otherwise weak charities to merge with stronger organizations or simply shut down, reducing the competition for contribution dollars.

"The non-profit world tends to operate slowly," Berger says. "When we're already over the cliff, then we notice."

    It's a hard time to be a charity, UT, 26.10.2008, http://www.usatoday.com/money/economy/services/2008-10-26-fundraising-crisis-donations-charities_N.htm

Op-Ed Columnist

Crises on Many Fronts

October 25, 2008
The New York Times
By BOB HERBERT

The closer you look at the current economic crisis, the more harrowing it becomes.

The focus in the presidential campaign has been almost entirely on the struggles faced by the middle class — on families worried about their jobs, their mortgages, their retirement accounts and how to pay for college for their kids.

Each nauseating plunge in the Dow heightens their anxiety. Each company that goes under and each government report showing joblessness on the rise intensifies their fear.

No one knows how to quell the uncertainty. And no one is even talking about the poor.

Alan Greenspan, uncharacteristically befuddled, went up to Capitol Hill on Thursday and lamented that some sort of fissure had erupted in his previously impregnable worldview. For Mr. Greenspan (“I still do not understand exactly how it happened”), this is a moment of intellectual anxiety.

But if we are indeed caught up in the most severe economic crisis since the Great Depression, the ones who will fare the worst are those who already are poor or near-poor. There are millions of them, and yet they remain essentially invisible. A step down for them is a step into destitution.

Listen to Dr. Irwin Redlener, president of the Children’s Health Fund, which he founded with the singer-songwriter Paul Simon to bring health services to poor and homeless children:

“First of all, at least in the short term, we can expect more families will become homeless as foreclosures continue to mount and jobs become harder to hold and more difficult to find. As jobs disappear and employers begin trimming expenses, we can foresee people losing health insurance, swelling the ranks of the medically uninsured.

“I don’t think the health care system can bear another five million or more people uninsured and economically fragile. More people without insurance will crowd into the nation’s hospital emergency rooms when medical problems become too severe to ignore or there is no other access to basic health services. Such a trend will have a seismic impact on our health care system.”

Few Americans have noticed, but a tremendous number of hospitals, from Boston to Los Angeles, are in serious, even dire, financial trouble. A survey of 4,500 hospitals by the New York consulting firm Alvarez & Marsal found that more than half were technically insolvent or at risk of insolvency.

The current economic downturn, combined with an anticipated surge in patients without health insurance, will only worsen what is already a crisis.

The nation’s financial system was all-but-overwhelmed by the mortgage crisis because none of the nation’s leaders paid serious enough attention to the widespread symptoms of what turned out to be a metastasizing disease.

A similar situation exists on a number of important fronts right now: the deteriorating national infrastructure, the woefully inadequate public school system, our self-defeating energy policies, health care. Symptoms of serious trouble are staring us in the face, but no one is mounting an adequate response.

When a new president takes office in January, the temptation will be to delay bold action on these fronts until the overall economic situation improves. That is the kind of mistake (like ignoring the housing and credit bubbles until it was too late or refusing to heed the pre-Katrina warnings in New Orleans) that opens the door to additional crises.

The Alvarez & Marsal study noted that at many community hospitals the physical plant itself is in bad shape because capital funding had to be curtailed because of budget shortfalls. “There are scores of hospitals that are slowly asphyxiating and slipping into insolvency,” the report said, “as they divert capital dollars to fund operations.

“For most of these hospitals, it is only a matter of time before they hit a ‘sudden’ liquidity crisis and cannot make payroll without entering insolvency and being forced into restructuring their finances and operations.”

Dr. Redlener, who is also a professor at Columbia University’s Mailman School of Public Health, said: “The federal government currently strains to pay hospitals more than $35 billion each year to cover the costs of the uninsured. That money comes from general tax revenue, and it is a budget line that will need to be increased if we don’t want to see an epidemic of hospital closures.”

Most important, of course, is a revamping (in a sane way) of the health insurance system.

There are no good scenarios in the offing. The markets are in turmoil. Banks are being nationalized. The U.S. auto industry has the look of a jalopy with four flat tires.

The evidence of decline and decay is everywhere around us. There has never been a time since World War II when the nation was more in need of a presidential administration with a comprehensive vision and the ability to lead on several fronts at once.

    Crises on Many Fronts, NYT, 25.10.2008, http://www.nytimes.com/2008/10/25/opinion/25herbert.html

Yard Sales Boom, and Sentiment Is First Thing to Go

October 25, 2008
The New York Times
By PATRICIA LEIGH BROWN

MANTECA, Calif. — As the classified ads put it, everything must go. Socks. Christmas ornaments. Microwave ovens. Three-year-old Marita Duarte’s tricycle was sold by her mother, Beatriz, to a stranger for $3 even as her daughter was riding it.

On Mission Ridge Drive and other avenues, lanes and ways in this formerly booming community, even birthday celebrations must go. “It was no money, no birthday,” said Ms. Duarte, who lost her job as a floral designer two months ago. The family commemorated Marita’s third birthday without presents last week, the occasion marked by a small cake with Cinderella on the vanilla frosting. They will move into a rental apartment next month.

An eternity ago, people in this city in northern San Joaquin County braved four-hour round-trip commutes to the San Francisco Bay Area for a toehold on the dream. Today, Manteca’s lawns and driveways are storefronts of the new garage-sale economy — the telltale yellow signs plastered in the rear windows of parked cars Friday through Sunday directing traffic to yet another sale, yet another family.

“You can get great deals,” said Sharrell Johnson, 32, who was scouting for toys in the Indian summer heat last Friday amid boxes of tools and DVDs and forests of little skirts and shirts dangling from plastic hangers on suspended rope. “Sad to say, you’re finding really good things. Because everybody’s losing their homes.”

The garage-sale economy is flourishing here and in many other regions of the country, so much so that some cities have begun cracking down. With more residents trying to increase their income, the city of Weymouth, Mass., limited yard sales to just three a year per address. Detective Sgt. Richard Fuller said it was now common to see 15 cars parked in front of a house.

Richmond, Ind., has had such an onslaught of garage sale signs posted in the right of way that the city has placed stickers on prominent light poles warning of violations and fines.

But it is a Sisyphean task: Manteca’s ordinance, restricting residents to two sales a year, is widely ignored.

The sales are part of the once-underground “thrift economy,” as a team of Brigham Young University sociologists have called it, which includes thrift stores, pawn shops and so-called recessionistas name-brand shopping at Goodwill.

“This is the perfect storm for garage sales,” said Gregg Kettles, a visiting professor at Loyola Law School in Los Angeles who studies outdoor commerce. “We’re coming off a 20-year boom in which consumers filled ever-bigger houses. Now people need cash because of the bust.”

And so the garages and yards of Manteca, some tinder-dry from neglect, offer a crash course in kitchen-table economics each weekend. On Klondike Way: “Tools, various household items, & much more!” On Virginia Street: “Moving Sale! Fridge, washer & dryer, men’s clothing, bike, BBQ, dinette, dresser, fans, microwaves, recliner, DVD player. Everything must go!”

When life’s daily trappings and keepsakes are laid out for sale on a collapsible table, sentiment is the first thing to go. “The cash helps a lot,” Constantino Gonzalez, Ms. Duarte’s neighbor, said of the family’s second sale in two weeks, in which he and his wife, Julia, were reluctantly selling their children’s inflatable bounce house for $650, with pump.

Since losing his construction job, Mr. Gonzalez, 43, has been economizing, disconnecting the family’s Internet and long-distance telephone service, and barely using his truck and the Jeep, strewn with leaves in the driveway. He has taken to picking up his children from school on his bicycle, with 6-year-old Daniel on the handlebars, cushioned by a terry-cloth towel.

The inflatable bounce house is the children’s favorite toy, but the family’s $1,800 mortgage payment is coming. So it sits propped up in its bright blue case, awaiting customers, many of them desperate themselves. Customers are searching for bargains on necessities so they might chip away at the rent, the truck payment, the remodeling bill on the credit card.

“We need to eat,” Mr. Gonzalez tells his children about selling off their toys. “I can’t cover the sun with my finger. So why lie?”

As he spoke, he watched his neighbor across the street pull out of her driveway with her family for the last time, their pickup truck piled high with chairs, firewood and other belongings, like modern Joads from Steinbeck’s “Grapes of Wrath.” “Bad loan,” explained the neighbor, Alex Martinez, who works nights at an automobile assembly plant in faraway Fremont. The garage sale she had held the week earlier barely made a dent.

As the family drove off, a woman with frosted hair wearing high heels got out of a parked car and placed a sign in the window of the former Martinez place: “Coming Soon: Innovative Realty.”

This is McCain-Palin placard country, where signs for the anti-gay-marriage state ballot measure, “Yes on 8,” pepper the landscape and billboards advertising “Buy Now/Low Rates" seem like grim fossils of a bygone age. Manteca lies at an epicenter of the foreclosure crisis, with median home values having fallen by nearly half since 2006, from $440,000 to the current $225,000. In San Joaquin County, Moody’s has estimated that more than 1 in 10 houses with mortgages have a payment that is more than 30 days late. Unemployment rates have increased by a third, from 7.6 percent in September 2007 to 10.2 percent this fall, said Hans Johnson, a demographer at the Public Policy Institute of California.

Before the downturn, Manteca, population 67,700, and other towns in the northern San Joaquin Valley were on the leading edge of growth, with stucco subdivisions carved out of almond orchards. Today some 1,500 to 2,000 homes in Manteca, which is 32.7 percent Hispanic, are in various stages of foreclosure.

Paul Farnsworth’s garage on Widgeon Way was a latter-day five and dime, his driveway an eclectic assortment of artificial flowers, cookie jars, decanters, spotlights, radar detectors, Hot Wheels miniature cars, a Dirt Devil. Mr. Farnsworth’s recent garage sales supplement his income as a manager for a beverage distributor, which pays about half of what he made as an apricot and cherry farmer in nearby Tracy. (He was laid off when the farm was sold.) Neither he nor his wife Ann, a beautician, can afford to retire.

“People want things for half, and I don’t blame them,” observed Mr. Farnsworth, 65, adding that only one couple that morning had not dickered on the price. His own house, appraised at $375,000 three years ago, is worth $200,000 today. He has resorted to holding garage sales “to help make payments on a house that’s worth less than what I owe,” he said, the irony not lost on him.

Ebi Yeri’s yard held big-ticket items: beds, a smoked-glass and black lacquer dinette set and — the pièce de résistance — a 51-inch Hitachi projection television that he had replaced with a plasma flat screen. Still, it pained Mr. Yeri to sell. He had it set thematically to the HGTV channel, figuring that “a judge show might offend somebody.”

Mr. Yeri, 35, was decluttering to offset losses in his 401(k), which he described as “in the tank.” He said he also cut costs by being “lighter on the foot,” driving 10 miles an hour slower than the speed limit on his 156-mile commute to and from his software job in San Jose.

On Chenin Blanc Drive, Robert Dadey, a car salesman, was holding his 20th garage sale. “I need money,” he said simply about selling the Oakland Raiders memorabilia, teddy bears and $40 brown ultrasuede recliner in his midst on the lawn. “It’s bad times.”

    Yard Sales Boom, and Sentiment Is First Thing to Go, NYT, 25.10.2008, http://www.nytimes.com/2008/10/25/us/25garage.html?hp

Greenspan Concedes Error in Regulatory View

October 24, 2008
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — Alan Greenspan, the former Federal Reserve chairman, said Thursday that the current financial crisis had uncovered a flaw in how the free market system works that had shocked him.

Mr. Greenspan told the House Oversight Committee on Thursday that his belief that banks would be more prudent in their lending practices because of the need to protect their stockholders had proved to be wrong.

Mr. Greenspan said he had made a “mistake” in believing that banks operating in their self-interest would be enough to protect their shareholders and the equity in their institutions.

Mr. Greenspan said that he had found “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”

Mr. Greenspan, who headed the nation’s central bank for 18.5 years, said that he and others who believed lending institutions would do a good job of protecting their shareholders are in a “state of shocked disbelief.”

He said that the current crisis had “turned out to be much broader than anything that I could have imagined.”

The committee called Mr. Greenspan to testify along with former Treasury Secretary John W. Snow and the Securities and Exchange Commission chairman, Christopher Cox, as lawmakers sought to discover if regulatory failings had contributed to the crisis.

The committee chairman, Henry A. Waxman, said he believed that the Federal Reserve, which regulates banks, the S.E.C. and the Treasury had all played a role in contributing to the mistakes.

“The list of mistakes is long and the cost to taxpayers is staggering,” Mr. Waxman, a California Democrat, told the three men. “Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is infallible.”

In his testimony, Mr. Greenspan blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.

“Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,” Mr. Greenspan said. “Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity.”

Mr. Greenspan said that a necessary condition for the crisis to end would be a stabilization in home prices but he said that was not likely to occur for “many months in the future.”

When home prices finally stabilize, Mr. Greenspan said, then “the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk.”

Mr. Greenspan said until that occurred, the government was correct to move forward aggressively with efforts to support the financial sector. He called the $700 billion rescue package passed by Congress on Oct. 10 “adequate to serve the need” and said that its impact was already being felt in markets.

Mr. Greenspan did not specifically address the criticism he is receiving now as being partly to blame for the current crisis.

Mr. Greenspan’s critics charge that he left interest rates too low in the early part of this decade, spurring an unsustainable housing boom, while also refusing to exercise the Fed’s powers to impose greater regulations on the issuance of new types of mortgages, including subprime loans. It was the collapse of these mortgages and rising defaults a year ago that led to the current crisis.

In his testimony, Mr. Greenspan put the blame for the subprime collapse on overeager investors who did not properly take into account the threats that would be posed once home prices stopped surging upward.

“It was the failure to properly price such risky assets that precipitated the crisis,” Mr. Greenspan said.

    Greenspan Concedes Error in Regulatory View, NYT, 24.10.2008, http://www.nytimes.com/2008/10/24/business/economy/24panel.html?hp

    Related > http://oversight.house.gov/documents/20081023100438.pdf

F.D.I.C. Chief Points to Efforts to Aid Homeowners

October 24, 2008
The New York Times
By BRIAN KNOWLTON

WASHINGTON — Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, said Thursday that her agency and the Treasury were developing a proposal to use government loan guarantees and financial incentives to encourage mortgage lenders to modify home loans now in danger of foreclosure.

“Specifically,” Ms. Bair said in testimony prepared for the Senate Banking Committee,“the government could establish standards for loan modifications and provide guarantees for loans meeting those standards. By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”

She said that the F.D.I.C. was working “closely and creatively” with the Treasury Department to carry out the proposal.

Senators John McCain and Barack Obama, the major-party presidential candidates, are both pushing for stepped-up efforts to prevent more widespread foreclosures, which could have a cascading effect on the economy.

The Treasury Department already plans to use part of the $700 billion financial rescue fund to buy and renegotiate mortgages directly.

Senator Christopher Dodd, Democrat of Connecticut, chairman of the committee, had words of cautious praise for the administration’s emergency steps so far. “Few have any doubt that those actions have forestalled the worst-case scenario: complete seizure of the financial markets,” he said.

But Mr. Dodd said that it was time now to focus on the underlying crisis. “It’s time to stop the hemorrhaging of our housing markets that has bled out into the wider economy,” he said.

The committee was also set to hear from Neel Kashkari, the assistant secretary of the Treasury who heads the Office of Financial Stability, which was set up to purchase troubled financial assets from financial firms under the $700 billion rescue plan.

    F.D.I.C. Chief Points to Efforts to Aid Homeowners, NYT, 24.10.2008, http://www.nytimes.com/2008/10/24/business/economy/24cong.html?ref=business

The Reckoning

Struggling to Keep Up as the Crisis Raced On

October 23, 2008
The New York Times
By JOE NOCERA and EDMUND L. ANDREWS

“I feel like Butch Cassidy and the Sundance Kid. Who are these guys that just keep coming?” — Treasury Secretary Henry Paulson Jr.


It was the weekend of Sept. 13, and the moment Treasury Secretary Henry M. Paulson Jr. had feared for months was finally upon him: Lehman Brothers was hurtling toward bankruptcy — fast.

Knowing that Lehman had billions of dollars in bad investments on its books, Mr. Paulson had long urged Lehman’s chief executive, Richard S. Fuld Jr., to find a solution for his firm’s problems. “He was asked to aggressively look for a buyer,” Mr. Paulson recalled in an interview.

But Lehman could not — despite what Mr. Paulson described as personal pleas to other firms to buy some of Lehman’s toxic assets and efforts to persuade another bank to acquire Lehman. With all options closed, he said, the government’s hands were tied. Although the Federal Reserve had helped bail out Bear Stearns — and was within days of bailing out the giant insurer American International Group — it could not help Lehman, even as its default threatened to wreak havoc on financial markets.

“We didn’t have the powers,” Mr. Paulson insisted, explaining a decision that many have since criticized — to allow Lehman to go bankrupt. By law, he continued, the Federal Reserve could bail out Lehman with a loan only if the bank had enough good assets to serve as collateral, which it did not.

“If someone thinks Hank Paulson could have made the Fed save Lehman Brothers, the answer is, ‘No way,’ ” he said.

But that is not the way that many who have scrutinized his actions see it. Bankers involved say they do not recall Mr. Paulson talking about Lehman’s impaired collateral. And they said that buyers walked away for one reason: because they could not get the same kind of government backing that facilitated the Bear Stearns deal. In retrospect, they added, it was emblematic of the miscalculations by the government in reacting to the crisis.

The day after Lehman collapsed, the Fed saved A.I.G. with an emergency $85 billion loan, but the credit markets around the world began freezing up anyway. It was at this point that Mr. Paulson — feeling outgunned by pursuers, like Butch and Sundance — decided he had to find a systemic solution and stop lurching from crisis to crisis, fixing one company’s problems only to find several more right behind.

“Ben said, ‘Will you go to Congress with me?’ ” said Mr. Paulson, referring to the Federal Reserve chairman, Ben S. Bernanke. “I said: ‘Fine, I’m your partner. I’ll go to Congress.’ ”

Seeing a Problem Earlier

In nearly a century, no Treasury secretary has faced a more difficult financial crisis than that Mr. Paulson is contending with. For months, he and his team have been working around the clock, often seven days a week, trying — in vain — to keep it from deepening. In an hourlong interview with The New York Times, Mr. Paulson defended Treasury’s actions, saying that he and his aides had done everything they could, given the deep-rooted problems of financial excess that had built up over the past decade.

“I could have seen the subprime problem coming earlier,” he acknowledged in the interview, quickly adding in his own defense, “but I’m not saying I would have done anything differently.”

History will be the final judge. But in contrast with Mr. Paulson’s perspective, other government officials and financial executives suggest that Treasury’s epic rescue efforts have evolved as chaotically as the crisis itself. Especially in the past month, as the financial system teetered on the abyss, questions have been raised about the government’s — and Mr. Paulson’s — decisions. Executives on Wall Street and officials in European financial capitals have criticized Mr. Paulson and Mr. Bernanke for allowing Lehman to fail, an event that sent shock waves through the banking system, turning a financial tremor into a tsunami.

“For the equilibrium of the world financial system, this was a genuine error,” Christine Lagarde, France’s finance minister, said recently. Frederic Oudea, chief executive of Société Générale, one of France’s biggest banks, called the failure of Lehman “a trigger” for events leading to the global crash. Willem Sels, a credit strategist with Dresdner Kleinwort, said that “it is the clear that when Lehman defaulted, that is the date your money markets freaked out. It is difficult to not find a causal relationship.”

In addition, Mr. Paulson and Mr. Bernanke have been criticized for squandering precious time and political capital with their original $700 billion bailout plan, which they presented to Congressional leaders days after the Lehman bankruptcy. The two men sold the plan as a vehicle for purchasing toxic mortgage-backed securities from banks and others.

But even after the House finally passed the bill on Oct. 3, markets remained in turmoil. It was not until Britain and other European countries moved to put capital directly into their banks, and the United States followed their lead, that some calm returned.

In the interview, Mr. Paulson said that even before the House acted, he had directed his staff to start drawing up a plan for using some of the $700 billion to recapitalize the banking system — something that Congress was never told and that he had publicly opposed.

Why? Because in the week before the plan passed Congress, conditions deteriorated significantly, Mr. Paulson said.

But many complain the worst of the turmoil might have been avoided if it hadn’t been for Mr. Paulson sticking with an original bailout plan that they viewed as poorly conceived and unworkable. “They were asking the most basic questions,” said one Wall Street executive who spoke to Treasury officials after the bailout bill was passed. “It was clear they hadn’t thought it through.” Senator Charles E. Schumer, Democrat of New York, who had called for an infusion of capital into banks in mid-September, said, “They are so much more on top of this recapitalization plan than they were about the auction plan.”

Even as he defended his actions, Mr. Paulson said he was worried that some of the government’s moves could wind up haunting future Treasury secretaries. He pointed in particular to the decision to guarantee all bank deposits and interbank loans, something the United States did to keep pace with similar decisions in Europe. “We had to,” Mr. Paulson said. “Our banks would not have been able to compete.”

But the federal guarantees could create “moral hazard” and simply encourage banks to take on dangerous risk, he acknowledged. “This is the last thing I wanted to do,” he said.

Summer of Eroding Conditions

The subprime mortgage debacle began emerging in the summer of 2007, about a year after Mr. Paulson left his job as head of Goldman Sachs and joined the Bush administration. But the true depth and extent of the losses did not become clear until earlier this year, Mr. Paulson said.

“We thought there was a reasonable chance of getting through this,” he recalled.

Then came the near failure in March of Bear Stearns, which was rescued in a takeover by JPMorgan Chase only after the Fed agreed to cover $29 billion in losses. That briefly lulled the markets into thinking the worst might be over. But during the summer, conditions deteriorated, and in early September the government was forced to take over Fannie Mae and Freddie Mac, the mortgage finance giants.

With increasing speed, other problems emerged, most notably Lehman and A.I.G., which was also burdened with bad mortgage-related investments. Both became the focus of intense meetings the weekend of Sept. 13-14.

Mr. Paulson, by then, had become frustrated with what he perceived as Mr. Fuld’s foot-dragging. “Lehman announced bad earnings around the middle of June, and we told Fuld that if he didn’t have a solution by the time he announced his third-quarter earnings, there would be a serious problem,” Mr. Paulson said. “We pressed him to get a buyer.”

Here the views of Mr. Paulson and his critics start to diverge, over what transpired in marathon meetings with Wall Street executives at the Federal Reserve Bank of New York that weekend.

Lehman officials said they believed the firm had not one but two potential buyers: Bank of America and Barclays, the big British bank. But both had conditions. Bank of America wanted the Fed to make a $65 billion loan to cover any exposure to Lehman’s bad assets, according to one person privy to the discussions who did not want to be identified because of their sensitive nature. Although this was more than double what the Fed had made available to facilitate the takeover of Bear Stearns by JPMorgan, Bank of America justified the request on the grounds that Lehman was larger.

Barclays also wanted a guarantee to protect against losses should Lehman’s business worsen before Barclays could compete its takeover.

The government initially was not clear in telling Bank of America and Barclays that no help would be forthcoming, participants said. The New York Fed president, Timothy F. Geithner, in particular, was uncomfortable about drawing a line in the sand against government support for a Lehman takeover. Participants said they were left with the impression from Mr. Paulson and Mr. Geithner that the government might well provide help for a serious buyer, with Mr. Paulson also trying to get Wall Street firms to create a $10 billion fund to absorb some of Lehman’s bad assets.

It remains unclear whether a more consistent message would have changed the outcome. But by Saturday, Bank of America, frustrated by the government’s unwillingness to commit to a deal, turned its attention to Merrill Lynch, which agreed to a takeover. Barclays, equally frustrated, walked away on Sunday, said the person with knowledge of the discussions.

Mr. Paulson said in the interview that Treasury was not at fault. The $10 billion industry fund had not worked because executives in the room realized that bailing out Lehman would not end the crisis. There were too many other firms that needed help. “I didn’t want to see Lehman go,” Mr. Paulson said. “I understood the consequences better than anybody.”

At a White House briefing on Sept. 15, Mr. Paulson shed no tears over Lehman’s failure. “I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers,” he told reporters.

In the interview, however, Mr. Paulson said the main issue was whether it was legal. Under the law, the Fed has the authority to lend to any nonbank, but only if the loan is “secured to the satisfaction of the Federal Reserve bank.” When pressed about why it was legal for the Fed to lend billions of dollars to Bear Stearns and A.I.G. but not Lehman Brothers, Mr. Paulson emphasized that Lehman’s bad assets created “a huge hole” on its balance sheet. By contrast, he said, Bear Stearns and A.I.G. had more trustworthy collateral.

People close to Lehman, however, say it was never told this by the government. “The Fed and the S.E.C. had their people on site at Lehman during 2008,” said a person in the Lehman camp. “The government saw everything in real time involving Lehman’s liquidity, funding, capital, risk management and marks — and never expressed any concerns about collateral or a hole in the balance sheet.”

The aftermath of the Lehman bankruptcy was disastrous. “Lehman was one of the single largest issuers of commercial paper in the world,” said Joshua Rosner, a managing director at Graham Fisher & Company, referring to short-term debt issued by companies to finance day-to-day operations; this market locked up in the wake of Lehman’s failure. “How could you let it go bankrupt and not expect the commercial paper market to be completely crushed?” Why Bear Stearns but not Lehman, wonders Representative Barney Frank. Mr. Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, has generally been a supporter of Mr. Paulson during the crisis. “If it was the right thing to do, why did they do it only once?” he asked.

In response, Mr. Paulson said that only now that the bailout bill has been passed does the government have the authority to intervene in a nonbank failure in cases of firms that lack adequate collateral, like Lehman.

A Difficult Sell

Lehman’s failure was followed by another strategic misstep by Treasury, critics say. They assert that Mr. Paulson initially pushed the wrong systemic fix: a bailout plan that revolved around buying up toxic securities, rather than putting capital into the banking system, a far more direct way of providing assistance.

Mr. Paulson rejects this view. In the interview, he cited several reasons he and Mr. Bernanke concentrated initially on purchasing distressed assets. First, he said, this plan had been in the works for months and was much further developed. “If we had felt going in that the right way to deal with the problem was to put equity in, we would have taken some time and developed a program,” he said.

He also worried that Congress would not be receptive to the idea of Treasury taking an ownership stake in banks: “This is a very complicated and difficult sell. We want to put equity in, but we don’t want to nationalize the banks. And I don’t know how to sell that.”

But he doesn’t dispute that he changed direction. Mr. Paulson said that by Oct. 2, as he was departing for a weekend getaway to an island with his family — his first weekend off in nearly two months — he told his staff, “We are going to put capital into banks first.”

Although the bailout bill still had not passed, the financial markets had deteriorated. He did not, however, inform Congress of his change of heart, and the House debate revolved almost entirely around the asset-purchase plan.

Just 11 days later, Treasury had come up with a plan to inject capital into the banks — which Mr. Paulson sold to the nation’s nine largest financial institutions on Oct. 13. “I can imagine being dinged for some things,” he said, “but not for moving that quickly.”

He also defended Treasury’s recapitalization plan against critics who say that he did not extract a high enough price from the banks getting taxpayers’ money. “I could not see the United States doing things like putting in capital on a punitive basis that hurts investors. And we don’t want to run banks.”

The Global Extent

Asked what he might have done better, Mr. Paulson replied, “I could have made a better case to the public.”

He added, “I never felt worse than when the House voted no” on the bailout plan Sept. 26, its initial rejection before ultimately passing the plan.

As for Lehman, Mr. Paulson insisted that it was “a symptom and not a cause” of the financial meltdown that took place in recent weeks. The real problem, he contended, is that banks all over the world made wrong-headed loans that have now come back to haunt them. After meeting recently with European central bankers, he said, “the thing that took your breath away was the extent of the problem. Look at country after country that said they didn’t have a problem, and it turned out they had a huge problem.”

Mr. Paulson added, “Ten years from now no one is going to say that this crisis was brought about because Lehman Brothers went down.”

Nelson D. Schwartz and Stephen Labaton contributed reporting.

    Struggling to Keep Up as the Crisis Raced On, NYT, 23.10.2008, http://www.nytimes.com/2008/10/23/business/economy/23paulson.html?hp

Hedge Funds’ Steep Fall Sends Investors Fleeing

October 23, 2008
The New York Times
By LOUISE STORY

The gilded age of hedge funds is losing its luster. The funds, pools of fast money that defined the era of Wall Street hyper-wealth, are in the throes of an unprecedented shakeout. Even some industry stars are falling back to earth.

This unregulated, at times volatile corner of finance — which is supposed to make money in bull and bear markets — lost $180 billion during the last three months. Investors, particularly wealthy individuals, are heading for the exits.

As the stock market plunged again on Wednesday, with the Dow Jones industrial average sinking 514 points, or 5.7 percent, the travails of the $1.7 trillion hedge fund industry loomed large. Some funds dumped stocks in September as their investors fled, and other funds could follow suit, contributing to the market plummet.

No one knows how much more hedge funds might have to sell to meet a rush of redemptions. But as the industry’s woes deepen, money managers fear hundreds or even thousands of funds could be driven out of business.

The implications stretch far beyond Manhattan and Greenwich, Conn., those moneyed redoubts of hedge-fund lords. That is because hedge funds are not just for the rich anymore. In recent years, public pension funds, foundations and endowments poured billions of dollars into these private partnerships. Now, in the midst of one of the deepest bear markets in generations, many of those investments are souring.

Granted, hedge funds are not going to disappear. In fact, some are still thriving. Even many of the ones that have stumbled this year are doing better than the mutual fund industry, which has also been hit with withdrawals that have forced their managers to sell.

But the reversal for the hedge fund industry represents a sea change for Wall Street and its money culture. Since hedge funds burst onto the scene in the 1990s, they have recast not only the rules of finance but also notions of wealth and status. Hedge-fund riches helped inflate the price of everything from modern art to Manhattan real estate. Top managers raked in billions of dollars a year, and managing a fund became the running dream on Wall Street.

Now, for lesser lights, at least, that dream is fading.

“For the past five or six years, it seemed anybody could go to their computer and print up a business card and say they were in the hedge fund business, and raise a pot of money,” said Richard H. Moore, the treasurer of North Carolina, which invests workers’ pension money in hedge funds. “That’s going to be gone forever.”

As are some hedge funds. For the first time, the industry is shrinking. Worldwide, the number of these funds dropped by 217 during the last three months, to 10,016, according to Hedge Fund Research.

Even some of the industry’s most well-regarded managers are starting to retrench. Richard Perry, who until now had not had a down year for his flagship fund in more than a decade, has laid off some employees. Mr. Perry, who began his career at Goldman Sachs, is moving away from stock-picking to focus on the troubled credit markets.

Three other hedge fund highfliers — Kenneth C. Griffin, Daniel S. Loeb and Philip Falcone — have suffered double-digit losses through the end of September.

Steven A. Cohen, the secretive chief of a fund called SAC Capital, has put much of the money in his funds into cash, reducing trading by some of his workers.

Many hedge fund investors, particularly the wealthy individuals, are flabbergasted by their losses this year. The average fund was down 17.6 percent through Tuesday, according to Hedge Fund Research.

“You’re seeing a lot of shock, a lot of inaction, a lot of reassessment of where their allocations are and what to do going forward,” said Patrick Welton, chief executive of the Welton Investment Corporation, whose fund is up double-digits this year.

Many investors, Mr. Welton said, had hoped hedge funds would protect them from a steep decline in the broader market. But in many cases, that has not happened.

Now Wall Street is buzzing about how much money could be pulled out of hedge funds — and which funds might bear the brunt of the redemptions.

Funds have set aside billions of dollars in cash to prepare for withdrawals, and many prominent funds require their investors to leave their money in the funds for years. That could help relieve some of the pressure.

But because hedge funds are largely unregulated, they do not publicly disclose the identity of their investors or whether they have received requests for withdrawals. While it might make sense to pull money out of poorly performing funds, investors might also exit funds that are doing well to offset losses elsewhere.

Institutions — pension funds, endowments and the like — pushed into hedge funds after the Nasdaq stock market bust at the turn of the century. Many hedge funds had prospered as technology stocks crashed, leading these investors to believe they would in the future.

In Massachusetts, for instance, Norfolk County broached the issue with the state’s pension oversight commission, said Robert A. Dennis, the investment director of the commission. Mr. Dennis was impressed that hedge funds had fared so much better than the broader stock market.

Though Mr. Dennis says he recognizes the risks that come with selecting hedge funds, he thinks they remain a good investment. Next week, the state commission will vote on whether to allow some towns with pension funds below $250 million to invest in hedge funds, a move Mr. Dennis supports.

“Hedge funds are having a bad year, absolutely, but they’re still holding up better than stocks,” Mr. Dennis said. “Losing less money than another investment is, while not great, it’s still something to be at least satisfied with.”

But now that the days of easy money are over, some fund managers are throwing in the towel.

One manager, Andrew Lahde, was blunt about his decision.

“I was in this game for the money,” Mr. Lahde wrote to his investors recently. He made a fortune betting against the mortgage markets, calling those on the other side of his trades “idiots.”

“I have enough of my own wealth to manage,” Mr. Lahde wrote. He did not return telephone calls seeking comment.

And what wealth there has been. More than anything else, hedge funds are vehicles for their managers to take a big cut of profits. The lucrative economics of the industry is known as “two and 20.” Managers typically collect annual management fees equal to 2 percent of the assets in their funds, and, on top of that, take a 20 percent cut of any profits. Last year, one manager, John Paulson, reportedly took home $3 billion.

But with the industry under pressure, those fat fees are being questioned. Mr. Moore and other investors are starting to ask whether hedge funds deserve all that money. Mr. Griffin, who runs Citadel Investment Group in Chicago, plans to offer funds with lower fees.

More changes could be coming, including increased regulation. The House Committee on Oversight and Government Reform is scheduled to hold a hearing about regulation next month with five hedge fund managers who reportedly made more than $1 billion last year: Mr. Griffin, Mr. Falcone and Mr. Paulson, as well as George Soros and James Simons.

    Hedge Funds’ Steep Fall Sends Investors Fleeing, NYT, 23.10.2008, http://www.nytimes.com/2008/10/23/business/23hedge.html?hp

Banks Mine Data and Pitch to Troubled Borrowers

October 22, 2008
The New York Times
By BRAD STONE

Brenda Jerez hardly seems like the kind of person lenders would fight over.

Three years ago, she became ill with cancer and ran up $50,000 on her credit cards after she was forced to leave her accounting job. She filed for bankruptcy protection last year.

For months after she emerged from insolvency last fall, 6 to 10 new credit card and auto loan offers arrived every week that specifically mentioned her bankruptcy and, despite her poor credit history, dangled a range of seemingly too-good-to-be-true financing options.

“Good news! You are approved for both Visa and MasterCard — that’s right, 2 platinum credit cards!” read one buoyant letter sent this spring to Ms. Jerez, offering a $10,000 credit limit if only she returned a $35 processing fee with her application.

“It’s like I’ve got some big tag: target this person so you can get them back into debt,” said Ms. Jerez, of Jersey City, who still gets offers, even as it has become clear that loans to troubled borrowers have become a chief cause of the financial crisis. One letter that arrived last month, from First Premier Bank, promoted a platinum MasterCard for people with “less-than-perfect credit.”

Singling out even struggling American consumers like Ms. Jerez is one of the overlooked causes of the debt boom and the resulting crisis, which threatens to choke the global economy.

Using techniques that grew more sophisticated over the last decade, businesses comb through an array of sources, including bank and court records, to create detailed profiles of the financial lives of more than 100 million Americans.

They then sell that information as marketing leads to banks, credit card issuers and mortgage brokers, who fiercely compete to find untapped customers — even those who would normally have trouble qualifying for the credit they were being pitched.

These tailor-made offers land in mailboxes, or are sold over the phone by telemarketers, just ahead of the next big financial step in consumers’ lives, creating the appearance of almost irresistible serendipity.

These leads, which typically cost a few cents for each household profile, are often called “trigger lists” in the industry. One company, First American, sells a list of consumers to lenders called a “farming kit.”

This marketplace for personal data has been a crucial factor in powering the unrivaled lending machine in the United States. European countries, by contrast, have far stricter laws limiting the sale of personal information. Those countries also have far lower per-capita debt levels.

The companies that sell and use such data say they are simply providing a service to people who are likely to need it. But privacy advocates say that buying data dossiers on consumers gives banks an unfair advantage.

“They get people who they know are in trouble, they know are desperate, and they aggressively market a product to them which is not in their best interest,” said Jim Campen, executive director of the Americans for Fairness in Lending, an advocacy group that fights abusive credit and lending practices. “It’s the wrong product at the wrong time.”
 

Compiling Histories

To knowledgeable consumers, the offers can seem eerily personalized and aimed at pushing them into poor financial decisions.

Like many Americans, Brandon Laroque, a homeowner from Raleigh, N.C., gets many unsolicited letters asking him to refinance from the favorable fixed rate on his home to a riskier variable rate and to take on new, high-rate credit cards.

The offers contain personal details, like the outstanding balance on his mortgage, which lenders can easily obtain from the credit bureaus like Equifax, Experian and TransUnion.

“It almost seems like they are trying to get you into trouble,” he says.

The American information economy has been evolving for decades. Equifax, for example, has been compiling financial histories of consumers for more than a century. Since 1970, use of that data has been regulated by the Federal Trade Commission under the Fair Credit Reporting Act. But Equifax and its rivals started offering new sets of unregulated demographic data over the last decade — not just names, addresses and Social Security numbers of people, but also their marital status, recent births in their family, education history, even the kind of car they own, their television cable service and the magazines they read.

During the housing boom, “The mortgage industry was coming up with very creative lending products and then they were leaning heavily on us to find prospects to make the offers to,” said Steve Ely, president of North America Personal Solutions at Equifax.

The data agencies start by categorizing consumers into groups. Equifax, for example, says that 115 million Americans are listed in its “Niches 2.0” database. Its “Oodles of Offspring” grouping contains heads of household who make an average of $36,000 a year, are high school graduates and have children, blue-collar jobs and a low home value. People in the “Midlife Munchkins” group make $71,000 a year, have children or grandchildren, white-collar jobs and a high level of education.

Profiling Methods

Other data vendors offer similar categories of names, which are bought by companies like credit card issuers that want to sell to that demographic group.

In addition to selling these buckets of names, data compilers and banks also employ a variety of methods to estimate the likelihood that people will need new debt, even before they know it themselves.

One technique is called “predictive modeling.” Financial institutions and their consultants might look at who is responding favorably to an existing mailing campaign — one that asks people to refinance their homes, for example — and who has simply thrown the letter in the trash.

The attributes of the people who bite on the offer, like their credit card debt, cash savings and home value, are then plugged into statistical models. Those models then are used for the next round of offers, sent to people with similar financial lives.

The brochure for one Equifax data product, called TargetPoint Predictive Triggers, advertises “advanced profiling techniques” to identify people who show a “statistical propensity to acquire new credit” within 90 days.

An Equifax spokesman said the exact formula was part of the company’s “secret sauce.”

Data brokers also sell another controversial product called “mortgage triggers.” When consumers apply for home loans, banks check their credit history with one of the three credit bureaus.

In 2005, Experian, and then rivals Equifax and TransUnion, started selling lists of these consumers to other banks and brokers, whose loan officers would then contact the customer and compete for the loan.

At Visions Marketing Services, a company in Lancaster, Pa., that conducts telemarketing campaigns for banks, mortgage trigger leads were marketing gold during the housing boom.

“We called people who were astounded,” said Alan E. Geller, chief executive of the firm. “They said, ‘I can’t believe you just called me. How did you know we were just getting ready to do that?’ ”

“We were just sitting back laughing,” he said. In the midst of the high-flying housing market, mortgage triggers became more than a nuisance or potential invasion of privacy. They allowed aggressive brokers to aim at needy, overwhelmed consumers with offers that often turned out to be too good to be true. When Mercurion Suladdin, a county librarian in Sandy, Utah, filled out an application with Ameriquest to refinance her home, she quickly got a call from a salesman at Beneficial, a division of HSBC bank where she had taken out a previous loan.

The salesman said he desperately wanted to keep her business. To get the deal, he drove to her house from nearby Salt Lake City and offered her a free Ford Taurus at signing.

What she thought was a fixed-interest rate mortgage soon adjusted upward, and Ms. Suladdin fell behind on her payments and came close to foreclosure before Utah’s attorney general and the activist group Acorn interceded on behalf of her and other homeowners in the state.

“I was being bombarded by so many offers that, after a while, it just got more and more confusing,” she says of her ill-fated decision not to carefully read the fine print on her loan documents.

Data brokers and lenders defend mortgage triggers and compare them to offering a second medical opinion.

“This is an opportunity for consumers to receive options and to understand what’s available,” said Ben Waldshan, chief executive of Data Warehouse, a direct marketing company in Boca Raton, Fla.

Among its other services, according to its Web site, Data Warehouse charges banks $499 for 2,500 names of subprime borrowers who have fallen into debt and need to refinance.

Representatives of these data firms argue that their products merely help lenders more carefully pair people with the proper loans, at their moment of greatest need. The onus is on the banks, they say, to use that information responsibly.

“The whole reason companies like Experian and other information providers exist is not only to expand the opportunity to sell to consumers but to mitigate the risk associated with lending to consumers,” said Peg Smith, executive vice president and chief privacy officer at Experian. “It is up to the bank to keep the right balance.”

Decrease in Mailings

In today’s tight credit world, the number of these kinds of credit offers is falling rapidly. Banks mailed about 1.8 billion offers for secured and unsecured loans during the first six months of this year, down 33 percent from the same period in 2006, according to Mintel Comperemedia, a tracking firm.

Countrywide Financial, one of the most aggressive companies in the selling of subprime loans during the housing boom, says it sent out between six million and eight million pieces of targeted mail a month between 2004 and 2006. That is in addition to tens of thousands of telemarketing phone calls urging consumers to either refinance their homes or take out new loans.

Even with the drop-off over the last year in such mailings, lenders continue to be eager customers for refined data on consumers, say people at banks and data companies. The information on consumers has become so specific that banks now use it not just to determine whom to aim at and when, but what specifically to say in each offer.

For example, unsolicited letters from banks now often state what each person’s individual savings might be if a new home loan or new credit card replaced their existing loan or card.

Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry’s newest challenge is to personalize each offer without appearing too invasive.

He describes one marketing campaign several years ago that crossed the line: a bank purchased satellite imagery of a particular neighborhood and on each envelope that contained a personalized credit offer, highlighted that recipient’s home on the image.

The campaign flopped. “It was just too eerie,” Mr. Harvey said.

    Banks Mine Data and Pitch to Troubled Borrowers, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/business/22target.html?hp#

Recession Fears Swamp Signs Of Bank Crisis Easing

October 22, 2008
Filed at 5:25 a.m. ET
The New York Times
By REUTERS

LONDON (Reuters) - Fears of global recession and a flight from emerging markets overshadowed signs on Wednesday that government attempts to end the gravest financial crisis in 80 years may be bearing fruit.

Stocks from London to Tokyo fell sharply on worries about the wider impact of the crisis which pushed the global financial system to the brink of collapse, forcing governments to prop up banks and central banks to sustain money markets.

Emerging market debt and currencies came under severe stress, prompting Hungary to ratchet up interest rates by three full points to defend its ailing forint currency.

But there were optimistic noises from various officials.

Treasury Undersecretary David McCormick, speaking in Hong Kong, said the U.S. economy was in for a challenging few quarters but could start to recover late next year.

"The name of the game is to bring back confidence to the financial market," he said.

Mervyn King, Governor of the Bank of England and a major player in Group of Seven nations' discussions on the crisis, said that for the financial system the worst may have passed.

"We are far from the end of the road back to stability," he said late on Tuesday. "But the plan to recapitalize our banking system, both here and abroad, will I believe come to be seen as the moment in the banking crisis of the past year when we turned the corner."

His comments were underlined by U.S. dollar short-term funding costs falling further in London and Asia, a sign banks are beginning to regain trust in each other.

Emerging powerhouse Russia, whose markets have been battered during the crisis, also signaled improvements in bank lending.

"The interbank has started working normally. The rates are high but coming down. Banks have started crediting sectors again. But we still need two or three weeks for the situation to start improving," the Financial Times quoted First Deputy Prime Minister Igor Shuvalov as saying.

Official help was still at hand, however, with the Federal Reserve on Tuesday saying it could lend up to $540 billion to buy certificates of deposit and commercial paper from money market funds, which have struggled to cope with a wave of withdrawals by investors.

Australia and New Zealand were forced to tweak their plans to guarantee bank deposits after media warned the moves had caused financial dislocation by prompting a rush of money from uncovered schemes into the back-stopped deposits.

Argentina on Tuesday took over the $30 billion private pension system to guarantee pensions.

RECESSION LOOMS

Emerging markets became the latest hotspot in the cycle of global turmoil.

MSCI's emerging market stock index was at its lowest since June 2005 and emerging market sovereign debt spreads widened beyond 700 basis points over Treasury yields for the first time since early 2003.

Currencies were also battered, with the Turkish lira falling to the lowest in more than two years and South Africa's rand at its lowest in more than 6 years against the dollar.

Ukrainian Prime Minister Yulia Tymoshenko said she expected the International Monetary Fund to decide on a loan for her country later in the day.

The IMF is also ready to help Pakistan, which needs funds to avoid a balance of payments crisis, and Iceland, driven close to bankruptcy as frozen credit markets caused its banks to fail.

The overarching fear, overshadowing the progress made in fighting financial collapse, is worry about the deteriorating global economic climate. Minutes from the Bank of England's last meeting, at which it joined a coordinated round of rate cuts, said the UK economy had deteriorated substantially and King, in his Tuesday comments, said it was probably entering its first recession in 16 years.

Such worries swept financial markets outside of emerging economies as well. European shares were down more than 2.7 percent on Wednesday and Japan's Nikkei average ended down 6.8 percent.

"Now we are going to have to deal with the problems of a business cycle downturn, which in all likelihood will be a fairly intense one," said Sanjay Mathur, economist at the Royal Bank of Scotland in Singapore.

A slew of U.S. company results later on Wednesday will give a snapshot of conditions across an array of industries and sectors in the world's largest economy.

Struggling bank Wachovia Corp, set to be taken over by Wells Fargo & Co, will report third quarter figures as will Boeing, tobacco giant Philip Morris, oil major ConocoPhillips and McDonald's among others.

(Editing by Mike Peacock)

    Recession Fears Swamp Signs Of Bank Crisis Easing, NYT, 22.10.2008, http://www.nytimes.com/reuters/business/business-us-financial5.html

Protests and Hecklers Have Mortgage Bankers Longing for Good Old Days

October 22, 2008
The New York Times
By JESSE McKINLEY

SAN FRANCISCO — It was just another business-as-usual day at the annual convention of the nation’s mortgage bankers: a few panels, a few presentations and an attempted abduction of Karl Rove.

Mr. Rove, the Republican strategist and former adviser to President Bush, was accosted onstage during a convention panel here on Tuesday morning by a protester who tried to handcuff and arrest him “for treason.” Mr. Rove tried to elbow her away before she was taken offstage.

No one was injured and no arrests were made, but the stage-storming was just the latest outburst at an event that usually packs all the excitement of a mortgage calculator. On Monday, another panel was interrupted by protesters demanding a moratorium on foreclosures, and hecklers screamed at attendees through bullhorns outside.

The convention was booked for San Francisco well before the national mortgage meltdown, the $700 billion bailout and all the recriminations between. But the rancor of the protests and the general malaise in the mortgage business has left more than a few conventioneers, like Gregory B. Lucas, a mortgage broker from Pomona, Calif., fondly remembering the good old days of the industry’s gatherings.

“We had streakers during the 1990s, but that was a joyful, happy thing,” said Mr. Lucas, who had been coming to such events for 20 years and recalled how a group of inebriated and naked bankers had once entertained the crowd. “But now everyone is blaming us for everything.”

Cheryl Crispen, a spokeswoman for the Mortgage Bankers Association, the convention’s organizer, said she had no regrets about coming to San Francisco, a liberal city where anger about the Bush administration’s financial policies is palpable.

“It was unfortunate that they chose this venue to protest whatever they chose to protest,” Ms. Crispen said. “We believe in free speech, but we believe there is a right time and place for it.”

With about 2,500 attendees, the convention’s attendance was down by about 20 percent this year, Ms. Crispen said, something that “mirrors what is going on the industry.” That new reality could also be reflected in some of the forums being offered, with names like “Eliminating Foreclosure” and “High Speed Legislation: How Congress Is Responding to the Mortgage Industry.”

Not that there weren’t optimists in the crowd. Lalit Maliwal, a salesman from Belle Mead, N.J., said the current economic travails were actually good for his line of work: outsourcing.

“Everyone is hurting,” Mr. Maliwal said. “But I think it seems a little harder than it is.”

Nor were all the conventioneers cutting corners. The comedian Jay Leno and a group of Beatles impersonators were scheduled to perform for the association on Tuesday night — for $1,990 a table.

Mr. Rove was already on a flight to Washington on Tuesday afternoon, according to his office, and could not be reached for comment. But Mr. Lucas, for one, said the networking at the event’s official watering hole at the nearby Marriott hotel was nowhere near as active as the protesting outside the convention hall.

“I’ve cut a lot of deals in those bars,” Mr. Lucas said, chomping on a cigar. “And there wasn’t anybody there last night.”

    Protests and Hecklers Have Mortgage Bankers Longing for Good Old Days, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/us/22mortgage.html?hp

On Health Plans, the Numbers Fly

October 22, 2008
The New York Times
By KEVIN SACK

Economics, it is said, is the dismal science. Anyone paying close attention to the campaign debate over the economics of health care might wonder about the science part.

As Senators Barack Obama and John McCain battle over how best to control spending and cover the uninsured, they are both filling their speeches, advertisements and debating points with authoritative-sounding statistics about the money they would save and the millions of Americans they would cover.

But the figures they cite are invariably the roughest of estimates, often derived by health economists with ideological leanings or financial conflicts. Over time, these forecasts have become so disparate and contradictory as to be almost meaningless.

How many of the country’s 45 million uninsured would gain coverage under Mr. McCain’s plan to reconfigure the tax treatment of health benefits?

Consultants paid by Mr. McCain concluded that his plan would cover 27.5 million of the uninsured. But four health economists who looked into the McCain plan at the urging of David Cutler, a health care adviser to Mr. Obama, reached a far different conclusion. They estimated in a peer-reviewed article in the journal Health Affairs that the number of uninsured would grow by 5 million after five years.

How much would it cost for Mr. Obama to offer subsidized health insurance to those with low incomes?

Last week, the Lewin Group, a consulting firm, projected the cost to taxpayers at $1.17 trillion over 10 years. That was about 27 percent lower than the $1.6 trillion estimated by the Tax Policy Center, a joint project of the Urban Institute and Brookings Institution. And it bore little similarity to a $6 trillion estimate — using a broader measurement — put forth by HSI Network, a Minnesota consulting group that was paid $50,000 by the McCain campaign to assess both plans.

The campaigns acknowledge that the numbers are “all over the map,” in the words of Jay Khosla, a McCain adviser. But that does not keep them from selectively highlighting the most favorable ones (as when Mr. Obama says his plan will cut insurance premiums by $2,500 per family, or when Mr. McCain says his tax changes will leave 95 percent of Americans with more money).

Even the economists behind the forecasts say it makes them uncomfortable to hear candidates assert their numbers as indisputable fact, as if stating Derek Jeter’s batting average. What they are modeling, they emphasize, is ultimately unknowable. And the transformational nature of both candidates’ health care plans means that they can only guess at the future behavior of consumers, employers and insurers.

“Every candidate should say that these numbers were produced by my experts and they’re my best estimates but they’re not exact,” said Roger D. Feldman, a health economist at the University of Minnesota who directed the HSI studies. “But the campaign trail is not the time for ‘on the one hand, on the other hand.’ It’s a system where you paint things in black and white.”

Dr. Feldman and other economists said politics and relationships did not sway their science. But they said estimates could vary widely because of the assumptions they must factor into their formulas. Often they are flying blind because the campaigns, aware that details make the fiercest enemies, do not provide critical variables. Mr. Obama, for instance, has steadfastly declined to say how he would penalize employers who do not offer health coverage, an important component of his plan.

The economists are often left to use small-scale studies to predict how the candidates’ policies might affect the cost of coverage or the willingness of employers to provide it.

“The uncertainty surrounding what will happen under these policies is huge,” said John F. Sheils, senior vice president of the Lewin Group.

Sherry A. Glied, a Columbia economist and a co-author of the Health Affairs article about the McCain plan, said, “We are estimating what would happen in a world we’ve never seen.”

The more radical the restructuring, the economists said, the more they must assume. And the more they must assume, the greater the chance that ideology may drive methodology.

“It’s garbage in, garbage out,” said Uwe E. Reinhardt, a health economist at Princeton. “Every econometric study is an effort in persuasion. I have to persuade the other guy that my assumptions are responsible. Depending on what I feed into the model, I get totally different answers.”

Katherine Baicker, a health economist at Harvard, said economists’ views about the mechanics of markets were often shaped by their politics, or vice versa. “Certainly people who work for the campaigns have a strong motivation to see things one way or another,” she said, “but even those not involved in campaigns still come to the table with their own prior beliefs.”

Both candidates are surrounded by advisers with extensive backgrounds in health economics, many of whom could be in line for administration jobs.

For Mr. McCain, there are Douglas Holtz-Eakin, a former Congressional Budget Office director; Stephen T. Parente of the University of Minnesota; Thomas P. Miller of the American Enterprise Institute; Gail Wilensky, a health adviser to the first President Bush; Grace-Marie Turner, president of the Galen Institute; and Mr. Khosla, a former Congressional aide.

Mr. Obama receives advice from Mr. Cutler, David Blumenthal and Jeffrey Liebman, all of Harvard; Stuart Altman of Brandeis; Austan Goolsby of the University of Chicago; Jeanne M. Lambrew of the University of Texas; three campaign aides, Heather Higginbottom, Jason Furman and Neera Tanden; and a Senate office staff member, Dora Hughes. Campaign insiders suspect that if Mr. Obama is elected, a significant health-related position may go to Tom Daschle, the former Senate majority leader and an early Obama endorser who recently published a book on the subject with help from Ms. Lambrew.

The conflicts that devalue economic estimates can be both political and financial.

Mr. Obama, for example, has been claiming in speeches and advertisements that Mr. McCain would cut $882 billion in Medicare benefits to pay for his health plan. The number came from the Center for American Progress Action Fund, a Democratic-leaning group with close ties to the Obama campaign (Ms. Lambrew is a fellow).

“Consider the source,” Mr. Holtz-Eakin urged reporters last Friday.

A week earlier, Mr. Holtz-Eakin issued a news release trumpeting the HSI Network analysis of the McCain plan as “an independent assessment.” He did not mention that the campaign had paid for it (an Aug. 27 payment for $50,000 shows up in Mr. McCain’s disclosure filings) or that Mr. Parente is one of the firm’s owners.

Dr. Feldman, whose work is highly regarded, described himself as an Obama supporter and contributor, but he said he preferred Mr. McCain’s health plan. Though he acknowledged that the McCain campaign’s sponsorship was “certainly a potential conflict,” he said he hoped the study might advance a worthy proposal. “I wouldn’t sign off on these things if I didn’t support them,” he said.

A number of economists said voters would be wise to simply tune out all of the competing numbers and focus instead on the philosophical underpinnings of the candidates’ plans. Indeed, Dr. Reinhardt offered voters the same instruction he delivers to his students, that economics as practiced in the political arena is often “just ideology marketed in the guise of science.”

“I give a lecture on whether you can trust economists, and I tell them no,” Dr. Reinhardt said. “I tell them that if at the end of the year I tell you the time of day and you trust me, I have failed.”

    On Health Plans, the Numbers Fly, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/us/politics/22health.html?hp

Some Cut Back on Prescription Drugs in Sour Economy

October 22, 2008
The New York Times
By STEPHANIE SAUL

For the first time in at least a decade, the nation’s consumers are trying to get by on fewer prescription drugs.

As people around the country respond to financial and economic hard times by juggling the cost of necessities like groceries and housing, drugs are sometimes having to wait.

“People are having to choose between gas, meals and medication,” said Dr. James King, the chairman of the American Academy of Family Physicians, a national professional group. He also runs his own family practice in rural Selmer, Tenn.

“I’ve seen patients today who said they stopped taking their Lipitor, their cholesterol-lowering medicine, because they can’t afford it,” Dr. King said one recent morning.

“I have patients who have stopped taking their osteoporosis medication.”

On Tuesday, the drug giant Pfizer, which makes Lipitor, the world’s top-selling prescription medicine, said United States sales of that drug were down 13 percent in the third quarter of this year.

Through August of this year, the number of all prescriptions dispensed in the United States was lower than in the first eight months of last year, according to a recent analysis of data from IMS Health, a research firm that tracks prescriptions.

Although other forces are also in play, like safety concerns over some previously popular drugs and the transition of some prescription medications to over-the-counter sales, many doctors and other experts say consumer belt-tightening is a big factor in the prescription downturn.

The trend, if it continues, could have potentially profound implications.

If enough people try to save money by forgoing drugs, controllable conditions could escalate into major medical problems. That could eventually raise the nation’s total health care bill and lower the nation’s standard of living.

Martin Schwarzenberger, a 56-year-old accounting manager for the Boys and Girls Clubs of Greater Kansas City, is stretching out his prescriptions. Mr. Schwarzenberger, who has Type 1 diabetes, is not cutting his insulin, but has started scrimping on a variety of other medications he takes, including Lipitor.

“Don’t tell my wife, but if I have 30 days’ worth of pills, I’ll usually stretch those out to 35 or 40 days,” he said. “You’re trying to keep a house over your head and use your money to pay all your bills.”

Although the overall decline in prescriptions in the IMS Health data was less than 1 percent, it was the first downturn after more than a decade of steady increases in prescriptions, as new drugs came on the market and the population aged.

From 1997 to 2007, the number of prescriptions filled had increased 72 percent, to 3.8 billion last year. In the same period, the average number of prescriptions filled by each person in this country increased from 8.9 a year in 1997 to 12.6 in 2007.

Dr. Timothy Anderson, a Sanford C. Bernstein & Company pharmaceutical analyst who analyzed the IMS data and first reported the prescription downturn last week, said the declining volume was “most likely tied to a worsening economic environment.”

In some cases, the cutbacks might not hurt, according to Gerard F. Anderson, a health policy expert at Johns Hopkins Bloomberg School of Public Health. “A lot of people think there there’s probably over-prescribing in the United States,” Mr. Anderson said.

But for other patients, he said, “the prescription drug is a lifesaver, and they really can’t afford to stop it.”

Dr. Thomas J. Weida, a family physician in Hershey, Pa., said one of his patients ended up in the hospital because he was unable to afford insulin.

Not everyone simply stops taking their drugs.

“They’ll split pills, take their pills every other day, do a lot of things without conferring with their doctors,” said Jack Hoadley, a health policy analyst at Georgetown University.

“We’ve had focus groups with various populations,” Mr. Hoadley said. “They’ll look at four or five prescriptions and say, ‘This is the one I can do without.’ They’re not going to stop their pain medication because they’ll feel bad if they don’t take that. They’ll stop their statin for cholesterol because they don’t feel any different whether they take that or not.”

Overall spending in the United States for prescription drugs is still the highest in the world, an estimated $286.5 billion last year. But that number makes up only about 10 percent of this country’s total health expenditures of $2.26 trillion.

Pharmaceutical companies have long been among those arguing that drugs are a cost-effective way to stave off other, higher medical costs.

The recent prescription cutbacks come even as the drug industry was already heading toward the “generic cliff,” as it is known — an approaching period when a number of blockbuster drugs are scheduled to lose patent protection. That will be 2011 for Lipitor.

Already, a migration to generic drugs means that 60 percent of prescriptions over all are filled by off-brand versions of drugs. But with money tight, even cheaper generic drugs may not always be affordable drugs.

Factors other than the economy that may also be at play in the prescription downturn include adverse publicity about some big-selling medications — like the cholesterol medications Zetia and Vytorin, marketed jointly by Merck and Schering-Plough. And sales of Zyrtec, a popular allergy medication, moved out of the prescription category earlier this year when Johnson & Johnson began selling it as an over-the-counter medication.

Diane M. Conmy, the director of market insights for IMS Health, said the drop in prescriptions might also be partly related to the higher out-of-pocket drug co-payments that insurers are asking consumers to pay.

“Some consumers are making decisions based on the fact that they are bearing more of the cost of medicines than they have in the past,” Ms. Conmy said.

The average co-payment for drugs on insurers’ “preferred” lists rose to $25 in 2007, from $15 in 2000, according to the Kaiser Family Foundation, a nonprofit health care research organization. And, of course, lots of people have no drug insurance at all. That includes the estimated 47 million people in the United States with no form of health coverage, but it is also true for some people who have medical insurance that does not include drug coverage — a number for which no good data may exist.

For older Americans, the addition of Medicare drug coverage in 2006 through the Part D program has meant that 90 percent of Medicare-age people now have drug insurance. And in the early going, Part D had helped stimulate growth in the nation’s overall number of prescriptions, as patients who previously had no coverage flocked to Part D.

But a potential coverage gap in each recipient’s benefit each year — the so-called Part D doughnut hole — means that many Medicare patients are without coverage for part of the year.

The recent IMS Health figures reveal that prescription volume declined in June, in July and again in August, mirroring studies from last year suggesting that prescription use begins dropping at about the time more Medicare beneficiaries begin entering the doughnut hole.

Under this year’s rules, the doughnut hole opens when a patient’s total drug costs have reached $2,510, which counts the portion paid by Medicare as well as the patient’s own out-of-pocket deductibles and co-payments.

The beneficiary must then absorb 100 percent of the costs for the next $3,216, until total drug costs for the year have reached $5,726, when Medicare coverage resumes.

Gloria Wofford, 76, of Pittsburgh, said she recently stopped taking Provigil, prescribed for her problem of falling asleep during the day, because she could no longer afford it after she entered the Medicare doughnut hole.

Her Provigil had been costing $1,695 every three months. “I have no idea who could do it,” she said. “There’s no way I could handle that.”

Without the medication, Ms. Wofford said, she falls asleep while sitting at her computer during the day but then cannot sleep during the night. Because she feels she has no choice, Ms. Wofford is paying out of pocket to continue taking an expensive diabetes medication that costs more than $500 every three months.

For some other people, the boundaries of when and where to cut back are less distinct.

Lori Stewart of Champaign, Ill., is trying to decide whether to discontinue her mother’s Alzheimer’s medications, which seem to have only marginal benefit.

“The medication is $182 a month,” said Ms. Stewart, who recently wrote about the dilemma on her personal blog.

“It’s been a very agonizing decision for me. It is literally one-fifth of her income.”

    Some Cut Back on Prescription Drugs in Sour Economy, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/business/22drug.html?hp

Candidates Face Off Over Economic Plans

October 22, 2008
The New York Times
By JACK HEALY and ELISABETH BUMILLER

The Democratic and Republican presidential candidates continued to hammer away at economic themes Tuesday morning, criticizing each other’s records on taxes, job creation and spending at events in the crucial states of Florida and Pennsylvania.

In Palm Beach, Senator Barack Obama, the Democratic nominee, moderated a panel discussion on unemployment, the sub-prime mortgage crisis and how businesses are scraping along in a weak economy. The friendly panel included Democratic governors of swing states, a former Federal Reserve chairman and the chief executive of Google, most of whom praised Mr. Obama’s economic plans.

“We need a whole new set of priorities to create jobs and grow our economy over the long term,” Mr. Obama said.

At the same time, Republicans talked up their own proposals to cut taxes as they sharpened a new line of attack, questioning Mr. Obama’s experience and readiness for the presidency. Speaking in Pennsylvania, Senator John McCain seized on a speech in which the Democratic vice-presidential nominee, Joseph R. Biden Jr., predicted that Mr. Obama would face “an international crisis, a generated crisis,” if he is elected Nov. 4.

Mr. McCain said that Mr. Biden’s comments had “guaranteed” such an event would occur.

“We don’t want a president who invites testing from the world at a time when our economy is in crisis and Americans are already fighting two wars,” Mr. McCain told a crowd at a manufacturing plant in Bensalem, Pa., situated in Bucks County, just north of Philadelphia. He added, “Senator Obama won’t have the right response” to such a crisis.

With just two weeks remaining before the Nov. 4 elections, the campaigns are focusing on such crucial swing states as Florida, Pennsylvania and Nevada, where Gov. Sarah Palin, the Republican vice-presidential nominee, is appearing later Tuesday.

Mr. Obama’s campaign is making an aggressive play for Florida and its 27 electoral votes, which Republicans won in 2000 and 2004. Mr. Obama and Senator Hillary Clinton, his onetime primary rival, campaigned throughout the state on Monday, and Mr. Obama will be in Miami later today.

Despite polls showing Mr. Obama ahead in Pennsylvania, the McCain campaign hopes to flip the state and its 21 electoral votes into the Republican column. Mr. McCain is holding three rallies throughout Pennsylvania on Tuesday. On Monday, his wifeCindy made four stops in the Philadelphia area, and Ms. Palin was in Lancaster over the weekend.

As the election draws closer, even baseball has gotten politicized. In an inevitable late-October punch, Mr. McCain after what he suggested was Mr. Obama’s flip-flopping on his choice of World Series teams, the Philadelphia Phillies and the Tampa Bay Rays.

“I heard that Senator Obama was showing some love to the Rays down in Tampa Bay yesterday,” Mr. McCain said. “Now, I’m not dumb enough to get mixed up in a World Series between swing states, but I think I may have detected a little pattern with Senator Obama.”

As the crowd booed, Mr. McCain added: “It’s pretty simple really. When he’s campaigning in Philadelphia, he roots for the Phillies, and when he’s campaigning in Tampa Bay, he shows love to the Rays. It’s kind of like the way he campaigns on tax cuts, but then votes for tax increases after he’s elected.

For the record, Mr. Obama is a Chicago White Sox fan, but has temporarily switched to the Phillies for the Series. On Monday, he was endorsed at a rally in Tampa by six players for the Rays -- outfielders Jonny Gomes and Carl Crawford, and Fernando Perez, the pitchers David Price and Edwin Jackson, and Cliff Floyd, the designated hitter.

Mr. Obama shook their hands, hugged them, smiled and offered: “I’ve said from the beginning that I am a unity candidate, bringing people together. So when you see a White Sox Fan showing love to the Rays, and the Rays showing some love back – you know we are on to something right here.”

Jack Healy contributed reporting from New York, and Elisabeth Bumiller from Bensalem, Pa.

    Candidates Face Off Over Economic Plans, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/us/politics/22campaign.html?hp

Regional Banks Struggled Through 3rd Quarter

October 22, 2008
The New York Times
By REUTERS

Three large regional banks all reported losses on Tuesday, and one, the National City Corporation, announced that it would lay off about 14 percent of its work force. A fourth regional bank, U.S. Bancorp, said that its quarterly profit fell a larger-than-expected 47 percent.

National City Corporation, which is based in Cleveland, posted its fifth quarterly loss, hurt by increased reserves for mortgage and real estate construction loan losses. The lender also said that it planned to eliminate 4,000 jobs over three years to save $500 million to $600 million a year by 2011.

Two other regional banks, Fifth Third Bancorp and Keycorp, posted their second consecutive quarterly losses, hurt by increased credit losses and increases to loan reserves.

National City’s third-quarter loss was $729 million, or $5.86 a share, and compared with a loss of $19 million, or 3 cents, in the quarter a year ago.

Results reflected a $4.4 billion preferred dividend paid in September as part of a $7 billion capital raising completed in April. After accounting for the preferred stock, its loss would have been 37 cents a share, the bank said.

National City set aside $1.18 billion for loan losses, up from $368 million a year earlier but down from $1.59 billion in the second quarter.

Most of the increased reserve was tied to a $21 billion portfolio of businesses that the bank is exiting, including broker-sold home equity, subprime and residential construction loans, and automobile, marine and recreational vehicle loans made through dealers. The portfolio was $17 billion three months earlier.

At KeyCorp, the bank said the third-quarter net loss was $36 million, or 10 cents a share, compared with a profit of $224 million, or 57 cents, in the quarter a year ago. Analysts on average forecast profit of 16 cents a share, according to Reuters Estimates.

The bank lost $1.13 billion, or $2.70 a share, in the second quarter.

The bank set aside $407 million for loan losses in the third quarter, compared with $69 million a year earlier. Net charge-offs more than quadrupled to $273 million.

The third-quarter loss at Fifth Third Bancorp of Cincinnati was $56 million. Including preferred stock dividends, the loss was $81 million, or 14 cents a share, compared with a profit of $325 million, or 61 cents, in the quarter a year ago. Fifth Third lost $202 million in the second quarter.

Results included charges of 6 cents a share to write down preferred stock of the mortgage finance giants Fannie Mae and Freddie Mac, 5 cents a share from a Visa settlement with Discover Financial Services and 4 cents a share for some bank-owned life insurance policies. They also included a 5-cent-a-share gain from a previous acquisition.

Analysts on average expected a profit of 19 cents a share, according to Reuters Estimates.

Fifth Third set aside $941 million for loan and lease losses, up from $139 million a year earlier. Net charge-offs quadrupled to $463 million.

At U.S. Bancorp, which is based in Minneapolis, third-quarter net income fell to $576 million, or 32 cents a share, from $1.1 billion, or 62 cents a share, a year earlier. Revenue fell 5 percent, to $3.38 billion, while expenses rose 3 percent to $1.82 billion.

Analysts on average expected profit of 43 cents a share on revenue of $3.79 billion, according to Reuters Estimates.

U.S. Bancorp set aside $748 million for credit losses, up from $199 million a year earlier, while charge-offs totaled $498 million, up from $199 million. Nonperforming assets more than doubled to $1.49 billion.

Compared with the second quarter, net charge-offs rose 26 percent and nonperforming assets rose 31 percent. Results also reflected losses on Fannie Mae and Freddie Mac preferred stock and other securities, and losses tied to the bankruptcies of Lehman Brothers Holdings and Washington Mutual.

    Regional Banks Struggled Through 3rd Quarter, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/business/22bank.html

Wall Street Lower After Earnings Reports

October 22, 2008
The New York Times
By DAVID JOLLY and BETTINA WASSENER

Shares on Wall Street opened slightly lower and then declined sharply Tuesday morning as investors took in quarterly earnings results and news that the billionaire investor Kirk Kerkorian had begun to sell his stake in Ford.

Equities declined after a spate of sobering earnings news from companies including Caterpillar and DuPont, which both offered a bleak outlook for the economy.

Mr. Kerkorian said his investment company, Tracinda, sold 7.3 million shares of Ford on Monday at a huge loss and intended to further reduce its remaining 6.09 percent stake. The move underscored the weakening state of Ford and its two Detroit rivals, General Motors and Chrysler, which are in merger talks.

At noon, the Dow Jones industrial average was down about 216 points or 2.2 percent. . The broader Standard & Poor’s 500-stock index was off 2.9 percent.

Ford’s shares were down 6 percent at noon.

European stocks gave up early gains Tuesday, turning mostly lower in afternoon trading a day after France announced a big injection of cash into French banks.

The Tokyo benchmark Nikkei 225 stock average rose 3.3 percent, powered by a big day on Monday and continued easing in the credit market. The main Sydney market index, the S&P/ASX 200, rose 3.9 percent. In Hong Kong, the Hang Seng fell 1.8 percent.

Under the plan announced late Monday by the French finance minister, Christine Lagarde, the government will buy 10.5 billion euros, or about $14 billion, of subordinated debt from six major lenders in exchange for a pledge that they will increase lending to businesses and consumers.

In European afternoon trading, BNP Paribas rose 7.3 percent, Société Générale gained nearly 10 percent, and Crédit Agricole rose more than 12 percent.

The French announcement was part of the 380 billion euro bailout plan the government announced last week. In the first installment of that plan, Ms. Lagarde said Monday that BNP Paribas would get 2.6 billion euros, Société Générale 1.7 billion and Crédit Agricole 3 billion. Three unlisted savings banks — Caisse d’Epargne, Crédit Mutuel and Banque Populaire — will share the rest of the money.

The gains in the banks’ share prices lifted the CAC-40 in Paris by 0.4 percent.

But the DJ Euro Stoxx 50 index was flat, while the FTSE 100 index in London fell 1 percent, and the DAX in Frankfurt fell 1.5 percent.

Standard & Poor’s 500 index futures suggested the broad U.S. index would fall as much as 1.5 percent at the opening.

Caterpillar, a top maker of earthmoving equipment, on Tuesday called the current situation “the worst in years,” as it reported worse-than-expected third-quarter profit. Texas Instruments on Monday predicted sales would disappoint market expectations.

In the United States on Monday, the Federal Reserve chairman, Ben Bernanke, reiterated his message that the global economy is slowing, but supported hopes for an added stimulus package.

The Dow Jones industrial average rose 4.7 percent on Monday. Indicators of market confidence have improved markedly since global bailouts were announced last week. Volatility declined sharply in New York trading Monday, for example.

And a measure of credit market confidence, the so-called Ted spread, the gap between yields on three-month U.S. government securities and the rate that banks charge each other for loans of the same duration, continued to fall.

Early in European trading the index was at 2.83 percentage points, down 15 points, its lowest level since Sept. 24.

The dollar was mixed against other major currencies. The euro fell to $1.3262 from $1.3343 late Monday in New York, while the British pound fell to $1.7118 from $1.7153. The dollar fell to 101.03 yen from 101.86. The dollar rose to 1.1513 Swiss francs from 1.1496 francs.

Crude oil for November delivery rose 41 cents to $74.66 a barrel.

Although the markets seem to have calmed in the last few sessions, analysts caution that risk aversion and volatility will continue.

A survey in Japan, which is teetering on the brink of recession, showed Japanese banks’ willingness to lend to small and midsized companies remained at the lowest level in at least eight years. The willingness of banks to lend to large companies fell to minus 2 from minus 1, a record low, according to the quarterly survey of loan officers conducted by the Bank of Japan.

In a note to investors Tuesday, referring to the Group of 3 — the United States, Japan and the euro zone — Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong said, “Many asset classes missed the improvement in sentiment, as credit default swaps widened, emerging currencies fell, and G-3 government debt advanced.”
 

David Jolly reported from Paris and Bettina Wassener from Hong Kong.

    Wall Street Lower After Earnings Reports, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/business/worldbusiness/22markets.html

Kerkorian Sells Part of His Stake in Ford

October 22, 2008
The New York Times
By BILL VLASIC

DETROIT — The billionaire investor, Kirk Kerkorian, has sold part of his stake in the Ford Motor Company and may divest his remaining shares in another sign of slumping investor confidence in the ailing American auto industry.

The Tracinda Corporation, Mr. Kerkorian’s investment company, said Tuesday that it sold 7.3 million shares of Ford on Monday at a huge loss and intended to further reduce its remaining 6.09 percent stake.

The move underscored the weakening state of Ford and its two Detroit rivals, General Motors and Chrysler, which are in merger talks.

In a statement, Tracinda said that “current economic and market conditions” and other investment opportunities — in gambling and energy — led to its decision on Ford.

“Tracinda also stated that it intends to further reduce its holdings in Ford common stock,” the company said. “Including the possible sale of all of its remaining 133.5 million shares, depending on market conditions and available sales prices.”

The move was unexpected given Mr. Kerkorian’s previously stated support of Ford management and the automaker’s turnaround plan.

But Ford stock has fallen sharply in recent weeks amid concern about a dismal outlook for United States vehicle sales and the ability of Detroit’s automakers to avoid bankruptcy filings.

Mr. Kerkorian began buying Ford stock in April, and had spent about $1 billion to accumulate a 6.49 percent stake in the automaker.

Ford’s shares traded at $2.33 on Tuesday, but had recently fallen to as low as $1.88 a share.

Tracinda said it sold 7.3 million shares on Monday for about $17.7 million or an average of $2.43 a share. Its remaining holdings are worth about $311 million. Ford shares were down 3 percent, to $2.25 Tuesday morning.

A Ford spokesman Mark Truby said Tuesday, “We’re not going to comment on their investment decision, and are staying focused on our turnaround plan.”

Ford lost $8.7 billion in the second quarter and has struggled to sell cars and trucks in what is the worst auto market in the United States in 15 years.

Mr. Kerkorian’s investment in Ford had been seen as a vote of confidence in the troubled automaker.

The 91-year-old financier had previously amassed large stakes in G.M. and Chrysler, but sold his holdings after conflicts with management.

However, Mr. Kerkorian and his top deputy, Jerome York, appeared to be solidly behind the turnaround strategy set by Ford’s chief executive, Alan R. Mulally.

Mr. Kerkorian increased his stake in Ford after a June meeting in Las Vegas with Mr. Mulally and Bill Ford Jr., the company’s executive chairman and leader of the automaker’s founding family.

Shares in automakers have slid sharply this month because of the weak economy, depressed auto sales and the impact of tightening credit practices on prospective new-car buyers.

In a federal filing, Tracinda said market conditions and the attractiveness of other investments led to its decision to begin selling its Ford holdings.

“In light of current economic and market conditions, it sees unique value in the gaming and hospitality and oil and gas industries and has, therefore, decided to reallocate its resources and to focus on those industries,” the company said.

The move is another indication of the low level of confidence that investors have in the Detroit automakers.

Merger talks between G.M. and Chrysler have been slowed recently because of skepticism by potential investors in the companies.

    Kerkorian Sells Part of His Stake in Ford, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/business/22auto.html?hp

Fed Adds to Its Efforts to Aid Credit Markets

October 22, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Adding to its efforts to unclog the credit markets, the Federal Reserve said on Tuesday that it would provide financing to shore up money market mutual funds, the consumer investment funds that have traditionally been considered as safe as bank accounts.

Under the program, the Fed will help buy up to $600 billion in short-term debt, including certificates of deposit and commercial paper that expires in three months or less. This type of debt has historically been used by money-market funds seeking safe, conservative returns for their clients, but the recent turmoil has roiled the market and caused a prominent fund to fall below $1 a share, an extremely rare occurrence.

Since that fund “broke the buck,” many money market funds have had trouble selling assets to meet redemption requests.

The new program “should improve the liquidity position of money market investors, thus increasing their ability to meet any further redemption requests and their willingness to invest in money market instruments,” the Fed said in the statement. “Improved money market conditions will enhance the ability of banks and other financial intermediaries to accommodate the credit needs of businesses and households.”

It is the third program of this type that the Fed has announced over the last month in its effort to unlock the frozen flow of credit.

While there have been encouraging signs in the credit market this week, the improvements have mostly benefited large businesses and banks. On Monday, the Fed chairman, Ben S. Bernanke, warned that the government and central bank may have to take additional efforts to ensure that credit returns on the consumer level.

The central bank has already said it would provide direct financing to businesses by buying three-month commercial paper, and a separate program provides loans to banks and other financial institutions that buy asset-backed commercial paper from money market mutual funds. Commercial paper is a form of short-term debt that many businesses rely on to finance day-to-day activities.

The actual purchasing of the short-term notes will be accomplished by a group of five funds administered by JPMorgan Chase, which was chosen by a consortium of money market funds surveyed by the Fed. (The central bank did not provide details on which funds made the decision.) Under the terms of the program, each fund will purchase short-term debt from a group of 10 financial institutions, for a total of 50 providers, none of which were identified. Each institution will provide no more than 15 percent of the total debt assets of each fund.

    Fed Adds to Its Efforts to Aid Credit Markets, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/business/economy/22fed.html?hp

Op-Ed Contributor

A Matter of Life and Debt

October 22, 2008
The New York Times
By MARGARET ATWOOD

THIS week, credit has begun to loosen, stock markets have been encouraged enough to reclaim lost ground (at least for now) and there is a collective sigh of hope that lenders will begin to trust in the financial system again.

But we’re deluding ourselves if we assume that we can recover from the crisis of 2008 so quickly and easily simply by watching the Dow creep upward. The wounds go deeper than that. To heal them, we must repair the broken moral balance that let this chaos loose.

Debt — who owes what to whom, or to what, and how that debt gets paid — is a subject much larger than money. It has to do with our basic sense of fairness, a sense that is embedded in all of our exchanges with our fellow human beings.

But at some point we stopped seeing debt as a simple personal relationship. The human factor became diminished. Maybe it had something to do with the sheer volume of transactions that computers have enabled. But what we seem to have forgotten is that the debtor is only one twin in a joined-at-the-hip pair, the other twin being the creditor. The whole edifice rests on a few fundamental principles that are inherent in us.

We are social creatures who must interact for mutual benefit, and — the negative version — who harbor grudges when we feel we’ve been treated unfairly. Without a sense of fairness and also a level of trust, without a system of reciprocal altruism and tit-for-tat — one good turn deserves another, and so does one bad turn — no one would ever lend anything, as there would be no expectation of being paid back. And people would lie, cheat and steal with abandon, as there would be no punishments for such behavior.

Children begin saying, “That’s not fair!” long before they start figuring out money; they exchange favors, toys and punches early in life, setting their own exchange rates. Almost every human interaction involves debts incurred — debts that are either paid, in which case balance is restored, or else not, in which case people feel angry. A simple example: You’re in your car, and you let someone else go ahead of you, and the driver doesn’t nod, wave or honk. How do you feel?

Once you start looking at life through these spectacles, debtor-creditor relationships play out in fascinating ways. In many religions, for instance. The version of the Lord’s Prayer I memorized as a child included the line, “Forgive us our debts as we forgive our debtors.” In Aramaic, the language that Jesus himself spoke, the word for “debt” and the word for “sin” are the same. And although many people assume that “debts” in these contexts refer to spiritual debts or trespasses, debts are also considered sins. If you don’t pay back what’s owed, you cause harm to others.

The fairness essential to debt and redemption is reflected in the afterlives of many religions, in which crimes unpunished in this world get their comeuppance in the next. For instance, hell, in Dante’s “Divine Comedy,” is the place where absolutely everything is remembered by those in torment, whereas in heaven you forget your personal self and who still owes you five bucks and instead turn to the contemplation of selfless Being.

Debtor-creditor bonds are also central to the plots of many novels — especially those from the 19th century, when the boom-and-bust cycles of manufacturing and no-holds-barred capitalism were new and frightening phenomena, and ruined many. Such stories tell what happens when you don’t pay, won’t pay or can’t pay, and when official punishments ranged from debtors’ prisons to debt slavery.

In “Uncle Tom’s Cabin,” for example, human beings are sold to pay off the rashly contracted debts. In “Madame Bovary,” a provincial wife takes not only to love and extramarital sex as an escape from boredom, but also — more dangerously — to overspending. She poisons herself when her unpaid creditor threatens to expose her double life. Had Emma Bovary but learned double-entry bookkeeping and drawn up a budget, she could easily have gone on with her hobby of adultery.

For her part, Lily Bart in “The House of Mirth” fails to see that if a man lends you money and charges no interest, he’s going to want payment of some other kind.

As for what will happen to us next, I have no safe answers. If fair regulations are established and credibility is restored, people will stop walking around in a daze, roll up their sleeves and start picking up the pieces. Things unconnected with money will be valued more — friends, family, a walk in the woods. “I” will be spoken less, “we” will return, as people recognize that there is such a thing as the common good.

On the other hand, if fair regulations are not established and rebuilding seems impossible, we could have social unrest on a scale we haven’t seen for years.

Is there any bright side to this? Perhaps we’ll have some breathing room — a chance to re-evaluate our goals and to take stock of our relationship to the living planet from which we derive all our nourishment, and without which debt finally won’t matter.
 

Margaret Atwood is the author of “The Handmaid’s Tale” and, most recently, “Payback: Debt and the Shadow Side of Wealth.”

    A Matter of Life and Debt, NYT, 22.10.2008, http://www.nytimes.com/2008/10/22/opinion/22atwood.html

Op-Ed Contributor

This Bailout Doesn’t Pay Dividends

October 21, 2008
The New York Times
By DAVID S. SCHARFSTEIN and JEREMY C. STEIN

Cambridge, Mass.

ON Oct. 13, the chief executives of nine large American banks were called to a meeting at the Treasury Department. At the meeting, Secretary Henry Paulson offered them $125 billion from the federal government in exchange for shares of preferred stock. The chief executives accepted his terms. In some accounts of the meeting, Secretary Paulson is described as playing the role of the Godfather, making the banks an offer they could not refuse. But in one important respect, he was more Santa Claus than Vito Corleone: the agreement allowed the banks to continue paying dividends to common shareholders.

Although there are many things to like about the government’s plan, the failure to suspend dividends is not one of them. These dividends, if they are paid at current levels, will redirect more than $25 billion of the $125 billion to shareholders in the next year alone. Taxpayers have been told that their money is required because of an urgent need to rebuild bank capital, yet a significant fraction of this money will wind up in shareholders’ pockets — and thus be unavailable to plug the large capital hole on the banks’ balance sheets.

Moreover, given their own equity stakes, the officers and directors of the nine banks will be among the leading beneficiaries of the dividend payout. We estimate that their personal take of the dividends will amount to approximately $250 million in the first year.

Bank executives may argue that it is necessary for them to maintain dividend payments to support their stock prices and to make further capital-raising possible. This argument is dubious. In recent years, the fraction of American public companies that pay dividends has fallen drastically, to a level of around 20 percent. The ranks of the companies that do not pay dividends include some of the most profitable and (until recently) best-performing market darlings, like Google.

These companies have come to recognize what finance academics have been preaching for decades: for financially healthy firms, there is no particular imperative to pay dividends every quarter, because retained cash can always be paid out to shareholders later, or used to repurchase stock.

So why would the banks want to maintain large dividend payouts when they’ve had such a hard time borrowing, are starved of cash, and the credit markets believe that they run a significant risk of defaulting? Shouldn’t these distressed banks be marshalling all of the financial resources available to them to ensure their viability?

Although dividends should be a matter of near indifference to shareholders of healthy companies, when companies are financially distressed there is a conflict of interest between shareholders and bondholders that leads shareholders to prefer immediate payouts.

Here’s why: Each dollar paid out as a dividend today is a dollar that cannot be seized by creditors in the event of bankruptcy. For a distressed company, dividends are not in the interest of the enterprise as a whole (shareholders and lenders taken together), but only in the interest of shareholders. They are an attempt by shareholders to beat creditors out the door.

The government should close the door by putting an immediate stop to the dividend payouts of any banks receiving direct federal support. The purpose is not just to be fair or to avoid unsavory appearances, but to improve the health of the banks and the economy.

There is ample precedent for such a move by the government. When Chrysler was bailed out with government loan guarantees in 1979, the legislation explicitly prohibited Chrysler from making any dividend payments. All dividends on its common shares were suspended from 1980 to 1983.

If the government is unwilling to take this step, then the boards of the banks should take it upon themselves to do the right thing. They may even have a legal obligation to do so, because courts have ruled that directors of financially distressed firms have a fiduciary duty to creditors as well as to shareholders.

The creditors of the banks include not just those who have already lent them money, but also American taxpayers who put their money on the line by guaranteeing the banks’ debts. From the perspective of this broader set of stakeholders, it is best to end dividend payments until the banks have returned to health.

David S. Scharfstein is a professor of finance at Harvard Business School. Jeremy C. Stein is a professor of economics at Harvard.

    This Bailout Doesn’t Pay Dividends, NYT, 21.10.2008, http://www.nytimes.com/2008/10/21/opinion/21stein.html

Bernanke Says He Supports New Stimulus for Economy

October 21, 2008
The New York Times
By EDMUND L. ANDREWS

WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, said on Monday that he supported a second round of additional spending measures to help stimulate the economy.

“With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by Congress at this juncture seems appropriate,” Mr. Bernanke told the House Budget Committee.

His remarks are his first endorsement of another round of energizing stimulus, which Democrats on Capitol Hill have advocated. The Bush administration has been cool to the notion.

Mr. Bernanke said the economic outlook was still so uncertain that the optimal size, composition and timing for any new stimulus plan were unclear.

But he said Congress should try to develop a plan that would have its maximum impact when the economy was probably at its weakest. Many if not most private forecasters contend that the economy has already entered a recession, which would seem to argue for measures that would bolster overall spending as soon as possible.

“If Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,” Mr. Bernanke said. “Such actions might be particularly effective at promoting economic growth and job creation.”

It was unclear what kind of measures he had in mind.

The government announced last week that it would invest $250 billion directly into the nation’s banks as part of a $700 billion bailout package to ease the financial turmoil and loosen the credit markets. In addition, the government has helped bail out the mortgage finance giants Fannie Mae and Freddie Mac as well as the insurance giant the American International Group.

Democratic leaders have called for an additional $300 billion package of spending measures that would include a big increase in spending on infrastructure projects, an additional extension of unemployment benefits and increases in spending for food stamps, home heating subsidies and state Medicaid programs.

Mr. Bush has repeatedly asked American consumers to be patient and give the bailout package time to work. Many Republicans instead have favored tax cuts to corporations and individuals.

Mr. Bernanke also cautioned that “any program should be designed, to the extent possible, to limit longer-term effects on the federal government’s structural budget deficit.”

In his comments, Mr. Bernanke essentially reiterated the grim economic outlook he provided in a speech last week.

“Even before the recent intensification of the financial crisis, economic activity had shown considerable signs of weakness,” he told lawmakers. Private sector employers shed 168,000 jobs in September and a total of 900,000 jobs since January. Real consumer spending, adjusted for inflation, declined during the summer and appears to have declined yet again in September.

“The pace of economic activity is likely to be below that of its longer-run potential for several quarters,” he said.

Mr. Bernanke and his colleagues at the Federal Reserve meet later this month, and many economists say they believe the Fed could again lower rates. Earlier this month, the Fed, along with the European Central Bank and other central banks, reduced primary lending rates by a half percentage point.

An earlier stimulus package, in which the government mailed out about $50 billion in checks in April and May, provided a lift to income and consumer spending. Consumer spending increased 0.4 percent in May, but dried up after that.

    Bernanke Says He Supports New Stimulus for Economy, NYT, 21.10.2008, http://www.nytimes.com/2008/10/21/business/economy/21fed.html?hp

Bush, Bernanke Say Time Is Right for New Stimulus

October 20, 2008
Filed at 1:13 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Momentum increased Monday for a new economic stimulus package to help cash-strapped Americans as President Bush and Federal Reserve Chairman Ben Bernanke threw their weight behind an idea they earlier opposed.

Press secretary Dana Perino told reporters on Air Force One as the president flew to Louisiana on Monday for an economic event that the White House will have to see what kind of package Congress crafts. Perino says the administration has concerns that what has been put forward so far by Democratic leaders in Congress would not actually stimulate the economy.

Earlier Monday, Bernanke told the House Budget Committee the country's economic weakness could last for a while and it was the right time for Congress to consider a new package. Earlier this year, most individuals and couples received tax rebate checks of $600-$1,200 through the $168 billion stimulus package enacted in February.

''With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate,'' Bernanke said in prepared testimony to the panel.

Bernanke's remarks before the House Budget Committee marked his first endorsement of another round of government stimulus. Democrats on Capitol Hill have been pushing for another stimulus plan, but the Bush administration has been cool to the idea as the federal budget deficit explodes.

Bernake also appeared to open the door for further interest rate cuts. Wall Street stocks rose on the news and on signals that the important credit markets were loosening further.

House Speaker Nancy Pelosi chimed in on the stimulus idea. ''I call on President Bush and congressional Republicans to once again heed Chairman Bernanke's advice and as they did in January, work with Democrats in Congress to enact a targeted, timely and fiscally responsible economic recovery and job creation package,'' Pelosi said in a statement Monday.

Pelosi has said an economic recovery bill could be as large as $150 billion. Economists have told leading Democrats the plan should be twice the size.

Bernanke suggested that Congress design the stimulus package so that it will be timely, well targeted and would limit the longer-term affects on the government's budget deficit, which hit a record high in the recently ended budget year.

The economy has been beaten down by housing, credit and financial crises. Its woes are likely to drag into next year, leaving more people out of work and more businesses wary of making big investments.

U.S. stocks rose in afternoon trading Monday. The Dow Jones industrials rose about 1.6 percent and the Standard & Poor's 500 index jumped 1.9 percent.

Interbank lending rates fell for a sixth straight day Monday. The London interbank offered rate, or Libor, for three-month dollar loans fell 0.36 percent to 4.06 percent, the biggest daily drop since January.

Bernanke said the package also should include provisions that would help break through the stubborn credit clog that is playing a major role in the economy's slowdown.

''If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers,'' Bernanke said. ''Such actions might be particularly effective at promoting economic growth and job creation,'' he added.

The Fed and the world's other major central banks recently joined forces to slice interest rates, the first coordinated action of that kind in the Fed's history. The central bank meets next on Oct. 28-29 and many economists believe Fed policymakers will again lower its key rate -- now at 1.50 percent -- to brace the wobbly economy.

Over time, ''stimulus provided by monetary policy'' along with the eventual stabilization in housing markets and improvements in credit markets will help the economy get back on firm footing, Bernanke said.

Dropping rates might induce consumers and businesses to boost their spending, an important ingredient to energize overall economic activity.

So far, though, a string of drastic actions by the Fed and the Bush administration has yet to turn around a bunker mentality. Banks fear lending money to each other and to their customers. Businesses are reluctant to hire and boost capital investments. Consumers have hunkered down. All the economy's problems are feeding off each other, creating a vicious cycle that Washington policymakers are finding difficult to break.

One-third of Americans are worried about losing their jobs, half fret they will be unable to keep up with mortgage and credit card payments, and seven in 10 are anxious that their stocks and retirement investments are losing value, according to an Associated Press-Yahoo News poll of likely voters released Monday.

Unemployment could hit 7.5 percent or higher by next year. Many analysts predict the economy will shrink later this year and early next year, meeting the classic definition of a recession. Some believe the economy already jolted into reverse during the July-to-September quarter.

Last week, the Treasury Department announced it would inject up to $250 billion in U.S. banks in return for partial ownership, something that hasn't been done since the Great Depression. The government hopes banks will use the capital infusions to rebuild their reserves and bolster lending to customers.

Treasury Secretary Henry Paulson said Monday that government purchases of stock in banks represent an investment that should eventually make money for the taxpayer.

So far this year, 15 banks have failed, including the largest U.S. bank failure in history, compared with three last year. And Wall Street's five biggest investment firms were swallowed by other companies, filed bankruptcy or converted themselves into commercial banks to weather the financial storm.

In other efforts to stem the crisis, the Federal Deposit Insurance Corp. is temporarily guaranteeing new issues of bank debt -- fully protecting the money even if the institution fails.

The FDIC also said it would provide unlimited deposit insurance for non-interest bearing accounts, which small businesses often use to cover payrolls and other expenses. Frequently, these accounts exceed the current $250,000 insurance limit, so the expanded insurance should discourage nervous companies from pulling their money out.

The United States and other top economic powers also have adopted a five-point action plan and pledge to do all they can to provide relief.

----

Associated Press writers Pan Pylas in London, Tom Raum and Marting Crutsinger in Washington contributed to this report.

    Bush, Bernanke Say Time Is Right for New Stimulus, NYT, 20.10.2008, http://www.nytimes.com/aponline/washington/AP-Financial-Meltdown.html

Consensus Emerges to Let Deficit Rise

October 20, 2008
The New York Times
By LOUIS UCHITELLE and ROBERT PEAR

Like water rushing over a river’s banks, the federal government’s rapidly mounting expenses are overwhelming the federal budget and increasing an already swollen deficit.

The bank bailout, in the latest big outlay, could cost $250 billion in just the next few weeks, and a newly proposed stimulus package would have $150 billion or more flowing from Washington before the next president takes office in January.

Adding to the damage is that tax revenues fall as the economy weakens; this is likely just as the government needs hundreds of billions of dollars to repair the financial system. The nation’s wars are growing more costly, as fighting spreads in Afghanistan. And a declining economy swells outlays for unemployment insurance, food stamps and other federal aid.

But the extra spending, a sore point in normal times, has been widely accepted on both sides of the political aisle as necessary to salvage the banking system and avert another Great Depression.

“Right now would not be the time to balance the budget,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan Washington group that normally pushes the opposite message.

Confronted with a hugely expensive economic crisis, Democratic and Republican lawmakers alike have elected to pay the bill mainly by borrowing money rather than cutting spending or raising taxes. But while the borrowing is relatively inexpensive for the government in a weak economy, the cost will become a bigger burden as growth returns and interest rates rise.

In addition, outlays for Medicare and Social Security are expected to balloon as the first baby boomers reach full retirement age in the next three years.

“The next president will inherit a fiscal and economic mess of historic proportions,” said Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget Committee. “It will take years to dig our way out.”

The Congressional Budget Office estimates that the deficit in the current fiscal year, which started this month, will reach roughly $700 billion, up more than 50 percent from the previous year. Measured as a percentage of all the nation’s economic activity, the deficit, at 5 percent, would rival those of the early 1980s, when a severe recession combined with stepped-up federal spending and Reagan-era tax cuts resulted in huge budget shortfalls.

Resorting to credit has long been the American solution for dealing with expensive crises — as long as the solution has wide public support. Fighting World War II certainly had that support. Even now many Americans tolerate running up the deficit to pay for the wars in Iraq and Afghanistan, which cost $11 billion a month combined. And so far there is wide support for an initial outlay of at least $250 billion for a rescue of the financial system, if that will stabilize banks and prevent a calamitous recession.

“There are extreme circumstances when a larger national debt is accepted as the lesser of two evils,” said Robert J. Barbera, chief economist at the Investment Technology Group, a research and trading firm.

There are also assumptions that help to make America’s deficits tolerable, even logical.

One is that people all over the world are willing, even eager, to lend to the United States, confident that the world’s most powerful nation will always repay on time, whatever its current difficulties.

“So far the market is showing that it is quite willing to finance our needs,” said Stephen S. McMillin, deputy director of the White House Office of Management and Budget.

Lenders are accepting interest rates of 4 percent or less, often much less, to buy what they consider super-safe American debt in the form of Treasury securities. The 4 percent rate means that the annual cost of borrowing an extra $1 trillion is $40 billion, a modest sum in a nearly $14 trillion economy, helping to explain why the current growing deficit has encountered little political resistance so far.

But if recent history repeats itself, the deficit is likely to be an issue again when the economy recovers.

Interest rates typically rise during a recovery, so the low cost of servicing the nation’s debt will not last — unless a recession set off by the banking crisis endures, repeating the Japanese experience in the 1990s and perhaps even stripping the United States and the dollar of their pre-eminent status.

The assumption is that will not happen, and as the economy recovers, the private sector will step up its demand for credit, making interest rates rise.

Higher rates in turn would increase the cost of financing the deficit, and there would probably be more pressure to reduce it through cuts in spending. That happened in the late 1980s, as Congress and the White House coped with the swollen Reagan deficits. The Gramm-Rudman-Hollings Act, with its attempt to put a ceiling on deficits, came out of this period.

Another assumption, also based on 60 years of post-World War II experience, is that although the economy is sliding into recession, in a year or two that recession will end and the national income (also known as the gross domestic product) will expand once again.

When that happens, the national debt — the accumulated borrowing to finance all the annual deficits — will shrink in relation to the income available to pay off the debt.

The nation’s debt as a percentage of all economic activity, while growing alarmingly now, is not at historic highs. The portion held outside the American government, here and abroad, in the form of Treasury securities was $5.8 trillion at the end of last month.

That is a relatively modest 40.8 percent of the nation’s annual income, far below the 109 percent coming out of World War II or the nearly 50 percent in much of the 1990s.

Put another way, if the entire national income were dedicated to debt repayment, the debt would be paid off in less than five months. For most of the years since 1940, paying down the debt would have taken longer, putting a greater strain on income.

Still, these are not ordinary times. The banking system is broken, and the national economy, in response, is plunging toward recession in a manner that evokes comparisons with the Great Depression. To soften the blow, the administration and Congress ran up a record $455 billion deficit in the just-ended 2008 fiscal year, and they are en route to a shortfall of $700 billion or more this year.

“I do think we need to be ready for a very significant increase in the budget deficit,” said Peter Orszag, director of the Congressional Budget Office.

Apart from the war spending, outlays for unemployment insurance have risen by one-third and spending on food stamps has increased 13 percent over the last 12 months. Congress has agreed to expand education benefits for veterans of the current wars, and last spring it authorized $168 billion for a stimulus package, most of it in the form of tax rebate checks. Now the Democratic Congressional leadership is pushing for another stimulus of at least that much.

All of this is happening as tax revenues are falling, particularly corporate tax receipts, which were down $66 billion, or 18 percent, in the fiscal year that just ended. The decline accelerated in September.

Many Republicans would probably go along with two elements in the stimulus package proposed by the Democrats — a tax cut of some sort and extended unemployment benefits. But they resist stepped-up spending on public works projects and a temporary increase in federal aid to the states.

Representative Roy Blunt of Missouri, the House Republican whip, said the stimulus bill should not be used to finance “a huge public works plan” or to bail out “states that spent a lot more money than they should have on Medicaid and other social programs.”

To pay for the surge in spending — and the shortfall in taxes — the federal government increased the national debt by $768 billion over the last year, to the present $5.8 trillion, with $300 billion of that amount going to the Federal Reserve for a variety of rescue initiatives for the financial system.

The outlays swell as each day brings fresh reports of a financial system that is costly to repair and a rapidly sinking economy in need of a leg up.

“The deficit is a burden in a long-term sense,” Mr. Barbera, the economist, said, “but it is small beer compared to the concerns of the moment.”

    Consensus Emerges to Let Deficit Rise, NYT, 20.10.2008, http://www.nytimes.com/2008/10/20/business/economy/20cost.html?hp

Eyes Turn to the Fear Index

October 20, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Fear is running high on Wall Street. Just look at the Fear Index.

With all those stomach-churning free falls and sharp reversals in the stock market recently, traders are keeping a nervous eye on an obscure index known as the VIX.

The VIX (officially the Chicago Board Options Exchange Volatility Index) measures volatility, the technical term for those wrenching market swings. A rising VIX is usually regarded as a sign that fear, rather than greed, is ruling the market. The higher the VIX goes, the more unhinged the market looks.

So how scared are investors? On Friday, the VIX rose to 70.33, its highest close since its introduction in 1993. To some experts, that suggests that the wild ride is far from over.

“Right now, it’s an extremely important part of the puzzle,” Steve Sachs, a trader at Rydex Investments, said of the VIX. “It’s showing a huge amount of fear in the marketplace.”

The VIX is hardly a household name like the Dow. But lately, it has become a fixture on CNBC and other financial news outlets, with commentators often invoking an index that most of the general public was blissfully unaware of only a few weeks ago.

Some traders think all the publicity has only added to the anxieties that the VIX is intended to reflect. “The VIX is a self-fulfilling prophecy,” said Ryan Larson, head equity trader at Voyageur Asset Management. “It’s almost adding to the problems.”

Speaking on Thursday, when the VIX hit an intraday high of 81.17 before closing lower, he said:

“You see the VIX trade north of 80, and of course the media starts to pick it up.” Mr. Larson continued, “It’s blasted on the TV, and for the average investor sitting at home, they think, oh, my gosh, the VIX just broke 80 — I’ve got to go sell my stocks.”

Put simply, the VIX measures the degree to which investors think stocks will swing violently in the next 30 days. It is calculated in real time throughout the trading day, fluctuating minute to minute.

The higher the VIX, the bigger the expected swings — and the index has a good track record. It spiked in 1998 when a big hedge fund, Long-Term Capital Management, collapsed, and after the 9/11 terrorist attacks.

Mr. Sachs, with some incredulity, said that the swings in the stock market have reflected the volatility implied by the VIX.

“We had a 17 percent peak-to-trough trading range this week,” he said. “It should take two years under normal circumstances for the S.& P. 500 to have that type of trading range.”

The VIX had its origin in 1993, when the Chicago Board Options Exchange approached Robert E. Whaley, then a professor at Duke, with a dual proposal.

“The first purpose was the one that is being served right now — find a barometer of market anxiety or investor fear,” Professor Whaley, who now teaches at the Owen Graduate School of Management at Vanderbilt University, recalled in an interview. But, he said, the board also wanted to create an index that investors could bet on using futures and options, providing a new revenue stream for the exchange.

Professor Whaley spent a sabbatical in France toying with formulas. He returned to the United States with the VIX, which gauges anxiety by calculating the premiums paid in a specific options market run by the Chicago Board Options Exchange.

An option is a contract that permits an investor to buy or sell a security at a certain date at a certain price. These contracts often amount to insurance policies in case big moves in the market cause trouble in a portfolio. A contract, like insurance, costs money — specifically, a premium, whose price can fluctuate.

The VIX, in its current form, measures premiums paid by investors who buy options tied to the price of the Standard & Poor’s 500-stock index.

In times of confusion or anxiety on Wall Street, investors are more eager to buy this insurance, and thus agree to pay higher premiums to get them. This pushes up the level of the VIX.

“It’s analogous to buying fire insurance,” Professor Whaley said. “If there’s some reason to believe there’s an arsonist in your neighborhood, you’re going to be willing to pay more for insurance.”

The index is not an arbitrary number: it offers guidance for the expected percentage change of the S.& P. 500. Based on a formula, Friday’s close of around 70 suggests that investors think the S. & P. 500 could move up or down about 20 percent in the next 30 days — an almost unheard-of swing.

So the higher the number, the bigger the swing investors think the market will take. Put another way, the higher the VIX, the less investors know about where the stock market is headed.

The current level shows that “investors are still very uncertain about where things will go,” said Meg Browne of Brown Brothers Harriman, a currency strategist who was keeping a close eye on the VIX as the stock market soared last Monday.

Since 2004, investors have been able to buy futures contracts on the VIX itself, providing a way to hedge against volatility in the market. Options on the VIX have been available since 2006.

“You have seen more and more investors using it as an avenue toward hedging their portfolios,” said Chris Jacobson, chief options strategist at the Susquehanna Financial Group. In times of crisis, “while you’re losing your portfolio, you could make some money on the increase in volatility,” he said.

Some investors are skeptical about the utility of the index. “If you’re trading the markets, you pretty much know the fear, you know the volatility. I don’t need an index to tell me there’s volatility out there,” Mr. Larson said.

    Eyes Turn to the Fear Index, NYT, 20.10.2008, http://www.nytimes.com/2008/10/20/business/20vix.html?hp

Regions in Recession, Bush Aide Says

October 20, 2008
The New York Times
By REUTERS

WASHINGTON (Reuters) — President Bush’s top economic adviser said Sunday that some regions of the United States were struggling with high jobless rates and seemed to be in recession.

“We are seeing what anyone would characterize as a recession in some parts of the country,” the adviser, Edward P. Lazear, chairman of the Council of Economic Advisers, told CNN.

Unemployment in some areas is “much higher” than the 6.1 percent national level, he said.

Mr. Lazear says the administration “has taken the right steps” to thaw out credit markets and get loans flowing to businesses and consumers.

Although it will take a few months for the full impact of the Treasury Department’s $700 billion credit market rescue plan to be felt, improvements are already visible, Mr. Lazear said.

“Banks are now willing to lend to one another. That’s a huge plus for the economy because the big problem has been that banks have been unwilling to trust one another,” he said.

Benchmark credit spreads have shrunk over the last week as new liquidity measures by global central banks and governments have started to take effect. Those spreads have been at unusually high levels, a reflection of risk aversion among banks.

Mr. Lazear said the federal budget deficit would grow because of the cost of the bailout, but he declined to say how high.

“The deficit is important,” he said, but “the main focus is turning the economy around.”

    Regions in Recession, Bush Aide Says, NYT, 20.10.2008, http://www.nytimes.com/2008/10/20/business/economy/20econ.html?ref=economy

With Economy, Day Laborer Jobs Dwindle

October 20, 2008
The New York Times
By KIRK SEMPLE

HEMPSTEAD, N.Y. — More than 50 day laborers stood, bored, anxious and mostly silent, in the sun-blasted parking lot of a Home Depot here last week, tracking the ebb and flow of customers and hoping for work. The hours crawled by. Six, maybe seven men scored jobs. The rest just waited.

“To stand here doesn’t make a lot of sense to a lot of people,” Jairo Mancillas, 29, a day laborer from El Salvador, said glumly as he waited on a grassy median in the parking lot. “But to us, it’s a very important thing. It means a lot.”

This bleak scene is playing out at scores of day laborer sites across the region. Here on Long Island; under the elevated No. 7 line on Roosevelt Avenue in Jackson Heights, Queens; at the intersection of Port Richmond Avenue and Castleton Avenue on Staten Island; along Bay Parkway in Brooklyn; near highway on-ramps in Westchester County; and into New Jersey and Connecticut, clusters of day laborers, their numbers swelled by people laid off from full-time jobs, wait for work that, more often than not, never comes.

Two years ago, when the economy was booming and home-building was thriving, many of these same laborers were working every day. Now, they are lucky if they work twice a week, many of them say. Their lives have become a test of wits, patience and hope.

Simple lives have become simpler. The laborers, most of them illegal immigrants, said they had stopped eating in restaurants, buying new clothes and sending money home to their families. In interviews with more than a dozen laborers in New York City and its suburbs, many said they were thinking about returning to their homelands.

Carmelo Peña Garcia, 59, an illegal immigrant from Mexico who waits for work every day at Roosevelt Avenue and 69th Street in Queens, said he was trying to make just enough money to buy a plane ticket home. “Sometimes you don’t sleep because you are thinking about work and nothing else,” he said on a recent morning.

Here in Hempstead, Mr. Mancillas said, “The American dream isn’t an American dream.”

The amount of money sent by immigrants in the United States to Latin America and the Caribbean is expected to increase this year over last year, according to the Inter-American Development Bank, which has been tracking remittances since 2000. But when adjusted for inflation, the value of the remittances is actually expected to decline. The bank attributed the drop to several factors, including the economic downturn in the United States, inflation and a weaker dollar.

Like other day laborers, Mr. Mancillas came to the United States with the intention of making money to help his family. In his village of Ahuachapán, El Salvador, he was a tailor and worked from home, making trousers for adults and children. But he was barely scraping by and decided to try his luck in the United States.

He left his wife and two young daughters behind, and with the help of a smuggler, whom he paid $2,500, traveled through Guatemala and Mexico, sneaked across the border into California, then made his way to Hempstead in 2005.

Work came quickly at first, he said. Every morning just after dawn he and many other day laborers would gather outside a Home Depot, and most days, he was hired. In flush times, he made as much as $800 a week. He would send $600 home and use the balance for food, clothes and his half of the $500 monthly rent for a tiny room he shared with another laborer in a rooming house in Hempstead.

He and his friends made enough to be able to eat meals in restaurants and buy clothes — for themselves and their families — at the mall. Mr. Mancillas would fill boxes with toys and other goods and ship them to his daughters in El Salvador.

But work slowed last year and now has nearly dried up: In the past several months, like many other laborers, he has been working once or twice a week, making between $80 and $200.

The drop in wages for Mr. Mancillas has resulted in sacrifices, large and small.

Mr. Mancillas said he now shops for clothes at the Salvation Army. He no longer eats out and instead subsists on basic home-cooked food or rice and beans from Latino delicatessens. He has also stopped buying clothes and toys for his family.

Most significantly, he said, the remittances home are much smaller and less frequent. Some weeks he does not send any money at all.

As the economy has worsened, the number of laborers gathering at the Home Depot here has grown, making the competition for fewer jobs that much fiercer. The newcomers have arrived from other cities, thinking things would be better in New York. Or they have been laid off from longer-term jobs in manufacturing and construction, either as a result of the economy or because of tougher crackdowns on illegal immigrants.

As demand for day labor has plunged, some employers have taken advantage of the glut of workers by paying them less or not paying them at all, several workers said.

One of Mr. Mancillas’s friends, David, an illegal immigrant from Mexico, said a contractor did not pay him for several days of work soon after he arrived last year in Hempstead. But he did not seek help from the authorities because he was afraid of being deported.

“He owed me $1,000,” said David, who refused to give his last name. “But fear kept my mouth shut.”

The crowd thinned throughout the day as workers gave up and went home, most to shared rooms in houses full of other laborers with little to do but watch television. By midafternoon, fewer than 20 remained. Some sat alone on the curbs of the medians, seemingly lost in their thoughts, but still keeping an eye out for potential employers.

“When you return to the house and you haven’t worked and you can’t provide for your family, you feel really bad,” Mr. Mancillas said.

Another of Mr. Mancillas’s friends, a 23-year-old Salvadoran named Junior Garcia, spotted a Home Depot customer trying to wrestle some lumber into the back of a van and sprinted over to help him. (Mr. Garcia would get a $10 tip out of it, a small windfall.)

A few minutes passed. The men watched cars drive by.

Wilfredo Hernandez, 38, who was also from El Salvador, broke the silence. “I used to go to restaurants all the time, drink beers,” he said. “One night I went to the restaurant Hooters. You know Hooters?” He itemized his meal from that night: a hamburger ($10) and four beers ($20). “I gave the waitress $36,” he said wistfully.

The men said they did not know much about the turmoil in the financial markets. “The investment in the war in Iraq is the reason, right?” Mr. Mancillas asked. But while the details might have been obscure to them, the realities of the country’s economic malaise were plainly, and painfully, evident.

“The situation in the United States has gotten bad,” Mr. Garcia said, fiddling with a paint-splattered tape measure he carried on his belt. “I didn’t think it was going to come to this.”

“Let’s see what sort of changes a new president brings,” Mr. Hernandez said. “If it continues the same, I’ll go back.”

The men grew silent again and continued to scan the lot. The idea of returning home was not a popular topic. And anyway, the day was not over yet, and there was still a chance, however slight, of work.

    With Economy, Day Laborer Jobs Dwindle, NYT, 20.10.2008, http://www.nytimes.com/2008/10/20/nyregion/20laborers.html

AP IMPACT: Mortgage Firm Arranged Stealth Campaign

October 19, 2008
Filed at 12:36 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Freddie Mac secretly paid a Republican consulting firm $2 million to kill legislation that would have regulated and trimmed the mortgage finance giant and its sister company, Fannie Mae, three years before the government took control to prevent their collapse.

In the cross hairs of the campaign carried out by DCI of Washington were Republican senators and a regulatory overhaul bill sponsored by Sen. Chuck Hagel, R-Neb. DCI's chief executive is Doug Goodyear, whom John McCain's campaign later hired to manage the GOP convention in September.

Freddie Mac's payments to DCI began shortly after the Senate Banking, Housing and Urban Affairs Committee sent Hagel's bill to the then GOP-run Senate on July 28, 2005. All GOP members of the committee supported it; all Democrats opposed it.

In the midst of DCI's yearlong effort, Hagel and 25 other Republican senators pleaded unsuccessfully with Senate Majority Leader Bill Frist, R-Tenn., to allow a vote.

''If effective regulatory reform legislation ... is not enacted this year, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole,'' the senators wrote in a letter that proved prescient.

Unknown to the senators, DCI was undermining support for the bill in a campaign targeting 17 Republican senators in 13 states, according to documents obtained by The Associated Press. The states and the senators targeted changed over time, but always stayed on the Republican side.

In the end, there was not enough Republican support for Hagel's bill to warrant bringing it up for a vote because Democrats also opposed it and the votes of some would be needed for passage. The measure died at the end of the 109th Congress.

McCain, R-Ariz., was not a target of the DCI campaign. He signed Hagel's letter and three weeks later signed on as a co-sponsor of the bill.

By the time McCain did so, however, DCI's effort had gone on for nine months and was on its way toward killing the bill.

In recent days, McCain has said Freddie Mac and Fannie Mae were ''one of the real catalysts, really the match that lit this fire'' of the global credit crisis. McCain has accused Democratic presidential candidate Barack Obama of taking advice from former executives of Fannie Mae and Freddie Mac, and failing to see that the companies were heading for a meltdown.

McCain's campaign manager, Rick Davis, or his lobbying firm has taken more than $2 million from Fannie Mae and Freddie Mac dating to 2000.

Obama has received $120,349 in political donations from employees of Freddie Mac and Fannie Mae; McCain $21,550.

The Republican senators targeted by DCI began hearing from prominent constituents and financial contributors, all urging the defeat of Hagel's bill because it might harm the housing boom. The effort generated newspaper articles and radio and TV appearances by participants who spoke out against the measure.

Inside Freddie Mac headquarters in 2005, the few dozen people who knew what DCI was doing referred to the initiative as ''the stealth lobbying campaign,'' according to three people familiar with the drive.

They spoke only on condition of anonymity, saying they fear retaliation if their names were disclosed.

Freddie Mac executive Hollis McLoughlin oversaw DCI's drive, according to the three people.

''Hollis's goal was not to have any Freddie Mac fingerprints on this project and DCI became the hidden hand behind the effort,'' one of the three people told the AP.

Before 2004, Fannie Mae and Freddie Mac were Democratic strongholds. After 2004, Republicans ran their political operations. McLoughlin, who joined Freddie Mac in 2004 as chief of staff, has given $32,250 to Republican candidates over the years, including $2,800 to McCain, and has given none to Democrats, according to the Center for Responsive Politics, a nonpartisan group that tracks money in politics.

On Friday night, Hagel's chief of staff, Mike Buttry, said Hagel's legislation ''was the last best chance to bring greater oversight and tighter regulation to Freddie and Fannie, and they used every means they could to defeat Sen. Hagel's legislation every step of the way.''

''It is outrageous that a congressionally chartered government-sponsored enterprise would lobby against a member of Congress's bill that would strengthen the regulation and oversight of that institution,'' Buttry said in a statement. ''America has paid an extremely high price for the reckless, and possibly criminal, actions of the leadership at Freddie and Fannie.''

Nine of the 17 targeted Republican senators did not sign Hagel's letter: Sens. Mitch McConnell of Kentucky, Christopher ''Kit'' Bond and Jim Talent of Missouri, Conrad Burns of Montana, Mike DeWine of Ohio, Lamar Alexander of Tennessee, Olympia Snowe of Maine, Lincoln Chafee of Rhode Island and George Allen of Virginia. Aside from the nine, 20 other Republican senators did not sign Hagel's letter.

McConnell's office said members of leadership do not sign letters to the leader. McConnell was majority whip at the time.

Eight of the targeted senators did sign it: Sens. Rick Santorum of Pennsylvania, Mike Crapo of Idaho, Jim Bunning of Kentucky, Larry Craig of Idaho, John Ensign of Nevada, Lindsey Graham of South Carolina, George Voinovich of Ohio and David Vitter of Louisiana. Santorum, Crapo and Bunning were on the Senate Banking, Housing and Urban Affairs Committee and had voted in favor of sending the bill to the full Senate.

On Thursday, Freddie Mac acknowledged that the company ''did retain DCI to provide public affairs support at the state and local level.'' On Friday, DCI issued a four-sentence statement saying it complied with all applicable federal and state laws and regulations in representing Freddie Mac. Neither Freddie Mac nor DCI would say how much Goodyear's consulting firm was paid.

Freddie Mac paid DCI $10,000 a month for each of the targeted states, so the more states, the more money for DCI, according to the three people familiar with the program. In addition, Freddie Mac paid DCI a group retainer of $40,000 a month plus $20,000 a month for each regional manager handling the project, the three people said.

Last month, the concerns of the 26 Republican senators who signed Hagel's bill became a reality when the government seized control of Freddie Mac and Fannie Mae amid their near financial collapse. Federal prosecutors are investigating accounting, disclosure and corporate governance issues at both companies, which own or guarantee more than $5 trillion in mortgages, roughly equivalent to half of the national debt.

Freddie Mac was so pleased with DCI's work that it retained the firm for other jobs, finally cutting DCI loose last month after the government takeover, according to the three people familiar with the situation.

Freddie Mac's problems began when Hagel's legislation won approval from the Senate committee.

Democrats did not like the harshest provision, which would have given a new regulator a mandate to shrink Freddie Mac and Fannie Mae by forcing them to sell off part of their portfolios. That approach, the Democrats feared, would cut into the ability of low- and moderate-income families to buy houses.

The political backdrop to the debate ''was like bizarre-o-world,'' said the second of three people familiar with the program. ''The Republicans were pro-regulation and the Democrats were against it; it was upside down.''

Sen. Richard Shelby, the committee chairman at the time, underscored that in a statement Wednesday, saying that with Democrats already on their side, it was not surprising that Freddie Mac and Freddie Mae went after Republicans. ''Unfortunately,'' said Shelby, R-Ala., ''efforts then to derail reform were successful.''

In a sign of bad things to come, Freddie Mac was already having serious problems in 2005. Auditors had exposed massive accounting issues, so improved regulation was one obvious remedy.

Once Freddie Mac's in-house lobbyists failed to keep Hagel's bill bottled up in the committee, McLoughlin responded by secretly hiring DCI.

DCI never filed lobbying reports with Congress about what it was doing because the firm was relying on a long-recognized gap in the disclosure law.

Federal lobbying law only requires reporting and registration when there are contacts with a legislator or staff.

''To have it stealthy, not to let people know who is behind this, in my opinion is unethical,'' said James Thurber, director of the Center for Congressional and Presidential Studies at American University who long has taught courses about lobbying.

Goodyear is a longtime political consultant from Arizona who resigned from the Republican convention job this year after Newsweek magazine revealed he had lobbied for the repressive military junta of Myanmar.

McLoughlin, Freddie Mac's senior vice president for external relations, was assistant treasury secretary from 1989 through 1992 in the administration of President Bush's father. McLoughlin served as chief of staff to Sen. Nicholas Brady, R-N.J., in 1982 and to Rep. Millicent Fenwick, R-N.J., from 1975-79.

Seven of the 17 targeted Republican senators were in the midst of re-election campaigns in 2006, and according to one of the three people familiar with the program, Freddie Mac and DCI hoped those facing tough races would tell their Republican colleagues back in Washington that ''we've got enough trouble; you're making it worse with Hagel's bill.''

Five of the seven DCI targets who ran for re-election in 2006 lost, and Senate control switched to the Democrats.

A Freddie Mac e-mail on May 4, 2006 -- the day before Hagel's letter -- details the behind-the-scenes effort that Freddie Mac and DCI generated to hold down the number of Republicans signing Hagel's letter urging a full Senate vote. It said:

''What I'm asking is that DCI get a few of their key well-connected constituents from each state to call in to the DC office of their Republican senators and speak to the (legislative director) or (chief of staff) and urge them not to sign the letter. The following could be used as a short script.''

The proposed script read: ''We can all agree that Fannie's and Freddie's regulator should be strengthened but unfortunately, S.190 goes too far and could potentially have damaging effects on Georgia's -- example -- home buyers.''

According to the third of the three people familiar with the program, ''DCI was asked to help keep senators from signing; it was a big part of their effort that year and it was viewed as a success since many DCI targets did not sign the letter.''

DCI's progress after the first four months of the campaign was spelled out in a 19-page document dated Dec. 12, 2005, and titled, ''Freddie Mac Field Program State by State Summary Report.''

A snippet of a senator-by-senator breakdown of the efforts says this about Maine's Snowe:

''Philip Harriman, former state senator, co-chair of Snowe's 2006 campaign, personal Snowe friend, major GOP donor and investment adviser, has written the senator a personal letter on this issue. Dick Morin, vice president Maine Association of Mortgage Brokers, has been in direct contact with Sen. Snowe's committee staff, has sent a letter to Snowe, and is pursuing a dozen(s) of letters from his members.''

On Wednesday, Snowe's office issued a statement saying that she ''literally gets hundreds of 'Dear Colleague' letters seeking support for their positions that she does not sign. Had this legislation come up for a vote in 2006, she certainly would have considered it on its merits -- as she does every vote. Just last July, she voted for the housing bill that established a new, stronger regulator.''

Rosario Marin, a staunch McCain supporter who spoke at the GOP convention in September, was among the people DCI used in carrying out the campaign.

Marin, the U.S. treasurer during the first term of the Bush administration, went to Missouri and to Montana, Burns' state, where she spoke out against Hagel's bill.

At the time, Burns, who ended up losing his re-election bid, was caught up in a Washington influence peddling scandal centering on disgraced lobbyist Jack Abramoff.

Marin's visit triggered a local newspaper story in which the reporter contacted Burns' staff for comment. Burns' office told the newspaper the senator was not supportive of the latest version of Hagel's bill.

On Wednesday, Marin, now state consumer services secretary in California, issued a statement confirming that her trips to Missouri and Montana were in her capacity as a DCI consultant.

The December 2005 summary listing 17 Republican targets outlines the inroads DCI was making.

''On day one'' of the effort, Sen. George Allen of Virginia had not addressed Hagel's bill and his legislative aide for housing was not assigned to it, the report said.

''Today,'' the report added, ''the senator is aware of the issue and ... at the moment he is undecided.'' Allen's deputy chief of staff ''has said that the senator will take into consideration before he decides that Freddie Mac is located in Virginia and is one of the largest Virginia employers.''

''Grasstops/opinion leaders James Todd, president, the Peterson Companies wrote to both senators,'' the report added. ''Milt Peterson, the founder and CEO of the company is one of Allen's major donors.''

In the end, Allen, who lost his bid for re-election in 2006, did not sign Hagel's letter.

    AP IMPACT: Mortgage Firm Arranged Stealth Campaign, NYT, 19.10.2008, http://www.nytimes.com/aponline/washington/AP-The-Influence-Game-Housing.html

White House's Lazear: Parts Of U.S. In Recession

October 19, 2008
Filed at 12:35 p.m. ET
By REUTERS
The New York Times

WASHINGTON (Reuters) - Chairman of the U.S. Council of Economic Advisors Edward Lazear said on Sunday that parts of the nation seem to be in recession, but the government's massive bank bailout plan was already starting to turn around credit markets.

"We are seeing what anyone would characterize as a recession in some parts of the country," the president's economic adviser told CNN, noting that some areas were seeing jobless rates much higher than the 6.1-percent national level.

Lazear said the administration "has taken the right steps to turn things around," and that the Treasury's $700 billion rescue plan to unlock credit markets has already had a positive impact in reviving bank lending.

(Reporting by Ros Krasny, editing by Maureen Bavdek)

    White House's Lazear: Parts Of U.S. In Recession, NYT, 19.10.2008, http://www.nytimes.com/reuters/business/business-us-usa-economy-lazear.html

THE WEEKEND INTERVIEW

Anna Schwartz

Bernanke Is Fighting the Last War

'Everything works much better when wrong decisions are punished and good decisions make you rich.'

OCTOBER 18, 2008
The Wall Street Journal
By BRIAN M. CARNE

New York

On Aug. 9, 2007, central banks around the world first intervened to stanch what has become a massive credit crunch.

Since then, the Federal Reserve and the Treasury have taken a series of increasingly drastic emergency actions to get lending flowing again. The central bank has lent out hundreds of billions of dollars, accepted collateral that in the past it would never have touched, and opened direct lending to institutions that have never had that privilege. The Treasury has deployed billions more. And yet, "Nothing," Anna Schwartz says, "seems to have quieted the fears of either the investors in the securities markets or the lenders and would-be borrowers in the credit market."

The credit markets remain frozen, the stock market continues to get hammered, and deep recession now seems a certainty -- if not a reality already.

Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She's not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, "A Monetary History of the United States" (1963). It's the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.

Since 1941, Ms. Schwartz has reported for work at the National Bureau of Economic Research in New York, where we met Thursday morning for an interview. She is currently using a wheelchair after a recent fall and laments her "many infirmities," but those are all physical; her mind is as sharp as ever. She speaks with passion and just a hint of resignation about the current financial situation. And looking at how the authorities have handled it so far, she doesn't like what she sees.

Federal Reserve Chairman Ben Bernanke has called the 888-page "Monetary History" "the leading and most persuasive explanation of the worst economic disaster in American history." Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.

To understand why, one first has to understand the nature of the current "credit market disturbance," as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."

So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."

In the 1930s, as Ms. Schwartz and Mr. Friedman argued in "A Monetary History," the country and the Federal Reserve were faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they'd lose their money if their bank, too, failed. So bank runs began, and these became self-reinforcing: "If the borrowers hadn't withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress," deepening the crisis and causing still more failures.

But "that's not what's going on in the market now," Ms. Schwartz says. Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."

"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement." The only way to "get rid of them" is to sell them, which is why Ms. Schwartz thought that Treasury Secretary Hank Paulson's original proposal to buy these assets from the banks was "a step in the right direction."

The problem with that idea was, and is, how to price "toxic" assets that nobody wants. And lurking beneath that problem is another, stickier problem: If they are priced at current market levels, selling them would be a recipe for instant insolvency at many institutions. The fears that are locking up the credit markets would be realized, and a number of banks would probably fail.

Ms. Schwartz won't say so, but this is the dirty little secret that led Secretary Paulson to shift from buying bank assets to recapitalizing them directly, as the Treasury did this week. But in doing so, he's shifted from trying to save the banking system to trying to save banks. These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."

Instead, we've been hearing for most of the past year about "systemic risk" -- the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.

Ms. Schwartz doesn't buy it. "It's very easy when you're a market participant," she notes with a smile, "to claim that you shouldn't shut down a firm that's in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that's their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn't have to save them, just as it didn't save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what's been going on."

It takes real guts to let a large, powerful institution go down. But the alternative -- the current credit freeze -- is worse, Ms. Schwartz argues.

"I think if you have some principles and know what you're doing, the market responds. They see that you have some structure to your actions, that it isn't just ad hoc -- you'll do this today but you'll do something different tomorrow. And the market respects people in supervisory positions who seem to be on top of what's going on. So I think if you're tough about firms that have invested unwisely, the market won't blame you. They'll say, 'Well, yeah, it's your fault. You did this. Nobody else told you to do it. Why should we be saving you at this point if you're stuck with assets you can't sell and liabilities you can't pay off?'" But when the authorities finally got around to letting Lehman Brothers fail, it had saved so many others already that the markets didn't know how to react. Instead of looking principled, the authorities looked erratic and inconstant.

How did we get into this mess in the first place? As in the 1920s, the current "disturbance" started with a "mania." But manias always have a cause. "If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.

"The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses."

The house-price boom began with the very low interest rates in the early years of this decade under former Fed Chairman Alan Greenspan.

"Now, Alan Greenspan has issued an epilogue to his memoir, 'Time of Turbulence,' and it's about what's going on in the credit market," Ms. Schwartz says. "And he says, 'Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated.'" In other words, Mr. Greenspan "absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage."

Ms Schwartz adds, gently, "I don't think that that's an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom." Policies based on such thinking only lead to a more damaging bust when the mania ends, as they all do. "In general, it's easier for a central bank to be accommodative, to be loose, to be promoting conditions that make everybody feel that things are going well."

Fed Chairman Ben Bernanke, of all people, should understand this, Ms. Schwartz says. In 2002, Mr. Bernanke, then a Federal Reserve Board governor, said in a speech in honor of Mr. Friedman's 90th birthday, "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

"This was [his] claim to be worthy of running the Fed," she says. He was "familiar with history. He knew what had been done." But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."

Mr. Carney is a member of The Wall Street Journal's editorial board.

    Bernanke Is Fighting the Last War, WSJ, 18.10.2008, http://online.wsj.com/article/SB122428279231046053.html

Average gas price drops below $3 a gallon

18 October 2008
USA Today
Staff and wire reports

The national average price of a gallon of gasoline has fallen below $3 for the first time since February.

The average price for a gallon of regular gas was $2.991 Saturday, according to the AAA's daily survey of up to 100,000 self serve gas stations by the Oil Price Information Service and Wright Express. That's down from $3.040 Friday.

A year ago, the national average price of a gallon of gas was $2.81, according to AAA. A month ago, it was $3.835.

Gasoline prices have been sliding along with crude oil prices since July, when gasoline hit a peak of $4.114.

According to the survey, gas was the least expensive in Oklahoma, with a gallon of regular averaging $2.58. Other cheap states were Missouri and Kansas, while the most expensive was Alaska, with a gallon averaging nearly $3.92. Hawaii and California also ranked high.

Gas prices likely will fall further, and figure to hit $2.50 to $2.60 a gallon if oil goes down to $50 a barrel as some analysts suspect.

While motorists welcome the decline in price, they are wary given the huge fluctuations the past couple of years, says Kit Yarrow, a consumer psychologist at San Francisco's Golden Gate University who has studied how high oil prices have affected Americans' buying behavior.

"People have learned that they can't trust gas prices to stay low," she says.

She says she doubts motorists — who cut fuel consumption as prices rose — will return to their old ways, even as prices have come down.

"Everywhere you go, be it the store, the diner, whatever, you hear people talking about there gas costs and how they need to cut back," David Robinson, 67, of Lakewood, N.J., said recently as he was getting coffee at a convenience store. "You still hear it, even though gas keeps dropping."

The drop in gasoline prices comes as crude oil rose Friday, rallying above $71 a barrel on speculation that the Organization of Petroleum Exporting Courntries might slash output to try to stop crude's downward spiral.

Light, sweet crude for November delivery rose $2 to settle at $71.85 a barrel on the New York Mercantile Exchange after earlier rising as high as $74.30. On Thursday, prices lost $4.69 to settle at $69.85 a barrel.

Despite Friday's modest rally, oil is still down $75 — or 51% — since catapulting to a record high $147.27 July 11.

The pullback in oil and gas comes as a widening economic slowdown forces a wholesale contraction in U.S. energy demand: Americans are driving less, airlines are keeping planes on the ground and businesses are winding down operations.

Worried about the financial fallout of the oil price drop on their countries, OPEC, which controls 40% of the world's oil supply, called a special meeting next Friday in Vienna to address the slide. Underscoring the cartel's anxiety, it moved up the meeting date by nearly a month.

An Iraqi lawmaker said Friday that his government expects to cut its budget next year by $15 billion because of falling oil prices. Abbas al-Bayati, a senior lawmaker of the United Iraqi Alliance, the largest Shiite bloc in parliament, said the recent plunge would cut into earlier budget estimates, which were made when crude was hovering around $120 a barrel.

Analysts say OPEC could decide to trim output by as much as 1 million barrels a day in a bid to halt the slide, in addition to a 500,000 barrel per day cut announced last month.

"Demand is really in trouble," says Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. "Every week we get figures showing falling U.S. demand for energy. European demand is just beginning to turn down, and all indications are that China is in for a significant economic downturn."

"We could have prices in the low $60 range very soon," he said.

Still, some analysts say crude's decline has been overdone.

"Even in a dire economic situation, a lot of energy use isn't discretionary, so I expect prices to bounce back at some point," said Gavin Wendt, head of mining and resources research at consultancy Fat Prophets in Sydney.

Contributing: Associated Press writers Mark Williams, Bruce Shipkowski in Lakewood, N.J., Pablo Gorondi in Budapest, Hungary, Bushra Juhi in Baghdad and Alex Kennedy in Singapore

    Average gas price drops below $3 a gallon, UT, 18.10.2008, http://www.usatoday.com/money/industries/energy/2008-10-18-gasoline-oil-prices_N.htm

The Guys From ‘Government Sachs’

October 19, 2008
The New York Times
By JULIE CRESWELL and BEN WHITE

THIS summer, when the Treasury secretary, Henry M. Paulson Jr., sought help navigating the Wall Street meltdown, he turned to his old firm, Goldman Sachs, snagging a handful of former bankers and other experts in corporate restructurings.

In September, after the government bailed out the American International Group, the faltering insurance giant, for $85 billion, Mr. Paulson helped select a director from Goldman’s own board to lead A.I.G.

And earlier this month, when Mr. Paulson needed someone to oversee the government’s proposed $700 billion bailout fund, he again recruited someone with a Goldman pedigree, giving the post to a 35-year-old former investment banker who, before coming to the Treasury Department, had little background in housing finance.

Indeed, Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.

The power and influence that Goldman wields at the nexus of politics and finance is no accident. Long regarded as the savviest and most admired firm among the ranks — now decimated — of Wall Street investment banks, it has a history and culture of encouraging its partners to take leadership roles in public service.

It is a widely held view within the bank that no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere. While Goldman sees this as little more than giving back to the financial world, outside executives and analysts wonder about potential conflicts of interest presented by the firm’s unique perch.

They note that decisions that Mr. Paulson and other Goldman alumni make at Treasury directly affect the firm’s own fortunes. They also question why Goldman, which with other firms may have helped fuel the financial crisis through the use of exotic securities, has such a strong hand in trying to resolve the problem.

The very scale of the financial calamity and the historic government response to it have spawned a host of other questions about Goldman’s role.

Analysts wonder why Mr. Paulson hasn’t hired more individuals from other banks to limit the appearance that the Treasury Department has become a de facto Goldman division. Others ask whose interests Mr. Paulson and his coterie of former Goldman executives have in mind: those overseeing tottering financial services firms, or average homeowners squeezed by the crisis?

Still others question whether Goldman alumni leading the federal bailout have the breadth and depth of experience needed to tackle financial problems of such complexity — and whether Mr. Paulson has cast his net widely enough to ensure that innovative responses are pursued.

“He’s brought on people who have the same life experiences and ideologies as he does,” said William K. Black, an associate professor of law and economics at the University of Missouri and counsel to the Federal Home Loan Bank Board during the savings and loan crisis of the 1980s. “These people were trained by Paulson, evaluated by Paulson so their mind-set is not just shaped in generalized group think — it’s specific Paulson group think.”

Not so fast, say Goldman’s supporters. They vehemently dismiss suggestions that Mr. Paulson’s team would elevate Goldman’s interests above those of other banks, homeowners and taxpayers. Such chatter, they say, is a paranoid theory peddled, almost always anonymously, by less successful rivals. Just add black helicopters, they joke.

“There is no conspiracy,” said Donald C. Langevoort, a law professor at Georgetown University. “Clearly if time were not a problem, you would have a committee of independent people vetting all of the potential conflicts, responding to questions whether someone ought to be involved with a particular aspect or project or not because of relationships with a former firm — but those things do take time and can’t be imposed in an emergency situation.”

In fact, Goldman’s admirers say, the firm’s ranks should be praised, not criticized, for taking a leadership role in the crisis.

“There are people at Goldman Sachs making no money, living at hotels, trying to save the financial world,” said Jes Staley, the head of JPMorgan Chase’s asset management division. “To indict Goldman Sachs for the people helping out Washington is wrong.”

Goldman concurs. “We’re proud of our alumni, but frankly, when they work in the public sector, their presence is more of a negative than a positive for us in terms of winning business,” said Lucas Van Praag, a spokesman for Goldman. “There is no mileage for them in giving Goldman Sachs the corporate equivalent of most-favored-nation status.”

MR. PAULSON himself landed atop Treasury because of a Goldman tie. Joshua B. Bolten, a former Goldman executive and President Bush’s chief of staff, helped recruit him to the post in 2006.

Some analysts say that given the pressures Mr. Paulson faced creating a SWAT team to address the financial crisis, it was only natural for him to turn to his former firm for a capable battery.

And if there is one thing Goldman has, it is an imposing army of top-of-their-class, up-before-dawn über-achievers. The most prominent former Goldman banker now working for Mr. Paulson at Treasury is also perhaps the most unlikely.

Neel T. Kashkari arrived in Washington in 2006 after spending two years as a low-level technology investment banker for Goldman in San Francisco, where he advised start-up computer security companies. Before joining Goldman, Mr. Kashkari, who has two engineering degrees in addition to an M.B.A. from the Wharton School of the University of Pennsylvania, worked on satellite projects for TRW, the space company that now belongs to Northrop Grumman.

He was originally appointed to oversee a $700 billion fund that Mr. Paulson orchestrated to buy toxic and complex bank assets, but the role evolved as his boss decided to invest taxpayer money directly in troubled financial institutions.

Mr. Kashkari, who met Mr. Paulson only briefly before going to the Treasury Department, is also in charge of selecting the staff to run the bailout program. One of his early picks was Reuben Jeffrey, a former Goldman executive, to serve as interim chief investment officer.

Mr. Kashkari is considered highly intelligent and talented. He has also been Mr. Paulson’s right-hand man — and constant public shadow — during the financial crisis.

He played a main role in the emergency sale of Bear Stearns to JPMorgan Chase in March, sitting in a Park Avenue conference room as details of the acquisition were hammered out. He often exited the room to funnel information to Mr. Paulson about the progress.

Despite Mr. Kashkari’s talents in deal-making, there are widespread questions about whether he has the experience or expertise to manage such a project.

“Mr. Kashkari may be the most brilliant, talented person in the United States, but the optics of putting a 35-year-old Paulson protégé in charge of what, at least at one point, was supposed to be the most important part of the recovery effort are just very damaging,” said Michael Greenberger, a University of Maryland law professor and a former senior official with the Commodity Futures Trading Commission.

“The American people are fed up with Wall Street, and there are plenty of people around who could have been brought in here to offer broader judgment on these problems,” Mr. Greenberger added. “All wisdom about financial matters does not reside on Wall Street.”

Mr. Kashkari won’t directly manage the bailout fund. More than 200 firms submitted bids to oversee pieces of the program, and Treasury has winnowed the list to fewer than 10 and could announce the results as early as this week. Goldman submitted a bid but offered to provide its services gratis.

While Mr. Kashkari is playing a prominent public role, other Goldman alumni dominate Mr. Paulson’s inner sanctum.

The A-team includes Dan Jester, a former strategic officer for Goldman who has been involved in most of Treasury’s recent initiatives, especially the government takeover of the mortgage giants Fannie Mae and Freddie Mac. Mr. Jester has also been central to the effort to inject capital into banks, a list that includes Goldman.

Another central player is Steve Shafran, who grew close to Mr. Paulson in the 1990s while working in Goldman’s private equity business in Asia. Initially focused on student loan problems, Mr. Shafran quickly became involved in Treasury’s initiative to guarantee money market funds, among other things.

Mr. Shafran, who retired from Goldman in 2000, had settled with his family in Ketchum, Idaho, where he joined the city council. Baird Gourlay, the council president, said he had spoken a couple of times with Mr. Shafran since he returned to Washington last year.

“He was initially working on the student loan part of the problem,” Mr. Gourlay said. “But as things started falling apart, he said Paulson was relying on him more and more.”

The Treasury Department said Mr. Shafran and the other former Goldman executives were unavailable for comment.

Other prominent former Goldman executives now at Treasury include Kendrick R. Wilson III, a seasoned adviser to chief executives of the nation’s biggest banks. Mr. Wilson, an unpaid adviser, mainly spends his time working his ample contact list of bank chiefs to apprise them of possible Treasury plans and gauge reaction.

Another Goldman veteran, Edward C. Forst, served briefly as an adviser to Mr. Paulson on setting up the bailout fund but has since left to return to his post as executive vice president of Harvard. Robert K. Steel, a former vice chairman at Goldman, was tapped to look at ways to shore up Fannie Mae and Freddie Mac. Mr. Steel left Treasury to become chief executive of Wachovia this summer before the government took over the entities.

Treasury officials acknowledge that former Goldman executives have played an enormous role in responding to the current crisis. But they also note that many other top Treasury Department officials with no ties to Goldman are doing significant work, often without notice. This group includes David G. Nason, a senior adviser to Mr. Paulson and a former Securities and Exchange Commission official.

Robert F. Hoyt, general counsel at Treasury, has also worked around the clock in recent weeks to make sure the department’s unprecedented moves pass legal muster. Michele Davis is a Capitol Hill veteran and Treasury policy director. None of them are Goldmanites.

“Secretary Paulson has a deep bench of seasoned financial policy experts with varied experience,” said Jennifer Zuccarelli, a spokeswoman for the Treasury. “Bringing additional expertise to bear at times like these is clearly in the taxpayers’ and the U.S. economy’s best interests.”

While many Wall Streeters have made the trek to Washington, there is no question that the axis of power at the Treasury Department tilts toward Goldman. That has led some to assume that the interests of the bank, and Wall Street more broadly, are the first priority. There is also the question of whether the department’s actions benefit the personal finances of the former Goldman executives and their friends.

“To the extent that they have a portfolio or blind trust that holds Goldman Sachs stock, they have conflicts,” said James K. Galbraith, a professor of government and business relations at the University of Texas. “To the extent that they have ties and alumni loyalty or friendships with people that are still there, they have potential conflicts.”

Mr. Paulson, Mr. Kashkari and Mr. Shafran no longer own any Goldman shares. It is unclear whether Mr. Jester or Mr. Wilson does because, according to the Treasury Department, they were hired as contractors and are not required to disclose their financial holdings.

For every naysayer, meanwhile, there is also a Goldman defender who says the bank’s alumni are doing what they have done since the days when Sidney Weinberg ran the bank in the 1930s and urged his bankers to give generously to charities and volunteer for public service.

“I give Hank credit for attracting so many talented people. None of these guys need to do this,” said Barry Volpert, a managing director at Crestview Partners and a former co-chief operating officer of Goldman’s private equity business. “They’re not getting paid. They’re killing themselves. They haven’t seen their families for months. The idea that there’s some sort of cabal or conflict here is nonsense.”

In fact, say some Goldman executives, the perception of a conflict of interest has actually cost them opportunities in the crisis. For instance, Goldman wasn’t allowed to examine the books of Bear Stearns when regulators were orchestrating an emergency sale of the faltering investment bank.

THIS summer, as he fought for the survival of Lehman Brothers, Richard S. Fuld Jr., its chief executive, made a final plea to regulators to turn his investment bank into a bank holding company, which would allow it to receive constant access to federal funding.

Timothy F. Geithner, the president of the Federal Reserve Bank of New York, told him no, according to a former Lehman executive who requested anonymity because of continuing investigations of the firm’s demise. Its options exhausted, Lehman filed for bankruptcy in mid-September.

One week later, Goldman and Morgan Stanley were designated bank holding companies.

“That was our idea three months ago, and they wouldn’t let us do it,” said a former senior Lehman executive who requested anonymity because he was not authorized to comment publicly. “But when Goldman got in trouble, they did it right away. No one could believe it.”

The New York Fed, which declined to comment, has become, after Treasury, the favorite target for Goldman conspiracy theorists. As the most powerful regional member of the Federal Reserve system, and based in the nation’s financial capital, it has been a driving force in efforts to shore up the flailing financial system.

Mr. Geithner, 47, played a pivotal role in the decision to let Lehman die and to bail out A.I.G. A 20-year public servant, he has never worked in the financial sector. Some analysts say that has left him reliant on Wall Street chiefs to guide his thinking and that Goldman alumni have figured prominently in his ascent.

After working at the New York consulting firm Kissinger Associates, Mr. Geithner landed at the Treasury Department in 1988, eventually catching the eye of Robert E. Rubin, Goldman’s former co-chairman. Mr. Rubin, who became Treasury secretary in 1995, kept Mr. Geithner at his side through several international meltdowns, including the Russian credit crisis in the late 1990s.

Mr. Rubin, now senior counselor at Citigroup, declined to comment.

A few years later, in 2003, Mr. Geithner was named president of the New York Fed. Leading the search committee was Pete G. Peterson, the former head of Lehman Brothers and the senior chairman of the private equity firm Blackstone. Among those on an outside advisory committee were the former Fed chairman Paul A. Volcker; the former A.I.G. chief executive Maurice R. Greenberg; and John C. Whitehead, a former co-chairman of Goldman.

The board of the New York Fed is led by Stephen Friedman, a former chairman of Goldman. He is a “Class C” director, meaning that he was appointed by the board to represent the public.

Mr. Friedman, who wears many hats, including that of chairman of the President’s Foreign Intelligence Advisory Board, did not return calls for comment.

During his tenure, Mr. Geithner has turned to Goldman in filling important positions or to handle special projects. He hired a former Goldman economist, William C. Dudley, to oversee the New York Fed unit that buys and sells government securities. He also tapped E. Gerald Corrigan, a well-regarded Goldman managing director and former New York Fed president, to reconvene a group to analyze risk on Wall Street.

Some people say that all of these Goldman ties to the New York Fed are simply too close for comfort. “It’s grotesque,” said Christopher Whalen, a managing partner at Institutional Risk Analytics and a critic of the Fed. “And it’s done without apology.”

A person familiar with Mr. Geithner’s thinking who was not authorized to speak publicly said that there was “no secret handshake” between the New York Fed and Goldman, describing such speculation as a conspiracy theory.

Furthermore, others say, it makes sense that Goldman would have a presence in organizations like the New York Fed.

“This is a very small, close-knit world. The fact that all of the major financial services firms, investment banking firms are in New York City means that when work is to be done, you’re going to be dealing with one of these guys,” said Mr. Langevoort at Georgetown. “The work of selecting the head of the New York Fed or a blue-ribbon commission — any of that sort of work — is going to involve a standard cast of characters.”

Being inside may not curry special favor anyway, some people note. Even though Mr. Fuld served on the board of the New York Fed, his proximity to federal power didn’t spare Lehman from bankruptcy.

But when bankruptcy loomed for A.I.G. — a collapse regulators feared would take down the entire financial system — federal officials found themselves once again turning to someone who had a Goldman connection. Once the government decided to grant A.I.G., the largest insurance company, an $85 billion lifeline (which has since grown to about $122 billion) to prevent a collapse, regulators, including Mr. Paulson and Mr. Geithner, wanted new executive blood at the top.

They picked Edward M. Liddy, the former C.E.O. of the insurer Allstate. Mr. Liddy had been a Goldman director since 2003 — he resigned after taking the A.I.G. job — and was chairman of the audit committee. (Another former Goldman executive, Suzanne Nora Johnson, was named to the A.I.G. board this summer.)

Like many Wall Street firms, Goldman also had financial ties to A.I.G. It was the insurer’s largest trading partner, with exposure to $20 billion in credit derivatives, and could have faced losses had A.I.G. collapsed. Goldman has said repeatedly that its exposure to A.I.G. was “immaterial” and that the $20 billion was hedged so completely that it would have insulated the firm from significant losses.

As the financial crisis has taken on a more global cast in recent weeks, Mr. Paulson has sat across the table from former Goldman colleagues, including Robert B. Zoellick, now president of the World Bank; Mario Draghi, president of the international group of regulators called the Financial Stability Forum; and Mark J. Carney, the governor of the Bank of Canada.

BUT Mr. Paulson’s home team is still what draws the most scrutiny.

“Paulson put Goldman people into these positions at Treasury because these are the people he knows and there are no constraints on him not to do so,” Mr. Whalen says. “The appearance of conflict of interest is everywhere, and that used to be enough. However, we’ve decided to dispense with the basic principles of checks and balances and our ethical standards in times of crisis.”

Ultimately, analysts say, the actions of Mr. Paulson and his alumni club may come under more study.

“I suspect the conduct of Goldman Sachs and other bankers in the rescue will be a background theme, if not a highlighted theme, as Congress decides how much regulation, how much control and frankly, how punitive to be with respect to the financial services industry,” said Mr. Langevoort at Georgetown. “The settling up is going to come in Congress next spring.”

    The Guys From ‘Government Sachs’, NYT, 19.10.2008, http://www.nytimes.com/2008/10/19/business/19gold.html

Editorial

The Bubble Keeps On Deflating

October 19, 2008
The New York Times

By now everyone knows that reckless and even predatory mortgage lending provoked the financial meltdown. But bad lending did not stop there. The easy money also fed a corporate buyout binge, with private equity firms borrowing huge sums to buy up public companies and pay themselves big dividends.

The process was much like a homeowner who borrowed big for a house and then refinanced to pull out cash. In corporate buyouts, however, the newly private company was left with the fat loan, while the private equity partners got the cash.

In keeping with the mania of the era, banks lowered their lending standards as they competed fiercely to make buyout loans. Lenders also did not worry much about being repaid, because they made money by slicing and dicing the buyout loans and selling them off in pieces to investors.

All of this means that the country needs to brace for yet another round of trouble: a potentially sharp increase in corporate bankruptcies. This time, government officials and Congress must not be taken by surprise.

So far relatively few companies have gone bust. But that is not necessarily a hopeful sign. Instead, loose lending has very likely allowed many troubled companies to postpone a day of reckoning — but not forever.

Under the lax terms of many buyout loans (deemed “covenant lite”), borrowers could delay payments, say, by issuing i.o.u.’s in lieu of payment or adding the interest to the loan balance rather than paying it. But when the loans come due and need to be repaid or refinanced, terms will no longer be so easy. The likely result will be defaults and bankruptcies.

A rash of corporate bankruptcies would obviously be very bad news for employees and lenders, and for stockholders at troubled public companies, like the carmakers. It could also rock the financial system anew.

As with mortgages, huge side bets have been placed on the performance of corporate debt via derivative securities, like credit default swaps. Derivatives are unregulated, so no one can be sure how widely a big or unexpected default would reverberate through the system.

Various measures indicate elevated default risk at a range of businesses, including retailers, media companies, restaurants and manufacturers. A survey released this month by the Federal Reserve and other regulators is especially sobering.

It looked at $2.8 trillion in large syndicated corporate loans held by American banks at the end of June. Compared with a year earlier, the share of loans rated as problematic had risen from 5 percent to 13.4 percent.

Regulators must continue to monitor possible bankruptcies. Even if they cannot prevent a failure, they can soften its impact by ensuring that it does not come as a shock, further spooking investors.

Congress must prepare to deal with higher unemployment from corporate failures. In the coming lame duck session, lawmakers must extend jobless benefits for people who have exhausted their previous allotment. The next Congress and the next president need to upgrade the nation’s outmoded system of unemployment compensation to cover more Americans.

Congress must also be prepared to investigate large or particularly disruptive bankruptcies to identify both possible unlawful activity and regulatory lapses.

So far, inquiries into the collapses of Bear Stearns, Lehman Brothers and American International Group have been little more than public hazings of corporate executives. What is needed is a serious effort to determine accountability and figure out what reforms are needed to make sure these disasters don’t happen again.

    The Bubble Keeps On Deflating, NYT, 19.10.2008, http://www.nytimes.com/2008/10/19/opinion/19sun1.html

Door to Door, Foreclosure Knocks Here

October 19, 2008
The New York Times
By MANNY FERNANDEZ

At times, this stretch of 118th Avenue in South Jamaica, Queens, feels not so much like a neighborhood but a memory of one.

A red-brick house with overgrown weeds in the yard is boarded shut. A house with a dirty awning has a thick chain looping out from a hole in the door where a deadbolt once was. On the front window of a vacant property around the corner, someone has taped a sign warning that the water supply has been shut off and antifreeze added to the sinks and toilets.

Newton and Ronda Whyte have gotten used to living next door to no one. “Every two or three houses it’s empty,” said Ms. Whyte, 36, a nurse assistant. “It’s not a good feeling. You see the weeds growing tall and the junk mail piling up.”

This area at 118th Avenue and 153rd Street is at the center of New York’s foreclosure crisis. About 28 percent of the homes in this working-class neighborhood just north of Kennedy Airport have been in some phase of foreclosure since 2004, and its census tract leads the city in foreclosure filings.

More than two years ago, most homes here were occupied and the neighborhood was making strides against the drugs, violence and abandonment that had plagued it in the past, residents and merchants said. But today they mostly talk about decreasing property values, increasing crime, struggling small businesses and fraying community bonds. They talk of leaving, and wonder whose house is next.

“It’s not even worth getting to know anybody because nobody is going to stay around anyway,” said Fernando Espinal, 23, who grew up on 118th Avenue.

The gates are down for good at the Mega Deli Grocery at one end of the avenue. Pansy Johnson, who owns Yaad Food, a nearby Caribbean restaurant, said she often has to ask for a rent extension because her sales have decreased by nearly a third. And there have been two burglaries of empty homes in foreclosure this year in the area of 118th Avenue and 153rd Street, the police said.

The telltale signs that a house is empty come not from a bank or real estate agent, but pizzerias and Chinese takeout restaurants: The length of time a house has been abandoned can be measured by the number of old menus, fliers and junk mail that collects on doors and stoops.

“It’s like a depression,” said Ms. Johnson, who is from the island of Jamaica, and whose restaurant is near 118th Avenue and Sutphin Boulevard. “I’ve never seen so much houses boarded up in all my life in this country. It’s so desolated. It hurts the heart.”

This corner of South Jamaica is much like neighborhoods in other cities around the country where foreclosure has spread like an epidemic. In many of those places, a spate of subprime lending made it easy for people with modest incomes and poor credit histories to buy homes — even as they increased their risk of foreclosure with adjustable interest rates and other types of complicated and costly loans.

This census tract — No. 288 in southeast Queens — had 226 foreclosure filings on one- to four-family homes in the past five years, the highest in the city, according to an analysis of housing data prepared for The New York Times by the Furman Center for Real Estate and Urban Policy at New York University. In 2005, 69 percent of the homes purchased in the tract were bought with subprime mortgages.

“What you see in that community is incredibly high rates of high-cost and subprime lending,” said Vicki Been, director of the Furman Center.

Within Tract 288, four blocks — encompassing 118th Avenue between 155th Street and Sutphin Boulevard, and 153rd Street between 118th and 119th Avenues — are some of the hardest hit by foreclosures.

Thirty-nine of the roughly 140 properties on those blocks have been in various stages of foreclosure since 2004, according to data on PropertyShark.com, a real estate site. Once a foreclosure petition is filed, the owner and lender can work out a settlement. But if they do not, the home can be repossessed and sold at auction.

The disposition of the foreclosure filings and scheduled foreclosure auctions of the 39 homes is unclear. About a dozen are vacant, blending in with other empty properties on those blocks. Two homes have eviction notices posted on them and others are undergoing renovations.

People here seem not to have moved out so much as vanished.

The unlocked screen doors of unoccupied homes sway in the breeze. At a red-brick home at 152-09 118th Avenue, the front door and the living room window are boarded up, but the DirecTV satellite dish remains, as does the message that a former occupant traced into the top step’s wet concrete long ago: three hearts and the words “Dez-n-Duke.” A foreclosure auction on the property is scheduled for Friday.

Despite the tightness that comes from living side by side in mostly narrow two-story homes, people largely keep to themselves. Few ever know for certain that neighbors are at risk of losing their homes. Departures happen quickly, mysteriously.

Newton and Ronda Whyte remember the man who lived next to them for years in the yellow house at 152-37 118th Avenue. Mr. Whyte called him Trini, because he was from Trinidad, but he never learned the man’s full name. The house the man left behind a few months ago, like the other foreclosed houses on these four blocks, quickly developed the feel of an abandoned property.

On the grass of their former neighbor’s small yard, next to the “For Sale” sign, someone stuck a placard advertising the “New York Foreclosure Showcase” at the Long Island Marriott Hotel in Uniondale. The sign is so big and so close to the Whytes’ house that some of Mr. Whyte’s visiting relatives thought that he was the one at risk of foreclosure.

“It’s a reminder of what’s staring us in the face,” said Ms. Whyte, who has lived on 118th Avenue with her husband and two children for 12 years.

Many of the homes on these four blocks are squeezed onto narrow lots no bigger than 1,350 square feet. At one end of 118th Avenue is Baisley Pond, a swath of lush greenery that gives the area a serene suburban feel.

In 1999, the median household income in Tract 288 was $44,348. Residents, many of them African-American, or of Guyanese or Jamaican descent, take pride in sweeping their stretch of sidewalk. Their ranks include custodians, nurses and retirees.

Adeline Marshall, 66, broom in hand one recent afternoon, said the neighborhood had come far since 1991, when she bought a two-bedroom house on 153rd Street for $75,000.

Back then, there were no sidewalks, just dirt. One of the lots at the corner was trash-strewn and vacant. In July 1995, gunfire erupted during a basketball tournament at Baisley Pond Park, killing two spectators. Seven years earlier, also at the park, a high school basketball coach volunteering as a referee was beaten to death after drug gangs bet thousands of dollars on the game and the referee made a call someone did not like.

Ms. Marshall, a retired practical nurse, said things had started to turn around in more recent years. The city installed sidewalks and pavement. A new residence went up on the once-empty corner lot. The population in Tract 288 grew to 4,300 in 2000 from 3,400 in 1990.

But now, Ms. Marshall and other residents said, the foreclosures have stalled the neighborhood’s progress.

William Knight’s 15-year-old son found a drug user’s syringe in the yard of the empty house next door on 118th Avenue in June. “In the one year being here, I’ve watched it just kind of spiral down,” said Mr. Knight, a civil engineer. “There’s definitely less people, and due to less people it brings the negative element.”

On a recent Tuesday afternoon on 153rd Street, the smell of marijuana lingered in the air. Residents complain that the empty homes have encouraged people from other neighborhoods to loiter on the street, drinking beer and making noise at all hours.

A few months ago, Ms. Marshall’s glass storm door was shattered by a gunshot. “Look at the sign,” Ms. Marshall said, pointing to the Foreclosure Showcase notice in the yard of the empty yellow house. “What am I going to do? You think I want to stay here? I want to sell, too.”

    Door to Door, Foreclosure Knocks Here, NYT, 19.10.2008, http://www.nytimes.com/2008/10/19/nyregion/19block.html

The Reckoning

Building Flawed American Dreams

October 19, 2008
The New York Times
By DAVID STREITFELD and GRETCHEN MORGENSON

SAN ANTONIO — A grandson of Mexican immigrants and a former mayor of this town, Henry G. Cisneros has spent years trying to make the dream of homeownership come true for low-income families.

As the Clinton administration’s top housing official in the mid-1990s, Mr. Cisneros loosened mortgage restrictions so first-time buyers could qualify for loans they could never get before.

Then, capitalizing on a housing expansion he helped unleash, he joined the boards of a major builder, KB Home, and the largest mortgage lender in the nation, Countrywide Financial — two companies that rode the housing boom, drawing criticism along the way for abusive business practices.

And Mr. Cisneros became a developer himself. The Lago Vista development here in his hometown once stood as a testament to his life’s work.

Joining with KB, he built 428 homes for low-income buyers in what was a neglected, industrial neighborhood. He often made the trip from downtown to ask residents if they were happy.

“People bought here because of Cisneros,” says Celia Morales, a Lago Vista resident. “There was a feeling of, ‘He’s got our back.’ ”

But Mr. Cisneros rarely comes around anymore. Lago Vista, like many communities born in the housing boom, is now under stress. Scores of homes have been foreclosed, including one in five over the last six years on the community’s longest street, Sunbend Falls, according to property records.

While Mr. Cisneros says he remains proud of his work, he has misgivings over what his passion has wrought. He insists that the worst problems developed only after “bad actors” hijacked his good intentions but acknowledges that “people came to homeownership who should not have been homeowners.”

They were lured by “unscrupulous participants — bankers, brokers, secondary market people,” he says. “The country is paying for that, and families are hurt because we as a society did not draw a line.”

The causes of the housing implosion are many: lax regulation, financial innovation gone awry, excessive debt, raw greed. The players are also varied: bankers, borrowers, developers, politicians and bureaucrats.

Mr. Cisneros, 61, had a foot in a number of those worlds. Despite his qualms, he encouraged the unprepared to buy homes — part of a broad national trend with dire economic consequences.

He reflects often on his role in the debacle, he says, which has changed homeownership from something that secured a place in the middle class to something that is ejecting people from it. “I’ve been waiting for someone to put all the blame at my doorstep,” he says lightly, but with a bit of worry, too.

The Paydays During the Boom

After a sex scandal destroyed his promising political career and he left Washington, he eventually reinvented himself as a well-regarded advocate and builder of urban, working-class homes. He has financed the construction of more than 7,000 houses.

For the three years he was a director at KB Home, Mr. Cisneros received at least $70,000 in pay and more than $100,000 worth of stock. He also received $1.14 million in directors’ fees and stock grants during the six years he was a director at Countrywide. He made more than $5 million from Countrywide stock options, money he says he plowed into his company.

He says his development work provides an annual income of “several hundred thousand” dollars. All told, his paydays are modest relative to the windfalls some executives netted in the boom. Indeed, Mr. Cisneros says his mistake was not the greed that afflicted many of his counterparts in banking and housing; it was unwavering belief.

It was, he argues, impossible to know in the beginning that the federal push to increase homeownership would end so badly. Once the housing boom got going, he suggests, laws and regulations barely had a chance.

“You think you have a finely tuned instrument that you can use to say: ‘Stop! We’re at 69 percent homeownership. We should not go further. There are people who should remain renters,’ ” he says. “But you really are just given a sledgehammer and an ax. They are blunt tools.”

From people dizzily drawing home equity loans out of increasingly valuable houses to banks racking up huge fees, few wanted the party to end.

“I’m not sure you can regulate when we’re talking about an entire nation of 300 million people and this behavior becomes viral,” Mr. Cisneros says.

Homeownership has deep roots in the American soul. But until recently getting a mortgage was a challenge for low-income families. Many of these families were minorities, which naturally made the subject of special interest to Mr. Cisneros, who, in 1993, became the first Hispanic head of the Department of Housing and Urban Development.

He had President Clinton’s ear, an easy charisma and a determination to increase a homeownership rate that had been stagnant for nearly three decades.

Thus was born the National Homeownership Strategy, which promoted ownership as patriotic and an easy win for all. “We were trying to be creative,” Mr. Cisneros recalls.

Under Mr. Cisneros, there were small and big changes at HUD, an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans. Families no longer had to prove they had five years of stable income; three years sufficed.

And in another change championed by the mortgage industry, lenders were allowed to hire their own appraisers rather than rely on a government-selected panel. This saved borrowers money but opened the door for inflated appraisals. (A later HUD inquiry uncovered appraisal fraud that imperiled the federal mortgage insurance fund.)

“Henry did everything he could for home builders while he was at HUD,” says Janet Ahmad, president of Homeowners for Better Building, an advocacy group in San Antonio, who has known Mr. Cisneros since he was a city councilor. “That laid the groundwork for where we are now.”

Mr. Cisneros, who says he has no recollection that appraisal rules were relaxed when he ran HUD, disputes that notion. “I look back at HUD and feel my hands were clean,” he says.

Lenders applauded two more changes HUD made on Mr. Cisneros’s watch: they no longer had to interview most government-insured borrowers face to face or maintain physical branch offices. The industry changed, too. Lenders sprang up to serve those whose poor credit history made them ineligible for lower-interest “prime” loans. Countrywide, which Angelo R. Mozilo co-founded in 1969, set up a subprime unit in 1996.

Mr. Cisneros met Mr. Mozilo while he was HUD secretary, when Countrywide signed a government pledge to use “proactive creative efforts” to extend homeownership to minorities and low-income Americans.

He met Bruce E. Karatz, the chief executive of KB Home, when both were helping Los Angeles rebuild after the Northridge earthquake in 1994.

There were real gains during the Clinton years, as homeownership rose to 67.4 percent in 2000 from 64 percent in 1994. Hispanics and African-Americans were the biggest beneficiaries. But as the boom later gathered steam, and as the Bush administration continued the Clinton administration’s push to amplify homeownership, some of those gains turned out to be built on sand.

Mr. Cisneros left government in 1997 after revelations that he had lied to federal investigators about payments to a former mistress. In the following years, HUD continued to draw attention in the news media and among consumer advocates for an overly lenient posture toward the housing industry.

In 2000, Mr. Cisneros returned to San Antonio, where he formed American CityVista, a developer, in partnership with KB, and became a KB director. KB’s board also included James A. Johnson, a prominent Democrat and the former chief executive of Fannie Mae, the mortgage giant now being run by the government. Mr. Johnson did not return a phone call seeking comment.

It made for a cozy network. Fannie bought or backed many mortgages received by home buyers in the KB Home/American CityVista partnership. And Fannie’s biggest mortgage client was Countrywide, whose board Mr. Cisneros had joined in 2001.

Because American CityVista was privately held, Mr. Cisneros’s earnings are not disclosed. He held a 65 percent stake, and KB had the rest. In 2002, KB paid $1.24 million to American CityVista for “services rendered.”

‘A Little Too Ambitious’

One of American CityVista’s first projects, unveiled in late 2000, was Lago Vista — Spanish for “Lake View.” The location was unusual: San Antonio’s proud and insular South Side, a Hispanic area home to secondhand car dealers, light industry and pawnshops.

Mr. Cisneros and KB pledged to transform an overgrown patch of land into a showcase. Homes were initially priced from $70,000 to about $95,000, and Mr. Cisneros promised that Lago Vista would be ringed with jogging paths and maple trees.

The paths were never built, and few trees provide shade from the Texas sun. The adjoining “lake” — at one point a run-off pit for an asphalt plant — is fenced off, a hazard to neighborhood children. The houses are gaily painted in pink, blue, yellow or tan, and most owners keep their yards green and tidy.

KB considers Lago Vista a “model community,” a spokeswoman said.

To get things rolling in Lago Vista, traditional bars to homeownership were lowered to the ground. Fannie Mae, CityVista and KB promoted a program allowing police officers, firefighters, teachers and others to get loans with nothing down and no closing costs.

KB marketed its developments in videos. In one from 2003, Mr. Karatz declared: “One of the greatest misconceptions today is people who sit back and think, ‘I can’t afford to buy.’ ” Mr. Cisneros appeared — identified as a former HUD director — saying the time was ripe to buy a home. Many agreed.

Victor Ramirez and Lorraine Pulido-Ramirez bought a house in Lago Vista in 2002. “This was our first home. I had nothing to compare it to,” Mr. Ramirez says. “I was a student making $17,000 a year, my wife was between jobs. In retrospect, how in hell did we qualify?”

The majority of buyers in Lago Vista “were duped into believing it was easier than it was,” Mr. Ramirez says. “The attitude was, ‘Sign here, sign here, don’t read the fine print.’ ” He added that some fault lay with buyers: “We were definitely willing victims.” (The Ramirez family veered close to foreclosure, but the couple now have good jobs and can make their payments.)

KB and Mr. Cisneros eventually built more than a dozen developments, primarily in Texas. But the shine slowly came off Lago Vista.

“It started off fabulously,” Mr. Karatz recalled. Then sales slowed considerably. “It was probably, looking back, a little too ambitious to think that there would be sufficient local demand.”

And then the foreclosures started. “A lot of people got approved for big amounts,” says Patricia Flores, another Lago Vista homeowner. “They bit off more than they could chew.” Families split up under the strain of mortgage payments. One residence had so much marital turmoil that neighbors nicknamed it “The House of Broken Love.”

Some homes were taken over and sold at a loss by HUD, which had insured them. KB was also a mortgage lender, a business many home builders pursued because it was so profitable. At times, it was also problematic.

Officials at HUD uncovered problems with KB’s lending. In 2005, about two years after Mr. Cisneros left the KB board, the agency filed an administrative action against KB for approving loans based on overstated or improperly documented borrower income, and for charging excessive fees. Because HUD does not specify where improprieties take place, it is not clear if this occurred at Lago Vista.

KB Home paid $3.2 million to settle the HUD action without admitting liability or fault, one of the largest settlements collected by the agency’s mortgagee review board. Shortly afterward, KB sold its lending unit to Countrywide. Then they set up a joint venture: KB installed Countrywide sales representatives in its developments.

By 2007, almost three-quarters of the loans to KB buyers were made by the joint venture. In Lago Vista, residents secured loans from a spectrum of federal agencies and lenders.

During years of heady growth, and then during a deep financial slide, Countrywide became a lightning rod for criticism about excesses and abuses leading to the housing bust — which Countrywide routinely brushed off.

Mr. Cisneros says he was never aware of improprieties at KB or Countrywide, and worked with them because he was impressed by Mr. Karatz and Mr. Mozilo. Mr. Mozilo could not be reached for comment.

Still, Countrywide expanded subprime lending aggressively while Mr. Cisneros served on its board. In September 2004, according to documents provided by a former employee, lending audits in six of Countrywide’s largest regions showed about one in eight loans was “severely unsatisfactory” because of shoddy underwriting.

HUD required such audits and lenders were expected to address problems. Mr. Cisneros was a member of the Countrywide committee that oversaw compliance with legal and regulatory requirements. But he says he did not recall seeing or receiving the reports.

Nor, he says, was there ever a board vote about the wisdom of subprime lending.

“The irresistible temptation to engage in subprime was Countrywide’s fatal error,” he says. “I fault myself for not having seen it and, since it was not something I could change, having left.”

Mr. Cisneros left Countrywide’s board last year. At the time, he expressed “enormous confidence in the leadership.” In 2003, Mr. Cisneros ended his partnership with KB because, he says, he felt constrained working with just one builder. He formed a new company with the same mission, CityView, that has raised $725 million.

Mr. Karatz has a different recollection of why the partnership ended.

“It didn’t become an important part of KB’s business,” he says. “It was profitable but I don’t think as profitable in those initial years as Henry’s group wanted it to be.”

Troubles in Lago Vista

Today in Lago Vista, many are just trying to get by. Residents say crime has risen, and with association dues unpaid, they cannot hire security. Salvador Gutierrez, a truck driver, woke up recently to see four men stealing the tires off his pickup. Seventeen houses are for sale, but there are few buyers.

Hugo Martinez, who got a pair of Countrywide loans to buy a two-bedroom house with no down payment, recently lost his job with a car dealership. He has a lower-paying job as a mechanic and can’t refinance or sell his house.

“They make it easy when you buy,” Mr. Martinez says. “But after a while, the interest rate goes up. KB Home says they cannot help us at all.”

Five years ago, Carlo Lee and Patricia Reyes bought their first home, a three-bedroom house in Lago Vista.

After Mrs. Reyes became ill last year and lost her job, they fell behind on their payments. Last month, Mr. Reyes was laid off from one of his jobs, assembling cabinets. He still works part time at a hospital, but unless the couple come up with missed payments and fees, they will lose their home.

“Everyone isn’t happy here in Lago Vista,” Mr. Reyes says. “Everyone has a lot of problems.”

Countrywide was bought recently at a fire-sale price by Bank of America. Mr. Cisneros describes Mr. Mozilo as “sick with stress — the final chapter of his life is the infamy that’s been brought on him, or that he brought on himself.”

Mr. Karatz was forced out of KB two years ago amid a compensation scandal. Last month, without admitting or denying the allegations, he settled government charges that he illegally backdated stock options worth $6 million.

For his part, Mr. Cisneros says he is proud of Lago Vista. “It is inaccurate to say that we put people into homes that they couldn’t afford,” he says. “No one was forcing people into homes.”

He also remains bullish on home building, despite the current carnage.

“We’re not selling cigarettes,” he says. “We’re not drawing people into casino gambling. We’re building the homes they’re going to raise their families in.”
 

David Streitfeld reported from San Antonio, and Gretchen Morgenson from New York.

    Building Flawed American Dreams, NYT, 19.10.2008, http://www.nytimes.com/2008/10/19/business/19cisneros.html?hp

On the White House

Bush Struggles to Be Heard in Economic Crisis

October 18, 2008
The New York Times
By SHERYL GAY STOLBERG

WASHINGTON — With the economy in full roller coaster mode, President Bush has been working overtime to convince the nation that the situation is under control.

Hardly a day has passed this month without Mr. Bush appearing in the Rose Garden, or meeting with business leaders, or convening his cabinet, or giving a speech, as he did at the United States Chamber of Commerce on Friday, to talk about the “systematic and aggressive measures” his government has taken to put the fragile economy back on track.

The headlines on the White House Web site all sound the same: “President Bush visits Ada, Mich., Discusses Economy,” or “President Bush Meets with G7 Finance Ministers to Discuss World Economy” or simply, “President Bush Discusses Economy.” On Saturday, there will be another, when Mr. Bush has the president of France, Nicolas Sarkozy, to Camp David.

It is, in short, an intensive public relations effort, designed, White House officials say, to keep Mr. Bush front-and-center in explaining the intricacies of a complicated and fast-moving financial crisis. At times, the president sounds like an economics professor, with his talk of interest rates and capital and tightening of credit.

“Let me explain this approach piece by piece,” he said Friday.

But while Mr. Bush is doing plenty of talking, Americans do not appear to be taking much reassurance from his words.

The sheer volatility of the markets suggests that investors remain unconvinced when he says, as he did on Friday, that the government’s bank rescue plan is “big enough and bold enough to work.” On Wednesday, hours after Mr. Bush said he was ‘’confident in the long run this economy will come back,” the Dow Jones average plunged 700 points. Nine in 10 people now say the country is on the wrong track.

“One of the things we’re seeing here is the perils of a weakened presidency,” said Vin Weber, a former Republican congressman from Minnesota. “If the president were very strong and had a high approval rating, he would be the guy to reassure America right now. He’s unfortunately not in a position to do that, and we’re finding that we pay a price for that as a country.”

In the earliest days of the crisis, Mr. Bush seemed to cede his platform to his treasury secretary, Henry M. Paulson Jr., only to face criticism that the president seemed disengaged. Once his administration settled on a plan — a $700 billion rescue package, which has since been eclipsed by a new plan for the government to take a stake in the nation’s banks — Mr. Bush delivered a prime-time televised address to sell Congress on the idea.

More than 52 million households tuned in, a respectable number by any standard. About the same number watched the first presidential debate this fall. Yet now that the White House has changed tactics, with Mr. Bush delivering remarks on the economy nearly every day, analysts and historians see Mr. Bush struggling to command the nation’s attention.

“I think he’s trying to make himself useful but I don’t think he’s having much of an impact,” said Alan Brinkley, a historian at Columbia University. “It would be strange in this kind of crisis if the president was invisible, but on the other hand, I don’t think his visibility is what’s shaping these events.”

Still, Mr. Bush gets credit in some quarters for trying. “I think he’s been wise to continue speaking out on a daily basis, because it shows him engaged, and in the early days of this financial crisis it was almost like he was an ethereal creature floating above it, as if Paulson and Bernanke were running the government,” said David Gergen, who has advised presidents including Ronald Reagan, Gerald R. Ford and Bill Clinton. “So I think he’s been wise to speak, but I don’t think many people have been listening.”

Americans have always looked to their presidents to provide comfort in times of crisis, especially through wars and economic turmoil. Franklin D. Roosevelt was brilliant at it. “He understood that the radio was an extraordinary vehicle for reaching millions of Americans, making them feel that the president was on their side,” the historian Robert Dallek said.

And Mr. Bush has used his presidential platform to great effect. One of the most lasting images of his administration will be that of the new president, standing amid the rubble of the ruined World Trade Center just days after Sept. 11, 2001, shouting spontaneously into a megaphone: “I can hear you. The rest of the world hears you. And the people who knocked these buildings down will hear all of us soon.”

But now, with fewer than 100 days left in office, Mr. Bush’s megaphone, both figuratively and literally, has disappeared. The nation often seems to have moved past Mr. Bush; people frequently seem more interested in what the presidential candidates, Senators Barack Obama and John McCain, have to say. And with a situation as volatile as the current economic crisis, scholars say, it might be difficult for any president to make the public feel better — let alone a lame duck president whose approval ratings were already as dismal as Mr. Bush’s.

“Presidents can rarely move public opinion,” said George C. Edwards III, a political scientist at Texas A & M University who wrote ‘On Deaf Ears: The Limits of the Bully Pulpit,’ published in 2003 by Yale University Press. Even Roosevelt faced obstacles; Mr. Edwards says a substantial number of Americans never listened to the fireside chats.

Aides to Mr. Bush say he understands the challenge. Just as he knew, during the darkest days of the war in Iraq, that the mood of Americans would not improve until they saw fewer fatalities and less violence, he knows that the nation will not be convinced his economic rescue package will be successful until people see the stock markets stabilize and credit markets loosen up.

“Look at the language he uses,” said Kevin Sullivan, Mr. Bush’s communications director. “It’s very realistic. He uses the word crisis; he talks about their anxiety, their concerns. There’s no rose-colored glasses, but by explaining how it’s going to work, that it’s not going to happen overnight, he hopes that people are going to be reassured.”

So the daily drumbeat continues. On Monday, Mr. Bush heads to Alexandria, La., to meet with business leaders and talk about — what else? — the economy.

    Bush Struggles to Be Heard in Economic Crisis, NYT, 18.10.2008, http://www.nytimes.com/2008/10/18/us/politics/w18memo.html?hp

Bush Says Bailout Package Will Take Time

October 18, 2008
The New York Times
By JACK HEALY

President Bush warned on Friday that paralyzed credit markets will “take awhile” to return to normal, but he again tried to reassure Americans that the federal government’s $700 bailout was “big enough and bold enough to work,” and would accelerate a recovery.

Speaking before business leaders at the United States Chamber of Commerce, Mr. Bush pushed back against critics who have called the bailout an expansion of government power tantamount to socialism. He insisted that the emergency measures, which include the government taking ownership stakes in some banks, were only taken as a “last resort.”

“The government intervention is not a government takeover,” Mr. Bush said. “Its purpose is not to weaken the free market. It is to preserve the free market.”

President Bush’s message was similar to those throughout the week by other Washington officials, including Treasury Secretary Henry M. Paulson Jr. and the Federal Reserve Chairman Ben S. Bernanke.

He said the government intervened only as a “last resort” to prevent the crisis in stock and lending markets from spiraling out of control.

“I know many Americans have reservations about their government’s approach,” Mr. Bush said. “I would oppose such measures under ordinary circumstances. But these are not ordinary circumstances.”

While the measures represent “an extraordinary response to an extraordinary crisis,” the president said they would be limited in size, scope and duration, and he said the government would recoup much of its $700 billion investment in troubled assets and financial institutions.

While the Treasury Department has pledged $250 billion to buy equity in large and small banks, Mr. Bush said the government would only buy a small percentage of stock, and would not act as a voting shareholder. He said the government would collect dividends and would encourage banks to buy back publicly held shares by increasing the government’s dividend after five years.

Mr. Bush’s speech preceded the opening of financial markets, which have swung wildly all week as investors fret about whether the government actions can help avoid a deep recession. Financial markets in New York were poised to open slightly lower Friday morning.

Shares have remained in a tumult even after Congress passed the $700 financial bailout on Oct. 1. Mr. Bush and other global leaders have made dozens of public statements to reassure jittery investors and lenders, pledging to do anything necessary to quell the crisis.

    Bush Says Bailout Package Will Take Time, NYT, 18.10.2008, http://www.nytimes.com/2008/10/18/business/economy/18bush.html?ref=business

Housing Starts Disappoint, Sending U.S. Markets Lower

October 18, 2008
The New York Times
By JULIA WERDIGIER and BETTINA WASSENER

Shares on Wall Street, continuing the pattern of wild swings, fell again on Friday after a day in which all three major exchanges ended the day at least 4 percent higher.

In early trading, the Dow Jones industrial average was down more than 210 points, or 2.5 percent, while the broader Standard & Poor’s 500-stock index was down 2.4 percent.

The latest economic report — housing starts — served as a reminder that the economy was facing a severe slowdown in the months ahead.

And President Bush again tried to reassure Americans that the government’s bailout efforts will succeed, but will take time.

In the housing report, the Commerce Department said that construction of new homes declined 6.3 percent in September, the slowest place since early 1991. The decline was led by a 20.9 percent drop in the Northeast, where construction of single-family units dropped to the lowest level on record.

European stocks advanced on Friday and Asian markets were mixed after a see-sawing week marked by dramatic swings across the globe, including a late 4.6 per cent rally Thursday on Wall Street.

In Tokyo, the Nikkei 225 share average, which plummeted 11.4 percent Thursday on concerns that the United States economy might be worsening, gained 2.8 percent Friday.

That set the tone for increases in Europe where, in early trading, London’s FTSE 100 index was up by 2.1 percent, the DAX in Frankfurt rose 3.1 percent and the CAC-40 in Paris rose 1.8 percent.

Oil prices rallied after touching a 13-month low below $70 a barrel on Thursday. Crude oil for November delivery rose to $73 on the New York Mercantile Exchange, Reuters reported.

The swings on the markets in recent days seemed to leave investors uncertain, even as governments pledged billions in bank bailouts.

“Too much has happened in too short of a period and that led to general disorientation,” said Dieter Buchholz, a fund manager at AIG Private Bank in Zurich.

“There was an overflow of news,” Mr. Buchholz said. “First the usual investors were made to believe the banks are safe, then that they are in trouble, then that the bond market isn’t working anymore, then oil prices came down almost too fast, then hedge funds weren’t coping. You really had no way to go.”

“Now it seems like the banking system at least is starting to stabilize. The spreads are coming down. At least we’ve got some good news from the banking system,” he said.

In a sign of cautious easing, the cost of borrowing dollars overnight between banks was indicated as slightly lower in London on Friday after the authorities moved to unfreeze money markets. But banks still seemed reluctant to lend for longer periods, Reuters reported, and investors seemed resigned to continued swings on the stock markets.

“The volatility we’re seeing is very extreme and it will drop off eventually but we don’t know when,” said Colin Morton, investment director at Rensburg Fund Management in Leeds.

“The volatility is a combination of people taking money out of hedge funds as they see their investments suffer and banks not allowing them to leverage at the levels they did in the past,” he said. “There are so many technical things happening beneath the surface. Also, people seem to be changing their minds about the outlook for the markets on a daily basis. That doesn’t help either.” Elsewhere, the Hang Seng index in Hong Kong closed down 4.4 percent while the Shanghai composite index closed up 1 percent. The S&P/ASX 200 index in Australia fell 1.1 percent, reversing earlier gains of more than 3 percent.

The Kospi index in South Korea shed 2.7 percent and worries persisted about the country’s beleaguered banks, which triggered a 9.4 percent fall on Thursday.

The won and the Kospi on Thursday saw their sharpest falls in years, prompting the top South Korean regulator to call for coordinated policy action, including interest rate cuts, to stabilize the economy and the local financial markets. Jun Kwang-woo, chairman of the South Korean Financial Services Commission, said the authorities needed to supply more cash to the financial system.

The South Korean stock market and currency have been under pressure for months amid worries that Korean banks are facing increasing difficulties borrowing overseas.

This prompted Standard & Poor’s this week to put seven South Korean financial institutions on a negative watch, citing the global liquidity squeeze.

Analysts cautioned that stock market volatility in Asia and elsewhere will continue as investors worry about how deeply the slowdown in global growth will affect company earnings.

Markets are also fearful that banks remain unwilling to lend to each other, or to consumers and companies. Despite a series of historic bailout and guarantee packages in the United States and elsewhere, designed to shore up confidence and unfreeze lending, interbank lending rates have yet to fall significantly.

Alan Cowell contributed from Paris.

    Housing Starts Disappoint, Sending U.S. Markets Lower, NYT, 18.10.2008, http://www.nytimes.com/2008/10/18/business/18markets.html?hp

Housing Starts at Slowest Pace Since 1991

October 18, 2008
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — Government data released Friday showed that construction of new homes declined by a bigger-than-expected amount in September as builders cut production to the slowest place since early 1991.

The Commerce Department reported Friday that construction of new homes and apartments dropped 6.3 percent last month, a much bigger decline than the 1.6 percent decrease that had been expected. It pushed total production to a seasonally adjusted annual rate of 817,000 units. That’s the slowest pace since January 1991, a period when the country was in a recession and going through a similar painful housing correction.

The declines last month reflected weakness in many parts of the country. It was led by a 20.9 percent drop in the Northeast, where construction of single-family units dropped to the lowest level on record.

Construction slipped by 16.8 percent in the West with single-family building hitting a record low there, too. The Midwest saw a gain of 5.6 percent, although that reflected strength in apartment construction as single-family building also hit a record low in that region. Construction activity in the South was up a slight 0.5 percent.

Applications for building permits, considered a good sign for future activity, also fell sharply in September, dropping 8.3 percent to an annual rate of 786,000 units, the weakest level since November 1981.

The housing industry, which enjoyed a five-year boom, is suffering its worst downturn in decades.

The weakness in housing, where prices have been falling sharply in many parts of the country, has triggered severe economic problems. The government has been forced to rush through a $700 billion rescue package for banks which have been hit with billions of dollars in losses from soaring defaults on mortgages.

Banks, worried about their cash reserves and the health of other banks and businesses, have tightened lending, causing credit markets around the world to freeze, stock markets to tumble and anxiety about a global recession to rise.

Builder sentiment dropped to a record low in October, according to the latest survey from the National Association of Home Builders which said builder confidence had been shaken by the recent financial market troubles. Builders have been facing tighter lending standards as they try to get financing for new projects.

    Housing Starts at Slowest Pace Since 1991, NYT, 18.10.2008, http://www.nytimes.com/2008/10/18/business/economy/18econ.html

    Related > http://www.census.gov/const/newresconst.pdf

Op-Ed Contributor

Buy American. I Am.

October 17, 2008
The new York Times
By WARREN E. BUFFETT

Omaha

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

    Buy American. I Am., NYT, 17.10.2008, http://www.nytimes.com/2008/10/17/opinion/17buffett.html

In Downturn, Families Strain to Pay Tuition

October 17, 2008
The New York Times
By JONATHAN D. GLATER

In difficult dinner-table conversations, college students and their parents are revisiting how to pay tuition as personal finances weaken and lenders get tough.

Diana and Ronnie Jacobs, of Salem, Ind., thought their family had a workable plan for college for her twin sons, using a combination of savings, income, scholarship aid and a relatively modest amount of borrowing. Then her husband lost his job at Colgate-Palmolive.

“It just seems like it’s really hard, because it is,” Ms. Jacobs, an information technology specialist, said of her financial situation. “I have two kids in college and I want to say ‘come home,’ but at the same time I want to provide them with a good education.”

The Jacobs family may be a harbinger of what is to come. Ms. Jacobs pressed the schools’ financial offices for several thousand dollars more for each son’s final year of college, and each son increased his borrowing to the maximum amount through the federal loan program. So they at least will be able to finish at their respective colleges.

With the unemployment rate rising and a recession mentality gripping the country, financial aid administrators say they expect many more calls like the one from Ms. Jacobs. More families are applying for federal aid, and a recent survey found that an increasing portion of families expected to need student loans. College administrators worry that as fresh cracks appear in family finances, they will not have enough aid money to go around, given that their own endowment returns are disappointing, states are making cutbacks and fund-raising will become more difficult.

“We are looking ahead and trying to be prepared for what might be coming,” said Jon Riester, associate dean of financial assistance at Hanover College, a private institution with about 1,000 undergraduates, including Justin Keeton, one of Ms. Jacobs’s sons. “We’re looking internally at our own budgets to see what we may be able to do in terms of providing additional assistance to students under various situations.”

The concern is widespread, even though college officials say it’s too soon to quantify how many students will face a shortfall. Even at wealthy institutions, financial aid administrators have begun weighing contingency plans. “Part of the conversation that’s going on now in many institutions is, do we want to put a dollar figure on how much we are willing to extend ourselves,” said L. Katharine Harrington, dean of admission and financial aid at the University of Southern California.

Ms. Harrington said she opposed setting a limit on aid, but added that the university’s pockets were not bottomless. “If we start seeing massive layoffs,” she added, “we may be in for a real bumpy ride.”

The credit crisis has made it harder for students and their parents to borrow, even as their needs grow and their savings accounts dwindle. In plenty of cases, students who had been borrowing on their own have had to ask parents — and in some cases, other relatives and friends — to help cover tuition or to cosign loans, both aid officials and lenders say.

Officials at most four-year colleges say that they have not seen rampant problems so far, because students have found alternatives. The financing for the fall semester was mostly in place many months ago, before the severity of the credit crisis and the economic downturn became apparent.

Others wonder privately whether there will a rebellion by parents about paying so much for education if the country’s economic distress is prolonged. A survey of nearly 3,000 parents by Fidelity Investments released earlier this month found that 62 percent of parents planned to use student loans to help finance expenses, up from 53 percent last year.

Ms. Jacobs said that with a family income of more than $100,000 a year, they had been counting on some loans to help pay for college for her 21-year-old sons, Justin and Jacob Keeton. Tuition, room and board add up to just over $32,000 at Hanover College in Hanover, Ind., which Justin attends, and nearly $29,500 at Franklin College, in Franklin, Ind., which Jacob attends.

Then, in December, Colgate-Palmolive closed its Jeffersonville plant, where her husband worked.

“I said, ‘This year the loans are going to have to be in your name, I’m not going to be able to pick up as much as I have before,’ ” Ms. Jacobs recalled. “They said they would be willing to put the student loans in their names and continue on. We all came to that consensus, but I hate it because I hate for them to come out of school with $20,000 in student loans,” Ms. Jacobs added. “To me that is so much money.”

She also called the two colleges, and each contributed about $3,000 more in aid, she said.

Financial aid administrators have been scrambling in a rapidly changing market, as many companies have decided that student loans are just not profitable enough. Many student loan providers, citing reduced profit margins and greater difficulty selling loans, have stopped making federally guaranteed loans, private loans or both.

Federal loans account for about three-quarters of student borrowing, and the government has assured that money will flow uninterrupted by agreeing to buy those loans, even if fewer companies are in the business. Federal loan volume is likely to grow this year; the number of applications for federal aid so far this year has risen to 13.5 million, up nearly 10 percent from 12.3 million a year earlier.

Private lending, which helps families plug the gap between federal aid and the total cost of attendance, has been the fastest-growing segment over the last decade but has been undergoing rapid changes. Some of the biggest lenders, like Sallie Mae, have tightened their credit standards and raised their interest rates yet again in recent weeks. “The current financial markets provide no other choice,” Sallie Mae wrote to colleges last week. “When conditions improve, we hope to relax our underwriting criteria and serve more students.”

Tim Ranzetta, the founder of Student Lending Analytics, posted the lender’s letter on his blog, where he called it “extremely bad news for students.”

Michaela Rice, now a sophomore at Plymouth State University, is one of the students who had to redesign her borrowing after she learned in the spring that a student loan she had taken out with her father as cosigner would evaporate because the lender was getting out of that business. A financial aid specialist at Plymouth State, which has about 4,300 undergraduates in Plymouth, N.H., suggested the family switch to federal parent loans.

That led Ms. Rice to ask her mother, who is divorced from her father, to take on $17,000 in debt. The new loan, called a Parent Plus loan, has a more flexible repayment options and a fixed 8.5 percent interest rate. But it also puts her mother at risk if Ms. Rice does not earn enough as a teacher to cover repayments.

“We haven’t really sat down and talked about how am I going to pay for it,” said Ms. Rice, 19. “My senior year we’ll probably sit down.”The subject touched on other sensitive issues — in this case, the question of how Ms. Rice’s biological father might continue to help pay for her college education and what her stepfather’s role should be.

Ms. Rice’s mother, Judy Krahulec, remarried to an American Airlines pilot who already had children of his own, and she did not want to saddle him with debt for children who were not his. She and Ms. Rice hesitated over the parent loan.“If I sign papers, who am I really indebting? My husband,” Ms. Krahulec said. “That’s who I’m indebting. It’s not my loan, it’s his.”

“It would be in my mom’s name,” said Ms. Rice, who said she would repay her mother, “but it’s my stepdad’s money if anything went wrong.”

Still, she was lucky, because not all students’ parents qualify for Plus loans. To satisfy companies that make private loans, more students have had to find cosigners.

Kiara S. Holiday, a sophomore this year at High Point University in High Point, N.C., learned just weeks before classes were to start that her mother had not qualified for a Plus loan.

“It threw me for a loop,” said Ms. Holiday, who is 19. “Person after person, they just denied, like my mother, my aunts.”

Ms. Holiday said she investigated the options. But even taking advantage of larger maximum federal Stafford loan amounts available to students whose parents are denied Plus loans, she did not have enough to cover about $31,000 in tuition, room and board at High Point.

So she called her great-grandmother, an octogenarian in Boston. Ms. Holiday, who wants to go to medical school and become an immunologist in a laboratory, said that despite the poor economy, she was not worried about being able to pay her debts after graduation.

“I’m pretty sure something will work out for me,” Ms. Holiday said.

    In Downturn, Families Strain to Pay Tuition, NYT, 17.10.2008, http://www.nytimes.com/2008/10/17/business/17student.html?hp

Oil Prices Slip Below $70 a Barrel

October 17, 2008
The New York Times
By THE ASSOCIATED PRESS

Crude oil plunged below $70 a barrel Thursday, bringing its price to less than half its July record high after the government reported massive increases in U.S. crude and gasoline supplies.

Investors took the news as more evidence that a global credit crisis and a shaky economy are curbing demand for oil, which has not been this cheap in nearly 14 months.

The sell-off came despite an announcement by the OPEC cartel on Thursday that it was moving up by almost a month an emergency meeting to discuss oil’s rapid drop in value. The Organization of the Petroleum Exporting Countries will now meet Oct. 24 in Vienna, Austria, instead of Nov. 18, the cartel said in a statement.

Light, sweet crude for November delivery dropped as low as $69.15 a barrel on the New York Mercantile Exchange before gaining slightly to trade down $3.81 to $70.73. It was crude’s lowest trading level since Aug. 22, 2007.

Crude has now fallen 53 percent since surging to a record closing price of $145.29 in early July.

Thursday’s declines accelerated after the Energy Information Administration said in its weekly report that crude stocks rose by 5.6 million barrels last week, well above the 3.1 million barrel increase expected by analysts surveyed by energy research firm Platts.

The agency also says gasoline stock rose by 7 million barrels last week, more than double the build analysts had expected.

    Oil Prices Slip Below $70 a Barrel, NYT, 17.10.2008, http://www.nytimes.com/2008/10/17/business/worldbusiness/17oil.html?hp

Merrill Reports Its Fifth Quarterly Loss

October 17, 2008
The New York Times
By LOUISE STORY

Merrill Lynch, the investment bank that sold itself to Bank of America last month, reported a third-quarter loss on Thursday of $5.1 billion, or $5.56 a share.

It is the fifth quarterly loss for the troubled company, known for its “thundering herd” of financial advisers.

Last year in the third quarter, as the credit markets were beginning to tighten, Merrill reported a loss of $2.4 billion and was one of the first banks to write-down some mortgage assets. Since then, Merrill has reported a loss for every quarter and has taken more than $45 billion in write-downs.

“We continue to reduce exposures and de-leverage the balance sheet prior to the closing of the Bank of America deal,” the chairman and chief executive, John A. Thain, said. “As the landscape for financial services firms continues to change and our transition teams make good progress, we believe even more that the transaction will create an unparalleled global company with pre-eminent scale, earnings power and breadth.”

Mr. Thain said in a conference call with analysts that he thought the focus was shifting to the problems in the real economy and away from weaknesses at financial institutions.

“The real question is not whether or not we’re in a recession,” he said. “The real question will be how deep and how long, and of course, government actions will have an impact on that.”

Mr. Thain has agreed to remain at Merrill after the deal with Bank of America closes, probably by the end of the year. He will oversee Merrill Lynch’s businesses within the banking giant. Shareholders from the two companies have yet to vote on the all-stock deal, which valued Merrill at $50 billion.

He sold Merrill after less than a year at the helm as he watched Lehman Brothers teeter towards bankruptcy last month. It was widely expected that Merrill would be the next investment bank to collapse after Lehman, and Merrill’s stock and credit were under attack in the markets.

Mr. Thain said he was optimistic about the earnings power of Merrill and Bank of America, when combined, despite the poor economy.

“The diversity of our businesses and earnings power, the strength of our balance sheet, the access to financing and liquidity, all I think make the combination very powerful,” he said.

Bank of America also considered buying Lehman but put that plan aside when Mr. Thain suggested that the bank look at Merrill. Bank of America had considered purchasing Merrill some 10 months ago but found its mortgage exposure too unpredictable. Mr. Thain oversaw the cleansing of much of that exposure.

Merrill’s results in the third quarter were as much from the slow business environment as they were about reckoning with past missteps. The bank saw its investment banking business slow, as companies put off plans to issue debt and undertake mergers. And it continued to take more write-downs, including $5.7 billion that were pre-announced related to mortgage bonds and $2.6 billion from discounted sales of commercial and residential mortgages.

Merrill also had to pay $2.5 billion to Temasek Holdings, the investment arm of the Singapore government, in July when raised more capital. That capital raise was costly because it diluted the value of existing shares and triggered a clause in an antidilution agreement that Merrill had with Temasek, a large shareholder.

The bank said the chaotic month of September caused it to take an additional $3.8 billion in write-downs on real estate investments as well as assets related to now-bankrupt Lehman Brothers and also the government-backed mortgage financial giants, Fannie Mae and Freddie Mac.

Merrill’s wealth management business, which includes its financial advisers, fared better and pulled in $3.2 billion, down 9 percent from net revenue in that division a year ago. Other profit areas for Merrill came from one-time sales, like the sale of its stake in Bloomberg, the financial news agency, which Merrill sold in July for $4.4 billion.

Merrill released results two days after the federal government announced a plan to inject $250 billion directly into the banks in order to help restore the credit markets. The big banks agreed to take investments totaling about $125 billion and the Bank of America will receive $25 billion.

“That capital cushion will provide an opportunity. It will really be after the merger closes,” Mr. Thain said. “We will have the opportunity to deploy that going forward, but in terms of the next quarter, it’s just going to be a cushion.”

“I think you will see us continue to shrink our assets and continue to improve and de-risk our balance sheet,” he said.

    Merrill Reports Its Fifth Quarterly Loss, NYT, 17.10.2008, http://www.nytimes.com/2008/10/17/business/17merrill.html

$2.8 Billion Loss Reported at Citigroup on Write-Downs

October 17, 2008
The New York Times
By ERIC DASH

Citigroup reported a $2.8 billion loss in the third quarter, the fourth consecutive period that the global banking giant has been swamped by write-downs on investments and steeper losses on consumer loans.

The bank took more than $13.2 billion in charges in the third quarter, bringing the total amount of write-offs and credit losses since the credit crisis began last year to more than $64 billion.

And as more signs of a global slowdown surface, the bank continues to come under pressure. Although the write-downs in its investment bank declined for the third quarter, losses in Citigroup’s global consumer businesses rose sharply. Credit costs increased 84 percent, to $9.1 billion driven by charge-offs and reserve increases in the bank’s credit card, consumer finance and banking operations.

Every major region of the world where Citigroup operates, with the exception of the one anchored by the Middle East, reported a decline in revenue.

The quarterly loss was a stark reversal from the $2.2 billion the bank earned in the period a year ago. The loss was 60 cents a share, compared with a gain of 42 cents a share in the third quarter a year ago. Revenue fell 23 percent, to $16.7 billion.

Vikram S. Pandit, Citigroup’s chairman and chief executive, said in a statement that the bank’s results reflected a “difficult environment” and write-downs as the bank sheds more than $400 billion in noncore operations, low-returning assets and toxic mortgages. Citigroup also eliminated 11,000 jobs in the third quarter, bringing the total number of layoffs to 23,000 this year,

Although Mr. Pandit said they were making “excellent progress,” he gave no indication of when the bank would return to profitability.

Mr. Pandit only hinted at the $25 billion investment stake that Citigroup accepted along with eight other big banks at the behest of Treasury Secretary Henry M. Paulson Jr. And Mr. Pandit did not address Citigroup’s failed bid for the Wachovia Corporation, a move that executives believed was a potentially game-changing deal for Citigroup’s domestic banking franchise. Wells Fargo swooped in with a counteroffer that derailed the bid; both sides are now waging an intense battle in the courts.

Citigroup has long been considered a bellwether for the global financial services industry. Its range of businesses, from investment banking to credit cards, and sprawling international reach are rivaled by only a handful of banks.

On paper, the diversified bank was supposed to be the ideal business model for these tumultuous times. But as the markets gyrated wildly and the global economy teeters, Citigroup shares have plummeted along with most other banks.

Citigroup is the latest big bank to announce results in what is expected to be yet another dismal quarter for nearly all financial firms. Merrill Lynch, which sold itself to Bank of America, also reported a $5.1 billion loss on Thursday morning, the fifth consecutive loss. Earlier, Bank of America, JPMorgan Chase, Wells Fargo and State Street reported earnings that were similarly muted by sobering economic projections. And dozens of small and regional banks have not yet reported their results.

Much of Citigroup’s loss was concentrated in investment banking, which is known as the institutional clients group. The unit reported $81 million in negative revenue, hurt by write-downs. Chief among those was $4 billion tied to its various exposures to faltering home loans, including assets belonging to various structured investment vehicles; $1.2 billion tied to Alt-A mortgages and $919 million related to its exposure to bond insurance companies. It included a $792 million charge tied to lending to private equity deals, a once-lucrative business that has left Citi with billions of dollars in loans and bonds it cannot sell.

In other earnings, the Bank of New York Mellon reported a 53 percent decline in third-quarter profit. The bank earned $303 million, or 26 cents a share, in the quarter, compared with $642 million, or 56 cents, in the quarter a year ago.

The bank took a charge of 37 cents a share, or $433 million, to bail out money market mutual funds, cash sweep funds and other investments affected by the bankruptcy filing of Lehman Brothers Holdings.

Profit, excluding one-time charges, was $908 million, or 79 cents a share. Revenue was $3.9 billion. Analysts surveyed by Thomson Reuters had expected earnings of 66 cents a share and revenue of $3.69 billion.

    $2.8 Billion Loss Reported at Citigroup on Write-Downs, NYT, 17.10.2008, http://www.nytimes.com/2008/10/17/business/17bank.html?hp

Home Prices Seem Far From Bottom

October 16, 2008
The New York Times
By VIKAS BAJAJ

The American housing market, where the global economic crisis began, is far from hitting bottom.

Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.

In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them.

Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates — all of which will reduce the already diminished pool of would-be buyers.

“The No. 1 thing that drives housing values is incomes,” said Todd Sinai, an associate professor of real estate at the Wharton School at the University of Pennsylvania. “When incomes fall, demand for housing falls.”

Despite the government’s move to bolster the banking industry, home loan rates rose again on Tuesday, reflecting concern that the Treasury will borrow heavily to finance the rescue.

On Wednesday, the average rate for 30-year fixed rate mortgages was 6.75 percent, up from 6.06 percent last week. While banks are moving aggressively to sell foreclosed properties, the number of empty homes is hovering near its highest level in more than half a century.

As of June, 2.8 percent of homes previously occupied by an owner were vacant. Nearly 1 in 10 rentals was without a tenant. Both numbers are near their highest levels since 1956, the earliest year for which the Census Bureau has such data.

At the same time, the number of people who are losing jobs or seeing their incomes decline is rising. The unemployment rate has climbed to 6.1 percent, from 4.4 percent at the end of 2007, and wages for those who still have a job have barely kept up with inflation.

In New York and other cities that rely heavily on the financial sector, economists expect that job losses will increase and that pay heavily tied to year-end bonuses will decline significantly.

One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms.

In Miami, for instance, home prices are about 22 times annual rents, according to analysis by Moody’s Economy.com. The average figure for the last 20 years is just 15 times annual rents. The difference between those two numbers suggests that a home valued at $500,000 today might be worth only $341,000 based on the long-term relationship between prices and rents.

The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.

It increased the most on the coasts and somewhat less in the middle of the country. Economy.com’s calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif.

The current housing downturn is much more national in scope and severe than any other in the postwar period, partly because of the proliferation of risky lending practices. Today, foreclosures are running ahead of the downturn in the economy, a reversal of previous housing slumps.

“We are in uncharted waters,” said Brian A. Bethune, an economist at Global Insight, a research firm.

Colleen Pestana, a real estate agent in Orange County in California, said many people losing their homes in Southern California used to work at mortgage and real estate companies. Many of them bet heavily on real estate by upgrading to bigger houses every few years. Now, many are losing their homes.

At the same time, Ms. Pestana said, her clients who are looking to buy are having a harder time lining up financing. One of her clients recently had to give up on a home after the lender that had offered a pre-approved loan changed its mind — a frequent occurrence, according to real estate agents and mortgage brokers.

“I am working harder than I have ever had to work to get a deal together and keep it together,” said Ms. Pestana, who has been a real estate agent for seven years.

To cushion themselves from potential losses if homes lose value, Fannie Mae and Freddie Mac, the mortgage finance companies that the government took over in September, have increased fees on loans made to borrowers who have good but not excellent credit records, even those who are making down payments as big as 30 percent.

Those higher fees are generally invisible to borrowers because banks factor them into mortgage interest rates. While the national average rate for a 30-year fixed-rate mortgage is now 6.75 percent, according to HSH Associates, mortgage brokers say the rates for many borrowers in the Southwest or Florida can be as high as 8 percent, especially for so-called jumbo loans that are too big to be sold to Fannie Mae and Freddie Mac. (Those loan limits vary by area from $417,000 to roughly $650,000.)

Higher interest rates result in bigger monthly payments, pricing some potential buyers out of the market. For example, monthly payments are $2,700 on a 6 percent 30-year, fixed-rate loan of $450,000. If the interest rate rises to 7 percent, those monthly payments jump to $3,000. All things being equal, when rates rise prices generally fall.

This month, Fannie and Freddie canceled a fee increase that would have applied to markets where home prices are falling, but the companies still have many other fees in place. In an effort to help drive down rates, the Treasury Department has announced plans to buy mortgage-backed securities issued by Fannie and Freddie. The government also recently increased the amount of loans the companies can buy and hold.

Still, those efforts will take time to have an impact and it is not clear whether they will be sufficient to get banks to lend more freely, especially in areas where jumbo loans make up a bigger percentage of lending, like New York and parts of California and Florida. Economists say that prices in those places will probably fall further.

In some of those places, price declines are being driven by a sharp increase in sales of foreclosed homes.

Hudson & Marshall, a Dallas-based auctioneer that holds sales for lenders, reports that banks are accepting prices that they refused to consider just 12 months earlier. In a recent auction of 110 foreclosed homes in the Las Vegas area, for instance, the auctioneer’s clients accepted 90 percent of the bids submitted by buyers, up from 60 percent a year earlier, said David T. Webb, a co-owner of the company.

Single-family home prices in Las Vegas have already fallen 34 percent from their peak in the summer of 2006, according to the Standard & Poor’s Case-Shiller home price index. Prices in San Diego have fallen 31 percent since late 2005.

While those declines have been painful to homeowners in those cities, economists said the quick decline might help the markets reach bottom faster than in previous housing cycles, said Edward E. Leamer, an economist at the University of California, Los Angeles. In a previous boom, home prices peaked in the Los Angeles area in 1990 but did not hit bottom until 1996. Prices remained near that low for more than a year before starting to climb again.

“In some areas of California, we are really at appropriate levels,” Mr. Leamer said of current home prices. But he added: “The risk is that we are going to get some overshooting, meaning that prices will be lower than they ought to be.”

In Florida, Jack McCabe, a real estate consultant, said that while some cities, like Fort Myers, are showing tentative signs of a rebound, others like Miami and Fort Lauderdale are still under pressure. Two homes on his street in Fort Lauderdale that sold for about $730,000 apiece in 2005 recently sold for $400,000 — a 44 percent decline.

“The rocket has run out of fuel, and now it’s plunged back down to earth,” he said.

Tara Siegel Bernard contributed reporting.

    Home Prices Seem Far From Bottom, NYT, 16.10.2008, http://www.nytimes.com/2008/10/16/business/economy/16housing.html?hp

Fear and Loathing Over Economy Spreads

October 16, 2008
Filed at 1:01 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Fear and loathing is spreading as signs mount that the economy is in danger of losing its balance.

And a fresh batch of economic reports due out Thursday is likely to show more problems for the already stumbling economy.

Industrial production is expected to have dropped in September, underscoring the plight of troubled auto makers as well as manufacturers of furniture, construction materials and other goods that have been hard hit by the collapse of the housing market.

The number of new people signing up for unemployment benefits last week may dip slightly but is still expected to top 400,000, a level that usually points to an ailing labor market.

Consumer prices probably will nudge up in September, but will be up sharply over the past year, further pinching Americans already smarting from dwindling nest eggs and sinking home values.

''Given the likely drawn-out nature of the prospective adjustments in housing and financial markets, I see the most probable scenario as one in which the performance of the economy remains subpar well into next year and then gradually improves in late 2009 and 2010,'' Donald Kohn, vice chairman of the Federal Reserve, concluded Wednesday evening.

Worries about the economy sent the Dow Jones industrials down a staggering 733 points earlier Wednesday, erasing any hopes that the convulsions that have shaken Wall Street for a month were over.

The selling spree carried over to Asia, where stocks fell sharply in early trading Thursday. Japan's key stock index plummeted more than 10 percent, South Korean shares shed 7 percent, while in Hong Kong, the Hang Seng Index was down 6 percent.

The plunge in stocks put the nation's economic anxiety front-and-center as the two major presidential candidates, Sens. Barack Obama and John McCain, squared off in their final debate Wednesday night in Hempstead, N.Y.

McCain used the debate to accuse Obama of waging class warfare by advocating tax increases designed to ''spread the wealth around.'' The Democrat denied it, and countered that he favors tax reductions for 95 percent of all Americans.

Wednesday's daylong stock market sell-off came as retailers reported the biggest drop in sales in three years and as a Federal Reserve snapshot showed Americans are spending less and manufacturing is slowing around the country.

Piling up losses in a rough final hour of trading, the Dow ended the day down nearly 8 percent -- its steepest drop since one week after Black Monday in 1987. The Dow has wiped out all but about 127 points of its record-shattering 936-point gain on Monday of this week.

Earlier this week, after governments around the world announced plans to use trillions of dollars to prop up banks, including a U.S. plan to buy about $250 billion in bank stocks, the market had appeared to be turning around -- or at least calming down.

Instead, relentless selling gave the Dow its 20th triple-digit swing in the past 23 trading sessions, an unprecedented run of volatility. The Dow has finished higher on only one day this month. The loss of 733 points is the second-worst ever for the average, topped only by a 778-point decline Sept. 29.

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke have expressed confidence that the government's radical efforts to stabilize the financial system and induce banks to lend again will eventually help the economy.

But Bernanke warned that even if the financial markets level off, the nation will not snap back to economic health quickly.

''Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,'' Bernanke told the Economic Club of New York on Wednesday. He left the door open to further interest rate reductions.

President Bush plans to speak on the financial crisis early Friday -- before the markets open -- at the U.S. Chamber of Commerce headquarters across from the White House. Officials said the speech wasn't intended to put forward new policy actions, but rather would be used by the president to give the nation a more detailed explanation of what the government is doing -- and why -- to combat the crisis.

Some analysts believe the economy jolted into reverse in the recently ended third quarter, while others predict it will shrink later this year or early next. The classic definition of a recession is back-to-back quarters of shrinking economic activity.

Two gloomy economic reports on Wednesday showed that the debate at this point is merely semantic.

The Fed's snapshot of business conditions around the nation, known as the Beige Book, showed economic activity weakening across all of the Fed's 12 regional districts. Consumer spending -- which accounts for more than two-thirds of economic activity -- slumped in most Fed regions. Manufacturing also slowed in most areas.

As shoppers cut back, retail sales dropped sharply in September. The 1.2 percent decline was the biggest in three years.

Leaders of the world's top economic powers, the Group of Eight, said they would meet ''in the near future'' for a global summit to tackle the financial crisis. The group comprises the United States, Japan, Germany, France, Britain, Italy, Canada and Russia.

British Prime Minister Gordon Brown said the meeting could be held as soon as next month. He said the discussions should include not only the world's richest nations but also major emerging economies such as China and India.

''I believe there is scope for agreement in the next few days that we will have an international meeting to take common action ... for very large and very radical changes,'' Brown told reporters before a meeting with other European Union leaders for talks in Brussels on the financial crisis.

German Chancellor Angela Merkel and French President Nicolas Sarkozy also called for a G-8 meeting.

Merkel said reform was needed so that ''something like this can never happen again,'' while Sarkozy said the meeting should be held in New York, ''where everything started.''

The current financial crisis began more than a year ago in the United States when lax lending standards on certain home mortgages came home to roost. Foreclosures skyrocketed, mortgage securities soured and financial companies racked up huge losses.

    Fear and Loathing Over Economy Spreads, NYT, 16.10.2008, http://www.nytimes.com/aponline/business/AP-Financial-Meltdown.html

As Consumers Keep Wallets Shut, Economic Outlook Dims

October 16, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Even as the federal government and its counterparts around the world readied an ambitious financial bailout, more signs emerged on Wednesday that the economic downturn had taken a darker turn.

Retail sales fell sharply in September as consumers shunned department stores, auto showrooms and shopping malls, ratcheting back spending for a third month. Economic activity slowed, according to a report from the Federal Reserve. And the Fed chairman, Ben S. Bernanke, warned in a speech that a recovery “will not happen right away.”

Each bleak economic report compounded on the last, and by the end of the day the Dow Jones industrial average had fallen 733 points. Many investors fear that corporations — and by extension their workers and shareholders — will face harder times.

The key troubles lie with the American consumer, who, after months of coping with soaring gasoline prices, is faced with losses in the stock market and an uncertain financial future.

The impact of the crisis on Wall Street put a clear dent in consumer spending. Last month’s 1.2 percent decline in retail sales was the sharpest drop in years, and it came in the back-to-school shopping season, traditionally the busiest time of the year for retailers outside of the December holidays.

The cutback in spending was underscored by the anecdotal reports in the Fed’s “beige book,” a regular survey of businesses around the country. The report found that spending decreased in all 12 metropolitan districts included in the report, and businesses that responded to the Fed complained they “had become more pessimistic about the economic outlook.”

“Normally the beige book has a lot of, ‘On the one hand, on the other hand,’ ” said Ethan Harris, an economist at Barclays Capital. “But all 12 districts weakened. That’s a recession sentence, without using the word.”

Auto dealers and manufacturers were hit hardest, as motor vehicle sales plummeted and orders tapered off at industrial companies. The real estate market remained stagnant and credit was tight. Discount and dollar stores reported more buyers, but sales fell 1.5 percent at department stores.

The slower sales are, in part, a result of the evaporation of common sources of consumer credit, which fueled the growth in consumption in the last decade. That flood of credit now has slowed to a trickle. “You’re beginning to see the deterioration of credit cards, consumer debt, home equity lines,” said Stephen Wood, a strategist at Russell Investments.

And a precipitous decline in consumer spending — the primary engine of economic growth for the last decade — could have dire consequences for the labor market, workers’ salaries and American industry.

“There can be no doubt now that the economy is in recession,” Ian Shepherdson of High Frequency Economics wrote in a note. “It will be there awhile.”

The bleak numbers could also spur further interest rate cuts from the Fed, which meets again at the end of the month. Mr. Bernanke, in his speech in New York, underscored the bleak outlook suggested by Wednesday’s reports, warning that the economy would face an extended period of difficulty.

Businesses may also be unnerved by signs that the global economy is slowing. Over the last year, as the American economy stumbled, domestic businesses became heavily dependent on foreign sales to prop up their bottom line. A downturn in Europe, coupled with a stronger dollar, could cut off that crucial source of revenue. Even Mr. Bernanke cautioned that export sales would slow.

Mr. Harris, of Barclays, said: “Trade has been one of the crutches of the economy in the last year. And it’s clearly weakening.”

The retail sales report, released by the Commerce Department, showed that automobile sales fell about 4 percent last month. A broad range of products sat unsold in stores as well, including furniture, electronics and clothing, suggesting that Americans were delaying big purchases.

“There is almost nothing positive to say about these figures,” Rob Carnell, an economist at ING Bank, wrote in a note.

Even a sharp drop in gasoline prices did not lure Americans back to the mall. A measure of inflation at the producer level, the Producer Price Index, fell 0.4 percent in September on the back of cheaper oil.

Prices for many other products stayed high; outside of energy products, businesses and wholesalers paid 0.4 percent more for finished goods in September than in August, according to the Labor Department.

In the last year, producer prices are up 8.7 percent; “core” prices, which exclude gasoline and food, rose 4 percent in the last year.

Still, economists suggested that as the economy slowed and oil got cheaper, inflation would be less of a worry. “You’ve got all the ingredients for a big drop in inflation going forward,” Mr. Harris said.

A measure of conditions in the manufacturing industry, released by the Federal Reserve Bank of New York on Wednesday, plunged to the lowest level since the survey began in 2001. The Empire State survey dropped to minus 24.6 points as demand for factory orders plummeted in October. The reading was at minus 7.4 in September.

    As Consumers Keep Wallets Shut, Economic Outlook Dims, NYT, 16.10.2008, http://www.nytimes.com/2008/10/16/business/economy/16data.html?hp

Markets Suffer as Investors Weigh Relentless Trouble

October 16, 2008
The New York Times
By PETER S. GOODMAN

Stock markets plunged anew on Wednesday, nearly wiping out the record gains of Monday and sending another wave of wealth destruction washing over American households.

The government’s rescue of the banks has been widely embraced, but the frenzied selling, which pushed the Dow Jones industrial average down 733 points, underscored how the economy’s troubles are too broad to be fixed by the bailout of the financial system.

In early trading in Asia on Thursday, the markets followed Wall Street's lead. The Nikkei was down 10.03 percent, or 957.90 points, the Hang Seng dropped 1,204.27 points, more than 7.5 percent, the South Korean Kospi fell 6 percent, the Standard and Poor’s/Australian Stock Exchange 200 index shed 5.5 percent and Taiwan opened down 3.8 percent.

Investors are recognizing that the financial crisis is not the fundamental problem. It has merely amplified economic ailments that are now intensifying: vanishing paychecks, falling home prices and diminished spending. And there is no relief in sight.

Wednesday’s rout began in the morning with the latest evidence of the nation’s economic deterioration — reports showing that retail spending slipped in September and broader signs of a pullback among suddenly thrifty American consumers.

Selling picked up momentum in the afternoon as the Federal Reserve’s chairman, Ben S. Bernanke, cautioned Americans that the bailout would not swiftly lift the economy and that continued weakness was certain.

“Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” Mr. Bernanke said in a speech to the Economic Club of New York. “Economic activity will fall short of potential for a time.”

By day’s end, the Dow had surrendered most of Monday’s 936-point gain, dropping 7.87 percent. The broader Standard & Poor’s 500-stock index was down 9 percent, and the technology-heavy Nasdaq was down 8.47 percent. Expectations that a worldwide slowdown will reduce demand for oil pushed prices below $75 a barrel. Signs of improvement continued in the credit markets, making it somewhat easier for companies and states to secure financing, but interest rates remained elevated.

Mr. Bernanke’s remarks — offered in the sober tones of a man cognizant that a stray syllable may prompt the loss of more billions on Wall Street — underscored the reality that the economy’s troubles go well beyond the financial crisis. The United States and many other major economies are almost certainly headed into a slog through economic purgatory, one that could last many months.

“People have focused so much on the immediate financial crisis that they haven’t realized how much the real economy is going down, largely independently,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “I don’t think there’s a way we can get out of this without a full-fledged recession and a lot of people losing their jobs. All we can really talk about is ameliorating it, making sure the people who are hit have support.”

On Monday, as the Dow posted its fifth-largest one-day percentage gain in history, some investors found quantifiable proof that the crisis was solved. Yet an unpalatable historical detail complicated that idea: The four previous largest percentage gains occurred from October 1929 to March 1933, in the early days of the Depression.

Then, it must be noted, the markets swung far more widely than they do in this era, and an epic collapse would still be required to bring the United States anywhere near a comparable depression.

Mr. Bernanke, a leading academic expert on the Depression, offered pointed assurances that no repeat of that disaster would unfold on his watch. The Fed stands ready to use all its tools to battle the financial crisis, he said. He exuded confidence that the American economy “will emerge from this period with renewed vigor.”

But when? Mr. Bernanke could not say. That uncertainty added to the gnawing worry gripping the economy.

“Ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning,” he said.

Strikingly, Mr. Bernanke expressed concern about how huge amounts of capital are increasingly concentrated in a handful of enormous financial institutions.

“The real concern that we have is that we have got and developed, in this country, a very serious ‘too big to fail’ problem,” Mr. Bernanke said. “And that problem, we’ve just recognized now in the current situation, how severe it is.”

It seemed a curious concern for a man whose central bank has worked with the Treasury to engineer a series of shotgun corporate weddings, such as Bank of America’s purchase of Merrill Lynch and JPMorgan Chase’s acquisition of Bear Stearns — deals that have further concentrated money in fewer hands.

Mr. Bernanke’s prognosis and the latest carnage on Wall Street lent urgency to the debate over what the government should do now to soften the blow to the economy.

In Washington, and on the campaign trail, conversation centers on putting together a second round of so-called government stimulus spending, following the $152 billion unleashed this year via tax rebates to households and tax cuts for businesses.

Democrats in the House are drafting a roughly $150 billion package of spending measures aimed at spurring the economy, according to senior aides, including aid for states, large-scale construction projects to generate jobs and the expansion of unemployment benefits. Senator Barack Obama of Illinois, the Democratic presidential nominee, is urging $175 billion worth of relief measures.

The Republican nominee, Senator John McCain of Arizona, has declined to outline his own proposal, though his senior economic adviser, Douglas Holtz-Eakin, said he is “open to any measure that genuinely stimulates the economy.”

Republicans on Capitol Hill have emphasized tax cuts for businesses in any stimulus package, a stance that puts them at odds with Democrats, though recent signs suggest greater potential for a compromise.

“We need fiscal stimulus,” said Douglas W. Elmendorf, a former Treasury and Federal Reserve Board economist, and now a fellow at the Brookings Institution in Washington. “The outlook is much darker than it was even a few months ago.”

The checks the government sent to households last summer appear to have kept the economy growing, but economists are skeptical such a course could work again.

“The spend rate will be really low because people are scared to death,” Mr. Baker said.

When economists met with House leaders on Monday to suggest a course, the favored means appeared to be aiding state and local governments, whose property tax revenues are diminishing as home values fall. Local governments are a crucial source of employment and social services relied upon by the poor.

“The states are taking steps right now that are deepening the recession, through no fault of their own,” said Jared Bernstein, senior economist at the Economic Policy Institute in Washington. “They’re forced to either raise taxes or cut services. Neither of those are where we need to be right now.”

The crisis on Wall Street has sown fears that banks would hold tight to their dollars and starve the economy of capital, preventing businesses from securing finances to hire people and expand. If the bailout succeeds in restoring confidence, that should eventually get money flowing and lift economic activity.

But regardless of Wall Street’s travails, a broader set of difficulties has been taking money out of the economy, putting the squeeze on American households and businesses.

The economy has lost 760,000 jobs since the beginning of the year, and millions of workers have seen their hours cut, shrinking paychecks just as plunging real estate prices prevent households from borrowing against the value of their homes.

In short, American spending power is declining, and this has become a downward spiral: As wages shrink, workers spend less, and that limits demand for workers at the businesses that once captured their dollars.

Many economists now assume that unemployment, currently at 6.1 percent, will climb to 9 percent by the end of next year. Some now envision it could reach 10 percent — a level not seen in 25 years.

“At this point, the thing has probably just got to play out,” said Martin N. Baily, a chairman of the Council of Economic Advisers under President Bill Clinton and now a fellow at the Brookings Institution. “I don’t know that there’s anything that we can do to avoid a mild recession. The question is what can we do to avoid a very severe recession.”

Peter S. Goodman contributed reporting.

    Markets Suffer as Investors Weigh Relentless Trouble, NYT, 16.10.2008, http://www.nytimes.com/2008/10/16/business/economy/16econ.html?hp

Bernanke Says Bailout Plan Will Need Time to Work

October 16, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The chairman of the Federal Reserve, Ben S. Bernanke, warned on Wednesday that the American economy was headed toward an extended period of difficulty, despite worldwide efforts to stabilize the financial markets.

But he said federal officials had armed themselves with “the tools we need to respond with the necessary force to these challenges.”

“Broader economic recovery will not happen right away,” Mr. Bernanke said in a speech to the Economic Club of New York, even if financial markets stabilize “as we hope they will.”

But he said that “Americans can be confident that every resource is being brought to bear to address the current crisis.”

Mr. Bernanke, in his remarks, said that because of the worldwide downturn, “our export sales, which have been a source of strength, very probably will slow.”

The labor, housing and credit markets would also take time to recover, he said, and consumer spending and business investment remained weak.

Inflation, however, appeared to have “held steady or eased,” Mr. Bernanke said, citing the sharp drop in oil prices in the last few weeks. He said that stable prices, coupled with the broader downturn, would probably keep inflation in check, offsetting other problems.

“Although much work remains and more difficulties surely lie ahead,” Mr. Bernanke said, “I remain confident that the American economy, with its great intrinsic vitality and aided by the measures now available, will emerge from this period with renewed vigor.”

He added that, “ultimately, the trajectory of economic activity beyond the next few quarters will depend greatly on the extent to which financial and credit markets return to more normal functioning.”

The speech offered a chronological account of the financial crisis, with Mr. Bernanke emphasizing the adaptability and innovation of the triage efforts undertaken by the Treasury Department and the central bank. He said that, unlike in past crises, the government had responded quickly and aggressively.

“Waiting too long to respond has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses,” Mr. Bernanke said in his remarks. “That is not the situation we face today.”

“We will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity,” he said.

The Fed chairman also touched on one of the third-rail issues of the last several weeks: why the government allowed Lehman Brothers to collapse, the catalyst that set up the latest and most turbulent period of the current crisis. Some have argued that the government should have made more efforts to prevent the investment bank from filing for bankruptcy protection.

But Mr. Bernanke said that “a public sector solution for Lehman proved infeasible.”

“The firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by another firm,” he said.

“Consequently,” he said, “little could be done except to attempt to ameliorate the effects of Lehman’s failure on the financial system.”

    Bernanke Says Bailout Plan Will Need Time to Work, NYT, 16.10.2008, http://www.nytimes.com/2008/10/16/business/economy/16bernanke.html?hp

Stocks Slide Amid New Trouble Signs in the Economy

October 16, 2008
The New York Times
By DAVID JOLLY and BETTINA WASSENER

Shares in New York fell sharply on Wednesday, following markets in Europe, as investors begin to face the likelihood that serious dislocations will plague the global economy even if the coordinated bailouts announced this week succeed in restoring confidence to credit markets.

In New York, investors were also digesting economic reports that reinforced concerns about a slowdown. In the first report, the Commerce Department said that retail sales decreased 1.2 percent last month, nearly double the 0.7 percent drop that had been expected. In the second, the Labor Department reported that core wholesale prices, which exclude volatile food and energy costs, rose 0.4 percent, above analysts’ expectations of a 0.2 percent increase.

Shorly before 1 p.m. , the Dow Jones industrial average was down almost 300 points, or 3.2 percent, and the broader Standard & Poor’s 500-stock index was down 4.1 percent. The technology heavy Nasdaq was down 3.4 percent, after the chipmaker Intel reported a profit for the quarter, but noted weaker-than-expected sales of chips used in corporate computers.

Crude oil for November delivery fell $3.29 to $75.14 a barrel.

“Everyone was focused on the credit crisis, but behind that, we have numbers coming in showing us the economy was much weaker than expected, and continuing to get weak. The numbers coming out have been dire to say the least,” Ryan Larson, the head equity trader at Voyageur Asset Management, said.

Jobless claims are creeping higher, a rise that is expected to accelerate. Of even greater concern, major manufacturing indicators are down. “If manufacturing has been the sliver lining that’s been holding us up to this point, it’s gone,” Mr. Larson said, referring to a index of manufacturing in New York State that tumbled in October to the lowest since its inception in 2001.

The general business conditions index, released Wednesday by the New York Federal Reserve, fell to minus 24.62, from September’s minus 7.41.

Credit market indicators showed improvement, with the so-called Ted spread, the gap between yields on three-month government securities and the rate that banks charge each other for loans of the same duration, fell 6 points to 4.30 percentage points. Analysts say a spread below 1.0 point would suggest that conditions were returning to normal.

“There are slight signs of the credit market easing, but it’s still extremely tight,” Mr. Larson said. “We’re not going to see the quick fix markets wanted to see. It’s a process. You want to see recovery, but the only thing that’s really going to help us is time. Nothing is a quick fix in this process, and that’s what the market is realizing.”

“The market’s focus in a day has shifted from resilience in the financial sector to the recession,” said Brian Gendreau, investment strategist at ING investment management.

Investors were also watching a meeting in Brussels of leaders of the 27 European Union countries, who were meeting Wednesday to decide the details of the big bank rescues announced Sunday and Monday.

Gordon Brown, the British prime minister, has called for the overhaul of the global financial system and the creation of “a new Bretton Woods,” the agreement that established the financial institutions of the post-World War II era.

Espen Furnes, a fund manager at Storebrand Asset Management in Oslo, said that there was concern about European economies softening. But despite the weak showing Wednesday, the market mood remained fundamentally one of relief, as “people are hopeful that the bailouts are going to make a big difference,” Mr. Furnes said.

“I wouldn’t read too much into the numbers today,” he added. “The declines are partly in reaction to investors selling after a couple of really good days.”

European markets closed substantially lower. The DJ Euro Stoxx 50, a barometer of euro zone blue chips, was down 6.4 percent, the CAC-40 in Paris fell 6.8 percent, and the DAX in Frankfurt lost 6.4 percent.

The FTSE 100 index in London was down 7 percent after Britain’s Office for National Statistics said Wednesday that the unemployment rate rose to 5.7 percent in the three months through the end of August from 5.2 percent in the previous quarter. The agency said the addition of 164,000 people to ranks of the jobless in the latest quarter was the biggest increase in 17 years.

Tokyo shares, which soared 14.1 percent Tuesday, recovered from morning losses to close 1.1 percent higher. In Hong Kong, the Hang Seng index fell 5 percent.

Trading in futures suggested the Standard & Poor’s 500 index would fall about 1.5 percent at the opening Wednesday in New York. The weak showing in equity markets followed a disappointing performance Tuesday on Wall Street, when the Dow Jones industrial average was unable to sustain early gains and ended the day down 0.8 percent.

Asian countries on Wednesday announced new measures to grapple with fallout from the crisis. Gloria Macapagal Arroyo, the Philippine president, said Asian policy makers had agreed to create a fund to help any countries suffering liquidity problems, with the World Bank committing $10 billion, The Associated Press reported.

The agreement was reached in Washington after a meeting of finance officials from the 10-member Association of Southeast Asian Nations and their partners from Japan, China and South Korea and representatives of international lending institutions.

After a host of European data Tuesday suggesting that the region was headed into a recession, Japan announced Wednesday that its current-account surplus shrank 52.5 percent from a year earlier, more than economists had expected. More alarming, exports during the month edged up only 0.9 percent, while imports soared 20.2 percent from a year earlier, mostly because of higher oil prices. Japan has suffered from weak domestic demand for a decade, and sales overseas have been a key support to the country’s economic growth.

The dollar was mixed as the yen rose against other major currencies. The euro fell to $1.3604 from $1.3620 late Tuesday in New York and fell to 137.94 yen from 139.03. The British pound rose to $1.7485 from $1.7397. The dollar fell to 101.09 yen from 102.07 and rose to 1.1375 Swiss francs from 1.1373.

Sharon Otterman contributed reporting.

    Stocks Slide Amid New Trouble Signs in the Economy, NYT, 16.10.2008, http://www.nytimes.com/2008/10/16/business/16markets.html?hp

Retail Sales Slump by 1.2% as Economy Downshifts

October 16, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Even as the federal government and its counterparts around the world began to introduce their financial bailout plans, more signs emerged on Wednesday that the economic downturn had taken a darker turn.

Retail sales fell sharply in September as consumers shunned department stores, auto showrooms and shopping malls, ratcheting back spending for a third consecutive month.

Last month’s 1.2 percent decline in retail sales was the sharpest drop in years, and it came in the heart of the back-to-school shopping season, traditionally the busiest time of the year for retailers outside of the December holidays.

“There is almost nothing positive to say about these figures,” Rob Carnell, an economist at ING Bank, wrote in a note.

Stocks on Wall Street were sharply lower Wednesday. The Dow Jones industrial average was down more than 330 points, as investors shifted their focus to the economic problems that could spell the start of a deeper phase of the slowdown. Many people fear that corporations — and by extension their workers and shareholders — will face harder times in the months ahead.

In Washington, President Bush again tried to reassure Americans that the government’s plan to inject $250 billion directly into banks would restore confidence in the financial system and unfreeze credit markets.

“These are extraordinary measures, no question about it,” President Bush said. “But they’re well thought out, they are necessary, and I’m confident in the long run this economy will come back.

“Had we not acted decisively at the time we did, the credit crunch, the inability for banks in your communities to loan to your businesses would have affected the working people and the small businesses of America,” he said, speaking before the start of a cabinet meeting.

A precipitous decline in consumer spending — the engine of economic growth for the last decade — could have dire consequences for the labor market, workers’ salaries and American industry. Consumer spending makes up about 60 percent of the economy.

The report, issued on Wednesday by the Commerce Department, could also spur further interest rate cuts from the Federal Reserve, which meets again at the end of this month. Ben S. Bernanke, the Fed chairman, is scheduled to speak on Wednesday in New York about the outlook for the economy.

JPMorgan Chase, the investment bank, reported an 84 percent decline in third-quarter profit as another bank, Wells Fargo, reported a 23 percent decline. Both cited loan losses and the declining economy in the results.

In the spending report, automobile sales took the biggest hit last month, falling by about 4 percent. But a broad range of products sat unsold in stores as well, including furniture, electronics, and clothing. At department stores, sales fell 1.5 percent.

Even a sharp drop in gasoline prices did not lure Americans back to the mall. A measure of inflation at the producer level, the Producer Price Index, fell 0.4 percent in September as energy prices fell on the back of cheaper oil.

But prices for many other products stayed high; outside of energy products, businesses and wholesalers paid 0.4 percent more for finished goods in September than in August, according to the Labor Department.

In the last year, producer prices are up 8.7 percent, a big jump and a sign of faster inflation. Even outside of gasoline, prices are up 4 percent for the year.

Businesses may also have been unnerved by signs that the global economy is slowing down. Over the last year, as the American economy slowed, domestic businesses became heavily dependent on foreign sales to prop up their bottom line. A downturn in Europe, coupled with a stronger dollar, could cut off that crucial source of revenue.

“The locomotive from overseas demand is braking sharply,” Brian Bethune, an economist at Global Insight, a research firm, wrote in a note.

A measure of conditions in the manufacturing industry, released by the Fed on Wednesday, plunged to the lowest level since the survey began in 1991. The Empire State survey dropped to minus 24.6 as demand for factory orders plummeted in October. The reading was at minus 7.4 in September.

“There can be no doubt now that the economy is in recession,” Ian Shepherdson of High Frequency Economics wrote in a note. “It will be there awhile.”

    Retail Sales Slump by 1.2% as Economy Downshifts,  NYT, 15.10.2008, http://www.nytimes.com/2008/10/16/business/economy/16econ.html?hp

    Related > http://www.census.gov/marts/www/marts_current.pdf , http://www.bls.gov/news.release/ppi.nr0.htm

Profit Falls at JPMorgan as Loan Losses Increase

October 16, 2008
The New York Times
By ERIC DASH and MICHAEL J. DE LA MERCED

Morgan Chase, the investment bank, reported third-quarter profit of $527 million on Wednesday, suffering a steep decline amid the turbulent markets but avoiding a loss.

JPMorgan’s profit, which was 11 cents a share, fell 84 percent from the quarter a year ago, when it reported $3.4 billion, or 97 cents a share. Analysts had expected on average a loss of 29 cents a share. Revenue fell 5 percent, to $14.7 billion from $16.1 billion.

Still, JPMorgan warned that it would continue to struggle amid challenging markets. The chairman and chief executive, Jamie Dimon, said that the bank was bracing for tougher times and that it was reasonable to expect reduced earnings over the next few quarters.

“Home loans are obviously far worse than we anticipated,” he said on a conference call. And if the economy gets worse, he added, so will the prospects for the bank’s main businesses.

“The watchful eye is what happens in the overall economy,” the bank’s finance chief, Michael J. Cavanagh, added. “Things are bad now recessionary conditions. We expect that to stay that way and likely worsen.”

JPMorgan earnings followed similarly weak results from Bank of America, and will probably tee up several dismal days of earnings as other big banks like Citigroup and Merrill Lynch report later this week.

Wells Fargo also announced its third-quarter results on Wednesday morning, with profit falling 23 percent on big losses on investments in troubled financial companies, like Fannie Mae, Freddie Mac, and Lehman Brothers. The bank said it earned $1.64 billion, or 49 cents a share, compared with $2.17 billion, or 64 cents a share, a year earlier and beating analysts projections.

Revenue rose 5 percent to $10.38 billion at Wells Fargo, and it set aside another $2.5 billion to protect against future losses. Now, Wells attention will turn to stitching together a complex merger with the Wachovia Corporation, which it acquired earlier this month for $15.1 billion.

JPMorgan and Wells Fargo’s results were released a day after the government announced a plan to inject $250 billion directly into the banks in order to help restore the credit markets. Eight big banks agreed to take investments totaling about $125 billion, with JPMorgan Chase and Wells Fargo each accepting $25 billion.

“We didn’t need the money,” Mr. Dimon said, noting that that it may benefit some banks more than others. “I don’t think that JPMorgan should stand in the way of the system.”

Wells Fargo said on Tuesday that it believed the government’s plan was a “positive step” in strengthening the confidence in the banking system and stimulating the American economy.

Shares of Wells Fargo rose 3.4 percent, to $34.67, in early afternoon trading. JPMorgan rose 1.8 percent, to $41.46.

Twice this year, JPMorgan has aided the government by rescuing failing firms, Washington Mutual and Bear Stearns, dramatically expanding its investment banking and retail banking operations in the process. And it has weathered the credit squeeze better than many of its competitors with what Mr. Dimon calls a “fortress balance sheet.”

JPMorgan reported net revenue of $16.1 billion for the three months ended Sept. 30, only a slight dip from the $17 billion it reported at the same time in 2007. But the bank took several billion dollars in charges, including $6.7 billion in credit losses.

Most of the firm’s troubles showed up in its consumer businesses. Its Chase retail banking business reported $247 million in net income, a 61 percent drop from the same time last year, reflecting $4.5 billion in charges related to regional banking and mortgage lending.

And its card services operations reported $292 million in net income, a 63 percent drop from last year. The unit took a $2.2 billion write-down to buffer against potential losses, as more consumers struggle to pay off their credit card debt.

The firm’s corporate-related banking businesses mostly showed gains in profit. Investment banking reported $882 million in net income, nearly trebling what it earned at the same time last year as it reported good results in both underwriting and trading. Commercial banking reported $312 million in profit, 21 percent higher than last year, while treasury and security services earned $406 million, up 13 percent.

JPMorgan eked out the slight gain in a quarter littered with one-time gains and losses. The bank reported a $3.6 billion write-down in its investment bank tied to the continued drop in value of complex mortgage investments and big buyout loans it could not sell. It increased its credit reserves by $1.3 billion in anticipation of losses tied to mortgages, home equity and credit cards .

And it suffered a $642 million loss on its position in preferred stock of the mortgage finance giants, Fannie Mae and Freddie Mac. In addition, the bank paid more than $248 million to settle claims that it improperly sold auction-rate securities.

The quarter was also the first time that JPMorgan had reported earnings since announcing the emergency takeover of Washington Mutual, the largest thrift, in late September. It results include $640 million of estimated losses tied to merger expenses and a $1.2 billion charge to increase consumer loan losses in the wake of that deal. Those were partially offset by a one-time gain related to the acquisition of WaMu’s banking operations. The bank was also helped by a $927 million tax benefit.

    Profit Falls at JPMorgan as Loan Losses Increase, NYT, 16.10.2008, http://www.nytimes.com/2008/10/16/business/16bank.html?hp

    Related > http://files.shareholder.com/downloads/ONE/440144567x0x240954/516966dc-b596-47cc-9b21-0c22ccbd21a6/3Q08EarningsPressRelease.pdf

    Related > https://www.wellsfargo.com/press/earnings20081015