History > 2008 > USA > Economy (XIa)

David G. Klein

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Challenging the Crowd in Whispers, Not Shouts

NYT

2.11.2008

http://www.nytimes.com/2008/11/02/business/02view.html

Op-Ed Columnist

Bailout to Nowhere

November 14, 2008
The New York Times
By DAVID BROOKS

Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler?

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state.

If ever the market has rendered a just verdict, it is the one rendered on G.M. and Chrysler. These companies are not innocent victims of this crisis. To read the expert literature on these companies is to read a long litany of miscalculation. Some experts mention the management blunders, some the union contracts and the legacy costs, some the years of poor car design and some the entrenched corporate cultures.

There seems to be no one who believes the companies are viable without radical change. A federal cash infusion will not infuse wisdom into management. It will not reduce labor costs. It will not attract talented new employees. As Megan McArdle of The Atlantic wittily put it, “Working for the Big Three magically combines vast corporate bureaucracy and job insecurity in one completely unattractive package.”

In short, a bailout will not solve anything — just postpone things. If this goes through, Big Three executives will make decisions knowing that whatever happens, Uncle Sam will bail them out — just like Fannie Mae and Freddie Mac. In the meantime, capital that could have gone to successful companies and programs will be directed toward companies with a history of using it badly.

The second part of Obama’s plan is the creation of an auto czar with vague duties. Other smart people have called for such a czar to reorganize the companies and force the companies to fully embrace green technology and other good things.

That would be great, but if Obama was such a fervent believer in the Chinese model of all-powerful technocrats, he should have mentioned it during the campaign. Are we really to believe there exists a czar omniscient, omnipotent and beneficent enough to know how to fix the Big Three? Who is this deity? Are we to believe that political influence will miraculously disappear, that the czar would have absolute power over unions, management, Congress and the White House? Please.

This is an excruciatingly hard call. A case could be made for keeping the Big Three afloat as a jobs program until the economy gets better and then letting them go bankrupt. But the most persuasive experts argue that bankruptcy is the least horrible option. Airline, steel and retail companies have gone through bankruptcy proceedings and adjusted. It would be a less politically tainted process. Government could use that $50 billion — and more — to help the workers who are going to be displaced no matter what.

But the larger principle is over the nature of America’s political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.

Bailout to Nowhere, NYT, 15.11.2008, http://www.nytimes.com/2008/11/14/opinion/14brooks.html

Laid-Off Worker Kills 3 in California

November 15, 2008
Filed at 1:28 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

SAN FRANCISCO (AP) -- A laid-off worker returned to his former office in Northern California and opened fire Friday, killing three people before fleeing and leading police on an intensive search.

The suspect was identified as 47-year-old Jing Wu of Mountain View, who police say was an engineer at SiPort Inc., a semiconductor company.

Authorities identified one of the victims as Sid Agrawal, SiPort chief executive officer. The identities of the other victims were not released pending notification of family, said Santa Clara Police Sgt. Jerry Rodriguez.

Officers responded to the office complex late Friday afternoon and found the bodies of two men and one women, said Santa Clara Police Lt. Mike Sellers.

Police stopped cars and scoured the office park where SiPort is located in search of Wu. They also went to his Mountain View home, Rodriguez said.

Sellers described Wu as about 5 feet 11 inches tall and weighing 170 pounds. Investigators believe he fled the complex in a silver SUV, possibly a rented Mercury Mountaineer.

''He could be anywhere,'' Sellers said. ''He's considered armed and dangerous. If you see him don't approach him, call the police.''

Laid-Off Worker Kills 3 in California, NYT, 15.11.2008,
http://www.nytimes.com/aponline/us/AP-Office-Park-Slayings.html?hp

Economy Is Only Issue for Michigan Governor

November 15, 2008
The New York Times
By MONICA DAVEY and SUSAN SAULNY

LANSING, Mich. — This is what a day looks like for Jennifer M. Granholm, the governor of Michigan, the state that sits, miserably, at the leading edge of the nation’s economic crisis.

Morning: Rev up government workers and ministers at a huge conference in Detroit to cope with expanding signs of poverty. Afternoon: Tell a room crushed with reporters here, in the state capital, why a federal bailout is essential for the Big Three automakers, who are also, of course, residents of her state. Evening: Pack for Israel and Jordan, where Ms. Granholm hopes to persuade companies that work with wireless electricity, solar energy and electric cars to bring their jobs to Michigan.

Whatever else Ms. Granholm, a Democrat in her second term, might once have dreamed of tackling as a governor (she barely seems to recall other realms of aspiration now), the economy is nearly all she has found herself thinking about, talking about, fighting about over the last six years. And Michigan, which has been hemorrhaging jobs since before 2001 and was once mainly derided in the rest of the nation as a “single-state recession,” now looks like an ominous sketch of just how bad things may get.

“This has been six straight years of jobs, jobs, jobs,” Ms. Granholm said, punctuating the word with three somber claps at her office table. Despite scathing critiques from some here who say she has failed to turn around Michigan’s woes, Ms. Granholm said in an interview that she still believed that her efforts to remake the state’s economy — in part by luring jobs that make something other than cars — would eventually overcome the steady stream of vanishing jobs.

“We were hoping it was going to be in 2009 where we’d see the balance tip, but with this financial meltdown and the challenges now in the auto industry obviously, I’m not sure whether that’s going to happen,” she said. “Probably not. But we’re going to still hammer away at it.”

She finds herself in the national spotlight more than ever. She is loudly pushing for the auto industry rescue while Michigan’s Congressional delegation works votes on Capitol Hill. President-elect Barack Obama has put her on his transition economic advisory board (an appointment her strongest critics here deride as ludicrous, akin to putting a tobacco executive on a health board).

Ms. Granholm, who played Sarah Palin in Senator Joseph R. Biden Jr.’s warm-ups for the vice-presidential debate and who is barred by term limits from seeking re-election in 2010, has been mentioned as someone Mr. Obama may appoint to his cabinet. It is a notion Ms. Granholm — long a Bush administration critic for what she describes as inconsistent enforcement of trade pacts and a lack of manufacturing policy — gently dismisses: “I really want to be governor when I have a partner in the White House.”

Her critics seem dismayed by the speculation. They blame her and the state’s business regulations and taxes, at least partly, for Michigan’s long list of dismal rankings among the states (No. 2 in unemployment; No. 5 in foreclosure starts; No. 51, including the District of Columbia, in attracting new residents). The governor’s approval ratings dropped to slightly less than 50 percent favorable last month from a high of near 70 percent in 2003.

“I fear if she has the president’s ear,” said Michael D. LaFaive, director of fiscal policy at the Mackinac Center for Public Policy, a research group in Midland, Mich., that advocates a free market. “There’s a reason people are fleeing the state, and it has much to do with the bad public policies this state has embraced over the last 6 to 12 years.”

But Ms. Granholm’s supporters say she has done all she could, given gloomy times brought on long before she arrived by monumental changes in the nation’s manufacturing, and, most of all, in the auto industry. As Ms. Granholm sees it, the state has responded by revamping just about everything — taxes, education, even the sorts of businesses it is seeking.

In her constant courting of companies in the United States and overseas, Ms. Granholm said she had focused on bringing home businesses that work with alternative energy (like wind turbines), domestic security (a field auto suppliers might easily move into), advanced manufacturing (like robotics) and life sciences.

The state has recently enacted a tougher, college-preparatory-style curriculum in its high schools. Its “No Worker Left Behind” retraining program depends on what jobs local employers say they actually need to fill. And this year, it began offering incentives to moviemakers in the hopes of building a “creative economy,” a concept, Ms. Granholm says, “we haven’t necessarily had since Motown days.”

In all of this, her efforts have brought more than 120,800 new jobs to the state since she took office in 2003, her office says. (Her staff noted those “direct” jobs were estimated to have brought two to three times as many new “indirect” jobs that cropped up around the others, and said state efforts had helped “retain” 233,000 jobs from companies that had hinted of leaving Michigan.)

Still, net losses since mid-2000 (and just for manufacturing jobs, since 1999) swamp the picture. Since June 2000, the state’s net job loss was more than 500,000; since Ms. Granholm took office, the net loss was 281,500.

“Sometimes leadership is planting trees under whose shade you’ll never sit,” she said. “It may not happen fully till after I’m gone. But I know that the steps we’re taking are the right steps.”

Jennifer Mulhern Granholm (she took the last name of her husband, Daniel, as her middle name and he did the same with her last name), 49, was born in Vancouver, British Columbia. She briefly considered an acting career and was once a contestant on “The Dating Game,” and graduated from University of California, Berkeley, and Harvard Law School. Eventually, she moved to Michigan. A former prosecutor, she was elected Michigan’s attorney general in 1998, then became the state’s first woman to be elected governor four years later. She has three children.

Even her critics praise Ms. Granholm’s political skills, her engaging speaking style, her ability to make even her most vocal opponents in the Legislature admit that they like her. But they say she started off as a nearly untested policy maker trying to solve an economic problem that would have challenged someone with far more experience.

“I think she’s a good politician, but at the same time, she’s not necessarily a great decision maker,” said Saul Anuzis, the state Republican Party chairman.

But Mark Schauer, the State Senate’s Democratic leader who was elected this month to Congress, pointed to a “hostile” Legislature — both chambers were controlled by Republicans until 2006 (and the Senate still is) — for a “lack of urgency” despite Ms. Granholm’s “focus and tenacity” on the economy.

In 2007, a contentious standoff over how to solve a more than $1.5 billion deficit in the state budget dragged on for months, finally ending in the face of a government shutdown and with tax increases — deeply difficult, Ms. Granholm said, but unavoidable.

This year, there were more distractions: For months, a scandal enveloped Kwame M. Kilpatrick, then the mayor of Detroit. Eventually, as Ms. Granholm began proceedings to determine if he should be removed, Mr. Kilpatrick resigned and pleaded guilty to felony charges — but not, she said, before more economic damage had been done, with conventions canceled and businesses not wanting to move to Detroit. “One crisis at a time,” she said in the interview.

For now, all eyes here are on whether Congress will provide $25 billion in emergency aid to the automakers, and whether lawmakers will do it soon enough, before some industry experts fear one of the Big Three may collapse. The mere possibility makes Ms. Granholm wince. The likely result, she said, would be catastrophic on residents, so many of whom work in the industry and all its offshoots.

“It would be such a huge, huge strain on our safety net,” she said. “It would be of double Katrina-like proportions. We would absolutely need assistance.”

But she said she felt confident that the aid would be granted. Still, she said, Michigan is a cautionary tale against putting a state’s entire hopes in a single industry.

“Now, we love our auto industry,” she said. “But if we had worked harder on diversifying this economy long ago, then if one of the legs of the stool starts to get wobbly, at least you’ve got three other legs to stand on.”

Monica Davey reported from Lansing, and Susan Saulny from Detroit.

    Economy Is Only Issue for Michigan Governor, NYT, 15.11.2008, http://www.nytimes.com/2008/11/15/us/15granholm.html

Tech Industry, Long Insulated, Feels a Slump

November 15, 2008
The New York Times
By ASHLEE VANCE

The technology industry, which resisted the economy’s growing weakness over the last year as customers kept buying laptops and iPhones, has finally succumbed to the slowdown.

In the span of just a few weeks, orders for both business and consumer tech products have collapsed, and technology companies have begun laying off workers. The plunge is so severe that some executives are comparing it with the dot-com bust in 2000, when hundreds of companies disappeared and Silicon Valley lost nearly a fifth of its jobs.

October “was like turning a switch,” said Robert Barbera, chief economist at the Investment Technology Group, a research and trading firm. “Everything pretty much shut down.”

After industry leaders like Intel and Nokia warned of slowing sales this week, investors aggressively sold technology stocks. On Friday, the Nasdaq composite index, which is full of technology names, fell 5 percent. Advanced Micro Devices and eBay both dropped more than 10 percent.

Tech companies directly account for about 4 percent of the nation’s employment. And globally, companies and governments spend about $1.75 trillion on technology a year, according to Forrester Research. But the industry’s importance to the world economy is larger than its size might suggest. Technology has fueled many of the productivity gains of the last two decades. And about half of the capital spending by corporations goes toward technology products, according to Moody’s Economy.com.

As struggling businesses cut back on spending of all kinds, a slowdown in tech proved inevitable.

During the dot-com crash, technology companies were victims of Internet hype that they helped create. Once the enthusiasm faded, so did the boom-era sales on software and infrastructure equipment.

However, consumer enthusiasm for products like video games, wireless phones and high-definition televisions helped the industry recover.

This time around, the tech sector finds itself at the mercy of a double-barreled slump in both corporate and consumer spending caused by the housing decline and the economic crisis on Wall Street. Technology companies are also feeling the effect of frozen credit markets as business and government customers struggle to finance computer and software purchases that can run to millions of dollars.

“We have never seen anything like this in history,” said William T. Coleman III, a Silicon Valley veteran who founded the software maker BEA Systems and is now chief executive at a start-up called Cassatt.

Best Buy, the leading electronics retailer, declared this week that “rapid, seismic changes in consumer behavior” had fostered the worst conditions in its 42-year history, and its main rival, Circuit City Stores, filed for bankruptcy protection. Nokia, the world’s largest maker of cellphones, predicted Friday that global sales of handsets would fall in 2009, which would be only the second decline ever.

Technology giants like Intel, which makes chips for personal computers and servers, and Cisco Systems, which makes network equipment, warned that revenue was plummeting at rates last seen in 2001.

Dozens of start-ups, like the messaging service Twitter and the electric carmaker Tesla Motors, have been cutting staff members as they prepare for a slow economy.

And on Friday, Sun Microsystems, a leading maker of computers used by financial services companies, announced that it would lay off as many as 6,000 employees, or 18 percent of its work force.

The turnaround has been as sudden as it is severe. Until late September, a number of large technology companies maintained an optimistic stance, despite the obvious distress in the global economy.

Cisco was the first large technology company to reveal its sales data from October, noting a 9 percent fall in sales compared with the same month last year. On Nov. 5, Cisco, which is based in San Jose, cautioned that because of a “completely different environment,” revenue in its current quarter could plummet as much as 10 percent — a major reversal from the 7 percent growth that Wall Street had been expecting.

Intel, the world’s largest chip maker, followed this week, warning that sales in the fourth quarter could fall as much as 19 percent compared with the same period last year.

Even Google, an advertising juggernaut that many analysts said they believed would weather a downturn better than other companies, is now feeling the impact.

About eight weeks ago, the company’s chief executive, Eric E. Schmidt, told reporters, “My guess is that the drama is in New York and not here.” A month later, Google surprised Wall Street when it reported strong financial results for the quarter that ended Sept. 30, sending its shares up 10 percent.

But Google’s stock has dropped 16 percent since, as the same analysts who were upbeat about its results have since cut their revenue and profit forecasts. This week, its shares dipped below $300 for the first time in three years, well below their $742 peak. And the company, known for its torrid hiring and free-spending on employee perks, has begun the most serious belt-tightening in its 10-year history.

“We don’t know as managers how long the crisis goes,” Mr. Schmidt said last week.

For all the gloom, the tech industry is still far healthier than Wall Street. Unlike the banks, many technology companies are flush with cash. Cisco has close to $27 billion; Google, $14 billion; and Apple, $24 billion. It is likely that some of these funds will go toward acquiring struggling competitors. “The guys that aren’t as strong will be good pickings,” Mr. Coleman said.

Powered by technology, Silicon Valley has stood out as a bright spot for jobs in the United States, with employment growing at about 2 percent a year while national employment slowed. Through 2007, the region continued to add 20,000 jobs, although that positive trend has started to change.

“With this now having become a worldwide event, it’s clear that the job losses will come,” said Stephen Levy, director of the Center for Continuing Study of the California Economy.

Given the unpredictability of the current economy, the industry’s past experience will only go so far, said Chris Cornell, an economist with Economy.com. “It would be a tragic mistake for C.E.O.’s who did a great job fighting the last recession to think the same tactics will work this time,” he said.

Miguel Helft contributed reporting.

    Tech Industry, Long Insulated, Feels a Slump, NYT, 15.11.2008, http://www.nytimes.com/2008/11/15/technology/15tech.html?hp

FDIC Says

Plan Could Help 1.5 Million Keep Homes

November 14, 2008
Filed at 9:43 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- The Federal Deposit Insurance Corp. says a new plan could help 1.5 million American households avoid foreclosure.

The agency released details Friday of a revised plan to have the government spend $24.4 billion to guarantee 2.2 million modified loans through the end of next year.

The FDIC says that the government's backing will make the lending industry more willing to modify loans because taxpayers will absorb half of the losses if the borrower defaults again.

Even if a third of those borrowers default again, 1.5 million homes will still be saved.

    FDIC Says Plan Could Help 1.5 Million Keep Homes, NYT, 14.11.2008, http://www.nytimes.com/aponline/washington/AP-Mortgage-Aid.html

Freddie Mac Lost $25.3 Billion in Quarter

November 15, 2008
The New York Times
By REUTERS

Freddie Mac, the mortgage finance giant, said Friday that it lost $25.3 billion in the third quarter as it wrote down a tax-related asset that had buoyed its capital and the housing slump took a significant turn for the worse.

Freddie Mac’s loss as $19.44 a share, compared with a loss, before preferred dividend payments, of $1.24 billion, or $2.07 a share, a year earlier.

The government placed Freddie Mac and its larger rival, Fannie Mae, under conservatorship in September, pledging to inject capital as needed for the companies to operate and help stabilize the housing market. The companies’ regulator has submitted a request for the Treasury Department to provide $13.8 billion for Freddie Mac to erase the shareholder equity deficit.

Freddie Mac said it expected to receive the money from Treasury by Nov. 29.

Deteriorating conditions in the housing market led Freddie Mac to increase its provision for credit losses to $5.7 billion in the third quarter from $2.5 billion in the second quarter. It also recorded $9.1 billion in write-downs on securities and $6.0 billion in other credit-related expenses, guarantee assets and derivatives, up from a $481 million loss in the previous period.

The government took Freddie Mac and Fannie Mae on concern that mortgage losses were eroding the capital they needed to operate as the top funders of residential loans. The companies together own or guarantee nearly half of all mortgages.

Earlier this week, Fannie Mae said it lost $29 billion in the third quarter, more than it earned from 2002 to 2006. Most of the Fannie loss reflected a $9.2 billion charge for credit expenses and a $21.4 billion write-down of deferred tax assets.

    Freddie Mac Lost $25.3 Billion in Quarter, NYT, 15.11.2008, http://www.nytimes.com/2008/11/15/business/15freddie.html

A Record Decline in October’s Retail Sales

November 15, 2008
The New York Times
By JACK HEALY

Dragged down by plummeting automobile sales, retail sales fell by a record amount in October, the Commerce Department reported on Friday.

Sales were down 2.8 percent in October from September, and 4.1 percent from October 2007 as consumers pared their spending in the face of plunging stocks, rising unemployment and growing worries that the United States was headed into a recession.

October’s decline was the fourth consecutive monthly drop, and was worse than Wall Street’s expectations of a 2.1 percent decline. The government also revised September retail sales downward by 0.1 percent. The October decline topped the 2.65 percent drop in November 2001, which came after the terrorist attacks.

Sales of cars and auto parts plunged 23.4 percent from last year, the Labor Department said. Industry sales in the United States have fallen 14.6 percent this year, and 31.9 percent in October, carmakers reported earlier this month. Sales began declining in the spring because of rising gas prices, but have since gotten worse. The sales rate in October was the lowest recorded in 25 years and analysts predict the market will remain weak into 2009.

Shares in American automakers Ford Motor Company and General Motors have fallen to multi-decade lows this fall as the companies reported billions in losses. Some lawmakers have called for a bailout of the auto industry, but Democratic leaders said Thursday that the odds of a rescue package looked dim.

Excluding autos, retail sales fell 2.2 percent, the report said. With consumer spending the engine that drives about two-thirds of the economy, the slowdown portended an extended, severe recession. Gross domestic product fell 0.3 percent at an annual rate in the third quarter.

Sales at the nation’s largest retailers plummeted in October. Of the more than two dozen major retailers that reported sales last week, most had declines, the majority of the decreases in double digits. Sales at Neiman Marcus, the luxury department store, dropped nearly 28 percent in October compared with the same month last year. Sales fell 20 percent at Abercrombie & Fitch, nearly 17 percent at Saks, 16 percent at Gap and nearly that much at Nordstrom .

Sales of furniture and home-furnishings fell by 13.5 percent compared with 2007, the latest report said, and Americans also spent less money at retailers who sell home electronics, appliances and sporting goods, books and clothes.

Spending at gas stations dropped sharply, by nearly 13 percent, as falling crude-oil prices pushed down the price of gasoline.

    A Record Decline in October’s Retail Sales, NYT, 15.11.2008, http://www.nytimes.com/2008/11/15/business/economy/15econ.html

Lower Gas Prices

Don’t Make Americans Feel Rich

November 14, 2008
The New York Times
By CHRISTOPHER MAAG

CLEVELAND — Drivers are breathing a sigh of relief as gasoline prices plunge across the country. Gas below $1.50 a gallon has appeared in a few places in recent days, and the national average has dropped almost in half since July, to $2.18 a gallon.

But even as worry about gas prices fades, it is being replaced by fear about the broader economy. Each 10-cent drop in gasoline prices puts $12 billion a year back in consumers’ pockets. Instead of spending that cash, people are trying to save it or cut their debt, many said in interviews.

“All that money is going right into paying off my credit cards,” said Jose Martinez, 33, as he pumped gas into his Dodge Charger at Ohio Gas Station No. 1 in Cleveland.

Moreover, the fall in gasoline prices is not translating into improved fortunes for automakers, at least not yet. Consumers said they remained wary of gas-guzzling cars on the theory that prices would rise again.

“I don’t think anyone who’s been paying attention for the last eight years would think that now is the time to go out and buy a Hummer,” said Geoff Sundstrom, spokesman for AAA, the automobile club.

When gasoline topped $4 a gallon this summer, Celeste Vazquez of Cleveland started working 10 hours of overtime every week to make ends meet. But lately, with prices falling below $2 a gallon at many stations here, she has been able to cut her hours.

“I finally get to spend time with my kids, which is wonderful,” said Ms. Vazquez, 34, as she paid $1.93 a gallon to fill her Chrysler PT Cruiser. “I doubt it will last, though. I’m not about to go buy a new wardrobe or anything.”

Lower gas prices meant that Art and Lisa Ritchie, who are farmers, could afford to spend $12 on breakfast last week at the Lighthouse Cafe in Lodi, Ohio. But they have no plans to spend tens of thousands of dollars to furnish and landscape their new house.

“I’d love to do those big projects,” said Mr. Ritchie, 49, who farms 16 acres of cherries, peaches, nectarines and figs in northwest Ohio. “But I just know that gas prices will go right back up.”

Lower gasoline prices have followed a rapid drop in the price of oil, to less than $59 a barrel on Thursday, from more than $145 a barrel in July. The pace of the recent drop in fuel prices is “absolutely unprecedented,” said Tom Kloza, publisher and chief analyst for the Oil Price Information Service.

“People are just excited about it,” said Dennelle Fisher, director at the Maverik store in Wheatland, Wyo., which was selling gas for $1.45 a gallon on Thursday, and even giving a 2-cent break on that price to people with the store’s loyalty cards. “They come in and they ask how long are we going to keep it down,” Ms. Fisher said.

Many experts say they believe that gasoline prices are close to bottoming out and that the national average will hover around $2 a gallon through the holidays before creeping up in the new year.

In the terrible economic climate, the gas price cut was not enough to bolster consumer spending in October, according to MasterCard SpendingPulse, a report based on MasterCard purchases and estimates of cash, check and other credit card sales.

“It would be very surprising if things recovered based solely on gasoline prices,” said Michael McNamara, vice president of research and analysis of MasterCard Advisors, which produces SpendingPulse.

Dan Stone certainly has not started spending again. Mr. Stone, of Cleveland, stopped driving his 1996 Dodge Ram pickup on vacations to Arizona and Florida when gas prices rose this year. He also quit buying tickets to Cleveland Indians and Cavaliers games. Now that prices have dropped, the only change he has made is to resume driving his 12-year-old daughter to basketball practice himself instead of arranging car pools.

“I still eat all my meals at home,” said Mr. Stone, 59, as he filled his pickup’s tank recently. “And I haven’t started going back to sports games because I’m pretty sure the gas prices will go right back up.”

Sitting around the communal table at the Lighthouse Cafe in Lodi, three couples enjoyed breakfast last week before leaving for a group camping trip in the Hocking Hills of Ohio, 150 miles away. One of the campers, Bob Leonard, replaced his Chevrolet S-10 pickup four months ago with a Toyota Prius. His brother, Bill Leonard, 65, swapped his Ford Ranger pickup for a compact Toyota Yaris last year.

“I don’t see gas prices staying this low,” said Bob Leonard, 63, a nutrition adviser from Medina, Ohio. “I’m glad I bought the Prius when I did.”

Their friend Bob Keller, 62, had parked his Toyota Highlander S.U.V. and started riding the bus to work in downtown Cleveland. With lower gas prices, riding the bus costs as much as he would spend on gas and parking, but he has not considered switching back.

“I get to nap on the bus,” said Mr. Keller, who works for Cuyahoga County Employment and Family Services. “Besides, why start driving again when the gas prices will only go right back up?”

Across the country, high prices seem to have produced lasting changes in public habits. As prices rose, many people parked their cars and took the bus or train, and that change is evidently sticking even as gas falls. At 22 transit systems surveyed last week by the American Public Transportation Association, ridership either stayed the same or increased over the last two months, said Virginia Miller, spokeswoman for the group.

Likewise, MasterCard Advisors reports show that national gasoline demand remains down compared to previous years — though by only 3 to 4 percent a week, compared with the 8 or 9 percent drops of earlier this year.

When prices topped $4 a gallon over the summer, Jim Booth of Cleveland could not afford gas for his 1992 Dodge Caravan to visit his 2-year-old son, who lived just eight miles away.

Last month, those visits started again. “So that’s wonderful,” said Mr. Booth, 51. “But it’s not like I can afford to buy a new car or anything.”

Not everyone is cutting back. Alexander Kudryk paid $2,000 last week for a 1988 Cadillac Brougham with flashy 22-inch rims so he could cruise the streets of Cleveland in style.

“I love it,” said Mr. Kudryk, 20. “But if gas prices go back up, I’ll have to sell it.”

    Lower Gas Prices Don’t Make Americans Feel Rich, NYT, 14.11.2008, http://www.nytimes.com/2008/11/14/business/14gas.html

Democrats Seek Help for Automakers

November 12, 2008
The New York Times
By DAVID M. HERSZENHORN and CARL HULSE

WASHINGTON — Democratic Congressional leaders said Tuesday that they were ready to push emergency legislation to aid the imperiled auto industry when lawmakers return to Washington next week, setting the stage for one last showdown with President Bush.

“Next week, during the lame-duck session of Congress, we are determined to pass legislation that will save the jobs of millions of workers whose livelihoods are on the line,” the majority leader, Harry Reid of Nevada, said in a statement.

His call for the session, the first since the election, came shortly after the House speaker, Nancy Pelosi, said Congress and the administration “must take immediate action” to stave off a possible collapse of the American auto industry.

Ms. Pelosi stopped short of saying Congress would adopt legislation to provide emergency financial aid to the automakers, giving the Treasury Department the option of using money from the $700 billion bailout program instead.

But with the White House insisting that the bailout money be reserved for financial institutions, that option seemed unlikely, leading a senior Democratic official to say Democrats would try to force Mr. Bush’s hand.

Congressional aides said that Democrats, should they move ahead with emergency legislation, would have to decide whether to put forward a stand-alone measure for the auto industry or include the aid in a wider economic stimulus measure. Such a package as the latter is likely to include extended unemployment benefits, aid to strapped states and cities, new money for health care and food stamps and possibly money for public works — all programs Mr. Bush has resisted.

Mr. Reid and Ms. Pelosi have urged the Bush administration to help the major automakers, especially General Motors, which is fast depleting its cash reserves and seems to be hurtling toward bankruptcy. G.M. shares, pummeled for weeks, fell an additional 13 percent on Tuesday to $2.92, its lowest point since 1943. G.M. on Monday warned shareholders that it might not be able to continue as a “going concern.”

At a meeting on Monday at the White House, President-elect Barack Obama also urged Mr. Bush to help the automobile companies, and Congressional aides said Democratic leaders were coordinating their activities with his transition team.

“In order to prevent the failure of one or more of the major American automobile manufacturers,” Ms. Pelosi said in her statement, “which would have a devastating impact on our economy, particularly on the men and women who work in that industry, Congress and the Bush administration must take immediate action.”

She added, “I am confident Congress can consider emergency assistance legislation next week during a lame-duck session, and I hope the Bush administration would support it.”

A senior Democratic official, who did not want to be identified talking publicly about party strategy, said Ms. Pelosi had decided to challenge Mr. Bush to work with the Democrats or veto aid to the teetering auto companies — and take the blame if one of them fails.

The White House has resisted calls by Congress to use the $700 billion to help the automakers, saying that money is better spent easing the credit crunch at the heart of the economic crisis.

Tony Fratto, the deputy White House press secretary, said it was not clear what the Democrats were proposing to do. But Mr. Fratto said Congress might better focus its efforts by easing restrictions on $25 billion in plant-retooling loans for the automobile industry that were approved in September.

The automakers have called for at least $25 billion more in assistance, and industry experts say G.M., Ford and Chrysler need quick access to unrestricted cash to help meet payroll and other basic obligations.

Mr. Bush, at his meeting with Mr. Obama on Monday, reiterated his longstanding desire to a reach a free-trade agreement with Colombia, which Mr. Obama and other Democrats have opposed. Some officials suggested Mr. Bush would back aid for the automakers in exchange for Democratic support on the free-trade deal, a notion that the White House dismissed.

A standalone bill would have the best chance of winning passage in Congress, where Republicans for the moment still retain a powerful minority in the Senate, and the best chance of winning Mr. Bush’s signature.

But many Democrats, and many leading economists, have said there is a need for a broader stimulus, and Democrats have been working on a package that would include an increase of unemployment benefits, new infrastructure spending, financial assistance for states struggling with increased Medicaid costs and increased food stamps.

Whichever path they choose, Democrats could be headed for a confrontation with Mr. Bush and were setting the stage for a dramatic lame-duck session, including a potential reunion on Capitol Hill of Mr. Obama, Vice President-elect Joseph R. Biden Jr. and the defeated Republican nominee, Senator John McCain of Arizona.

Mr. Obama does not intend to play a leading role in the session. Aides said he was focused on the economic packages he would offer as president, as well as working behind the scenes with Congressional Democratic leaders. But aides have not definitively ruled out the prospect of Mr. Obama casting his vote if it was needed. His Senate replacement will not be named by then.

The Senate had long planned to come back into session next week to deal with a public lands bill, and both the Senate and the House had planned to begin organizing for the next Congress.

But it was not certain that the House would convene for a formal post-election session, in which dozens of retiring and defeated lawmakers will be called back to work. House Democrats have said they are not inclined to spend time considering a stimulus package if it was only going to be vetoed by Mr. Bush.

With the auto companies reeling and Mr. Bush sending no signal that he would act, Ms. Pelosi said she had asked Representative Barney Frank, Democrat of Massachusetts and chairman of the Financial Services Committee, to begin drafting legislation directing that part of the $700 billion bailout be used to help the automakers.

“Emergency assistance to the automobile industry would be conditioned on executive compensation restrictions, a prohibition on golden parachutes, rigorous independent oversight and other taxpayer protections to ensure that any companies that benefit from this assistance and not the taxpayers bear the full burden of repaying any costs that are incurred,” Ms. Pelosi said in her statement.

Ms. Pelosi’s position drew quick support from Representative John D. Dingell, Democrat of Michigan and a top ally of the auto industry, who said he was working with other Michigan lawmakers on a measure to help the industry “re-emerge as a global, competitive leader in fuel efficiency and in new, path-breaking, energy-efficient technologies that protect our environment.”

General Motors, and to a lesser extent, Ford, were also mobilizing their car dealers and suppliers across the country to exert pressure on the White House and Congressional Republicans to support federal relief, according to industry sources.

They noted that Kentucky, the home state of Senator Mitch McConnell, the Republican leader, has auto manufacturing facilities that could make him sympathetic to moving quickly on aid.

    Democrats Seek Help for Automakers, NYT, 12.11.2008, http://www.nytimes.com/2008/11/12/washington/12cong.html

G.M., Once a Powerhouse, Pleads for Bailout

November 12, 2008
The New York Times
By BILL VLASIC

DETROIT — Just two months after celebrating its 100th birthday, General Motors is facing the grim prognosis that it may not survive to see another year unless it is rescued by a bailout from the federal government.

Shares in G.M. sank to their lowest point in 65 years, to $2.92, on Tuesday, the day after the company revealed in a federal filing that its “ability to continue as a going concern” is in substantial doubt because it may run out of money by the end of the year.

Its cash cushion has been shrinking by more than $2 billion a month this fall. If that continues, G.M.’s reserves will fall below the minimum of $10 billion in cash it needs to run its global operations by January, the company said in its third-quarter S.E.C. filing.

In that event, G.M. said it might be unable to pay its suppliers, meet its loan covenants or cover health care obligations in its labor contracts. The extent of G.M.’s financial crisis, revealed in greater detail in its filing than it acknowledged before, is proving to be far worse than investors and analysts expected just last week.

Only an emergency federal bailout seemingly stands between G.M. and a bankruptcy filing, according to industry analysts.

As the G.M.’s crisis deepens, the pressure increases in Washington to pass a rescue package for up to $50 billion in assistance for Detroit’s troubled Big Three or risk the economic fallout of a bankruptcy that would affect hundreds of thousands of jobs that rely on the auto industry.

Democratic Congressional leaders said Tuesday they would push next week for emergency legislation to help the automakers.

Despite a recent plea from President-elect Barack Obama, the Bush administration has been unwilling to commit any funds to Detroit beyond a $25 billion loan program to assist the companies in developing more fuel-efficient cars.

G.M.’s chairman, Rick Wagoner, says the company cannot wait for aid that may come when Mr. Obama takes office in January.

“This is an issue that needs to be addressed urgently,” Mr. Wagoner said in an interview with Automotive News.

Investors drove G.M.’s stock down for a fifth consecutive day Tuesday. The company’s market value fell to about $1.7 billion, a more than 90 percent decline from a year ago. A spokesman for G.M., Steve Harris, said Tuesday that Mr. Wagoner’s job was not in jeopardy and reaffirmed the G.M. board’s support for its embattled chairman.

“Nothing has changed relative to the G.M. board’s support for the G.M. management team during this historically difficult economic period for the U.S. auto industry,” he said.

The depths of G.M.’s problems came to light in its federal filing that painted a bleak picture of a company that has lost more than $20 billion this year and is in danger of not being able to pay its bills in a few weeks.

“We do not currently expect our operations to generate sufficient cash flow to fund our obligations as they come due,” the company said. “And we do not have other traditional sources of liquidity available to fund these obligations.”

G.M. ended the third quarter with $16.2 billion in available cash. The company estimates it needs a minimum of $11 billion at any time to pay its bills.

At its current pace, G.M. will have less than $10 billion by the end of the year — and that is after cutting 30 percent of its white-collar work force, halting the development of new models and temporarily shutting down most of its North American assembly plants in a desperate bid to save money.

The credit-rating agency Standard & Poor’s cut its ratings on G.M. debt further into junk status on Tuesday, and Fitch ratings is also considering another cut.

Analysts said G.M.’s inability to raise cash, other than from federal loans, will force another, deeper round of restructuring — at a minimum — to keep it solvent.

“We expect cash outflows to quickly reduce the company’s liquidity during the next few quarters, perhaps to levels that would force G.M. to consider a financial restructuring, even if it does not file for bankruptcy,” S. & P. said.

By its own admission, G.M. cannot cut its costs fast enough to balance the sharp fall in revenue in what is the worst United States vehicle market in 15 years.

“Looking into the first two quarters of 2009, even with our planned actions, our estimated liquidity will fall significantly short of the minimum required to operate our business,” the company said its third-quarter filing.

G.M. said the deterioration in its balance sheet could make it difficult to pay its suppliers by the end of this year, and it has no other sources of cash to tap except federal funds.

It also said it might not be in compliance with its credit agreements, including a $4.5 billion revolving credit line and a $1.5 billion term loan. “There is no assurance we could cure a default, secure a waiver or arrange substitute financing,” G.M. said.

    G.M., Once a Powerhouse, Pleads for Bailout, NYT, 12.11.2008, http://www.nytimes.com/2008/11/12/business/12auto.html

Economic Scene

Buying Binge Slams to Halt

November 12, 2008
The New York Times
By DAVID LEONHARDT

Just as one crisis of confidence may be ending, another may be coming.

The panic on Wall Street has eased in the last few weeks, and banks have become somewhat more willing to make loans. But in those same few weeks, American households appear to have fallen into their own defensive crouch.

Suddenly, our consumer society is doing a lot less consuming. The numbers are pretty incredible. Sales of new vehicles have dropped 32 percent in the third quarter. Consumer spending appears likely to fall next year for the first time since 1980 and perhaps by the largest amount since 1942.

With Wall Street edging back from the brink, this crisis of consumer confidence has become the No. 1 short-term issue for the economy. Nobody doubts that families need to start saving more than they saved over the last two decades. But if they change their behavior too quickly, it could be very painful.

Already, Circuit City has filed for bankruptcy, and General Motors has said that it’s in danger of running out of cash. If the consumer slump continues, there is a potential for a dangerous feedback loop, in which spending cuts and layoffs reinforce each other.

“It’s a scary time,” Liz Allen, 29, a nursing student in Atlanta, told one of the Times reporters who fanned out across the country last weekend to ask people about the economy. “Worry can make the economy worse. If people worry too much, they won’t spend as much money. We’re seeing that happen, I think, already.”

It’s not entirely clear what anyone, including Barack Obama and his incoming administration, can do to temper the current worries. Mr. Obama has called for a stimulus package, which will make up for some of the consumer pullback. He and his advisers will also try to shore up confidence by projecting both a calm competence and a willingness to be more aggressive than the Bush administration. All of that should help.

But the stimulus package under discussion would bring no more than $150 billion in new government spending. The difference between a good year for consumer spending and a really bad one is about $400 billion.

So 2009 could turn out to be fairly miserable. The American consumer, long the spender of last resort for the global economy, may finally be spent.

•

You have heard such warnings before, I realize. For years, journalists and other economic worrywarts have been predicting a serious slump in consumer spending, and it did not happen. “Never underestimate the American consumer,” as a Wall Street cliché puts it.

Like most clichés, this one has some truth to it. Even before its recent housing-fueled boom, consumer spending was a bigger part of the American economy than of, say, the French or German economy. Americans like to buy things, and they also don’t tend to stay pessimistic for long.

Andrew Kohut, president of the Pew Research Center, noted that his recent polls showed a sharp rise in the number of people planning to cut back on spending — but also a clear increase in the number who expected the economy to be in better shape next year. “What the American economy has going for it is the innate optimism of the public,” he said. “Americans get optimistic at the drop of a hat.”

Perhaps falling gas prices or Mr. Obama’s victory will shake them out of their torpor, Mr. Kohut said. A recent Gallup Poll found that consumer confidence rose slightly after the election. (Links to the Pew and Gallup research are at nytimes.com/economix.) Based on recent history, it’s easy to imagine that the trend will continue and spending will soon bounce back.

Yet if the last year has proven anything, it’s that we should not assume something can’t happen simply because it hasn’t happened recently. Cold economic realities deserve the benefit of the doubt, even when they point to uncomfortable conclusions. And right now, the economic realities are pointing to a serious consumer recession.

Let’s start with the job market. It “already appears to be in worse shape than at any time during the recessions of the early 1990s or early 2000s,” says Lawrence Katz, a Harvard professor and former Labor Department chief economist. Unemployment is higher than the official rate suggests, and it is rising. Incomes, which for most families barely kept pace with inflation over the past decade, are now falling.

In all, the total amount of income taken home by American households will still probably rise next year, because the population will grow and government transfer payments (like jobless benefits) will surely increase. But total real income will rise a lot more slowly than it has been rising recently. One percent is a reasonable estimate.

The next question is how much of that income people will spend. For decades — from the 1950s through the 1980s — Americans spent about 91 percent of their income, on average, and put away the rest. In the last few years, they have spent close to 99 percent and saved only about 1 percent.

This simply cannot continue. For one thing, people need to pay down their debts and replenish their retirement accounts. For another, the psychology of spending and saving may well be changing. After the worst housing bust on record and one of the three worst bear markets of the last century, Americans are probably starting to realize that they can’t always fall back on ever-rising house values or stock values to make ends meet.

In the unlikely event that Mr. Obama decided to mimic President Bush’s post-9/11 plea for spending in the name of patriotism, it probably would not have the same impact. We’re not as flush as we were in 2001.

Economists are now busy trying to forecast how rapidly people will begin saving again, but it’s essentially an exercise in guesswork. There is no good historical analogy. A savings rate of about 3 percent seems plausible — higher, but not radically so — and that’s what some forecasters are projecting.

At that rate, consumer spending would decline about 1 percent next year, which is worse than it sounds. It would be the first annual decline since 1980, as I mentioned above, and the biggest since 1942. Relative to the typical increases from recent years, it would represent $400 billion in lost consumer spending. To find a stimulus package so big, you’d have to go to Beijing.

And get this: Spending in the last few months has actually been falling at an annual rate of 3 percent. So the seemingly pessimistic events I have sketched out here are based on the assumption that things are about to get better.

As Joshua Shapiro of MFR, an economic research firm in New York, puts it, the American consumer has quickly gone from being the world economy’s greatest strength to its Achilles’ heel. “Everything has changed,” he says. “The financial sector is deleveraging. Credit availability is severely constrained. Asset prices are deflating. And household balance sheets are severely stressed.”

It would be silly to insist that a few terrible months meant the end of American consumer culture. But it would be equally silly to assume that culture could never change. It might be changing right now.

Robbie Brown, Sean Hamill and John Dougherty contributed reporting.

    Buying Binge Slams to Halt, NYT, 12.11.2008, http://www.nytimes.com/2008/11/12/business/economy/12leonhardt.html

Your Money

Negotiating Better Terms for Mortgage

November 12, 2008
The New York Times
By RON LIEBER

You don’t need to be behind on your mortgage payments to ask for a better deal from your bank.

Surprised? It’s easy to see why. The government’s announcement on Tuesday that Fannie Mae and Freddie Mac would modify terms for borrowers who are at least 90 days late with their payments makes it seem as if only the delinquent are eligible for a personal bailout.

But 90 percent or so of homeowners are still current with their payments, and for them, it has often seemed as if the banks were playing a game of chicken. Sorry, but until you blow off the payments for a few months running and wreck your credit in the process, the lender won’t even consider renegotiating the terms.

On Monday, however, Citigroup announced a pre-emptive campaign to talk to people before they fall behind on their payments. It plans to reach out to borrowers in distressed areas, including Arizona, California, Florida, Indiana, Michigan, Nevada and Ohio, and offer new terms to those who anticipate trouble making their payments.

And it turns out that other banks may also be willing to negotiate with borrowers who are current with their payments, even if they aren’t promoting it as aggressively as Citi.

JPMorgan Chase, HSBC and Bank of America, which took over Countrywide and its soured mortgage portfolio, have modified terms for such borrowers. And some of these adjustments are patterned after plans that the Federal Deposit Insurance Corporation put into place after it took over IndyMac.

There are several prerequisites to consider if you’re a borrower who is paying on time and wants some kind of a break. The home in question must be your primary residence. And the banks generally need to have your mortgage on their books and not have sold it off to Fannie Mae or Freddie Mac or someone else.

Then, the big question will be how financially strained you are. Perhaps your loan is about to adjust to a higher rate that is barely affordable — or already has. Or maybe you live in a two-income household where one income has disappeared or fallen drastically because of reduced sales commissions. Or, possibly, you lied about how much money you were making when you applied for a mortgage back in 2006 when nobody bothered checking.

Whatever the reason, the bank wants to know your current debt to (pretax) income ratio. If your monthly household income is $10,000, the bank may consider you overburdened if you’re paying more than $4,000 or so toward your housing costs, or 40 percent of your income. So don’t bother trying to get a better deal if your percentage is down near 25 percent.

If you think you may qualify, then you need to figure out whom to talk to. You should expect that every major mortgage lender or servicer is utterly overwhelmed right now. Calling the 800 number on your bank statement may lead to long hold times or representatives confused about changing internal guidelines.

Try asking immediately to speak to a loss mitigation or workout specialist. Chase has helpfully set up a separate number, (866) 550-5705, to take customers of Chase, EMC Mortgage and Washington Mutual straight to a loan modification specialist. Whomever you’re dealing with, write down everything they say and get the phone extension for people who are particularly helpful so you can talk to them again when things go wrong.

Then, expect a grilling. Chase will want a hardship letter, explaining what has gone wrong and why you need a break on your loan terms. A bank may ask for your last few pay stubs, a few years of tax returns and other financial information. “Expect to have your numbers crunched pretty hard,” said a Chase spokesman, Tom Kelly.

A bank may turn you down because you’re not struggling enough. Or, if you’re out of work, the bank may decide that foreclosure will be cleaner than lowering your payments to a level that you still won’t be able to afford.

If you do get a better deal — and it’s possible that very few people current on a 30-year fixed-rate mortgage will — don’t expect much of a gift. As far as the banks are concerned, they want to extract as much as possible, as long as it doesn’t break you.

In reducing the size of your monthly payments, they can play with the interest rate or the principal owed, either temporarily or permanently. If at all possible, the banks want any adjustment to be temporary and would prefer not to reduce the principal owed by a single penny.

At IndyMac, many mortgage customers whose payments were about to adjust upward to unaffordable levels were switched into loans with much lower interest rates for five years. The alterations are aimed at keeping the debt-to-income ratio at 38 percent or below. Then, the rate adjusts upward by no more than 1 percentage point each year until it hits the prevailing average at that point.

Other banks are doing something called principal forbearance. There, the bank carves off a chunk of the money you owe and puts it aside. You continue making payments, now lowered, on the rest of the loan. When you sell or refinance later, however, the bank adds that chunk back onto the total amount you must repay. By then, it is hoped, the value of the home has rebounded or you’ve built up enough equity to make the bank whole.

Alas, this is not exactly a handout. We’re not at the point yet where widespread offers of no-strings reductions in principal are available (or mandated by the government). But banks do seem to hope that if they continue to offer a bit more flexibility in dribs and drabs every few months, borrowers will forget that they owe $100,000 more than their home is worth and remember that they like their neighborhood and don’t want to turn the keys over to the bank.

So if you’re devoting a big chunk of your income to dutifully sending the mortgage lender a check, it may be worth calling to see if you can figure out a way to make the payment smaller.

    Negotiating Better Terms for Mortgage, NYT, 12.11.2008, http://www.nytimes.com/2008/11/12/business/yourmoney/12money.html

White House Scales Back a Mortgage Relief Plan

November 12, 2008
The New York Times
By EDMUND L. ANDREWS

WASHINGTON — The Bush administration is backing away from proposals to have the government refinance a broad swath of homeowners who face foreclosure after taking out subprime mortgages and other high-risk loans over the last few years.

The clearest sign of retreat came on Tuesday, when administration officials announced a much more limited plan to help people who have become seriously delinquent on conventional loans guaranteed by Fannie Mae and Freddie Mac, the two government-controlled mortgage finance companies.

The plan announced on Tuesday could lead to lower monthly payments for several hundred thousand homeowners, according to officials. But it would have virtually no impact on the millions of people who took out expensive subprime loans and who are at the heart of the nation’s foreclosure crisis.

The plan fell well short of one championed by the chairwoman of the Federal Deposit Insurance Corporation, Sheila C. Bair. As recently as two weeks ago, Ms. Bair thought she was close to an agreement with the Treasury Department on a plan to spend as much as $50 billion to modify mortgages and keep people in their homes.

But people close to Ms. Bair said Treasury officials broke off the discussion early last week.

Shortly after Fannie Mae and Freddie Mac announced their new plan, Ms. Bair declared that it was inadequate and pointedly said that the government had spent hundreds of billions of dollars to bail out financial institutions like American International Group, the giant insurer.

The plan “falls short of what is needed to achieve wide-scale modifications of distressed mortgages,” Ms. Bair said in a written statement on Tuesday. “As we lend and invest hundreds of billions of dollars to help institutions suffering leveraged losses from defaulting mortgages, we must also devote some of that money to fixing the front-end problem: too many unaffordable home loans.”

Senior Treasury officials said they were still working on ideas to reduce foreclosures and had not yet rejected Ms. Bair’s proposal.

“There is an ongoing process to examine additional foreclosure prevention proposals such as the F.D.I.C. proposal,” said Michele Davis, a spokeswoman for the Treasury secretary, Henry M. Paulson Jr.

Democratic lawmakers have become increasingly impatient with the Treasury Department’s implementation of the $700 billion bailout program — known as the Troubled Asset Relief Program, or TARP — that Congress approved in early November.

So far, Mr. Paulson has committed $265 billion out of the initial $350 billion that Congress approved to prop up banks and financial institutions. Those commitments consist of $125 billion for capital injections into the nation’s nine biggest banking companies; $100 billion for injections in regional banks; and $40 billion to buy up preferred shares in American International Group.

“I’d like to see them use more of the money in TARP to help homeowners,” said Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “I think we’ve given them more authority than they have used.”

To be sure, the program announced on Tuesday by Fannie Mae and Freddie Mac could lead to significantly lower mortgage payments for several hundred thousand people facing foreclosures.

The program would be open to people who are at least three months delinquent on mortgages that are either owned or guaranteed by Fannie Mae or Freddie Mac. The goal would be to reduce the monthly payments on all of those loans — by stretching the term to 40 years, or lowering the interest rate, or even lowering the amount of the loan — so that payments would not be higher than 38 percent of a family’s monthly income.

“Foreclosures hurt families, their neighbors, whole communities and the overall housing market,” said James B. Lockhart, director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.

But the plan directly affects only those people with loans controlled by Fannie Mae and Freddie Mac, and those mortgages are mostly conservative “conforming” mortgages rather than the high-risk subprime loans.

The foreclosure rate on loans owned by Fannie Mae is about 1.72 percent. By contrast, the foreclosure rate on adjustable-rate subprime loans is nearly 20 percent, according to the Mortgage Bankers Association.

Treasury officials acknowledged that the program would not be a cure-all.

“There is no silver bullet to address the housing downturn,” said Neel Kashkari, the assistant Treasury secretary who oversees the bailout program. “We are experiencing a necessary correction and the sooner we work through it, the sooner housing can again contribute to our economic growth.”

But housing advocates were more skeptical.

“It’s a positive step for the loans that Fannie Mae and Freddie Mac control, but it doesn’t solve the foreclosure crisis for the country,” said Eric Stein, a senior vice president of the Center for Responsible Lending, a nonprofit organization that has called for tougher action. “More needs to be done.”

    White House Scales Back a Mortgage Relief Plan, NYT, 12.11.2008, http://www.nytimes.com/2008/11/12/business/12mortgage.html

A Town Drowns in Debt

as Home Values Plunge

November 11, 2008
The New York Times
By DAVID STREITFELD

MOUNTAIN HOUSE, Calif. — This town, 59 feet above sea level, is the most underwater community in America.

Because of plunging home values, almost 90 percent of homeowners here owe more on their mortgages than their houses are worth, according to figures released Monday. That is the highest percentage in the country. The average homeowner in Mountain House is “underwater,” as it is known, by $122,000.

A visit to the area over the last couple of days shows how the nationwide housing crisis is contributing to a broad slowdown of the American economy, as families who feel burdened by high mortgages are pulling back on their spending.

Jerry Martinez, a general contractor, and his wife, Marcie, an accounts clerk, are among the struggling owners in Mountain House. Burdened with credit card debt and a house losing value by the day, they are learning the necessity of self-denial for themselves and their three children.

No more family bowling night. No more dinners at Chili’s or Applebee’s. No more going to the movies.

“We make decent money, but it takes a tremendous amount to pay the mortgage,” Mr. Martinez, 33, said.

First American CoreLogic, a real estate data company, has calculated that 7.6 million properties in the country were underwater as of Sept. 30, while another 2.1 million were in striking distance. That is nearly a quarter of all homes with mortgages. The 20 hardest-hit ZIP codes are all in four states: California, Florida, Nevada and Arizona.

“Most people pay very little attention to what their equity stake is if they can make the mortgage,” said First American’s chief economist, Mark Fleming. “They think it’s a bummer if the value has gone down, but they are rooted in their house.”

And yet the magnitude of the current declines has little precedent. “When my house is valued at 50 percent less than it was, does this begin to challenge the way I’m going to behave?” he said.

Mountain House, a planned community set among the fields and pastures of the Central Valley about 60 miles east of San Francisco, provides a discomfiting answer.

The cutbacks by the Martinezes and their neighbors are reflected in a modest strip of about a dozen stores in nearby Tracy. Three are empty while a fourth has only a temporary tenant. Some of those that remain say they are just hanging on.

“Before summer, things were O.K. Not now,” said My Phan of Hailey Nails and Spa. “Customers say they cannot afford to do their nails.” She estimated her business had fallen by half.

At Cribs, Kids and Teens, Jason Heinemann says his business is also down 50 percent. He opened the store in early 2006; last month was his worst ever. “Grandparents are big buyers of kids’ furniture, but when their 401(k)’s are dropping $10,000 and $20,000 a week, they don’t come in,” he said.

Mr. Heinemann laid off his one employee, a contribution to an unemployment rate in San Joaquin County that has surpassed 10 percent. He dropped his advertising in the local newspaper and luxury magazines.

As Mr. Heinemann’s sales sink, he is tightening his own belt. “I used to be a big spender,” he said. “We’re setting a budget for Christmas.”

In the window of another tenant, Wells Fargo Home Mortgage, a placard shows two happy homeowners holding a sign saying, “Someday we’ll owe a lot less than we thought.”

Someday, maybe, but not now. First American has been refining its figures on underwater mortgages, formally known as negative equity. The data company evaluated 42 million residential properties with mortgages. (Though Maine, Mississippi, North Dakota, South Dakota, Vermont, West Virginia and Wyoming were excluded because of insufficient data, none of those states have been central to the mortgage crisis.) A computer model was used to calculate current values, using comparable sales. More than 10 million homes do not have mortgages.

The figures rank the 20 ZIP codes that are furthest underwater. The 95391 ZIP code, which includes all of Mountain House and some properties outside it, has the unwelcome distinction of being first in the country.

Out of 1,856 mortgages in the ZIP code, First American calculates that nearly 90 percent are underwater. Only 209 owners owe less on their mortgages than the homes are worth.

The first homes in Mountain House were sold in 2003, just as the real estate boom began to go into overdrive. Its relative proximity to San Francisco drew many who traded a longer commuting trip for a bigger place.

The Martinezes bought their house in early 2005 for $630,000. It is now worth about $420,000. They have an interest-only mortgage, a popular loan during the boom that allows owners to forgo principal payments for a time.

But these loans eventually become unmanageable. In 2015, Mr. Martinez said, his monthly payments will be $12,000 a month. He laughed and shook his head at the absurdity of it.

They fear the future, so they stay home. They rent movies. They play board games. (But not Monopoly — with its real estate theme, it reminds them too much of real life.)

“It’s a vicious circle,” Mr. Martinez said. The economy is faltering because he and millions of others are not spending. This killed his career in home remodeling this year, and threatens his current work as a contractor on commercial properties.

For the moment, the family is just trying to hold on. But Mr. Martinez acknowledges that it has entered his mind to turn his house back over to the bank. “By next June, if things aren’t better, I’m walking,” Mr. Martinez said.

Many in Mountain House have already taken that option. Banks took over 101 properties in the 95391 ZIP code in the third quarter, according to DataQuick Information Systems.

Even relatively recent arrivals are feeling a pinch.

Kenny Rogers, a data security specialist, moved into Mountain House last year, buying a foreclosed property on Prosperity Street for $380,000. But the decline in values has been so fierce that he too is underwater.

He has cut his DVD buying from 50 a month to perhaps one, and is waiting until the Christmas sales to buy a high-definition television. He does not indulge much anymore in his hobbies of scuba diving and flying. “Best to wait for a better price, or do without,” Mr. Rogers, 52, said.

People deciding to do without are hurting a second mall close to Mountain House. There is a shuttered Linens ’n Things, part of a chain that went bankrupt. Another empty storefront used to be a Fashion Bug. Soccer World could not make it. Shoe Pavilion is festooned with going-out-of-business signs.

Chris and Janet Ackerson can survey this carnage from their own store with a certain equanimity. Their business, a member of the Vino 100 chain of wine outlets, is doing well.

The store opened at the beginning of the year, so long-term trends are not clear. But sales did not plunge in the last few months as they did for so many other retailers. Four more people joined the store’s wine club last weekend.

“My house is underwater, so I’m not doing too much impulse shopping or any renovation. But I’m not cutting back on this,” said Ray Lopez, a database administrator, as he placed a $24 petite sirah on the counter. “Life’s too short.”

    A Town Drowns in Debt as Home Values Plunge, NYT, 11.11.2008, http://www.nytimes.com/2008/11/11/business/11home.html

Fannie Mae Loses $29 Billion on Write-Downs

November 11, 2008
The New York Times
By REUTERS

The mortgage insurance giant, Fannie Mae, said Monday that it had lost a record $29 billion in the third quarter as the company wrote down a tax-related asset that has buoyed capital and the housing slump deepened.

The quarterly loss is the fifth consecutive for the company that had been operating under a government conservatorship since September.

Fannie Mae in October warned it would write down “substantially all” of its deferred tax assets, which had become a controversial addition to capital as losses mounted. Deferred tax assets can be used to offset future taxes but only if the company can show it will return to profitability.

Credit expenses soared to $9.2 billion in the quarter because of deteriorating mortgage credit conditions and as home prices declined, the company said.

Fannie Mae’s loss equaled $13 a share, compared with a loss of $1.4 billion, or $1.56 a share a year earlier.

    Fannie Mae Loses $29 Billion on Write-Downs, NYT, 11.11.2008, http://www.nytimes.com/2008/11/11/business/economy/11fannie.html

Circuit City Seeks Bankruptcy Protection

November 11, 2008
The New York Times
By REUTERS

The electronics retailer, Circuit City Stores, filed for bankruptcy protection on Monday, falling victim to tighter credit terms from vendors and a loss of market share to rivals like Best Buy, Wal-Mart Stores and other rivals.

The retailer and 17 affiliates filed for Chapter 11 protection from creditors with the federal bankruptcy court in Richmond, Va., where it is based.

Circuit City filed a week after saying it would close 155 stores, or more than one-fifth of its retail base, and eliminate 17 percent of its work force. It also said it was considering all options to restructure.

The company had lost money in five of the last six quarters. In recent weeks, suppliers pinched by the global credit crunch have tightened terms, sometimes requiring up-front payments before shipping goods.

A larger rival Best Buy, which is based in Minneapolis, has said it might take over stores that distressed rivals close.

According to the filing, Circuit City had $3.4 billion of assets and $2.32 billion of debts as of Aug 31, and more than 100,000 creditors.

Among the company’s largest unsecured creditors are Hewlett-Packard, Samsung Electronics and Sony , the filing shows. The largest shareholders include HBK Master Fund and First Pacific Advisors, the filing shows.

    Circuit City Seeks Bankruptcy Protection, NYT, 11.11.2008, http://www.nytimes.com/2008/11/11/technology/11circuit.html

The Reckoning

How the Thundering Herd Faltered and Fell

November 9, 2008
The New York Times
By GRETCHEN MORGENSON

“We’ve got the right people in place as well as good risk management and controls.” — E. Stanley O’Neal, 2005

THERE were high-fives all around Merrill Lynch headquarters in Lower Manhattan as 2006 drew to a close. The firm’s performance was breathtaking; revenue and earnings had soared, and its shares were up 40 percent for the year.

And Merrill’s decision to invest heavily in the mortgage industry was paying off handsomely. So handsomely, in fact, that on Dec. 30 that year, it essentially doubled down by paying $1.3 billion for First Franklin, a lender specializing in risky mortgages.

The deal would provide Merrill with even more loans for one of its lucrative assembly lines, an operation that bundled and repackaged mortgages so they could be resold to other investors.

It was a moment to savor for E. Stanley O’Neal, Merrill’s autocratic leader, and a group of trusted lieutenants who had helped orchestrate the firm’s profitable but belated mortgage push. Two indispensable members of Mr. O’Neal’s clique were Osman Semerci, who, among other things, ran Merrill’s bond unit, and Ahmass L. Fakahany, the firm’s vice chairman and chief administrative officer.

A native of Turkey who began his career trading stocks in Istanbul, Mr. Semerci, 41, oversaw Merrill’s mortgage operation. He often played the role of tough guy, former executives say, silencing critics who warned about the risks the firm was taking.

At the same time, Mr. Fakahany, 50, an Egyptian-born former Exxon executive who oversaw risk management at Merrill, kept the machinery humming along by loosening internal controls, according to the former executives.

Mr. Semerci’s and Mr. Fakahany’s actions ultimately left their firm vulnerable to the increasingly risky business of manufacturing and selling mortgage securities, say former executives, who requested anonymity to avoid alienating colleagues at Merrill.

To make matters worse, Merrill sped up its hunt for mortgage riches by embracing and trafficking in complex and lightly regulated contracts tied to mortgages and other debt. And Merrill’s often inscrutable financial dance was emblematic of the outsize hazards that Wall Street courted.

While questionable mortgages made to risky borrowers prompted the credit crisis, regulators and investors who continue to pick through the wreckage are finding that exotic products known as derivatives — like those that Merrill used — transformed a financial brush fire into a conflagration.

As subprime lenders began toppling after record waves of homeowners defaulted on their mortgages, Merrill was left with $71 billion of eroding mortgage exotica on its books and billions in losses.

On Sept. 15 this year — less than two years after posting a record-breaking performance for 2006 and following a weekend that saw the collapse of a storied investment bank, Lehman Brothers, and a huge federal bailout of the insurance giant American International Group — Merrill was forced into a merger with Bank of America.

It was an ignominious end to America’s most famous brokerage house, whose ubiquitous corporate logo was a hard-charging bull.

“The mortgage business at Merrill Lynch was an afterthought — they didn’t really have a strategy,” said William Dallas, the founder of Ownit Mortgage Solutions, a lending business in which Merrill bought a stake a few years ago. “They had found this huge profit potential, and everybody wanted a piece of it. But they were pigs about it.”

Mr. Semerci and Mr. Fakahany did not return phone calls seeking comment. Bill Halldin, a Merrill Lynch spokesman, said, “We see no useful purpose in responding to unnamed, former Merrill Lynch employees about a risk management process that has not existed for a year.”

TYPICAL of those who dealt in Wall Street’s dizzying and opaque financial arrangements, Merrill ended up getting burned, former executives say, by inadequately assessing the risks it took with newfangled financial products — an error compounded when it held on to the products far too long.

The fire that Merrill was playing with was an arcane instrument known as a synthetic collateralized debt obligation. The product was an amalgam of collateralized debt obligations (the pools of loans that it bundled for investors) and credit-default swaps (which essentially are insurance that bondholders buy to protect themselves against possible defaults).

Synthetic C.D.O.’s, in other words, are exemplars of a type of modern financial engineering known as derivatives. Essentially, derivatives are financial instruments that can be used to limit risk; their value is “derived” from underlying assets like mortgages, stocks, bonds or commodities. Stock futures, for example, are a common and relatively simple derivative.

Among the more complex derivatives, however, are the mortgage-related variety. They involve a cornucopia of exotic, jumbo-size contracts ultimately linked to real-world loans and debts. So as the housing market went sour, and borrowers defaulted on their mortgages, these contracts collapsed, too, amplifying the meltdown.

The synthetic C.D.O. grew out of a structure that an elite team of J. P. Morgan bankers invented in 1997. Their goal was to reduce the risk that Morgan would lose money when it made loans to top-tier corporate borrowers like I.B.M., General Electric and Procter & Gamble.

Regular C.D.O.’s contain hundreds or thousands of actual loans or bonds. Synthetics, on the other hand, replace those physical bonds with a computer-generated group of credit-default swaps. Synthetics could be slapped together faster, and they generated fatter fees than regular C.D.O.’s, making them especially attractive to Wall Street.

Michael A. J. Farrell is chief executive of Annaly Capital Management, a real estate investment trust that manages mortgage assets. A unit of his company has liquidated billions of dollars in collateralized debt obligations for clients, and he believes that derivatives have magnified the pain of the financial collapse.

“We have auctioned billions in credit-default swap positions in our C.D.O. liquidation business,” Mr. Farrell said, “and what we have learned is that the carnage we are witnessing now would have been much more contained, to use that overworked word, without credit-default swaps.”

The bankers who invented the synthetics for J. P. Morgan say they kept only the highest-quality and most bulletproof portions of their product in-house, known as the super senior slice. They quickly sold anything riskier to firms that were willing to take on the dangers of ownership in exchange for fatter fees.

“In 1997 and 1998, when we invented super senior risk, we spent a lot of time examining how much is too much to have on our books,” said Blythe Masters, who was on the small team that invented the synthetic C.D.O. and is now head of commodities at JPMorgan Chase. “We would warehouse risk for a period of time, but we were always focused on developing a market for whatever we did. The idea was we were financial intermediaries. We weren’t in the investment business.”

For years, the product that Ms. Masters and her colleagues invented remained just a mechanism for offloading risk in high-grade corporate lending. But as often occurs with Wall Street alchemy, a good idea started to be misused — and a product initially devised to insulate against risk soon morphed into a device that actually concentrated dangers.

This shift began in 2002, when low interest rates pushed investors to seek higher returns.

“Investors said, ‘I don’t want to be in equities anymore and I’m not getting any return in my bond positions,’ ” said William T. Winters, co-chief executive of JPMorgan’s investment bank and a colleague of Ms. Masters on the team that invented the first synthetic. “Two things happened. They took more and more leverage, and they reached for riskier asset classes. Give me yield, give me leverage, give me return.”

A few years ago, of course, some of the biggest returns were being harvested in the riskier reaches of the mortgage market. As C.D.O.’s and other forms of bundled mortgages were pooled nationwide, banks, investors and rating agencies all claimed that the risk of owning such packages was softened because of the broad diversity of loans in each pool.

In other words, a few lemons couldn’t drag down the value of the whole package.

But the risk was beneath the surface. By 2005, with the home lending mania in full swing, the amount of C.D.O.’s holding opaque and risky mortgage assets far exceeded C.D.O.’s composed of blue-chip corporate loans. And inside even more abstract synthetic C.D.O.’s, the risk was harder to parse and much easier to overlook.

Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago, describes synthetic C.D.O.’s as a fanciful structure “sort of like a unicorn born out of the imagination.”

More important, she said, is that the products allowed dicier assets to be passed off as higher-quality goods, giving banks and investors who traded them a false sense of security.

“A lot of deals were doomed from the start,” Ms. Tavakoli said.

BY 2005, Merrill was in a full-on race to become the biggest mortgage player on Wall Street. A latecomer to the arena, it especially envied Lehman Brothers for the lush mortgage profits that it was already hauling in, former Merrill executives say.

Lehman had also built a mortgage assembly line that Merrill wanted to emulate. Lehman made money every step of the way: by originating mortgage loans, administering the paperwork surrounding them, and packaging them into C.D.O.’s that could be sold to investors.

Eager to build its own money machine, Merrill went on a buying spree. From January 2005 to January 2007, it made 12 major purchases of residential or commercial mortgage-related companies or assets. It bought commercial properties in South Korea, Germany and Britain, a loan servicing operation in Italy and a mortgage lender in Britain. The biggest acquisition was First Franklin, a domestic subprime lender.

The firm’s goal, according to people who met with Merrill executives about possible deals, was to generate in-house mortgages that it could package into C.D.O.’s. This allowed Merrill to avoid relying entirely on other companies for mortgages.

That approach seemed to be common sense, but it was never clear how well Merrill’s management understood the risks in the mortgage business.

Mr. O’Neal declined to comment for this article. But John Kanas, the founder and former chief executive of North Fork Bancorp, recalls the many hours he spent talking with Mr. O’Neal, Mr. Fakahany and other Merrill executives about a possible merger in 2005.

“We spent a great deal of time with Stan and the entire management team at Merrill trying to learn their business and trying to explain our business to them,” Mr. Kanas said. “Unfortunately, in the end we were put off by the fact that we couldn’t get comfortable with their risk profile and we couldn’t get past the fact that we thought there was a distinct possibility that they didn’t understand fully their own risk profile.”

Mr. Kanas, who later sold his bank to the Capital One Financial Corporation, had many meetings with Mr. Fakahany, who was responsible for the firm’s credit and market risk management as well as its corporate governance and internal controls. Former executives say Mr. Fakahany had weakened Merrill’s risk management unit by removing longstanding employees who “walked the floor,” talking with traders and other workers to figure out what kinds of risks the firm was taking on.

Former Merrill executives say that the people chosen to replace those employees were loyal to Mr. O’Neal and his top lieutenants. That made them more concerned about achieving their superiors’ profit goals, they say, than about monitoring the firm’s risks.

A pivotal figure in the mortgage push was Mr. Semerci, a details-oriented manager whom some former employees described as intimidating. He joined Merrill in 1992 as a financial consultant in Geneva.

After that, he became a fixed-income sales representative for the firm’s London unit. He later rose quickly through Merrill’s ranks, ultimately overseeing a broad division: fixed income, currencies and commodities.

Always carrying a notebook with his operations’ daily profit-and-loss statements, Mr. Semerci would chastise traders and other moneymakers who told risk management officials exactly what they were doing, a former senior Merrill executive said.

“There was no dissent,” said the former executive, who requested anonymity to maintain relationships on Wall Street. “So information never really traveled.”

Beyond assembling its own mortgage machine and failing to police risks so it could book fatter profits, Merrill also dove into the C.D.O. market — primarily synthetics.

Unlike the C.D.O. pioneers at J. P. Morgan who saw themselves as financial designers and intermediaries wary of the dangers of holding on to their products too long, Merrill seemed unafraid to stockpile C.D.O.’s to reap more fees.

Although Merrill had a scant presence in the C.D.O. market in 2002, four years later it was the world’s biggest underwriter of the products.

The risk in Merrill’s business model became viral after A.I.G. stopped insuring the highest-quality portions of the firm’s C.D.O.’s against default.

For years, Merrill had paid A.I.G. to insure its C.D.O. stakes to limit potential damage from defaults. But at the end of 2005, A.I.G. suddenly said it had had enough, citing concerns about overly aggressive home lending. Merrill couldn’t find an adequate replacement to insure itself. Rather than slow down, however, Merrill’s C.D.O. factory continued to hum and the firm’s unhedged mortgage bets grew, its filings show.

The number of mortgage-related C.D.O.’s being produced across Wall Street was staggering, and all of that activity represented a gamble that mortgages underwritten during the most manic lending boom ever would pay off.

In 2005, firms issued $178 billion in mortgage and other asset-backed C.D.O.’s, compared with just $4 billion worth of C.D.O.’s that used safer, high-grade corporate bonds as collateral. In 2006, issuance of mortgage and asset-backed C.D.O.’s totaled $316 billion, versus $40 billion backed by corporate bonds.

Firms underwriting the C.D.O.’s generated fees of 0.4 percent to 2.5 percent of the amount sold. So the fees generated on the $316 billion worth of mortgage- and asset-backed C.D.O.’s issued in 2006 alone, for example, would have been about $1.3 billion to $8 billion.

Merrill, the biggest player in the C.D.O. game, appeared to be a cash register. After its banner year in 2006, it produced another earnings record in the first quarter of 2007, finally beating three rivals, Lehman, Goldman Sachs and Bear Stearns, in profit growth.

But as 2007 progressed, the mortgage business began to fall apart — and the impact was brutal. As mortgages started to fail, the debt ratings on C.D.O.’s were cut; anyone left holding the products was locked in a downward spiral because no one wanted to buy something that was collapsing. Among the biggest victims was Merrill.

In October 2007, the firm shocked investors when it announced a $7.9 billion write-down related to its exposure to mortgage C.D.O.’s, resulting in a $2.3 billion loss, the largest in the firm’s history. Mr. Semerci was forced out, later landing at a London-based hedge fund, the Duet Group.

Merrill’s board also ousted Mr. O’Neal. On top of the $70 million in compensation he was awarded during his four-year tenure as chief executive, Mr. O’Neal departed with an exit package worth $161 million.

JOHN A. THAIN, a former Goldman Sachs executive who was also head of the New York Stock Exchange, was hired as Merrill’s chief executive to try to clean up Mr. O’Neal’s mess. But multibillion-dollar losses kept piling up, and Merrill was hard pressed to raise enough to replenish its coffers.

“None of the trading businesses should be taking risks, either single positions or single trades, that wipe out the entire year’s earnings of their own business,” Mr. Thain said in January. “And they certainly shouldn’t take a risk to wipe out the earnings of the entire firm.”

A month later, Mr. Fakahany left Merrill. Upon his departure, in a statement that Merrill issued, he said: “I leave knowing that the firm’s financial condition is significantly enhanced and the new team is in place and moving forward.”

Mr. Fakahany continued to receive a Merrill salary until the end of this summer; he does not appear to have received an exit package.

Mr. Thain, meanwhile, sold off assets for whatever price he could get to try to salvage the firm. In August, he arranged a sale of $31 billion of Merrill’s C.D.O.’s to an investment firm for 22 cents on the dollar. For the first nine months of this year, Merrill recorded net losses of $14.7 billion on its C.D.O.’s. Through October, some $260 billion of asset-backed C.D.O.’s have started to default.

As the depth of Merrill’s problems emerged, its shares plummeted. With Lehman on the verge of collapse, Wall Street began to wonder if Merrill would be next.

Some banks were so concerned that they considered stopping trading with Merrill if Lehman went under, according to participants in the Federal Reserve’s weekend meetings on Sept. 13 and 14.

The following Monday, Merrill — torn apart by its C.D.O. venture — was taken over by Bank of America.

    How the Thundering Herd Faltered and Fell, NYT, 9.11.2008, http://www.nytimes.com/2008/11/09/business/09magic.html

Tough Times Strain Colleges Rich and Poor

November 8, 2008
The New York Times
By TAMAR LEWIN

Arizona State University, anticipating at least $25 million in budget cuts this fiscal year — on top of the $30 million already cut — is ending its contracts with as many as 200 adjunct instructors.

Boston University, Cornell and Brown have announced selective hiring freezes.

And Tufts University, which for the last two years has, proudly, been one of the few colleges in the nation that could afford to be need-blind — that is, to admit the best-qualified applicants and meet their full financial need — may not be able to maintain that generosity for next year’s incoming class. This fall, Tufts suspended new capital projects and budgeted more for financial aid. But with the market downturn, and the likelihood that more applicants will need bigger aid packages, need-blind admissions may go by the wayside.

“The target of being need-blind is our highest priority,” said Lawrence S. Bacow, president of Tufts. “But with what’s happening in the larger economy, we expect that the incoming class is going to be needier. That’s the real uncertainty.”

Tough economic times have come to public and private universities alike, and rich or poor, they are figuring out how to respond. Many are announcing hiring freezes, postponing construction projects or putting off planned capital campaigns.

With endowment values and charitable gifts likely to decline, the process of setting next year’s tuition low enough to keep students coming, but high enough to support operations, is trickier than ever.

Dozens of college presidents, especially at wealthy institutions, have sent letters and e-mail to students and their families describing their financial situation and belt-tightening plans.

At Williams College, for example, President Morton Owen Schapiro wrote that with last year’s negative return on the endowment and the worsening situation since June, some renovation and facilities spending would be reduced and nonessential openings left unfilled.

Many students, increasingly conscious of costs, are flocking to their state universities; at Binghamton University, part of the New York State university system, applications were up 50 percent this fall. But with this year’s state budget problems, tuition increases at public universities may be especially steep. Some public universities have already announced midyear tuition increases.

With endowment values shrinking, variable-rate debt costs rising and states cutting their financing, colleges face challenges on multiple fronts, said Molly Corbett Broad, president of the American Council on Education.

“There’s no evidence of a complete meltdown,” Ms. Broad said, “but the problems are serious enough that higher education is going to need help from the government.”

And as in other sectors, she said, some financially shaky institutions will most likely be seeking mergers.

Nationwide, retrenchment announcements are coming fast and furious, as state after state reduces education financing.

The University of Florida, which eliminated 430 faculty and staff positions this year, was told recently to cut next year’s budget by 10 percent, probably requiring more layoffs. Financing for the University of Massachusetts system was cut $24.6 million for the current fiscal year.

On Thursday, Gov. Arnold Schwarzenegger of California proposed a midyear budget cut of $65.5 million for the University of California system — on top of the $48 million reduction already in the budget.

“Budget cuts mean that campuses won’t be able to fill faculty vacancies, that the student-faculty ratio rises, that students have lecturers instead of tenured professors,” said Mark G. Yudof, president of the California system. “Higher education is very labor intensive. We may be getting to the point where there will have to be some basic change in the model.”

Private colleges, too, are tightening their belts — turning down thermostats, scrapping plans for new gardens or quads, reducing faculty raises.

But many are also increasing their pool of financial aid.

Vassar College will give out $1 million more in financial aid this year than originally budgeted, even though the endowment, which provides a third of its operating budget, dropped to $765 million at the end of September, down $80 million from late June. President Catharine Bond Hill of Vassar said the college would reduce its operating costs, but remain need-blind.

Many institutions with small endowments, however, will probably become more need-sensitive than usual this year, quietly offering places to fewer students who need large aid packages.

At Dickinson College in Pennsylvania, Robert J. Massa, the vice president for enrollment and student life, said that about 200 applicants last year might have been accepted if they had not needed so much financial help, but that that number might rise to 250 this year.

Dickinson’s endowment was $280 million in mid-October, Mr. Massa said, down from $350 million in June. And while more than three quarters of the college’s operating budget comes from student fees, some endowment revenue will have to be replaced.

“Here’s the rub,” Mr. Massa said. “I really don’t think that colleges can afford to increase their tuition price at higher than inflation this year. I don’t think the public will stand for it. What we’ve done in higher education is let our dreams and aspirations dictate our cost structure.”

Most colleges will have a better sense next month of how many students are struggling, when second-semester tuition bills come due.

Paola Aguilar, a sophomore at Shenandoah University in Winchester, Va., is worrying about whether she can afford to return next year.

“My mom became a Realtor last year to try to earn more money, but that didn’t help,” Ms. Aguilar said. “I’ve talked to the people here, and they’ve helped me out a little more for next semester, but as of right now, if I don’t get more help, I’ll have to leave next year and go somewhere cheaper, near home.”

Tracy Fitzsimmons, Shenandoah’s president, said she began hearing about students’ financial anxieties in mid-September.

“They’d tell me they were thinking they might have to move off campus next semester and stay three to a bedroom, or give up the meal plan and just eat one meal a day,” Ms. Fitzsimmons said.

Shenandoah has started an emergency grant fund for students, increased its loan program and prepared to stretch out spring tuition payments for hard-pressed families.

Economic uncertainty touches every facet of higher education.

“We are planning to begin a capital campaign of $150-185 million,” said Karen R. Lawrence, president of Sarah Lawrence College. “We will still do that. We’re not compromising our ambitions, but the timing will be a little bit deferred.”

At the wealthiest institutions, endowment revenue usually covers about a third of operating costs, and most colleges and universities spend a percentage of their endowment, based on its average value over the previous three years, helping to smooth out economic ups and downs.

In recent years, with tuition rising faster than inflation, college affordability has become a significant issue. And with the sharp growth of endowments in recent years — Harvard’s hit $36.9 billion this summer — some politicians, notably Senator Charles E. Grassley, Republican of Iowa, have pushed for a requirement that colleges spend 5 percent of their endowments. Many of the wealthiest institutions responded by expanding financial aid last year, with dozens of them replacing loans with grants.

This fall, more universities are taking steps to increase affordability. Benedictine University, a Roman Catholic institution in Illinois, is freezing tuition; Vanderbilt University will replace loans with grants; Boston University has expanded scholarships for students who graduated from Boston public schools; and the University of Toledo announced free tuition for needy, high-performing graduates of Ohio’s six largest public school systems.

Presidents of many expensive private colleges are wondering how much more tuition pressure families can bear.

“I wouldn’t deny that a tuition freeze has occurred to me, but we can’t afford heroic gestures,” said Sandy Ungar, president of Goucher College in Baltimore.

Given the current climate, some say, colleges need to re-examine all of their economic assumptions.

“Several years ago, we started thinking about sustainability in environmental terms,” said Dick Celeste, the president of Colorado College. “Now we need to be thinking about sustainability in economic terms.”

    Tough Times Strain Colleges Rich and Poor, NYT, 8.11.2008, http://www.nytimes.com/2008/11/08/education/08college.html

Jobless Ranks Hit 10 Million,

Most in 25 Years

November 8, 2008
Filed at 3:52 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- The nation's jobless ranks zoomed past 10 million last month, the most in a quarter-century, as piles of pink slips shut factory gates and office doors to 240,000 more Americans with the holidays nearing. Politicians and economists agreed on a painful bottom line: It's only going to get worse.

The unemployment rate soared to a 14-year high of 6.5 percent, the government said Friday, up from 6.1 percent just a month earlier. And there was more grim news from U.S. automakers: Ford Motor Co. and General Motors Corp., American giants struggling to survive, each reported big losses and figured to be announcing even more job cuts before long.

Barack Obama, in his first news conference as president-elect, said the nation was facing the economic challenge of a lifetime but expressed confidence he could deal with it.

''Immediately after I become president, I'm going to confront this economic crisis head on by taking all necessary steps to ease the credit crisis, help hardworking families, and restore growth and prosperity,'' he said after meeting with economic advisers in Chicago. ''I'm confident a new president can have an enormous impact.''

Wall Street revived somewhat after two days of big losses. The Dow Jones industrials rose 248 points.

Still, the Labor Department's unemployment report provided stark evidence that the economy's health was deteriorating at an alarmingly rapid pace. The jobless rate was 4.8 percent just one year ago.

About 10.1 million people were unemployed in October, the most since the fall of 1983. More people have jobs now, since the population has grown, but it's still a staggering jobless figure. With employers slashing jobs every month so far this year, some 1.2 million positions have disappeared, over half in the past three months alone.

Like Obama, President Bush expressed confidence that things would get better: ''Our economy has overcome great challenges before, and we can be confident that it will do so again.''

But economists were much less upbeat than politicians.

''There is no light at the end of the tunnel, and the outlook is pitch black,'' said Richard Yamarone, economist at Argus Research.

And Bernard Baumohl, chief global economist at the Economic Outlook Group, said the report ''depicts an economy still in free fall and without a safety net anywhere in sight.''

All the economy's woes -- a housing collapse, mounting foreclosures, hard-to-get credit and financial market upheaval -- will confront Obama when he assumes office in January. Unemployment is expected to keep rising during his first year in office, while record budget deficits will crimp his domestic agenda.

October's jobless rate was the highest since March 1994 and now has surpassed the 6.3 percent 2003 high after the most recent recession. The government also said job losses were worse than first reported for the preceding two months, 284,000 rather than 159,000 in September and 127,000 rather than 73,000 in August.

Many economists believe the unemployment rate will climb to 8 percent or 8.5 percent by the end of next year before slowly drifting downward. Some think unemployment could even hit 10 or 11 percent -- if an auto company should fail.

In any case, the rate is likely to move higher even if the economy is on somewhat stronger footing by the middle of next year as some hope. That's because companies won't be inclined to ramp up hiring until they feel certain that a recovery has staying power.

Joshua Shapiro, chief economist at consulting firm MFR Inc., said another reason the unemployment rate can keep climbing -- even after a recession is over -- is because people tend to flock back to the labor market when they sense their job prospects might be better. ''It takes (people) awhile to figure out, 'Hey, there's jobs out there,''' Shapiro said.

In the 1980-1982 recession -- considered the worst since the Great Depression in terms of unemployment -- the jobless rate rose as high as 10.8 percent in late 1982 just as the recession ended, before inching down.

Friday's report was worse than analysts had expected. They had been forecasting a jobless rate of 6.3 percent with payrolls falling about 200,000.

Factories, including auto makers, construction companies, especially home builders, retailers, mortgage bankers, securities firms, hotels and motels and educational services, all cut jobs. As did temporary help firms -- a barometer of future hiring. All those losses more than swamped the few gains elsewhere, including in the government, health care and in accounting and bookkeeping.

Private companies cut 263,000 jobs, the most since the country was beginning to emerge from the 2001 recession. It marked the 11th straight month of such reductions.

The grim numbers spurred calls from Democrats on Capitol Hill to provide fresh relief. House Speaker Nancy Pelosi said Democrats, in a lame-duck session later this month, will push to enact another economic stimulus package of around $100 billion, possibly including provisions to create jobs through big public works projects.

Obama said if the session doesn't bring passage, the measure will be his first priority as president in January.

He has called for about $175 billion in new stimulus spending, including money for roads, bridges and aid to hard-pressed states. He wants a rebate of $500 for individuals, $1,000 for families and a new $3,000 tax credit for businesses for each new job created.

Workers with jobs saw only modest wages gains in October. Average hourly earnings rose to $18.21, a 0.2 percent increase from the previous month. Over the past year, wages have grown 3.5 percent, but paychecks aren't stretching far because high food, energy and other prices have propelled overall inflation at a faster pace.

The economy has lost its footing in just a few months. It contracted at a 0.3 percent pace in the July-September quarter, signaling the onset of a likely recession. It was the worst showing since the 2001 recession, and reflected a massive pullback by consumers.

As consumers watch jobs disappear, they'll probably retrench even further, spelling more trouble. Analysts say the economy is still shrinking in the current October-December quarter and will contract further in the first quarter of next year. All that more than fulfills a classic definition of a recession: two straight quarters of contracting economic activity.

''The U.S. recession is deepening,'' said Michael Gregory, economist at BMO Capital Markets Economics. The final quarter of this year is getting off to a ''particularly ugly'' start.

------

AP Economics Writer Christopher S. Rugaber contributed to this report.

    Jobless Ranks Hit 10 Million, Most in 25 Years, NYT, 8.11.2008, http://www.nytimes.com/aponline/business/AP-Financial-Meltdown.html





 

The government reported Friday that more than 240,000 lost their jobs in October

as the unemployment rate rose to 6.5 percent.

Above,

jobseekers lined up last last month for a career fair sponsored by the I.R.S.

Photograph: Mario Tama/Getty Images

Jobless Rate at 14-Year High After Big October Losses        NYT        8.11.2008

http://www.nytimes.com/2008/11/08/business/economy/08econ.html


 

Jobless Rate at 14-Year High

After Big October Losses

November 8, 2008
The new York Times
By PETER S. GOODMAN and MICHAEL M. GRYNBAUM

Squeezed by tight credit and plunging spending power, the American economy is losing jobs at the fastest pace since 2001, and the losses could accelerate to levels not seen since the deep recession of the early 1980s.

Employers shed 240,000 more jobs in October, the government reported Friday morning, the 10th consecutive monthly decline and a clear signal that the economic slowdown is troubling households and businesses.

Since August, the economy has lost 651,000 jobs — more than three times as many as were lost from May to July. So far, 1.2 million jobs have been lost this year.

“Clearly, these are very bad numbers,” said Nigel Gault, chief domestic economist at IHS Global Insight. “Businesses had been paring back for most of the year, but I suspect that it had been more caution on hiring rather than firing,” Mr. Gault said. “In September, they decided, ‘O.K., look, this isn’t just a mini-recession, this is a full-blown recession. We better take some action.’ And they did.”

The unemployment rate climbed to 6.5 percent, the highest level since 1994 and up from 6.1 percent the month before.

The Labor Department also steeply revised down its employment numbers for the third quarter. Employers slashed 284,000 jobs in September, far higher than the 159,000 that was initially reported. In August, 127,000 jobs were lost, compared with the previous estimate of 73,000.

“The U.S. consumer, which for so many years was the global engine of growth, is now the world economy’s Achilles heel,” Joshua Shapiro, an economist at MFR, a research firm, wrote in a note.

The latest signs of distress seemed certain to inject more urgency into the debate over another round of government stimulus to spur spending, and is more evidence that President-elect Barack Obama will inherit a deeply troubled economy.

Mr. Obama has in recent months called for another package of so-called stimulus spending initiatives. Democratic leaders in the House suggested this week that they might seek swift passage of $60 billion worth of measures that would extend unemployment benefits and food stamps, while aiding states whose tax revenues have plummeted. They would then pursue a broader package that could reach $200 billion in spending once Mr. Obama takes office.

The Bush administration has criticized Democratic proposals for immediate aid, raising the specter of a veto.

On Friday, a spokeswoman for President Bush, Dana Perino, called the employment numbers “a stark reminder of how critical it is we keep focused on utilizing” the programs that Washington has put in place, including a $700 billion bailout of the financial system.

“We know what the main problems are — tight credit and housing markets — and we have the tools to solve them,” Ms. Perino said. “The programs we’re putting in place will improve the flow of credit to consumers and businesses that will spur economic growth, job creation and stabilization of our financial markets.”

Above all, the latest monthly snapshot of the job market reinforced how the economy remains gripped by a potent combination of troubles — plunging housing prices, tight credit and shrinking paychecks — with all three operating at once in a downward spiral.

Companies have been hiring tepidly and laying off workers throughout the year as business has slowed, while cutting working hours for those on the payroll. Millions of Americans accustomed to borrowing against homes to finance spending have lost that artery of cash as home prices have fallen.

Wages have effectively shrunk for most workers, as rising costs for food and fuel have more than absorbed meager increases in pay. That has further crimped American proclivities to spend.

In October, weekly wages for rank-and-file workers — those not in supervisory or managerial positions — grew just 2.9 percent from October 2007, well below the rate of inflation.

The health care industry and public schools were the only sectors of the economy that showed more than notional growth last month. Otherwise, the losses were deep and broad. The troubles in the auto industry led to thousands of layoffs at car dealerships and factories that produce car parts. Tens of thousands of workers at manufacturers and construction companies lost their jobs.

Janitors, administrative workers and temporary employees were hit hard, with 57,000 jobs lost in October. Even general merchandise stores, which have seen an increase in business because of lower prices and more budget-minded consumers, laid off 18,000 workers last month.

The 284,000 jobs lost in September was the biggest monthly toll since November 2001, in the aftermath of the terrorist attacks in New York and Washington.

All of this has cut into spending power. Consumer spending dropped between July and September — the first quarterly decline in 17 years — further eroding the motivation for businesses to hire.

Friday’s report offered signs that the pressures on workers are rapidly intensifying. Between January and August, the economy lost about 75,000 jobs a month, according to preliminary numbers from the Bureau of Labor Statistics. The pace has more than doubled since then.

Many economists now expect the unemployment rate to reach 8 percent by the middle of next year, a level not seen in 25 years. Most forecasts envision the economy shrinking well into the next year and perhaps until 2010.

Recent days have offered new indications of trouble. On Thursday, several retailers announced sharp declines in sales in October, suggesting that consumer spending would continue to tighten. The annual pace of auto sales fell sharply in October, down 15 percent compared with September, according to an analysis from Goldman Sachs.

The widely watched Institute for Supply Management survey fell in October to depths last seen 26 years ago, reflecting shrinking industrial activity and suggesting weakening demand for goods as the economy slows.

That weakness has gone global, as many other major economies also are hit by the slowdown — from Spain and Britain to Japan and Brazil — and as the financial crisis now restricts economic activity in much of the world.

At the same time, banks continued to tighten their purse strings in October, according to a survey of senior loan officers conducted by the Federal Reserve. Economists construed the survey as an indication that even healthy companies and many households were having difficulty securing capital, further braking the economy and making prospects more difficult for American workers.

Many economists expect this picture to worsen as the consequences of the global financial crisis ripple out to businesses and households. Though the $700 billion taxpayer-financed bailout has staved off fears of an imminent collapse and restored some order to the financial system, it has not persuaded banks to lend freely. Credit remains tight for businesses and homeowners.

    Jobless Rate at 14-Year High After Big October Losses, NYT, 8.11.2008, http://www.nytimes.com/2008/11/08/business/economy/08econ.html

Carmakers Report Losses

as They Burn Cash

November 8, 2008
The New York Times
By BILL VLASIC and NICK BUNKLEY

DETROIT — General Motors is edging closer to running out of money, as slumping sales and deteriorating economic conditions drove the automaker to a larger-than-expected loss of $4.2 billion in the third quarter, excluding one-time gain.

G.M.’s results came on the heels of similar dismal quarterly earnings from the Ford Motor Company, raising new concerns about the prospects for survival of the two largest American automakers.

G.M. said its revenue in the third quarter declined 13 percent to $37.9 billion from $43.7 billion a year ago on weak demand in its core North American and European markets.

Including the one-time gain, the loss was $2.5 billion or $4.45 a share compared with $42.5 billion or $75.12 a share in the quarter a year ago, a period that included non-cash charge of $38.3 billion on deferred tax assets.

The company also reported that it burned through $6.9 billion in cash during the quarter, and the ended the period with just $16.2 billion in cash reserves.

The rapid depletion of its cash position puts G.M. perilously close to dropping below the level needed to finance its operations.

The company said it has identified another $5 billion in new actions to conserve cash, on top of an earlier plan to bolster its liquidity by $15 billion.

Still, G.M. said that it “will fall significantly short” of the cash needed to run its business in the first half of 2009 unless economic conditions improve and the company gets access to financial aid from the federal government.

“Even if G.M. implements the planned operating actions that are substantially within its control,” the company said, “G.M.’s estimated liquidity during the remainder of 2008 will approach the minimal level necessary to operate its business.”

Earlier, the Ford Motor Company, said that it burned through $7.7 billion in cash in the third quarter, leaving it with $18.9 billion at the end of September, as vehicle sales in the United States plunged amid historically weak levels of consumer confidence and tight credit markets that have prevented some consumers from obtaining loans.

Ford reported that its automotive business lost $2.9 billion in the third quarter as it announced more cuts to conserve cash, including an additional 10 percent reduction in salaried payroll costs and lower capital spending.

Over all, Ford said it lost $129 million in the quarter, or 6 cents a share, helped by a $2 billion gain as it shifted some retiree health care liabilities to a trust run by the United Automobile Workers union. In the same period a year ago, Ford lost $380 million, or 19 cents a share.

Excluding that gain and other one-time items, the company lost $2.7 billion. Its revenue was $32.1 billion, down from $41.1 billion in the third quarter of 2007.

“The global auto industry is facing unprecedented challenges,” Ford’s chief executive, Alan R. Mulally, said. “But we are absolutely convinced that we have the right plan and are taking the right actions to weather this difficult period. In these challenging times our plan is more important than ever.”

Ford said it expected to increase its cash on hand by $14 billion to $17 billion in the next two years with its new round of cutbacks. The company will eliminate as many as 2,200 salaried jobs by January and end merit-based raises, bonuses and investment contribution matches for those who remain. It also plans to reduce global vehicle inventories, delay development of “a few select vehicles” and sell more noncore assets. The company said it remained on track to reduce fixed costs this year by $5 billion.

Mr. Mulally said the additional actions were necessary because “we now believe the industry downturn will be broader, deeper and longer than previously expected.”

Underscoring the dire circumstances facing the industry, the chief executives of G.M., Ford and Chrysler met with Nancy Pelosi, the House speaker, and Harry Reid, the Senate majority leader, on Thursday about an emergency loan package. The meeting focused on a request by automakers for up to $25 billion in loans to help the companies get through the worst vehicle market in 15 years and avoid bankruptcy protection.

Mr. Mulally said Ford was hopeful that the government would step in but was not factoring that into its planning.

“We are not assuming that kind of help from the U.S. government at this time,” he said Friday. “We are absolutely going to continue to dialogue with the government and others, if things deteriorate, to keep this very important industry going.”

The loan request is in addition to $25 billion in low-interest loans administered by the Energy Department to assist automakers in developing more fuel-efficient vehicles.

Automakers have been battered by a weak economy, rising gas prices, a sharp shift away from their most profitable products and a credit crisis that has emptied dealer showrooms. The stunning falloff has affected all automakers, as shaky consumer confidence and the inability of many eager shoppers to get loans because of tight credit drove sales down 31.9 percent in October compared with the period a year ago.

Ford lost $8.6 billion in the first half of 2008. Its sales in the United States are down 18.6 percent this year through October.

Not long ago, it was viewed as being in the worst shape of the three Detroit automakers, but now, as its two crosstown rivals — G.M. and Chrysler — explore a merger to avoid running out of cash, Ford has become the most stable. It still has a large cash cushion — $26.6 billion as of June — from mortgaging most of its North American assets in 2006, before the credit markets tightened.

“Despite meaningful production declines forecasted for the coming quarters, we estimate that Ford has enough cash through 2009,” Brian A. Johnson, an analyst with Barclays Capital, wrote in a report this week.

After losing $18.8 billion in the first six months of the year, G.M. suffered an even further decline in fortunes in the third quarter.

The company’s global sales fell 11.4 percent in the quarter, with most of the damage done in the slumping vehicle markets of North America and Europe.

A lack of available credit for consumers has hurt all automakers this fall, but G.M. has been particularly hard hit by the problems of the finance unit GMAC Financial Services.

GMAC is controlled by Cerberus Capital Management, which has a 51 percent ownership stake. G.M. owns the remaining 49 percent. GMAC reported a $2.52 billion loss in the third quarter, mostly because its lack of access to available capital choked off the flow of auto loans to G.M. customers.

As a result, G.M.’s dealers have been increasingly unable to finance sales to even creditworthy customers. In October, G.M.’s United States sales plunged 45.1 percent, compared with a 31.9 percent drop for the overall industry.

Those declining sales have cut sharply into G.M.’s revenues and crippled its previously announced turnaround plans.

With the company burning through cash, G.M. said in July that it would increase its liquidity by cutting costs by $10 billion, and by raising $5 billion through new borrowing and asset sales.

But the company has been unable to take on new debt, and has been unable to sell any major assets like its Hummer brand.

With revenues declining and its cash reserves rapidly diminishing, G.M. began looking for a merger partner this summer, according to people with knowledge of the company’s actions.

G.M.’s chairman, Rick Wagoner, first approached Ford, but its leadership rejected the overtures. In September, G.M. began talks with Chrysler, which is also controlled by Cerberus.

While both sides are committed to merging the two automakers, the deal has stalled because prospective lenders have been hesitant to support it without assurances of government assistance to Detroit.

Mr. Wagoner and other G.M. executives have repeatedly vowed that the automaker will not seek bankruptcy protection.

Analysts, however, believe that without an infusion of capital from the government, G.M. will exhaust its cash reserves next year.

For its part, Ford has reacted aggressively in recent months to the downturn, announcing a plan to convert three truck plants so they can build small cars instead and to bring six fuel-efficient vehicles to the United States from Europe in the next few years.

It is beginning a major new-product blitz, introducing a redesigned version of its stalwart F-series pickup this fall and more revamped models, including new versions of the Taurus and Mustang, next year. It is counting on strong sales of the F-series, despite lessened demand for trucks, to lift its short-term fortunes.

Any momentum that Ford has been building, though, took a big hit last month when its largest shareholder, the casino mogul Kirk Kerkorian, began selling off his stake. Mr. Kerkorian had previously expressed confidence in the company and in the leadership of Mr. Mulally, and that support pushed shares of the company to more than $8 in May. But the company’s stock hit a 26-year low of $1.88 last month.

    Carmakers Report Losses as They Burn Cash, NYT, 8.11.2008, http://www.nytimes.com/2008/11/08/business/08auto.html?hp

Ford Plans More Cuts

as It Posts a $129 Million Loss

November 7, 2008
The New York Times
By BILL VLASIC and NICK BUNKLEY

The Ford Motor Company, battered by the weak economy and a shift in consumer preferences, announced more cost cuts on Friday and reported a third-quarter loss.

Ford said it lost $129 million, or 6 cents a share, less than the $380 million, or 19 cents a share, in the third quarter a year ago.

In its statement, Ford said it would cut another 10 percent of its salaried work force in North America. The company also said that it had used up $7.7 billion in cash.

Third-quarter sales were $32.1 billion, down from $41.1 billion a year ago. Ford said the decline reflected lower sales volume, the sale of Jaguar and Land Rover units, changing product mix and lower net pricing.

Excluding special items, Ford lost was about $3 billion, or $1.31 a share, compared with a loss of $24 million, or a penny a share, a year ago. On that basis, analyst surveyed by Thomson Reuters expected a loss of 94 cents a share.

Rival General Motors will report results later Friday.

Underscoring the dire circumstances facing the industry, the chief executives of G.M., Ford and Chrysler met with Nancy Pelosi, the House speaker, and Harry Reid, the Senate majority leader, on Thursday about an emergency loan package. The meeting focused on a request by automakers for up to $25 billion in loans to help the companies get through the worst vehicle market in 15 years and avoid bankruptcy protection.

The loan request is in addition to $25 billion in low-interest loans administered by the Department of Energy to assist automakers in developing more fuel-efficient vehicles.

Automakers have been battered by a weak economy, rising gas prices, a sharp shift away from their most profitable products and a credit crisis that has emptied dealer showrooms. The stunning falloff has affected all automakers, as shaky consumer confidence and the inability of many eager shoppers to get loans because of tight credit drove sales down 31.9 percent in October compared with the period a year ago.

Ford lost $8.6 billion in the first half of 2008. Its sales in the United States are down 18.6 percent this year through October.

Not long ago, it was viewed as being in the worst shape of the three Detroit automakers, but now, as its two crosstown rivals — G.M. and Chrysler — explore a merger to avoid running out of cash, Ford has become the most stable. It still has a large cash cushion — $26.6 billion as of June — from mortgaging most of its North American assets in 2006, before the credit markets tightened.

“Despite meaningful production declines forecasted for the coming quarters, we estimate that Ford has enough cash through 2009,” Brian A. Johnson, an analyst with Barclays Capital, wrote in a report this week.

After losing $18.8 billion in the first six months of the year, G.M., suffered an even further decline in fortunes in the third quarter.

The company’s global sales fell 11.4 percent in the quarter, with most of the damage done in the slumping vehicle markets of North America and Europe.

A lack of available credit for consumers has hurt all automakers this fall, but G.M. has been particularly hard hit by the problems of the finance unit GMAC Financial Services.

GMAC is controlled by Cerberus Capital Management, which has a 51 percent ownership stake. G.M. owns the remaining 49 percent. GMAC reported a $2.52 billion loss in the third quarter, mostly because its lack of access to available capital choked off the flow of auto loans to G.M. customers.

As a result, G.M.’s dealers have been increasingly unable to finance sales to even creditworthy customers. In October, G.M.’s United States sales plunged 45.1 percent, compared with a 31.9 percent drop for the overall industry.

Those declining sales have cut sharply into G.M.’s revenues and crippled its previously announced turnaround plans.

With the company burning through cash, G.M. said in July that it would increase its liquidity by cutting costs by $10 billion, and by raising $5 billion through new borrowing and asset sales.

But the company has been unable to take on new debt, and has been unable to sell any major assets like its Hummer brand.

With revenues declining and its cash reserves rapidly diminishing, G.M. began looking for a merger partner this summer, according to people with knowledge of the company’s actions.

G.M.’s chairman, Rick Wagoner, first approached Ford, but its leadership rejected the overtures. In September, G.M. began talks with Chrysler, which is also controlled by Cerberus.

While both sides are committed to merging the two automakers, the deal has stalled because prospective lenders have been hesitant to support it without assurances of government assistance to Detroit.

Mr. Wagoner and other G.M. executives have repeatedly vowed that the automaker will not seek bankruptcy protection.

Analysts, however, believe that without an infusion of capital from the government, G.M. will exhaust its cash reserves by sometime next year.

For its part, Ford has reacted aggressively in recent months to the downturn, announcing a plan to convert three truck plants so they can build small cars instead and to bring six fuel-efficient vehicles to the United States from Europe in the next few years.

It is beginning a major new-product blitz, introducing a redesigned version of its stalwart F-series pickup this fall and more revamped models, including new versions of the Taurus and Mustang, next year. It is counting on strong sales of the F-series, despite lessened demand for trucks, to lift its short-term fortunes.

Any momentum that Ford has been building, though, took a big hit last month when its largest shareholder, the casino mogul Kirk Kerkorian, began selling off his stake. Mr. Kerkorian had previously expressed confidence in the company and in the leadership of the chief executive, Alan R. Mulally, and that support pushed shares of the company to more than $8 in May. But the company’s stock hit a 26-year low of $1.88 last month.

    Ford Plans More Cuts as It Posts a $129 Million Loss, NYT, 7.11.2008, http://www.nytimes.com/2008/11/07/business/08auto.html

Hospitals See Drop in Paying Patients

November 7, 2008
The New York Times
By REED ABELSON

In another sign of the economy’s toll on the nation’s health care system, some hospitals say they are seeing fewer paying patients — even as greater numbers of people are showing up at emergency rooms unable to pay their bills.

While the full effects of the downturn are likely to become more evident in coming months as more people lose their jobs and their insurance coverage, some hospitals say they are already experiencing a fall-off in patient admissions.

Some patients with insurance seem to be deferring treatments like knee replacements, hernia repairs and weight-loss surgeries — the kind of procedures that are among the most lucrative to hospitals. Just as consumers are hesitant to make any sort of big financial decision right now, some patients may feel too financially insecure to take time off work or spend what could be thousands of dollars in out-of-pocket expenses for elective treatments.

The possibility of putting off an expensive surgery or other major procedure has now become a frequent topic of conversation with patients, said Dr. Ted Epperly, a family practice doctor in Boise, Idaho, who also serves as president of the American Academy of Family Physicians. For some patients, he said, it is a matter of choosing between such fundamental needs as food and gas and their medical care. “They wait,” he said.

The loss of money-making procedures comes at a difficult time for hospitals because these treatments tend to subsidize the charity care and unpaid medical bills that are increasing as a result of the slow economy.

“The numbers are down in the past month, there’s no question about it,” said Dr. Richard Friedman, a surgeon at Beth Israel Medical Center in New York, although he said it said it was too early to call the decline a trend.

But many hospitals are responding quickly to a perceived change in their circumstances. Shands HealthCare, a nonprofit Florida hospital system, cited the poor economy and lower patient demand when it announced last month that it would shutter one of its eight hospitals and move patients and staff to its nearby facilities.

The 367-bed hospital that is closing, in Gainesville, lost $12 million last year, said Timothy Goldfarb, the system’s chief executive. “We cannot carry it anymore,” he said.

Some other hospitals, while saying they have not yet seen actual declines in patient admissions, have tried to curb costs by cutting jobs in recent weeks in anticipation of harder times. That includes prominent institutions like Massachusetts General in Boston and the University of Pittsburgh Medical Center, as well as smaller systems like Sunrise Health in Las Vegas.

“It’s safe to say hospitals are no longer recession-proof,” said David A. Rock, a health care consultant in New York.

A September survey of 112 nonprofit hospitals by a Citi Investment Research analyst, Gary Taylor, found that overall inpatient admissions were down 2 to 3 percent compared with a year earlier. About 62 percent of the hospitals in the survey reported flat or declining patient admissions.

Separately, HCA, the Nashville chain that operates about 160 for-profit hospitals around the country, reported flat admissions for the three months ended Sept. 30 compared with the period a year earlier, and a slight decline in inpatient surgeries.

Many people are probably going to the hospital only when they absolutely need to. “The only way they are going to tap the health care system is through the emergency room,” Mr. Taylor said.

And now, as the economy has slid more steeply toward recession in recent weeks, patient admissions seem to have declined even more sharply, some hospital industry experts say. “What we have not seen through midyear this year is the dramatic slowdown in volume we’re seeing right now,” said Scot Latimer, a consultant with Kurt Salmon Associates, which works closely with nonprofit hospitals.

While the drop-off in patient admissions may still seem relatively slight, hospital executives and consultants say it is already having a profound impact on many hospitals’ profitability. As fewer paying customers show up, there has been a steady increase in the demand for services by patients without insurance or other financial wherewithal, many of whom show up at hospital emergency rooms — which are legally obliged to treat them.

“It’s disproportionately affecting the bottom line,” Mr. Latimer said.

In California, for example, the amount of bad debt and charity care among hospitals has been steadily climbing, to $7.1 billion last year from about $5.8 billion in 2005. Those numbers could approach $8 billion for 2008, according to an analysis by Kurt Salmon.

The situation is exposing a main vulnerability of the nation’s hospital care system, which executives say relies heavily on private insurance to subsidize certain services. When there is a decline in profitable procedures paid for by private insurance, hospitals have less money to offset the relatively lower fees they receive from government insurance programs like Medicare and Medicaid.

“What happens in our country is that there’s really a hidden tax built in,” said Richard L. Gundling, an executive with a trade group for hospital financial executives, the Healthcare Financial Management Association. “Hospitals have to balance the mix of patients in order to survive.”

The amount of charity care provided by Shands HealthCare, the operator of the Gainesville hospital, has doubled in the last four years, to $115 million in fiscal 2008, Mr. Goldfarb said. He worries that the financial outlook will become even worse, with the prospect of payment cuts from state governments that are facing large budget shortfalls.

“If we’re going to survive the next few years,” he said, “we have to circle the wagons.”

The rapid moves by hospitals to cut costs — by laying off workers, consolidating facilities and freezing construction and other capital spending — are an abrupt change for an industry traditionally seen as insulated from economic woes.

Some hospital executives say they are simply being prudent. The University of Pittsburgh Medical Center, for example, is eliminating 500 jobs. The hospital system, which includes 20 hospitals and serves a large portion of Medicare and Medicaid patients, says that so far it has not seen a drop in patient admissions, but growth is tailing off.

“It’s much, much slower than we’ve seen in years past,” said Robert A. DeMichiei, Pittsburgh’s chief financial officer.

Mr. DeMichiei said Pittsburgh was mainly trying to reduce administrative jobs as a way to keep ahead of the worsening economy. Because large hospital groups like his have become more professionally managed in recent years, he said, they are no longer slow to reduce expenses.

Hospital executives “are beginning to act more like Corporate America,” said Mr. DeMichiei, whose own résumé includes various jobs at General Electric.

Another source of financial anxiety, hospitals say, is the continued difficulty in raising money through the credit markets. The majority of the nation’s hospitals are nonprofit, and they often raise capital through the municipal bond market to erect new buildings or make other significant capital investments. Because many hospitals say they are still unable to borrow easily, they have reacted by scaling back projects or holding off on major purchases.

“We are being extremely cautious about approving spending in these 60 to 90 days, until the markets stabilize,” said Michael A. Slubowski, the president of hospital and health networks for Trinity Health, a large Catholic system based in Novi, Mich., which operates nearly four dozen hospitals, mostly scattered across the Midwest.

While Trinity says it has not seen an overall reduction in its patient admissions, Mr. Slubowski says many of his counterparts have. “People are seeing declines,” he said.

Making matters worse for some hospitals has been a slowdown in bill payments, particularly by state Medicaid programs. The money hospitals are owed for their services — their accounts receivable — is growing, said Mr. Rock, the health care consultant, who works for the investment and consulting firm Carl Marks & Company in New York. “What we’re finding is one of the key drivers is Medicaid,” he said.

Many hospital executives also expect outright reductions in payments by Medicaid and Medicare.

Mr. Rock predicts that many hospitals will soon start to reconsider the services they provide, with an eye toward scaling back or eliminating some altogether. Procedures that rely heavily on patients’ making sizable cash outlays, like bariatric surgery, are particularly vulnerable, he said.

Hospital executives concede that they may not be as directly affected by the weak economy as retailers and banks, but they also say they are bracing for what is shaping up to be a severe and prolonged recession.

“There’s a lot of C.F.O. doom and gloom,” said Robert Shapiro, the chief financial officer at North Shore-Long Island Jewish Health System. “The sky may be really falling this time.”

    Hospitals See Drop in Paying Patients, NYT, 7.11.2008, http://www.nytimes.com/2008/11/07/business/07hospital.html

Retailers Report a Sales Collapse

November 7, 2008
The New York Times
By STEPHANIE ROSENBLOOM

Sales at the nation’s largest retailers fell off a cliff in October, casting fresh doubt on the survival of some chains and signaling that this will probably be the weakest Christmas shopping season in decades.

The remarkable slowdown hit luxury chains that sell $5,000 designer dresses as badly as stores that offer $18 packs of underwear, suggesting that consumers at all income levels are snapping their wallets shut.

Sales at Neiman Marcus, the luxury department store, dropped nearly 28 percent in October compared with the same month last year. Sales fell 20 percent at Abercrombie & Fitch, nearly 17 percent at Saks, 16 percent at Gap and nearly that much at Nordstrom.

Of the more than two dozen major retailers that reported on Thursday, most had sales declines at stores open at least a year, the majority of the decreases in double digits. Deep discounters like Wal-Mart and BJ’s Wholesale Club reported gains.

Consumer spending represents two-thirds of the nation’s economic activity, and analysts said the striking sales declines at retailers almost certainly portended an extended, severe recession. The reports highlighted once again the depth of the economic problems confronting President-elect Barack Obama.

Consumers are cutting their spending for many reasons, but high on the list is the weakening employment picture. Even people who still have jobs are pinching pennies as they hear of layoffs among friends and family. Unemployment has hit 6.1 percent, and a new jobs report due Friday is expected to show further deterioration.

“October was every bit as bad we feared,” said John D. Morris, a retailing analyst with Wachovia. “Maybe worse. October’s numbers were so disappointing, particularly in the final week, which had to leave retailers in a state of high anxiety going into the holiday season.”

Indeed, the situation for retailers is so dire that it is creating opportunity for any consumers in a mood to spend money. Seven weeks before Christmas, stores are offering eye-catching bargains as they struggle to move merchandise.

“This is the year the consumer has been given a holiday gift beyond belief,” said Marshal Cohen, chief industry analyst for NPD Group. “You can get anything, anywhere, at any price.”

Malls are papered with sale signs, some seven feet tall and obscuring storefronts. New merchandise is being marked down before it even hits the sales floor. Stores are extending their hours and offering the kinds of deals — “doorbusters” — that are usually reserved for the day after Thanksgiving, known as Black Friday.

Kohl’s will stay open until midnight this Friday and offer an array of doorbusters, such as $250 diamond earrings for $77.99. Kmart is offering “early Black Friday” deals on Sundays, such as a Sylvania 32-inch LCD television for $439.99, instead of the usual $549.99.

Even Wal-Mart, whose sales at stores open at least a year were up 2.4 percent in October, began a big discount program on Thursday, lowering prices on thousands of food and gift items. It is cutting the price of a Magnavox Blu-ray player to $198 from $229, and of the Battleship board game to $10 from $14.38.

“Wal-Mart’s beating the promotional drum as loud as ever and as early as ever in advance of Christmas,” said Bill Dreher, an analyst with Deutsche Bank.

Only a few months ago, retailers thought they were prepared for the economic slowdown. They cut inventories in anticipation of weak back-to-school sales. But to their shock, sales declines reached double-digits in September, only to get worse in October.

The result? Retailers have too much fall merchandise still on their shelves, even as Christmas merchandise is starting to arrive.

“I’ve never seen as many ‘percent off the entire store’ promotions as we’re seeing right now,” said Kimberly Greenberger, a retail analyst at Citigroup who has been studying apparel sales and promotions for a decade.

Retailers that include American Eagle, Ann Taylor, Chico’s, Soma, Gap, Victoria’s Secret, Bath & Body Works, Talbots and J. Jill have offered discounts on their entire merchandise lines or are letting shoppers buy one item and take 50 percent off a second, she said.

“What we’re hearing anecdotally from different retailers is that when they’re putting something on sale at 30 or 40 percent discount it is no longer having an effect on consumers,” Ms. Greenberger said. “They’re having to cut prices 50 to 60 percent to get consumers interested.”

Two stylishly dressed friends spending time in Midtown Manhattan on Thursday said they used to enjoy shopping. “I want to impulse-buy again,” said a wistful Louise Van Veenendaal, an actress. But these days, economic anxiety is prompting the women to steer clear of stores. They refuse even to look at sales circulars.

“I’m much poorer than I’ve ever been,” said her friend, Kate Pistone, also an actress, who makes ends meet by working at a restaurant. Sales there have been declining. “I made $5 last night,” she said.

Analysts who spend time prowling the nation’s stores to track trends say that consumers are simply shell-shocked by all the grim financial news.

“You walk the mall and consumers look like zombies,” said Mr. Morris of Wachovia, after visiting a mall last week. “They’re there in person, but not in spirit.”

While the stores’ price cuts are good news for consumers, they are a dangerous tactic for retailers.

Retailers usually make most of their profit during the Christmas shopping season. And while they always offer impressive sales, they plan to discount only about 25 percent of their merchandise, not half of it, Mr. Cohen said. Too much discounting erodes profits. And by cutting prices so early, retailers risk running out of stock, or color and size options, before the season’s home stretch.

A few retailers have strong balance sheets, but many do not, and with credit hard to find they can ill afford a disastrous Christmas season. Analysts said they expected a new wave of bankruptcies after the first of the year.

Bankrupt and ailing retailers are undercutting some of their healthy peers. Last week, for instance, Mervyn’s announced a 149-store liquidation sale just in time for the holidays. Other such sales are already under way at Steve & Barry’s and Linens ’n Things. Circuit City, the struggling electronics chain, began liquidation sales this week at 155 stores it is closing.

Mr. Cohen of NPD Group said wise retailers would not sacrifice profits just to shove goods out the door. But he acknowledged that in such a panicky climate, the race to discount merchandise had become nearly unstoppable.

“What’s happening is the retailer is almost saying, ‘Please just come in,’ ” he said. “ ‘We’ll pay you to shop.’ ”

    Retailers Report a Sales Collapse, NYT, 7.11.2008, http://www.nytimes.com/2008/11/07/business/07retail.html

Wal-Mart the Exception

as Sales Fall for Retailers

November 7, 2008
The New York Times
By THE ASSOCIATED PRESS

The nation’s retailers saw their sales plummet last month in what is likely the weakest October in decades, as the financial crisis and mounting layoffs left shoppers too scared to shop.

The drop-off from an already weak September performance is further darkening the outlook for the holiday season and dimming hopes for any industry recovery until at least the second half of next year.

As merchants reported their dismal sales figures Thursday, Wal-Mart Stores, the world’s largest retailer, proved to be among the few bright spots as it benefits from shoppers focusing on buying basics at discounters.

Most other stores, from luxury merchants to retailers for retailers, suffered steep sales declines as consumers were spooked by shrinking retirement funds, volatile markets and layoffs across many industries. The number of people continuing to receive jobless benefits reached its highest level in more than 25 years, according to government figures released Thursday.

Even the warehouse club operator, Costco Wholesale , which sells items like TVs along with basics, posted disappointing results.

“Wal-Mart’s solid performance is reflective of the weakness in consumer spending,” said Ken Perkins, president of research company RetailMetrics. “As soon as the financial crisis hit, consumers spending dropped dramatically. ... Consumer spending ground to a halt in October.”

According to Thomson Reuters’ preliminary sales tally for October, nine retailers beat estimates and one merchant met expectations, while 13 missed projections. The tally is based on same-store sales, or sales at stores opened at least a year, which are considered a crucial indicator of a retailer’s health.

Wal-Mart, which has seen its aggressive discounting resonate with shoppers, posted a 2.4 percent gain in same-store sales, beating Wall Street projections for a 1.6 percent gain. The results exclude sales from fuel. Including fuel sales, same-store sales rose 2.5 percent.

At Sam’s Club, its warehouse club division, fresh food, dry groceries and other consumables were strong. Weaker categories included electronics, jewelry and home-related products, the company said.

Wal-Mart predicted that same-store sales for its overall American stores will be up from 1 percent to 3 percent in November.

The Target Corporation, which has lagged behind Wal-Mart in recent months because of its heavier emphasis on nonessentials, posted a 4.8 percent drop, worse than the 2.8 percent decline that analysts had expected.

“Sales for the month of October were very disappointing, with continued volatility in daily results,” the president and chief executive of Target, Gregg W. Steinhafel, said in a statement. “We expect the recent challenging sales environment to continue into the holiday season and beyond as a result of the economic factors currently affecting consumer spending.”

Costco, hurt by currency effects, reported a 1 percent decline in October. Analysts surveyed by Thomson Reuters expected a gain of 3.6 percent. Excluding the negative effect of foreign exchange — particularly in Canada, Britain and South Korea, international same-store sales would have increased 3 percent for the month, still well below its usual hefty gains.

Among department stores, Macy’s Inc. reported a 6.3 percent drop in same-store sales for October.

Gap Inc. suffered a 16 percent drop in same-store sales, worse than the 11.1 percent decline Wall Street had forecast. The retailer reaffirmed its profit outlook for the third quarter, as it focused on inventory control.

Limited Brands reported a 9 percent sales drop in October, a bigger decline than the 7.2 percent analysts were expecting.

Even teenagers dramatically scaled back their spending, resulting in dismal sales at some stalwarts.

American Eagle Outfitters reported a 12 percent drop in same-store sales, worse than the 8 percent decline predicted, while Abercrombie & Fitch suffered a 20 percent sales drop last month, steeper than the 14.4 percent decline expected.

Wet Seal Inc. saw its sales fall 6.2 percent, less than the 8.6 percent decline expected. The retailer said it now expected third-quarter profit at the high end of its guidance.

    Wal-Mart the Exception as Sales Fall for Retailers, NYT, 7.11.2008, http://www.nytimes.com/2008/11/07/business/07shop.html

Stocks Fall After Troubling Economic Data

November 7, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Stocks slumped on Thursday, extending their losses to a second day, amid a poor outlook for the retail and automobile industries and worries about the state of the labor market.

The Dow Jones industrial average fell 240 points in morning trading and the broader Standard & Poor’s 500-stock index dropped 2.9 percent. The Dow fell 486 points on Wednesday.

Before the markets opened, retailers reported that their October sales slowed as Americans pulled back on spending. The holiday shopping season could be the worst in years, analysts said, as consumers buckle down to ride out a looming recession.

The job situation may be worsening, as well. The Labor Department is expected to report on Friday that employers cut hundreds of thousands more jobs last month, data that could prompt a sell-off in stocks. The agency said on Thursday that new claims for unemployment benefits declined by 4,000 last week, to 481,000; readings above 400,000 are considered recessionary. The agency also said that worker productivity grew at an annual pace of 1.1 percent in the third quarter, down from a 3.6 percent growth rate in the second quarter.

The declines on Wall Street came despite sharp reductions in foreign interest rates by central banks seeking to further ease the credit crisis. The Bank of England lowered its benchmark rate by 1.5 percent, more than analysts had expected, and the European Central Bank cut rates by half a percentage point.

The moves did little to reassure European investors, who sent stocks down more sharply than their American counterparts. Stocks in London fell 5.7 percent; Paris stocks were down 6.4 percent. The benchmark index in Germany tumbled more than 7 percent.

In Asia, where stock markets had several sessions of modest rises before the United States presidential election, the Nikkei 225, Hang Seng and Kospi indexes all dropped more than 6.5 percent, wiping out most of a recent rally.

Analysts in Asia said Thursday’s declines were not a huge surprise. “Some fizzle was to be expected,” said Stephen Davies, chief executive of Javelin Wealth Management in Singapore, who said the pre-election rally now looked more like a blip, as investors turned their attention to the difficulties still facing the global economy.

In Tokyo, the Nikkei 225 share average closed 6.5 percent lower after weak United States economic news on Wednesday spelled tough times for Japanese exporters. Shares of Canon and Sony dropped more than 12 percent on Thursday.

After the Nikkei closed, Toyota Motor said that it had slashed its annual profit forecast by more than half. Toyota said it now expected net profit of 550 billion yen, or $5.5 billion, for the fiscal year ending March 31, down 56 percent from its earlier forecast.

Elsewhere, the Hang Seng index in Hong Kong fell 6.4 percent. Shares in Cathay Pacific led the declines, plunging 13 percent after the airline warned of unrealized fuel hedging losses of $360 million, in October.

Investors in Australia joined the retreat with the S.& P./ASX 200 index down 4.3 percent. The Kospi index in South Korea dropped 7.5 percent.

The interest rates are the latest in a wave around the world as policy makers try to prop up their economies and bolster confidence in the financial system.

“After the elections in the U.S., markets are now turning their focus on the issues of economies sliding into a recession again and getting back into the reality of tougher times ahead,” said Richard Hunter, a fund manager at Hargreaves Lansdown in London.

Bettina Wassener and Julia Werdigier contributed reporting.

    Stocks Fall After Troubling Economic Data, NYT, 7.11.2008, http://www.nytimes.com/2008/11/07/business/07markets.html

A Towering Economic To-Do List for Obama

November 6, 2008
The New York Times
By THE NEW YORK TIMES

The dismal state of the economy helped decide Tuesday’s presidential election. And it almost certainly will dominate the early days of the Obama administration.

Few presidents have entered office with an economy in such turmoil. Reflecting worries that the worst may not be over, the stock market continues to languish, with a 5 percent decline on Wednesday, leaving it 35 percent below its peak last fall.

The reasons are myriad: the financial system, though back from the brink, remains deeply troubled. Housing may no longer be in free fall, but plummeting values and rising defaults have impoverished many homeowners and burdened states with widening budget deficits. The once-mighty auto industry is on the verge of implosion.

Consumers who piled up credit card debt are pulling back, a major concern because their spending helped power economic growth in recent years. And with unemployment widely expected to increase to 8 percent or higher, from 6.1 percent, consumers are likely to tighten their belts even more.

Moreover, with upward of $1 trillion already pledged by the federal government to bail out the banking and housing industries, financing a growing deficit to address the problems could be difficult — and saddle the Treasury Department with high levels of debt for years to come.

But even before President-elect Obama takes the oath of office, Democrats are likely to push his agenda with urgency, because the economy otherwise could worsen quickly — complicating the task ahead. “The cost of allowing an economy to flounder is very high in lost output and rising unemployment,” said James Glassman, chief domestic economist at JPMorgan Chase & Company.

Here are some of the crucial issues that economists say will test the new administration, and how it might address them.

ECONOMIC STIMULUS: Obama Is Likely to Act Quickly

Quick passage of an economic stimulus package is high on Mr. Obama’s agenda, even more pressing for the moment than the tax package that he promoted repeatedly during his campaign.

Congress could act on the stimulus this month — but only if the president-elect signals that he favors a preinauguration special session, Congressional Democrats said. Legislators would more than likely adopt some relatively inexpensive measures rather than try to pass a much larger outlay that the Bush administration might oppose. After he takes office, Mr. Obama is likely to ask Congress for an additional economic lift, those in his camp say.

Before the election, the party leadership in Congress discussed a lame-duck session to take up a bill that would pump $150 billion to $200 billion into the economy. That would follow the $168 billion stimulus, most of it in rebate checks mailed to tens of millions of Americans earlier this year.

Those checks lifted spending a bit. But they came before the credit crisis struck in force in early September.

“We need a package that matches the problem as it exists today, and in my view that means at least $200 billion a year for a couple of years,” said a senior member of the House Financial Services Committee staff.

As private sector spending dries up, the case builds — among Republicans as well as Democrats — for the government to jump-start the economy.

“Right now, the economy is in a really deep recession,” said Kevin Hassett, director of economic policy studies at the American Enterprise Institute and a senior economic adviser to John McCain.

Like many Republicans, he wants the stimulus — whatever its size — to be a cut in tax rates, not an increase in public spending. The Obama camp also supports a tax cut, possibly front-loaded so that refund checks would go out before tax returns are filed in April. But that would be enacted after the inauguration.

As for immediate relief, Obama aides say, a lame-duck session of Congress could pass a $60 billion package of additional outlays for food stamps, extended unemployment benefits and subsidies to the states to minimize their spending cuts.

The big question is “should the Democrats risk a Bush veto in a lame-duck session,” said Jared Bernstein, a senior economist at the Economic Policy Institute and an Obama adviser, “or should they wait for Obama to take office in January to get a more effective recovery package.”

As a candidate, Mr. Obama said he would extend the Bush tax cuts of 2001 and 2003 for families whose income is under $250,000 a year. He pledged to add new tax breaks for homeowners who did not itemize deductions and more breaks for savings accounts, college costs and farming. He said he would change the alternative minimum tax so it did not affect the middle class.

To raise revenue, Mr. Obama said he would repeal the Bush tax cuts for people in the top two marginal tax brackets before their scheduled expiration at the end of 2010, and raise taxes on capital gains and dividends.

His tax plans are reminiscent of Clinton administration policies that increased taxes on the affluent but gave targeted breaks to others. He would also repeal corporate loopholes and retain an estate tax.

The nonpartisan Tax Policy Center estimated that the Obama plans would reduce revenues by as much as $2.9 trillion over a decade. The center said Mr. Obama’s incentives could strengthen the labor market, while giving further breaks to “an already favored group — seniors.” -- LOUIS UCHITELLE and JACKIE CALMES

MORTGAGES: A Pledge to Aid Homeowners

Mr. Obama has pledged to help hard-pressed homeowners, but he will have to move quickly to forestall a new wave of foreclosures.

Some in Congress favor direct mortgage relief, but others worry that the cost — on top of the bank bailout — will be too expensive.

Judging by positions laid out in his campaign, Mr. Obama might seek to change personal bankruptcy laws to help people avoid losing their homes, a step that the Bush administration and the mortgage industry have resisted.

Like other Democrats, Mr. Obama wants to empower bankruptcy judges to ease the terms of home loans on primary residences. Under current laws, judges are prohibited from reducing the balance on those mortgages but can change loans backed by commercial property or second homes.

The shift, proponents say, would help keep millions of people in their homes and ease the broader housing crisis. Many mortgage companies and Wall Street investors, however, might suffer greater losses on the loans and securities backed by them.

The Bush administration and many lenders have argued that changing the bankruptcy law would ultimately drive up mortgage rates, worsening the downturn in the housing market. They also argue that it would violate the sanctity of contracts and drive investors away from the mortgage market.

But with more comfortable majorities in both houses of Congress, Democrats could move quickly. Republicans in the Senate could try to block a change through a filibuster.

Mr. Obama has generally supported the $700 billion financial rescue package that Congress and the Bush administration negotiated and approved last month. He also endorsed the move by the Treasury secretary, Henry M. Paulson Jr., to redirect $250 billion of that money to recapitalizing the nation’s banks.

But Mr. Obama has not specifically said how he would spend the remainder of the money or whether his administration would acquire loans or securities as Congress initially intended. (The Treasury has made no acquisitions yet and it is unclear if it will do so before the Bush administration leaves office in January.) Mr. Obama has said that the government should help homeowners refinance troubled loans that can be saved. -- VIKAS BAJAJ

FEDERAL REGULATION: Tighter Reins on Wall Street

Mr. Obama called for reorganizing the financial regulatory system months before the housing and credit crises spiraled into a debacle. He outlined six principles, but offered few details.

He said one major priority would be to consolidate the financial regulatory system. He promised to streamline the alphabet soup of agencies, from the Federal Reserve to the Securities and Exchange Commission, that have enforcement powers.

But he has not said which agencies he would eliminate or merge.

Mr. Obama has also pledged to impose stronger liquidity, capital and disclosure requirements on financial institutions, and to subject unregulated financial businesses — like hedge funds, mortgage brokers, derivatives traders and credit-rating agencies — to federal oversight.

Mr. Obama promised he would increase penalties for market manipulation and predatory lending, and create a new financial-market oversight commission to review conditions regularly and advise the president and Congress about potential risks.

In one of his campaign-ending speeches on Monday, Mr. Obama said, “The last thing we can afford is four more years where no one in Washington is watching anyone on Wall Street because politicians and lobbyists killed common-sense regulations.”

He returned to that theme on Tuesday night after he clinched the election, signaling that the financial industry should brace itself for a regulatory crackdown. Some Democratic lawmakers already have held hearings on what a new financial regulatory landscape would look like. -- JACKIE CALMES

AUTO INDUSTRY: In Detroit, No Cash, No Credit, No Time

General Motors, Ford Motor and Chrysler are rapidly running out of cash in the worst sales market for new vehicles in 15 years. Both G.M. and Ford are expected to announce billions of dollars more in losses for the third quarter on Friday, and the threat of bankruptcy will grow without some form of federal assistance.

The Bush administration has so far denied G.M., Ford and Chrysler any aid from the $700 billion financial rescue fund or any other new source of assistance. It will, however, pay out the $25 billion in low-interest loans for cleaner cars sooner than had been promised.

The pleas for help from the Big Three are growing louder. “This is really a severe, severe recession for the U.S. auto industry and something we cannot sustain,” said Michael DiGiovanni, G.M.’s chief market analyst.

Mr. Obama has promised to meet soon with the chief executives of the Big Three to discuss adding another $25 billion in aid to the loan program for more fuel-efficient vehicles.

Democratic leaders in Congress are also considering ways to inject new cash into Detroit as quickly as possible. Michigan’s ranking Democrats, Senators Carl Levin and Representative John D. Dingell, will be instrumental in crafting any proposed legislation.

The aid could come in the form of government-backed, low-interest loans, similar to the bailout package for Chrysler in 1979. In addition, the Congress and Mr. Obama could tap the $700 billion financial assistance fund to buy up bad car loans and help automotive lenders get credit flowing to consumers again.

One potential hurdle for aid, however, is the proposed merger of G.M. and Chrysler, which is majority-owned by the private equity firm Cerberus Capital Management. The deal, if completed, would cost thousands of jobs and has so far found little support in Washington. -- BILL VLASIC

HEALTH CARE: An Overhaul Will Have to Wait

Democrats’ campaign rhetoric aside, few health care analysts expect the new president and Congress to undertake a sweeping overhaul of the health care industry any time soon.

The more pressing needs of a faltering economy make it unlikely that big changes in health care can quickly make their way to the top of the new agenda. But analysts say the newly empowered Democrats are likely to abandon some of the health care positions staked out by the Bush administration, particularly when it comes to Medicare.

Private insurers’ role in Medicare “is target No. 1 for Democrats,” said Robert Laszewski, the president of Health Policy and Strategy Associates, a consulting firm in Alexandria, Va.

Under the privatization approach of the Bush White House, commercial insurers now provide coverage to about a quarter of the nation’s 44 million Medicare enrollees — at a cost to the Medicare program of about 15 percent more than when the government provides the benefits directly. With the threat of a Bush veto removed, Congress will now be looking to shrink or end those industry subsidies to save Medicare money, Mr. Laszewski said.

The president-elect and the Democratic Congress also are likely to give Medicare the power to directly negotiate with pharmaceutical companies — a change that the Bush administration has resisted — though the impact on prices would depend on the authority Congress grants.

Analysts also expect the Democrats to seek closer scrutiny of the drug industry through the Food and Drug Administration, an agency that has been stretched thin in recent years.

And many analysts expect Congress to take some steps to address the increasing cost of medical care. High on the list might be covering more children under the federally subsidized State Children’s Health Insurance Program. Congress might also try some relatively inexpensive other changes, like pushing harder for the adoption of electronic health records or requiring hospitals and doctors to report publicly both the cost and the outcomes of their care, to enable patients to comparison-shop. -- REED ABELSON

TECHNOLOGY: To Shape Policy, a Cabinet Voice

Technology companies have long argued that they need the best and brightest engineers if they are going to compete in the global economy. President-elect Obama has endorsed the industry’s call for raising the number of H-1B temporary work visas, which are available now to only 65,000 skilled foreign engineers each year. (The visas are all claimed within minutes.)

But even with a sympathetic ear in the White House, getting Congress to agree to more visas could present a major challenge given the probability that, in a recession, public sentiment will be heightened that foreigners are taking Americans’ jobs.

In the meantime, the tech industry — which has grown much more politically active in recent years — will greet the new president with a list of other wishes. One is that he push policies to spread high-speed Internet access, which provides a conduit for e-commerce, online advertising and other Web-centric business models. The industry argues that the United States has fallen to 16th in the world in terms of broadband penetration, frustrating consumers with a lack of services — like the high-speed downloading of movies — and the still-choppy performance of their Internet connections.

The industry also hopes Mr. Obama will stand behind his stated support of “net neutrality,” which is a government requirement that telecommunications companies provide Internet content providers equal access to delivery lines.

Such tech policy could fall to a chief technology officer, a cabinet position the president-elect has pledged to create. -- MATT RICHTEL

ENERGY: An Agenda Faces Possible Delays

An Obama presidency could mean a sharp shift in the nation’s energy policies, with particular emphasis on conservation and renewable power. But some of the candidate’s bolder proposals, like a global warming bill, may have to wait for the economy to recover, according to analysts and energy experts.

High energy costs and concerns about global warming have heightened the sense of urgency for a broad policy that tackles both the nation’s oil use and its energy-related carbon emissions. As a candidate, Mr. Obama shifted from his initial opposition to expanding offshore drilling, but his core message remained that the United States should reduce its oil consumption, encourage energy conservation and efficiency, and develop low-carbon forms of energy.

“There is an opportunity to address energy needs in a way that hasn’t been possible for decades,” said Daniel Yergin, the chairman of Cambridge Energy Research Associates. “It almost feels like we’re picking up from where we were in the 1970s.”

But, he added, “resources are going to be constrained, and spending on energy will have to compete for dollars with spending on the financial crisis and two wars.”

The Obama energy plan called for investing $150 billion in clean energy technologies over the next 10 years, creating green jobs and ensuring that a growing share of the country’s electricity came from renewable sources. He also proposed an aggressive mandate over the next four decades to cut greenhouse gas emissions, which cause global warming.

Given the size of the Democratic majority, an Obama administration is also likely to impose stricter environmental regulations and place higher taxes on oil companies than the Bush administration did. -- JAD MOUAWAD

TRADE: Cooperation Fades, Protectionism Rises

What consensus there was on international trade seemed to evaporate with the failure of world trade talks this summer. Indeed, with the world on the brink of a global recession, led by the United States and Europe, the fear of a rise in protectionism grows.

The first test of sustaining international cooperation will come on Nov. 14 and 15, long before Mr. Obama takes office. Leaders from 20 major countries will gather in Washington with President Bush to embark on an effort to rewrite international financial regulations — an undertaking some liken to a latter-day Bretton Woods conference.

Whether or not he attends, Mr. Obama will cast a long shadow.

In short order, the recession and a likely spike in unemployment are sure to put him under pressure from union supporters, as well as Congressional Democrats, to take a tougher line on trade.

“China is the issue that should be part of Obama’s trade policy right away,” said Thea M. Lee, the chief economist of the A.F.L.-C.I.O. “Part of it is sending a strong message to the Chinese government that the U.S. is not willing to tolerate currency manipulation and violation of workers’ rights.”

But China’s economy is slowing, making its leaders even less receptive to demands to allow their currency to rise. The United States will also need the Chinese to buy a good chunk of the debt being run up by the bailout of banks and housing.

It is also unclear whether Mr. Obama will pursue a renegotiation of the North American Free Trade Agreement, which he discussed in the hard-fought primaries.

“He parsed his answers in a way that suggests he understands the importance of global trade,” said Hank Cox, a spokesman for the National Association of Manufacturers. -- MARK LANDLER

    A Towering Economic To-Do List for Obama, NYT, 6.11.2008, http://www.nytimes.com/2008/11/06/business/06challenges.html?hp

Longer-Term Jobless Benefits Hit 25-Year High

November 6, 2008
Filed at 1:12 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- The number of out-of-work Americans continuing to draw unemployment benefits has surged to a 25-year high, while shoppers turned extra frugal, further proof of the damage from sinking economy, credit problems and financial stresses.

The Labor Department reported Thursday that the number of people continuing to draw unemployment benefits jumped by 122,000 to 3.84 million in late October. It was the highest level since late February 1983, when the country was struggling to recover from a long and painful recession.

New filings for jobless benefits last week dipped to 481,000, a still-elevated level that suggests companies are in a cost-cutting mode.

The work force was much smaller in February 1983, when the number of people continuing to claim benefits was 3.88 million.

At that time, about 87.2 million Americans were in the work force, compared to almost 134 million today. That's one reason the unemployment rate was 10.4 percent in February 1983, compared to 6.1 percent last month.

Still, the increase in people continuing to draw unemployment benefits is an indication that laid-off workers are having a harder time finding new jobs.

Democrats in Congress are pushing to include an extension of unemployment benefits in a new stimulus package, which could be taken up this month. Benefits typically last 26 weeks.

Congress approved a 13-week extension of benefits in June, and the department said about 773,000 additional people claimed benefits through that program for the week ending Oct. 18, the most recent data available. That extension is scheduled to end next June.

Americans hit by layoffs, shrinking nest eggs and other stresses are pulling back even more, sending sales at many big retailers down in what may have been the weakest October in decades. That further darkened the outlook for the holiday sales season.

Target Corp. and Costco were among the many retailers reporting sales declines last month. Wal-Mart Stores Inc., the world's largest retailer, however, logged a sales gain.

On Wall Street, stocks slumped. The Dow Jones industrials were down about 350 points in afternoon trading.

Hoping to prevent a deep recession, the Federal Reserve last week ratcheted down interest rates last week to 1 percent and left the door open to further reductions.

The country's economic state has rapidly deteriorated in just a few months. The economy contracted at a 0.3 percent pace in the July-September quarter, signaling the onset of a likely recession. It was the worst showing since the last recession, in 2001, and reflected a massive pull back by consumers.

With the economy sinking and consumers appetites flagging, employers have been slashing jobs. They are expected to cut around 200,000 jobs when the government releases the October employment report on Friday. The unemployment rate -- now at 6.1 percent -- is expected to climb to 6.3 percent in October.

As American consumers watch jobs disappear and their wealth shrink, they'll probably retrench even further.

That's why analysts predict the economy is still shrinking in the current October-December quarter and will continue to contract during the first quarter of next year. All that more than fulfills a classic definition of a recession: two straight quarters of contracting economic activity.

Yet another report out Thursday showed the efficiency of U.S. workers slowed sharply in the summer as overall production, or output, declined, reflecting the hit to consumers from housing, credit and financial troubles.

Productivity -- the amount an employee produces for every hour on the job -- grew at an annual pace of 1.1 percent in the July-September quarter, down from a 3.6 percent growth rate in the second quarter, the Labor Department reported.

With productivity growth slowing, labor costs picked up. Unit labor costs -- a measure of how much companies pay workers for every unit of output they produce-- increased at a 3.6 percent pace in the third quarter, compared with a 0.1 percent rate of decline in the prior period.

The 1.1 percent productivity growth logged in the summer beat economists' expectations for a 0.8 percent growth rate. The pickup in labor costs-- while welcome to workers -- was faster than the 2.8 percent pace economists were forecasting.

Economists often look at labor compensation for clues about inflation. These days, however, the Federal Reserve and analysts are more concerned about the economy's feeble state. While the pick up in labor costs might raise some economists' eyebrows, the Fed is predicting inflation pressures will lessen as the economy loses traction.

The 1.1 percent productivity gain was the smallest since the final quarter of last year, while the increase in labor costs was the biggest since that time.

    Longer-Term Jobless Benefits Hit 25-Year High, NYT, 6.11.2008, http://www.nytimes.com/aponline/washington/AP-Economy.html

AutoNation Swings to $1.41 Billion 3Q Loss

November 6, 2008
Filed at 12:40 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

RICHMOND, Va. (AP) -- AutoNation Inc. said Thursday it swung to a $1.41 billion loss in the third quarter, with customers finding it increasingly difficult to get a car loan and the overall economy heading south.

Fort Lauderdale, Fla.-based AutoNation, the nation's largest automotive retailer, said it lost $1.41 billion, or $7.99 per share, compared with a profit of $72.1 million, or 37 cents per share, a year ago. It recorded non-cash charges for goodwill and franchise impairments of $1.46 billion after-tax.

Revenue fell 21 percent to $3.5 billion from $4.5 billion in the year-ago period.

Analysts polled by Thomson Reuters, on average, expected earnings of 29 cents per share on revenue of $3.88 billion. Those estimates typically exclude charges.

Shares fell 40 cents, or 6.6 percent, to $5.69 in midday trading Thursday. The stock has traded between $3.97 and $19.59 over the last 52 weeks.

The company said the tough vehicle market and the drop in its share price resulted in the charges. Excluding those items, AutoNation said it earned $44 million, or 25 cents per share.

Results for the quarter were ''negatively impacted by the credit crisis that escalated in September into a full blown credit panic,'' Chief Executive Mike Jackson said in a news release.

''This created a credit freeze that broke consumer confidence and, along with a continued housing depression, accelerated the decline in the U.S. economy and auto retail market,'' Jackson said. ''We expect the rest of 2008 will continue to be challenging.''

Jackson said the company remains in compliance with all of the financial covenants, quelling worries from analysts over the last few weeks, and has reduced debt by $589 million so far this year and is planning a further reduction of $500 million.

Despite the sales drop, AutoNation said it fared better than others in the industry. Industry wide new vehicle sales fell about 31 percent, while AutoNation's dropped just 24 percent, according to data compiled by CNW Research that was cited by AutoNation.

Slowdowns in industry sales have hit automakers hard, forcing jobs cuts and other reductions in hopes of surving the dramatic downturn. Leading automakers say some sort of government funding is necessary to bail out the troubled industry.

AutoNation said due to changes in the auto retail market, it altered its management approach by dividing its business into three operating segments -- domestic, import and premium luxury.

Domestic refers to stores that sell vehicles manufactured by General Motors, Ford, and Chrysler; import, stores that sell vehicles manufactured primarily by Toyota, Honda and Nissan; and premium luxury, comprised of stores that sell vehicles manufactured primarily by Mercedes, BMW and Lexus.

For the quarter, the company said domestic segment income was $23 million compared with $54 million in the year-ago period, with a 36 percent decline in new vehicle sales. Imports declined from $53 million compared with $69 million last year and saw an 18 percent drop in new vehicle sales. Premium luxury income was $43 million compared with $56 million a year ago, with a 14 percent slip in new vehicle sales.

In a conference call with investors, Goldman Sachs analyst Matthew Fassler asked how higher-priced luxury cars may rebound compared to more moderately priced vehicles.

''We're in a very extraordinary period where you have this most unfortunate combination of a cyclical downturn all of the sudden combined with a credit crisis,'' Jackson responded. ''That is a very toxic combination that no segement will be immune from.''

AutoNation said it is on-track to meet its planned cost reductions of $100 million a year previously announced in Septmeber. The planned included cutting jobs and selling underperforming stores. It also planned to reduce advertising spending, cut capital expenditures and reduce its vehicle inventory, which is down 6,600 units since the beginning of the year.

------

On the Net:

AutoNation: http://www.autonation.com

    AutoNation Swings to $1.41 Billion 3Q Loss, NYT, 6.11.2008, http://www.nytimes.com/aponline/business/AP-Earns-AutoNation.html

Bleak Night at Christie’s, in Both Sales and Prices

November 6, 2008
The New York Times
By CAROL VOGEL

In a hushed salesroom at Christie’s on Wednesday night, works by a wide range of artists, from Manet, Cézanne and Renoir to Rothko and de Kooning, failed to sell, and prices for things that did find buyers often went for far less than what they would have a year ago.

“It’s all down to estimates, and people were frightened,” said James Roundell, a London dealer.

Early in the summer, well before the world financial picture darkened, Christie’s secured art collections from the estates of two New York philanthropists: Rita K. Hillman, who was president of the Alex Hillman Family Foundation, named for her husband, a publisher who died in 1968; and Alice Lawrence, the widow of Sylvan Lawrence, a Manhattan real estate developer who died in 1981. Since both collections center on late 19th- and 20th-century art, Christie’s decided to put the two collections together and hold a special sale that it called “The Modern Age.”

From a sales standpoint, estate items are usually attractive because they are perceived as fresh material that has not been on the market for years. But in this case the works were not good enough to warrant the estimated prices, given the grim financial climate.

“The estimates were from an earlier time, and the market has changed now,” said Christopher Burge, honorary chairman of Christie’s in America and the evening’s auctioneer.

In the case of the Lawrence property, Christie’s had given the estate a guarantee — an undisclosed sum regardless of the outcome of the sale — so the auction house could set its own reserves (that is, the undisclosed minimum prices that bidders must meet for the art to be sold). Even after those reserves were lowered, the audience barely bit.

The two collections brought a total of $47 million, less than half of its $104 million low estimate. Of the 58 lots, 17 failed to sell. (Final prices include the commission to Christie’s: 25 percent of the first $50,000, 20 percent of the next $50,000 to $1 million, and 12 percent of the rest. Estimates do not reflect commissions.)

Of the 30 works from the Lawrence collection, the highlight was expected to be “No. 43 (Mauve),” a classic 1960 Rothko painting. The dark abstract canvas was estimated at $20 million to $30 million, far beyond the $1.5 million the couple paid for it at Sotheby’s in 1988. Mr. Burge opened the bidding at $10 million, but he had no takers. (Before the auction, experts grumbled that the painting had condition issues.)

Other casualties were a 1970 abstract drawing by de Kooning, estimated at $500,000 to $700,000, and a 1964 crushed metal sculpture by John Chamberlain, estimated at $900,000 to $1.2 million.

One of the few works that several people were willing to reach for was Magritte’s “Empire of the Lights” (1947), a gouache of one of the artist’s most famous images — a nocturnal street scene featuring a spookily shuttered house and a brilliant blue sky with puffy white clouds. David Benrimon, a New York dealer, bought the work for $3.1 million ($3.5 million including Christie’s fees), just above its high estimate of $3 million.

Anything connected with Francis Bacon has been a hit at auction in recent years, and Christie’s was selling a portrait of George Dyer, Bacon’s companion, who committed suicide in 1971. The image was painted by Lucian Freud in 1966. The salesroom perked up when three bidders tried for the painting, which ended up bringing its low estimate of $1.8 million, or $2 million with Christie’s commission.

The evening began with 28 paintings and works on paper from the Hillman collection. In the hope of warming up the audience, Christie’s had choreographed the sale so that several lower-priced drawings went on the block first. But that did not help. Early on, a Cézanne watercolor landscape from 1904-6, “The Cathedral at Aix From the Studio at Les Lauves,” was expected to bring $4 million to $6 million. It failed to sell. One bottom-feeder was willing to pay $2.8 million.

One work that sold for about its low estimate was Léger’s “Study for a Nude Model in the Studio,” an oil and gouache on paper from 1912. It not only was a study for a painting he completed the following year but also prefigured his iconic series “Contrast of Forms.” The black-and-white work of curves and angles sold to a telephone bidder for $2.9 million, or $3.3 million with fees, right at its low estimate.

The evening’s most expensive work turned out to be De Chirico’s “Metaphysical Composition,” from the Hillman collection, a 1914 oil on canvas in which a bizarre assemblage of objects like a foot and an egg form a still life in an outdoor setting. The painting has a particularly distinguished past: it initially belonged to the artist’s dealer, Paul Guillaume, and after his death was owned by a succession of writers and artists including Paul Éluard. The painting had three bidders, and it sold to an unidentified telephone bidder for $5.4 million, or $6.1 million with Christie’s fees, just above its $6 million low estimate.

More expensive works had no takers, including Manet’s “Young Girl on a Bench,” an 1880 portrait of a girl with a wide-brim hat that was expected to bring $12 million to $18 million.

There were bargains to be had. An 1897 portrait by Toulouse-Lautrec of Henri Nocq, a Belgian artist and craftsman, showing him in his studio in front of a painting, was priced at $6 million to $9 million. A lone telephone bidder was able to get it for $3.9 million, or $4.4 million with Christie’s commission.

After the sale, many people criticized Christie’s for trying too hard to market what were not perceived as great collections. The auction house had printed separate hardbound catalogs for each collection and several promotional brochures trumpeting the sale. “It was all down to packaging,” Mr. Roundell said. “It was mutton dressed as lamb.”

    Bleak Night at Christie’s, in Both Sales and Prices, NYT, 6.11.2008, http://www.nytimes.com/2008/11/06/arts/design/06auction.html?hp

Stocks Fall as Investors Refocus

November 6, 2008
The New York Times
By SHARON OTTERMAN

The presidential election behind, investors once again faced the reality of an economic slowdown on Wednesday. Markets declined as investors moved to take profits on gains over the last week.

“I think anytime you do see a rally like we’ve been having, there will always be a little bit of pullback when people wake up and see things like today’s headline number on non-manufacturing activity, which was the lowest of all time,” said Michael Feroli, an economist at JPMorgan Chase. “If there’s data out, there’s going to be bad news out. That will tend to keep market enthusiasm a little bit contained.”

The nation’s service sector contracted in October, falling at the fastest pace since a survey of industry executives started keeping records.

The Institute for Supply Management’s non-manufacturing index, which covers almost 90 percent of the economy, dropped to 44.4, its lowest figure since 1997, the group reported Wednesday.

At 2 p.m., the Dow Jones industrial average was down 3.5 percent, or about 343 points, while the broader Standard & Poor’s 500-stock index declined 3.6 percent.

The main employment report for October will be released Friday, but its bad news was presaged Wednesday by an ADP Employer Services report that showed that companies in the United States cut an estimated 157,000 jobs in October, the most in almost six years. Layoffs spread from automakers, financial and housing-related companies to retailers and other services as the economic downturn deepened.

For investors, there was one silver lining to Wednesday’s market downturn, because it seemed to indicate that Wall Street was once again reacting in predictable ways to negative news. For weeks, traders have been in crisis mode, obsessing about credit market details like Ted spreads, credit default swaps, as well as the election. On the top of the wish list for investors is a return to stability.

“The market is starting to focus on normal things, like company fundamentals, earnings, macroeconomic data, employment, even market technicals like trend lines,” said Steve Sachs, director of trading at Rydex Investments. “After four or five weeks where none of that mattered, this is the first week we are thinking about that. Markets are moving in a more orderly way.”

Several earnings reports also offered disappointing assessments. GMAC, the finance company partly owned by General Motors, said that it lost $2.52 billion in the third quarter and that its mortgage unit, ResCap, was struggling to survive. Time Warner reported a higher-than-expected profit for the third quarter, but lowered its outlook.

And two bond insurers, MBIA and Ambac Financial, posted wider losses. MBIA lost $806.5 million after setting aside $961 million for guarantees on bonds. Its shares were down almost 16 percent. Ambac had a $2.43 billion loss and put aside $3.1 billion. Its shares dropped 24 percent.

European share prices tumbled, after a rally in Asia, as investors studied the implications of Barack Obama’s election as America’s 44th president.

“Obama’s victory was no surprise,” said Philippe Gijsels, senior equity strategist at Fortis Global Markets in Brussels. “The market will move on quickly from here.”

Historically, Democratic presidents have been better for stocks than Republicans, he said, especially in their first 12 months in office, so the rally that has lifted shares recently could continue through the end of December and possibly into next year.

Nonetheless, it appears that stocks are in “a very big bear-market rally,” Mr. Gijsels said, and “we’re facing one of the worst global economic slowdowns we’ve ever seen. That’s not political.”

In early afternoon trading, the Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, fell less than 1 percent, while the FTSE 100 index in London was down 1.6 percent. The CAC 40 in Paris lost 1.8 percent, and the DAX in Frankfurt fell 0.96 percent.

The weak opening to European trading followed a rally in Asia.

In Tokyo, the Nikkei 225 stock average rose 4.5 percent, while in Hong Kong the Hang Seng index closed 3.2 percent higher. In Seoul, the Kospi index rose 2.4 percent and the Straits Times index in Singapore rose 3.3 percent.

In Sydney, the S.& P./ASX 200 index rose 2.9 percent, a day after the central bank made an unexpectedly deep rate cut to bolster economic growth. Asian stocks followed Wall Street’s lead Tuesday, when the S.& P. 500-stock index climbed 4.1 percent to close above 1,000 for the first time since Oct. 13.

Wall Street has historically had a bounce in the fourth quarter after a presidential election as investors breathe a sigh of relief that the long election cycle has ended.

“We don’t know if it’s the end of the bear market yet, but it looks as though the bear has taken a nap,” said Sam Stovall, chief investment strategist at Standard & Poor’s equity research. “So investors are thinking, let’s enjoy a bit of a relief, both from the market’s lows and from the endless pre-election rhetoric.”

The dollar rose against major European currencies. The euro fell to $1.2887 from $1.2981 late Tuesday in New York, while the British pound fell to $1.5910 from $1.5954. The dollar rose to 1.1650 Swiss francs from 1.1625 francs. But the United States currency fell to 99.07 yen from 99.71.

Investors continue to watch for more signs of a thaw in the credit markets. One measure, the so-called Ted spread, the gap between yields on safe three-month government securities and the rate that banks charge each other for loans of the same duration, has been ticking lower for weeks. On Wednesday, the gap stood at 2.23 percentage points — unchanged from Tuesday, but down sharply from the peak of 4.6 percentage points on Oct. 10. Analysts say a gap of 0.5 to 1.0 would suggest normalcy had returned to the market.

David Jolly and Bettina Wassener contributed reporting.

    Stocks Fall as Investors Refocus, NYT, 6.11.2008, http://www.nytimes.com/2008/11/06/business/worldbusiness/06markets.html?hp

Strongest Election Day Stock Rally in 24 Years

November 5, 2008
The New York Times
By SHARON OTTERMAN

Wall Street built on recent gains Tuesday as reduced volatility and easing in the credit markets helped give stocks their strongest Election Day rally in 24 years.

The Standard & Poor’s 500-stock index closed above 1,000 for the first time since Oct. 13, gaining 4.08 percent, and the Nasdaq composite index had its sixth consecutive daily rise.

At the close, the Dow Jones industrial average was up 3.28 percent, or 305.45 points, to 9,625.28. The broader S. & P. index gained 39.45 points, to 1,005.75, and the Nasdaq rose 3.12 percent, or 53.79 points, to 1,780.12.

Crude oil settled at $70.53 a barrel, up $6.62 in New York trading on speculation that the world’s largest oil exporter, Saudi Arabia, had cut supplies to some buyers.

Historically, Wall Street has enjoyed a bounce in the fourth quarter after a presidential election as investors breathe a sigh of relief that the long election cycle, with its accompanying uncertainty, has ended. Some analysts said investors seemed to be trying to get a jump on the expected rally by buying on Election Day.

“We don’t know if it’s the end of the bear market yet, but it looks as though the bear has taken a nap,” said Sam Stovall, chief investment strategist at Standard & Poor’s equity research. “So investors are thinking, let’s enjoy a bit of a relief, both from the market’s lows and from the endless pre-election rhetoric.”

Other analysts said they believed the election had only a peripheral effect on the market, as there had been no major surprises. More important to the rally, they said, was a continuing round of coordinated interest rate cuts worldwide, a further thaw in the credit markets and the increasing resiliency of the markets to the daily drumbeat of bad economic news. The extreme volatility of recent weeks has calmed, though trading volume remained light.

The Chicago Board Options Exchange’s volatility index dipped below 50 for the first time since Oct. 14. The Dow Jones industrial average has rallied 18 percent since the close on Oct. 27, including the 10.9 percent gain on Oct. 28.

“Investors are starting to look ahead of some of these numbers to 2009, and they are starting to see a bit of recovery,” said Ryan Larson, head equity trader at Voyageur Asset Management. “Some of the volatility is coming out of the marketplace.”

The markets showed little reaction as the government reported that new orders for manufactured goods in September dropped $11.2 billion, or 2.5 percent, to $432 billion, a larger-than-expected decline. That came after a 4.3 percent decrease in August.

It was the second negative manufacturing report in two days. On Monday, the Institute for Supply Management’s index of manufacturing activity in the United States fell to 38.9 in October, from 43.5 in September, the worst reading since September 1982. The markets also seemed to take that news in stride, spending the day trading in a narrow range before eventually ending the day flat.

The rally that unfolded on Wall Street was broad-based. All industry sectors in the S.& P. index rose, led by energy stocks. Among the 30 blue-chip stocks that make up the Dow, General Electric, Verizon Communications and Caterpillar were among the strongest performers.

The stock exchange first opened for trading on Election Day in 1984. That year, the Dow rose 1.2 percent, a gain not topped since, as Ronald Reagan was re-elected.

Shares of MasterCard, the world’s second-biggest credit card company after Visa, jumped 18 percent, to $170.24, after the company said that higher overseas revenue had helped bolster profit.

Still, the company warned that the economic slowdown would affect profit in the near term.

Building on a trend from the last several days, the credit markets eased further on Tuesday, with interbank and corporate borrowing rates declining significantly. The London interbank offered rate, or Libor, a benchmark that banks charge one another, fell to 0.375 percent.

The Treasury’s 10-year bill rose 1 17/32, to 102 7/32. The yield, which moves in the opposite direction from the price, was 3.72 percent, down from 3.91 percent late Monday.

Stock markets were also higher in Europe and Asia. The Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 5.56 percent, while the FTSE 100 index in London jumped 4.42 percent. The CAC 40 in Paris gained 4.62 percent, and the DAX in Frankfurt was up 5 percent.

In Tokyo, the Nikkei 225 stock index rose 2.8 percent on Wednesday morning, buoyed by a softer yen and the rally in the American markets.

In Sydney, the S.& P./ASX 200 index was 1.9 percent higher on Wednesday morning. The Australian central bank surprised the markets on Tuesday with a larger-than-expected interest rate cut. The bank cut its main interest rate target by three-quarters of a percentage point, to 5.25 percent, rather than by the half-point that had been widely expected.

Following are the results of Tuesday’s Treasury auction of 238-day cash management bills and four-week bills:

David Jolly, Bettina Wassener and Vikas Bajaj contributed reporting.

David Jolly, Bettina Wassener and Vikas Bajaj contributed reporting.

    Strongest Election Day Stock Rally in 24 Years, NYT, 5.11.2008, http://www.nytimes.com/2008/11/05/business/05markets.html?hp

U.S. Markets Higher as Americans Vote

November 5, 2008
The New York Times
By SHARON OTTERMAN

Investors seemed to be in a buying mood Tuesday as the markets opened in New York and millions of Americans across the country went to the polls.

At noon, the Dow Jones industrial average was up 2.9 percent or about 277 points. The broader Standard & Poor’s 500-Stock index was up 3.7 percent.

Historically, Wall Street has enjoyed a bounce in the fourth quarter after an presidential election as investors breathe a sigh of relief that the long election cycle, with its accompanying uncertainty, has ended. Analysts said investors seemed to be trying to get a jump on the expected rally by buying on Election Day.

“We don’t know if it’s the end of the bear market yet, but it looks as though the bear has taken a nap,” said Sam Stovall, chief investment strategist at Standard & Poor’s equity research. “So investors are thinking, let’s enjoy a bit of a relief, both from the market’s lows, and from the endless pre-election rhetoric.”

A reminder of the weakness in the overall economy came as the government reported that new orders for manufactured goods in September decreased $11.2 billion, or 2.5 percent, to $432 billion. This followed a 4.3 percent August decrease.

It was the second negative manufacturing report in as many days. On Monday, the Institute for Supply Management’s index of manufacturing activity in the United States fell to 38.9 in October from 43.5 in September, the worst since September 1982. The markets also seemed to take that news in stride, spending the day trading in a narrow range before eventually ending the day flat.

Shares in MasterCard, the world’s second-biggest credit-card company, jumped 11 percent after the company said that higher overseas revenue had helped bolster profit.

“It is going to be very challenging in the U.S. and Western Europe throughout 2009. I would not expect, and we are not planning on, any significant economic growth in those two major parts of the world. We do expect the emerging markets and economies to continue to show positive growth, positive G.D.P. development, ” the chief executive of MasterCard, Robert W. Selander, told Bloomberg News.

Archer Daniels Midland, the world’s largest grain processor, was up 20 percent as rising commodity prices caused earnings to more than double.

All industry sectors in the S.&P. index rose, with telecommunications and energy stocks leading the gains. Among the 30 blue-chip stocks that make up the Dow — General Electric, Verizon Communications and AT&T — were among the strongest performers.

Building on a trend from the last several days, the credit markets eased further on Tuesday with interbank and corporate borrowing rates declining significantly. The London interbank offered rate, a benchmark that banks charge one another, fell to 0.375 percent.

The rate corporations pay for short-term loans known as commercial paper, a part of the market that had seized up in recent weeks making it hard for businesses to borrow, dropped to 2.88 percent for three-month loans, down from 3.31 on Monday. It was the lowest the rate has been since mid-September.

Last week, the Federal Reserve began lending directly to corporations through commercial paper. Those efforts and many others from central banks around the world appear to be helping restore a degree of normalcy to the debt market after weeks of tumult.

Still, in some important parts of the market conditions remain far from normal. Yields on mortgage securities, which determine mortgage interest rates, remain at elevated levels though they have fallen somewhat in the last couple of days. Last week, the average interest rate on 30-year fixed-rate mortgages was 6.46 percent, up from 6.04 a week earlier, according to Freddie Mac.

Crude oil was up $1.94 on Tuesday, to $65.85, in New York trading on reports that the world’s largest oil exporter Saudi Arabia had cut supplies to some buyers.

Tuesday’s factory order numbers were weaker than expected. Excluding transportation, such as aircraft and autos, demand for manufactured goods decreased 3.7 percent in September, the largest percent decrease since the started keeping records in 1992.

Still, the news remained in line with weeks of economic data indicating that the economy took a sharp downturn beginning in the third quarter as ripples from the subprime mortgage crisis began to severely constrain access to credit. The gross domestic product shrunk at a 0.3 percent annual rate in the third quarter, led by consumer spending, which contracted for the first time in 17 years.

Stock markets were also higher in Europe and Asia.

“Given the election, there’s not a major incentive to take excessive risk,” Thomas Lam, senior treasury economist at United Overseas Bank in Singapore, told The Associated Press.

In afternoon trading, the Dow Jones Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 2.7 percent, while the FTSE 100 index in London rose 1.9 percent. The CAC 40 in Paris gained 2.4 percent, and the DAX in Frankfurt was up 2.1 percent.

In Tokyo, the Nikkei 225 stock average jumped 6.3 percent, as investors returned from a holiday Monday. The Hang Seng index in Hong Kong rose 0.3 percent.

In Sydney, the S&P/ASX 200 index closed 0.2 percent lower, after the Australian central bank on Tuesday surprised the markets with a larger-than-expected interest rate cut.

The bank cut its main interest rate target by three-quarters of a percentage point to 5.25 percent, rather than by the half-point that had been widely expected.

“International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well," the Reserve Bank of Australia said in a statement.

“Deteriorating international conditions and falling commodity prices will have a dampening influence” on the Australian economy. Policy makers worldwide are racing to prop up banks, calm volatile stock markets and inject steam into their flagging economies by trying aggressively to reduce the cost of borrowing.

The Federal Reserve Board in Washington last week lowered its benchmark interest rate by half a percentage point to 1 percent, its second big rate cut this month. The Bank of Japan last week cut its main rate target to 0.3 percent from 0.5 percent. The European Central Bank and the Bank of England are expected to cut rates on Thursday.

David Jolly, Bettina Wassener and Vikas Bajaj contributed reporting.

    U.S. Markets Higher as Americans Vote, NYT, 5.11.2008, http://www.nytimes.com/2008/11/05/business/05markets.html

Treasurys Edge Up

After Manufacturing Contraction

November 3, 2008
Filed at 2:51 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

NEW YORK (AP) -- Treasury prices rose modestly in quiet trading Monday after a bleaker-than-expected reading on the manufacturing sector, but investors avoided making large bets ahead of Tuesday's presidential election. Meanwhile, key interbank lending rates extended their declines, a sign of further easing in the credit markets.

Normally, data pointing to severe economic weakness would give Treasurys a big boost. Treasurys did rise Monday, but not as much as one might expect considering that the Institute for Supply Management said U.S. manufacturing activity in October sank to its lowest level in 26 years.

''The numbers were bond-friendly and the market, as it did Friday, did nothing,'' said John Spinello, bond strategist at Jefferies & Co., referring to the market's having little reaction that day to disappointing consumer spending. ''There are not a lot of people committing to the market right now, especially before the election.''

The 2-year note rose 5/32 to 100 1/32 and yielded 1.48 percent, down from 1.57 percent. The 10-year note rose 14/32 to 100 21/32 and yielded 3.92 percent, down from 3.96 percent. And the 30-year bond rose 19/32 to 102 22/32 and yielded 4.34 percent, down from 4.37 percent.

Generally, investors have been seeking short-term Treasury bills more than longer-term debt. The yield on the three-month Treasury bill, seen as one of the safest assets around, saw only marginal improvement Monday, rising to 0.47 percent from 0.43 percent Friday. A low yield indicates high demand.

''There's such a preservation of capital right now ... and risk averse behavior,'' Spinello said.

But investors are largely shying away from longer-term notes and bonds in anticipation of huge amounts of supply coming to market as the Treasury attempts to finance its rescue efforts. Last week's auctions of 2-year and 5-year notes met with decent demand, but there's a concern that upcoming auctions might not go as well.

The credit markets have been gradually becoming more functional after massive intervention by governments around the world since the seize-up in the wake of Lehman Brothers Holdings Inc.'s mid-September bankruptcy. The improvement is starting to give stocks some stability.

On Monday, the interbank lending rate known as the London Interbank Offered Rate, or Libor, fell to 2.86 percent for three-month dollar loans. That's down from 3.03 percent Friday, and the lowest level since Sept. 17. Libor for overnight dollar loans dropped to 0.39 percent from 0.41 percent Friday.

Sinking interbank rates show that banks are more willing to lend to one another.

In another positive sign, the cost of insuring against investment-grade corporate bond defaults, as measured by the Markit CDX North America Investment Grade Index, slipped Tuesday, according to Phoenix Partners Group. This suggests that people were generally less worried about bond defaults.

These improvements are not enough, however, to ease credit worries for the numerous troubled companies out there in need of loans to tide them over during this year's tough economy.

''Let's not equate the lowering of the crisis temperature with saying that our problems are behind us,'' said Howard Simons, strategist with Bianco Research in Chicago.

The ISM's manufacturing report said nearly 53 percent of the companies surveyed or their supplies were affected by the market turmoil. Of those affected, almost 45 percent said they saw a decrease in the availability of credit; nearly 41 percent saw an increase in the cost of credit; nearly 25 percent experienced difficulty in initiating or renewing a bank credit line; and nearly 79 percent reduced spending or hiring.

Circuit City Stores Inc. said Monday it is closing about 20 percent of its U.S. stores and laying off about 17 percent of its domestic work force. The electronics retailer said its vendors have been limiting the use credit for purchases, and although the company is working to secure support from its vendors, the ''current mix of terms and credit availability is becoming unmanageable for the company.''

The news followed an announcement late Friday by VeraSun Energy Corp., the nation's second largest ethanol producer accounting for about 13 percent of U.S. capacity, that it is seeking Chapter 11 bankruptcy protection. The company, slammed by rising corn costs, found its liquidity severely constrained after the capital markets deteriorated and trade credit tightened.

    Treasurys Edge Up After Manufacturing Contraction, NYT, 3.11.2008, http://www.nytimes.com/aponline/business/AP-Credit-Markets.html

This Land

Financial Foot Soldiers,

Feeling the World’s Weight

November 3, 2008
The New York Times
By DAN BARRY

New York

“What’s up, Lenny,” a broker on the floor of the New York Stock Exchange says, just before the ringing of the Pavlovian bell that opens the financial market. Lenny answers this morning bid with the customary response: “What’s up.”

Posed less as a sincere inquiry into one’s well-being than as a passing nod to another day in the financial scrum, the greeting can also be interpreted in these uncertain times as a question baldly seeking reassurance: What’s up?

Stocks? Hopes? Layoffs? Blood pressure?

Leaving unexplored the phrase’s deeper meaning, the two brokers melt into a blue-coated sea on the main floor of the exchange, where the Lennys have come to personify the amorphous, temperamental, life-altering thing called Wall Street — an all-encompassing name for the stock market, the economy, your 401(k).

From the balcony above this gladiator’s pit, photographers crouch to capture expressions of joy, of anguish, of bewilderment, that are then presented as clues to how we should feel — even though that broker’s frown may reflect nothing more than digestive disagreement with a wolfed-down fried egg sandwich.

Not long ago, a floor broker named Danny Trimble cocked a finger to his head and placed it against his temple, for reasons unrelated to the market; soon an image of Mr. Trimble “shooting” himself made the newspapers. No matter that he is not a hedge fund manager, bank C.E.O. or fat cat; no matter that he is just a financial foot soldier from Jersey, hoarse from shouting at his son’s Pop Warner football games.

Mr. Trimble, 41, works at the edge of the exchange’s main floor, shoulder to shoulder with six other men in a booth the size of an elevator car. Not everyone graduated from college, but all are resident scholars of the hurly-burly floor, educated in reading markets, hunting for matches and executing buy-and-sell orders. They are worth their commissions, they say, because they provide things a computer cannot, things like experience, intuition — a “feel.”

Crammed into this booth with no place to sit are Mike Ackerman, Paul Davis, Billy Johnson and Nick Stratakis, of B and B Securities; Mr. Trimble and Chris Martin, of Greywolf Equity Partners; and Ralph Roiland, a clerk. Scrappy independents, all; no one works for Goldman Sachs.

Still, when they step onto Broad and Exchange Streets to breathe the autumn air, they sometimes get blamed for the world’s economic crisis. “You walk out there and people think you’re what’s wrong with this country,” says Mr. Martin, father of three, of Morristown, N.J.

With the opening of the market imminent, the men in the booth send instant messages to clients, asking, hoping, for interest in trading stock. But the volatile activity in recent weeks has unnerved many investors; some respond with noncommittal “Thanks” and “I’m away from my desk.”

At 9:30 on the dime the opening bell rings, clanging off the century-old walls of white marble, the ornate ceiling of gold. Brokers rush to the center of the floor, where specialists in individual stocks track the last best data. Shouts of “Buy off 10,000, pair off 10,000,” and “How’s Marathon?” feed the low roar of business.

After a while, though, quiet returns. Brokers study computer screens in their booths, some to monitor stocks, some to play virtual games. In one corner, a man is deciphering a crossword puzzle, while three beside him play cards. The stock exchange has a different rhythm now, its denizens say, because of technological advances and the shrinking of the once-dominant house firms. It’s not like before.

Many of the men, and it’s still almost all men, remember the days when they stood several deep around the specialists, nudging, pushing, staying put for several straight hours, shouting “Squad!” for pages to hustle handwritten notes to clerks on the wings, jockeying at the banks of phones now hanging from hooks like relics.

Those were the days when black humor and practical jokes helped to blow off steam and show affection for comrades. The one-liners would fly minutes after, say, the space shuttle Challenger went down. A trader would return to work, disfigured, after a serious car accident to find at his station a toy car, burned and crushed. And he would laugh.

Billy Johnson, 48, a burly former firefighter from Oceanport, N.J., recalls how his floor colleagues helped him to toast his approaching marriage: by ripping his jacket and covering him with shaving cream, perfume and potato chips.

The jokes and put-downs still go on, and lately someone has been beeping a horn concealed in his jacket. But the humor is not quite as black.

“A lot of that stopped after 9/11,” says Doreen Mogavero, 53, an experienced floor broker who points out that ground zero is a couple of blocks away. “It wasn’t that funny anymore.”

Gone too is the loud physicality. Headsets and hand-held computerized pads mean less running around, fewer clerks, softer voices, a smaller chance for error. Those technological advances have opened the market to just about anyone with a computer, making floor trading seem almost quaint. Many traders retired rather than change their ways; others were laid off, including one now walking through the exchange. Selling insurance, someone says.

Of the 1,366 broker’s licenses available for an annual fee of $40,000, only 553 are being used. In 2006 there were 3,534 people working on the floor; today there are 1,273.

“The stress now is the lack of business,” says Benedict Willis III, 48, a senior broker who started here in 1982. Moments later he is interrupted by applause. It is the sound of a lost job: a floor broker of 20 years has just been laid off from a major firm, and now his colleagues are showing their respect.

“They’re clapping him off,” Mr. Willis says. “It’s the second one this week.”

One of the brokers in that small booth, Mike Ackerman, leads a Scandinavian delegation on a brief tour of the exchange, past computer screens flashing red and green, past taped-up photographs of family members, closed baseball stadiums and the Lower Manhattan skyline when it was intact. As he takes them to the balcony, a delegate asks a question in halting English: Does Mr. Ackerman feel personally responsible for the collapsing economy?

Good question, answers Mr. Ackerman, 39, father of three, from Basking Ridge, N.J. Good question. But — no.

He and all the people down on that floor are executing trades on behalf of others, using a hybrid method that combines a computer’s technology with a human’s gut instinct. They do not deal in subprime mortgages; they do not get golden parachutes. But hey: Good question.

These brokers make money whether the market goes up or down; their earnings depend on the volume of trades, and the floor averages 117 million orders received a day. Still, they prefer north to south. “It’s political economics,” Mr. Willis explains. “We want to reassure investors that it’s O.K. to come back.”

Tomorrow the market will plummet in the very last minutes. Beaten brokers will repair to bars like Bobby Van’s across the street, where the bartenders know their drinks before they’ve ordered.

But right now the market climbs with every tick toward the 4 p.m. closing, as though willed to rise by all the Lennys now eyeing the electronic board. Up, up, up.

“Two minutes to go,” someone says at 3:58. “A lifetime.”

    Financial Foot Soldiers, Feeling the World’s Weight, NYT, 3.11.2008, http://www.nytimes.com/2008/11/03/us/03land.html?hp

Stocks weaken after manufacturing index drops

3 November 2008
USA Today
AP Business Writer
By Tim Paradis

NEW YORK — Stocks started November on a cautious note Monday, pulling back after a weak reading on the manufacturing sector.

Stocks pared early gains after the Institute for Supply Management, a trade group, reported that its index of manufacturing activity fell to 38.9 in October from 43.5 in September.

A separate report is showing construction spending has fallen by a smaller-than-expected amount in September as a rebound in non—residential activity helped offset further weakness in home building.

Analysts are also anticipating extremely weak vehicle sales figures from the auto industry for October — even more anemic than in September, when automakers said fewer than 1 million vehicles were sold for the first time in 15 years.

Given how far the stock market has already tumbled, analysts believe the market is showing signs of bottoming out. Last month, for all its problems, did end with a positive tone, thanks in large part to weeks of gradual improvement in the tight credit markets, but also because mutual funds were finished with selling at the end of their fiscal year. The Dow added 11.3% last week, its best weekly performance in 34 years, while the S&P 500 index climbed 10.5%.

On Monday, the interbank lending rate known as Libor fell to 2.86% for three-month dollar loans — that's down from 3.03% Friday, and the lowest level since Sept. 17. A fall in the London Interbank Offered Rate indicates that banks are more willing to lend to one another.

    Stocks weaken after manufacturing index drops, UT, 3.11.2008, http://www.usatoday.com/money/markets/2008-11-03-stocks-monday_N.htm

Manufacturing index at lowest level in 26 years

3 November 2008
USA Today

NEW YORK (AP) — A measure of U.S. manufacturing activity plummeted to its lowest level in 26 years in October as the credit crisis and Hurricane Ike disrupted businesses from plastics companies to lumberyards.

The reading of 38.9 reported Monday by the Institute for Supply Management was the worst reading since September 1982. Any reading below 50 signals contraction, and a reading below 40 is exceptionally weak.

"Pretty grim. It means we're in a recession, it's as simple as that ... a pretty solid manufacturing recession," said Robert Macintosh, chief economist at Eaton Vance in Boston, adding:

"... The question is how long or deep is it going to be? Where is this group of economists that is charged with declaring a recession? Why haven't they said anything?"

Economists had expected a reading of 41.5, according to the median of forecasts in a Reuters poll.

The report was uniformly weak, and employment in the sector was dismal. The ISM's gauge of employment fell to its lowest since March 1991 and suffered its biggest one-month drop in 20 years.

The data foreshadowed a grim outlook, with the index of new orders hitting its lowest since 1980.

The index had been hovering near what economists call "the boom-bust" line for most of the year until its sharp fall in September brought it to the lowest level since the aftermath of the Sept. 11, 2001 attacks.

"It appears that manufacturing is experiencing significant demand destruction as a result of recent events," Norbert J. Ore, chairman of ISM's manufacturing business survey committee, said in a statement accompanying the report.

Another report said that construction spending fell a smaller-than-expected amount in September as a rebound in non-residential activity helped offset further weakness in home building.

The Commerce Department said construction spending dropped 0.3% in September, less than the 0.8% decline many economists had been expecting. Spending had been up by 0.3% in August after a huge 2.4% plunge in July.

The weakness in September was led by a 1.3% drop in housing construction, which has fallen every month but two over the past 30 months. Spending on government projects fell 1.3%, the biggest setback since January.

Contributing: Reuters
 

    Manufacturing index at lowest level in 26 years, UT, 3.11.2008, http://www.usatoday.com/money/economy/2008-11-03-ism-construction_N.htm

Pentagon Expects Cuts in Military Spending

November 3, 2008
The New York Times
By THOM SHANKER and CHRISTOPHER DREW

WASHINGTON — After years of unfettered growth in military budgets, Defense Department planners, top commanders and weapons manufacturers now say they are almost certain that the financial meltdown will have a serious impact on future Pentagon spending.

Across the military services, deep apprehension has led to closed-door meetings and detailed calculations in anticipation of potential cuts. Civilian and military budget planners concede that they are already analyzing worst-case contingency spending plans that would freeze or slash their overall budgets.

The obvious targets for savings would be expensive new arms programs, which have racked up cost overruns of at least $300 billion for the top 75 weapons systems, according to the Government Accountability Office. Congressional budget experts say likely targets for reductions are the Army’s plans for fielding advanced combat systems, the Air Force’s Joint Strike Fighter, the Navy’s new destroyer and the ground-based missile defense system.

Even before the crisis on Wall Street, senior Pentagon officials were anticipating little appetite for growth in military spending after seven years of war. But the question of how to pay for national security now looms as a significant challenge for the next president, at a time when the Pentagon’s annual base budget for standard operations has reached more than $500 billion, the highest level since World War II when adjusted for inflation.

On top of that figure, supplemental spending for the wars in Iraq and Afghanistan has topped $100 billion each year, frustrating Republicans as well as Democrats in Congress. In all, the Defense Department now accounts for half of the government’s total discretionary spending, and Pentagon and military officials fear it could be the choice for major cuts to pay the rest of the government’s bills.

On the presidential campaign trail, Senators John McCain and Barack Obama have pledged to cut fat without carving into the muscle of national security. Both have said they would protect the overall level of military spending; Mr. McCain has further pledged to add more troops to the roster of the armed services beyond the 92,000 now advocated by the Pentagon, a growth endorsed by Mr. Obama.

Some critics, citing the increase in military spending since Sept. 11, 2001, say it would be much easier to cut military spending than programs like Social Security and Medicare at a time when most people’s retirement savings are dwindling because of the financial crisis. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, has raised the idea of reducing military spending by one-quarter.

At the Pentagon, senior officials have taken up the mission of urging sustained military spending. Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, has asked Congress and the nation to pledge at least 4 percent of the gross domestic product to the military. And Defense Secretary Robert M. Gates has warned against repeating historic trends, in which the nation cut money for the armed services after a period of warfare.

“We basically gutted our military after World War I, after World War II, in certain ways after Korea, certainly after Vietnam and after the end of the cold war,” Mr. Gates said. “Experience is the ability to recognize a mistake when you make it again.”

Mr. Gates acknowledges that military spending is almost certain to level off, and he expressed a goal that the Pentagon budget at least keep pace with inflation over coming years.

Apprehension over potential budget cuts has trickled down the Pentagon bureaucracy to those who each year draft the military’s spending proposals.

“If that’s what they want, they have to know that we simply cannot do everything we are doing now, but for less money,” said one Pentagon budget officer who was not authorized to speak for attribution. “So if there’s going to be less, it’s up to the president, Congress and the public to tell us what part of our national security mission we should stop carrying out.”

Much of the Pentagon budget pays for personnel costs, which are difficult to cut at any time, and particularly while troops are risking their lives in combat.

Mr. Obama has said his plan to begin drawing down American forces from Iraq would ease a wartime taxpayer burden that now totals over $10 billion a month. But budget analysts at the Pentagon and on Capitol Hill say that even troop reductions in Iraq — whether at the cautious pace laid out by President Bush and endorsed by Mr. McCain or at the more rapid pace prescribed by Mr. Obama — would present little savings in the first years.

Moving tens of thousands of troops and their heavy equipment home from the Persian Gulf region is a costly undertaking. And housing at stateside bases is more expensive than in the war zone, so savings would be seen only in subsequent years.

Calls by both presidential candidates to shift troops from Iraq to Afghanistan actually would add costs to the Pentagon budget, according to military planners and Congressional budget experts. It is significantly more expensive to sustain each soldier in Afghanistan than in Iraq because of Afghanistan’s landlocked location and primitive road network.

The federal budget is due to Congress in February, but that document is expected to be little more than an outline, arriving soon after Inauguration Day. Congressional officials predict the new president will require several months to put his imprint on a detailed spending plan that would actually be worth debating on Capitol Hill.

On the campaign trail, Mr. Obama has said he would initially maintain overall military spending at current levels.

“Obama has made it very clear that he doesn’t see how the defense budget can be cut now given the commitments we have,” said F. Whitten Peters, a former Air Force secretary now advising Mr. Obama on national security policies. “His sense is that there is not money to be cut from the defense budget in the near term.”

But in looking to future Pentagon budgets, he added, it is clear that “all the weapons programs cannot fit.”

“So,” he continued, “you’re going to have to make some hard decisions.”

Mr. McCain, a former Navy combat pilot who was taken prisoner during the war in Vietnam, is known for taking on what he has seen as wasteful Pentagon spending.

According to one of his advisers on military policy, Mr. McCain “feels very strongly that the whole procurement process is totally dysfunctional.”

“He believes that putting order, discipline and accountability back into the process will stop the gold-plating and bring costs down,” said the adviser, who asked not to be named in order to discuss the candidate’s views frankly.

These budget pressures also seem quite likely to add to the tensions between Congress and the Pentagon over the best balance between supporting the troops fighting insurgencies and developing weapons that might be needed in larger wars.

“I think we need a complete review of this whole thing,” said Representative Neil Abercrombie, a Democrat from Hawaii who is chairman of a House Armed Services subcommittee. “You cannot make a case for undermining the readiness of the Army and the Marines in the circumstances that we face today with a commitment of so much money to weapons systems that are at best abstract and theoretical.”

Executives at the leading defense contractors say they realize that the Pentagon’s spending is likely to be more restrained. Boeing’s chief executive, W. James McNerney Jr., recently wrote in a note to his employees: “No one really yet knows when or to what extent defense spending could be affected. But it’s unrealistic to think there won’t be some measure of impact.”

Ronald D. Sugar, the chief executive of Northrop Grumman, told stock analysts last month that financing for the company’s projects seemed locked in for the coming year. But, Mr. Sugar added, “Clearly the pressures are going to increase in the out years.”

A number of scholars who have examined the subject, including David C. Hendrickson, a political scientist at Colorado College, predict that “defense will not prove to be ‘recession proof.’ ”

“Serious savings could be had by reducing force structure and limiting modernization,” said Professor Hendrickson, who posted a “blogbook” on the financial crisis at pictorial-guide-to-crisis.blogspot.com. “Though American power has weakened on every count, there is no reconsideration of objectives. Defining a coherent philosophy in foreign affairs and defense strategy that is respectful of limits is vital.”

Other analysts, like Loren B. Thompson of the Lexington Institute, a policy research center, say that weapons spending will be fiercely defended by many in Congress and their allies in the weapons industry as a way to stimulate the economy. Buying new armaments and repairing worn-out weapons, Mr. Thompson said, protects jobs and corporate profits, and therefore benefits the economy over all.

Thom Shanker reported from Washington, and Christopher Drew
from New York.

    Pentagon Expects Cuts in Military Spending, NYT, 3.11.2008, http://www.nytimes.com/2008/11/03/washington/03military.html



 

Matt Dorfman

No More Economic False Choices        NYT        3.11.2008

http://www.nytimes.com/2008/11/03/opinion/03rubin.html

Op-Ed Contributors

No More Economic False Choices

November 3, 2008
The New York Times
By ROBERT E. RUBIN and JARED BERNSTEIN

AS economists and policy advisers try to sort out where we are, how we got here and where we must go for both the short term and the longer term, we are surrounded by polarizing dichotomies: Fiscal recklessness versus fiscal rectitude; capital versus labor; free trade versus protectionism.

The next president, the prevailing wisdom goes, will have to choose between these polarities. But how real are these differences? Our view — and we come from pretty different analytical perspectives — is that in many important ways, they are false, and serve as more of a distraction than a map.

Fiscal rectitude versus stimulus and public investment: The Bible got this right a long time ago (paraphrasing slightly): there’s a time to spend, a time to save; a time to build deficits up and a time to tear them down. Though one of us (Mr. Rubin) is often invoked as an advocate of fiscal discipline, we both agree that there are times for fiscal discipline and times for fiscal largess. With the current financial crisis, our joint view is that for the short term, our economy needs a large fiscal stimulus that generates substantial economic demand.

We also jointly believe that fiscal stimulus must be married to a commitment to re-establishing sound fiscal conditions with a multi-year program that includes room for critical public investment, once the economy is back on a healthy track.

One of us (Mr. Rubin) views long-term fiscal deficits — in combination with a low national savings rate, large current account deficits and foreign portfolios that are heavily over-weighted in dollar-dominated assets — as a serious threat to long-term interest rates and our currency and, therefore, to our economic future. The other views these economic relationships as much weaker.

At the same time, we both agree that our economic future also requires public investment in critical areas like education, health care, energy, worker training and much else. In our view, then, the next president needs to proceed on multiple tracks, with both the restoration of a sound fiscal regime and critical public investment.

First, under the $700 billion program to support the financial system, the government will buy assets, whether in the form of equity injections or the purchase of debt from banks. And the real cost to the government is not the face value of those purchases but rather the budget authorities’ estimate of the subsidy built into the price of those purchases given the risks that are involved. That number will be some relatively limited fraction of the total amount paid. Congress also included in the recent legislation an option for the next president to consider levying a fee on the financial services industry if the taxpayers’ investment is not recouped.

Second, certain public investment can help us meet our fiscal challenges. Most powerfully, the single largest factor in our projected fiscal imbalances are the health care entitlements Medicare and Medicaid, underscoring the fundamental importance of health care reform that expands coverage to more Americans yet constrains costs. While plans that would accomplish these goals have some cost, by pooling risk and stressing cost effectiveness, they could more than pay for themselves by reducing the growth trajectory of our health care spending, in both the private and public spheres.

One important policy question is what our fiscal objectives should be in terms of deficits and of the ratio of the national debt to the gross domestic product. In times like these, larger than normal budget deficits will add to the national debt. In more stable times, a budget deficit equivalent to roughly 2 percent of G.D.P. will keep the debt-to-G.D.P. ratio constant, a legitimate fiscal policy goal. In flush times, a smaller deficit would lower the debt ratio and that might be desirable.

We both agree that individual income tax rates and other taxes for those at the very top could be moved back to the rates of the Clinton era. It’s worth remembering that rates at this level helped finance deficit reduction and public investment that contributed to the longest economic expansion in our history.

In addition to restoring a sound fiscal regime, we could improve our personal savings rate and expand retirement security by establishing some kind of individualized account separate from Social Security, financed by an appropriate revenue measure. Also, we need to work with other countries toward equilibrium exchange rates, as part of redressing our current account imbalances. But the idea that we can’t be fiscally responsible while undertaking public investment at the same time is a myth.

Capital versus labor: Here again, for all their alleged friction, our dynamic and flexible capital and labor markets have combined to generate impressive productivity gains in recent years. The problem is that the benefits of this productivity growth have largely eluded working families. Though productivity grew by around 20 percent from 2000 to 2007, the real income of middle-class, working-age households has actually fallen $2,000, down 3 percent.

One factor behind this outcome is the severely diminished bargaining power of many workers, and here the decline in union membership has played a key role. A true market economy should have true labor markets in which labor and business negotiate as peers. Many years ago, the economist John Kenneth Galbraith argued that collective bargaining was necessary so workers had the countervailing force they needed to bargain for their fair share of the growth they’re helping produce. To re-establish that force, workers should be allowed to choose to be unionized or not.

Tight labor markets, the kind we saw in the 1990s, are another source of bargaining power, helping to rebalance the claims of labor and capital on growth. Sound public policy, like public investment in education, health care, energy, infrastructure and basic research, financed by progressive taxation, can also drive strong growth and business confidence to invest and hire. Moreover, the policies that are requisites for strong growth also increase wages by better equipping workers to succeed in a global marketplace and by encouraging businesses to create jobs.

Free markets versus regulation and protection: We both feel strongly that there are important lessons to be learned from the disruptions in our financial system, and that significant reforms are needed. The objective ought to be to optimize the balance between increasing consumer protection and reducing systemic risk on the one hand, and preserving the benefits of a market-based system on the other.

We know, too, that Wall Street and Main Street are intimately connected. The consequences of the financial market crisis are profound for Americans in terms of lost jobs, lower incomes and reduced retirement savings. Measures to reform and strengthen the financial system should be evaluated by this measure: Do they ultimately translate into improving the jobs, incomes and assets of working Americans?

With respect to trade, the choice is not trade liberalization versus protectionism. Instead, as trade expands, we must recognize that protecting workers is not protectionism. We must better prepare our people to compete effectively and help those who are hurt by trade — not just dislocated workers, but those who find their incomes lowered through global competition. This means investing more of the benefits of trade in offsetting these losses, through more effective safety nets, including universal health care and pension coverage.

Beyond that, while we share a commitment to helping workers deal with our new global challenges, one of us (Mr. Bernstein) would advocate provisions in trade agreements that are intended to protect workers, both here and abroad, and the other would have considerable skepticism about the likely effectiveness of those provisions for our workers.

•

Public policy in all these areas — and a host of others — has been seriously deficient in recent years. It has led to a great increase in federal debt, inadequate regulatory protection against systemic risk and underinvestment in our people and infrastructure. Regressive tax policies have increased market-driven inequalities that could have been offset through progressive taxation.

False choices, grounded in ideology, have kept us from effectively addressing all these issues. The next president must do his utmost to avoid being drawn into these Potemkin battles. At this critical juncture, we face both the most significant economic upheaval since the Depression and the long-term challenge of successfully competing in the global economy. We have no choice but to move beyond such false dichotomies and toward a balanced pragmatism whose goal is broadly shared prosperity and increased economic security.
 

Robert E. Rubin, Treasury secretary from 1995 to 1999, is a director of Citigroup. Jared Bernstein is a senior economist at the Economic Policy Institute and the author of “Crunch: Why Do I Feel So Squeezed?”

    No More Economic False Choices, NYT, 3.11.2008, http://www.nytimes.com/2008/11/03/opinion/03rubin.html

Dodging another Great Depression

Sun Nov 2, 2008
3:02pm EST
Reuters
By Emily Kaiser

WASHINGTON (Reuters) - Starbucks is starting to sell more coffee. Companies are once again finding buyers for their short-term debt. Money is beginning to flow back into emerging markets.

Maybe this is not the second Great Depression after all.

While there is no doubt the global economy is hurting -- perhaps sliding into the worst recession since the 1970s -- investors seem to be concluding that comparisons to the dark days of the 1930s are a bit overdone.

A news database search turned up 16,095 articles that included the phrase "Great Depression" in the past three months, nearly triple the number of times it appeared in the previous three months.

But there are promising signs central banks are gaining some traction with their efforts to stabilize financial markets and reopen the lending taps, and the panic-selling that gripped stock markets for much of October seems to be abating.

Since October 7, the day before major central banks announced coordinated interest rate cuts, the rates banks charge each other for overnight lending have fallen dramatically.

On October 7, the London interbank offered rates for U.S. dollars jumped to nearly 4 percent. As of Friday, it was down to 0.4 percent. Libor is the benchmark used to set borrowing costs on trillions of dollars worth of lending worldwide.

"It's certainly moving in the right direction," Jay Bryson, global economist with Wachovia, said on a conference call as he discussed the bank's economic outlook. Bryson expects a global recession, probably deeper than the most recent one in 2001.

"Our underlying assumption is that the steps that the governments around the world have taken to date, and potentially ones that haven't been announced yet ... will ease the global credit crunch. There could be hiccups along the way but you won't see a complete lock-down in credit markets."

PERKING UP

On Thursday, both the European Central Bank and the Bank of England hold interest rate-setting meetings, and both are expected to reduce short-term borrowing costs. The U.S. Federal Reserve, Bank of Japan and People's Bank of China all lowered interest rates last week.

With the rate cuts, government steps to shore up banks and guarantee loans, and programs to get hard currency into emerging markets, credit is starting to flow again.

Issuance of commercial paper, a form of debt that companies use to finance day-to-day business, grew last week after six consecutive weeks of declines. To be sure, that was largely because the Federal Reserve launched a new program to buy the paper, and private investors have yet to show much enthusiasm.

The U.S. central bank and the International Monetary Fund also opened up new lending channels last week to get dollars and other hard currencies into key emerging economies. That helped to lift stock markets in countries such as Brazil.

There were also some reassuring comments from the corporate world. Starbucks Corp (SBUX.O: Quote, Profile, Research, Stock Buzz) said sales at its established stores edged up in October, and it was hopeful that it had weathered the worst of the slowdown.

UGLY PRICED IN?

As of Friday, nearly two-thirds of the companies in the U.S. Standard and Poor's 500 index had reported quarterly earnings, and 60 percent of them posted results that were better than analysts expected, according to Thomson Reuters data. Of course, earnings were down 11.7 percent on average.

The message from those companies was that the U.S. economy is tilting into a recession that some CEOs say will be the worst since the 1970s. But they do not expect catastrophic job losses and bank failures on a par with the Depression era.

"For the time being, investors appear to be more focused -- and cheerful -- over the slate of global policy announcements and the ensuing impact of breaking the logjam in the money and credit markets than on the continuous set of very weak incoming economic data, not just here but abroad," said Merrill Lynch economist David Rosenberg.

"Either a deep and prolonged recession has already long been discounted, or financial market participants are going to be in for a very big surprise because the economic data, as ugly as they are, are likely to get a lot uglier in coming months and quarters," he said.

The next unpleasant surprises may come this week. Euro-zone retail sales for September are expected to show a decline, and the global manufacturing sector probably contracted last month. U.S. retailers are expected to report weak sales for October, and the U.S. October employment report may show job losses nearing the 200,000 mark.

As depressing as those figures may sound, they are consistent with a recession, not a depression. The commonly cited rule of thumb for determining when a garden variety recession becomes something much worse is a 10 percent drop in GDP. Not even bearish economists are predicting that.

(Editing by Dan Grebler)

    Dodging another Great Depression, R, 2.11.2008, http://www.reuters.com/article/ousiv/idUSTRE4A128R20081102

Election to Benefit Some Industries, Harm Others

November 2, 2008
Filed at 10:39 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Battered by the financial meltdown, America's business community is anxiously calculating how Tuesday's presidential election will affect it.

Energy, pharmaceutical and telecommunications companies could face tax and other policy changes no matter who wins the White House. The outcome also could determine how well alternative energy developers, generic biotechnology companies, stem cell researchers and others fare.

Labor unions put major resources behind Democrat Barack Obama and could wind up a big winner if he takes the White House. Nuclear power and the coal industry would get a boost if Republican John McCain prevails. Obama promises to raise corporate tax rates and income taxes on families making over $250,000; McCain promises to cut corporate taxes and extend all of President Bush's tax cuts.

A look at how some could fare:

UNIONS

With Obama in office and an expected stronger Democratic majority on Capitol Hill, unions could achieve their top goal of making it easier for workers to organize. Labor wants to winning passage of a measure that would require companies to recognize unions once a majority of employees sign cards expressing support.

The U.S. Chamber of Commerce opposes the bill. Steven Law, the group's general counsel, said the elimination of secret ballot votes ''creates tremendous incentives for intimidation and harassment.'' But Bill Samuel, director of government affairs at the AFL-CIO, says, ''We see (it) as a way to strengthen the middle class'' by enabling more workers to push for higher wages and benefits.

Obama has endorsed the measure; McCain opposes it.

------

ALTERNATIVE ENERGY AND NUCLEAR POWER

Both candidates back expanded use of alternative energy such as solar and wind power -- through greater spending in Obama' case and tax credits in McCain's.

Obama proposes spending $150 billion over 10 years to speed the development of plug-in hybrid cars and ''commercial-scale'' renewable energy, among other goals.

McCain favors the construction of 45 new nuclear power plants by 2030 and spending $2 billion annually in support of ''clean coal.''

While McCain has been a critic of government support for ethanol, most analysts think congressional support for the alternative fuel would enable it to survive under a McCain administration.

------

STEM CELL RESEARCH

Few sectors have more to gain on Election Day than the nation's fledgling stem cell companies, which long have bemoaned the administration's policy limiting federal money for embryonic stem cell research. Bush believes the research is immoral because the process of culling the stem cells kills the embryo.

Both Obama and McCain support federal spending on stem cell research and could move to overturn current restrictions.

Industry executives say the policy change would shore up investor confidence in stem cell developers.

''It will relieve a lot of uncertainty among the investment community that we are going to become an outlaw industry,'' said Richard Garr, chief executive of Neuralstem.

------

BIOTECH GENERICS

Both candidates have endorsed creating a pathway for generic biotech drugs, a long-sought goal for generic drug companies such as Teva Pharmaceutical Industries Ltd. and Mylan Inc.

Unlike traditional chemical drugs, biotech companies such as Amgen Inc. and Genentech Inc. face no generic competition in the U.S. because the Food and Drug Administration lacks authority to approve copies of biotech medicines. That is because biotech drugs, which are made from living cells or bacteria, are more complicated to manufacture than chemical drugs.

Both campaigns have praised generic drugs as a tool to lower health care costs.

''We know that expanding the use of generics and eliminating barriers to that goal must be a centerpoint of any health reform effort,'' said Dora Hughes, a health care adviser for Obama, at a recent industry conference.

In politics, of course, not everyone is a winner. Some possible losers include:

OIL COMPANIES

Companies such as Exxon Mobil Corp. and Chevron Corp. are likely to face higher taxes under a President Obama, who supports a windfall profits tax.

The two companies did not help their cause by reporting record profits in late October. Still, as oil prices fall, profits are likely to follow suit.

Even if a windfall profit tax is not imposed, at least eight different taxes and fees could be slapped on the cash-rich industry by a Democratic Congress looking for extra revenue, said Kevin Book, an energy analyst at FBR Capital Markets.

They include adopting a surtax on oil and gas production in the Gulf of Mexico and eliminating a 2 percent tax cut included in recent legislation, Book said.

On the other hand, oil companies could profit if McCain wins since he is a big champion of offshore drilling.

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PHARMACEUTICALS

No matter which candidate wins the White House, the largest drugmakers, such as Pfizer Inc. and Merck & Co. Inc., will struggle to defend lucrative government programs. That includes the Medicare drug benefit, which pays for medications taken by 47 million older people and which provided much-needed revenue to the drug industry last year.

Dozens of insurers now separately negotiate prices with pharmaceutical makers; the government reimburses insurers for the final cost. Though the program has come in under budget, most Democrats say greater savings could be had by letting the government directly negotiate prices with drugmakers.

Obama has pledged to take up the effort, arguing that savings could total up to $30 billion. McCain also supports giving the government power to negotiate prices, but only at the request of individual insurers.

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TELECOMMUNICATIONS

Big telecommunications carriers have forged many deals in the past eight years, such as Verizon Wireless' $28 billion purchase of Alltel Corp., approved with conditions by the Justice Department Thursday.

Such deals will likely face tougher antitrust scrutiny under either an Obama or McCain administration, analysts say.

In fact, some of the more contentious industry deals in recent years -- including the merger of Sirius Satellite Radio and XM Satellite Radio, and Google Inc.'s acquisition of DoubleClick -- might not have been approved under either candidate, says Paul Gallant, a telecom analyst at Stanford Washington Research Group.

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DEFENSE CONTRACTORS

After years of record Pentagon budgets, defense companies such as Lockheed Martin Corp. and Raytheon Co. face the prospect of slowing military spending.

Big budget deficits are projected to worsen due in part to the financial bailout package approved by Congress. Defense spending will become a prime target for cuts. That could mean trouble for over-budget programs such as the Army's $200 billion Future Combat Systems, which aims to outfit units with high-tech weapons and communications tools.

Both candidates also want to overhaul the contracting process, especially after some high-profile flops such as the Air Force's attempt to award a $35 billion contract for new aerial refueling planes over the past seven years.

McCain has promoted his role in spiking an earlier Boeing Co. contract for the planes. Obama, meanwhile, has suggested that the Pentagon's effort to build a missile defense shield for the United States and its allies could be scaled back.

----

Associated Press writers Matthew Perrone, John Porretto, Joelle Tessler and Stephen Manning contributed to this report.

    Election to Benefit Some Industries, Harm Others, NYT, 2.11.2008, http://www.nytimes.com/aponline/washington/AP-Candidates-Business.html

Election, Jobs to Set Tone For Stocks

November 2, 2008
Filed at 10:51 a.m. ET
The New York Times
By REUTERS

NEW YORK (Reuters) - Wall Street hopes to turn a new page as it heads into November, but this week is littered with hurdles ranging from the U.S. presidential election to a likely gloomy jobs report.

Traders were more than happy to see the back of October, one of the worst months in history for the broader market, and took heart from the fact that it ended with one of the best weeks on record.

Last week's strength came as the host of efforts by central banks and governments to ease credit strains began to bear fruit, and volatility abated slightly. Bargain hunting and funds buying stocks to rebalance their portfolios also helped boost stocks.

For the first part of this week, Wall Street -- like the rest of America -- will turn its attention to Tuesday's presidential election.

Democrat Barack Obama's lead over Republican rival John McCain held steady at seven points as the race for the White House entered its final four days, according to a Reuters/C-Span/Zogby tracking poll released on Friday.

Investors will likely assess the possibility of quick fiscal stimulus after the election and the risk of protectionist measures or more regulation.

Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Illinois, said as long as the election was decisive, stock markets will likely react positively, regardless who wins.

Thomson Reuters data shows that on average the 60 days preceding a new presidential term yield positive returns, suggesting that the lack of uncertainty after elections usually gives the market a boost.

"Once we know what the balance of power will look like, investors can factor that into the equation. The market may not like who wins, but it will like knowing," said Christopher Zook, chairman and chief investment officer of CAZ Investments in Houston.

But a raft of economic data will be vying for investors' attention, as will earnings reports in the last heavy week of the autumn results season.

Fred Dickson, chief market strategist at Davidson Companies in Lake Oswego, Oregon, said he expects the economic data "won't make very good reading as the news coming from companies who have already reported third-quarter earnings continues to point to an economy that has come to an abrupt stop, primarily as a result of the credit crisis."

HUGE JOB LOSSES FORESEEN

The main event on this week's economic calendar is the October U.S. employment report. That data, due on Friday, is expected to show that U.S. nonfarm payrolls shed 200,000 jobs in October, according to a Reuters poll, while the unemployment rate is forecast to rise 6.3 percent.

Other key economic reports include the Institute for Supply Management (ISM) reports on manufacturing on Monday and non-manufacturing, or service-sector, activity on Wednesday. Both are expected to produce readings showing that the economy contracted in October.

Among the major companies set to report earnings this week are Anadarko Petroleum, MasterCard, Cisco Systems and Sprint Nextel. With 59 percent of S&P 500 companies having reported earnings in the third quarter, on average earnings for companies in the index are expected to fall 23.8 percent for the quarter.

Any further easing in credit strains, however, could help the market look past weak economic and earnings data, analysts said.

"Volatility will likely continue, though maybe not to the extremes we have seen," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.

"You have some stabilization in the credit markets, but there is also still a lot of ugly economic news that is washing up on to the shore, so there is still that to and fro," he added.

On Friday, short-term credit markets showed more signs of emerging from a deep freeze as banks again lowered the rates they charge each other for borrowing dollars overnight and central banks across the world made the currency more easily available.

Meanwhile, the Federal Reserve's efforts to shore up short-term lending for companies and banks continued to build momentum in the critical commercial paper market with a program the U.S. central bank launched this week.

"I think we probably have passed the worst as far as credit market lock-up and the ending of the world as we know it," Hinsdale Associates' Nolte said.

That said, "I don't think we're completely out of the woods yet," he added.
 

TRICKS AND A HALLOWEEN TREAT

October was a nightmare for U.S. stock investors, with the Dow Jones industrial average ending the month down 14.06 percent -- its worst monthly percentage drop since August 1998. The Standard & Poor's 500 Index fell 16.83 percent this month for its worst one-month percentage slide since October 1987. The Nasdaq lost 17.73 percent in October, its worst one-month percentage loss since February 2001.

For the week, though, Wall Street wrapped up a rotten month with a Halloween treat. Stocks ended Friday's session higher, following Thursday's advance a day after the Fed's half-percentage-point rate cut. This performance gave the U.S. stock market its first back-to-back gains in over a month.

The Dow finished the week up 11.3 percent, its best weekly percentage gain since October 1974, while the S&P 500 climbed 10.5 percent, its best weekly percentage gain since at least January 1980. The Nasdaq rose 10.9 percent, its best weekly percentage gain since April 2001.

A big bright spot: U.S. oil futures prices dropped a record 32.62 percent in October. On the New York Mercantile Exchange, U.S. front-month crude settled at $67.81 a barrel -- down $32.83 from its close on September 30.

(Additional reporting by Ryan Vlastelica and Leah Schnurr; Editing by Jan Paschal)

    Election, Jobs to Set Tone For Stocks, NYT, 2.11.2008, http://www.nytimes.com/reuters/business/business-us-column-stocks-outlook.html

Economic View

Challenging the Crowd in Whispers,

Not Shouts

November 2, 2008
The New York Times
By ROBERT J. SHILLER

ALAN GREENSPAN, the former Federal Reserve chairman, acknowledged in a Congressional hearing last month that he had made an “error” in assuming that the markets would properly regulate themselves, and added that he had no idea a financial disaster was in the making. What’s more, he said the Fed’s own computer models and economic experts simply “did not forecast” the current financial crisis.

Mr. Greenspan’s comments may have left the impression that no one in the world could have predicted the crisis. Yet it is clear that well before home prices started falling in 2006, lots of people were worried about the housing boom and its potential for creating economic disaster. It’s just that the Fed did not take them very seriously.

For example, I clearly remember a taxi driver in Miami explaining to me years ago that the housing bubble there was getting crazy. With all the construction under way, which he pointed out as we drove along, he said that there would surely be a glut in the market and, eventually, a disaster.

But why weren’t the experts at the Fed saying such things? And why didn’t a consensus of economists at universities and other institutions warn that a crisis was on the way?

The field of social psychology provides a possible answer. In his classic 1972 book, “Groupthink,” Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group.

Members of the Fed staff were issuing some warnings. But Mr. Greenspan was right: the warnings were not predictions. They tended to be technical in nature, did not offer a scenario of crashing home prices and economic confidence, and tended to come late in the housing boom.

A search of the Federal Reserve Board’s working paper series reveals a few papers that touch on the bubble. For example, a 2004 paper by Joshua Gallin, a Fed economist, concluded: “Indeed, one might be tempted to cite the currently low level of the rent-price ratio as a sign that we are in a house-price ‘bubble.’” But the paper did not endorse this view, saying that “several important caveats argue against such a strong conclusion and in favor of further research.”

One of Mr. Greenspan’s fellow board members, Edward M. Gramlich, urgently warned about the inadequate regulation of subprime mortgages. But judging at least from his 2007 book, “Subprime Mortgages,” he did not warn about a housing bubble, let alone that its bursting would have any systemic consequences.

From my own experience on expert panels, I know firsthand the pressures that people — might I say mavericks? — may feel when questioning the group consensus.

I was connected with the Federal Reserve System as a member the economic advisory panel of the Federal Reserve Bank of New York from 1990 until 2004, when the New York bank’s new president, Timothy F. Geithner, arrived. That panel advises the president of the New York bank, who, in turn, is vice chairman of the Federal Open Market Committee, which sets interest rates. In my position on the panel, I felt the need to use restraint. While I warned about the bubbles I believed were developing in the stock and housing markets, I did so very gently, and felt vulnerable expressing such quirky views. Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated.

Reading some of Mr. Geithner’s speeches from around that time shows that he was concerned about systemic risks but concluded that the financial system was getting “stronger” and more “resilient.” He was worried about the unsustainability of a low savings rate, government deficit and current account deficit, none of which caused our current crisis.

In 2005, in the second edition of my book “Irrational Exuberance,” I stated clearly that a catastrophic collapse of the housing and stock markets could be on its way. I wrote that “significant further rises in these markets could lead, eventually, to even more significant declines,” and that this might “result in a substantial increase in the rate of personal bankruptcies, which could lead to a secondary string of bankruptcies of financial institutions as well,” and said that this could result in “another, possibly worldwide, recession.”

I distinctly remember that, while writing this, I feared criticism for gratuitous alarmism. And indeed, such criticism came.

I gave talks in 2005 at both the Office of the Comptroller of the Currency and at the Federal Deposit Insurance Corporation, in which I argued that we were in the middle of a dangerous housing bubble. I urged these mortgage regulators to impose suitability requirements on mortgage lenders, to assure that the loans were appropriate for the people taking them.

The reaction to this suggestion was roughly this: yes, some staff members had expressed such concerns, and yes, officials knew about the possibility that there was a bubble, but they weren’t taking any of us seriously.

I BASED my predictions largely on the recently developed field of behavioral economics, which posits that psychology matters for economic events. Behavioral economists are still regarded as a fringe group by many mainstream economists. Support from fellow behavioral economists was important in my daring to talk about speculative bubbles.

Speculative bubbles are caused by contagious excitement about investment prospects. I find that in casual conversation, many of my mainstream economist friends tell me that they are aware of such excitement, too. But very few will talk about it professionally.

Why do professional economists always seem to find that concerns with bubbles are overblown or unsubstantiated? I have wondered about this for years, and still do not quite have an answer. It must have something to do with the tool kit given to economists (as opposed to psychologists) and perhaps even with the self-selection of those attracted to the technical, mathematical field of economics. Economists aren’t generally trained in psychology, and so want to divert the subject of discussion to things they understand well. They pride themselves on being rational. The notion that people are making huge errors in judgment is not appealing.

In addition, it seems that concerns about professional stature may blind us to the possibility that we are witnessing a market bubble. We all want to associate ourselves with dignified people and dignified ideas. Speculative bubbles, and those who study them, have been deemed undignified.

In short, Mr. Janis’s insights seem right on the mark. People compete for stature, and the ideas often just tag along. Presidential campaigns are no different. Candidates cannot try interesting and controversial new ideas during a campaign whose main purpose is to establish that the candidate has the stature to be president. Unless Mr. Greenspan was exceptionally insightful about social psychology, he may not have perceived that experts around him could have been subject to the same traps.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

    Challenging the Crowd in Whispers, Not Shouts, NYT, 2.11.2008, http://www.nytimes.com/2008/11/02/business/02view.html

Editorial

Island of Lost Homes

November 2, 2008
The New York Times

As the financial crisis crisscrosses the globe, mutating as it goes, it is important to remember the brownfield of bad American home loans that are its ground zero. The view is ugly, the effects dire and the need for solutions just as urgent whether you look in the stucco foreclosure tracts of Phoenix and Southern California, the condo-boom cities like Miami — or a birthplace of the suburban American dream, Long Island.

Long Island’s two counties, Suffolk and Nassau, are first and fourth in the number of loans at risk of foreclosure in New York State. Long Island was not supposed to be hit this hard, because of its affluence, highly desirable housing stock and relative lack of room to sprawl. But for lots of reasons distinctly its own, it was highly susceptible to the toxic fallout of the subprime bubble.

Long Island now has two housing crises, an acute new one laid over a chronic old one. The old one is a severe shortage of housing for regular people, in a market pathologically skewed by racial segregation and not-in-my-backyard resistance to responsible development.

Housing in the land of Levittown, the national symbol of affordable starter homes, has for years been out of reach to young couples and the working class. Thousands of Long Islanders of modest means, from young professionals to immigrant day laborers, are crowding into illegally subdivided single-family houses. Demographers have documented an exodus of people who grew sick of living in their parents’ basements, while retirees rattled around in empty nests, cash-poor but property-rich — at least until the mortgage meltdown.

For all that, there are few legal rental units, and efforts to build higher-density “smart growth” developments have been vigorously, often rabidly, opposed by communities wedded to the single-family house behind the white picket fence. McMansions have been eating up the island’s dwindling open space and farmland, while its downtowns and infrastructure wither from age and neglect.

To top it off, the island remains one of the most segregated suburbs in the country, designed from the days of its earliest tract homes to be a haven of white aspiration. For years, African-American homeowners were shunted to tightly bounded neighborhoods that became self-perpetuating pockets of poverty with severely underperforming school districts.

It is little wonder that within Long Island’s dysfunctional housing market, where more than half of residents spend more than 30 percent of their income on housing, the lure of easy credit was irresistible. Mortgage lenders cajoled the elderly to plunder their equity, people in heavily minority areas like Hempstead Village, Amityville and Brentwood lined up for the subprime express, investors snapped up homes for illegal rentals, and trader-uppers in richer ZIP codes dived in over their heads.

Advocates who had struggled to get poor people into housing realized a few years ago that things were moving too fast. Peter Elkowitz, chief executive of the Long Island Housing Partnership, said people at the group’s home-ownership workshops would sometimes bristle at being told what they could not afford and take their business to storefront brokers who offered no-income-verification loans and the false promise that home values would keep rising forever.

Now it is all crashing down. The ranch homes have plywood picture windows, and front lawns sprout billboards for foreclosure auctions. The disaster is particularly acute in black and Latino communities, where subprime loans were advertised heavily. The Empire Justice Center found that the three Suffolk communities with the highest foreclosure risk — Amityville, Brentwood and Central Islip — are home to a full 30 percent of the county’s African-American homeowners. Nassau’s three hardest-hit areas — Hempstead, Freeport and Elmont — are home to 42 percent of its black homeowners.

The county executives of Nassau and Suffolk, Thomas Suozzi and Steve Levy, have ramped up services like debt counseling to keep the next wave of troubled homeowners from defaulting when their adjustable-rate mortgages reset next year. But the counties are struggling to keep their own budgets right-side-up in a wretched economy. New York State’s deficit is mountainous, and Mr. Levy and Mr. Suozzi expect to get hammered on aid from Albany, even as their own sales taxes and property-transfer taxes dwindle.

Crime is not up yet, but homelessness and hunger are. So is blight: town and village officials have their hands full keeping lawns mowed for a glut of abandoned houses. The bottom-feeders are out: “We Buy Houses,” read the light-post fliers in poor neighborhoods, offering fast cash for troubled homes. Brokers who shamelessly peddled subprime loans to unqualified buyers are now offering, for thousands of dollars in fees, to fix people’s credit, convert their loans and negotiate with lenders — the same thing nonprofit groups do at no charge.

This disaster was caused by a torrent of bad loans, but there has been only a trickle of the money and leadership needed from Washington, where the focus has been on bailing out banks before homeowners. At a training workshop at the Long Island Housing Partnership in Hauppauge last week, representatives of Citibank met with nonprofit groups to explore ways to repair mortgages so that families can keep their homes for the life of the loans, and not simply postpone inevitable foreclosures.

The emphasis was on realism and honesty in a world that jettisoned both. Participants agreed that a solution as big as the problem had not yet been devised. Lenders, homeowners and advocates are stuck with straightening out a colossal mess, one bad loan at a time.

    Island of Lost Homes, NYT, 2.11.2008, http://www.nytimes.com/2008/11/02/opinion/02sun1.html

If Elected ...

Hopefuls Differ as They Reject Gay Marriage

November 1, 2008
The New York Times
By PATRICK HEALY

Several gay friends and wealthy gay donors to Senator Barack Obama have asked him over the years why, as a matter of logic and fairness, he opposes same-sex marriage even though he has condemned old miscegenation laws that would have barred his black father from marrying his white mother.

The difference, Mr. Obama has told them, is religion.

As a Christian — he is a member of the United Church of Christ — Mr. Obama believes that marriage is a sacred union, a blessing from God, and one that is intended for a man and a woman exclusively, according to these supporters and Obama campaign advisers. While he does not favor laws that ban same-sex marriage, and has said he is “open to the possibility” that his views may be “misguided,” he does not support it and is not inclined to fight for it, his advisers say.

Senator John McCain also opposes same-sex marriage, but unlike Mr. Obama’s, his position is influenced by generational and cultural experiences rather than a religious conviction, McCain advisers say.

But Mr. McCain, reflecting his strongly held views on federalism, has also broken with many Republican senators and joined Mr. Obama and most Democrats to oppose amending the United States Constitution to ban same-sex marriage, arguing that the issue should be left to the states to decide.

The candidates have very different positions, though, when it comes to the state level. Mr. Obama opposes amending state constitutions to define marriage as a heterosexual institution, describing such proposals as discriminatory. Mr. McCain, however, has been active in such efforts: On the most expensive and heated battle to ban same-sex marriage this year, a proposed constitutional amendment in California known as Proposition 8, he has endorsed the measure and sharply criticized a State Supreme Court ruling that granted same-sex couples the right to marry.

Mr. Obama has spoken out against Proposition 8, and opponents of the measure hope that a huge Democratic turnout in California on Nov. 4 — and, possibly, depressed turnout among conservatives — will help defeat it. At the same time, some Democrats say that if many socially conservative blacks and Hispanics turn out to support Mr. Obama, but oppose same-sex marriage, the amendment’s chances for passage could improve.

While same-sex marriage is not expected to play a consequential role in the elections on Tuesday — unlike in 2004, when a proposed ban in Ohio was widely seen as hurting the Democratic presidential nominee that year, Senator John Kerry — passions remain high for voters on both sides. Some gay Democrats had hoped, in particular, that Mr. Obama would extend his message of unity and tolerance to their fight on the issue.

“Barack is an intellectual guy, and I know he has been thinking through his position on gay marriage, and what is fair for all people,” said Michael Bauer, an openly gay fund-raiser for Mr. Obama and an adviser to his campaign on gay issues. “But he is just not there with us on this issue.”

Some gay allies of Mr. Obama thought, during a televised Democratic forum in Los Angeles in August 2007, that he might come out in favor of same-sex marriage, after he was asked if his position supporting civil unions but not same-sex marriage was tantamount to “separate but equal.”

“Look, when my parents got married in 1961, it would have been illegal for them to be married in a number of states in the South,” Mr. Obama said. “So, obviously, this is something that I understand intimately. It’s something that I care about.”

At that point, he veered onto legal rights, saying that — both in 1961 and today — it was more important to fight for nondiscrimination laws and employment protections than for marriage.

Mr. Obama has spoken only occasionally about his religious beliefs influencing his views on same-sex marriage, and he has indicated that he is wary of linking his religion to policy decisions.

“I’m a Christian,” Mr. Obama said on a radio program in his 2004 race for Senate. “And so, although I try not to have my religious beliefs dominate or determine my political views on this issue, I do believe that tradition, and my religious beliefs say that marriage is something sanctified between a man and a woman.”

In one of his books, “The Audacity of Hope,” however, Mr. Obama describes a conversation with a lesbian supporter who became upset when he cited his religious views to explain his opposition.

“She felt that by bringing religion into the equation, I was suggesting that she, and others like her, were somehow bad people,” he wrote. “I felt bad, and told her so in a return call. As I spoke to her, I was reminded that no matter how much Christians who oppose homosexuality may claim that they hate the sin but love the sinner, such a judgment inflicts pain on good people.”

“And I was reminded,” Mr. Obama added, “that it is my obligation, not only as an elected official in a pluralistic society but also as a Christian, to remain open to the possibility that my unwillingness to support gay marriage is misguided, just as I cannot claim infallibility in my support of abortion rights.”

Advisers to Mr. McCain, meanwhile, say that he is not especially fervent on the issue — he simply believes that marriage has always been between a man and a woman, and that this is a culturally accepted norm that he sees no need to dispute.

Mr. McCain discussed his views with the openly gay entertainer Ellen DeGeneres in an appearance on her television talk show in May.

The California Supreme Court had just cleared the way for same-sex marriage, and Ms. DeGeneres had announced on her program that she planned to marry her longtime girlfriend. “We are all the same people, all of us — you’re no different than I am,” Ms. DeGeneres told Mr. McCain as they sat next to each other in plush chairs. “Our love is the same.”

Mr. McCain called her comments “very eloquent” and added: “We just have a disagreement. And I, along with many, many others, wish you every happiness.”

Ms. DeGeneres said: “So, you’ll walk me down the aisle? Is that what you’re saying?”

Mr. McCain replied, “Touché.”

As a matter of policy, Mr. McCain approaches same-sex marriage from his strong federalist viewpoint. He was one of seven Republican senators to vote in June 2006 against a proposed federal amendment banning such marriages, saying it was an issue for the states. That same year, he also worked to try to amend Arizona’s Constitution to define marriage as between a man and a woman. That amendment failed — the first rejection in 28 statewide votes on similar measures since 1998; a new effort is on the ballot next week in Arizona, and Mr. McCain has endorsed it.

“He is a true federalist, seeing no need for the federal government to dictate laws on who can marry who,” said Jim Kolbe, a former Republican congressman from Arizona and a friend of Mr. McCain’s, and who is openly gay.

“As a personal matter, I think this is entirely a generational and cultural thing for him — he just doesn’t see a need for gay marriage,” Mr. Kolbe said. “I just think gay marriage is not part of the world and background that he comes from.”

    Hopefuls Differ as They Reject Gay Marriage, NYT, 1.11.2008, http://www.nytimes.com/2008/11/01/us/politics/01marriage.html?hp

Banks Alter Loan Terms to Head Off Foreclosures

November 1, 2008
The New York Times
By VIKAS BAJAJ and ERIC DASH

Even as political pressure builds in Washington for a sweeping program to help struggling homeowners, some banks are realizing that it may be good business to keep borrowers in their homes.

On Friday, JPMorgan Chase became the latest big bank to pledge to cut monthly payments, by lowering interest rates and temporarily reducing loan balances for as many as 400,000 homeowners. Early in October, Bank of America, which acquired the large lender Countrywide, announced a similar effort aimed at 400,000 borrowers as part of a settlement with state officials.

Though the measures encompass only a fraction of the nation’s troubled homeowners, analysts say they could become more instrumental in stemming the rising tide of foreclosures than the government’s plan to partly guarantee home loans.

“The banks are doing the cost-benefit analysis,” said Gerard S. Cassidy, a banking analyst with RBC Capital Markets. “The banks don’t want these customers going into foreclosure because it is a costly and punitive way of trying to collect your money.”

Roughly 1.5 million homes were in foreclosure at the end of June, and economists expect several million more borrowers may default in the coming year as housing prices erode and job losses rise. Nearly one in 10 mortgages is either delinquent or in foreclosure.

Chase officials said their effort was not an act of charity or a response to government pressure. By renegotiating loans with borrowers, the bank is hoping to reduce the losses that it incurs in the foreclosure process and when it sells repossessed homes. Chase said it has already modified 250,000 loans since the start of 2007.

“What we are doing is a process that just makes a lot of sense,” said Charlie Scharf, chief executive of retail financial services at Chase. “If the government can come in and help us find ways to modify more people that would be wonderful.”

The bank, which will open 24 counseling centers and hire 300 employees to work with borrowers, will suspend foreclosures on loans it owns for at least 90 days while it puts its new policies into place at Chase and the two banks it acquired this year, Washington Mutual and Bear Stearns.

Like other banks, Chase is largely aiming at loans that the bank owns and not the mortgages that it services on behalf of bond investors who own mortgage-backed securities. Banks have less leeway in changing the terms of loans packaged into securities, because contracts that govern them can be very restrictive.

Those contracts could limit the impact of loan modification programs at Chase and other banks. For instance, Chase owns $350 billion of the $1.5 trillion in the home mortgages it services; the rest are owned by investors. Some hedge fund investors have threatened legal action if banks aggressively modify the loans that back bonds that they own. Mr. Scharf said the bank was working with investors to gain approval to modify more loans.

Chase’s effort resembles a plan put in place at IndyMac after the Federal Deposit Insurance Corporation took it over in July. Chase’s program closely mirrors that template by lowering interest rates on existing mortgages and temporarily reducing the principal owed on loans. The goal would be to lower a borrower’s housing payments to 31 to 40 percent of disposable income.

Sheila C. Bair, the chairman of the F.D.I.C., has said the agency may be able to help 40,000 of the 60,000 delinquent IndyMac borrowers. About 3,500 of those who have been approached have agreed to a modification. IndyMac owns most of those loans but it has been seeking permission from investors to modify other loans, as well.

But the steps being taken by banks on their own could affect a much larger pool of troubled homeowners.

“A clear consensus is emerging that broad-based and systematic loan modifications are the best way to maximize the value of mortgages while preserving homeownership — which will ultimately help stabilize home prices and the broader economy,” Ms. Bair said in a statement that applauded the announcement by Chase.

Mr. Scharf said Chase would also offer modifications to borrowers who were not currently delinquent but who the bank thought could be at risk of defaulting. For certain risky loans, it might offer to temporarily reduce interest rates to as low as 2 percent and calculate payments on a reduced loan balance for a few years.

Bank of America agreed to make similar changes under a settlement of predatory lending practices with officials from 11 states, and agreed to permanently write down the amount owed on some mortgages. HSBC, another big bank, is also pre-emptively providing relief to some borrowers and has modified nearly 25 percent of its subprime mortgages.

Mark Pearce, a banking regulator in North Carolina, said the government interventions at IndyMac and Countrywide were helping to set a good example for lenders like Chase that were now beginning to take a more aggressive approach to loan modifications.

“It’s clear that they have studied IndyMac and the Countrywide settlement,” said Mr. Pearce, who is a deputy commissioner for banks in North Carolina. “Those public programs are leading other servicers to rethink how they are approaching these issues.”

    Banks Alter Loan Terms to Head Off Foreclosures, NYT, 1.11.2008, http://www.nytimes.com/2008/11/01/business/01modify.html

Specter of Deflation Lurks

as Global Demand Drops

November 1, 2008
The New York Times
By PETER S. GOODMAN

As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy — the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.

The word for this is deflation, or declining prices, a term that gives economists chills.

Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s — a period in which some experts now find parallels to the American predicament.

“That certainly is the snapshot of the risk I see,” said Robert J. Barbera, chief economist at the research and trading firm ITG. “It is the crisis we face.”

With economies around the globe weakening, demand for oil, copper, grains and other commodities has diminished, bringing down prices of these raw materials. But prices have yet to decline noticeably for most goods and services, with one conspicuous exception — houses. Still, reduced demand is beginning to soften prices for a few products, like furniture and bedding, which are down slightly since the beginning of 2007, according to government data. Prices are also falling for some appliances, tools and hardware.

Only a few months ago, American policy makers were worried about the reverse problem — rising prices, or inflation — as then-soaring costs for oil and food filtered through the economy. In July, average prices were 5.6 percent higher than a year earlier — the fastest pace of inflation since 1991. But by the end of September, annual inflation had dipped to 4.9 percent and was widely expected to go lower.

The new worry is that in the worst case, the end of inflation may be the beginning of something malevolent: a long, slow retrenchment in which consumers and businesses worldwide lose the wherewithal to buy, sending prices down for many goods. Though still considered unlikely, that would prompt businesses to slow production and accelerate layoffs, taking more paychecks out of the economy and further weakening demand.

The danger of this is the difficulty of a cure. Policy makers can generally choke off inflation by raising interest rates, dampening economic activity and reducing demand for goods. But as Japan discovered, an economy may remain ensnared by deflation for many years, even when interest rates are dropped to zero: falling prices make companies reluctant to invest even when credit is free.

Through much of the 1990s, prices for property and many goods kept falling in Japan. As layoffs increased and purchasing power declined, prices fell lower still, in a downward spiral of diminishing fortunes. Some fear the American economy could be sinking toward a similar fate, if a recession is deep and prolonged, as consumers lose spending power just as much of Europe, Asia and Latin America succumb to a slowdown.

“That’s a meaningful risk at this point,” said Nouriel Roubini, an economist at New York University’s Stern School of Business, who forecast the financial crisis well in advance and has been warning of deflation for months. “We could get into a vicious circle of deepening malaise.”

Most economists — Mr. Roubini and Mr. Barbera included — say American policy makers have tools to avert the sort of deflationary black hole that captured Japan. Deflation fears last broke out in the United States in 2003, but the Federal Reserve defeated the menace with low interest rates that kept the economy growing. This time, the Fed is again being aggressive, dropping its target rate to 1 percent this week. And the government’s various bailout plans have also pumped money into the economy.

“If you print enough money, you can create inflation,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard.

But even as American authorities unleash credit, the threat has intensified. Not since the Depression have so many countries faced so much trouble at once. The financial crisis has gone global, like a virus mutating in the face of every experimental cure. From South Korea to Iceland to Brazil, the pandemic has spread, bringing with it a tightening of credit that has starved even healthy companies of finance.

“We’re entering a really fierce global recession,” Mr. Rogoff said. “A significant financial crisis has been allowed to morph into a full-fledged global panic. It’s a very dangerous situation. The danger is that instead of having a few bad years, we’ll have another lost decade.”

Global economic growth has flourished in recent years, much of it fertilized with borrowed investment. This raised kingdoms of houses in Florida and California, steel mills in Ukraine, slaughterhouses in Brazil and shopping malls in Turkey.

That tide is now moving in reverse. Banks and other financial institutions are reckoning with hundreds of billions of dollars worth of disastrous investments. As they struggle to rebuild their capital, they are halting loans to many customers, demanding swift repayment from others and dumping assets — homes sold out of foreclosure, investments linked to mortgages and corporate loans. Selling is pushing prices down further, making the assets left on balance sheets worth less, in some cases prompting another round of sales.

“You get this adverse feedback loop where assets keep falling in value,” Mr. Barbera said. “You’re essentially putting big downward pressure on the global economy.”

In past crises, like those that devastated Mexico in 1994 and much of Asia in 1997 and 1998, weak economies managed to recover by exporting aggressively, not least to the United States. But American consumers are battered this time. After years of borrowing against homes and tapping credit cards, consumers are pulling back.

From Asia to Latin America, exports are slowing and should continue to do so as the global appetite shrinks. This is spawning fears that major producers like China and India — which vastly expanded production capacity in recent years — will have to dump products on world markets to keep factories running and stave off unemployment, pressing prices lower.

Earlier this year, some analysts suggested that American businesses might continue to prosper, even as consumers pulled back at home, by selling into foreign markets. Caterpillar, the construction equipment manufacturer, might suffer declining sales in the United States, the argument went, but huge projects from Russia to Dubai required front-end loaders. Australia and Brazil needed earth-movers to expand mining operations as they sent iron ore toward smelters in Northeast Asia.

But as much of the planet now struggles, Caterpillar is worried. “Next year, no doubt, will be a challenge,” Caterpillar’s chief executive, James W. Owens, recently warned.

China has long been at the center of claims that the world could keep growing regardless of American troubles. China has been importing cotton from India and the United States; electronics components from South Korea, Malaysia and Taiwan; timber from Russia and Africa; and oil from the Middle East.

But many of the finished goods China produces with these materials have ultimately landed in the United States, Europe and Japan. When consumers pull back in those countries, Chinese factories feel the impact, along with their suppliers around the globe.

Fewer laptop computers shipped from China spells less demand for chips. Last week, Toshiba — Japan’s largest chip maker — said it lost $275 million from July to September, blaming its troubles on a world glut.

Lower demand for flat-screen televisions means less need for flat-panel glass displays. This month, Samsung, the Korean electronics giant, said a global oversupply in that item caused its biggest dip in quarterly profits in three years.

Now, a glut of products may be building in the United States. Orders for trucks used by business have plummeted. Investments in industrial equipment are declining. Yet inventories have grown.

“I worry about an economy that looks like Japan,” said Barry P. Bosworth, a senior fellow at the Brookings Institution. “We’re going to be struggling with how to put this back together again for several more years.”

    Specter of Deflation Lurks as Global Demand Drops, NYT, 1.11.2008, http://www.nytimes.com/2008/11/01/business/economy/01deflation.html