History > 2008 > USA > Economy (IV)

Michael Klein

Editorial cartoon

Tighten Your Belt, Strengthen Your Mind        NYT        2.4.2008

http://www.nytimes.com/2008/04/02/opinion/02aamodt.html

Investors see recession,

Wall Street depression

Wed Apr 30, 2008
12:56am EDT
The New York Times
By Nichola Groom and Bernard Woodall

BEVERLY HILLS, California (Reuters) - The U.S. economy may be in a funk, but that's nothing compared with the pall hanging over Wall Street.

Some of the biggest U.S. investors said on Tuesday they expected the nation's economy to get worse, but then work its way toward recovery later this year.

On Wall Street, however, the road back to health will take much longer.

"It is the Great Depression on Wall Street. It sure isn't on Main Street," Ken Griffin, chief executive of hedge fund Citadel Investment Group LLC, said during a panel at the Milken Institute Global Conference in Beverly Hills, California.

According to Griffin and other top U.S. investors at the conference, the credit and housing crises that led to hundreds of billions of dollars in losses for Wall Street firms will take those investment banks years to claw back from.

"Until you see Wall Street put on their party hats again and get on the tables and start dancing is going to be years," said Ken Moelis, a former UBS (UBSN.VX: Quote, Profile, Research) banker who now runs his own investment firm, Moelis & Company. "It will be a long time for Wall Street to come back to where it was."

Leon Black, billionaire investor and founding partner of hedge fund Apollo Advisors, said the banking system has been "broken" since last summer and has fostered a credit crisis "the likes of which I've never seen in the 30 years I've been in the business."

Notwithstanding that, however, Moelis said he did not expect to see "a deep Main Street recession." In parts of the country, such as Pittsburgh, he said, business is booming thanks to soaring prices on commodities such as steel.

"They are looking for strategic deals and they are not interested in hearing how bad it is on Wall Street," Moelis said.

Chuck Ward, chairman of Lazard Asset Management Group, and Peter Weinberg, a partner with "boutique" investment bank Perella Weinberg Partners, agreed that the U.S. economic downturn would likely be a short one.

"We are just starting to see the slide in the economy and I think that will play out over six months," Ward said. "I don't think it will be a big recession. But by the end of the year I gotta believe that that's going to be behind us."

The stock market, which has been pummeled this year, will likely recover sooner, Weinberg said.

"I would say that the crisis starts to work itself out toward the end of the year and the equity market will sense that a bit before that," he said.

Ward said, however, that he expected to see more job losses on Wall Street as investment banks struggle to regain their footing.

It will take at least a year before they are fully back in the business of offering loans, said Apollo's Black.

"My guess is it will take six to 18 months, probably 12 to 18 months, before the banks are back lending," he said, adding that the leveraged buyouts of recent years would likely be "on hold" for up to 18 months.

"Competition in private equity," Black said, "is going to be fairly dormant for the next 12 to 18 months. And even when it comes back, my guess is that it's not going to come back in the size that we've experienced in the last few years."

One investor, however, said he was less pessimistic, and expected to see small LBO deals later this year.

"You will start to see LBO activity for deals in the $3 billion to $5 billion range in the next six months," said Bennett Goodman, senior managing partner of hedge fund GSO Capital Partners LP, a unit of private equity firm Blackstone Group LP (BX.N: Quote, Profile, Research).

(Editing by Tomasz Janowski)

Investors see recession, Wall Street depression, R, 30.4.2008, http://www.reuters.com/article/ousiv/idUSN2933499120080430

Countrywide Posts Loss of $893 Million

April 29, 2008
Filed at 11:23 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

LOS ANGELES (AP) -- Countrywide Financial Corp., the nation's largest mortgage lender and servicer, said Tuesday it lost $893 million during the first quarter due to a sharp increase in its provision to gird against unpaid home mortgage loans amid a deepening housing downturn.

The latest results marked the third consecutive quarterly loss for Countrywide, which agreed in January to sell itself to Bank of America Corp. for about $4 billion in stock.

Calabasas, Calif.-based Countrywide said it lost $893 million, or $1.60 per share, for the quarter ended March 31 compared with earnings of $434 million, or 72 cents per share, in the same period a year earlier.

Revenue plunged 72 percent to $679 million from $2.4 billion in the year-ago quarter.

Analysts polled by Thomson Financial, on average, forecast earnings of 2 cents per share.

The results were hurt as the company was forced to set aside $1.5 billion to cover loan losses, up from $158 million in the year-ago period. Charge-offs, or loans written off as not being repaid, totaled $606 million during the quarter, compared with $39 million in the same quarter last year, the company said.

The lender raised its reserve for credit losses to $3.4 billion by the close of the quarter.

Countrywide shares rose 7 cents to $5.90 in morning trading Tuesday after falling as low as $5.63 earlier in the session.

Countrywide said the increase in credit-related charges were driven by rising mortgage delinquencies and defaults. Falling home values also forced the lender to cut back its previous expectations for home prices in its loan portfolio.

The mortgage lender recorded an impairment charge of $347 million during the quarter related to securities backed by home equity lines of credit.

Because of continued deterioration in the credit markets, Countrywide also took a loss of $394 million as it transferred loans to a held-for-investment portfolio.

The company, which began pulling back on originating home equity lines of credit during the quarter, said its liability for estimated losses on home equity lines of credit totaled $798 million at the close of the quarter.

Countrywide's loan production unit posted earnings of $232 million during the quarter, up from $171 million a year earlier.

The unit's loan originations totaled $73 billion, compared with $69 billion in the year-ago period.

The company's average daily mortgage applications were valued at $2.2 billion during the quarter, a 27 percent jump from the fourth quarter.

Some 9.3 percent of the loans in Countrywide's mortgage servicing portfolio were delinquent as of March 31, up from 4.9 percent a year earlier. About 4.8 percent were 90 days or more behind in payments, the company said.

Nearly 39 percent of Countrywide's subprime mortgage loans made to borrowers with past credit problems were delinquent, up from 19.6 percent a year earlier.

The company's loan servicing portfolio was valued at $1.48 trillion as of March. 31.

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On the Net:

Countrywide Financial: http://www.countrywide.com

    Countrywide Posts Loss of $893 Million, NYT, 29.4.2008, http://www.nytimes.com/aponline/business/AP-Earns-Countrywide.html

Consumer Confidence Slips

as Home Prices Drop

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

Americans’ confidence in the economy continued to plunge this month as their homes lost value at the fastest rate in two decades, according to reports released on Tuesday.

The data suggested that the housing slump was far from a recovery and the job market might continue to weaken, ratcheting up pressure on the Federal Reserve, which began a two-day meeting on Tuesday, to take steps to stave off a prolonged slowdown.

The reports were consistent with a recession, economists said, though some optimists have insisted the economy is growing, albeit at a snail’s pace. President Bush remained in the latter camp at a news conference on Tuesday, where he said the economy was facing “a tough time.”

Much of the damage has stemmed from a slump in the housing market, where prices are nearly 15 percent off their high in July 2006.

In the 12 months ended in February, the Case-Shiller home price index, which measures the value of single-family homes in 10 major metropolitan regions, fell 13.6 percent, the worst decline since records began in 1987. A broader 20-city index dropped 12.7 percent.

The slump in home prices was more severe than the worst point of the recession of the 1990s, the last time values fell so far, so quickly.

As foreclosures rise and mortgage lenders tighten their standards, the market is expected to continue to suffer under the pressure of sagging inventories and a dearth of qualified buyers, economists said.

“This is not, alas, a fluke,” Ian Shepherdson, a London-based economist at High Frequency Economics, wrote in a note to clients. “The monthly declines have been accelerating steadily over the past year and this just marks another step on the way.”

The slump has hurt manufacturers, construction firms and other businesses that depend on strength in the housing industry, forcing some companies to lay off workers. It also lies at the root of the current credit crisis on Wall Street, where banks were left holding investments linked to mortgages that defaulted or were downgraded.

The problems are likely to weigh heavily on the nation’s overall economic growth in the first three months of 2008. Many economists think the economy slowed to a crawl in the first quarter; some predict a contraction. The government will release its first-quarter growth estimate on Wednesday; the technical definition of a recession is two consecutive quarters of negative growth.

The fall in home prices has also cut into Americans’ home equity and forced many to grapple with mortgages now worth more than the house itself. The problems have contributed to a deepening gloom, which was reinforced on Tuesday by a grim confidence survey released by the Conference Board.

The private report, which surveys up to 5,000 American households, dropped to its lowest point since March 2003, at the start of the invasion of Iraq. Americans feel worse about the economy’s prospects than any time since the mid-1970s, and many are bracing for job losses.

The index fell in April to 62.3 from a revised 65.9 in March and 76.4 in February, the Conference Board said.

“With house prices falling, wages failing to keep pace with inflation and job worries growing, we suspect that both confidence and spending will remain under downward pressure,” wrote James Knightley, an economist at ING Bank, in a note.

The effects of the housing slump are spread more or less evenly across the country. All 20 regions included in the Case-Shiller index recorded price declines in February, with Western cities like San Francisco, Los Angeles and San Diego among the worst performers. Only the Charlotte, N.C., area has seen prices increase to February 2008 from February 2007.

Single-family homes in Las Vegas, Miami and Phoenix have lost more than a fifth of their value over that period, according to the report, which is released by the ratings firm Standard & Poor’s.

Home values in the New York City area fell 1.2 percent in February and were down 6.6 percent compared to February 2007. Chicago’s homes lost 8.5 percent of their value in the last year, and Washington suffered a 13 percent year-over-year decline. Boston and Atlanta homes lost about 5 percent in 12 months.

“There is no sign of a bottom in the numbers,” said David M. Blitzer, who oversees the index, in a statement.

    Consumer Confidence Slips as Home Prices Drop, NYT, 29.4.2008, http://www.nytimes.com/2008/04/29/business/29econ-web.html?hp

Loan Industry

Fighting Rules on Mortgages

April 28, 2008
The New York Times
By STEPHEN LABATON

WASHINGTON — The mortgage industry, facing the prospect of tougher regulations for its central role in the housing crisis, has begun an intensive campaign to fight back.

As the Federal Reserve completes work on rules to root out abuses by lenders, its plan has run into a buzz saw of criticism from bankers, mortgage brokers and other parts of the housing industry. One common industry criticism is that at a time of tight credit, tighter rules could make many mortgages more expensive by creating more paperwork and potentially exposing lenders to more lawsuits.

To the chagrin of consumer groups that have complained that the proposed rules are not strong enough, the industry’s criticism has already prompted the Fed to consider narrowing the scope of the plan so it applies to fewer loans.

The debate over new mortgage standards comes in response to a severe crisis in the housing and financial markets that many economists trace back to overly loose credit and abusive loans. Those practices, combined with low interest rates, led to inflated market values that have declined rapidly in recent months as investors have begun to lose confidence in the financial instruments tied to those loans.

Four months ago, the Fed proposed the new standards on exotic mortgages and high-cost loans for people with weak credit. The Fed’s proposals came after it was criticized sharply as a captive of the mortgage lending industry that had failed over many years to supervise it adequately.

Proposals are pending in Congress on mortgage standards, but it is not clear whether they will be adopted this year. The Fed has its own authority under housing and lending laws to adopt mortgage standards.

The plan presented by the Fed was proposed by its chairman, Ben S. Bernanke, and Randall S. Kroszner, a former White House economist in the Bush administration who is now a Fed governor and leads the Fed’s consumer and community affairs committee.

The plan would not cover existing mortgages but would apply only to new ones. It would force mortgage companies to show that customers can realistically afford their mortgages. It would require lenders to disclose the hidden fees often rolled into interest payments. And it would prohibit certain types of advertising considered misleading.

The Fed is expected to issue final rules this summer.

Earlier this month, as the comment period was about to close, the Fed was deluged with more than 5,000 comments, mostly from lenders who said the proposals could affect loans that have not presented problems. Some bankers and brokers also said the rules would discourage them from lending to some creditworthy borrowers.

The plan was criticized in separate filings by three of the industry’s most influential trade groups — the American Bankers Association, the Mortgage Bankers Association and the Independent Community Bankers of America. More modest concerns about some of the provisions were also raised by the National Association of Home Builders and the National Association of Realtors.

Regulators have been meeting about the proposals with bankers, brokers and consumer groups in recent weeks and are continuing to do so.

Some of the groups seeking changes maintain that the proposals threaten to make borrowing for a home far more expensive and would unfairly deny mortgage brokers the right to earn certain fees.

Small community banks, which have played no significant role in the housing crisis, have urged the Fed to limit the scope of the proposed rules so that they do not discourage them from issuing loans. Lending groups have also raised concern that they would lead to frivolous and expensive litigation.

“We support many of the provisions in the proposed rule, but we do have concerns about the increased regulatory burden, liability and reputational risks that lenders might face,” said Kieran P. Quinn, chairman of Column Financial, Credit Suisse’s mortgage lending subsidiary in Atlanta, and the chairman of the Mortgage Bankers Association.

On at least one major aspect of the proposed restrictions — how broadly they should apply — the industry appears to be making headway. In a recent speech, Mr. Kroszner suggested that in response to criticism that the plan was including too many kinds of loans the Fed was considering whether to narrow the plan.

“We have heard from commenters who have expressed concern that in the current market environment, the proposed trigger could cover the market too broadly, and we will carefully consider the issues they raise and other possible approaches to achieve our objective,” Mr. Kroszner said last month at a conference of the National Association of Hispanic Real Estate Professionals.

Before this year, the Fed had applied an extra set of protection from abusive lending practices to a subset of subprime borrowers under the Home Ownership Equity Protection Act of 1994. The Fed has applied the law to fewer than 1 percent of all mortgages — those with interest rates at least eight percentage points above prevailing rates on Treasury securities.

Some economists and housing experts say the Fed’s lax oversight helped enable lending companies to reap enormous profits by providing millions of unsuitable and abusive loans to homeowners who often did not fully understand the terms or appreciate their risk.

As of January, the most recent month of available data, about a quarter of all subprime adjustable mortgages were delinquent, twice the level of the same period last year. Lenders began foreclosure proceedings on about 190,000 of these mortgages in the last three months of 2007.

The new rules would apply extra protection to any mortgage with an interest rate three percentage points above Treasury rates. Officials said that they would cover all subprime loans, which accounted for about a quarter of all mortgages last year as well as many exotic mortgages known in the industry as “Alt-A” loans.

These loans are made to people with relatively good credit scores but who might provide little documentation of their income or assets, or who make smaller than usual down payments or purchase loans that have unusual terms, like interest-only payments for an initial period.

Many mortgage brokers and bankers complain that the lower threshold would unnecessarily include many borrowers who are not at risk from abusive practices.

“There are a lot of community banks that have shied away from these loans because nobody wants to be a higher-priced lender,” said Karen Thomas, a lobbyist for the Independent Community Bankers. “With the trigger being set so low, it is encroaching on traditional, common sense mortgages. Our fear is it will result in less credit availability, which is not what we need in an already tight credit market.”

But consumer groups say that the proposed rules are already weak and that efforts to further weaken them would render them all but useless.

“The Fed has accurately diagnosed that this is a brain tumor and responded by prescribing an aspirin,” said Kathleen E. Keest, a former state regulator who is now a senior policy counsel at the Center for Responsible Lending, a group supporting home ownership. “In the industry, there is a fair amount of denial. They just don’t get it. There is a calamity within the industry, and they don’t have a new script yet, so they rely on the old script, which is that regulation will raise costs.”

But, she went on, “What we now see is that the unintended consequences of deregulation are worse. Their line is that regulation will cut back access to credit. That’s been their line ever since the small loan laws were adopted in the early 1900s.”

At the same time, letters urging the Fed to further tighten the rules were sent by Sheila C. Bair, the Republican head of the Federal Deposit Insurance Corporation, as well as senior members of the House Financial Services Committee.

In her letter, Ms. Bair, whose agency regulates many banks, urged the Fed to apply the proposed restrictions to loans that are three percentage points or higher than equivalent Treasuries. To prevent lenders from evading the limit by creatively structuring the loan and fees, she also suggested that the Fed impose the tighter restrictions if the loan fees exceeded a dollar amount.

While the Fed plan would require disclosures that could make it harder for lenders to include hidden sales fees that are usually paid to the mortgage broker, Ms. Bair suggested that the plan go further and ban some practices.

The plan, for instance, would require subprime lenders to explicitly describe fees that are now hidden. But Ms. Bair has proposed the elimination of such fees, saying such a ban would “eliminate compensation based on increasing the cost of credit and make the amount of the compensation more transparent to consumers.”

Ms. Bair also proposed making it easier for borrowers to sue lenders without having to show that they were engaged in a pattern of abusive practices, which is a requirement under the proposed Fed rules. She said that forcing borrowers to show a pattern of abuse “clearly favors lenders by limiting the number of individual consumer lawsuits and the ability of regulators to pursue individual violations.”

Ms. Bair also recommended that the Fed eliminate a so-called safe harbor provision in the proposal that protects lenders who fail to verify the income or assets of a borrower in some circumstances.

    Loan Industry Fighting Rules on Mortgages, NYT, 28.4.2008, http://www.nytimes.com/2008/04/28/business/28mortgage.html

Gas Hits $3.60 a Gallon

as Crude Nears $120

April 28, 2008
Filed at 12:27 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Gas prices hit $3.60 a gallon and oil futures rose to their own new record near $120 a barrel on Monday as labor actions overseas threatened crude supplies. Oil prices later retreated to alternate between gains and losses as the dollar stabilized against foreign currencies.

At the pump, the national average price Americans pay to gas up rose 0.4 cent overnight to a record $3.603 a gallon, according to a survey of stations by AAA and the Oil Price Information Service. While prices are 66 cents higher than a year ago, their rate of increase has slowed some since last week, when prices jumped more than 2 cents a day several times.

That could suggest that a price peak is near, analysts said.

''I've got to think we're close to the end on increases,'' said Michael Lynch, president of Strategic Energy & Economic Research Inc. in Cambridge, Mass.

However, Lynch thinks prices could rise another 10 cents to 15 cents before they reach that peak and begin falling.

Gas prices are rising in part because refiners are making the seasonal switch-over from making winter-grade gasoline to the more expensive, but less polluting, fuel they must sell during the summer. Supplies tend to fall while refiners are doing this as they try to sell off all of their winter gasoline.

But short supplies of a key ingredient used in the manufacture of summer grade gas have contributed to the increases, as has an intentional slowing of gasoline production by many refiners due to low profit margins on the fuel. Refiners have to buy the crude they turn into gasoline and other fuels, and crude prices have risen much faster over the past year than gas prices.

Light, sweet crude for June delivery rose to a record $119.93 a barrel in electronic trading on the New York Mercantile Exchange overnight, then retreated to trade up 13 cents at $118.65 a barrel. Oil prices alternated between positive and negative territory, buffeted by the dollar, which was mixed against foreign currencies, and concerns about supplies.

When the dollar holds its ground, commodities such as oil become less effective hedges against inflation. Many analysts believe oil's meteoric rise from around $65 a barrel a year ago is due in large part to a protracted decline in the value of the greenback.

Energy investors will be closely watching the Federal Reserve's decision Wednesday on interest rates; lower rates tend to weaken the dollar. If, as expected, the Fed lowers a key interest rate by another quarter percentage point and signals that it will temporarily hold off on any future rate cuts, the dollar could strengthen, and oil might fall.

''A quarter point cut could suggest ... we're getting to a point where the dollar might bottom out,'' Lynch said.

An unexpectedly large cut, or a suggestion that rates might be cut further, however, could fuel oil to new heights.

Meanwhile, Monday, labor actions that cut crude supplies from the North Sea and Nigeria supported prices. BP PLC on Sunday shut down the Forties Pipeline System that carries more than 700,000 barrels of oil a day to the U.K. because of a 48-hour walkout by employees at a refinery in central Scotland.

''With the refinery being shut down, it will affect supplies from the North Sea, and that has a potentially significant impact,'' said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney. ''That comes at the same time that there's production disruptions from Nigeria, so the combined effect of those is the immediate factor that's put pressure on oil prices.''

In Nigeria, workers at an ExxonMobil Corp. joint venture cut production by an unspecified amount to demand more pay. Militant attacks on oil infrastructure have also cut production of Nigeria's light, sweet crude, which is easily refined. After years of attacks, Nigeria's output is dropping and the country can produce only about 75 percent of its official capacity of 2.5 million barrels per day.

In other Nymex trading Monday, May gasoline futures fell 1.58 cent to $3.0379 a gallon, and May heating oil futures fell 0.53 cent to $3.2975 a gallon. May natural gas futures rose 20.7 cents to $11.17 per 1,000 cubic feet.

In London, Brent crude futures rose 14 cents to $116.48 a barrel on the ICE Futures exchange.

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Associated Press writers George Jahn in Vienna, Gillian Wong in Singapore and Jamey Keaten in Paris contributed to this report.

    Gas Hits $3.60 a Gallon as Crude Nears $120, NYT, 28.4.2008, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html

Kerkorian Buys 4.7% of Ford

and Plans More

April 28, 2008
The New York Times
By BILL VLASIC

DETROIT — The billionaire financier Kirk Kerkorian made a dramatic move on another Detroit automaker Monday with an announcement that he had acquired a 4.7 percent stake in the Ford Motor Company and planned a $170 million cash offer for an additional 20 million shares.

The surprising bid for a major stake in Ford follows earlier, unsuccessful efforts by Mr. Kerkorian to buy Chrysler and force General Motors into an alliance with foreign automakers.

Mr. Kerkorian’s Los Angeles-based investment arm, the Tracinda Corporation, said in a statement Monday that it had bought 100 million Ford shares since April 2 for about $690 million, giving the company a 4.7 percent stake in the auto company, which is based in Dearborn, Mich.

Tracinda said it also intended to start a tender offer for 20 million more shares at a price of $8.50 a share, a 13 percent premium over Ford’s closing price on Friday. Shares were up more than 8 percent in Monday morning trading.

If successful, the tender offer would give Mr. Kerkorian a 5.6 percent stake in Ford and a potentially powerful voice in the future of Detroit’s second-largest auto company.

The announcement follows Ford’s unexpectedly strong first-quarter results last week, when the company said it earned $100 million and was on track to earn a full-year profit in 2009.

“Tracinda has been following Ford closely since the company released its fourth-quarter results which indicated that Ford’s management was starting to receive highly meaningful traction in its turnaround efforts,” Tracinda said. “Last week this was reinforced by Ford’s first quarter 2008 results, achieved despite the difficult U.S. economic environment.”

While there was no indication that Mr. Kerkorian has met with Ford management or its board, Tracinda indicated that it supported the company’s current strategy to shrink its American capacity and globalize its auto operations.

“Tracinda believes that Ford management under the leadership of Chief Executive Officer Alan Mulally will continue to show significant improvements in its results going forward,” Tracinda said.

Ford released a statement from Mr. Mulally and William C. Ford Jr. — the company’s executive chairman — that avoided mentioning Tracinda or Mr. Kerkorian by name.

“We welcome confidence in Ford and the progress we are making on our transformation plan,” the statement said. “Any investor can purchase Ford shares, which are sold on the open market. The Ford team remains focused on executing our plan to transform Ford into a lean global enterprise delivering profitable growth for all.”

Tracinda gave no indication when it will start its tender offer. But Mr. Kerkorian has shown in past forays into the auto industry that he moves quickly and deliberately.

In 1995, Mr. Kerkorian teamed with the former Chrysler chairman Lee Iacocca to start a hostile, $23-billion takeover of the smallest of Detroit’s Big Three automakers.

While the effort failed, it ultimately triggered merger talks between Chrysler’s management and the German auto company Daimler-Benz that led to the creation of DaimlerChrysler.

Mr. Kerkorian took another shot at buying Chrysler last year when DaimlerChrysler put the American operation up for sale. However, his bid was never seriously considered and Chrysler was sold to the private equity firm, Cerberus Capital Management.

In 2005, Mr. Kerkorian acquired nearly a 10 percent stake in General Motors and was able to get one of his top advisers, Jerome York, named to the G.M. board.

Then, in June 2006, Mr. Kerkorian and Mr. York began courting Carlos Ghosn, the chief executive of Renault of France, and Nissan Motor of Japan, to form a global alliance with G.M.

Mr. Kerkorian pushed the G.M. chairman G. Richard Wagoner Jr., into opening talks with Mr. Ghosn. But in the fall of 2006, Mr. Wagoner and G.M.’s board rejected the alliance idea. Mr. Kerkorian later sold his G.M. stock holdings and Mr. York quit the company’s board.

Any effort by Mr. Kerkorian to alter Ford’s strategy or to take control of the company could prove even more challenging than his efforts at Chrysler and G.M.

Descendants of Henry Ford, the founder of the company, have 40 percent voting control of the company through a special class of stock. The family, including William C. Ford Jr., have been highly supportive of Mr. Mulally’s turnaround plans since hiring the former Boeing executive as Ford chief executive in 2006.

    Kerkorian Buys 4.7% of Ford and Plans More, NYT, 28.4.2008, http://www.nytimes.com/2008/04/28/business/28ford-web.html?hp

Mars Acquires Wrigley’s for $23 Billion

April 28, 2008
The New York Times
By ANDREW ROSS SORKIN

Mars, the makers of M&M’s, announced a deal Monday morning to acquire the Wm. Wrigley Jr. Company, the chewing gum concern, for about $23 billion. The transaction would create a confectionery behemoth and could pressure rivals into a cascade of other mergers.

The Mars-Wm. Wrigley Jr. deal has an unusually famous financier: Warren E. Buffett. Mr. Buffett’s Berkshire Hathaway is helping finance the transaction, Mars said Monday in a statement. Mr. Buffett has a history with iconic food and beverage businesses. He was an early investor in Coca-Cola and is already a candy owner in Sees Candies.

Under the agreement, Wrigley will become a separate, stand-alone subsidiary of Mars. With $5.4 billion in sales, Wrigley is a world leader in gum and confections.

Shareholders of Wrigley will receive $80 in cash for each share of stock, a premium of 28.1 percent premium over Friday’s closing price of $62.45. The deal has been approved by the boards of both companies.

In a statement, Wrigley said Monday that Berkshire Hathaway would buy a stake worth $2.1 billion or about 10 percent.

Shares in Wrigley were up about 20 percent on Monday.

“The strong cultural heritage of two legendary American companies with a shared commitment to innovation, quality and best-in-class global brands provides a great basis for this combination,” Paul S. Michaels, global president of Mars, said. “We are looking forward to continuing on our path of growth by jointly developing those values even further.”

The merger could spark a wave of further consolidation: Hershey and Cadbury Schweppes have held talks for years, but have been unwilling to consummate a deal. They may feel pressure given the scale and scope of a Mars-Wm. Wrigley Jr. combination, which would bring together a big stable of brands with worldwide distribution.

The sale price represents an enormous premium over Wm. Wrigley Jr.’s market value, which was $17.3 billion Friday.

Among Wrigley’s brands are Extra, Orbit and Eclipse gums as well as LifeSavers and Altoids. Mars has M&M’s, Snickers, Starburst, Skittles and Twix. Mars also makes Uncle Ben’s rice products and pet food under the Pedigree brand.

Mars is a tightly controlled, privately held company, one of the last in the confectionery business and one of the largest family controlled firms in the nation. It is controlled by the Mars family of northern Virginia. Forrest Mars Sr. created the recipe, and the first M&M’s were sold in 1941.

Wrigley, similarly has a storied history, though it went public in 1923. The Wrigley family, originally of Philadelphia, became a major presence in Chicago, where the company has its headquarters. The family’s name famously adorns the Chicago Cubs baseball stadium.

In addition to Berkshire Hathaway, Goldman Sachs and JPMorgan Chase also provided financing for the deal.

    Mars Acquires Wrigley’s for $23 Billion, NYT, 28.4.2008, http://www.nytimes.com/2008/04/28/business/28gum-web.html?hp

Recession Diet Just One Way to Tighten Belt

April 27, 2008
The New York Times
By MICHAEL BARBARO and ERIC DASH

Stung by rising gasoline and food prices, Americans are finding creative ways to cut costs on routine items like groceries and clothing, forcing retailers, restaurants and manufacturers to decode the tastes of a suddenly thrifty public.

Spending data and interviews around the country show that middle- and working-class consumers are starting to switch from name brands to cheaper alternatives, to eat in instead of dining out and to fly at unusual hours to shave dollars off airfares.

Though seemingly small, the daily trade-offs they are making — more pasta and less red meat, more video rentals and fewer movie tickets — amount to an important shift in consumer behavior.

In Ohio, Holly Levitsky is replacing the Lucky Charms cereal in her kitchen with Millville Marshmallows and Stars, a less expensive store brand. In New Hampshire, George Goulet is no longer booking hotel rooms at the Hilton, favoring the lower-cost Hampton Inn. And in Michigan, Jennifer Olden is buying Gain laundry detergent instead of the full-price Tide.

Behind the belt-tightening — and brand-swapping — is the collision of several economic forces that are pinching people’s budgets or, at least, leaving them in little mood to splurge.

The price of household necessities has surged, with milk topping $4 a gallon in many stores and regular gasoline closing in on $3.60 a gallon nationwide.

Home prices are sliding, wages are stagnant, job losses are growing and the Standard & Poor’s 500-stock index, a broad measure of stock performance, is down 6 percent in the last year. So consumers are going on a recession diet.

Burt Flickinger, a longtime retail consultant, said the last time he saw such significant changes in consumer buying patterns was the late 1970s, when runaway inflation prompted Americans to “switch from red meat to pork to poultry to pasta — then to peanut butter and jelly.”

“It hasn’t gotten to human food mixed with pet food yet,” he said, “but it is certainly headed in that direction.”

Retail sales figures and consumer surveys confirm that Americans are strategically cutting corners, whether it is at the coffee house or the airport. (In: brewing coffee at home and flying coach. Out: Starbucks and first class.)

In March, Americans spent less on women’s clothing (down 4.9 percent), furniture (3.1 percent), luxury goods (1.3 percent) and airline tickets (1.1 percent) compared with a year ago, according to MasterCard SpendingPulse, a service of the credit card company that measures spending on 300 million of its cards and estimates purchases with other cards, cash and checks.

Wal-Mart Stores reports stronger-than-usual sales of peanut butter and spaghetti, while restaurants like Domino’s Pizza and Ruby Tuesday have suffered a falloff in orders, suggesting that many Americans are sticking to low-cost home-cooked meals.

Over the last year, purchases of brand name cookies and crackers have fallen, according to Information Resources, which tracks retail sales.

Sales of Nabisco graham crackers have dropped 7.5 percent, and Keebler Fudge Shoppe cookies have slipped by 12.3 percent. Not even beer is immune. Sales of inexpensive domestic beers, like Keystone Light, are up; sales of higher-price imports, like Corona Extra, are down, the firm said.

Some are skipping drinks altogether. The number of people ordering an alcoholic drink fell to 31 percent last month from 42 percent last summer, according to a survey of 2,500 people conducted by Technomic, a restaurant industry consulting firm.

“People have started to shift spending as if we were in a recession,” said Michael McNamara, vice president for research and analysis at MasterCard.

Such trade-offs were on vivid display last week in Ohio, where layoffs have been rampant. At Save-A-Lot, a discount grocery store in Cleveland, Teresa Rutherford, 51, chided her sister-in-law, Donna Dunaway, 44, for picking up a package of Sara Lee honey ham (eight ounces for $2.49).

“We can’t afford that!” she said. “Get the cheap stuff.” They settled on a 16-ounce package of Deli Pleasures ham for $3.29, or 34 percent less an ounce.

The women said that soaring prices for food and fuel had changed what they buy and where they buy it. “We used to eat out at Bob Evans or Denny’s once a month,” said Ms. Rutherford, who works in an auto-parts factory. “Now we don’t go out at all. We eat in all the time.”

Ms. Dunaway, a homemaker, used to splurge on the ingredients for homemade lasagna, her husband’s favorite, before food prices began to surge this year.

“Now he’s lucky to get a 99-cent lasagna TV dinner, or maybe some Manwich out of a can,” she said. “I just can’t afford to be buying all that good meat and cheese like I used to.”

By no means has the economic downturn been bad for all product categories. For instance, sales of big-ticket electronics, like $1,000 flat-panel televisions and $300 video game systems, are on the rise, according to retailers and research firms.

Falling prices for such devices and a looming government deadline to convert to digital television have helped. So has the view, sensible or not, that the technology is a good investment. At a Best Buy in Southfield, Mich., James Szekely, 28, a mechanical engineer, was shopping for a big high-definition TV that he expected would cost at least $2,000, an expense he rationalized because “at least we can watch movies at home.”

(In a survey conducted this month by the NPD Group, a research firm, consumers suggested that they would sooner cut spending on clothing, furniture and eating out than on video games.)

At Home Depot, sinks and faucets are selling briskly. Managers at the chain suspect that consumers, loath to spend money on a splashy kitchen renovation or new roof, are settling for a cheaper bathroom “refresh.”

Another top seller at home improvement stores: programmable thermostats and insulation, which can cut fuel bills.

Many retailers are struggling to adjust to the new needs. Clothing sales have started to sink at department stores like Macy’s, Kohl’s and J. C. Penney. So have furniture sales at companies like Bombay and Domain, both of which have filed for bankruptcy protection.

Consumers are spurning small indulgences. Starbucks is warning of a drop-off in purchases, and sales have dipped at higher-end restaurant chains, including the steakhouses Ruth’s Chris and Morton’s.

To drum up business, Domino’s is offering a new deal: three 10-inch pizzas for $4 each. “We are not recession-proof,” said the chain’s president, J. Patrick Doyle.

But chains that emphasize low prices, like TJ Maxx and Wal-Mart, are thriving. And cut-rate supermarkets, like Save-A-Lot, are swamped.

“People are not not spending, but they are changing how they spend,” said Marshal Cohen, chief analyst at the NPD Group.

And they are often willing to sacrifice convenience or swallow their pride.

George Goulet, 52, the business traveler switching from the Hilton to the Hampton Inn, now books flights that depart in the afternoon rather than the early morning. “It’s a lot cheaper,” he said. “I can really see the difference.”

Mary Gregory, 55, a telephone company operator in Cleveland, used to eat red meat at least once a week. Now it is hardly ever on her menu. “I usually buy turkey instead,” she said. “Any recipe that calls for meat, like chili or spaghetti, I try to substitute turkey.”

Carl Hall, a retired construction worker in Detroit, wants to buy a fence for his backyard. But he decided not to buy a finished product at Lowe’s, the home improvement chain where he was shopping recently. With money tight, “I am looking to put it together myself,” he said, adding that he hoped to save $200.

As the compromises mount, people are even coming up with clever schemes to hide their cost-cutting.

Holly Levitsky, a 56-year-old supermarket cashier in Cleveland, buys a brand of steak sauce called Briargate for 85 cents and surreptitiously pours it into an A1 steak sauce bottle she keeps at home.

“My husband can’t even tell the difference,” she said.
 

Mary M. Chapman, Brenda Goodman and Christopher Maag contributed reporting.

    Recession Diet Just One Way to Tighten Belt, NYT, 27.4.2008, http://www.nytimes.com/2008/04/27/business/27spend.html?hp

New-Home Sales Fall to Low Last Seen in 1990s

April 24, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The worst days of the housing slump may lie ahead.

Buyers vanished from the housing market in March, as sales of new homes plummeted to the lowest level since the housing recession of the 1990s, the government said on Thursday.

Builders are now faced with the biggest backlog of unsold homes in more than a quarter century, a sign that home values may continue to drop.

“People are obviously reluctant to buy so long as prices continue to fall,” said Bernard Baumohl, managing director of the Economic Outlook Group in Princeton, N.J. “They have no desire to buy a house that is going to be worth less two months later.”

Even those who wish to buy may be stymied, Mr. Baumohl said, as banks and mortgage lenders tighten their credit standards amid broader troubles in the economy.

Sales of new homes fell 8.5 percent, a far sharper decline than economists had forecast. The drop-off may be related to the downturn in the job market; employers shed 80,000 jobs in March, the biggest bleed so far this year.

“That has a very profound psychological impact on people,” Mr. Baumohl said. “They are not likely to make a major investment if they are uncertain about job security and income growth.”

Sales are running at an annual rate of 526,000 after adjusting for seasonal factors, the lowest pace since October 1991.

At the current sales rate, it will take 11 months for builders to work off the current backlog, the biggest inventory pile-up since 1981.

“The housing sector will continue to act as deadweight on overall growth throughout the remainder of 2008,” an economist at IdeaGlobal, Joseph Brusuelas, wrote in a note to clients.

Sales fell in every region of the country, with the Northeast suffering the steepest drop, 19.4 percent. Sales in the Midwest and the West dropped about 13 percent and sales in the South fell about 5 percent.

Adding to the gloom, the Commerce Department lowered its initial estimate for February sales as well, to a 5.3 percent decline from 1.8 percent.

Prices continued to fall as well, which could discourage would-be buyers from re-entering the market. The median price of a new home dropped in March to $227,600, down 13.3 percent from a year ago.

The housing slump, coupled with the current slowdown, has weighed heavily on manufacturing, as Americans shy away from large purchases.

Facing a sharp drop in demand, many businesses have become reluctant to make large investments in capital equipment. The government reported on Thursday that manufacturing orders fell again in March, the third consecutive monthly decline.

Orders for durable goods, which are intended to last three years or more, dipped 0.3 percent last month to a seasonally adjusted $212.2 billion, down $0.7 billion from February, according to the Commerce Department.

Still, there were some signs of stabilization, suggesting that businesses have bet that a rise in foreign demand will help prop up bottom lines even as the domestic economy grinds to a halt. A closely watched barometer of business spending, which measures orders of civilian capital goods excluding aircraft, flattened out in March after dipping 2 percent in February.

Sales of heavy-duty manufacturing machinery rebounded in March after a record decline in February, and orders of fabricated metal products also increased.

The government also revised higher its estimates for the first quarter of 2007. Durable goods orders fell 0.9 percent in February and 4.4 percent in January, an improved showing from the initial readings of 2.6 percent and 4.7 percent.

Although some economists had expected a small rise in durable goods orders, the report was considered relatively mild after the results of recent months.

Rob Carnell, an economist at ING Bank in London, said the data could lend support to the “it will all be fine” camp of analysts who believe the nation will avoid a prolonged recession.

Some trouble spots remained. Transportation orders decreased 4.6 percent, a particularly steep decline, and orders of computers and communications equipment also fell. Motor vehicle orders dipped 4.6 percent as automobile sales continued to stumble. Orders of defense capital goods plummeted nearly 20 percent.

In a separate report on Thursday, the Labor Department reported that the number of newly laid-off workers filing claims for unemployment benefits declined last week.

Claims for unemployment benefits fell by 33,000 last week to 342,000, the government said. The four-week moving average for claims, which tends to smooth out weekly volatility, fell by 7,250, to 369,500.

    New-Home Sales Fall to Low Last Seen in 1990s, NYT, 24.4.2008, http://www.nytimes.com/2008/04/24/business/24econ-web.html?hp

Oil Rises Above $118 a Barrel on Supply Concerns

April 22, 2008
By THE ASSOCIATED PRESS
Filed at 12:18 p.m. ET
The New York Times

NEW YORK (AP) -- Gas and oil prices moved further into record high territory Tuesday, with retail gas reaching a national average of $3.51 for the first time and crude nearing $120 as the dollar fell to a new low against the euro.

At the pump, the national average price of a gallon of regular gas rose 0.8 cent Tuesday to $3.511, according to a survey of stations by AAA and the Oil Price Information Service. Prices for diesel -- the fuel used for the transport of most food, industrial and commercial goods -- also rose overnight to a new record of $4.204 a gallon.

Gas prices are nearly 66 cents higher than last year, when prices peaked at a then-record of $3.23 in late May, and have prompted many analysts to raise their estimates of where gas is going to go.

''I wouldn't rule out the possibility that we could get to $4,'' said Antoine Halff, an analyst at Newedge USA LLC.

Other analysts are less certain. Fred Rozell, retail pricing director at the Oil Price Information Service, thinks gas prices will rise only another 10 cents to 20 cents nationally. That would mean they would peak near $4.15 a gallon in California, where prices are typically highest, and around $3.50 in New Jersey, where they're typically lowest.

Gas prices are rising for many reasons, including oil's record run. Light, sweet crude for May delivery rose to a new trading record of $119.74 before retreating slightly to trade up $2.06 at $119.54 a barrel on the New York Mercantile Exchange.

Many investors see commodities such as oil as a hedge against inflation and a falling dollar. Also, a weaker greenback makes oil cheaper for investors overseas.

The dollar fell Tuesday after the National Association of Realtors said sales of existing homes fell in March while the median home price declined, raising prospects that the Federal Reserve will cut interest rates further this year to try to shore up the ailing economy. Fed interest rate cuts tend to further weaken the dollar.

Oil also rose on concerns about supply constraints overseas. A Royal Dutch Shell PLC joint venture declared force majeure on April and May oil delivery contracts from a 400,000-barrel-a-day Nigerian oil field due to a pipeline attack last week. The move protects the company from litigation if it fails to deliver on contractual obligations to buyers.

While gas prices are following oil futures higher, they're also rising because supplies are falling. Refiners are in the process of switching over from making winter grade gasoline to the more-expensive, less-polluting, form of the fuel they're required to sell in summer. That's pushing supplies down as producers try to sell off all of their winter gas.

Gasoline supplies are also being hurt by low profit margins on the fuel. Refiners have to buy the crude they turn into fuel, but falling demand for gasoline has hurt their ability to raise gas prices as much as they would like. While the average profit margin on gasoline hovers above $10, analysts say margins have gone negative in some parts of the country in recent weeks. In those cases, refiners were actually losing money on every gallon of gas they made. Many refiners have reacting by producing less gas.

''Very high crude prices can constrain gasoline supplies as it hurts the margins,'' Halff said.

In other Nymex trading Tuesday, May gasoline futures rose 3.16 cents to $3.0107 a gallon after earlier rising to a trading record of $3.02, while May heating oil futures rose 3.2 to $3.3434 a gallon after earlier rising to their own trading record of $3.35. May natural gas futures fell 3.3 cents to $10.70 per 1,000 cubic feet.

In London, June Brent crude rose $1.88 to $116.31 a barrel on the ICE Futures exchange.

    Oil Rises Above $118 a Barrel on Supply Concerns, NYT, 22.4.2008, http://www.nytimes.com/aponline/business/AP-Oil-Prices.html?hp

Existing Home Sales Decline 2% in March

April 22, 2008
Filed at 12:29 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Sales of existing homes fell in March as a severe slump in housing showed no signs of abating. The median price of a home fell compared with the price a year ago.

The National Association of Realtors said sales of existing single-family homes and condominiums dropped by 2 percent in March to a seasonally adjusted annual rate of 4.93 million units.

The median price of a home sold last month was $200,700, a decline of 7.7 percent from the median price a year ago. That was the second-biggest year-over-year price decline following a record 8.4 percent drop in February. The records go back to 1999.

It marked the seventh consecutive year-over-year drop in prices, although the March sales price was up slightly from a February median price of $195,600. Economists prefer to compare the prices on a year-over-year basis because, unlike sales, the monthly prices are not adjusted for normal seasonal variations.

The March sales decline, which was in line with expectations, followed a 2.9 percent increase in sales in February. The February rise, which followed six straight monthly declines, had raised hopes that the steep housing correction could be hitting bottom.

However, many private analysts said they do not expect a rebound for a number of months, given the problems weighing on housing from a severe glut of unsold homes to tighter credit standards for prospective buyers and a rising tide of mortgage foreclosures.

Sales were down 19.3 percent compared with a year ago, reflecting the depth of the housing bust, which is coming after sales set records for five consecutive years.

For March, sales were down 6.5 percent in the Midwest and 3.5 percent in the South but increased by 2.2 percent in the Northeast and 2.2 percent in the West.

The Northeast was the country's only region to experience a rise in median prices, which were up 4.6 percent compared with a year ago. Prices were down in all other regions of the country, dropping by 14.7 percent in the West, 7.1 percent in the South and 5.3 percent in the Midwest.

Lawrence Yun, chief economist for the Realtors, said he expected sales would begin to show improvements in the second half of this year, helped by an improved availability of mortgage-backed insurance from the Federal Housing Administration and higher limits for jumbo mortgages, loans that are critically important in high-priced areas of the country such as California.

    Existing Home Sales Decline 2% in March, NYT, 22.4.2008, http://www.nytimes.com/aponline/business/AP-Economy.html?hp

Bank of America Braces for Consumer Loan Losses

April 21, 2008
The New York Times
By ERIC DASH

In another sign of the pain gripping the financial industry, Bank of America said on Monday that its quarterly profit declined 77 percent and that it was bracing for heavy losses on consumer loans.

The bank said it would set aside an additional $3.8 billion to bolster its reserves because of souring home equity, construction and small business loans. It also announced nearly $2 billion in write-downs tied to a drop in the value of leveraged loans as well as mortgage-linked securities.

The results marked the third consecutive decline in quarterly earnings at the bank and raised questions about its ability to weather a prolonged economic slump.

Bank of America prides itself on its reputation as a consumer-banking powerhouse with a vast retail branch network to sell credit cards, mortgages and personal loans. Now, as a recession looms, the bank’s strength in the consumer area may become its weakness.

Shares were down about 2 percent in early afternoon trading.

The chairman and chief executive, Kenneth D. Lewis, said on a conference call with investors on Monday that the bank’s diverse operations would help it weather a slowdown. But he said the current economic environment was “the most challenging that I have dealt with.” He said the economy would grow only marginally, if not contract, in the second quarter, and then pick up in the second half of the year.

“It is too early to strike up the band and say happy days are here again,” Mr. Lewis said.

He said the worst was probably over for Bank of America’s battered investment banking operations but cautioned that a softening economy could continue to hurt overall results.

“We have at least the rest of this year to go,” he said, “because we have very high-levels of charge-offs and additional reserve builds, though not the level of reserve builds we’ve had for the first and fourth quarters.”

Many other bank executives agree with his sober assessment. Though Bank of America’s most immediate pain stemmed from the stressed credit markets, its earnings report showed that the credit crisis had seeped into other areas as well. The bank reported $2.72 billion in net charge-offs, or loans that it thinks are uncollectable, a 90 percent jump from last year. It also raised its credit loss provisions to $6.01 billion from $1.24 billion.

Bank of America said that its nonperforming assets rose to $7.83 billion, or 0.9 percent of its total loans, leases and foreclosed properties. That is up from $2.06 billion, or 0.29 percent, at the same time last year.

The sustained shock provided by weak housing markets may not bode well for Bank of America’s acquisition of Countrywide Financial, the troubled mortgage lender that the bank has agreed to buy for $4 billion.

It also means the bank may need to seek fresh financing. Bank of America has already announced several moves to raise capital, including a sale of $6 billion in preferred shares. It is also reported to be selling its prime brokerage unit.

Late Sunday, reports emerged that the bank is seeking to find more money, including the possible sale of its stake in China’s second-largest bank, the China Construction Bank.

“We will work with the Chinese to see what the ultimate level they would be comfortable holding and the schedule they would like us monetizing the remaining piece,” Bank of America’s finance chief, Joe Price, said.

Bank of America’s global consumer and small business unit, its core source of revenue, reported net income of $1.09 billion, a 59 percent drop from last year. The firm said that the unit’s credit loss provisions rose to $6.45 billion for the first quarter, up significantly from $2.4 billion last year. That increase reflected the weakness in the housing markets and the general economic downturn.

At Bank of America’s wealth management division, profit fell 54 percent to $228 million. The bank was also forced to inject another $220 million into certain Columbia cash money market funds, another sign that the credit crisis had not abated.

But the investment banking unit, which Bank of America had sought to expand aggressively over recent years, again provided the most pain. Last year, Mr. Lewis told investors, “I’ve had all the fun I can stand in investment banking right now,” suggesting that he was seeking to pare back his ambitions to rival the likes of Citigroup and JPMorgan Chase in that sector. (He later said he has no such plans.)

The unit reported a 90 percent drop in net income, to $115 million. The unit was hobbled by $1.47 billion in write-downs of collateralized debt obligations, or bundles of subprime mortgages, and $439 million in write-downs of its loans to buyout firms.

    Bank of America Braces for Consumer Loan Losses, NYT, 21.4.2008, http://www.nytimes.com/2008/04/21/business/21cnd-bank.html?hp

Citigroup Records a Loss and Plans 9,000 Layoffs

April 18, 2008
The New York Times
By ERIC DASH

Citigroup, caught in the midst of the housing slowdown and tight credit market, reported a $5.1 billion loss on Friday and announced that it would cut 9,000 more jobs in the next 12 months.

The layoffs are in addition to the 4,200 cuts announced in January, the bank said during its conference call.

The bank’s first-quarter results reflected more than $16.9 billion in write-offs and additional loan loss reserves as Vikram S. Pandit moved to reshape the company and clean up the mortgage mess in his first three months as chief executive.

“We are not happy with our financial results this quarter, although they are not completely unexpected given the assets we hold,” Mr. Pandit said Friday on a conference call with investors.

Of the 9,000 layoffs, at least 2,000 have already been announced in the investment banking unit, and executives are looking to trim staff jobs in legal and technology where there is a significant overlap. The layoffs represent less than 2.5 percent of the company’s 369,000 employees worldwide.

The bank also announced a $622 million restructuring charge. It is the bank’s second consecutive quarterly loss as it absorbed heavy blows in all of its four main businesses.

Wall Street analysts had been expecting Mr. Pandit to swallow big losses in the bank’s consumer businesses and in investment banking so he could get off to a fresh start. The quarter, littered with eight unusual items and a laundry list of charges, was as messy as they thought.


Citigroup recorded a $6 billion pretax write-down on bad subprime mortgage related investments and $1.8 billion on the drop in value of commercial real estate as well as other securities tied to structured investment vehicles and less risky mortgages.

It took a $3.1 billion charge tied to the collapse of high-yielding buyout loans, a $1.5 billion hit from its exposure to bond insurance companies and another $1.5 billion write-down on its inventory of auction-rate securities as that market failed. Citigroup set aside another $3.1 billion to cover future losses in its global consumer division, an area that analysts say has long been underserved.

“We believe we have substantially reduced our risk given the size of the write-downs, we have taken the last few quarters,” the chief financial officer, Gary L. Crittenden, said. He warned that consumer credit costs may continue to worsen for the rest of the year.

All told, Citigroup has taken write-offs that total nearly $39 billion, including more than $22 billion in charges in the second half of 2007. And with unemployment rising and the economy possibly entering a recession, those figures could continue to grow. Loan losses from mortgages, credit cards and other consumer loans are expected to balloon.

“Our financial results reflect the continuation of the unprecedented market and credit environment and its impact on our historical risk positions,” Mr. Pandit said in a statement.

Unlike the public comments of other Wall Street chief executives, his published remarks shed no light on Citigroup’s prospects in the second half of the year.

Citigroup’s first-quarter loss in 2008 was about as much money as the bank earned in the first-quarter of 2007 — clearly its worst results since the company was forged by a merger a decade ago. The company recorded a net loss of $5.1 billion, or $1.02 a share, compared with a gain of $5 billion, or $1.01 a share, a year earlier. Revenue fell to $13.22 billion, a 48 percent drop from 2007.

With fewer deals, tighter lending standards and stressed markets, most analyst expect Wall Street’s earnings power will be significantly weaker.

Citigroup’s earnings report culminates one of Wall Street’s worst weeks ever, as bank after bank reported grim news. JPMorgan took $5.1 billion in write-downs and provisions for the first quarter, bringing its total this year to about $10 billion. Merrill Lynch took write-downs of $9.7 billion. The earnings prospects for Bank of America, which reports on Monday, are expected to be similarly bleak.

And yet shares of financial stocks, as measured by the Standard & Poor’s financial index, have soared this week as investor expectations have beaten downs so much that anything short of horrific now qualifies as good news.

Investors responded to the Citigroup report as well as a good earnings report from Google by pushing the markets up almost 200 points in midmorning trading. The bank’s shares were up about 5 percent.

Citigroup shareholders have had little to cheer recently. Since Sanford I. Weill put together the landmark Citicorp-Travelers Group merger in April 1998, the bank has been plagued by dismal results and a series of scandals. Many of the highly touted advantages of its financial supermarket model, where gains in one business can offset weakness in others, have proven elusive. And the failure to properly integrate the company has led to bloated costs, brutal politics and a lack of a cohesive culture.

Mr. Pandit, a former Morgan Stanley investment banker with a Ph.D. in finance, is now tackling those problems. He has settled on a plan that will keep the bank’s diversified business model largely in tact but promises better execution and risk oversight.

He has also vowed to push the company into products and overseas markets that promise faster growth. To raise capital, he is shedding several businesses, like the sale of Citi’s commercial lending to the General Electric Company on Wednesday, that he believes no longer fit into its plans.

“We have taken decisive and significant actions to strengthen our balance sheet, including over $30 billion of capital raised during December and January,” he said in a statement. “We are taking the necessary steps to make Citi more efficient while fostering a culture of accountability and teamwork.

Mr. Pandit has already begun to reshape the company since taking over for Charles O. Prince III in December. He has overhauled the company with a new, regionally focused organizational structure aimed to speed decision-making. He has recruited several outsiders to replenish the bank’s depleted management roster, including a new head of its consumer operations and chief risk officer. Mr. Pandit is also intensely focused on cutting costs as he cleans up the mortgage mess on Citigroup’s books.

But judging from the results of this quarter, there is still work to do.

Executive have sharply reduced the bank’s exposure to most risky “super-senior” collateralized debt obligations. It has also sold about $10 billion of leveraged loans, though at a steep discount. It currently has about $28 billion in buyout loans. And executives said they are looking to offload other assets.

“We are on top of our risks and are prudently managing our legacy risk assets,” Mr. Pandit said.

Citigroup’s investment bank swung to a loss of $5.7 billion in the first quarter, after a profit of $2.67 billion a year earlier. Equity and revenue from debt underwriting fees were down significantly; advisory fees fell 28 percent as the deal business ground to a halt. Trading performance was similarly weak as the capital markets seized up. But emerging markets and the currency business had record revenue.

Citigroup’s alternative investment unit had a loss of $509 million, compared with $222 million a year ago. The loss was a result of sharp trading losses, a $212 mark-down on the value of S.I.V. assets. It also took a $202 million write-down on the value of Old Lane Partners, the investment firm that Citigroup bought last year to bring Mr. Pandit to Citigroup. It has struggled amid the challenging credit markets, and bank executives said they now expect many investors to leave.

Citigroup’s big consumer profits fell 45 percent, to $1.43 billion in the first quarter. Strong revenue gains from its international lending operations helped offset steep declines in its much larger domestic businesses.

Over all, domestic consumer revenue rose 1 percent, excluding a one-time gain on the sale of shares from Visa’s initial public offering.

But consumer credit costs increased sharply, especially in the United States. The bank set aside more than $1.1 billion to cover future losses and saw charge-offs ratchet up to $1.2 billion. Citigroup said it saw borrowers fall behind on mortgage, home equity, credit card and auto loans during the quarter.

Bank executives said that the deterioration was weakest in areas like California, Florida, and Nevada where housing values have declined the most. And they warned of higher charge-offs ahead. Globally, however, executives said credit costs remain stable except in Japan.

Mr. Crittenden said the combination of a collapse in housing prices and higher unemployment was packing a one-two punch.

“We are in uncharted territory,” he said. “There are times where we could face significant headwinds during the year.”

Citigroup’s global wealth management business reported a first-quarter profit of $299 million, a 33 percent drop from 2007. Over all, Smith Barney brokerage and private bank revenue increased 16 percent. But the unit took a $250 million reserve to cover future liquidation costs from unspecified fund for global wealth management clients.

    Citigroup Records a Loss and Plans 9,000 Layoffs, NYT, 18.4.2008, http://www.nytimes.com/2008/04/18/business/18cnd-citi.html?hp

Google Defies the Economy and Reports a Profit Surge

April 18, 2008
The New York Times
By MIGUEL HELFT

SAN FRANCISCO — The American economy may be weakening, but Google said once again that the slowdown has not affected its business.

Easing concerns that its growth would stall, the Internet search giant on Thursday reported better-than-expected financial results for the first three months of the year, igniting a huge rally in its shares.

“We are obviously very pleased with another strong quarter for Google,” Eric E. Schmidt, Google’s chief executive, said during a conference call with Wall Street analysts. “It is clear to us that we are well positioned for 2008 and beyond, regardless of the business environment that we find ourselves surrounded by."

Mr. Schmidt credited improvements to the company’s highly targeted advertising business for the growth, which was stronger overseas than domestically. For the first time, international sales accounted for the majority of revenue.

The results came as a relief to investors, who were bracing for a big slowdown in Google’s business. The company issued its report after the close of markets, and its shares surged more than $76.42, or 17 percent, in after-hours trading, to end the day at $525.96. They had closed down $5.49, to $449.54, in regular trading.

Still, Google’s performance is not likely to ease anxiety among investors about the overall health of the online advertising business. The company relies almost exclusively on short text ads that appear next to search results and on other Web sites. Analysts say that because those ads are more targeted and are used by marketers to drive traffic to their sites, they are more impervious to a slowdown than banners and other graphical ads, which are intended to increase brand awareness. Yahoo, the leader in the sale of display ads, reports financial results on Tuesday.

Some analysts noted that Google’s growth did slow from the previous quarter and said the results did not completely dispel concerns about the health of Google’s business in the United States.

“The international piece was solid,” said Ross Sandler, an analyst with RBC Capital Markets. “That is where most of the upside came from. Despite the comments that they are seeing no impact from the economy whatsoever, I think the growth rate in the U.S. deserves more attention.”

Mr. Sandler noted that Google’s business in the United States had grown little from the last quarter of 2007 through the first quarter of 2008.

Google, based in Mountain View, Calif., said net income grew 30 percent, to $1.31 billion, or $4.12 a share, compared with $1 billion, or $3.18 a share, in the first quarter of 2007. Revenue climbed 42 percent, to $5.19 billion, from $3.66 billion a year earlier.

Excluding commissions paid to advertising partners, a widely followed measure, Google’s revenue was $3.7 billion, slightly higher than analysts expected. Its profit, excluding the cost of stock options, was $4.84 a share, handily beating forecasts.

On average, Wall Street analysts were expecting Google to report revenue, excluding commissions to advertising partners, of $3.61 billion and income, excluding the cost of stock options, of $4.52 a share.

Analysts and investors have obsessed in recent weeks over Google’s paid clicks, or the number of times users clicked on its ads. The concerns were heightened by various reports from comScore, the Web audience measuring firm, indicating that paid clicks declined sharply. The numbers are important because Google typically charges advertisers only when someone clicks on their ads.

Google said paid clicks in the first quarter were up 20 percent from a year ago. That was lower than the 30 percent growth rate in paid clicks in the fourth quarter, but better than many investors had predicted. Overall revenue growth was also down from last quarter’s rate of 51 percent.

During the call with analysts, Google executives said that the decline in growth of paid clicks was partly self-inflicted, as the company took several initiatives to improve the quality and relevancy of ads and to reduce accidental clicks.

Mr. Schmidt said that as a result, Google was showing fewer ads, but those ads were more useful to users and to advertisers, leading to higher prices per click. “The domestic numbers are showing a material slowdown,” said Youssef H. Squali, an analyst with Jefferies & Company. “It is clearly a result of Google doing housecleaning, but we don’t know how much of the slowdown is due to the housecleaning.”

During the call, Mr. Schmidt was asked about the possibility that Yahoo would outsource its search advertising business to Google, as part of Yahoo’s effort to fend off Microsoft’s takeover offer. Last week, the two companies announced a limited test in which Google would place ads on about 3 percent of Yahoo’s search results in the United States.

“It is nice to be working with Yahoo, and we like them very much,” he said, declining to comment further.

Google said that DoubleClick, which it acquired in mid-March, had little impact on the company’s finances this quarter. Executives said they were working on integrating the two companies’ products. They said the integration would help growth in Google’s nascent display advertising business.

    Google Defies the Economy and Reports a Profit Surge, NYT, 18.4.2008, http://www.nytimes.com/2008/04/18/technology/18google.html

Workers Get Fewer Hours, Deepening the Downturn

April 18, 2008
The New York Times
By PETER S. GOODMAN

Not long ago, overtime was a regular feature at the Ludowici Roof Tile factory in eastern Ohio. Not anymore. With orders scarce and crates of unsold tiles piling up across the yard, the company has slowed production and cut working hours, sowing worry and thrift among its workers.

“We don’t just hop in the car and go shopping or get something to eat,” said Kim Baker, whose take-home pay at the plant has recently dropped to $450 a week, from more than $600. “You’ve got to watch everything. If we go to town now, it’s for a reason.”

Throughout the country, businesses grappling with declining fortunes are cutting hours for those on their payrolls. Self-employed people are suffering a drop in demand for their services, like music lessons, catering and management consulting. Growing numbers of people are settling for part-time work out of a failure to secure a full-time position.

The gradual erosion of the paycheck has become a stealth force driving the American economic downturn. Most of the attention has focused on the loss of jobs and the risk of layoffs. But the less-noticeable shrinking of hours and pay for millions of workers around the country appears to be a bigger contributor to the decline, which has already spread from housing and finance to other important areas of the economy.

While official unemployment has risen only modestly, to 5.1 percent, the reduction of wages and working hours for those still employed has become a primary cause of distress, pushing many more Americans into a downward spiral, economists say.

Moreover, this slippage is a critical indicator that the nation may well be on the verge of a recession, if not already in one.

Last month, the hours worked by those on American payrolls dropped, compared with six months earlier, according to an index maintained by the Labor Department. The last time the index moved into negative territory was February 2001, when the economy was on the doorstep of recession. A similar slide emerged in August 1990, one month into what proved an even more severe downturn.

From March 2007 to March of this year, the average workweek reported in the private sector slipped slightly to 33.8 hours, from 33.9 hours, while overtime for manufacturing workers fell by a larger margin.

At the end of last month, more than 4.9 million people were working part time either because they could not find full-time jobs or because their companies had cut hours in the face of slack business, according to a Labor Department survey. That represented an increase of 400,000 since November.

And on Wednesday, the government reported that average earnings slipped in March after accounting for the rising costs of food and fuel — the sixth consecutive month that pay failed to keep pace with inflation.

As people bring home paychecks that do not go as far, they are forced to economize, eliminating demand for goods and services that once captured their dollars, spreading pain to providers like auto dealers and lawn care providers. They, too, must trim their outlays on pay, shrinking working hours more and furthering the slowdown

“It means spending slows going forward,” said Robert Barbera, chief economist at the trading and research firm ITG.

Paychecks are diminishing just as millions of Americans are finding their access to credit constricted as well. Borrowing against the value of real estate — a crucial artery of household finance in recent years — has been pared back as home prices have plummeted and as banks have tightened lending standards in the aftermath of the collapse of the housing bubble.

“At this point, those avenues are blocked,” said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. “Consumption going forward is going to be in large part a good old-fashioned function of paychecks and incomes.”

Even before the rollback in working hours, pay was barely keeping up with the rising costs of gas and food. From February to September of last year, the average hourly earnings for workers in the private sector was still growing at a slightly faster clip than the pace of inflation, according to the Labor Department. But from November through March, as employers began to scale back in a variety of ways, wage growth fell below the pace of inflation, meaning that paychecks were effectively shrinking.

Now, work opportunities are themselves declining, as the downturn snuffs out business.

In the suburbs of Denver, Max Garcia was netting as much as $2,000 a month last year as a self-employed computer repairman, he said. As recently as November, he was still receiving three and four calls for help a week. But since early February, calls have dropped to one a week or fewer, he said.

“Everybody’s getting tighter,” he said — himself included. With his income cut in half, Mr. Garcia, a single father, no longer takes his two young daughters out for fast food, he said. For clothing, he now goes to secondhand stores instead of the mall. For amusement, he visits the park instead of the museum.

“We spend more time at home,” Mr. Garcia said. “We don’t drive anywhere we don’t have to.”

In Los Angeles, William Righi, a musician, bemoans the sudden difficulty of getting jazz and blues gigs at restaurants and parties. He gives fewer private singing lessons to high school students.

“Their parents don’t want to pay,” Mr. Righi sighed. “They don’t have the money to burn. In the last month, it’s really dropped off.”

With his income down, Mr. Righi has been putting off buying new musical instruments and sheet music. He has curtailed his traveling.

At a factory in Lancaster, Pa., Armstrong World Industries, which makes flooring products, cut production of vinyl sheets for two weeks in March in reaction to softening demand for its goods, the company said.

Management is now seeking to slow production further, said Joe Rumberger, president of the local branch of the United Steelworkers, which represents workers there.

Some of those sent home received temporary unemployment benefits, he said, securing government checks of about $520 a week in lieu of paychecks that reached $900.

“It hurts,” he said. “If you’re not working, unemployment checks only go so far.”

At many companies, management is hanging on to as many workers as it can, cutting hours to try to limit layoffs, while hoping that business improves.

As the construction business deteriorated rapidly last fall, so did demand for the ceramic tiles produced in New Lexington, Ohio, at the Ludowici factory. In November, the company began drastically cutting overtime for many workers. The following month it laid off several people. Last month, the factory resorted to layoffs, cutting the hourly work force to 81, from 93. It idled the kiln on weekends.

But even as sales fell, the company kept producing, building up stocks of tiles that it assumed it could sell eventually.

“We thought that would be a smart way to do it in order to keep people working,” said Derek Thomas, the plant manager. “The philosophy around here is we remain hopeful that things are going to pick up.”

But if fresh orders do not arrive soon, Mr. Thomas acknowledged that his hopes were likely to be dashed. In that case, he said, the company was facing further “head count reductions.”

With his overtime pay gone and faced with the ugly potential of a layoff from the job he has known for 14 years, Mr. Baker, the plant worker, is streamlining his spending every way he can.

This time of year, he would normally be planning a trip through Ohio in his camper. But he does not expect to take to the road anytime soon. “Not with the money flowing the way it is,” he said, “and the price of gas.”

To John E. Silvia, chief economist for Wachovia, the banking company based in Charlotte, N.C., Mr. Baker and his boss are representative of a national economy that is hunkered down and awaiting better while worrying about worse.

“You’ve got a lot of people sitting around now,” he said, “waiting and hoping for orders.”

    Workers Get Fewer Hours, Deepening the Downturn, NYT, 18.4.2008, http://www.nytimes.com/2008/04/18/business/18hours.html?hp

Merrill Posts a Loss and Plans to Cut 2,900 More Jobs

April 17, 2008
The New York Times
By LOUISE STORY

Merrill Lynch & Company, the investment bank, posted a loss on Thursday and announced that it would cut about 4,000 jobs by the end of the year.The 4,000 layoffs include 1,100 jobs — mostly in mortgage-related businesses — that have already been cut this year.

The bank reported worst-than-expected earnings for the first quarter, including $6.5 billion in write-downs and adjustments to assets in its mortgage, leveraged finance and other assets. The write-downs bring Merrill’s total in the last three quarters to more than $30 billion.

Merrill said in its earnings release that it had lost $1.96 billion or $2.19 a share, after its write-downs, in the first three months, down from a profit of $2.106 billion or $2.26 a share in the same period a year ago.

Analysts surveyed by Bloomberg News had expected a loss of $1.79 a share.

Merrill’s revenue, including interest and dividends, was $2.9 billion — down 69 percent from a year ago.

The job cuts will come from the company’s global markets and investment banking division, which includes fixed income, currency, commodity and equity trading as well as banking. That part of the bank recorded a pretax loss of $4 billion this quarter and negative revenue of $690 million. The layoffs will save $800 million a year in compensation expenses, the bank said. The jobs cuts represent 10 percent of the bank’s work force excluding financial advisers and investment associates.

Bank executives warned on Thursday that Merrill could continue to struggle as the broader economic downturn continues.

“We are planning for a slower and more difficult next couple of months and probably next couple of quarters,” John A. Thain, chairman and chief executive of Merrill Lynch, said on a conference call with analysts.

But Mr. Thain said the bank was on solid footing; it has raised more than $12 billion in fresh capital, including some from sovereign wealth funds that manage funds for foreign governments.

The market, however, initially reacted negatively. Merrill’s shares fell $2 or4.6 percent, in pre-market trading but were up about 2 percent in late morning trading.

Meanwhile, Moody’s Investors Service placed the bank’s long-term debt on review for a possible downgrade. The ratings agency predicted that Merrill Lynch would be forced to lower the value of its mortgage assets known as collateralized debt obligations by an additional $6 billion. Merrill marked down the values of bonds and other assets it owned by $27.4 billion last year, mostly related to the meltdown in the subprime mortgage market.

“Bigger is better with respect to mortgage-related security write-downs,” said Meredith Whitney, the banking analyst at Oppenheimer & Company, who has a negative rating on Merrill. “The market wants to see it over and done with.”

In the bank’s earnings call, executives said that March had been a significantly more difficult month in the markets than January or February.

Merrill’s network of 16,660 financial advisers dispersed across the country will not be reduced, the company said. Those individuals work in the bank’s wealth management unit, which was profitable this quarter with earnings of $730 million.

Even as Merrill has been writing down the value of its investments in mortgage securities, some bank traders have been purchasing additional Alt-A bonds, blocks of mortgage loans with credit rated between prime and subprime levels. Merrill executives said on the earnings call that those bonds were purchased this quarter at large discounts because of forced liquidations.

Mr. Thain said the largest question facing the bank is how much the losses by banks like his own would “seep” into the real economy. Banks like Merrill may see losses on bets they made far beyond mortgages if consumers find themselves unable to pay back car loans, credit debt and other loans.

A Merrill rival, JPMorgan Chase, reported a 50 percent drop in income on Wednesday. JPMorgan’s net income fell to $2.4 billion, or 68 cents a share, compared with $4.8 billion, or $1.34 a share, for the same time last year. Revenue fell 9 percent, to $17.9 billion.

    Merrill Posts a Loss and Plans to Cut 2,900 More Jobs, NYT, 17.4.2008, http://www.nytimes.com/2008/04/17/business/17cnd-merrill.html?hp

Coca-Cola Profit Climbs 19% as Sales Soar

April 16, 2008
Filed at 9:59 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

ATLANTA (AP) -- The Coca-Cola Co.'s first-quarter profit rose 19 percent due to acquisitions and overseas growth, offsetting unimpressive results in its home North America unit that were affected by fewer people going out to eat because of fuel prices and the slowing U.S. economy.

The results beat Wall Street expectations, and its shares edged up in morning trading.

The world's biggest beverage company said its profit was $1.50 billion, or 64 cents a share, in the three-month period ending March 28. That compared to a profit of $1.26 billion, or 54 cents a share, a year earlier.

Excluding a one-time charge of 3 cents a share related to restructuring charges and asset write-downs, Atlanta-based Coca-Cola said it earned $1.58 billion, or 67 cents a share, in the quarter.

Analysts polled by Thomson Financial were expecting earnings of 63 cents a share in the quarter. Analysts generally exclude one-time items from their estimates.

Revenue rose to $7.38 billion from $6.10 billion a year earlier.

Its shares rose 29 cents to $61.23 in morning trading.

Coca-Cola said its revenue growth was helped by an increase in concentrate sales, structural changes primarily related to bottler acquisitions, currency benefits and better pricing and mix.

''Once again, our international growth drove our results,'' Chief Executive Neville Isdell, who will be succeeded July 1 by the company's No. 2 executive, Muhtar Kent, told analysts in a conference call.

He added, ''The growth continues to be sourced from developed and emerging markets.''

Worldwide unit case volume was up 6 percent for the first quarter, helped by acquisitions, and international unit case volume was up 7 percent.

The company saw strong unit case volume growth in China, India, Brazil, Turkey, Russia, Eastern Europe and the Philippines. However, in its key North America unit volume was even, due in part to the challenges in the U.S. economy, Coca-Cola said.

Coca-Cola has had problems executing its strategy in its home market in the past, and for several years it has seen weaker results in North America as compared to several other countries.

Analysts asked on the conference call whether those problems continue. Coca-Cola executives responded that they believe they have the right strategy for the unit, and they suggested the main impact on the unit in the first quarter was the slowing U.S. economy. They noted that the foodservice segment was hard hit.

''People are staying home,'' Chief Financial Officer Gary Fayard said, citing higher fuel prices in the U.S.

The company said key brands drove its overall results, including Coca-Cola, Fanta and Sprite.

The results were reported ahead of Coca-Cola's annual meeting later Wednesday in Wilmington, Del.

------

On the Net:

The Coca-Cola Co.: www.thecoca-colacompany.com 

    Coca-Cola Profit Climbs 19% as Sales Soar, NYT, 16.4.2008, http://www.nytimes.com/aponline/business/AP-Earns-Coca-Cola.html

JPMorgan Income Falls 50%, but Beats Forecast

April 16, 2008
The New York Times
By ERIC DASH

JPMorgan Chase, fresh from scooping up a rival investment bank, Bear Stearns, saw earnings drop 50 percent in the first quarter as it was hurt badly by market turmoil and heavy credit losses.

The bank also set aside $5.1 billion to strengthen its reserves by $2.5 billion and to account for $2.6 billion in losses in its loan portfolio.

The drop in earnings comes after a record first quarter in 2007 and is an indication of how the housing slowdown and the tight credit markets have battered all banks.

Even an unusual $1.5 billion gain from the initial public offering of Visa, the credit and debit card processor, was not enough to offset losses from home equity loans and a sharp drop in values on complex mortgage investments and leveraged loans.

Net income fell to $2.4 billion, or 68 cents a share, compared with $4.8 billion, or $1.34 a share, for the same time last year. Revenue fell 9 percent, to $17.9 billion. Still, that profit beat expectations. The average estimate of analysts surveyed by Reuters was 65 cents a share.

Investors found some reassurance in JPMorgan’s results as well as those of the Coca-Cola Company and the Intel Corporation. In early trading, the Dow was up more than 160 points, while the S.&P. 500-stock index was 1.35 percent higher and the technology-driven Nasdaq rose 2.19 percent. JPMorgan’s shares were up $2.08 to $44.20 in late morning trading.

Coca-Cola reported a 19 percent increase in first-quarter profit on Wednesday, while Intel on Tuesday reported net income that was down 12 percent, but in line with analysts’ forecasts.

JPMorgan’s recent performance has brought renewed attention to benefits of the diversified banking model, where strong results in one business can offset heavy losses in another.

It has also elevated James Dimon, the bank’s chairman and chief executive, into the upper echelon of Wall Street leaders.

His brazen $2-a-share bid for Bear Stearns in mid-March only cemented that reputation, though he ended up raising the offer to $10 a share a week later.

Mr. Dimon remained focused Wednesday on the risks of a challenging economy but said that he believed the industry was more than halfway through the current financial crisis.

“How bad the economy gets, we simply don’t know. There are some very good signs and very bad signs,” Mr. Dimon said on a conference call with journalists. “On the financial side, I think we are more than half that, maybe 75 percent. That side is working itself out, and it will be fully worked out by the end of the year. That does not mean the recession will not get worse, or better.”

Banks and brokerage firms have been reeling since the credit markets tightened last summer. As write-downs have risen, regulators have stepped up scrutiny. And investors alternate between anger and nervousness. Meanwhile, executives are grappling with their missteps.

Banks like Citigroup, Wachovia and Washington Mutual have raised billions of dollars to restore balance sheets. While JPMorgan has not had to raise money, and has no plans to do so, it faces intense pressure in virtually all of its businesses.

Mortgage and credit card losses have ballooned, especially in areas like Arizona and Florida where housing values have plummeted and foreclosures have risen. Bank executives set aside more than $1.1 billion, about what they disclosed in February, to cover future home equity loan losses. But they are expected to continue to rise.

Its investment bank, meanwhile, sits on top of billions in big buyout loans that have been difficult to sell. And JPMorgan is a significant player in the credit default swap business, which could be the company’s Achilles heel if market conditions continue to worsen.

Still, the bank managed to post a profit because of the Visa initial offering. It not only received fees as one of the lead underwriter but reaped earned more than $1.5 billion after it sold part of its holdings.

    JPMorgan Income Falls 50%, but Beats Forecast, NYT, 16.4.2008, http://www.nytimes.com/2008/04/16/business/16cnd-bank.html?hp

Foreclosures Push States to Try a Mix of Solutions

April 16, 2008
The New York Times
By JOHN LELAND

As the federal government debates responses to the foreclosure crisis, states are experimenting with a broad range of solutions, including emergency loans and agreements to limit high interest rates. The result is a rapidly changing patchwork of local approaches, some far-reaching, others modest, according to a survey issued Tuesday by the Pew Charitable Trusts.

Among other measures, 20 states have created intervention programs, 13 have set up counseling hot lines, 14 have assembled task forces and 9 have established funds for emergency loans or refinance loans, totaling $450 million.

“States have had to step into the void because the federal government has not moved,” said Tobi Walker, a senior program officer at Pew. “The nature of the problem changes quickly; that’s why it’s important to look to states, which can be far more innovative. They can adapt solutions to local circumstances.”

It is too soon to say how effective any of the programs will be.

The states face an uphill battle, in part because of resistance from the lending industry to new regulation. Only nine states require mortgage brokers to consider the best interests of borrowers when making loans, and only seven require lenders to assess borrowers’ ability to repay. At the same time, state governments are hamstrung by declining revenues as a result of the housing meltdown.

Ohio, which has been hit particularly hard, with 85,000 properties going into foreclosure last year, announced last week a nonbinding agreement with nine large loan servicers to modify troubled loans and report their progress to state officials. In addition, the state’s chief justice recruited more than 1,000 lawyers to represent borrowers free of charge, and the state set up a hot line to direct borrowers to the lawyers.

“We need more help from the federal government,” said Gov. Ted Strickland of Ohio, a Democrat. “The states are in trouble. States do not have resources or mechanisms to deal with this issue.”

But even so, Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio, said the results were visible on the ground. “Up through the end of 2007, counselors and homeowners said, ‘We call these companies and we get the runaround, we can’t get through the maze,’ ” said Mr. Faith, referring to loan servicers. “We weren’t seeing any significant modifications. That’s beginning to change. When I talk to the nonprofits, they say they’ve had as many loan modifications in the first quarter of 2008 as in all of 2007.”

Gov. Tim Pawlenty of Minnesota, a Republican, this week asked loan servicers in the state to sign a similar agreement, and he announced a program to pay for mediators when counselors and lenders come to an impasse in modifying loan terms. The state’s Commerce Department also set up a hot line for housing counselors to call when they cannot get responses from lenders.

Using public and private money, the state provided grants to increase the number of housing counselors to 37 from 18. But even so, foreclosures are expected to rise this year.

“States have an important role in the foreclosure crisis, and Minnesota is taking among the most aggressive actions to help homeowners,” said Brian McClung, a spokesman for the governor. “But at a broader level we’re hopeful the federal government will provide some overarching structure.”

In all, about 20 states formed partnerships with the nonprofit Homeownership Preservation Foundation, which provides homeownership and foreclosure counseling, sometimes over the telephone.

In Colorado, the state housing division raised $750,000 in private donations to hire a nonprofit agency to run a hot line that refers callers for counseling in person. The program grew out of a consortium of lenders, servicers, nonprofit groups and state and federal agencies. “It needs to be a public-private partnership,” said Kathi Williams, the division’s director.

Mrs. Williams said that the hot line received 30,000 calls last year, and that four of five callers who received counseling had so far stayed out of foreclosure. But foreclosure remains a tenacious problem, up 10 percent over last year, compared with a 30 percent jump in 2007.

Other states have called for delays in the foreclosure process, emergency loans and legislation to prevent foreclosure rescue fraud. Maryland passed a ban on prepayment penalities, which make it onerous or impossible for many borrowers to refinance high-cost loans.

While several states — including Colorado, Maine, Massachusetts, Minnesota, North Carolina and Ohio — have passed legislation requiring tighter underwriting standards for lenders, such legislation may be more effective at the national level, said Ms. Walker of Pew, because of the concerted resistance by the lending industry.

Not all state programs have been effective, said Allen Fishbein, director of housing and credit policy at the nonprofit Consumer Federation of America. An emergency loan program in Maryland failed because its eligibility requirements disqualified the people who needed it most.

“Trying to find loan products is a process of trial and error,” said Thomas E. Perez, the state secretary of labor, licensing and regulation. “We now have new products that allow people with blemishes on their credit record to qualify. We’re learning from our mistakes.”

While states are working ahead of federal policy, many say the problem is too big for states to handle on their own.

“It’s tinkering around the edges,” said Mr. Faith of the Ohio homeless organization. “We’re saving a few thousand homeowners when we have 85,000 foreclosure filings a year. We’ve been trying to see what we can do in the absence of action on the federal level. But we don’t have the resources or the regulatory authority or the leverage with the industry. Much more serious progress is only going to be achieved if the feds take appropriate action.”

    Foreclosures Push States to Try a Mix of Solutions, NYT, 16.4.2008, http://www.nytimes.com/2008/04/16/us/16foreclose.html

Wall Street Winners Get Billion-Dollar Paydays

April 16, 2008
The New York Times
By JENNY ANDERSON

Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms.

One manager, John Paulson, made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them.

Mr. Paulson, the founder of Paulson & Company, was not the only big winner. The hedge fund managers James H. Simons and George Soros each earned almost $3 billion last year, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine, which comes out Wednesday.

Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again.

Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.

Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”

The richest hedge fund managers keep getting richer — fast. To make it into the top 25 of Alpha’s list, the industry standard for hedge fund pay, a manager needed to earn at least $360 million last year, more than 18 times the amount in 2002. The median American family, by contrast, earned $60,500 last year.

Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers’ own pay and excludes the compensation of their employees. Five of the top 10, including Mr. Simons and Mr. Soros, were also at the top of the list for 2006. To compile its ranking, Alpha examined the funds’ returns and the fees that they charge investors, and then calculated the managers’ pay.

Top hedge fund managers made money in many ways last year, from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Mr. Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.

As early as 2005, Mr. Paulson began betting that complex mortgage investments known as collateralized debt obligations would decline in value, much as Wall Street traders bet that shares will drop in price. In that case, known as shorting, they borrow shares and sell them, wait for the price to fall, buy the shares back at a lower price and return them, pocketing the profit.

Then, over the next two years, Mr. Paulson established two funds to focus on the credit markets. One of those funds returned 590 percent last year, and the other handed back 353 percent, according to Alpha. By the end of 2007, Mr. Paulson sat atop $28 billion in assets, up from $6 billion 12 months earlier.

Mr. Soros, one of the world’s most successful speculators and richest men, leapt out of retirement last summer as the market turmoil spread — and he won big. He made $2.9 billion for the year, when his flagship Quantum fund returned almost 32 percent, according to Alpha. Mr. Simon, a mathematician and former Defense Department code breaker who uses complex computer models to trade, earned $2.8 billion. His flagship Medallion fund returned 73 percent.

Like Mr. Paulson, Philip Falcone, who founded Harbinger Partners with $25 million in June 2001, cast a winning bet against the mortgage market. He pulled in returns of 117 percent after fees in 2007 and made $1.7 billion. The trade thrust him from relative obscurity to hedge fund heavyweight: he now manages $18 billion. Harbinger recently won agreement from The New York Times Company to add two members to its board.

Hedge fund managers share their success with their investors, which include wealthy individuals, pension funds and university endowments. They typically charge annual fees equal to 2 percent of their assets under management, and take a 20 percent cut of any profits.

With a combined $2 trillion under management, the hedge fund industry is coming off its richest year ever — a feat all the more remarkable given the billions of dollars of losses suffered by major Wall Street banks.

In recent months, however, scores of hedge funds have quietly died or spectacularly imploded, wracked by bad investments, excess borrowing or leverage, and client redemptions — or a combination of those events.

“To some degree it’s a very gigantic version of Las Vegas,” said Gary Burtless, an economist at the Brookings Institution.

As Alpha’s list shows, managers who reap big gains one year can lose the next.

Edward Lampert, the founder of ESL Investments and a member of the 2007 Alpha list, was absent this year. His fund fell 27 percent last year, according to Alpha. About 60 percent of ESL’s equity portfolio is invested in Sears, whose shares plunged 40 percent last year. ESL is also a major holder of Citigroup, whose abysmal performance matched that of Sears.

A manager who ranked high in the 2007 list and fell off in 2008 was James Pallotta of the Tudor Investment Corporation, who was 17th last year and earned $300 million. Mr. Pallotta’s $5.7 billion Raptor Global Fund fell almost 8 percent last year, according to Alpha.

A few who did not make the cut still made buckets of money. Bruce Kovner of Caxton Associates and Barry Rosenstein at Jana Partners didn’t make the top 50. But Mr. Kovner earned $100 million, and Mr. Rothstein earned $170 million, according to Alpha. Spokesmen for the hedge fund managers either declined to comment on Tuesday or could not be reached.

Since 1913, the United States witnessed only one other year of such unequal wealth distribution — 1928, the year before the stock market crashed, according to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington. Such inequality is likely to impede an economic recovery, he said.

“For a recovery to be robust and sustainable you can’t just have consumer demand at Nordstrom,” he said. “You need it at the little shop on the corner, too.”

Despite the explosive growth of the industry — about 10,000 hedge funds operate worldwide — it is relatively lightly regulated. On Tuesday, two panels appointed by Treasury Secretary Henry M. Paulson Jr. advised hedge funds to adopt guidelines to increase disclosure and risk management.

And Mr. Gross, the fund manager, warned that the widening divide among the richest and everyone else is cause for worry.

“Like at the end of the Gilded Age and the Roaring Twenties, we are going the other way,” Mr. Gross said. “We are clearly in a period of excess, and we have to swing back to the middle or the center cannot hold."

    Wall Street Winners Get Billion-Dollar Paydays, NYT, 16.4.2008, http://www.nytimes.com/2008/04/16/business/16wall.html?hp

Wall Streeter Converts to a Fan of Regulation

April 15, 2008
The New York Times
By LANDON THOMAS Jr.

Robert K. Steel leans forward, speaking in a rapid, excitable burst about the powers that a superregulator might wield over Wall Street one day.

“It will have the license to go everywhere: private equity funds, investment banks, hedge funds,” Mr. Steel, the under secretary of the Treasury for domestic finance, said in an interview last week.

By his words and demeanor, Mr. Steel could be mistaken for a midlevel policy wonk — someone hoping to let a little sunlight disinfect the dark corners of the financial world.

In fact, he is a former vice chairman at Goldman Sachs, the big investment bank. And in the last two years, Mr. Steel has been co-chairman of one commission that claimed heavy-handed regulation was stanching financial innovation and another that argued that hedge funds could police themselves.

His apparent conversion to the merits of regulation illustrates how the laissez-faire bones of the Bush administration have been rattled by the government-brokered rescue of Bear Stearns and the trauma of the credit crisis.

The new industry watchdog that Mr. Steel is trumpeting is the cornerstone of Treasury Secretary Henry M. Paulson Jr.’s controversial effort to revamp the regulatory apparatus of the nation’s financial system.

In truth, the plan may well fail to become law because some of its prescriptions, like diluting the power of the Securities and Exchange Commission, have drawn fire from those who have long believed that the Treasury has an antiregulatory bias.

In Washington bureaucratese, the entity is called a market stability regulator, but there is nothing dull about its mandate. The regulator would pass judgment on the capital levels, trading exposure and leverage of Wall Street’s most sophisticated institutions.

“When you are driving fast down a slippery road, sometimes a regulator needs to tap lightly on the brakes to get you to slow down,” Mr. Steel said.

But to many on Wall Street and on Main Street, the car has already crashed. Mr. Steel’s enthusiasm may represent less a philosophical conversion than an acceptance of raw political facts.

“Everybody likes to say I told you so, but we told them they were excessively deregulatory,” Representative Barney Frank, the Democratic chairman of the House Financial Services Committee, said of the Bush administration. “I very much welcome this affirmation by Paulson and Steel that we need to regulate risk in ways that we haven’t.”

Such a suspicion is in many ways rooted in Mr. Steel’s own promarket sympathies, which were on display when he was co-chairman of the United States Chamber of Commerce’s inquiry into the country’s regulatory structure. He gave up that position when he joined the Treasury in 2006.

“The blueprint is an attempt to weld together two contradictory ways of thinking,” said Damon Silvers, an associate general counsel for the A.F.L.-C.I.O. “One is what Treasury has learned over the past year, and the other is the pre-existing deregulatory agenda coming out of the business community.”

Mr. Paulson disputes the notion that the plan or Mr. Steel is antiregulatory in the slightest. “Bob has never been antiregulation,” Mr. Paulson said in his hoarse voice. At Goldman, he said, Mr. Steel was an effective liaison with regulators and was often “on the point of the spear,” when it came to dealing with them. As for the plan’s broad, if not self-defeating ambition, he is blunt. “I think it will stand the test of time,” he said.

On Tuesday, Mr. Steel’s office will bless the release of two reports that examine the issues of hedge funds, risk and investor protection. In one, Eric Mindich, a former Goldman executive who now runs the hedge fund Eton Park, will — with a group of supporting funds — propose nonbinding steps that hedge funds should take. They include publishing audited financial statements like public companies do, the establishment of conflict committees and disclosing on a quarterly basis the extent of their hard-to-value assets.

The other report, directed by Russell Read, the chief investment officer of Calpers, the California state pension fund, will address the question of applicability of such funds to different classes of investors.

As someone who reaped significant gains from his days at Goldman, and who further augmented his wealth from investments in some of Wall Street’s most exclusive and successful hedge funds like Tontine Partners, Eton Park, TPG-Axon and Lone Pine Capital, Mr. Steel brings the practiced, experienced eye of the genuine participant to the task.

At times, he still sounds like a deal maker. “I can give leverage to the secretary,” he said at one point, using Wall Street jargon to describe his mission to provide support to Mr. Paulson on financial matters.

Mr. Steel was forced to sell all his Goldman stock as well as his positions in a number of prominent hedge funds before coming to Treasury, but he is still in all likelihood, the wealthiest under secretary of domestic finance to hold the post.

Like most Goldman executives, he has been schooled to not flaunt his riches or success — to grow, not swell, in the words of a former senior partner. But there is no getting around the fact that Mr. Steel leads a different life from most people on government salaries.

He recently bought a house in the Georgetown section of Washington, and he has an investment in NetJets, which allows him use of a private plane to fly to and from his main home in Greenwich, Conn. His investments, according to his financial disclosure form, are varied and include partnerships that invest in Georgia timber, real estate in Greenwich and Bordeaux wine futures.

Nevertheless, dating back to his days on Wall Street he has shown an ability to reach consensus with parties on the opposite sides of the ideological and wealth spectrum.

Mr. Silvers, the labor lawyer who is a critic of the blueprint, calls Mr. Steel a friend. He and other friends of Mr. Steel say his shift is an example of essential pragmatism as opposed to being a philosophical retreat.

“Bob and Hank are pretty balanced thinkers,” said Thomas Healey, a former Goldman partner who held a similar position to Mr. Steel’s at Treasury during the Reagan administration. “They are trying to analyze data and come up with solutions as opposed to doctrinaire conditions.”

It has been a heady year and a half for Mr. Steel, capped by a limousine ride with President Bush last month on the day that the Bear Stearns deal was announced, during which he briefed the president on the latest developments and then returned with him to Washington on Air Force One.

Born and bred in Durham, N.C., Mr. Steel went to Duke University, where he retains deep ties, as chairman of the board of trustees. He joined the Chicago office of Goldman in 1976 and quickly bonded with Mr. Paulson, another small-town boy eager to make his mark inside Wall Street’s most prestigious firm.

By the start of this decade he had become the firm’s most senior executive in its blue-chip equities division, and in 2002 he was named co-head of the firm’s equities and trading business with Lloyd C. Blankfein, who ran the firm’s booming bond and commodities trading business.

As Mr. Blankfein consolidated control, Mr. Steel’s role diminished. In 2004, Mr. Steel quietly retired, taking up a teaching job at the Kennedy School of Government at Harvard. And there he might have labored in obscurity, until he received a call from Mr. Paulson just days after his nomination in 2006.

Now, as Wall Street executives come under pressure from shareholders for their mounting subprime-related losses, Mr. Steel’s mix of a Goldman pedigree and years in the thick of the government’s effort to grapple with the housing crisis has made him a short-list regular on investment bank board committees looking for new leadership.

Like many of the top Goldman executives who rose high at the firm, yet missed out on running the place, Mr. Steel seems driven by an urge to prove himself. Predictably, Mr. Steel bats aside questions about any grander ambitions either in Washington or Wall Street.

But he concedes that he has no plans to sit idle. “I’m a young guy,” Mr. Steel, who is 56, said. “I like being fully engaged.”

    Wall Streeter Converts to a Fan of Regulation, NYT, 15.4.2008, http://www.nytimes.com/2008/04/15/business/15steel.html

Retailing Chains Caught in a Wave of Bankruptcies

April 15, 2008
The New York Times
By MICHAEL BARBARO

The consumer spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.

Since last fall, eight mostly midsize chains — as diverse as the furniture store Levitz and the electronics seller Sharper Image — have filed for bankruptcy protection as they staggered under mounting debt and declining sales.

But the troubles are quickly spreading to bigger national companies, like Linens ‘n Things, the bedding and furniture retailer with 500 stores in 47 states. It may file for bankruptcy as early as this week, according to people briefed on the matter.

Even retailers that can avoid bankruptcy are shutting down stores to preserve cash through what could be a long economic downturn. Over the next year, Foot Locker said it would close 140 stores, Ann Taylor will start to shutter 117, and the jeweler Zales will close 100.

The surging cost of necessities has led to a national belt-tightening among consumers. Figures released on Monday showed that spending on food and gasoline is crowding out other purchases, leaving people with less to spend on furniture, clothing and electronics. Consequently, chains specializing in those goods are proving vulnerable.

Retailing is a business with big ups and downs during the year, and retailers rely heavily on borrowed money to finance their purchases of merchandise and even to meet payrolls during slow periods. Yet the nation’s banks, struggling with the growing mortgage crisis, have started to balk at extending new loans, effectively cutting up the retail industry’s collective credit cards.

“You have the makings of a wave of significant bankruptcies,” said Al Koch, who helped bring Kmart out of bankruptcy in 2003 as the company’s interim chief financial officer and works at a corporate turnaround firm called AlixPartners.

“For years, no deal was too ugly to finance,” he said. “But now, nobody will throw money at these companies.”

Because retailers rely on a broad network of suppliers, their bankruptcies are rippling across the economy. The cash-short chains are leaving behind tens of millions of dollars in unpaid bills to shipping companies, furniture manufacturers, mall owners and advertising agencies. Many are unlikely to be paid in full, spreading the economic pain.

When it filed for bankruptcy, Sharper Image owed $6.6 million to United Parcel Service. The furniture chain Levitz owed Sealy $1.4 million.

And it is not just large companies that are absorbing the losses. When Domain, the furniture retailer, filed for bankruptcy, it owed On Time Express, a 90-employee transportation and logistics company in Tempe, Ariz., about $30,000.

“We’ll be lucky to see pennies on the dollar, if we see anything,” said Ross Musil, the chief financial officer of On Time Express. “It’s a big loss.”

Most of the ailing companies have filed for reorganization, not liquidation, under the bankruptcy laws, including the furniture chain Wickes, the housewares seller Fortunoff, Harvey Electronics and the catalog retailer Lillian Vernon. But, in a contrast with previous recessions, many are unlikely to emerge from bankruptcy, lawyers and industry experts said.

Changes in the federal bankruptcy code in 2005 significantly tightened deadlines for ailing companies to restructure their businesses, offering them less leeway.

And the changes may force companies to pay suppliers before paying wages or honoring obligations to customers, like redeeming gift cards, said Sally Henry, a partner in the bankruptcy law practice at Skadden, Arps, Slate, Meagher & Flom and the author of several books on bankruptcy.

As a result, she said, “it’s no longer reorganization or even liquidation for these companies. In many cases, it’s evaporation.”

Several of the retailers that filed for Chapter 11 bankruptcy protection over the last eight months, like the furniture sellers Bombay, Levitz and Domain, have begun to wind down — closing stores, laying off workers and liquidating merchandise.

In most cases, the collapses stemmed from a combination of factors: flawed business strategies, a souring economy and banks’ unwillingness to issue cheap loans.

Bombay, a chain with 360 stores, was considered a success in the furniture world, after its sales surged from $393 million in 1999 to $596 million in 2003.

Then the chain decided to move most of its stores out of enclosed malls into open-air shopping centers. It started a children’s furniture business, called BombayKids. And it started carrying bigger items, like beds and upholstered couches, with higher prices than its regular furniture.

Consumers balked at the changes, hurting Bombay’s sales and profits at the same time that its expenses for the ambitious new strategies began to grow. The timing was unenviable: By early 2007, the housing market began to falter, so purchases of furniture slowed to a trickle.

The company was running out of money, but banks refused to lend more. “They did not want to take the chance that we might not repay the loans,” Elaine D. Crowley, the chief financial officer, said in an interview.

In September 2007, Bombay filed for bankruptcy protection. The highest bid for the company came from liquidation firms, who quickly dismembered the 33-year-old chain. Bombay, which once employed 3,608, now has 20 employees left. “It is very difficult and sad,” Ms. Crowley said.

The bankruptcies are putting a spotlight on a little-discussed facet of retailing: heavy debt.

Stores may appear to mint money by paying $2 for a T-shirt and charging $10 for it. But because shopping is based on weather patterns and fashion trends, retailers must pay for merchandise that may sit, unsold, on shelves for long periods.

So chains regularly borrow large sums to cover routine expenses, like wages and electricity bills. When sales are strong, as they typically are during the holiday season, the debts are repaid.

Fortunoff, a jewelry and home furnishing chain in the Northeast, relied on $90 million in loans to help operate its 23 stores, using merchandise as collateral.

But by early 2008, as the housing market struggled, the chain’s profits dropped, meaning its collateral was losing value and the amount it could borrow fell.

In better economic times, the banks might have granted Fortunoff a reprieve. But with a recession looming, they refused, forcing it to file for bankruptcy in February. In filings, the chain said it was “facing a liquidity crisis.” (Fortunoff was later sold to the owner of Lord & Taylor.)

Plenty of retailers remain on strong footing. Arnold H. Aronson, the former chief executive of Saks Fifth Avenue and a managing director at Kurt Salmon Associates, a retail consulting firm, said the credit tightness and consumer spending slowdown have only wiped out the “bottom tier” companies in retailing.

“This recession dealt the final blow to these chains,” he said. But several big-name chains are looking vulnerable. Linens ’n Things, which is owned by Apollo Management, a private equity firm, is considering a bankruptcy filing after years of poor performance and mounting debts, though it has additional options, people involved in the discussions said Monday.

Whether more chains file for bankruptcy or not, it will be hard to miss the impact of the industry’s troubles in the nation’s malls.

J. C. Penney, Lowe’s and Office Depot are scaling back or delaying expansion. Office Depot had planned to open 150 stores this year; now it will open 75.

The International Council of Shopping Centers, a trade group, estimates there will be 5,770 store closings in 2008, up 25 percent from 2007, when there were 4,603.

Charming Shoppes, which owns the women’s clothing retailers Lane Bryant and Fashion Bug, is closing at least 150 stores. Wilsons the Leather Experts will close 158. And Pacific Sunwear is shutting a 153-store chain called Demo.

Those decisions were made months ago, when it was unclear how long the downturn in consumer spending might last. If March was any indication, it is nowhere near over. Sales at stores open at least a year fell 0.5 percent, the worst performance in 13 years, according to the shopping council.

    Retailing Chains Caught in a Wave of Bankruptcies, NYT, 15.4.2008, http://www.nytimes.com/2008/04/15/business/15retail.html?hp

Gas prices keep climbing as average hits $3.39 a gallon

14 April 2008
USA Today
By James R. Healey

Oil set a record on Monday — and gasoline tried to.

The nationwide average for a gallon of regular was $3.389, the federal Energy Information Administration reported. That's the highest actual price the EIA has recorded, but still short of the $3.413 that would match the record after adjusting for inflation. That is $1.417 in March 1981.

Oil, already at all-time highs, closed Nymex trading Monday at a record $111.76 a barrel, up $1.62 from the Friday close.

"At this point, there's not much reason for prices to come back down," says Peter Beutel, president of energy consultant Cameron Hanover. "Everything's saying it's going to go higher."

Oil rose on a weak dollar and short-term supply worries caused by sabotage in Nigeria and problems on a Midwest pipeline. It ignored short-term forecasts of less U.S. demand and long-term news of what may be the world's third-biggest oil deposit, in deep water hundreds of miles off Brazil. That would take years to develop.

Diesel — the fuel of the semis, locomotives and local delivery trucks that tote goods to keep the U.S. economy going — averaged $4.059. That was up 10.4 cents in a week and $1.182 more than a year ago. It's the first EIA report showing diesel averaging $4 or more. The previous record was $3.989 March 24.

Diesel, like gasoline, skyrocketed in 1981, but even adjusted for inflation, today's price is at least $1 higher.

The EIA's Monday survey showed that the gasoline average jumped 5.7 cents in the past week. If that pace continues, the average would pierce the inflation-adjusted high by the weekend. Monday's price was up 51.7 cents from a year ago.

The government's most recent short-term energy forecast, published last week, foresees a monthly average as high as $3.60 this spring, and cautions: "It is possible that prices at some point will cross the $4-per-gallon threshold."

Some West Coast stations are above $4 for regular, but the only local U.S. average that high is Wailuku, Hawaii, at $4.072, according to a daily price report by the Oil Price Information Service and AAA.

San Francisco's $3.927 is the next-highest local average, according to OPIS/AAA data.

    Gas prices keep climbing as average hits $3.39 a gallon, UT, 14.4.2008, http://www.usatoday.com/money/industries/energy/2008-04-14-gas-prices_N.htm

Despite Tough Times, Ultrarich Keep Spending

April 14, 2008
The New York Times
By CHRISTINE HAUGHNEY and ERIC KONIGSBERG

Who said anything about a recession? Sometime between the government bailout of Bear Stearns and the Bureau of Labor Statistics report that America lost 80,000 jobs in March, Lee Tachman spent roughly $50,000 last month on a four-day jaunt to Miami for himself and three close friends.

The trip was an exercise in luxuriant male bonding. Mr. Tachman, who is 38, and his friends got around by private jet, helicopter, Hummer limousine, Ferraris and Lamborghinis; stayed in V.I.P. rooms at Casa Casuarina, the South Beach hotel that was formerly Gianni Versace’s mansion; and played “extreme adventure paintball” with former agents of the federal Drug Enforcement Administration.

Mr. Tachman, a manager for a company that executes trades for hedge funds and the owner of “a handful” of buildings in New York, said he has not felt the need to cut back.

“I always feel like there’s a sword of Damocles over my head, like it could all come crashing down at any time,” he said. “But there’s always going to be people who are trading, and there’s always going to be a demand for real estate in New York.”

He is hardly alone in his eagerness to keep spending. Some businesses that cater to the superrich report that clients — many of them traders and private equity investors whose work is tied to Wall Street — are still splurging on multimillion-dollar Manhattan apartments, custom-built yachts, contemporary art and lavish parties.

Buyers this year have already closed on 71 Manhattan apartments that each cost more than $10 million, compared with 17 apartments in that price range during all of 2007. Last week, a New York art dealer paid a record $1.6 million for an Edward Weston photograph at Sotheby’s. And the GoldBar, a downtown lounge, reports that bankers continue to order $3,000 bottles of Rémy Martin Louis XIII Cognac.

“When times get tough, the smart spend money,” said David Monn, an event planner who is organizing a black-tie party on May 10 for dignitaries and recent purchasers of apartments at the Plaza Hotel; the average price there was $7 million. “Short of our country going on food stamps, I don’t think we’re doing anything differently.”

Some extreme spenders say they have not cut back on their impulse Bentley or apartment purchases because they have made so much money in the good times from the Internet, stock market and real estate. Some have been able to move their money into investments like private equity that are available only to those with extensive capital. Some rationalize cars and home renovations as “investments.” And some simply don’t want to skimp on the weddings and anniversary parties that they see as milestone events.

“We’re trying to spend on what we feel is important,” said Victor Self, an executive with a fitness company who, with his partner, is planning to spend $100,000 on a commitment ceremony on St. Barts and a dessert party for 200 to 300 guests at Jeffrey, a clothing store in the meatpacking district.

Many economists warn that the nation’s financial troubles may spread far more widely, and could ultimately touch even the wealthiest. The financial sector could lose as many as 20,000 jobs in New York City by the end of 2009, according to the city’s Independent Budget Office. And at a March 18 policy meeting, Federal Reserve Board members raised the possibility of a “prolonged and severe economic downturn,” recently released minutes show. That threat has undoubtedly caused some affluent people to consider some degree of frugality.

But that still leaves plenty who are consuming away, and one of the things New Yorkers love to consume is real estate. In October, Marc Sperling, the 36-year-old president of an equity-trading company, bought a new condo on the Upper West Side in a building where four-bedroom apartments like his cost more than $4 million. When he moves into the completed building next year, he plans to hold on to his other two apartments in Murray Hill and Miami Beach — each of which he values at about $2.5 million.

Mr. Sperling views the nation’s economic slump as a temporary problem, and is grateful that it has yet to affect him. “I think if you have the means to ride it out, that’s what you do,” he said.

His view of the subprime mortgage crisis seemed to reflect a sort of inverse class resentment.

“I don’t want to sound harsh, but the people who were buying million-dollar houses with a combined household income of $70,000 or $80,000 were the ones who were chasing easy money,” he said.

Days before the collapse of Bear Stearns, the bank’s chairman, James E. Cayne, paid $25 million for a 14th-floor condo at the Plaza Hotel.

He, too, is invited to the May 10 party at the Plaza. It will feature a dozen female string musicians made up to look like statues and clothed in dresses of fresh flowers, like roses and gardenias. There will be caviar and Cognac bars, as well as a buffet designed to visually replicate 17th-century Dutch paintings from the recent Metropolitan Museum of Art exhibit, “The Age of Rembrandt.”

Even high-end rentals are going fast. In just the three weeks since it arrived on the market, a four-bedroom apartment at 15 Central Park West, advertised for $55,000 a month, has gone to contract. The broker, Roberta Golubock with Sotheby’s International Realty, said she showed the apartment to eight financially qualified prospects.

Some New Yorkers defend their spending as investments or gifts to themselves. In August, Karen Borkowsky and Robert Kennedy, a partner in a law firm, were married at the Rainbow Room. The reception, which the event planner, Shawn Rabideau, lavished with glass and calla lilies, cost $150,000 to $200,000. But when Ms. Kennedy considered that she had survived breast cancer and, at age 41, married a guy she had dated in high school, the wedding’s cost seemed less exorbitant. Then, shortly after returning from their honeymoon, the couple started a $400,000 project to combine and restore two apartments into a three-bedroom, three-bath co-op on the Upper West Side. “We are investing in the longevity of the apartment,” she said.

There are also some people who say they have not been hurt because they have poured so much money into opportunities not available to the Main Street investor. Paul Parmar, a 37-year-old investor in companies specializing in health care, defense, media, luxury items and private aviation, says he is living just as large as ever.

In recent months, Mr. Parmar, who lives in Colts Neck, N.J., said he bought 140 acres in Mineola, Tex., and is spending $20 million to begin building a refuge there for abused tigers. Since January, he said he added to his car collection with a $110,000 BMW 750 Li (for his girlfriend) and a Bentley Arnage for himself, for about $300,000. He is leasing a Maybach through Luxautica, an “ultimate car club” that has annual fees of about $125,000.

“On a spending level,” Mr. Parmar said, speaking about a possible recession, “it doesn’t affect me at all.” That said, providers of luxury goods reported anecdotal evidence of a widening gap between the merely rich and the ultrarich. Clifford Greenhouse, who owns a household-staff employment company, said he suspects that the merely rich might be starting to lag behind their far richer counterparts, and are trimming their budgets. He cited reduced demand for chauffeurs — a relatively small-ticket service — yet ever-strong demand for private chefs, butlers and “household managers.”

Darren Sukenik, a real estate broker with Prudential Douglas Elliman, said that while business may be slower for clients with a mere million to spend on apartments, none of his clients with budgets of more than $2.5 million have stopped shopping. Seth Semilof, the publisher of Haute Living, a luxury magazine, said that luxury car dealerships that advertise with him are pushing Bentleys and Rolls-Royces at the expense of less-extravagant cars like the BMW 5 Series.

“If you look at the $20 million-plus market, it’s still strong as ever,” Mr. Semilof said. Some of the ultrarich are still willing to pay above sticker price for things they want badly enough. Mr. Semilof helped three buyers in the past two months acquire Rolls-Royce Phantom convertibles for as much as $200,000 above the asking price of $465,000.

And Eric Lepeingle, a yacht salesman for the Rodriguez Group, said that since January, three New Yorkers bought yachts worth $8 million to $35 million. Although the weak dollar does give some pause to buyers considering Italian-built yachts, Mr. Lepeingle said, they eventually give in. “They want the product anyway,” he said.

All sorts of products, actually.

“They want their Jeroboam, or Methuselah, or Nebuchadnezzar,” said Ronnie Madra, referring to the sizes of Champagne bottles served at 1OAK, a lounge on West 17th Street where he is a part-owner. A Nebuchadnezzar, weighing in at 15 liters, costs up to $35,000.

There would be no Nebuchadnezzar for Mr. Tachman and his friends in Miami, but they soldiered on until the moment the wheels of their private jet returned to the tarmac in New York.

There were hand-rolled cigars, massages, guided rides in racing boats and fighter jets — all arranged by In The Know Experiences, a travel and concierge service in Manhattan.

“It was just all out — it was insane,” said Mr. Tachman. “I’m not afraid to spend money like that.”

Sharon Otterman contributed reporting.

    Despite Tough Times, Ultrarich Keep Spending, NYT, 14.4.2008, http://travel.nytimes.com/2008/04/14/nyregion/14partying.html?scp=1&sq=despite+tough+times&st=nyt

Housing Woes in U.S. Spread Around Globe

April 14, 2008
The New York Times
By MARK LANDLER

DUBLIN — The collapse of the housing bubble in the United States is mutating into a global phenomenon, with real estate prices swooning from the Irish countryside and the Spanish coast to Baltic seaports and even parts of northern India.

This synchronized global slowdown, which has become increasingly stark in recent months, is hobbling economic growth worldwide, affecting not just homes but jobs as well.

In Ireland, Spain, Britain and elsewhere, housing markets that soared over the last decade are falling back to earth. Property analysts predict that some countries, like this one, will face an even more wrenching adjustment than that of the United States, including the possibility that the downturn could become a wholesale collapse.

To some extent, the world’s problems are a result of American contagion. As home financing and credit tightens in response to the crisis that began in the subprime mortgage market, analysts worry that other countries could suffer the mortgage defaults and foreclosures that have afflicted California, Florida and other states.

Citing the reverberations of the American housing bust and credit squeeze, the International Monetary Fund last Wednesday cut its forecast for global economic growth this year and warned that the malaise could extend into 2009.

“The problems in the U.S. are being transmitted to Europe,” said Michael Ball, professor of urban and property economics at the University of Reading in Britain, who studies housing prices. “What’s happening now is an awful lot more grief than we expected.”

For countries like Ireland, where prices were even more inflated than in the United States, it has been a painful education, as homeowners learn the American vocabulary of misery.

“We know we’re already in negative equity,” said Emma Linnane, a 31-year-old university administrator.

She bought a cozy, one-bedroom apartment in the Dublin suburbs with her fiancé, Paul Colgan, in May 2006, at the peak of the market. They paid $575,000 — at least $100,000 more than it would fetch today. “I sometimes get shivers thinking about it,” Ms. Linnane said, “but I’ll let the reality hit me when I go to sell it.”

That reality is spreading. Once-sizzling housing markets in Eastern Europe and the Baltic states are cooling rapidly, as nervous Western Europeans stop buying investment properties in Warsaw, Tallinn, Estonia and other real estate Klondikes.

Further east, in India and southern China, prices are no longer surging. With stock markets down sharply after reaching heady levels, people do not have as much cash to buy property. Sales of apartments in Hong Kong, a normally hyperactive market, have slowed recently, with prices for mass-market flats starting to drop.

In New Delhi and other parts of northern India, prices have fallen 20 percent over the last year. Sanjay Dutt, an executive director in the Mumbai office of Cushman & Wakefield, the real estate firm, describes it as an erosion of confidence.

Much of the retrenchment seems to be following the basic law of gravity: what goes up must come down. With low interest rates helping to inflate housing bubbles in many countries, economists said the confluence of falling prices was predictable, if unsettling.

This is not the first housing downturn to cross borders, but its reverberations have been amplified by the integration of financial markets. When faulty American mortgages end up on the books of European banks, the problems of the United States aggravate the world’s problems.

Consider Britain, which had one of Europe’s most robust housing markets, with less of an oversupply than in Ireland or Spain. Then last summer came the subprime crisis across the Atlantic.

Within two months, mortgage approvals dropped 31 percent, compared with the previous year. And by March, average housing prices had fallen 2.5 percent, the largest monthly decline since 1992.

“The boom in house prices was actually much bigger here than in the U.S.,” said Kelvin Davidson, an economist at Capital Economics in London. “If anything, people should be more worried than in the U.S.”

Britain has one of the most developed home-financing industries, not far behind that of the United States. The amount of outstanding mortgage debt, as a share of total economic output, is higher there than in the United States, according to a study by the International Monetary Fund.

“The U.K. followed the U.S. into never-never land, pushing mortgages out the door, believing that prices would go up forever,” said Allan Saunderson, the managing editor of Property Finance Europe, a newsletter for investors.

Still, the problems in Britain pale next to those of Spain and Ireland. Residential investment accounts for 12 percent of the Irish economy and 9 percent of the Spanish economy, compared with 5 percent in Britain and 4 percent in the United States, according to the I.M.F.

The glut of housing has brought new construction to a standstill, driving up unemployment and dimming the prospects for two of Europe’s stellar performers over the last decade.

“We’re waking up from the property dream and finding ourselves in a situation where prices are falling in Spain for the first time,” said Fernando Encinar, a founder of Idealista.com, a real estate Web site.

In Spain, more than four million homes were built in the last decade, more than in Germany, Britain and France combined. Average house prices tripled in parts of the country, as Spain’s torrid economy attracted immigrants and Northern Europeans snapped up holiday homes along the Costa del Sol.

Now, though, thousands of those houses stand empty. The I.M.F. estimates that property is overvalued by more than 15 percent. With mortgages drying up and prices swooning, speculators who once viewed Spanish property as a no-lose proposition are confronting hard reality.

In 2005, Julian Felipe Fernandez bought three small apartments, as an investment, in a huge development being built outside Madrid. He paid 100,000 euros as a deposit for the units, and now he is eager to sell them to avoid having to taking on a costly mortgage. But with the market stalled, Mr. Fernandez’s asking price is what he paid for them.

“Three years ago, it looked like I would be able to flip them for a nice profit before they were finished,” he said. “I just want to get them off my hands, to get rid of this headache.”

If he unloads them, he will be lucky. Enric Bueno, head of marketing for Ibusa, a real estate company in Barcelona, said his firm was closing six or seven sales a month, compared with 40 a month a year ago.

“Things are really bad,” Mr. Bueno said. “If this goes on for five years, we won’t make it.”

Economists have been busy cutting their growth forecasts for Spain, with a few saying that it may stagnate this summer. BBVA, a leading Spanish bank, forecasts that unemployment will rise to an average of 11 percent this year, from 8.6 percent in 2007.

Such cutbacks are well under way in Ireland, where the taxi drivers complain that their ranks are being swollen by laid-off home builders. The housing collapse has brought an abrupt end to more than a decade of pell-mell growth that earned Ireland the nickname “the Celtic tiger.”

Today, the mood in this country feels like a wake, and not an Irish one. Average house prices fell 7 percent last year, the most in Europe, according to the Royal Institution of Chartered Surveyors, a British real estate group. They are likely to fall by a similar amount this year.

After a 16-year boom that was interrupted only briefly after the Sept. 11 terrorist attacks, Ireland has the most overvalued housing market among developed countries, according to the I.M.F. In its recent economic outlook, the fund calculated that prices are 30 percent higher than they should be, given Ireland’s economic fundamentals.

For many Irish, accepting that reality is like passing through the seven stages of grief. Some homeowners are still in denial, brokers said, asking $5 million for houses worth no more than $4 million. But developers have begun cutting prices for smaller apartments like the one owned by Emma Linnane.

“Last year was our ‘wake up in the middle of the night with sweat pouring down your face’ period,” said David Bewley, a director at the Lisney real estate agency. “Now we’ve grown up.”

Not all the omens are negative. Mr. Bewley said houses were selling again, albeit for 25 percent less. Ireland has not yet suffered widespread incidences of defaulting mortgages or foreclosures in this downturn, in part because lenders have not been as aggressive as those in the United States.

But some worry that the housing meltdown could spoil Ireland’s recipe for success. Like Spain, it attracted lots of foreign workers, many of whom came for well-paying jobs in the construction industry. That fueled the Irish rental market, which has remained buoyant and been a source of income for Ireland’s many real estate speculators.

“If the immigrants go back home, will this hurt the rental market?” asked Ronan O’Driscoll, a director in the Dublin office of Savills, a real estate firm. “If that happens, it would definitely cause foreclosures.”

Reporting was contributed by Victoria Burnett in Madrid, Eamon Quinn in Dublin, Heather Timmons in New Delhi and Julia Werdigier in London.

    Housing Woes in U.S. Spread Around Globe, NYT, 14.4.2008, http://www.nytimes.com/2008/04/14/business/worldbusiness/14real.html?hp

Op-Ed Contributor

Home Buyers Needed

April 14, 2008
The New York Times
By EDWARD E. LEAMER

OUR politicians are devising economic stimulus measures to encourage consumers to spend more. These measures will cost taxpayers $200 billion or more. This is not money well spent. The problem is not too little consumer spending; the problem is too few home buyers.

Many argue that we don’t need government intervention to bring the buyers back; we just need the market to work its magic through lower prices.

Well, not entirely. When it comes to housing, lower prices don’t inevitably cause sales to rise. Why? Because lower housing prices create the expectation of still lower prices later, causing buyers to wait for a better deal. Left alone, a weak market therefore overshoots with prices too low and construction too little.

But a hot market can also overshoot with prices too high and construction too great. The Federal Reserve should control a hot housing market by raising interest rates to limit excessive price appreciation and overbuilding. When the housing market heats up, as it did between 2002 and 2004, the last thing the Fed should offer is low interest rates. But that’s what it did — now it doesn’t matter what the rates are; not even low levels can entice buyers when house prices are declining.

The only solution is for the federal government to offer a temporary 5 percent tax rebate — up to $25,000 — for first-time home buyers.

This rebate is ideal because it would go to middle-class families who thought they were priced out of the market forever and young couples who will benefit from getting a home sooner rather than later. It doesn’t bail out speculators. But by creating demand for homes, this rebate cushions the fall for everyone and stimulates economic growth.

Timing is important. If the rebate is offered too early, it will delay the adjustment we need to make, and push the problem into the future. If it’s offered too late, we risk creating another episode of overbuilding. The right time to do the stimulus is when the adjustments have been substantial but not quite complete.

Based on what I’m seeing, a stimulus should commence in the second half of this year and be offered for about 12 months, depending on how the housing market is responding.

The really good news is that the cost for this program is minimal and would likely stimulate enough spending and growth to more than pay back the Treasury with higher revenues later.

Edward E. Leamer is a professor of management, economics and statistics and the director of the Anderson Forecast at the University of California, Los Angeles.

    Home Buyers Needed, NYT, 14.4.2008, http://www.nytimes.com/2008/04/14/opinion/14leamer.html

Editorial

Foreclosure Politics

April 14, 2008
The New York Times
 

With foreclosures running at about 20,000 per week, at least 100,000 more families are likely to lose their homes before Congress passes a relief bill. And even then, the measure may fail to stanch the problem unless Congress comes up with something that is significantly better than proposals currently in either chamber.

To produce a worthy relief package, lawmakers will first have to scrap most of the provisions in a bill passed last week by the Senate.

That bill would cost $21 billion over 10 years, with $15 billion of the total going to tax cuts that offer no direct help to at-risk families or hard-hit communities. One set of cuts would subsidize renewable energy; another would let businesses take temporarily larger write-offs for losses. A proposed $7,000 tax credit for buyers of foreclosed homes could backfire, encouraging more foreclosures by allowing banks to charge more for repossessed property. A measure to let non-itemizers deduct property taxes is dubious tax policy and bad foreclosure prevention, since it does not target the neediest.

Lawmakers will also have to ditch an unhelpful item in a bill from the House Ways and Means Committee — a tax break for first-time home buyers. It makes no sense to encourage buyers to jump in when further price declines are likely. Scarce resources should be put toward preventing foreclosures.

There are parts of each of the bills that should be preserved, including money for foreclosure-prevention counseling, for issuing tax-exempt bonds to help refinance subprime mortgages and for local governments to buy up foreclosed properties. But that is only a start.

Democratic leaders want a final bill that would have as its centerpiece a bold plan for the Federal Housing Administration to guarantee the restructuring of mortgages for at-risk borrowers. An advantage of the plan, given the scale of the problem, is that loans could be modified en masse.

But the plan also has flaws. One is political: taxpayers could be on the hook if F.H.A. borrowers defaulted. Congress cannot ask taxpayers to step up without doing all it can to solve the problem without shifting the risk to taxpayers. The way to do that is to allow bankruptcy courts to modify mortgages for troubled homeowners.

The Senate dropped a provision from its recent bill that would have done just that. In the House, separate legislation on bankruptcy has stalled. It is up to Democratic leaders of the House and Senate to close ranks in support of the measure. Neither chamber can wait and hope that the other will stand up to the mortgage industry, which must not be allowed to undermine a policy aimed at fixing a problem it helped to create.

The plan for an F.H.A.-backed rescue also would rely on lenders to voluntarily reduce the loan balances to a level where the F.H.A. could take over. Volunteerism is not working. What’s needed is a stick like the bankruptcy amendment. Lenders will be more likely to modify a loan if they know the alternative is having a judge do it.

Lawmakers know what to do. They just need the political courage to confront the mortgage industry.

    Foreclosure Politics, NYT, 14.4.2008, http://www.nytimes.com/2008/04/14/opinion/14mon1.html

Even Renters Aren’t Safe

April 13, 2008
The New York Times
By ELIZABETH A. HARRIS

ON a cold evening in March, Desiree Dookhoo was at home in Ozone Park, Queens, studying for a nursing exam, when she heard someone trying to open her front door. She demanded to know who was there and threatened to call the police.

“It’s Richard from the bank,” a voice answered. “Your landlord has lost the house.”

Many renters may believe that they have avoided the chaos of the subprime loan crisis and the mortgage meltdown simply by renting and not buying, but they may not be as insulated as they think. Buildings with tenants are going into foreclosure as well.

“This is a growing problem nationwide,” said Mark Zandi, the chief economist at Moody’s Economy.com, a research company. “Landlords of all stripes could potentially get caught up in this very severe downturn.”

“I suspect that it’s going to be more of a problem for lower- to middle-income markets,” Mr. Zandi added.

Ms. Dookhoo said her landlord had told her that “he wasn’t ready to buy a house at that point in his life. He just got sidetracked by the bank and told all these wonderful stories,” about how he could afford a mortgage. Eventually, his debts caught up to him and the house slipped into foreclosure. “It didn’t work out for him, unfortunately,” she said.

It has not worked out terribly well for Ms. Dookhoo, either. Her lease expired last year, so when the property manager appointed by the bank asked her to move out, she started looking. Now, she and her two children have to find a new place to live in New York’s expensive and saturated housing market.

The property manager who came knocking on Ms. Dookhoo’s door has not been forthcoming about which bank he represents. But since he is giving her some time to look for a new apartment, she decided not to push the issue. He has also said that he would give her a little money for her moving expenses — an offer known in the industry as “cash for keys.”

“I’ve got to leave, it’s their house now,” she said.

In New York, a city of renters despite the recent condominium boom, tenants are particularly at risk. According to census figures for 2006, the most recent year for which data was available, an estimated 65.6 percent of New York City housing was renter occupied, as opposed to 32.7 percent nationwide.

“The effects of the subprime crisis and the housing-price crisis are just different in New York than in many parts of the country,” said Vicki Been, the director of the Furman Center for Real Estate and Urban Policy at New York University, citing factors like strong home prices and low homeownership rates. “The crisis is unfolding more slowly and, I think, it is affecting many more renter households than it is elsewhere in the country.”

In 1993, during the last big wave of foreclosures in New York City, nearly 6,200 buildings (residential, commercial and mixed-use) began the foreclosure process. In 2007, the Furman Center estimated that at least 38,000 people facing a foreclosure in New York City were renters.

The center, analyzing data in New York City from housing court and the county registrar, estimates that foreclosure proceedings were begun on nearly 15,000 residential or mixed-use buildings last year alone — a majority of them small buildings with just a few units, and almost all of them in the boroughs outside of Manhattan. (The center counts a total of about 900,000 buildings with residential space in the 5 boroughs and some 3.2 million units of housing.)

“The national discussion about foreclosures has largely focused on owners,” Ms. Been said. “There’s a whole group here that is not being talked about:” renters.

Foreclosures can have an impact on tenants in lots of ways, but there are two sets of problems that most will face. The first and most daunting is eviction. The second is a loss of services, which can mean anything from having to fix your own clogged pipes to losing heat in the winter.

Luis Matute moved into a two-bedroom railroad apartment at the top of a walk-up in Bushwick, Brooklyn, 13 years ago. Five years later, Nelva Muy joined him when they were married. Now, the couple, who are from Ecuador, and their 6-year-old son, Jinson, live in the same apartment, which has become plagued with cracks and leaks.

Two years ago, the person who collected the rent every month stopped showing up. Mr. Matute and Ms. Muy have not paid rent since, though they have been saving their rent money of $575 a month.

Michael Grinthal, a lawyer at South Brooklyn Legal Services’ housing unit, said that putting rent money in a bank account is a good way for tenants to protect themselves from lawsuits or eviction if a court decides that the landlord or new owner is entitled to unpaid back rent.

In a sense, however, Mr. Matute and Ms. Muy are getting what they pay for.

Since their landlord disappeared, they have grappled with everything from a crumbling roof to lapsed utility bills. They have pitched in with their neighbors to pay some of the bills and make repairs to try to keep their apartments livable.

“I did the best I could,” Mr. Matute said.

“We do everything in the building,” Ms. Muy added. (They both spoke in Spanish, through an interpreter.)

Despite their efforts, worsening conditions landed their home on the city’s list of the 200 worst residential buildings in the five boroughs, which was released last November.

Since then, the Department of Housing Preservation and Development has made $70,000 worth of repairs — and still when it rains they put a bowl in their living room to collect the leaking raindrops.

With their lease expired and the future of the building uncertain, the family doesn’t know if a move is in the offing.

They have the cushion of saved rent, but finding housing that is affordable long-term will be a challenge. Mr. Matute earns $11 per hour working in a lumber warehouse, and Ms. Muy recently lost her job in a clothing factory. They know their rent could easily double if they moved to another apartment in their Bushwick neighborhood.

“We want to stay here,” Ms. Muy said. “This is our home. I would like to know, if I have to move out.”

Other renters are forced out of their apartments because of worsening conditions.

According to Neill Coleman, a spokesman for the Department of Housing Preservation and Development, residents who find themselves without essential services like heat, water or gas can ask the city for help by calling 311.

“H.P.D. will make emergency repairs if necessary (that could include delivery of oil for the boiler or picking up the electricity account),” he wrote in an e-mail message.

This winter, the heat went out in Yolanda Feliciano’s apartment in the Bronx. More than two months later, it was still not working. Her landlord defaulted on her mortgage and left this problem to her tenants.

Ms. Feliciano contacted the city several weeks ago. Mr. Coleman said that a case had been brought against the landlord in housing court and that the department officials had tried to turn the heat on twice but they could not get into the building. He invited Ms. Feliciano to schedule a time for them to come by again.

For the time being, Ms. Feliciano is staying with friends and has sent her two children to live with their father. She said a potential buyer was interested in the building, and has told her that she can stay on as a tenant.

William Carbine, an assistant commissioner for neighborhood preservation at the Department of Housing Preservation and Development, said that there had been a program in place since 2005, called PACE, to help homeowners with mortgage troubles. But the program was intended to help victims of predatory lending, and hasn’t been able to keep up with problems caused by the subprime crisis.

“Subprime really overwhelmed what was available,” he said.

Mr. Carbine cited a range of problems brought on the city by the housing crisis, ranging from neighborhood destabilization to speculative construction that has left buildings standing empty. To address them, he said, the city is creating the Center For New York City Neighborhoods, which provides resources like counseling and legal services citywide.

The city does not have a tenant program, the hope being that if you help the owner, the tenant will also be taken care of. Renters, however, can call for advice.

By the time the city gets involved, it might be too late the help the landlord. And some owners simply walk away from buildings that they can no longer afford.

Carmelo Casiano and his mother, Gregoria, have been living in the same building on Dekalb Avenue in Bushwick, Brooklyn, since Mr. Casiano got a divorce more than 20 years ago.

Their landlord disappeared some five years ago, and eventually the building went into foreclosure. Since then, it has fallen into disrepair, losing everything from heat to pieces of the ceiling.

Late last year, Sister Kathleen Maire of the Bushwick Housing Independence Project, began helping the Casianos and their neighbors sort out the legal and physical mess of their building.

She is helping them apply for “7A” status, under which a court-appointed caretaker collects rent and administers an abandoned building. The rent goes toward utilities and repairs. If their building is sold instead, they may well have to move.

Sister Maire says she thinks that the city housing department makes an effort to respond to complaints and keep people’s apartments safe, but “they just don’t have the staff.”

When the landlord leaves, she added, “What it does, is put a terrible burden on the tenants.”

    Even Renters Aren’t Safe, NYT, 13.4.2008, http://www.nytimes.com/2008/04/13/realestate/13cover.html

It’s a Long, Cold, Cashless Siege

April 13, 2008
The New York Times
By GRETCHEN MORGENSON

CRAIG JOFFE, an investor who owns a laser surgery business in Minneapolis, says that a couple of years ago he was looking for a safe place to put most of his life savings. So he said that on the advice of his broker, he invested 90 percent of his wealth in something he thought was just as conservative, reliable and liquid as cash: three auction-rate securities.

In fact, he says, his broker at UBS put so much of his money into just one of those securities, issued by John Hancock, that he now holds more than 5 percent of the shares outstanding.

“They were sold to me as cash equivalents,” Mr. Joffe said. “In the fourth quarter of last year, I very explicitly said to my broker, ‘Do I have any market risk in these securities?’ and he said no. I’m usually a thorough guy, but my radar wasn’t up at all.”

It wasn’t until two months ago — when the cash-out window of the $330 billion auction-rate securities market slammed shut — that warning signs began flashing across the radar screens of many people like Mr. Joffe. With the market now frozen, investors like Mr. Joffe are in limbo, and many are having to report losses, if only on paper.

Institutional investors are also feeling the pain.

Some of the big underwriters — UBS is one — are marking down the value of auction rate securities in their clients’ accounts, and companies are also writing down the value of their holdings. Last week, Palm Inc. recorded a $25 million write-down related to auction-rate securities it cannot sell. Others are sure to follow, analysts say.

But even though Wall Street heavyweights and major corporations have been stung, many of them also appear to have bailed out of the market well ahead of individuals. At the end of 2006, institutional investors held about 80 percent of all auction-rate securities issues, according to Treasury Strategies, a consulting firm in Chicago. At the end of last year that portion had fallen to just 30 percent.

“A number of corporations understood there was a rising threat to their securities; there had been failures and warnings,” Anthony Carfang, chief executive of Treasury Strategies, said in a conference call late last month.

As big holders of these securities accelerated their selling late last year, Wall Street firms overseeing the auctions would have come under greater pressure to find buyers to make the auctions succeed. It is unclear whether they turned to individual clients to fill this void.

UBS officials declined to discuss this issue or the specifics of Mr. Joffe’s case.

Only a handful of the issuers — municipalities, student loan companies or closed-end funds — have offered to redeem the securities. And brokerage firms in charge of the periodic auctions that determined the securities’ interest rates say the auctions have simply stalled because of a lack of buyers.

Thomas Martin, head of America’s Watchdog, a consumer protection advocacy group, says he has heard from more than 1,000 investors who cannot get the money out of these securities. He said they ranged from young people with $25,000 at stake to others with $1 million invested.

“The majority of people have $200,000 to $300,000 invested, but it’s their life savings, and they were told this was the same as a money market or C.D.,” Mr. Martin said. “I must have 50 or 60 people that were buying houses that were supposed to close in March and their earnest money is at risk of forfeiture because they relied on the liquidity in these things.”

While Mr. Joffe is still receiving interest payments on his securities, he is unable to retrieve his principal.

A UBS spokesman said that to help clients in need of liquidity, the firm had just begun a program to let them borrow 100 percent of the par value of their securities at a modest interest rate.

A John Hancock spokeswoman said the company was actively pursuing solutions to the liquidity crisis.

NOW that the initial shock of the auction-rate freeze has worn off, investors are pleading with issuers to buy back the securities and suing the brokers who, they said, told them they were the equivalent of cash.

Regulators are also nosing around Wall Street, asking whether the firms disclosed all the risks of these securities to the investors who bought them.

Investors should prepare for a long and dispiriting siege, experts who know the structure of these securities say. Although many of the assets and issuers backing these securities are solid, or “money good” in Wall Street parlance, the mechanics of the auction-rate securities market as well as the continuing credit squeeze give issuers and brokers little incentive to help the investors.

For example, even as investors wait in exasperation for the return of their money, Wall Street firms continue to earn the same fees for running the auctions — typically 0.25 percent of the amount of shares or notes outstanding on an annual basis — even though few auctions are succeeding.

Because the so-called penalty rates — what issuers must pay to investors when auctions fail — are relatively low, often only a bit higher than a short-term benchmark like Libor, the London Interbank Offered Rate, issuers don’t want to redeem them early. Considering that the investors have no access to their money, the low penalty rates they are receiving only add to their distress.

Many individual investors say their brokers put them into these securities for the first time in the second half of 2007 — just as big companies were aggressively dumping their stakes.

Investors were not provided with prospectuses outlining the risks in these securities because they are considered secondary market issues. Unlike primary issues, like initial public offerings, secondary issues do not require the delivery of offering circulars.

Auction-rate securities, invented in the 1980s, are debt obligations whose interest rates are set at auctions every 7 to 35 days. The bonds typically have maturities of 30 years, but the preferred shares have no maturity date.

The first issue was of preferred shares in American Express; other financial institutions soon followed because the shares were considered equity capital and bolstered their balance sheets. Industrial companies also issued them because they were a relatively cheap source of capital.

In 1989, a big auction failed because a company that issued the securities, MBank, defaulted. Later, the Federal Reserve changed the capital requirements, barring banks from listing auction-rate preferred securities as highly rated equity on a balance sheet because they could be redeemed and weren’t really permanent capital. Most corporations stopped issuing the securities in the early 1990s.

Closed-end funds soon took them up, issuing auction-rate preferred shares to generate higher returns for their common stockholders. They now account for $65 billion of the market. Student-loan companies also issue auction-rate securities to finance their lending, and the collapse of the auctions may make it hard for some students to get loans.

Municipalities flocked to the auction-rate market for low-cost money. New issues peaked in 2004, according to Thomson Financial, when $44 billion was raised. Auction-rate securities morphed from a product sold mainly to corporations to one marketed heavily to individual investors; minimum investments were dropped to $25,000.

The top underwriters in the municipal part of the market were Citigroup, UBS, Merrill Lynch and Morgan Stanley. Many of these firms’ customers wound up owning the securities and are now up in arms.

The market worked relatively smoothly until mid-February this year, when the credit crisis made big brokerage firms reluctant to put up precious capital to keep the auctions going. Investors could no longer sell their securities — and cannot to this day.

Dwight Grant is a managing director at Duff & Phelps, a financial advisory firm that helps corporate clients assign values to their auction-rate holdings. (It is unrelated to the closed-end fund company of the same name.)

“I talked to a very senior person at a large financial institution who inferred that she believed this could last quite a long time,” Mr. Grant said. “There is a very difficult calculus in the process with respect to capital and reserves of the underwriters. To maintain auctions they were going to have to commit substantial reserves. It is not obvious when they are going to reallocate capital to this market.”

Indeed, experts say that calling these securities auction-oriented is something of a misnomer because real auctions — during which buyers and sellers meet and an interest rate is set based upon their interest — weren’t taking place in recent years. Instead, the Wall Street firms in charge of the auctions smoothed the process by bidding with their own capital rather than rustling up thousands of buyers to meet up with sellers every week or so.

Given this market’s size, it became harder for Wall Street to arrange true auctions regularly. Last Wednesday, for example, some 545 auctions were scheduled covering $27.2 billion of securities. Conducting that many auctions — one for each security whose interest rate expires that day — would be an enormous undertaking for the handful of underwriters in the arena.

“Auction securities became a managed bidding system, not a true investor auction,” said Joseph S. Fichera, chief executive of Saber Partners, a financial advisory firm. “The investor never knew how many investors there were, how often the brokerage firms were stepping in to make the system work, nor that the broker’s support could stop all of a sudden.

“If we had transparency in the system, investors could have judged the ability to sell in the individual auctions and bid accordingly,” he added.

Sure enough, back in May 2006, liquidity problems associated with auction-rate notes emerged when the Securities and Exchange Commission brought a case against 14 big brokerage firms that sold them. The commission accused the firms — including Bear Stearns, J. P. Morgan Securities, Goldman Sachs and Lehman Brothers — of favoring some customers over others and manipulating the auctions by adding capital to smooth out the process.

Such arrangements, while easing the bidding process, hid the potential for this market to freeze up, the regulators said. In announcing a settlement, the S.E.C. said that “investors may not have been aware of the liquidity and credit risks associated” with the securities. The firms paid $13 million to settle the matter, neither admitting nor denying the allegations.

Today, investors say they had no idea that their securities could be tied up indefinitely if the big brokerage firms couldn’t find buyers. The Financial Industry Regulatory Authority, which polices much of Wall Street, is asking firms about sales practices and risk disclosures.

How Wall Street is paid for these auctions is central to understanding why the firms have little interest in resolving the problem of failed auctions. The firms earn money at least twice: First, when the notes or shares are underwritten, they receive 1.5 percent of the amount of money raised, in the form of a fee. Then they receive 0.25 percent annually for conducting the auctions — a total of $825 million this year, based on the size of the market.

But they receive these auction fees even when the auctions fail, so the firms have no incentive to help revive this market.

On auction-rate notes backed by municipalities, Wall Street firms sometimes earn a third fee by selling an interest-rate swap alongside the note. These swaps help lower the interest rates that municipalities pay on the securities but can add considerably to the complexity of unwinding them when auctions fail.

Auction-rate securities have been popular among both individual investors and corporations looking for higher yields on their cash because they typically pay up to one percentage point more than money market funds. As of July 1, 2007, corporations owned $170 billion of these securities, or just over half of the total outstanding, according to Treasury Strategies.

But through the second half of 2007, corporate investors were dumping their stakes, Treasury Strategies said. During these months, corporations cut their holdings to $98 billion.

At the same time, many individual investors were being persuaded by their brokers to buy auction-rate securities for the first time. Jacob H. Zamansky, a lawyer in New York, says he has 50 cases involving individuals stuck in auction-rate securities who say they weren’t told of the risks. Of those, he said, 80 percent were put into the securities in the second half of 2007.

“THESE securities really worked very well for a relatively long period of time,” said Mr. Grant at Duff & Phelps. “It’s possible that people were lulled into a sense of false security because if something works well for 20 years you might not be as attentive to the terms of the contract.”

Lewis D. Lowenfels, a securities lawyer at Tolins & Lowenfels in New York, represents several investors who are stranded in auction-rate securities. “If the evidence shows that large corporate clients were being advised to unload these securities at the same time that the investing public was being counseled to purchase the same securities,” he said, “one begins to slip over the line from questions of due diligence and suitability into the realm of securities fraud.”

    It’s a Long, Cold, Cashless Siege, NYT, 13.4.2008, http://www.nytimes.com/2008/04/13/business/13cash.html

A Lender Failed. Did Its Auditor?

April 13, 2008
The New York Times
By VIKAS BAJAJ and JULIE CRESWELL

ALTHOUGH he had been with the mortgage lender New Century Financial for only two months, Tajvinder S. Bindra had spent a good part of late 2006 and early 2007 pelting the company’s controller and a member of its auditing firm, KPMG, with questions about the company’s accounting.

Frustrated by their responses and staring down a deadline to close New Century’s year-end books, Mr. Bindra, the company’s chief financial officer, told both men that he needed written assurances from KPMG that New Century’s bookkeeping was proper, according to accounts of the discussions.

But KPMG balked. A few weeks later, on Jan. 31, 2007, KPMG and New Century’s own accountants stunned the company’s board by revealing that the lender had incorrectly calculated its reserves for troubled home loans. That mistake was likely to cost New Century $300 million, wiping out all of its profits from the second half of 2006.

Two months later, New Century, one of the largest subprime mortgage lenders in the country, would be bankrupt.

New Century’s collapse ushered in a series of failures among mortgage lenders — ultimately rocking global financial markets, forcing banks around the world to write down or take losses on nearly $250 billion in mortgage-linked securities and sending the nation’s housing market into a tailspin.

As homeowners, shareholders and federal investigators pick through the subprime wreckage, many have asked how effectively front-line financial monitors carried out their duties. Ratings agencies responsible for signing off on the creditworthiness of securities, and regulators responsible for overseeing banking practices and safeguarding the entire financial system, have already been roundly criticized for not sounding alarms earlier.

Now, attention is turning toward yet another steward of financial reporting ensnared in the subprime debacle: accounting firms.

While accounting firms don’t exert legal or regulatory authority over their clients, they do bestow seals of approval, the way ratings agencies do. People in the financial industry, as well as investors, have reason to believe that a green light from an auditor means that a company’s accounting practices have passed muster.

Accounting practices drew increased scrutiny after Enron collapsed and its auditor, Arthur Andersen, went out of business in 2002 amid a federal prosecution. Analysts say the mortgage crisis may not result in criminal charges against auditors, but it is certain to renew interest in how accountants conducted themselves.

The interpretive waltz between a company and its auditor, of course, can be complicated and open to varying perceptions. But New Century’s accounting and KPMG’s review of the mortgage lender’s financial statements offer a window onto some of the problematic practices that helped lead to the mortgage bust.

A recently unsealed report by an examiner for the United States Bankruptcy Court in Delaware raises the question of whether New Century’s accounting obscured an early signal that the mortgage freight train was about to run off the rails.

New Century’s accounting methods let it prop up profits, charming investors and allowing the company to continue to tap a rich vein of Wall Street cash that it used to underwrite more mortgages. Without the appearance of a strong bottom line, New Century’s financial lifeline could have been cut even earlier than it was.

“It would have had widespread repercussions for the lenders who were buying loans from New Century,” Zach Gast, an analyst at the research firm RiskMetrics, said about the possible impact of an earlier profit warning from the lender. “It may have even accelerated the whole downturn of the subprime market.”

Still, some accounting experts question how appropriate it is to take auditors to task for judgment calls that, even in hindsight, are hard to make.

“I think it’s a stretch to blame everything on the accounting profession,” said David Aboody, a professor of accounting at the University of California, Los Angeles. “What does the S.E.C. want? Does it want an auditor who tries to predict the future? Or does it want an auditor to record what is clearly going on at the time?”

ANALYSTS say that auditors, because of in-depth knowledge of complex accounting rules and first-hand relationships with corporate management, are there to push back, examining how executives calculate numbers and assessing the financial health of enterprises.

In New Century’s case, the court examiner, Michael J. Missal, concluded that KPMG was not skeptical enough and that the lender’s creditors could pursue negligence and negligent misrepresentation claims against the auditor. But the examiner did not accuse KPMG of fraud or intentional wrongdoing. The examiner said he also “did not find sufficient evidence to conclude that New Century engaged in earnings management or manipulation.”

KPMG strongly contests any suggestion that it was derelict in its duties or that it went overboard trying to retain a well-paying client. It resigned from its New Century engagement shortly after the lender filed for bankruptcy, and it never completed the audit of the lender’s statements for 2006, the year in which New Century’s accounting was at its most improper, according to the examiner.

KPMG says that it’s unclear whether the examiner’s conclusions are derived from objective evidence available at the time it worked for New Century, or simply represent assumptions that are now being made in hindsight.

“The examiner was appointed by the court to identify potential lawsuits in a bankruptcy case,” said Kathleen M. Fitzgerald, a KPMG spokeswoman. “Consistent with that charge, he has prepared an advocacy piece, which has many one-sided statements and significant omissions. In the end, the examiner concluded that the bankruptcy estate may be able to file a lawsuit against KPMG for negligence — a claim we strongly dispute — and a claim even the examiner notes in his report for which KPMG has strong defenses.”

Even so, the examiner’s report has signaled to some analysts that something may have gone seriously awry in KPMG’s relationship with New Century.

“Allegations that an auditing firm didn’t engage in due professional care and made recommendations that are inconsistent with GAAP must be taken very seriously,” said Kathleen M. Hamm, a former senior enforcement official at the Securities and Exchange Commission, referring to the “generally accepted accounting principles” that public companies must follow. Ms. Hamm is now a managing director at a consulting firm, the Promontory Financial Group.

The examiner’s investigation is also the latest in a string of embarrassing episodes for KPMG. In March, Xerox and KPMG settled a securities lawsuit relating to decade-old accusations of accounting manipulations. And KPMG has been criticized for its audit of the Federal National Mortgage Association, after it was revealed that the company, known as Fannie Mae, had overstated its earnings by billions of dollars over several years.

And, finally, nearly three years ago, federal prosecutors came within an eyelash of filing criminal charges against KPMG over dubious tax shelters it set up for clients, leading to a deferred prosecution agreement and a wrenching internal investigation.

“For KPMG, this comes on the heels of all of the tax-shelter stuff, and they just got rid of having a court-appointed examiner, so this is difficult for them,” said Jack Ciesielski, editor of The Analyst’s Accounting Observer, a trade publication.

FROM the 11-story glass-and-steel tower that housed its headquarters in Irvine, Calif., New Century ruled during the recent housing boom as one of the nation’s largest lenders to individuals with weak, or subprime, credit.

The company’s three founders, Robert K. Cole, Edward F. Gotschall and Bradley A. Morrice, met while working at the same mortgage bank in the early 1990s. They founded New Century in 1995, and KPMG became the company’s auditor.

At the epicenter of the subprime boom, New Century and its founders grew wealthy as the company’s stock soared. The company churned out billions of dollars worth of subprime mortgages, many of which it then sold to Wall Street banks. And, quarter after quarter, it generated robust earnings.

Behind the scenes, however, the explosive growth at New Century shot beyond the company’s internal controls and policies as well as the managerial abilities of some of its key executives, the bankruptcy court examiner concluded.

For instance, the examiner said in his report that the company did not have a formal policy spelling out exactly how to calculate reserves it might need to repurchase loans if Wall Street rejected them. The lender also used simple spreadsheets to evaluate its own mortgage securities holdings, the examiner said. KPMG flagged some of these shortcomings to the management, but because KPMG considered them to be “inconsequential,” they were not reported publicly, according to the examiner’s study.

The relationship between New Century’s executives and board and KPMG also became strained as early as the end of 2005, the examiner report said.

Some members of New Century’s board were uncomfortable with what they believed was a lack of acumen displayed by certain accounting and financial managers at the company. Others, like the director Richard A. Zona, appeared to have had early concerns about whether the company was being conservative and thorough enough in various aspects of its accounting.

In one of two resignation letters that Mr. Zona drafted in late 2005 but never submitted to the board, he called New Century’s management team “dysfunctional.” A former vice chairman of U.S. Bancorp and a former partner at Ernst & Young, Mr. Zona told the examiner he had not left the board because other directors persuaded him to stay.

A lawyer representing New Century’s former directors said Mr. Zona and other directors declined to comment.

According to the report, Mr. Zona and some of his fellow directors did ask New Century’s management and KPMG whether the lender was setting aside enough money to repurchase loans rejected by Wall Street.

In 2005 and 2006, the number of mortgages sent back to New Century skyrocketed as some borrowers became delinquent in payments as early as the first few months after taking out a loan, indicating shoddy lending practices, according to the report.

On the evening of Sept. 7, 2006, a senior New Century executive, Kevin Cloyd, sent an e-mail message to the chief executive, Mr. Morrice, and Patti M. Dodge, the company’s chief financial officer, saying, “We got our teeth kicked in with regard to repurchase requests in Aug. and thus far in September,” according to the examiner’s report.

An hour later, Mr. Morrice sent a livid e-mail response, criticizing Mr. Cloyd for the timing of this revelation, especially because it came shortly “after sending a positive report” to New Century’s board.

Yet the very next day, New Century issued a press release about its August lending levels, which it said had climbed 9 percent from July. Saying it had “strict underwriting guidelines” and “skilled risk management,” the company asserted in the release that the increase in repurchases because of early-payment defaults at the end of August “has been modest.”

Despite the internal misgivings, the company made no effort to recall or correct the press release, according to the examiner’s report. Mr. Cloyd did not return phone calls. Ms. Dodge could not be reached. And a lawyer representing Mr. Morrice did not return calls.

Although New Century sold more than $40 billion in loans in the first nine months of 2006, it had reserved only $13.9 million as of Sept. 30 that year to repurchase loans, according to the firm’s securities filings. Those filings were not audited by KPMG, but they were reviewed by the firm.

The reserve was woefully inadequate, according to the examiner’s report. By the end of September 2006, New Century already had $400 million in pending repurchase requests — meaning that the $13.9 million it had set aside represented just 3.5 percent of that troubled pool of loans. Officials in New Century’s accounting department and on the KPMG audit team told the examiner that they were not aware of the rising backlog of repurchase claims.

The examiner asserted that New Century had made two glaring errors in how it calculated its repurchase reserves: first, it assumed that it would be asked to buy back only loans sold in the previous three months, though it was fielding requests for loans it sold as much as a year earlier.

“New Century and KPMG each share responsibility for failing to correct the repurchase reserve calculation methodology that permitted the backlog claims to be excluded from the repurchase reserve through all accounting periods,” the examiner’s report said. He said New Century provided information to KPMG officials that showed pending repurchase claims totaled $188 million at the end of 2005, adding that that “should have made KPMG investigate the issue.”

But Ms. Fitzgerald said KPMG determined that the reserve for 2005 was appropriate and added that the “examiner’s report itself makes clear that even if the entire $188 million of repurchase claims were separately considered, the estimated result would have been only $8 million of increased reserves against reported net income of over $400 million.”

Second, in the summer of 2006, the company simply stopped estimating the losses on loans it would have to buy back, a breach of standard accounting practices, according to the examiner.

New Century’s low reserve levels, meanwhile, were catching the attention of outside analysts. In reports in November and December of 2006, Mr. Gast of RiskMetrics said he believed that the company was setting aside far too little to buy back loans. The reports created a stir at New Century, and the accounting department prepared a rebuttal.

Settling into his new job, Mr. Bindra, the chief financial officer who succeeded Ms. Dodge in November, raised the issues in Mr. Gast’s report with New Century’s controller, David Kenneally, and the KPMG partner in charge of New Century’s audit, John Donovan, according to the examiner’s report and interviews with former New Century executives who requested anonymity because of their concerns about being entangled in litigation.

Until late January, according to the report, Mr. Kenneally defended the company’s reserve calculations. After that, the report said, Mr. Donovan told him that a further accounting review showed that New Century had made a mistake.

Mr. Kenneally’s lawyer declined to comment, and KPMG declined to make Mr. Donovan available for comment. Mr. Bindra’s lawyer also declined to make him available.

By underreserving, New Century was able to show still-rising profits in the second quarter and declining, yet positive, earnings in the third quarter of 2006. Had New Century been more conservative about its reserves, second-quarter profits would have been halved and it would have reported a loss in the third quarter, the examiner determined.

Eventually, these problems burst into public view. In March 2007, after New Century disclosed that it would need to restate its earnings and would probably be shown as unprofitable during the last six months of the previous year, its lenders pulled the plug on the company. In April, it filed for bankruptcy.

But some experts say that regardless of what KPMG did, New Century would have collapsed.

“The business model of New Century depended on real estate values that would continue to go up and certainly not go down,” said Roman L. Weil, an accounting professor at the University of Chicago Graduate School of Business. “The economic model here is what is at fault. It’s the cause of what happened, not anything that KPMG did.”

AMONG the “Big Four” auditing firms, KPMG is the smallest. Yet it is the go-to auditor for banking and financial services firms and real-estate investment trusts like New Century, according to Audit Analytics, an independent research firm. Deloitte & Touche and Ernst & Young also have many financial services clients.

KPMG is the auditor for such prominent mortgage players as Wells Fargo, Citigroup, HSBC Finance, Countrywide Financial and Thornburg Mortgage, according to an examination of annual reports.

Those relationships put KPMG in a potentially vulnerable spot as authorities increased their scrutiny of the subprime business. The Federal Bureau of Investigation has said it has 17 continuing investigations of possible corporate and accounting fraud related to subprime lending. That number, the F.B.I has said, is likely to increase.

Although federal prosecutors are examining the trading activities of New Century executives, KPMG is not a target of the inquiry, according to a person briefed on the matter who wasn’t authorized to speak publicly.

Moreover, the appetite for prosecuting accounting firms has diminished since Arthur Andersen was convicted of obstruction of justice as part of the Enron investigation, according to analysts. In 2005, the Supreme Court overturned that conviction, but it was too late to save the firm. With only four large accounting firms left, the government is unlikely to push any of them too hard, experts say.

“The Justice Department learned from its prosecution of Arthur Andersen that threatening entire firms jeopardizes our system of private auditing,” said Lawrence A. Cunningham, a professor at the George Washington University Law School. “What’s vital is that individuals be held responsible for wrongdoing.”

A MORE likely threat to auditing firms and mortgage companies could be civil, rather than criminal, lawsuits. Shareholders have already filed a raft of lawsuits against lenders that failed or whose stocks have dropped sharply. In some cases, shareholders are trying to add the auditors as defendants.

In January, New York City and New York State pension funds that are leading a class-action lawsuit against Countrywide added its auditors, KPMG and Grant Thornton, as defendants. KPMG declined to comment on the suit. A spokesman for Grant Thornton said the firm was confident it would be dropped from the suit because it had not audited Countrywide for four years.

Last week, liquidators of two hedge funds run by Bear Stearns sued the bank and its auditor, Deloitte & Touche. They contend that the firms hid the true financial risks and health of the funds, which invested in mortgage-linked securities. Bear Stearns declined to comment, and, in a statement, Deloitte said that the suit was without merit and that the firm intended to defend itself.

It is unclear whether the creditors in the New Century bankruptcy will try to recoup losses from KPMG. Even the court examiner, Mr. Missal, notes in his report that creditors of New Century could pursue negligence claims against KPMG but that such a case could be hard to win.

Even if KPMG is safe from large damages and a criminal prosecution, Lynn E. Turner, a former chief accountant at the S.E.C., said the findings were still troubling.

“The examiner cites different pieces of evidence that do raise concerns about whether or not you had an honest-to-goodness independent audit going on,” Mr. Turner said.

For its part, KPMG says that it faithfully carried out its professional duties.

“It is very easy — and totally unreasonable — to look at decisions made in 2005 or 2006 through a 2008 lens,” said Ms. Fitzgerald, the KPMG spokeswoman. “The full record shows that KPMG acted in accordance with professional standards. We will vigorously defend our audit work in the appropriate forum, which will allow for a complete hearing of the facts.”

    A Lender Failed. Did Its Auditor?, NYT, 13.4.2008, http://www.nytimes.com/2008/04/13/business/13audit.html

Wall Street's Insecurity

Cuts in Jobs, Bonuses
Add to Ripple Effect;
More Home-Cooking

By IANTHE JEANNE DUGAN
The Wall Street Journal
April 12, 2008; Page B1

Derek Thornhill never imagined he would be canceling vacations and cooking dinner at home to save money. In 10 years working at Bank of America Corp., he rose to become one of the company's top equity salesmen.


But in January, Mr. Thornhill was laid off -- the day before he was expecting the annual bonus that typically accounts for 75% of his pay. Instead, he was paid 20 weeks of severance and a bonus that was only 5% of the previous year's. People in his position typically earn roughly $500,000 to more than $750,000, including their bonus.

"I not only lost my job, but I barely got paid for all the work I did last year," bristles Mr. Thornhill, 34 years old, who has had no luck finding a similar job. Dozens of other laid-off workers said they are having the same problem, forcing some to consider lower-paying jobs or new professions.

It is crunch time on Wall Street as the mortgage turmoil and a dearth of deals and credit lead to mounting job losses. Since last summer, securities firms have announced more than 20,000 job cuts, stretching from New York to London to Hong Kong.

While U.S. securities-industry employment is still bigger than a year ago, in New York about 6,000 Wall Street jobs, or 3% of the total, have been lost since July, after adjusting for seasonal variations, according to Mark Zandi, chief economist and co-founder of research firm Moody's Economy.com.

"The job prospects for Wall Street through this time next year are about as bad as for any industry in the country," Mr. Zandi says. "And people who hang on to jobs will suffer through less compensation. The Wall Street job engine won't be going again until sometime in the next decade."


Throughout the U.S., the sputtering economy has claimed more than 85,000 jobs since December. Particularly hard hit are mortgage lenders, construction and manufacturing firms. As more securities jobs disappear, the ripple effect could hurt many other industries.

Among the announced job cuts: Citigroup Inc. will get rid of more than 6,000 jobs, or 10%, in its capital-markets and mergers-and-acquisitions work force. Lehman Brothers Holdings Inc. is laying off 1,425 people, or 5% of its employees. Goldman Sachs Group Inc. went deeper than its annual routine of cutting the weakest 5% of employees.

J.P. Morgan Chase & Co.'s emergency takeover of Bear Stearns Cos. is expected to cost at least half of Bear's 14,000 employees their jobs, though no exact figure has been disclosed by the companies yet.

"I have been stressed that it will happen to me," says Carol Guenther, 38, an executive administrative assistant at Bear Stearns. She doesn't know if her job is in jeopardy, but has been bracing for the worst since colleagues were laid off in July.

Employees who keep their jobs will likely get much smaller bonuses, which typically can range from hundreds of dollars for assistants to millions for top bankers. Last year, bonuses declined only 5% to an average $180,420 per worker, according to New York's comptroller.

Wall Street turns in cycles of booms and busts. Thousands of securities employees were fired after the 1987 stock-market crash. There were mass layoffs after the dot-com bubble burst and the Sept. 11, 2001, terrorist attacks. Since 2003, though, Wall Street added 100,000 jobs as securities-industry profits surged.

In New York, city officials expect to lose $2.6 billion this year in business and real-estate tax collections and $690 million in personal-income-tax collections, partly because of Wall Street's turmoil. The industry represents 5% of jobs in the city, but 23% of income. "We are starting to see big cutbacks in luxury purchases: chartered yachts, expensive cars and the like," says Milton F. Pedraza, chief executive of the Luxury Group, which conducts research in the high-end market.

Some downsized employees are fighting back. John Harris, an attorney at Litowitz, Berger & Grossmann LLP, is representing more than a dozen former Bank of America employees claiming they were offered bonuses of only 5% to 10% of their pay. Mr. Harris has filed several arbitration cases against Bank of America. "These are people who worked more than 70 hours a week," Mr. Harris says. "They never would have worked so hard, had they known" they weren't going to be paid their full bonus.

Bank of America has announced job cuts of about 3,650 employees since October. The bank won't comment on individuals. But Jennifer DiClerico, a Bank of America spokeswoman, says bonuses are based on the company's and the individual's performance. Last year, Bank of America's corporate and investment banking unit posted a profit of $538 million compared with $6.03 billion in 2006.

Milind Parate, a 35-year-old analyst, was laid off from Bank of America, and his brother now is paying the mortgage on the Manhattan apartment Mr. Parate bought a few years ago. "I couldn't imagine this a few years ago," says Mr. Parate, who was promoted to vice president a couple weeks before losing his job. He wouldn't comment on Bank of America.

Despite great references and contacts, Mr. Thornhill has found jobs only at smaller firms. "It has been absolutely excruciating," he says.

--Justin Lahart contributed to this article.

    Wall Street's Insecurity, WSJ, 12.4.2008, http://online.wsj.com/article/SB120795699896909269.html?mod=home_we_banner_left

Op-Ed Contributor

The Age of Foreclosure

April 12, 2008
The New York Times
By BROCK CLARKE

Cincinnati

IT’S recently been announced that the Mount, Edith Wharton’s home in Lenox, Mass., faces foreclosure, unless as much as $3 million can be raised before April 24. This loss would be terrible for fans of American literature, not merely because Wharton is one of our most enduring novelists and we would lose a valuable window into her life and work, the place where she finished writing “House of Mirth” and was inspired to write “Ethan Frome.” We would also lose access to the grand 35-room white classical-revival house, surrounded by three acres of gardens, as beautiful and inspired a creation as Wharton’s fiction, which is saying something.

Just as significant, foreclosure on the Mount would send a clear signal to the scholars and readers who depend on the houses of other writers for research and inspiration: literature and all that goes into creating it, because it is not financially viable, is not worth preserving.

The reasons for the foreclosure are depressingly familiar to those who operate, sustain and care about historical homes: unmet fund-raising goals, heavy debts and, in the case of the Mount, a $2.5 million loan used to buy Wharton’s 2,600-volume library from a British book collector. But sometimes familiar problems call for unfamiliar solutions. That’s why it is not enough to merely send a donation to the Save the Mount campaign. Citizens and public officials of New York City should buy the Mount outright, to make it their own. Yes, the house stands in Massachusetts, but for various reasons I believe it is up to New Yorkers to save it.

First, Edith Wharton is a New York writer, not a New England one. Her greatest novels, “The Age of Innocence” and “The House of Mirth,” are set in New York City, and have contributed mightily to our understanding of Manhattan in the Gilded Age. It is almost impossible to separate our sense of turn-of-the-last-century New York from Wharton’s depictions of it. Nor should we want to: New York is a great place, but greater yet for having inspired Wharton’s novels.

Her most famous New England novel, “Ethan Frome,” is also powerful and influential, but maybe unfortunately so: before that book was written, rural northern New Englanders were known for their optimism and volubility; after “Ethan Frome,” they came to be thought of as doomed, taciturn mopes. Indeed, I assume New Englanders would gladly allow New York to buy the Mount, in the hope that the veil of “Ethan Frome” would be lifted and they could be happy-go-lucky once more.

Perhaps the stress of their literary legacy is causing New Englanders to take less-than-perfect care of their famous writers’ homes. In December, a group of teenagers in Ripton, Vt., vandalized one of Robert Frost’s houses, causing thousands of dollars of damage. Just as the ornate Mount is a reflection of its former owner’s writing style, so does the simple Frost farmhouse exemplify the New England austerity that came to define his poetry. To have the Mount imperiled so soon after the Frost farmhouse was vandalized makes one wonder if something larger and more sinister is at work here. (Disclosure: I wrote a novel in which several writers’ homes are destroyed, but I meant it to be a satire, not a blueprint).

Taking control of the Edith Wharton house would also go a long way toward helping New Yorkers reclaim from Massachusetts the mantle of regional superiority. As any New Yorker knows, the Empire State has fallen behind in most important categories. The Red Sox have won two World Series Championships in the last four years, the Yankees and Mets none. The Celtics have the best record in the National Basketball Association, while the Knicks have one of the worst.

The purchase would be practical, given that Lenox is pretty much overrun by New Yorkers who in summer flock to see the Boston Symphony at Tanglewood, and who have long known that it’s cheaper to park their BMWs there than to pay for a garage in Manhattan. Buying the Mount would only make their presence more official. And as owners, they’d have a motive to spend more time at this glorious house conceived and lived in by one of our most brilliant authors.

New Yorkers know a worthy cause when they see one. Edith Wharton and her house, the Mount, is such a worthy cause. I hope that New Yorkers will make that cause their own.
 

Brock Clarke, the author, most recently, of “An Arsonist’s Guide to Writers’ Homes in New England,” is an associate professor of creative writing at the University of Cincinnati.

    The Age of Foreclosure, NYT, 12.4.2008, http://www.nytimes.com/2008/04/12/opinion/12clarke.html

G.E. Earnings Drop, Raising Broader Fears

April 12, 2008
The New York Times
By REED ABELSON and LOUISE STORY

General Electric, which is widely viewed as a bellwether for the economy because of its diverse operations, stunned Wall Street on Friday by reporting sharply disappointing results for the first quarter and creating widespread concern about the outlook for other companies.

The inability of G.E. to sidestep current market forces underscores just how broadly the credit crisis is spreading through the economy. The company, which has businesses as varied as finance and jet engines, has normally been able to manage weakness in any given sector, making its surprise all the more worrisome.

The weakening outlook for company profits and a poor consumer confidence report pushed the Dow Jones industrial average down by 256 points, about 2 percent, and the other major indexes had similar declines. G.E.’s stock fell 13 percent, its biggest one-day loss in two decades.

“G.E.’s results are telling us that we may have more bad news and worse than expected in the economy,” said Richard Tortoriello, an analyst who follows G.E. for Standard & Poor’s Equity Research. G.E. also reduced its full-year profit projections, telling investors to expect little or no earnings growth in 2008.

Investors have already seen an average profit decline of 20 percent from the 32 companies in the Standard & Poor’s 500-stock index that have reported their first-quarter earnings, and they are particularly worried about more unpleasant news from the financial industry. Companies like Citigroup and JPMorgan Chase will report their results next week, followed by numerous other companies.

The financial sector, which makes up nearly 20 percent of the companies in the S.& P. 500, is dragging down the overall market, analysts say, and the credit crisis now threatens other types of companies.

About 160 companies from the index are expected to report over the next two weeks, and analysts say that with the exception of the energy sector, investors should be braced for more bad news.

“If you think of all the banks that were in trouble last quarter, that’s likely to move into the real economy now,” said Tobias M. Levkovich, chief United States equity strategist at Citi Investment Research.

Financial stocks are likely to be among the biggest disappointments. Analysts are predicting they will report sharply lower first-quarter earnings, an estimated 64 percent below the same period of 2007, according to Thomson Financial Services. Lehman Brothers, Goldman Sachs and Morgan Stanley have already reported their earnings, and they all took write-downs on their investments. In total, financial institutions have written down more than $230 billion in mortgage loans and other assets since the credit crisis began.

But defaults on other sorts of consumer loans, like credit card and auto debt, have been soaring since late last year, and those loan losses may surprise investors, analysts said.

If G.E. is any guide, even the unsuspecting may be caught up in the credit crisis. G.E. was once a large subprime mortgage lender but sold that business in October.

On Friday, the company reported net income of $4.3 billion for the quarter, or 43 cents a share, down from $4.57 billion, or 44 cents a share, in the period a year earlier. Analysts had been expecting about 51 cents a share in net earnings, and the company had projected profit of 50 to 53 cents a share. Its stock finished down $4.70, at $32.05.

While the company continued to post strong results in areas like its global infrastructure business, aircraft engines and energy equipment, the performance of its financial services business pulled down profits. The company also had difficulty smoothing its results through various asset sales, including real estate, and consumers were buying fewer of its famous appliances.

“It does show how the credit turmoil extends out to very well-managed companies like G.E.,” said Deane M. Dray, an analyst with Goldman Sachs who downgraded the stock to neutral on Friday because of the sizable earnings miss.

While some of the weakness in demand was predictable, analysts say what particularly troubled them was management’s admission that it had been surprised by the severity of the credit crisis, having reassured analysts just a few weeks ago that it expected to meet earnings expectations for the quarter.

“We had planned for a difficult environment,” Jeffrey R. Immelt, the chairman and chief executive, told investors Friday morning. “We had planned for an environment that was going to be challenging, but what I would say is kind of late in the quarter, particularly after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments.”

Other companies, especially those with financial units that have not been in the public eye, may similarly startle investors, analysts said.

“What other companies might have the same financial issues that the market hasn’t recognized yet?” asked Timothy M. Ghriskey, who oversees investments at Solaris Asset Management, an investment management group in Bedford Hills, N.Y., that does not own shares in G.E.

Wall Street has, in general, been overly optimistic about earnings over the last two quarters, although analysts have lowered their estimates in the last three months. But there is a growing divergence between what analysts think will happen with company earnings and the more negative outlook by economists, says a recent Goldman Sachs report.

The Goldman report predicted that many companies will lower their earnings estimates for the year during their coming first-quarter earnings calls — saying this would be a “profit recession” along with an “economic recession.”

In fact, companies’ earnings typically drop more than the gross domestic product during recessions, said Robert Barbera, chief economist at ITG, an investment and research firm.

“Corporate profits exaggerate economic momentum,” Mr. Barbera said. “There’s a violence to profit performance.”

Consumer discretionary spending is already weakening. While retail companies report their earnings later than other industries, spending at discount stores like TJ Maxx and Aéropostale will be closely watched. Luxury retailers have benefited from foreign sales. At Tiffany & Company, for example, half of all sales are in stores abroad, and 14 percent of all sales within the United States come from foreign tourists, said Brian J. Tunick, a retail analyst at JPMorgan Securities.

But United States companies may not be able to count on the rest of the world for all their earnings growth. About two-thirds of the money earned abroad by American companies is made in Europe, said Mr. Levkovich, the Citi analyst, and the housing market in several European countries has started to suffer.

It is not only the consumer spending cutback that is expected to hurt profits. As companies produce fewer products, many of the goods they create will become more expensive per unit. Companies are already reducing the amount of goods they keep in inventories, which adds to expenses. And, of course, rising fuel costs harm all companies that ship goods.

While analysts say they were surprised by G.E.’s earnings announcement, some say the company’s difficulties are not all that shocking, given its range of businesses that tend to mirror the ups and downs of the economy.

“G.E. isn’t immune from that,” said Daniel Rosenblatt of Marble Harbor Investment Counsel in Boston, which owns the stock. “It’s hard to get away from the really big macrotrends.”

    G.E. Earnings Drop, Raising Broader Fears, NYT, 12.4.2008, http://www.nytimes.com/2008/04/12/business/12electric.html?hp

Troubled homeowners fall prey to "rescue" scams

Fri Apr 11, 2008
11:18am EDT
Reuters
By Nick Carey

EASTPOINTE, Michigan (Reuters) - Among the byproducts of the U.S. housing crisis is a surge in scams that cheat people out of their money, their homes, or both, under the guise of offering to rescue them from foreclosure.

"There is a lot of money to be made if you are good at committing fraud," said Debra Zimmerman, an attorney at Los Angeles-based Bet Tzedek Legal Services, which provides free legal assistance to stricken home owners. "Foreclosure rescue scams are big business right now."

Groups like Zimmerman's say that as soon as borrowers end up in foreclosure -- a matter of public record in the United States - they are bombarded with calls, leaflets and knocks on the door from people armed with fraudulent offers of help.

Huston Julian, 54, of Eastpointe, Michigan, nearly fell for such a scam. Julian bought a home in this working class suburb of Detroit in October 2006, but fell behind with his $1,084 monthly payment when his disability benefits were cut off. He ended up in foreclosure in December.

"I got calls all day from people saying they could save my home," said Julian, 54, seated at a small table in his kitchen.

One group promised help if he gave them $3,800. He borrowed money from family and was all ready to pay, until his suspicions were aroused by the frequency of their calls.

"I said to myself 'something just ain't right here," Julian remembered. On the advice of his younger sister, he got in touch with local non-profit counseling agency the Michigan Neighborhood Partnership (MNP).

"I was able to convince Huston not to send the money and explained to him this was a rescue scam," said Juanita Bryant, a loss mitigation specialist at MNP who is negotiating with Julian's lender on a mortgage repayment schedule based on his restored disability benefits.

While such scams are on the rise, law enforcement agencies are overwhelmed.

"Almost every foreclosure rescue program you see out there is fraud," said Todd Lackner, a San Diego-based mortgage fraud investigator. "Sadly, the law enforcement community lacks the funds to investigate or prosecute all the cases."

Nonprofit groups say they, too, are vastly outgunned.

"The challenge we face is we lack the resources to compete with groups going door-to-door targeting home owners," said Josh Zinner, co-director of New York-based nonprofit NEDAP.

SMOOTH OPERATORS

As well as extorting money with promises of help that never materialize, other rescue scams include tricking borrowers into signing over part or all of their property. Often, the owners think they are signing a refinancing when they are actually signing a deed of transfer.

"In many cases people sign blank documents that are then doctored by adding text and a notary stamp to make them look like genuine contracts," said Pegah Kamrava of Bet Tzedek.

Kamrava is representing Teresa Martinez, 60, who said she was tricked out of her home by four men when she fell behind on her mortgage.

"They seemed like such decent young men so I trusted them," she said. "Now I feel stupid because they stole my home."

Martinez said she did not knowingly sign a transfer document, and paid $2,000 a month to the men, thinking she was still making her mortgage payments.

Randy Cornejo, listed as the owner of the home in court papers, said he bought the home from Martinez a year ago and rented it back to her. "I am the owner, and because she stopped paying rent we want to evict her," he told Reuters by telephone.

Bet Tzedek's Zimmerman said rescue scams prey on borrowers' fear and desperation when they end up in foreclosure.

"Property ownership is an integral part of the American dream," she said. "When home owners face losing that dream and someone says they can help, they jump at the chance."

The U.S. Department of Housing and Urban Development (HUD) has a list of certified counseling groups on its Web site (http://www.hud.gov) and experts say homeowners should accept help only from certified groups.

"If a group is not HUD certified, home owners should avoid it," said Ozell Brooklin of Acorn Housing in Atlanta. "The cash people hand over to crooks is money that could help them get a loan modification from their lender and save their home."

Rescue scam statistics are scarce. The U.S. Federal Bureau of Investigation includes rescue scams in overall fraud data. This year, the FBI says it expects 60,000 Suspicious Activity Reports related to mortgage fraud, up from 47,000 in 2007 and just 7,000 in 2003. The agency periodically announces it has filed charges in high-profile rescue fraud cases involving millions of dollars and hundreds of homes.

"We've had reports of rescue scams from almost every field office," said FBI spokesman Stephen Kodak. "This shows the ingenuity of criminals who can adapt to any economic environment."

The FBI has 150 agents devoted to mortgage fraud and has formed task forces with local law enforcement agencies in 32 U.S. states to help track rescue scams, he said.

But some officials argue more funding and public support are needed.

"Law enforcement agencies were already overworked and overwhelmed before this problem arose," said David Fleck, deputy district attorney for Los Angeles county. "The public at large sees violent crime as a greater threat than white collar crime, so rescue scams receive less attention."

"But fraud is just theft," Fleck said, "only instead of a gun you use a lie."

(Reporting by Nick Carey; Editing by Eddie Evans)

    Troubled homeowners fall prey to "rescue" scams, R, 11.4.2008, http://www.reuters.com/article/newsOne/idUSN1928370720080411

Confidence Falls to New Low

April 11, 2008
Filed at 3:20 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Americans' confidence in the economy fell to a new low, dragged down by worries about mounting job losses, record-high home foreclosures and zooming energy prices.

According to the RBC Cash Index, confidence dropped to a mark of 29.5 in April, down from 33.1 in March. The new reading was the worst since the index began in 2002. It marked the fourth month in a row where confidence has fallen to an all-time low.

''Consumers are very pessimistic,'' said Mark Vitner, economist at Wachovia. ''There are not a lot of happy campers out there.''

Over the past year, consumer confidence has deteriorated significantly. Worsening problems in housing, harder-to-get credit, financial turmoil on Wall Street and lofty energy prices have put people in a much more gloomy mind-set. Last April, confidence stood at 85.4. The index is based on results from the international polling firm Ipsos.

All the economy's problems are taking a toll on President Bush's approval ratings, too. The public's approval rating on his economic stewardship fell to a low of 27 percent, according to a separate Associated Press-Ipsos poll. Bush's overall job-approval rating dipped to 28 percent, also an all-time low, the poll said.

Many economists believe the country has tipped into its first recession since 2001. Federal Reserve Chairman Ben Bernanke for the first time acknowledged last week that a recession was possible. It was a rare public utterance of the ''r'' word by a Fed chief.

''Consumer sentiment is tracking at levels we think are consistent with a mild recession at this point,'' said Brian Bethune, economist at Global Insight.

A measure looking at consumer's feelings about current economic conditions slipped to a 54.6 in April, from 54.7 in March. The new reading was the lowest in six years of records.

Rising unemployment and job losses are making people more uneasy.

The government reported last week, that employers slashed 80,000 jobs in March, the most in five years and the third straight month where the nation's payrolls were cut. The unemployment rate jumped from 4.8 percent to 5.1 percent, the highest since the aftermath of the devastating Gulf Coast hurricanes.

Another factor blamed for eroding consumer confidence is high gasoline prices, which are socking people's wallets and pocketbooks. That's squeezing already strained budgets and leaving people with less money to spend on other things.

''Much of the angst we're seeing from consumers is `Gosh, I'm working harder and harder, and all I'm doing is paying for my basic necessities. I don't have anything left to have any fun,''' Vitner said.

Gasoline prices, which have set a string of records in recent weeks, climbed to a new record of $3.357 a gallon on Thursday, according to AAA and the Oil Price Information Service.

Anxiety also has grown as people wonder if there is any relief in sight for the troubled housing market. With the housing collapse, many people have watched their single-biggest asset -- their home -- drop in value. That has made them feel less wealthy and less inclined to spend.

Against the backdrop of all these concerns, another measure tracking individuals' sentiments about the economy and their own financial standing over the next six months fell deeper into negative territory. This gauge dropped to a negative 48.3 in April, down from a negative 41.6 in March. The new reading was the worst on record.

A measure on consumers feelings about employment conditions fell to 97 in April, from 99.2 in March. The new reading was the lowest since early October 2003. Another gauge of attitudes about investing, including comfort in making major purchases, declined to 56.4 in April, from 56.7 in March. The new figure was the lowest on records going back to 2002.

Economists keep close tabs on confidence barometers for clues about consumer spending, a major shaper of overall economic activity.

Cautious shoppers gave most retailers their most dismal March in 13 years, according to sales figures reported by major retailers on Thursday. J.C. Penney Co., Gap Inc., and Limited Brands Inc. were among the merchants hit by a sharp drop in sales.

The RBC consumer confidence index was based on the responses from 1,005 adults surveyed Monday through Wednesday about their attitudes on personal finance and the economy. Results of the survey had a margin of sampling error of plus or minus 3 percentage points. The overall confidence index is benchmarked to a reading of 100 in January 2002, when Ipsos started the survey.

Pointing to the overall confidence reading of 29.5 in April, T.J. Marta, a fixed-income strategist at RBC Capital Markets, said: ''What confidence? There is no confidence. It's like 1929.''

    Confidence Falls to New Low, NYT, 11.4.2008, http://www.nytimes.com/aponline/us/AP-Consumer-Confidence.html

The Face of a Prophet

April 11, 2008
The New York Times
By LOUISE STORY

George Soros will not go quietly.

At the age of 77, Mr. Soros, one the world’s most successful investors and richest men, leapt out of retirement last summer to safeguard his fortune and legacy. Alarmed by the unfolding crisis in the financial markets, he once again began trading for his giant hedge fund — and won big while so many others lost.

Mr. Soros has always been a controversial figure. But he is becoming more so with a new, dire forecast for the world economy. Last week he rushed out a book, his 10th, warning that the financial pain has only just begun.

“I consider this the biggest financial crisis of my lifetime,” Mr. Soros said during an interview Monday in his office overlooking Central Park. A “superbubble” that has been swelling for a quarter of a century is finally bursting, he said.

Mr. Soros, whose daring, controversial trades came to symbolize global capitalism in the 1990s, is now busy promoting his book, “The New Paradigm for Financial Markets,” which goes on sale next month.

And yet this is not the first time that Mr. Soros has prophesied doom. In 1998, he published a book predicting a global economic collapse that never came.

Mr. Soros thinks that this time he is right. Now in his eighth decade, he yearns to be remembered not only as a great trader but also as a great thinker. The market theory he has promoted for two decades and espoused most of his life — something he calls “reflexivity” — is still dismissed by many economists. The idea is that people’s biases and actions can affect the direction of the underlying economy, undermining the conventional theory that markets tend toward some sort of equilibrium.

Mr. Soros said all aspects of his life — finance, philanthropy, even politics — are driven by reflexivity, which has to do with the feedback loop between people’s understanding of reality and their own actions. Society as a whole could learn from his theory, he said. “To make a contribution to our understanding of reality would be my greatest accomplishment,” he said.

Mr. Soros has been worrying about the fragile state of the markets for years. But last summer, at a luncheon at his home in Southampton with 20 prominent financiers, he struck an unusually bearish note.

“The mood of the group was generally gloomy, but George said we were going into a serious recession,” said Byron Wien, the chief investment strategist of Pequot Capital, a hedge fund.

Mr. Soros was one of only two people there who predicted the American economy was headed for a recession, he said.

Shortly after that luncheon Mr. Soros began meeting with hedge fund managers like John Paulson, who was early to predict a crisis in the housing market. He interrogated his portfolio managers and external hedge funds that manage his fund’s money, and he took on new positions to hedge where they might have gone wrong. His last-minute strategies contributed to a 32 percent return — or roughly $4 billion for the year.

The more Mr. Soros learned about the crisis, the more certain he became that he should rebroadcast his theories. In the book, Mr. Soros, a fierce critic of the Bush administration, faults regulators for allowing the buildup of the housing and mortgage bubbles. He envisions a time, not so distant, when the dollar is no longer the world’s main currency and people will have a harder time borrowing money.

Mr. Soros hopes his theories will finally win the respect he craves. But, ever the trader, he hedges his bets. “I may well be proven wrong,” he said. “I would say that I’m the boy who cried wolf three times.”

Many of the people Mr. Soros wants to influence may view him with skepticism, in part because of how he made his fortune. In 1992, his fund famously bet against the British pound and helped force the British government to devalue the currency. Five years later, he bet — correctly — that Thailand would be forced to devalue its currency, the baht. The resulting bitterness toward him among Thais was such that Mr. Soros canceled a trip to the country in 2001, fearing for his safety.

Asked if it bothers him that people accuse him of causing economic pain, his blue eyes dart around the room. “Yes, it does, actually yes,” he said.

Asked if those people are right to blame him, he says, “Well no, not entirely.”

No single investor can move a currency, he said. “Markets move currencies, so what happened with the British pound would have happened whether I was born or not, so therefore I take no responsibility.”

Mr. Soros, came of age in Nazi-occupied Hungary and has for decades longed to write a masterpiece that might put him among thinkers like Hegel or Keynes, said Michael T. Kaufman, who wrote a book about Mr. Soros. “He spent years writing papers and letters to people, but everyone ignored him,” Mr. Kaufman said.

But when Mr. Soros became rich, people began listening. He also started giving large sums to charities, and in Eastern Europe, as the Soviet Union crumbled, he distributed copy machines to encourage free speech in his native Hungary. So generous was Mr. Soros with his money that “Sorosovat” became a new verb in Russian, loosely meaning to apply for a grant.

He continues to be one of the top givers to charities around the world, and has given more than $5 billion away through his foundations.

Yet even Mr. Soros acknowledges that many economists still slight his theories.

“I am known as a hedge fund manager and I am known as a philanthropist, and it’s very hard for, say, academics to accept that a hedge fund manager may actually have something to say about economics,” Mr. Soros said. “So that has been difficult for me to overcome.”

But Joseph E. Stiglitz, a professor at Columbia who won the Nobel for economics in 2001, said Mr. Soros might still meet success. “With a slightly different vocabulary these ideas, I think, are going to become more and more part of the center,” said Mr. Stiglitz, a longtime friend of Mr. Soros.

Mr. Soros’s firm, Soros Fund Management, has been through several turbulent years. Stanley Druckenmiller, his longtime No. 2, left in 2000, in part because he was tired of the constant media attention Mr. Soros attracted. (Mr. Soros credits Mr. Druckenmiller for the winning gamble on the British pound, saying he added the encouragement to bet more money on the trade.)

Several outside investors also left, and Mr. Soros overhauled the company as more of a wealth management tool for his own family and related charities. Mr. Soros said in 2000 that he no longer desired returns like the 30.5 percent his fund returned on average, after management fees, from 1969 to 2000.

In 2004, Mr. Soros tapped his oldest son, Robert, to become the chief investment officer, despite Robert’s reluctance.

At that time, Mr. Soros, was busy trying to turn public opinion against President Bush. He donated $27 million to anti-Bush organizations and traveled the country speaking out against the president. This time around, he is less involved. He endorsed Senator Barack Obama but kept his distance from the campaign trail.

Robert Soros, 44, who once claimed his father based his trades not on grand theories like reflexivity but rather on his back pain, never shared his father’s enthusiasm for the markets. “When you’re a billionaire’s son, you’re less hungry than when you’re a Hungarian immigrant,” one former Soros Fund Management executive said.

Even so, the Soros fund performed well under the younger Soros, and as recently as last June, it was up 10 percent for the year, according to a letter to investors. At the end of July, Robert stepped down from his head investment role, just before his father returned to trading. Robert and his brother Jonathan remain deputy co-chairmen, under their father, the chairman of the fund.

This week, Mr. Wien illustrated the knack of Mr. Soros for timing with an old story. In 1995, Mr. Soros asked Mr. Wien why he bothered going to work every day. Why not go to work only on days when there is something to do?

“I said, ‘George, one of the differences between you and me is you know when those days are, and I don’t,’” Mr. Wien said.

    The Face of a Prophet, NYT, 11.4.2008, http://www.nytimes.com/2008/04/11/business/11soros.html#

Senate Approves Housing Relief Bill

April 11, 2008
The New York Times
By DAVID M. HERSZENHORN

WASHINGTON — The Senate on Thursday moved to stabilize the battered housing market by approving a bill to provide tax breaks for home builders and other businesses, a $7,000 tax credit for buyers of foreclosed homes, $150 million for counseling borrowers and $4 billion for local governments to buy foreclosed properties.

The White House has expressed strong opposition to the bill, and Congressional Democrats say it does not provide enough direct assistance to Americans at risk of losing their homes. But lawmakers in both parties and the Bush administration expect some elements of the Senate bill to survive as part of a larger deal on housing legislation.

The Senate approved the bill by a vote of 84 to 12, with 35 Republicans joining the Democrats in favor — an overwhelming show of bipartisan consensus given the White House opposition to the measure. The three presidential candidates, who were campaigning, did not vote; neither did Senator Elizabeth Dole, Republican of North Carolina, whose brother died this week.

Senate Democrats said they were counting on improvements being made in the House, where Representative Barney Frank, Democrat of Massachusetts, is leading an effort to help as many as 1.5 million homeowners at risk of foreclosure by having the Federal Housing Administration insure up to $300 billion in refinanced mortgages.

The Senate majority leader, Harry Reid of Nevada, called the vote “just the beginning of a process” that he said “will continue in the House of Representatives.” He added, “I hope that when the process is complete, we will have a strengthened bipartisan bill that will do even more to help families, communities and our economy.”

Hoping to head off more aggressive legislation by Democrats, the Bush administration on Wednesday announced its own plan to help homeowners replace expensive adjustable-rate mortgages with more affordable 30-year loans insured by the government. Officials said the plan would help as many as 100,000 homeowners this year.

And in a sign of the growing consensus that more government action is needed, Senator John McCain, the Republican presidential candidate, announced his own plan on Thursday at a speech in Brooklyn. Mr. McCain said his plan would similarly help up to 400,000 homeowners refinance into more stable government-backed loans.

The Democratic presidential candidates, Senators Hillary Rodham Clinton of New York and Barack Obama of Illinois, both issued statements saying the Senate bill did not go far enough.

In the House, Mr. Frank has said his plan would help as many as 1.5 million homeowners. The Bush administration disputes that figure, and says that aiding that many borrowers would require loosening underwriting standards to a point where taxpayers would be at serious risk of having to cover the cost of what could be a large number of defaulted loans.

Some of the numbers given for the Bush administration’s plan are also being questioned. Officials say that a loan refinancing program, created by the president in August, called FHA Secure, has helped 140,000 owners refinance so far, and is on track to help 400,000 by year-end. With the new plan to loosen eligibility rules, another 100,000 will refinance, they say.

But some Democrats and advocacy groups say those numbers are exaggerated and only a small fraction of those being helped by the Bush administration were really in danger of foreclosure.

Despite the dispute over the numbers and the disagreement over whether additional assistance would be better handled through legislation or administrative changes to the existing FHA Secure program, some lawmakers predicted that Congress and the White House were on track toward a wider deal on help for homeowners.

“You are finding these things coming to a common ground,” said Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking Committee, who conceded that the Senate bill, which he wrote, fell far short of his goals.

The Senate bill, although unlikely to be enacted in its current form, would cost about $15 billion over 10 years.

The bill would provide $17.6 billion in tax breaks for struggling businesses, including home builders, in 2008 and 2009. The bill would also create a temporary property tax deduction for tax filers who currently do not itemize their deductions. That would cost $1.5 billion through 2009.

In the House, the Ways and Means Committee has advanced a rival bill that does not include the tax break for struggling business owners or the credit for purchases of foreclosed homes.

One provision in the Senate bill that also has support in the House and the White House would provide $10.9 billion in tax- exempt bonds for local housing agencies to refinance subprime loans.

Many Republicans said the Senate bill represented a positive step. “While this measure is a good start in stabilizing the current crisis, there is more to be done for the long term,” Senator Mel Martinez, Republican of Florida, said in a statement.

But some opponents denounced the bill. “This bill needlessly spends billions of dollars to bail out lenders, makes our tax code even more complex and will do little to nothing to stimulate our economy,” Senator Jim DeMint, Republican of South Carolina, said. “In fact, this bill could have the perverse effect of increasing the number of foreclosures and reduce home values for American families nationwide.”

    Senate Approves Housing Relief Bill, NYT, 11.4.2008, http://www.nytimes.com/2008/04/11/business/11housing.html

Op-Ed Contributor

The Fed’s Money Well Spent

April 11, 2008
The New York Times
By ALICE M. RIVLIN

Washington

ONE benefit of the Federal Reserve’s rescue of Bear Stearns is that public outrage has aroused the political system to action in mitigating the foreclosure crisis.

Never mind that the supposed conflict between Wall Street and Main Street is a false one — Main Street runs on credit and cannot prosper if the financial system is in shambles and credit dries up. Never mind that the supposed Fat Cat “bailout” was a disaster for Bear Stearns stockholders, and that the idea of a “moral hazard” risk — that other investment banks will be tempted to emulate Bear Stearns — is preposterous. Never mind that if markets head back up and the collateral can be sold at a profit, taxpayers may lose nothing.

In the end, the Fed’s action was not aimed at rescuing those who made bad decisions out of greed or stupidity, but at protecting the rest of the country — and indeed the world — from the possibly devastating consequences of a financial meltdown.

Nevertheless, the outrage is both understandable and useful. Public money has been put at risk to calm a storm on Wall Street while ordinary people are losing their homes. The public is crying, “What about us?” and politicians are listening, as they should.

Like the failure of a financial behemoth, spreading foreclosures engulf the innocent as well as the imprudent and unwise. To be sure, many homeowners were shortsighted and greedy. Like their Wall Street counterparts they borrowed too much and got caught when the music stopped. Like the Bear Stearns shareholders, they should take losses. But putting them out of their homes does not merely harm them and their children, it endangers whole neighborhoods and drags down the assets of their more prudent neighbors.

Congress and the Bush administration should move quickly — as they proved they could with the rapid passage of the stimulus package — to enact laws to ease the renegotiation of mortgages and keep homeowners who are able to pay the new charges in their homes. Public money will have to be put at risk, but it is worth it. The deals should be structured so that the taxpayer shares in the gains if markets recover and the properties or mortgages are later sold at a profit.

When the immediate crisis is past, however, we must turn to the difficult task of reducing the chances of a replay. It will not be easy to design regulations that do more good than harm, but at the very least all financial institutions that stand to benefit from Federal Reserve help in a crisis must be subject to regulatory scrutiny to make sure they are managing their risk prudently. There must be higher capital requirements and limits on excessive leverage. If the rules are reasonable, we should not weep if a few high fliers choose to move their operations to other countries with laxer rules. Our markets will be better off without them.

After that, we must take on the even harder job of sorting through the explosion of financial instruments that have proliferated in the boom and deciding which belong in our kit of tools and which should be relegated to the waste heap. If they genuinely spread risk and help move capital into more productive uses, they should stay. But some exotic derivatives seem mainly to reflect the efforts of traders to outsmart each other. Their opaqueness may entail more systemic risk than social value.

The folks who devise these exotica are talented enough to create something useful. We would all be better off if they were productively employed in the “real” economy — or pursued wealth in Las Vegas, where the risks the smartest gamblers pose to the house are carefully controlled.
 

Alice M. Rivlin, a former vice chairman of the Federal Reserve Board and director of the Office of Management and Budget in the Clinton administration, is a senior fellow in economic studies at the Brookings Institution.

    The Fed’s Money Well Spent, NYT, 11.4.2008, http://www.nytimes.com/2008/04/11/opinion/11rivlin.html

Retailers Post Sluggish Sales in March

April 10, 2008
Filed at 8:58 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Most retailers reported sluggish sales in March when consumers -- fretting about mounting economic problems -- limited their shopping to food and other essentials.

As the nation's merchants reported sales figures on Thursday, it was clear that shoppers remained focused on buying basics at discounters and wholesale clubs and snubbed mall-based chains for clothing and other discretionary purchases. The earliest Easter in 95 years also hurt sales; shoppers weren't in the mood to buy spring clothing in cold weather.

Wal-Mart Stores Inc. and Costco Wholesale Corp. were among the best performers. Wal-Mart raised its earnings outlook, noting that better inventory control helped to limit markdowns on merchandise.

But March proved to be another weak month for many others, including J.C. Penney Co., Gap Inc., and Limited Brands Inc. All of them reported sharp drops in sales.

''Discounters are going to continue to do well in this economy,'' said Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass. ''Anything that is discretionary is going to continue to be under pressure.''

According to a preliminary sales tally by Thomson Financial, 17 retailers missed sales expectations, while only six merchants beat estimates. The tally is based on same-store sales or sales at stores opened at least a year and are considered a key indicator of a retailer's health.

Analysts already had been bracing for a weak March because the early Easter. But retailers struggled with a collapse of confidence among shoppers, who face mounting financial problems -- soaring food and gas prices, limited credit and slumping home prices.

The big worry is that the job market -- which had helped to propel spending over the past few years -- is showing more signs of weakness. On Friday, the Labor Department reported a loss of 80,000 jobs, the most in five years. Meanwhile, the national unemployment rate rose to 5.1 percent from 4.8 percent.

While many economists believe that the country is in a recession, the Bush administration says that growth should revive this summer when 130 million households start spending their economic stimulus checks. Janet Hoffman, managing partner of the North American retail division of Accenture, and other analysts believe that any sales lift at stores will only be temporary, however.

''Consumers are looking for value and are willing to trade down,'' said Hoffman.

Wal-Mart Stores reported a 0.7 percent gain in same-store sales. That was slightly below the 1.0 percent estimate by analysts surveyed by Thomson Financial.

The nation's largest retailer said that food and consumables, and electronics such as video games and digital cameras sold well. But cold weather hurt apparel, except for basics like T-shirts. Home furnishings continued to be weak.

Wal-Mart raised its first-quarter earnings outlook because better inventory controls yielded fewer markdowns and reduced store theft.

A slew of other merchants' sales declines were larger than expected: Costco Wholesale, Limited Brands, Gap, even teen retailers like Pacific Sunwear of California Inc. and Wet Seal Inc.

Among department stores, J.C. Penney posted a larger-than-expected 12.3 percent sales decline. The department store retailer had warned late last month that same-store sales would be down at least 10 percent amid a souring economy.

Limited Brands reported an 8 percent drop in sales, larger than the 7.2 percent decline that analysts had expected. Gap reported an 18 percent drop in same-store sales; analysts had expected a 7.7 percent decline. At the company's Old Navy division, same-store sales were down 27 percent.

    Retailers Post Sluggish Sales in March, NYT, 10.4.2008, http://www.nytimes.com/aponline/business/AP-Retail-Sales.html?hp

U.S. Trade Deficit Grows Unexpectedly

April 10, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The gap between what Americans import and export unexpectedly widened in February as domestic demand appeared to increase for automobiles and capital goods.

The trade deficit grew 5.7 percent, to $62.3 billion, its highest reading since November and the second consecutive month of increases. The estimate for January was revised up to $59 billion from $58.2 billion, the Commerce Department said on Thursday.

The increase came as a surprise to economists who had expected the economic downturn to suppress domestic demand for foreign goods. Instead, import sales jumped 3.1 percent, the biggest gain in almost a year, to $213.7 billion from $206.4 billion in January.

Americans bought up more foreign motor vehicles, clothing, household appliances and industrial equipment.

The appetite for foreign goods even outpaced the first decline in oil imports in nearly a year. Foreign petroleum sales fell in February, though the figure will probably climb back in March, when the price of crude oil reached to a record high.

“The trend in import growth is slowing as domestic demand softens and we fully expect a sharp correction next month,” wrote Ian Shepherdson, a London-based economist at the forecasting firm High Frequency Economics.

Sales of exports increased 2 percent to $151.4 billion from $148.2 billion in January. Foreign demand for motor vehicles, agricultural products and heavy machinery all increased.

Export sales, which have advanced over the last year, were likely to bolster again as the dollar fell to new lows against other world currencies.

Thursday’s report may not bode well for the economy as a whole. With consumer spending on the home front falling, many economists — including those at the Federal Reserve — have said that demand from foreign customers has propped up the ailing American economy, keeping many businesses afloat even as the housing slump and a weakening job market dampen domestic demand.

If imports outpace exports, that means more money may be moving out of American businesses than coming in. But economists said the deficit would probably narrow in coming months.

“We expect a reversal of the numbers soon as households continue grappling with falling home prices, plunging payrolls and financial market turmoil,” wrote Dimitry Fleming, an economist at ING Bank, in a note to clients.

    U.S. Trade Deficit Grows Unexpectedly, NYT, 10.4.2008,http://www.nytimes.com/2008/04/10/business/worldbusiness/10cnd-trade.html?hp

Poor get poorer as recession threat looms: report

Wed Apr 9, 2008
4:26am EDT
Reuters
By Lisa Lambert

WASHINGTON (Reuters) - The gap between rich and poor in many states has broadened at a quickening pace since the last U.S. recession, which could make it difficult for low-income families to weather the current economic downturn, according to a report issued Wednesday.

Since the late 1990's average incomes have declined 2.5 percent for families on the bottom fifth of the country's economic ladder, while incomes have increased 9.1 percent for families on the top fifth, said the report from the liberal-leaning Center on Budget and Policy Priorities and Economic Policy Institute.

The result is that the average incomes of the top five percent of families are 12 times the average incomes of the bottom 20 percent.

"The report's bottom line is that since the late 1980's income gaps widened in 37 states and have not narrowed in any states," said Jared Bernstein, one of the report's authors. "In fact, we've found that the trend toward growing inequality has accelerated during this decade."

Meanwhile, the middle class has remained virtually stagnant, with average incomes growing by just 1.3 percent in nearly eight years, the report said.

The report drew from 20 years of U.S. Census Bureau data collected from 1987 through 2006 on post-federal tax changes in real incomes, and is one of the few to record income inequality on a state-by-state basis. It did not include capital gains and losses in its calculations.

The technology boom and economic expansion of the late 1990's put many lower-income families in better positions at the start of the 2001 economic downturn than they are in now, when many economists say a downturn has begun, Bernstein said.

Elizabeth McNichol, another author of the report, said wages grew before the 2001 recession, but they did not increase much during the past several years of recovery. In a conference call with reporters, she pointed to Connecticut, which has had the greatest increase in income inequality since the 1980's, according to the report.

In Connecticut, incomes of the wealthiest 20 percent are eight times those of the poorest 20 percent, according to the report. New York has the greatest disparity, with incomes of the top 20 percent 8.7 times the bottom ones, followed by Alabama, where the top are 8.5 times the bottom.

Only recently has Connecticut begun recovering from the downturn of six years ago, according to Douglas Hall, associate director of research for Connecticut Voices for Children, who participated in the call. By August 2007 the state gained enough jobs to make up for those lost in the last recession, he said, but now it is losing them again.

Even though the study did not include capital gains, Bernstein said the effects of booming wealth on Wall Street for most of this decade did contribute to the spread between incomes, showing up as higher salaries.

Some have criticized income inequality studies. Writing for the conservative Cato Institute last year, Alan Reynolds said tax law changes skew the numbers. For example, executives once took stock options that were taxed as capital gains but now take nonqualified stock options that are taxed as salaries.

Bernstein said that if the report had considered capital gains, the disparities would have likely been greater, as capital gains generally affect higher-income people.

(Reporting by Lisa Lambert, Editing by Chizu Nomiyama)

    Poor get poorer as recession threat looms: report, R, 9.4.2008, http://www.reuters.com/article/domesticNews/idUSN0838901420080409

4.15pm BST update

IMF says US crisis is 'largest financial shock since Great Depression'

Wednesday April 9 2008
Heather Stewart in Washington
Guardian.co.uk
This article was first published on guardian.co.uk on Wednesday April 09 2008.
It was last updated at 16:18 on April 09 2008.

America's mortgage crisis has spiralled into "the largest financial shock since the Great Depression" and there is now a one-in-four chance of a full-blown global recession over the next 12 months, the International Monetary Fund warned today.

The US is already sliding into what the IMF predicts will be a "mild recession" but there is mounting pessimism about the ability of the rest of the world to escape unscathed, the IMF said in its twice-yearly World Economic Outlook. Britain is particularly vulnerable, it warned, as it slashed its growth targets for both the US and the UK.

The report made it clear that there will be no early resolution to the global financial crisis.

"The financial shock that erupted in August 2007, as the US sub-prime mortgage market was derailed by the reversal of the housing boom, has spread quickly and unpredictably to inflict extensive damage on markets and institutions at the heart of the financial system," it said.

After warning earlier this week that the world's financial firms could end up shouldering $1 trillion (£500bn) worth of losses from the credit crunch, the IMF said it expects the US to achieve GDP growth of just 0.5% this year, and 0.6% in 2008, with the housing crash getting even worse.

Simon Johnson, the IMF's director of research, said later the key risk to the forecasts was the danger of a vicious circle emerging, as house prices continue to fall, dealing a fresh blow to the banks, and exacerbating the problems in the markets. "Sentiment in financial markets has improved in recent weeks since the Federal Reserve's strong actions with regard to investment banks. But we have seen how strains in markets can quickly become reinforcing, and the possibility of a negative spiral or 'financial decelerator' remains a possibility."

President George Bush has already signed off a $150bn tax rebate package to kick-start the economy, and the Federal Reserve has backed an emergency buyout of investment bank Bear Stearns, but the IMF said this may still not be enough: "Room may need to be found for some additional support for housing and financial markets."

In the UK, the chancellor has repeatedly insisted that the economy is "better-placed" to weather the storm, because of its flexible labour market and low unemployment, but the IMF calculated that the British housing market is overvalued by up to 30%, and could be destined for a damaging correction.

Alistair Darling is due to fly to Washington tomorrow to discuss the turmoil with fellow G7 finance ministers.

Mervyn King, governor of the Bank of England, will also be in Washington this weekend to discuss the ramifications of the credit crunch with central bankers from around the world.

    IMF says US crisis is 'largest financial shock since Great Depression', G, 9.4.2008, http://www.guardian.co.uk/business/2008/apr/09/useconomy.subprimecrisis

As credit turmoil grows, U.S. heads for recession: IMF

Wed Apr 9, 2008
12:19pm EDT
Reuters
By Lesley Wroughton

WASHINGTON (Reuters) - The U.S. economy will tip into recession this year and there is a 25 percent chance world growth will drop to 3 percent or less -- a level that would be considered recessionary, the International Monetary Fund said on Wednesday.

The IMF said the global expansion of the last several years was fast losing ground in the face of a major financial crisis brought on by a downturn in the U.S. housing sector that continues "full blast."

While the IMF's latest World Economic Outlook puts world growth at 3.7 percent this year, the projection marked the second time in four months the global watchdog cut its forecast.

In October, it had looked for growth of 4.8 percent, a forecast it had lowered to 4.1 percent in January to try to account for the world's fast-spreading credit woes.

The IMF sees only a bit of a pick-up next year, with growth reaching 3.8 percent, somewhat slower than that following the 2001 U.S. recession.

In the United States, growth in economic output will skid from a subpar 2.2 percent in 2007 to a bare-bones 0.5 percent this year and 0.6 percent in 2009, the fund said.

"The U.S. economy will tip into mild recession in 2008 as the result of mutually reinforcing housing and financial market cycles, with only a gradual recovery in 2009," it said.

The brunt of the crisis will be felt in the United States and Western Europe, the IMF said.

It cut its growth outlook for the euro zone to 1.4 percent this year, down from a January forecast of 1.6 percent and off sharply from last year's 2.6 percent expansion. In October, it had said it expected the euro zone to expand 2.1 percent.

For 2009, it expects euro-zone growth of just 1.2 percent.

The IMF cautioned that financial market strains would persist until there was greater clarity about the extent and distribution of losses on structured securities, and until banks rebuilt capital and strengthened their balance sheets.

The housing correction in the United States will remain a drag on demand and a source of uncertainty for financial markets, the fund said.

ABOVE-TREND GROWTH

In contrast, emerging and developing economies have so far been less affected by the financial market turbulence and their growth is set to remain above trend, led by China and India.

The IMF said, however, there were signs economic activity was starting to moderate in some emerging and developing countries.

It cautioned that these countries would not always remain insulated, especially if the U.S.-led downturn intensified, and said policy-makers should stand ready to respond.

Meanwhile, rising inflation in the developing world from higher food and energy prices, and overheating pressures as economic growth outstripped potential, were the biggest immediate challenges for policy-makers, the IMF said.

In Asia, robust inter-regional trade has helped to insulate the region from the slowdown in the West, although a sharper downturn could pose problems for export-dependent nations, the IMF said.

It said Japan and the emerging economies of Asia have limited direct exposure to U.S. subprime securities but would suffer spillover in the export sector if demand weakened.

The economic expansion in regional growth locomotive China is projected to moderate to 9.3 percent this year from 11.4 percent in 2007, while growth in India is expected to slow to 7.9 percent from 9.2 percent last year.

In Sub-Sahara Africa, economic growth is set to ease by a fraction to 6.6 percent this year from 6.8 percent in 2007, as it largely looks set to avoid spillover from the global credit crisis.

Growth in the region would be led by oil exporters, such as Nigeria and Angola, reflecting new production facilities coming on stream, the IMF said.

(Editing by Andrea Ricci)

    As credit turmoil grows, U.S. heads for recession: IMF, R, 9.4.2008, http://www.reuters.com/article/ousiv/idUSN0839856620080409

Bush and Democrats push ahead with housing plans

Wed Apr 9, 2008
12:03pm EDT
Reuters
By Patrick Rucker and Tabassum Zakaria

WASHINGTON (Reuters) - President George W. Bush proposed on Wednesday expanding a program to help homeowners meet mortgage payments while Democratic lawmakers pressed ahead with a broader plan, setting the stage for a political showdown over how best to aid the housing market.

Bush approved a plan that would insure mortgage loans for homeowners who may have missed payments, were facing the prospect of higher interest rates and whose homes had fallen in value. The White House said it would help about 500,000 borrowers by the end of this year.

The move comes as political pressure builds for more dramatic government intervention to prop up a housing market that has pushed the U.S. economy to the brink of recession, if not into one, threatening global growth.

Failing mortgage loans are at the root of the financial market turmoil that has cost banks some $200 billion in write-downs and choked off the flow of credit to companies and consumers around the world.

"This is not a silver bullet that will solve all the problems in housing, but it will help some additional people stay in their homes, and that's something the president wants to see," White House spokeswoman Dana Perino said.

Bush has steadfastly refused to commit public funds to bail out the housing sector. The U.S. Senate is expected to vote later on Wednesday on a bill, opposed by the White House, that would cost as much as $20 billion to provide tax breaks and other assistance to builders, companies and homeowners.

At issue is how to prevent a wave of foreclosures from driving millions of people out of their homes as rising interest rates and falling home values wipe out hundreds of billions of dollars in housing equity.

With households feeling poorer and coping with rising costs for basics such as food and fuel, consumer spending has faltered, cracking the foundation of the U.S. economy.

ENCOURAGING WRITE-DOWNS

Under Bush's plan, the Federal Housing Administration would underwrite loans that have sunk in value if the lender will first erase a share of the existing loan.

"We will permit and encourage lenders to voluntarily write down outstanding principal," FHA Director Brian Montgomery told the House of Representatives' Financial Services Committee.

The U.S. Federal Reserve has encouraged banks to consider writing down the value of loans when homes are worth less than the mortgage amount.

Fed Governor Randall Kroszner told the committee that home foreclosures in 2008 would top the 1.5 million seen in 2007. In January, some 24 percent of subprime adjustable rate mortgages were behind on payments, double the fraction that were delinquent a year earlier, he said.

Kroszner also said that given the scale of the country's housing woes, "it is in everyone's interest to develop prudent loan modification programs."

FHA's Montgomery stressed that the he did not want to put taxpayers on the hook for failing loans. Unlike a proposal by Democratic lawmakers, the plan outlined by Montgomery would not require a big cash infusion to get started.

"This new administrative change will ensure the integrity of the FHA insurance fund over the long term, protect the taxpayer and guarantee that FHA will be around to help struggling homeowners in the future," he said.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, backed the FHA plan, but noted that simply modifying troubled loans will not resolve the current U.S. housing crisis and a government backstop was needed.

"Loan modifications were never intended to be the sole solution to the problems in the mortgage market," she said at the hearing. "It is appropriate that policy-makers carefully consider additional tools."

Bair, who oversees the national deposit insurance fund, said speculators who helped fuel an overheated housing market should now help bail out troubled borrowers.
 

(Writing by Emily Kaiser; editing by Gary Crosse)

    Bush and Democrats push ahead with housing plans, R, 9.4.2008, http://www.reuters.com/article/politicsNews/idUSN0947277720080409

The Mortgage Bust Goes Global

April 6, 2008
The New York Times
By NELSON D. SCHWARTZ

Basel, Switzerland

NORMALLY, St. Jakob’s Hall here is home to soccer tournaments or the occasional hockey game. But on a sunny morning in February, the stadium offered a corporate face-off every bit as contentious as any athletic event. More than 6,000 shareholders of the Swiss banking giant UBS packed the house to vent their fury over tens of billions in losses on American subprime mortgages and what they saw as an insult to traditional Swiss values like prudence and thrift.

The target of their anger wasn’t just UBS’s chairman, Marcel Ospel, or any of the bank’s other top executives, who were arrayed under a giant screen near where goalies usually tend the net. Instead, much of their ire was aimed at the United States itself — specifically an addiction to high-octane risk-taking, easy credit and dubious financial assumptions that created the domestic mortgage mess in the first place.

“The American El Dorado has become a scene from a Western,” declared one middle-aged shareholder, Therese Klemenz. “UBS was the figurehead of Swiss business. As a good housewife, I know you shouldn’t put all your eggs in one basket. A bank is not a casino.”

Thomas Minder, a local shareholder activist, was even more outraged. “What happened here is a scandal,” he thundered. “You’re responsible for the biggest loss in the history of the Swiss economy. Put an end to the Americanization of the Swiss economy!” At that point, Mr. Minder charged the podium, only to be dragged away by security guards.

While the housing slump has come to dominate American presidential debates and has sent Wall Street into a tailspin, the consequences of millions of foreclosures across the United States are also being felt far overseas. Nowhere is that more true than in this serene land of snowy peaks, ice-cold lakes and staid banks long considered to be among the most cautious in the world.

Until now, that is. That’s because UBS — with $3.1 trillion in assets, Switzerland’s biggest bank — made an astonishingly large bet on risky mortgage securities. At one point, that wager amounted to $80 billion, a gambit the bank lost. UBS has already been forced to write down about $37 billion of that financial roll of the dice — more than Citigroup, more than Merrill Lynch, more than any other bank in the world.

Last week, after enduring months of fierce criticism, Mr. Ospel abruptly announced that he would step down as chairman later this month. Shares of UBS rallied, but that’s cold comfort to people like Mrs. Klemenz, who have watched the stock drop by half since last summer.

IN Switzerland, they say, if you want to be nice, speak Italian. If you want to be understood, speak French. And if you want to be heard, speak German.

Like much of the financial and political elite here, Mr. Ospel is Swiss-German, and he speaks fluent English and French. But his style is definitely Teutonic. When a shareholder at the Basel meeting insisted on speaking in Italian, one of Switzerland’s four official languages, Mr. Ospel cut him off.

“You can speak Italian if you want to, but I won’t understand,” he said.

Looking out at the huge crowd over a pair of half-rim glasses, Mr. Ospel, 58, never lost his poise. When a shareholder named Jakob Trump called for him and the rest of the board to resign, adding that “a normal worker would be sacked for this,” Mr. Ospel coolly responded, “Danke, Herr Trump.”

But during an interview on Friday at UBS’s neo-Classical headquarters in downtown Zurich, the steely composure Mr. Ospel brandished at the Basel meeting was gone. Sitting in a plain white conference room adorned with maps of the world and the United States, his hands trembled and his eyes were cast downwards.

“I’m the chairman of this firm and ultimately responsible for what has happened,” he said, taking a long drag on a cigarette. “But I have the highest respect and confidence for the leadership as it is now in charge.”

Mr. Ospel said he first became aware of the extent of the threat UBS was facing in early August — three months after its Dillon Read Capital Management hedge fund unit was shuttered after big trading losses. This was six weeks after the implosion of two highly leveraged Bear Stearns hedge funds kicked off the credit crisis for the rest of Wall Street.

“I remember when I came back from summer vacation, Rohner explained we had this gigantic exposure,” he recalled, referring to UBS’s chief executive, Marcel Rohner.

Like others at UBS interviewed for this article, Mr. Ospel said the bank’s failure stemmed from a fundamental misreading of the market for mortgage securities. But he also acknowledged that the losses showed that UBS’s vaunted risk-management system had broken down.

“The key issue is that the system operated within its limits, given the assumed quality and liquidity of the assets,” he said. “Clearly, there was a problem when you build such a concentrated exposure and it doesn’t appear on any of the appropriate radar screens.”

And he ruefully noted that until UBS’s disastrous foray into what turned out to be Wall Street’s riskiest market, the bank’s success in the United States was a source of satisfaction in Switzerland.

“People were proud that a Swiss firm had established such a significant footprint in the most competitive market on the globe,” he said. “So the greater the disappointment with what they have had to digest.”


DISAPPOINTMENT is widespread. “People now question UBS’s ability to manage risk and judge just what a conservative investment is,” says Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein & Company.

UBS bought mortgage-backed securities on Wall Street, rather than making loans directly to American home buyers with bad credit histories and no assets, but that’s a distinction lost on the Swiss public.

“A large part of the population thinks we did what Countrywide did,” says Mr. Rohner, the UBS chief, referring to Countrywide Financial, the troubled California company that is the largest American mortgage lender. “People think we gave subprime mortgages in the U.S. We did not.”

Maybe so, but even after the huge write-downs, UBS still has more than $30 billion in exposure to securities linked to the kind of risky mortgages that Countrywide and other lenders doled out when home prices were still rising. And there’s no guarantee that the red ink has been stanched.

“We still have positions, and I can’t foretell the future,” Mr. Rohner acknowledges. “The real issue is that if liquidity dries up, there is no way out.”

Even UBS’s wealth management arm, which is the most popular private bank in the world for wealthy people seeking safety and discretion and has $2.1 trillion in assets, has seen its global luster dimmed by the American losses.

Although UBS has replaced or forced out many executives, most members of the committee responsible for assessing potential risks remain in senior positions in Zurich. The incoming chairman of UBS, Peter Kurer, was on this committee, as were Marco Suter, the current chief financial officer, and Mr. Rohner.

These days, UBS executives are rushing around the globe reassuring clients that the bank doesn’t face the kind of threats that brought down Bear Stearns last month.

That’s especially true in the United States, where UBS employs roughly 30,000 people, slightly more than in Switzerland itself. In New York, UBS’s top investment bankers say they are scrambling to make sure competitors don’t try to pick off wary clients. UBS executives also say the bank has no plans to pull back from the American market, despite pressure from many Swiss shareholders to do so.

While Wall Street giants like Citigroup and Merrill Lynch have seen their chief executives depart amid billions in mortgage-related losses, UBS has been unusually open about its failure to foresee the subprime crisis and the inability of its sophisticated risk-controls to sound alarms.

Partly that’s because UBS is desperate to shore up its reputation, given scenes like the one here in Basel. But it’s also because its top leaders seem puzzled that their bank could lose this much, this fast.

“It’s been hard emotionally because we were the safe bank, the conservative bank, and we worked very hard on that,” says Daniel Coleman, an American who is a top equities executive with UBS’s investment bank in Stamford, Conn. “Mortgages were viewed as a safe, liquid asset, which turned out to be wrong.”

STRETCHING out over the length of two football fields, UBS’s open trading floor in Stamford is the largest of its kind in the world. Surrounded by 5,000 computer monitors and a sea of blinking lights, traders at one end of the floor appear as mere specks to their colleagues at the other end. Heating is unnecessary, because all the computers and bodies give off enough heat to warm the room even on the coldest days. The site has its own backup generators as insurance against blackouts.

Unlike other European financial heavyweights like Deutsche Bank or Barclays, which failed to establish a major presence on Wall Street over the past decade, UBS has been relatively successful on American shores. A creation of the 1998 megamerger of the Union Bank of Switzerland and the Swiss Bank Corporation, UBS went on to acquire the PaineWebber Group, a major American brokerage firm, in 2000.

After that, it continued to do well in the fiercely competitive realm of investment banking, and now it ranks not far behind American stalwarts like Goldman Sachs and Morgan Stanley. Although UBS has advised on megadeals like Procter & Gamble’s acquisition of Gillette, the Swiss giant still feels slighted.

“In investment banking, UBS doesn’t get its due,” says J. Richard Leaman III, the joint global head of investment banking at the firm. “If you asked who is in the top five, I’m not sure our name would come up for the uninformed.”

Yet, for all the strides UBS made in investment banking in the United States, over the last few years its executives began to feel like laggards in one area that was booming: the mortgage market.

They watched enviously as rivals like Bear Stearns and Merrill Lynch practically minted money in the mortgage frenzy. So, about three years ago, UBS jumped into the fray.

“They were late to the game,” says Jon Peace, a Lehman Brothers analyst in London. Still, UBS had other advantages, Mr. Peace says, like access to billions of dollars it could borrow at very low interest rates, thanks to its position as the bedrock of conservative Swiss banking.

In 2005, UBS started buying billions in mortgage-backed securities, profiting from the higher yields these bonds carried and trusting their AAA credit ratings, despite the risks inherent in the underlying mortgages.

At the same time, its Dillon Read unit was doubling up on the same bets. If all this weren’t enough, UBS’s fixed-income desk was also scooping up mortgages and repackaging them as securities that could be sold to other investors or simply added to the bank’s already-swelling inventory.

With important parts of the UBS empire gorging on mortgages, profits and revenues rose smartly, Mr. Peace says. But by the beginning of 2007, problems were cropping up as American subprime lenders like New Century filed for bankruptcy. With losses mounting, UBS moved to shut down Dillon Read in early May, making it Wall Street’s first casualty of toxic mortgage debt.

“We like to say we’re in the moving business, not the storage business,” says Robert Wolf, the president of UBS’s investment bank. “But we got away from that philosophy.”

UBS officials like Mr. Wolf now blame Dillon Read for adding to the magnitude of the disaster, but a former senior trader at Dillon Read says he warned bank managers in early 2007 that credit markets were on the verge of a meltdown.

“I first started selling in March but they thought we were crazy, that we were panicking,” recalls this trader, who insisted on anonymity because he was not authorized to publicly discuss UBS affairs.

In interviews, this trader, as well as several other former senior managers of UBS, said the company’s layered system of management committees compounded the problem. Before major decisions could be put into effect, the investment bank’s management committee needed to sign off. Then a special risk-monitoring team had to review it. Lastly, an entity known as the Group Executive Board bestowed the final seal of approval.

Or maybe not. In some instances, the chairman’s office in Zurich, made up of Mr. Ospel and two other senior Swiss executives, would also weigh in.

“UBS’s reputation was conservatism, and bureaucracy goes hand in hand with that,” Mr. Peace says. “Things were much more controlled out of Zurich at UBS.”

While bureaucracy offers a buffer against ill-considered investment and trading strategies, once those decisions are set in motion it can cause a bank to be less dexterous when markets turn in unforeseen and unpredictable directions. UBS is Exhibit A for both sides of that divide.

The bank’s measured, formal pace may have undermined UBS when it collided with rapidly shifting American capital markets. The senior trader from Dillon Read points to the ability of more nimble competitors like Lehman Brothers — and especially Goldman Sachs — to speedily reposition themselves; that agility helped them to avoid the worst of the fallout from the mortgage mess.

“No one got out unscathed,” he says. “But the committee process inhibited UBS from acting quickly.”

By the time UBS got around to unloading its hoard of subprime assets late last year, prices for those assets were already plunging. In some cases entire markets were freezing up, making further sales impossible. “If you compare UBS to other banks, UBS clearly held on to these positions until very late,” says Mr. Hoffmann-Becking, the Sanford C. Bernstein analyst.

For Swiss shareholders, however, something more than stunning losses is gnawing at them. They say the larger mystery is why UBS got involved with American-style investment banking in the first place, rather than sticking to its core strengths as a private money manager for the world’s wealthy and its traditional banking activities in its home market.

“Everyone should know that investment banking is dangerous,” says Roby Tschopp, managing director of Actares, a Swiss organization that represents shareholders and is one of Mr. Ospel’s loudest critics. “For everyone in Switzerland, UBS remained the big retail bank — reliable, quiet, ordinary. They didn’t know UBS is no longer what they had in mind.”

TWO months ago, Mr. Leaman, a straight-talking Pennsylvania native who has been with UBS for more than a decade, gathered several hundred of his investment bankers for a town-hall-style meeting in Manhattan.

“I put up a horrible headline on the screen and said: ‘This is what you are going to be looking at. This is what you’re going to be reading about. This is what you’re going to sell,’ ” he recalls.

His thoughts were prescient. When UBS announced a $13.7 billion write-down last fall, the bank received relatively little media attention in the United States. American banks were revealing their own titanic losses at the time, and UBS stayed beneath the radar. But last week, after announcing a $19 billion write-down, the bank landed on the front page.

Mr. Leaman says he has urged his bankers to be candid with customers about the write-downs, while assuring them that “we’re alive and well and very, very much in business.”

“If you write down $19 billion, you have to go out and you talk to your clients, quickly,” he adds. Mr. Leaman and his team scored one notable success recently when UBS was given a key role in the $18 billion initial public offering by Visa last month, the biggest I.P.O. in Wall Street history.

From the trading floor in Stamford, Mr. Coleman is making similar phone calls, and in some cases he is arranging conversations between Mr. Rohner, the C.E.O., and UBS’s trading partners and investors to reassure them.

“Our clients are staying with us,” Mr. Coleman says. “It could be a lot worse.”

Sticking with activities like trading and underwriting now, he argues, will ultimately pay off. He compares the current crisis to the economic downturn that ravaged overseas markets a decade ago. “We are the best I-bank in Asia today because we didn’t pull back in 1998,” he says.

UBS, meanwhile, says its private bank is thriving. Even though inflows of new cash have slowed during the subprime debacle, “the miracle of UBS is that we gather as much net new wealth every year as some private banks have as total assets under management,” says Marten S. Hoekstra, head of wealth management for the Americas. The bank’s total assets in the United States now equal $740 billion, up from $540 billion two years ago.

Late last year, there were rumors that UBS planned to sell the retail brokerage wing of its former Paine Webber unit, which employs more than 8,000 financial advisers. But Mr. Wolf and other UBS executives say that this business is not for sale.

Mr. Rohner adds that he is similarly committed to the American market, and he plays down the anger at home. “The anger wasn’t at America,” he says. “It was at UBS. We made some mistakes. Take it with a grain of salt; it’s not representative of broad Swiss opinion.”

As for any cultural difference between the American approach to capitalism and the Swiss one, he doesn’t buy it. “I think in terms of values and culture, the U.S. and Switzerland are close together,” he says. “When I’m in Cleveland, Ohio, it could be Switzerland. There is not much of a division.”

Perhaps. But some shareholders clearly see a divide, and at least one is calling for the bank to make an even more explicit division. In a letter last week, Luqman Arnold, an investor and former president of UBS, called on the company to split the troubled investment bank from UBS’s crown jewel, the wealth management business.

Mr. Ospel, in the interview on Friday, said that this would be a mistake: “We have reassessed the strategy over and over again and came to the conclusion that the integrated model makes sense.”

As Mr. Rohner did, Mr. Ospel also shrugged off the resentment now brewing in Switzerland over UBS’s headlong plunge into the subprime pool. “I don’t think it’s about these two countries,” he said. “America’s culture has always attracted interest and enthusiasm here.”

    The Mortgage Bust Goes Global, NYT, 6.4.2008, http://www.nytimes.com/2008/04/06/business/06ubs.html

A Plan to Prevent Foreclosures

April 6, 2008
The New York Times
By DAVID M. HERSZENHORN

A proposal under consideration in the House of Representatives would seek to prevent home foreclosures. Here is one example of how it might work.

Imagine a home bought in 2006 for $300,000, with 100 percent financing and interest-only payments at an adjustable rate of 5 percent.

The monthly payments started at $1,250. But by now, the interest rate has jumped to 8 percent and monthly payments to $2,000. The value of the home has dropped to $270,000. The borrower is falling behind in payments and cannot afford to sell or refinance.

Under the House proposal, the borrower would apply for a conventional 30-year mortgage, insured by the Federal Housing Administration, for 90 percent of the home’s value, or $243,000. The original lender would have to accept about $231,000 as final payment on the old mortgage, incurring a loss. About $12,000 would go into an F.H.A. insurance reserve.

Monthly payments on the new loan, at 6.5 percent interest, would be about $1,536. The borrower would also pay a small monthly fee into the F.H.A. insurance fund to help protect taxpayers against default.

The government would retain a lien on the property of at least 3 percent of the value of the new loan. If the homeowner sold, say, seven years later at a tidy profit, the government would get a little more than $7,000.

Some variants of the plan call for giving the original lender a lien similar to the government’s, so that it can recoup some of its loss if the house eventually sells at a profit.

    A Plan to Prevent Foreclosures, NYT, 6.4.2008, http://www.nytimes.com/2008/04/06/business/06hbox.html

Executive Pay: A Special Report

A Brighter Spotlight, Yet the Pay Rises
 

April 6, 2008
The New York Times
By CLAUDIA H. DEUTSCH

WASN’T 2008 supposed to be the year of shareholder victory on the executive compensation front?

After all, tighter disclosure rules kicked in last year, and — the theory went — once companies had to shine a spotlight on their compensation practices, they were bound to make them better. Politicians, never loath to acknowledge the national mood — particularly in an election year — held several hearings about excessive pay.

But signs of sweeping change remain few. Once again, many — perhaps most — companies filled their proxies with a blizzard of words and numbers that did more to obscure their processes than to illuminate them. And most irksome of all, true links between pay and performance remained scarce.

Shareholders were mad about excessive compensation last year, when the economy was booming. This year, governance experts say, they are livid. “They are furious about the dichotomy of experiences — their shares fall, yet C.E.O. pay still rises,” said Paul Hodgson, a senior research associate at the Corporate Library, a governance research group.

The compensation research firm Equilar recently compiled data about chief executive pay at 200 companies that filed their proxies by March 28 and had revenues of at least $6.5 billion. And the data illustrates Mr. Hodgson’s point. It shows that average compensation for chief executives who had held the job at least two years rose 5 percent in 2007, to $11.2 million (If new C.E.O.’s are counted, that number is $11.7 million). Even though performance-based bonuses were down last year, the value and prevalence of discretionary bonuses — ones not linked to performance — were up. A result is that C.E.O.’s who have held their jobs for two years received an average total bonus payout of $2.8 million, up 1.1 percent from 2006.

“We’re not against pay,” said Dennis Johnson, a senior portfolio manager who is responsible for corporate governance for Calpers, the California pension fund. “But we are certainly against pay for failure, or for just showing up.”

Certainly, some of the highest-paid chiefs — including Lawrence J. Ellison of Oracle, Alan G. Lafley of Procter & Gamble and Lloyd C. Blankfein of Goldman Sachs — presided over companies that did very well. But in other cases, it was hard to see a connection between high pay and savvy management.

Soaring oil prices, not stellar strategy, brought huge profits to many oil companies last year, yet Ray R. Irani, chief of Occidental Petroleum, saw his compensation rise 21 percent, to $33.6 million making him the sixth-highest-paid executive in the group of 200 in the survey.

Conversely, the aftermath of the subprime mortgage debacle wreaked havoc at Merrill Lynch, causing the ouster of E. Stanley O’Neal last fall. It is too soon to know whether John A. Thain, who now has the top spot, can restore Merrill’s former glory. But thanks in large part to a hefty sign-on bonus, he was the highest-paid executive in the survey, with a compensation package that totaled almost $83.8 million.

Then again, the financial services industry traditionally pays well. The heads of four financial companies — Mr. Thain, Mr. Blankfein, Kenneth I. Chenault of American Express and John J. Mack of Morgan Stanley — were among the 10 highest-paid chief executives in the survey.

Even when the credit crisis cost financial chiefs their jobs, it did not hurt their paychecks. Mr. O’Neal at Merrill and Charles Prince at Citigroup both walked away with fortunes.

Washington Mutual, meanwhile, decided that write-offs would not count when it calculated performance-based bonuses, a decision that one compensation expert referred to as calculating batting averages without counting strikes.

“Boards are just too willing to change the goal posts in bad times,” said Scott A. Fenn, managing director of policy for the proxy advisory firm Proxy Governance.

A result, said Charles M. Elson, a corporate governance expert at the University of Delaware, is that “we’re paying executives like successful entrepreneurs, without asking them to take entrepreneurial risks.”

THAT seemed particularly apparent among real estate companies that are coping with a housing downturn. Jeffrey Mezger, the new chief at KB Home, received a discretionary bonus of $6 million even though the company is suffering. Robert Toll, the chief at Toll Brothers, received no bonus in 2007 — but the company has rewritten the compensation plan so that he will probably get one this year even if home building does not recover.

“Directors have to look at C.E.O. pay in terms of return on investment, just like they judge any other dollar they allocate,” said Nell Minow, editor and co-founder of the Corporate Library. “They have to ask, ‘What are we getting back for this money?’ ”

In many cases, the answer would be “not much.” According to Equilar, the chiefs of the 10 largest financial services firms in the survey were awarded a combined total of $320 million last year, even though the firms reported mortgage-related losses that totaled $55 billion and that wiped out more than $200 billion in shareholder value.

Still, even the angriest shareholders acknowledge that some companies are trying to take inequities — and the mystique — out of their compensation plans. The chief executives of Morgan Stanley and Bear Stearns did forfeit their bonuses after the subprime mortgage debacle decimated company profits. And Morgan Stanley said it would introduce performance-related stock options.

At the 200 companies that Equilar studied this year, the average value of performance-based bonuses granted to chief executives who had been in their jobs for at least two years was $1.8 million, a drop of 2.5 percent from 2006. Moreover, only 73 percent of the chiefs got performance bonuses, down from 78.6 percent in 2006.

Equilar also said that 14.7 percent of the stock options and shares awarded to executives in the fourth quarter of 2007 had performance-based vesting criteria — a small percentage, but a big increase from 8.2 percent in the fourth quarter of 2006.

More companies adopted clawback provisions, in which executives are required to return bonuses or stock options that were based on faulty numbers. The Arkansas Best Corporation even established one for outside directors if any “misconduct” on their part ever contributed to the need to restate finances. (Wal-Mart Stores adopted a similar clause two years ago.)

And a handful of chief executives and directors led the charge against excessive pay themselves.

Four years ago, when David P. Steiner was promoted to chief of Waste Management, he took what he calls a “surgical look” at the compensation system. It rewarded executives, including the chief, for bringing in new customers and orders, even unprofitable ones. “It sent the wrong message, that we wanted growth for growth’s sake,” he said.

Gradually the board, at Mr. Steiner’s prodding, changed the formula. Last year, 75 percent of Mr. Steiner’s long-term incentive plan was tied to specific targets for earnings growth and return on invested capital. And for the first time, the plan included a clawback provision, saying he must return any payments if they were based on numbers that had to be restated.

And next year’s proxy will reflect even more changes. Mr. Steiner’s pay is now linked entirely to achieving those targets. And some perks he used to get — about $35,000 worth of items like car allowances and country club dues — are gone, though their value will be added to his base salary or bonus.

RiskMetrics just went public this year, and M. Ethan Berman, its chief executive, insisted on getting it right from the start. Last year, RiskMetrics bought Institutional Shareholder Services, the high-profile proxy watchdog organization, so Mr. Berman knew that, as he put it, “Ours will be one of the world’s most well-read proxies.” He also buys into the concept, he said, that an excessive pay package can indicate a board that is too beholden to top management.

Thus, his incentive compensation will be based on attaining a mix of financial growth and client and employee retention objectives that are clearly spelled out in the proxy. Mr. Berman said he already owns 10 to 15 percent of the company — “more than enough to align my interests with shareholders,” he said — so he receives no stock grants or options. And he does not have a severance package. “I get the same four weeks vacation as any other employee, and if I leave, I’ll get the same severance,” he said.

Some companies that have been castigated for compensation fiascos in the past are emerging in the best light now. In 2007, shareholders howled when they discovered that Robert L. Nardelli’s contract as chief of Home Depot enabled him to command a severance package totaling $210 million when he was ousted.

The Home Depot board did not make the same mistake when it wrote the contract for Frank Blake, Mr. Nardelli’s successor. “Frank Blake’s package is so tied to performance that it is almost the mirror image of Nardelli’s,” said Ms. Minow of the Corporate Library. “Home Depot went from the worst pay package imaginable to one that is close to exemplary.”

Still, shareholders say praiseworthy packages remain in the minority. And they have plenty of compensation issues they continue to attack.

A group of investors, led by the American Federation of State, County and Municipal Employees, is asking companies to limit or bar “gross-ups,” in which companies pay the taxes the C.E.O.’s incur from their pay packages.

The timing is not surprising. Many shareholders were aghast last year when Angelo R. Mozilo, who earned $100 million at Countrywide Financial in 2006, successfully argued that Countrywide should pay the taxes that were incurred that year when his wife accompanied him to business functions on the corporate jet.

And gross-ups certainly have not disappeared this year. R. Chad Dreier, the chief of Ryland Homes, earned almost $8.2 million last year. Only $1 million of his pay was salary, and a bit over $2 million was bonus. More than $4 million was gross-ups to cover taxes incurred by vesting of restricted stock that was granted in previous years.

The Corporate Library has just released data showing that 20 percent of chief executives received a tax gross-up on part of their income in 2006. The median gross-up amount was just $13,000, but the concept — that any corporate chief should receive tax assistance on top of multimillion-dollar payouts — stuck in shareholders’ craws.

“We’re putting this research out early enough so that shareholders can wave it at directors,” Mr. Hodgson said.

Shareholders are also concerned about pay packages that can encourage executives to sacrifice the future for a present-day payout. Mr. Hodgson points to Sprint Nextel as a prime example. In a recent filing to the Securities and Exchange Commission, the company said it had redesigned its compensation plans so that incentive pay for progress toward goals would kick in every quarter.

“If you put a carrot in front of a donkey’s nose, it simply chases that carrot,” Mr. Hodgson said. “Better you add the carrots to the feedbag, but you don’t let the donkey eat any of them until it’s accomplished what’s needed for long-term success.”

And a growing cadre of investors are asking that companies reward only superior performance — for example, if the company was more profitable than its peers. The United Brotherhood of Carpenters has filed pay-for-superior-performance proposals at 33 companies, including Best Buy, Honeywell International, WellPoint and Northern Trust, according to RiskMetrics records.

Disclosure — or lack thereof — remains a huge issue for shareholders.

“We don’t want to see boilerplate,” said Hye-Won Choi, head of governance for TIAA-Cref, which has made compensation the cornerstone of its governance campaign this year. (Last year it was majority voting for directors.) “We want to see how the compensation plan is integrated into the business plan and strategic goals and how it is tied to the performance of the individual and the company. And we want companies to clearly articulate targets for payout.”

So does the S.E.C. The agency has contacted 350 companies to insist that they specify performance targets and couch their disclosures in understandable English.

It has also revamped its own Web site, to make it the go-to spot for companies seeking guidance on plain-English disclosure.

“It’s our aim to break down all the legalese and the jargon, and the dense cover-your-assets boilerplate that reads more like the insurance policy it is than the helpful guide to investors that it’s meant to be,” Christopher Cox, the agency’s chairman, said in a speech last year.

But excess, incomprehensible verbiage was not the only problem with disclosure this year. Many companies — most citing a reluctance to disclose competitive information — couched the criteria by which they measured performance in the vaguest of terms. According to the Corporate Library, two-thirds of companies listed fuzzy performance targets — and of those, no more than 30 percent were really competitively sensitive.

“Sure, we understand if you don’t want competitors to know that your chief executive’s bonus is tied to opening 10 stores in Delaware,” said John Nestor, director of the S.E.C.’s office of public affairs. “But you could at least say the bonus is dependent on successfully expanding.”

Shareholders, for the most part, say they accept that companies cannot divulge sensitive information. But they do not accept that stock price appreciation or profit growth goals belong in that category.

“Companies are still failing to disclose the performance hurdles that trigger pay for performance, and that remains a hugely contentious issue for shareholders,” said Patrick McGurn, special counsel to the RiskMetrics Group, the new name for Institutional Shareholder Services.

Perhaps surprisingly, not all governance experts buy into the idea of forced transparency on targets. Some worry that if shareholders win on this issue, it might be a pyrrhic victory.

“We worry about unintended consequences,” said Rebecca K. Darr, a senior fellow at the Aspen Institute, which convenes forums at which executives and shareholders discuss governance issues. “If companies have to say how they measure individual performance, they might simply revert to easily quantifiable numbers like earnings per share, rather than complex long-term goals.”

In fact, some compensation consultants say the S.E.C. disclosure rules went too far. Pearl Meyer, a senior managing director at Steven Hall & Partners, suggests that executives who missed performance targets might still deserve hefty bonuses, if they managed to stem losses even as economic factors beyond their control — say, soaring oil prices or a housing slowdown — decimated their industry. But, she said, it would be hard to lay out a cogent formula for that. Thus, she concludes, making directors spell out the details of their compensation plans could force them toward rewarding conventional short-term performance.

OF course, some governance experts are suggesting the quintessentially simple fix: Have directors sit down with shareholders and ask what they really want to know.

“When it comes to disclosure, last year was a dud,” said Stephen M. Davis, project director at the Millstein Center for Corporate Governance and Performance at Yale. “So you’d think that, since the proxy statements are supposed to communicate to the investor community, the boards would ask shareholders what should or should not go into them.”

Pfizer, for one, seems to be doing just that. Shareholders were outraged last year when Hank McKinnell, the company’s former chief, walked away with nearly $200 million when he was ousted. So last October, the Pfizer directors invited representatives of large shareholder groups to sit down and air any governance issues that troubled them. About a third of the discussion revolved around compensation.

“They billed it as a listening session, but it was interactive and seemed productive,” said Ms. Choi at TIAA-Cref, who said one of her colleagues attended. But she quickly added: “Of course, we don’t yet know if it will result in any action.”

    A Brighter Spotlight, Yet the Pay Rises, NYT, 6.4.2008, http://www.nytimes.com/2008/04/06/business/06comp.html?hp

80,000 Jobs Cut in March; Unemployment Rate Rises

April 4, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The economy shed 80,000 jobs in March, the third consecutive month of rising unemployment, presenting a stark sign that the country may already be in a recession.

Sharp downturns in the manufacturing and construction sectors led the decline, the biggest in five years. The Labor Department also said employers cut far more jobs in January and February than originally estimated.

There were fewer jobs in March than there had been five months earlier. In the last 50 years, whenever there has been an employment downturn like the one of the last few months, a recession has followed.

The unemployment rate ticked up to 5.1 percent from 4.8 percent, its highest level since the aftermath of Hurricane Katrina in September 2005. More Americans looked for work than in February, when many simply took themselves out of the job market. But employment opportunities appeared sparse.

Stock markets on Wall Street opened flat, as investors hoped that the worst of the downturn was over.

Economists were less optimistic. The drop in payrolls was worse than feared: many analysts had expected a decline of 50,000 jobs and an unemployment rate of 5 percent.

“Three months in a row of payroll job losses and a sizable negative revision: these are clear signs that the job market is in recession,” said Jared Bernstein, an economist at the Economics Policy Institute. “I’m hard-pressed to imagine anyone who would raise doubt to that at this point.”

The employment report is considered the most important monthly indicator of the health of the economy. Many economists were already bracing for a poor report, and the chairman of the Federal Reserve, Ben S. Bernanke, told Congress earlier this week that the labor market would continue to soften.

The numbers suggest the Fed will extend its string of rate-cutting when it meets April 29. Investors expect central bankers to lower the benchmark interest rate by at least a quarter point, a move that can stimulate growth.

Wage increases continue to fall behind inflation, meaning many employees are actually earning less than a year earlier. Average hourly salaries ticked up 5 cents, or 0.3 percent, in March, and were running 3.6 percent higher than a year earlier. But consumer prices rose 4 percent over the same period.

In March, private payrolls dropped for a fourth month, as factories, home builders and retail outlets all slashed positions. The only increases came in education and government jobs, as well as the leisure and hospitality industries.

Employers cut 76,000 jobs in January and February, far more than originally estimated.

    80,000 Jobs Cut in March; Unemployment Rate Rises, NYT, 4.4.2008, http://www.nytimes.com/2008/04/04/business/04cnd-econ.html?hp

Investors Stalk the Wounded of Wall Street

April 4, 2008
The New York Times
By LOUISE STORY

Almost two centuries ago, as Napoleon marched on Waterloo, a scion of the Rothschilds banking dynasty is said to have declared: The time to buy is when blood is running in the streets.

Now, as red ink runs on Wall Street, the figurative heirs of the Rothschilds — bankers, traders, hedge fund gurus and takeover artists — are plotting to profit from today’s financial upheaval.

These market opportunists — vulture investors is the Wall Street term — have begun to swoop. They are buying up mortgages of hard-pressed homeowners, the bank loans of cash-short businesses, and companies that seem to be hurtling toward bankruptcy. And they are trying to buy them all on the cheap.

One Wall Street specialist in so-called distressed debt recently spent at least $450 million for assets of Thornburg Mortgage, the battered mortgage servicing company. Others are buying beaten-down corporate bonds and looking at car and credit card loans.

A former executive of the Countrywide Financial Corporation, one of the mortgage giants that fostered subprime lending, recently helped start a company — to buy mortgages. And executives of the Blackstone Group, those lords of the now faded buyout boom, just raised $10.9 billion from investors to scoop up real estate.

The vultures are betting, and betting big, that some people have thrown the good out with the bad, and that the prices of some investments have simply fallen too far.

But even many of the vultures warn that the worst is not over for the markets or the broader economy. The investors say that they are spotting deals that are good values and that their footsteps do not always track the broader economy.

Opportunity investing, as the trade is politely known, takes nerve: the best time to buy is when others panic or are forced to sell something they wish they could keep.

And the moment to buy is often clear only in hindsight. Even supposedly savvy traders, as well as cash-rich investors from the Middle East and Asia, have lost big in recent months by jumping into the markets too early. Among the most prominent is the billionaire investor Joseph Lewis, who lost a reported $1.19 billion when Bear Stearns collapsed last month. “The only time you really know you’ve reached the bottom is when you’re back on the other side and things are going back up,” said Wilbur L. Ross Jr., a dean of vulture investing, who made a fortune buying steel companies when no one else seemed to want them.

Such caution aside, his firm, W. L. Ross & Company, recently spent $2.6 billion for two mortgage servicers and a bond insurance company. He said he planned to buy more as hedge funds and other investors sell at bargain prices.

Some deep-pocketed investors are following his lead. Wealthy individuals, endowments and pension funds are giving the vultures billions of dollars to invest.

Last year, as the mortgage crisis erupted and then ripped through the credit markets, about $21 billion flowed into hedge funds that specialize in distressed investments — just over $1 out of every $10 flowed into those loosely regulated investment vehicles, according to Hedge Fund Research.

“There are a lot of dead carcasses on the road, and the vultures are out sniffing,” said Andy Kessler, a former hedge fund manager. “This is the cycle of Wall Street. When bubbles crash, you get the value guys who come in and say, ‘This thing is cheap.’ ”

To some, Wall Street looks like a big bargain basement. All kinds of financial assets are selling for a fraction of what they were only months ago. The average corporate loan, for example, fetches less than 90 cents on the dollar in the secondary, or resale, market. Some mortgage bonds sell for pennies on the dollar.

It is no surprise more hedge funds and private equity firms are getting into distressed investing given the outlook for the economy, said Abraham Gulkowitz, a portfolio manager at FrontPoint, the hedge fund business within Morgan Stanley.

“A lot of companies are under stress,” Mr. Gulkowitz said. “When you have more and more companies under stress, suddenly by force everyone becomes a distressed investor.”

Mr. Ross is already planning a reshaping of the mortgage industry. He said he would use his mortgage servicing companies — Option One and a unit of American Home Mortgage — to expand into mortgage origination and eventually to purchase loans. He predicts huge consolidation in the troubled bond reinsurance business, where he will play a role through Assured Guaranty. He paid $1 billion for a stake in Assured a few weeks ago.

Some longtime vulture investors, however, said they were waiting for prices to get even cheaper. “There aren’t many great bargains around,” said David A. Tepper, founder of Appaloosa Management, a hedge fund in New Jersey that is a major investor in the auto parts company Delphi.

When asked about mortgage assets, he said, “The fact that things are distressed or down doesn’t mean that they’re cheap or good buys.”

The outcome of several big investments last fall is still up in the air. For example, the Citadel Investment Group, a hedge fund known for buying distressed assets, purchased $3 billion of E*Trade’s asset-backed securities for $800 million, or 27 cents on the dollar, last November. Only time will tell if that trade, and Citadel’s 18 percent stake in E*Trade, pays off.

For now, many investors have a “buried optimism” about distressed assets, said Mark Patterson, chairman of MatlinPatterson Global Advisers, which bought substantial assets from Thornburg Mortgage. His firm made hundreds of millions of dollars purchasing distressed bonds from WorldCom during the last economic downturn.

Investors have fled some kinds of assets indiscriminately in recent months. Standard & Poor’s data shows that corporate bonds are selling for less than 90 cents on the dollars — across the board. In the 2002 downturn, particular bonds like those in telecommunications fell far more than the average bond. The broad flight this time leaves an opening for firms that can pick out the valuable ones, said Leon Wagner, chairman of GoldenTree Asset Management, an investment fund in New York.

“People know there will be money made out of this,” Mr. Wagner said, adding that “distressed” has become a buzzword on Wall Street.

Already in the private equity world, more distressed companies are under review. Stephen Presser, a partner at Monomoy Capital Partners, said a year ago he was seeing 15 to 20 midsize companies a month that were in trouble. Now, that figure is 30.

“There is an actual consumer spending slowdown that we can see almost throughout the companies,” Mr. Presser said. “The same companies have typically borrowed their way out of trouble in the past.”

Banks are also trying to sell the mortgage loans that they did not bundle into bonds and resell, said Stanford L. Kurland, the former president of Countrywide.

Mr. Kurland now runs a joint venture that will buy mortgages on the cheap and rework their terms. The venture is backed by the investment funds BlackRock Inc. and Highfields Capital Management.

Mr. Ross predicted that the debt troubles of ordinary Americans will spread far beyond mortgages. And on Wall Street, some hedge funds are selling good assets on the cheap.

Just last month, Mr. Ross spent $1 billion buying municipal bonds at a discount from a hedge fund that faced margin calls. The fund, which Mr. Ross declined to identify, had bet that municipal bonds would increase in price and Treasury bond prices would fall. The bet went wrong, and the fund had to sell — fast.

In swooped Mr. Ross.

    Investors Stalk the Wounded of Wall Street, NYT, 4.4.2008, http://www.nytimes.com/2008/04/04/business/04vultures.html?hp

Jobless Claims Hit Highest Level Since 2005

April 3, 2008
By REUTERS
Filed at 9:02 a.m. ET
The New York Times

WASHINGTON (Reuters) - The number of U.S. workers applying for unemployment benefits soared by 38,000 last week, posting the highest reading since September 2005 and reinforcing fears that the U.S. economy has stalled, government data on Thursday showed.

A Labor Department official said there were no special factors to explain the increase in initial claims to 407,000 in the week ended March 29, but he said seasonal adjustments to the data owing to the early timing of the Easter public holiday this year may have influenced the reading.

"Part of what is going on is seasonal adjustments and part of it is higher claims," said the Labor official.

U.S. government Treasury notes extended gains on the news, with investors betting this will encourage the U.S. Federal Reserve to cut interest rates further, while the dollar edged back from earlier highs and stock futures dropped.

"The trend is for rising unemployment. There's no doubt about it," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey. "I've been bearish for a long time and I don't think we have found a bottom."

Economists polled by Reuters had expected initial jobless claims to increase to 370,000 in the week ending March 29, compared with 369,000 the prior week, initially estimated at 366,000 claims.

The four-week moving average of new claims, a more reliable guide to underlying labor market trends because it smoothes out weekly data swings, also increased sharply. It rose to 374,500, which was the highest reading since October 2005.

Analysts fear a housing slump and credit crunch may have tipped the U.S. economy into recession and are scrutinizing the labor market for evidence of slackening jobs that could chill consumer spending.

Economists polled by Reuters had expected initial jobless claims to increase to 370,000 in the week ending March 29, compared with 369,000 the prior week, initially estimated at 366,000 claims.

The four-week moving average of new claims, a more reliable guide to underlying labor market trends because it smoothes out weekly data swings, also increased sharply. It rose to 374,500, which was the highest reading since October 2005.

Analysts fear a housing slump and credit crunch may have tipped the U.S. economy into recession and are scrutinizing the labor market for evidence of slackening jobs that could chill consumer spending.

In further evidence of soft labor conditions. the number of workers remaining on jobless benefits climbed 97,000 to 2.94 million in the week ending March 22, the most recent week these figures were available. This compared with forecasts for 2.87 million so-called continued claims.

It was the highest reading for continued claims since July 2004.

The weekly jobs data was released on the eve of the monthly payrolls report on Friday, but was collected in a week that falls after the survey period for the monthly update. Analysts are expecting the U.S. economy shed 60,000 jobs in March after losing 63,000 the month before.

Federal Reserve Chairman Ben Bernanke warned on Wednesday that unemployment would push up as the U.S. economy slowed in the first half of the year.

The Fed has slashed interest rates 3 percentage points since mid-September to shield the economy from the housing slump and investors think it will cut again at its next scheduled policy meeting, at the end of this month.
 

(Reporting by Alister Bull, editing by Joanne Morrison)

    Jobless Claims Hit Highest Level Since 2005, NYT, 3.4.2008, http://www.nytimes.com/reuters/business/business-usa-economy-jobless.html

Manhattan Apartment Prices Hit Record High

April 2, 2008
The New York Times
By CHRISTINE HAUGHNEY

While most of the nation plods through a housing slowdown, Manhattan is experiencing its highest prices in history.

The average price of a Manhattan apartment in the first three months of this year was $1.7 million, up 33.5 percent from the same period last year, according to the real estate appraisal firm Miller Samuel Inc., which processed the numbers for the brokerage firm Prudential Douglas Elliman.

But the record prices do not tell the entire story of Manhattan’s real estate. Although prices are rising, sales are slowing, and executives of the four largest brokerage firms in Manhattan said they see some trouble, though not disaster, ahead for Manhattan’s real estate.

The huge price increase reflects the sale of an unusually large number of very expensive apartments, which skewed the average. In this year’s first quarter, 71 apartments sold for more than $10 million, compared with 17 apartments in that range for all of 2007. This year’s first quarter also included the sale of dozens of apartments at the extremely high-priced 15 Central Park West and the Plaza Hotel.

A number of brokerage firms released data about the first quarter that generally showed the same trends. All showed that the median price of an apartment grew. According to Miller Samuel, it was up to $917,000 from $840,000, suggesting high prices for many types of apartments.

The median price for studios rose by 22 percent, to $490,000 from $401,000; and the median price for one-bedroom apartments grew by 12 percent, to $750,000 from $669,000, according to the Corcoran Group, a real estate brokerage firm.

The firms disagree, however, on the extent of the slowdown in sales in the first quarter. According to Prudential Douglas Elliman, the number of sales fell by 34 percent in the first quarter, to 2,282 apartments from 3,474 last year. Data analyzed by Brown Harris Stevens and Halstead Property showed a 1 percent drop in sales. Corcoran also said it saw a slight drop.

No one disputes the fact, however, that inventory is rising, and after a wave of bad news in the financial world, a crucial underpinning of New York’s economy, fewer buyers are signing contracts. “We’re starting to see a hesitancy in the marketplace,” said Diane M. Ramirez, the president of Halstead. “What I look at very carefully is the signed contracts, the deals that are coming to us right now. I’m starting to see a slowdown.”

So far, wealthy Wall Street executives and foreign buyers have stayed in the market, paying record prices in a range of buildings. The high average price of Manhattan apartments reflects the popularity of luxury condos. The average price of a co-op rose to $1.3 million in the first quarter of this year from $996,000 last year, and the average price of a condo rose to $1.9 million from $1.3 million during the same period, according to Halstead. Corcoran and Prudential Douglas Elliman reported similar figures.

The value of a co-op with four or more bedrooms rose an average of 86 percent this past quarter, to $12.9 million from $6.9 million the year before, according to Halstead.

The rising prices are not just concentrated among Thurston Howell III types who want to live near Central Park. Apartments in less expensive areas like Inwood, Harlem and Hudson Heights also saw price increases, according to Halstead’s data. The average price of a studio rose by 2 percent, one- and two- bedroom apartments by 9 percent and three-bedroom apartments by 57 percent, according to Halstead.

Gregory J. Heym, an economist who prepared the reports for Halstead and Brown Harris Stevens, said that in Harlem, prices rose in new condo projects like the one at 111 Central Park North. In Inwood and Hudson Heights, the prices of co-ops increased.

“In Inwood and Hudson Heights, that just shows you it’s a decent resale market,” he said.

Contrary to the trend in Manhattan, in Brooklyn, overall prices have started to drop. Median and average sale prices dropped by 2 percent in the first quarter of this year, according to data tracked by the Corcoran Group. Median prices in Brooklyn dipped to $549,000 from $560,000, according to the data. Pamela Liebman, president of the Corcoran Group, said this pattern was typical of any slowdown. “When buyers become more cautious, the first markets to feel it are those that have been considered to be emerging neighborhoods,” Ms. Liebman said.

All five boroughs are also facing an escalating number of foreclosures. The number jumped by 65.7 percent, to 918 foreclosures in the first quarter of this year, compared with 554 during the same time last year, according to PropertyShark.com, a real estate data company based in Brooklyn.

The numbers make up a small percentage of New York City’s three million households, according to PropertyShark.com. The foreclosures are concentrated in Queens neighborhoods like Jamaica and Howard Beach, and Staten Island’s Mid-Island and North Island.

Brokers are not as optimistic, however, about the next few quarters in Manhattan. Sales in the first quarter were strong in part because nearly a third of the apartments that closed were for condos that buyers signed contracts for at least a year ago, according to data tracked by Brown Harris Stevens and Halstead.

Now buyers have more choices, with an inventory of 6,194 apartments compared with 5,923 at this time last year, according to Prudential Douglas Elliman. The brokerage firms reported that the number of buyers who went to contract in the first quarter was far lower compared with buyers last year.

Hall F. Willkie, the president of Brown Harris Stevens, said that in the first quarter, the number of contracts signed in Manhattan fell by 21 percent even though the average price rose by 3 percent.

Ms. Liebman said she had fielded calls from several Bear Stearns executives wanting to sell their apartments in the wake of the buyout of their firm. She said that a couple of Bear Stearns executives put their homes on the market.

“Wall Street’s pain is definitely real,” she said. “We will see less transactions, but stable prices.”

But while the brokerage firms say prices may eventually decline, they do not expect Manhattan’s real estate market to suffer as much as the rest of the nation’s.

“I don’t think you’re going to see the next quarter being the end of the world,” said Dottie Herman, the president of Prudential Douglas Elliman. “You’re going to see a market that’s a lot more conservative, and things are going to be on the market longer.”

    Manhattan Apartment Prices Hit Record High, NYT, 2.4.2008, http://www.nytimes.com/2008/04/02/nyregion/02prices.html

Factory Orders Are the Latest Sign of a Slowdown

April 2, 2008
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) — Orders to American factories fell for a second consecutive month, a worse-than-expected performance that reinforced worries that the risk of recession is rising.

The Commerce Department reported Wednesday that factory orders dropped 1.3 percent in February, about double the downturn that economists had been expecting. Orders had fallen an even bigger 2.3 percent in January, the largest decline in five months.

The falloff in demand was widespread, with steep declines in orders for motor vehicles, various types of heavy machinery and demand for iron and steel.

Many economists believe a prolonged housing slowdown and a tight credit market have already pushed the country into a recession. The Federal Reserve chairman Ben Bernanke, testifying before the Joint Economic Committee on Wednesday, said that the economy could shrink over the first half of this year, his most pessimistic assessment to date.

“It now appears likely that gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,” Mr. Bernanke told lawmakers. Under one rule, six consecutive months of declining G.D.P. would constitute a recession.

The report on factory orders showed demand falling by 1.1 percent for durable goods, items expected to last at least three years, while orders for non-durable goods, products such as oil and chemicals, fell by 1.5 percent.

The weakness in manufacturing occurred even though orders for commercial airplanes rose 5.1 percent in February, rebounding from a big decline in January. Orders for motor vehicles fell by 2 percent in February after no gain in January. Automakers are struggling with weak demand in the face of soaring gasoline prices.

Overall, orders for transportation products posted a 1.8 percent rise in February as the strength in commercial and defense aircraft orders as well as higher demand for ships and boats offset the drop in motor vehicles.

Orders for heavy machinery plunged by 12.3 percent in February, the biggest decline since January 2004, while orders for iron and steel fell by 2.3 percent.

    Factory Orders Are the Latest Sign of a Slowdown, NYT, 2.4.2008, http://www.nytimes.com/2008/04/02/business/apecon-web.html

Op-Ed Contributors

Tighten Your Belt,

Strengthen Your Mind

April 2, 2008
The New York Times
By SANDRA AAMODT
and SAM WANG

DECLINING house prices, rising job layoffs, skyrocketing oil costs and a major credit crunch have brought consumer confidence to its lowest point in five years. With a relatively long recession looking increasingly likely, many American families may be planning to tighten their belts.

Interestingly, restraining our consumer spending, in the short term, may cause us to actually loosen the belts around our waists. What’s the connection? The brain has a limited capacity for self-regulation, so exerting willpower in one area often leads to backsliding in others. The good news, however, is that practice increases willpower capacity, so that in the long run, buying less now may improve our ability to achieve future goals — like losing those 10 pounds we gained when we weren’t out shopping.

The brain’s store of willpower is depleted when people control their thoughts, feelings or impulses, or when they modify their behavior in pursuit of goals. Psychologist Roy Baumeister and others have found that people who successfully accomplish one task requiring self-control are less persistent on a second, seemingly unrelated task.

In one pioneering study, some people were asked to eat radishes while others received freshly baked chocolate chip cookies before trying to solve an impossible puzzle. The radish-eaters abandoned the puzzle in eight minutes on average, working less than half as long as people who got cookies or those who were excused from eating radishes. Similarly, people who were asked to circle every “e” on a page of text then showed less persistence in watching a video of an unchanging table and wall.

Other activities that deplete willpower include resisting food or drink, suppressing emotional responses, restraining aggressive or sexual impulses, taking exams and trying to impress someone. Task persistence is also reduced when people are stressed or tired from exertion or lack of sleep.

What limits willpower? Some have suggested that it is blood sugar, which brain cells use as their main energy source and cannot do without for even a few minutes. Most cognitive functions are unaffected by minor blood sugar fluctuations over the course of a day, but planning and self-control are sensitive to such small changes. Exerting self-control lowers blood sugar, which reduces the capacity for further self-control. People who drink a glass of lemonade between completing one task requiring self-control and beginning a second one perform equally well on both tasks, while people who drink sugarless diet lemonade make more errors on the second task than on the first. Foods that persistently elevate blood sugar, like those containing protein or complex carbohydrates, might enhance willpower for longer periods.

In the short term, you should spend your limited willpower budget wisely. For example, if you do not want to drink too much at a party, then on the way to the festivities, you should not deplete your willpower by window shopping for items you cannot afford. Taking an alternative route to avoid passing the store would be a better strategy.

On the other hand, if you need to study for a big exam, it might be smart to let the housecleaning slide to conserve your willpower for the more important job. Similarly, it can be counterproductive to work toward multiple goals at the same time if your willpower cannot cover all the efforts that are required. Concentrating your effort on one or at most a few goals at a time increases the odds of success.

Focusing on success is important because willpower can grow in the long term. Like a muscle, willpower seems to become stronger with use. The idea of exercising willpower is seen in military boot camp, where recruits are trained to overcome one challenge after another.

In psychological studies, even something as simple as using your nondominant hand to brush your teeth for two weeks can increase willpower capacity. People who stick to an exercise program for two months report reducing their impulsive spending, junk food intake, alcohol use and smoking. They also study more, watch less television and do more housework. Other forms of willpower training, like money-management classes, work as well.

No one knows why willpower can grow with practice but it must reflect some biological change in the brain. Perhaps neurons in the frontal cortex, which is responsible for planning behavior, or in the anterior cingulate cortex, which is associated with cognitive control, use blood sugar more efficiently after repeated challenges. Or maybe one of the chemical messengers that neurons use to communicate with one another is produced in larger quantities after it has been used up repeatedly, thereby improving the brain’s willpower capacity.

Whatever the explanation, consistently doing any activity that requires self-control seems to increase willpower — and the ability to resist impulses and delay gratification is highly associated with success in life.

Sandra Aamodt, the editor in chief of Nature Neuroscience, and Sam Wang, an associate professor of molecular biology and neuroscience at Princeton, are the authors of “Welcome to Your Brain: Why You Lose Your Car Keys but Never Forget How to Drive and Other Puzzles of Everyday Life.”

    Tighten Your Belt, Strengthen Your Mind, NYT, 2.4.2008, http://www.nytimes.com/2008/04/02/opinion/02aamodt.html

Bernanke Offers Bleaker View on U.S. Economy

April 2, 2008
The New York Times
By MICHAEL M. GRYNBAUM

Ben S. Bernanke, the chairman of the Federal Reserve, presented his bleakest assessment yet of the economy on Wednesday morning, warning a Congressional committee that economic growth was likely to stagnate — and perhaps even contract — over the first half of the year.

In his first public remarks since the Fed orchestrated an unprecedented bailout of the brokerage firm Bear Stearns, Mr. Bernanke defended the central bank’s actions against accusations of “moral hazard” and acknowledged considerable problems in the broader economy.

He also said the Fed’s steps to restore confidence in the credit markets had “helped stabilize the situation somewhat” and would probably stimulate an economic recovery after the summer. But he warned that the current turbulence made the economic outlook difficult to predict.

“The uncertainty attending this forecast is quite high and the risks remain to the downside,” he said, in remarks for delivery Wednesday morning to the Joint Economic Committee.

Over all, Mr. Bernanke said, “it now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly.”

But for the first time in months, the chairman omitted any language suggesting the Fed was poised to extend its string of sharp interest rates cuts. He said inflation remained a serious concern, which could reduce the Fed’s flexibility to lower rates.

“We expect inflation to moderate in coming quarters,” he said, but added, “Uncertainly about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully in the months ahead.”

In his testimony, Mr. Bernanke presented a laundry list of coming economic woes. He said he expected the unemployment rate to rise, payrolls to shrink and home construction to fall.

And even after weeks of efforts to shore up confidence in the credit markets, the chairman acknowledged that banks and other financial institutions remained hesitant to lend, which was causing problems for the broader economy.

“Financial markets remain under considerable stress,” Mr. Bernanke said. “The capacity and willingness of some large institutions to extend new credit remains limited.”

He cited strains in a range of credit markets, including those for corporate debt, municipal bonds, student loans and government-backed mortgages, but added that he was “confident in our economy’s long-term prospects.”

At Wednesday’s hearings, lawmakers peppered Mr. Bernanke with questions about the legal and regulatory implications of the Bear Stearns bailout. In his testimony, the chairman defended the Fed’s actions against accusations of “moral hazard,” which some critics had invoked in calling for the bank to suffer the consequences for its bad bets on securities linked to subprime mortgages.

“We did not bail out Bear Stearns,” Mr. Bernanke said, during the question-and-answer session following his testimony. “Bear Stearns shareholders took a very significant loss. An 85-year-old company lost its independence and became acquired by another firm. Many Bear Stearns employees, as you know, are concerned about their jobs.”

He said the consequences of allowing Bear to collapse would have led to broad troubles for the credit markets and economic confidence.

“The damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain,” Mr. Bernanke said. Later, he added, “We did what we did because we felt it was necessary to sustain the viability of the American financial system.”

The chairman said the Fed was not informed of the severity of Bear’s capital shortage until 24 hours before its near-collapse. BlackRock, the investment advisory firm, was hired to evaluate Bear’s assets for an unspecified fee, the chairman said. According to Mr. Bernanke, BlackRock said the bank’s assets could be sold off at full value if done “on a measured basis.”

Mr. Bernanke also stopped short of endorsing a plan proposed by the Bush administration to overhaul the nation’s financial regulatory infrastructure.

“The Treasury plan is a very interesting and useful first step,” he said. “I think we all agree there is going to be quite a bit of discussion and analysis before we are ready to do major changes in our regulatory structure.”

    Bernanke Offers Bleaker View on U.S. Economy, NYT, 2.4.2008, http://www.nytimes.com/2008/04/02/business/02cnd-bernanke.html?hp

Gold Plunges on Wall Street Rally

April 1, 2008
Filed at 1:40 p.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- Gold prices plunged Tuesday, tumbling below $900 as investors shed hard assets and sank money into stocks on hopes that the U.S. economy may be emerging from a debilitating credit crisis.

Other precious metals also fell sharply, with platinum plummeting more than $100 and silver and copper also trading lower.

The steep losses came as Wall Street staged a big rally to start the second quarter, signaling new optimism that the credit crisis that has roiled global markets and slowed the U.S. economy may finally be easing. The Dow Jones Industrials jumped more than 300 points.

''There's a perception that the credit freeze may finally be thawing and that has hedge funds leaving the commodities complex and buying equities,'' said Jon Nadler, analyst with Kitco Bullion Dealers in Montreal.

Gold for June delivery plunged $30.80 to $890.70 an ounce on the New York Mercantile Exchange, after earlier falling as low as $876.30 -- its lowest level in nine weeks.

Gold has fallen 5 percent in the last month and is down more than $100 from its record high of $1,038.60, reached March 17. The metal has sank as the dollar has steadied against the euro and crude oil prices have eased, diminishing gold's appeal as an inflationary safe haven. The dollar ticked higher Tuesday against the euro, which bought $1.5610 in afternoon trading.

Analysts say gold could sink lower as more large funds pull positions out of gold and buy assets that offer higher returns.

''We think the risk of further de-leveraging (of gold) is too high and even if physical demand remains strong, it will not prevent gold from selling off,'' John Reade, analyst with UBS Investment Bank in London, said in a note.

Other precious metals also fell sharply Tuesday. Silver for May delivery lost 40 cents to $16.910 an ounce on the Nymex, after earlier falling to a nine-week low of $16.30 an ounce.

Platinum for July delivery dropped $113.30 to $1,930.10 an ounce on the Nymex, after earlier falling as low as $1,887. Nymex copper, meanwhile, slipped 3 cents to $3.801 a pound.

In agriculture markets, wheat prices fell further a day after the U.S. Department of Agriculture predicted farmers will increase the acreage dedicated to the crop.

Wheat for May delivery lost 16 cents to $9.13 a bushel on the Chicago Board of Trade, after earlier falling as low as $8.99 a bushel.

Other agriculture futures rose. Corn for May delivery climbed 17 cents to fetch $5.8425 a bushel on the CBOT, while May soybeans added 5.75 cents to $12.03 a bushel.

In energy futures, crude oil gyrated Tuesday, briefly falling below the $100 level before technical buy orders kicked in and pushed prices slightly above break-even.

Light, sweet crude for May delivery gained 82 cents to $102.40 a barrel on the Nymex, after earlier falling to $99.55.

Other energy futures also rose. May gasoline futures added 4.14 cents to $2.6684 a gallon on the Nymex, while May heating oil futures rose 1.68 cents to $2.9229 a gallon.

    Gold Plunges on Wall Street Rally, NYT, 1.4.2008, http://www.nytimes.com/aponline/business/AP-Commodities-Review.html

Doubts Greet Treasury Plan Regulation

April 1, 2008
The New York Times
By STEPHEN LABATON

WASHINGTON — As Treasury Secretary Henry M. Paulson Jr. laid out an ambitious plan to overhaul the regulatory apparatus that oversees the nation’s financial system on Monday, lawmakers and lobbyists from an array of industries opposed to the plan predicted that most of it would be dead on arrival.

While the plan promotes a long-term goal of reducing an alphabet soup of regulatory agencies, in the shorter run it may actually do the opposite. One of the blueprint’s few short-term goals is the creation of a mortgage commission that would set new minimum standards for mortgage brokers and otherwise unregulated financial institutions that sell mortgages. The new commission could be formed only by Congress, and some lawmakers predicted it might be adopted this year.

Officials said that, as part of the Paulson plan, President Bush was preparing to issue an executive order soon to expand the membership and reach of an interagency committee called the President’s Working Group on Financial Markets. The group was created after the stock market plummeted in 1987. The group is also expected to consider ways to broaden the authority of the Federal Reserve to lend money to nonbanks as needs arise.

The Working Group, headed by the Treasury Secretary, consists of the top officials from the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Under the proposal, it would be enlarged to include the heads of the three other agencies, including one, the Office of Thrift Supervision, that the plan proposes eventually to abolish.

But other than those relatively modest provisions, most parts of the plan are not likely to be adopted any time soon, if at all. The calendar of a Congressional election year seldom favors complex pieces of legislation.

Key lawmakers have signaled that they want to take their time in weighing ideas for broad changes. They are already hearing from state regulators and consumer groups who say that the proposal would do little to curb risky behavior by financial institutions, and from industry groups that say it goes too far.

The plan, produced by a lame-duck Republican administration facing a Democratic Congress, would drastically expand the authority of the Federal Reserve to oversee financial markets. It would consolidate federal agencies that regulate the nation’s securities and commodities futures markets. And it would allow insurance companies, which have long been regulated by the states, to choose instead to have a national charter and be supervised by a new federal agency under the Treasury Department.

Mr. Paulson said on Monday that he did not expect the bulk of the plan to be adopted during the current administration — and he said Congress should not even consider adopting most of it until after the current housing and credit crisis ended.

“Some may view these recommendations as a response to the circumstances of the day,” Mr. Paulson said. “That is not how they are intended.”

Senior lawmakers, while praising the administration for raising important points for further discussion, said the odds were long for a major overhaul before Congress all but shuts down for the elections in the fall.

“Since this is opening day in baseball, I might as well make a baseball metaphor,” said Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate Banking Committee. “This is a wild pitch. It is not even close to the strike zone.”

Mr. Dodd and Senator Harry Reid of Nevada, the majority leader, said in a telephone conference call with reporters that overhauling the regulatory structure was not a high priority. Instead, they said, they were hoping to quickly move legislation that would help homeowners facing higher mortgage rates and foreclosure.

The Democrats’ bill would provide an additional $200 million for counseling for homeowners in danger of foreclosure, would authorize $10 billion in bonding authority for housing finance agencies to refinance subprime loans, and provide $4 billion for local governments to purchase foreclosed properties.

The bill would also change the bankruptcy laws to allow judges to modify mortgages on primary homes — a provision opposed by Republicans who say it will only increase mortgage rates.

“In time, we will hold hearings on reorganizing the regulatory structure,” Mr. Dodd said.

In a statement later in the day, Mr. Dodd indicated that he had reservations about the plan’s proposal to expand the authority of the Federal Reserve.

“On the one hand, it would allow the Fed to examine all financial companies — not just banks — to be sure they are not posing a risk to the overall financial system,” Mr. Dodd said. “On the other hand, it fails to realize that the Fed helped create this crisis by ignoring the red flags as far back as five years ago. It does not make sense to give a bigger shovel to the very people who helped dig us into this hole.”

In a speech at the Treasury Department, Mr. Paulson disputed critics who have complained either that the plan was deregulatory or would impose greater regulation.

“Those who want to quickly label the blueprint as advocating ‘more’ or ‘less’ regulation are oversimplifying this critical and inevitable debate,” he said. “The blueprint is about structure and responsibilities — not the regulations each entity would write. The benefit of the structure we outline is the accountability that stems from having one agency responsible for each regulatory objective. Few, if any, will defend our current Balkanized system as optimal.”

But in fact, the fine print of the 218-page plan features both regulatory and deregulatory elements. The creation of a new mortgage origination commission, for instance, was expected to result in higher nationwide standards to encourage mortgage brokers not to promote unsuitable or abusive loans.

On the other hand, other elements of the plan are clearly deregulatory. The plan proposes, for instance, to reduce the enforcement authority of the S.E.C. in a variety of ways and hand that authority instead to industry groups. The plan recommends that investment advisers no longer be directly regulated by the commission, but instead be supervised by an industry regulatory organization.

The plan was sharply criticized by state regulators as being a big gift to the nation’s largest financial institutions.

“The Treasury Department’s blueprint is designed to boost Wall Street’s competitiveness, not Main Street investor protection,” said Karen Tyler, president of the North American Securities Administrators Association and the securities commissioner of North Dakota.

Consumer groups also criticized it.

“Rolling out this plan in the middle of the current crisis is like telling Hurricane Katrina victims stranded on their rooftops in New Orleans, ‘Don’t worry, if you can hold for a few years, we’ve got a really great plan to restructure the federal emergency response system,’ ” said a statement issued by the Consumer Federation of America.

“This plan,” the group said, “had its genesis in Secretary Paulson’s conviction that overregulation and inefficient regulation were hurting the global competitiveness of U.S. markets. In fact, experience has repeatedly shown that regulatory failure, not overregulation, is the greatest threat to the health of our markets.”

Major elements of the plan face fierce resistance from powerful industry groups that prefer their current regulators.

The American Bankers Association attacked a provision to eliminate the Office of Thrift Supervision, although it applauded the proposal to create a new federal charter for insurance.

Dan Mica, president and chief executive of the Credit Union National Association, said he was “astonished and angered” by the plan, which he said would “add up to more choices for Wall Street and less for consumers — and turn credit unions into banks.”

Several features were also criticized by regulators appointed by the Bush administration.

John M. Reich, the director of the Office of Thrift Supervision, said that the savings and loan industry regulated by his agency remains vibrant in large part because of the effectiveness of regulators. In an e-mail message to agency employees, he said regulatory overhauls similar to the one made by Mr. Paulson have been floated throughout history, and been rejected.

“Although none of these proposals became reality, many of you might be wondering whether financial services restructuring is an idea whose time has finally come,” Mr. Reich wrote. “I don’t think so, at least as it pertains to the four federal banking agencies.”

Some business groups hailed the plan. John J. Castellani, president of the Business Roundtable, which represents chief executives at many of the nation’s largest companies, said the plan “represents a timely response to the current state of our country’s aging regulatory system.”

And T. Timothy Ryan Jr., president of Wall Street’s biggest trade group, the Securities Industry and Financial Markets Association, said the plan was “thoughtful” and “very wise.”

“Our present regulatory framework was born of Depression-era events and is not well suited for today’s environment, where billions of dollars race across the globe with the click of a mouse,” said Mr. Ryan, who earlier in his career was a director of the Office of Thrift Supervision, an agency the Paulson plan proposes to eliminate.

Doubts Greet Treasury Plan Regulation, NYT, 1.4.2008, http://www.nytimes.com/2008/04/01/business/01regulate.html