History > 2008 > USA > Economy (VII)

Lewis Scott

Editorial cartoon

Getting There, Without Going Broke        NYT        July 6, 2008

http://www.nytimes.com/2008/07/06/opinion/l06gas.html

A Hidden Toll on Employment:

Cut to Part Time

July 31, 2008
The New York Times
By PETER S. GOODMAN

The number of Americans who have seen their full-time jobs chopped to part time because of weak business has swelled to more than 3.7 million — the largest figure since the government began tracking such data more than half a century ago.

The loss of pay has become a primary source of pain for millions of American families, reinforcing the downturn gripping the economy. Paychecks are shrinking just as home prices plunge and gas prices soar, furthering the austerity across the nation.

“I either stop eating, or stop using anything I can,” said Marvin L. Zinn, a clerk at a Walgreens drugstore in St. Joseph, Mich., who has seen his take-home pay drop to about $550 every two weeks from about $650, as his weekly hours have dropped to 37.5 from 44 in recent months.

Mr. Zinn has run up nearly $2,000 in credit card debt to buy food. He has put off dental work. He no longer attends church, he said, “because I can’t afford to drive.”

On the surface, the job market is weak but hardly desperate. Layoffs remain less frequent than in many economic downturns, and the unemployment rate is a relatively modest 5.5 percent. But that figure masks the strains of those who are losing hours or working part time because they cannot find full-time work — a stealth force that is eroding American spending power.

All told, people the government classifies as working part time involuntarily — predominantly those who have lost hours or cannot find full-time work — swelled to 5.3 million last month, a jump of greater than 1 million over the last year.

These workers now amount to 3.7 percent of all those employed, up from 3 percent a year ago, and the highest level since 1995.

“This increase is startling,” said Steve Hipple, an economist at the Labor Department.

The loss of hours has been affecting men in particular — and Hispanic men more so. Among those who were forced into part-time work from the spring of 2007 to the spring of 2008, 73 percent were men and 35 percent were Hispanic.

Some 28 percent of the jobs affected were in construction, 14 percent in retail and 13 percent in professional and business services, according an analysis by Mr. Hipple.

“The unemployment rate is giving you a misleading impression of some of the adjustments that are taking place,” said John E. Silvia, chief economist of Wachovia in Charlotte. “Hours cut is a big deal. People still have a job, but they are losing income.”

Many experts see the swift cutback in hours as a precursor of a more painful chapter to come: broader layoffs. Some struggling companies are holding on to workers and cutting shifts while hoping to ride out hard times. If business does not improve, more extreme measures could follow.

“The change in working hours is the canary in the coal mine,” said Susan J. Lambert of the University of Chicago, a professor of social service administration and an expert in low-wage employment. “First you see hours get short, and eventually more people will get laid off.”

For the last decade, Ron Temple has loaded and unloaded bags for United Airlines in Denver, earning more than $20 an hour, plus generous health and flight benefits. On July 6, as management grappled with the rising cost of fuel, Mr. Temple and 150 other people in Denver were offered an unpalatable set of options: they could transfer to another city, go on furlough without pay and hope to be rehired, or stay on at reduced hours.

Mr. Temple and his wife say they cannot envision living outside Colorado, and they probably could not sell their house. Similar homes are now selling for about $180,000, while they owe the bank $203,000.

So Mr. Temple took the third option. He reluctantly traded in his old shift — 3 p.m. to midnight — for a shorter stint from 5:30 p.m. to 10 p.m. He gave up benefits like paid lunches and overtime. His take-home pay shrunk to $570 every two weeks from about $1,350, he said.

Mr. Temple’s wife, Ali, works as an aide at a cancer clinic, bringing home nearly $1,000 every two weeks, he said. But collectively, they earn less than half of what they did.

Suddenly, they are having trouble making their $1,753 monthly mortgage payment, he said. They are relying on credit cards to pay the bills, running up balances of $2,700 so far. Gone are their dinners at the Outback Steakhouse. Mr. Temple recently bought cheap, generic groceries from a church that sells them to people in need.

“That’s the first time in my life I’ve had to do that,” he said. “We are cutting back in every way.”

Mr. Temple has been searching for another job, applying for a cashier’s position at Safeway and a clerk’s job at Home Depot, among others. But the market is lean.

“I’ve applied more than 20 times, and I haven’t had a single call back,” he said.

His search is constrained by the high price of gas. “I can’t afford to go drive my truck around and look for a job,” he said.

So Mr. Temple has done his search online — until he fell behind on the bills, and the local telephone company cut off Internet service. On a recent day, he bicycled to a Starbucks coffee shop with his laptop for the free connection.

The growing ranks of involuntary part-timers reflect the sophisticated fashion through which many American employers have come to manage their payrolls, say experts.

In decades past, when business soured, companies tended to resort to mass layoffs, hiring people back when better times returned. But as high technology came to permeate American business, companies have grown reluctant to shed workers. Even the lowest-wage positions in retail, fast food, banking or manufacturing require computer skills and a grasp of a company’s systems. Several months of training may be needed to get a new employee up to speed.

“Companies today would rather not go through the process of dumping someone and hiring them back,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “Firms are going to short shifts rather than just laying people off.”

More part-time and fewer full-time workers also allows companies to save on health care costs. Only 16 percent of retail workers receive health insurance through their employer, while more than half of full-time workers are covered, according to an analysis by Ms. Lambert, the University of Chicago employment expert.

The trend toward cutting hours in a downturn lessens the pain for workers in one regard: it moderates layoffs. Many companies now strive to keep payrolls large enough to allow them to easily adjust to swings in demand, adding working hours without having to hire when business grows.

But that also sows vulnerability, heightening the possibility that hours are cut when the economy slows and demand for goods and services dries up.

“There’s a lot of people at risk in the economy when they keep the headcount high and they only have so many hours to distribute,” Ms. Lambert said. “It really is a trade-off for society.”

Goodyear Tire has in recent months idled work for a few days at a time at many of it factories, as the company adjusts to weakening demand. At one plant in Gadsden, Ala., workers expect they will soon lose a week’s wages to another slowdown — something Goodyear would neither confirm nor deny.

“People are scared,” said Dennis Battles, president of the local branch of the United Steelworkers union, which represents about 1,350 workers there. “The cost of gas, the cost of food and everything else is extremely high. It takes every penny you make. And once it starts, when’s it going to quit? What’s going to happen next month?”

    A Hidden Toll on Employment: Cut to Part Time, NYT, 31.7.2008, http://www.nytimes.com/2008/07/31/business/economy/31jobs.html?hp

Bush Signs Housing Bill

July 30, 2008 8:08 a.m.
Associated Press

WASHINGTON -- President George W. Bush on Wednesday signed a massive housing bill intended to provide mortgage relief for 400,000 struggling U.S. homeowners and to stabilize financial markets.

Mr. Bush signed the bill without any fanfare or signing ceremony, affixing his signature to the measure he once threatened to veto in the White House's Oval Office in the early morning hours. He was surrounded by top administration officials, including Treasury Secretary Henry Paulson and Housing Secretary Steve Preston.

"We look forward to put in place new authorities to improve confidence and stability in markets," White House spokesman Tony Fratto said. He added that the Federal Housing Administration would begin right away to implement new policies "intended to keep more deserving American families in their homes."

The measure, regarded as the most significant U.S. housing legislation in decades, lets homeowners who cannot afford their payments refinance into more affordable government-backed loans rather than losing their homes. It offers a temporary financial lifeline to troubled mortgage companies Fannie Mae and Freddie Mac, and tightens controls over the two government-sponsored businesses.

The House of Representatives passed the bill a week ago; the Senate voted Saturday to send it to the president.

Mr. Bush didn't like the version emerging from Congress, and initially said he would veto it, particularly over a provision containing $3.9 billion in neighborhood grants. He contended the money would benefit lenders who helped cause the mortgage meltdown, encouraging them to foreclose rather than work with borrowers. But he withdrew that threat early last week, saying hurting homeowners couldn't wait -- and even blaming the Democratic Congress' delays in action for forcing an imperfect solution.

Meanwhile, many Republicans, particularly those from areas hit hardest by housing woes, were eager to get behind a housing rescue as they looked ahead to tough re-election contests. Mr. Paulson's request for the emergency power to rescue Fannie Mae and Freddie Mac helped push through the measure. So did the creation of a regulator with stronger reins on the government-sponsored companies, which Republicans have long sought.

Democrats won cherished priorities in the bargain: the aid for homeowners, a permanent affordable housing fund financed by Fannie Mae and Freddie Mac, and the $3.9 billion in neighborhood grants.

    Bush Signs Housing Bill, WSJ, 30.7.2008, http://online.wsj.com/article/SB121741699750696667.html?mod=hpp_us_whats_news

Bush signs sweeping housing bill

30 July 2008
USA Today

WASHINGTON (AP) — President Bush has signed a massive housing bill intended to provide mortgage relief for 400,000 struggling U.S. homeowners and stabilize financial markets.

A White House spokesman said Bush signed the measure Wednesday to "improve confidence and stability in markets and to provide better oversight of Fannie Mae and Freddie Mac."

The measure offers a temporary financial lifeline to troubled mortgage companies Fannie Mae and Freddie Mac and tightens controls over the two government-sponsored businesses.

It is regarded as the most significant U.S. housing legislation in decades. It lets homeowners who cannot afford their payments refinance into more affordable government-backed loans rather than losing their homes.

    Bush signs sweeping housing bill, UT, 30.7.2008, http://www.usatoday.com/news/washington/2008-07-30-bush-housing_N.htm

Energy Prices

Are Bright Sliver in Grim Economy

July 30, 2008
The New York Times
By JAD MOUAWAD

The sharp drop in energy prices since the beginning of the month is turning into a rare bright spot in a bleak economic landscape.

For the moment, at least, fears of a prolonged energy shock seem to have subsided a bit.

Oil has fallen more than $23 a barrel, or 16 percent, since peaking on July 3. Gasoline has slipped below $4 a gallon and is dropping fast as Americans drive less. Natural gas prices, which had risen the fastest this year as traders anticipated a hot summer, have fallen 33 percent since the beginning of the month.

Crude oil prices extended their decline on Tuesday, falling 2.5 percent, to $122.19 a barrel, their lowest level since the beginning of May. This helped spur a broad rally in the stock market, with all major indexes rising more than 2 percent. But stock markets still remain close to the lows of earlier this month, when they officially entered bear-market territory.

The declines in energy costs come after an equally sharp correction in the prices of many agricultural commodities like corn, wheat and rice, which took place a few weeks ago. These moves suggest to economists that global markets, in a near-panic early this year to find prices high enough to allocate scarce supplies, overshot the mark and bid prices too high.

Commodity prices remain extraordinarily high by historical standards. Gasoline and particularly diesel remain especially costly despite the recent fall in crude oil prices, partly because of strong demand from emerging markets that continue to subsidize the retail sale of these fuels to consumers. But with the economy weakening amid a housing crisis and a credit squeeze that show few signs of improving, many traders have begun to believe demand for oil and other commodities will soften worldwide. Investors became net sellers in the oil market last week for the first time since mid-February 2007, according to Barclays Capital.

“The market’s expectations have changed very rapidly and unexpectedly,” said Edward Morse, the chief energy economist at Lehman Brothers. “The market went out of control on the upside. But market participants realized there was much more demand destruction than had been thought even a month ago, that inventories are building up quickly, and that, in fact, more supplies are coming onto the market.”

As a result of looser market fundamentals, many analysts believe energy prices could keep falling through the end of the year. The president of the OPEC oil cartel, Chakib Khelil, said Tuesday that oil might drop as low as $70 a barrel.

Whether that actually happens will depend on the course of the American economy and its impact on the rest of the world. How long will the American slowdown last and what effect will it have on emerging markets like China, which have accounted for the bulk of the growth in oil demand?

Many experts warn that a hurricane hitting the oil-producing region of the Gulf Coast or renewed tensions in the Persian Gulf could easily push prices back up again, quickly.

Only a few weeks ago, Israel conducted war games and Iran tested new missiles, renewing fears of a flare-up in the Middle East, and pushing oil prices to a record of $145.29 a barrel. The recent shift in American policy regarding Iran, with an emphasis on diplomacy, helped deflate some of the geopolitical risk premium that had been built into oil prices.

“The one piece of good news we’ve had recently has been the drop in oil prices,” said Bernard Baumohl, the chief global economist at the Economic Outlook Group. “But there is nothing that tells us with any certainty that this decline can be sustained. Just as abruptly as they have fallen, oil prices can rebound because of geopolitical factors.”

Gasoline peaked at a nationwide average of $4.11 a gallon on July 17. Since then, retail gasoline prices have been falling briskly, to a nationwide average of $3.94 on Tuesday, according to AAA, the automobile group. Still, that is $1.05 a gallon higher than at the same time last year, when gasoline sold for $2.89 a gallon.

Natural gas settled at $9.22 a thousand cubic feet on Tuesday, down from a high of about $13.58 at the beginning of the month, as a cooler-than-expected summer helped curb the use of gas to generate electricity. That has led to a build-up of commercial inventories.

The drop in oil prices has come as gasoline demand in the United States fell sharply in recent months, thanks to Americans cutting back on their driving. Gasoline consumption fell 3.6 percent in the week ending July 18, compared with the year-earlier period, according to the Energy Department. Americans drove 9.6 billion fewer miles in May compared with the same period last year, a 3.7 percent decline and the biggest-ever drop at that time of year, the Transportation Department said on Monday.

“People are waking up to the fact that prices have an impact on demand and that what happens in the U.S. gasoline market has a worldwide impact,” said Daniel Yergin, the chairman of Cambridge Energy Research Associates, a consulting firm. The United States is the world’s largest oil consumer, and its gas market alone is bigger than the entire Chinese oil market, he said.

“As a result of the economic slowdown and high prices, we’ve probably seen the peak in American gasoline demand, at least for some years,” he said.

Americans remain unhappy about the state of the economy. But consumer confidence rose slightly this month compared with last, according to a report released on Tuesday by the Conference Board, a private research group. That was mainly because of the declining gasoline prices, said Ian Shepherdson, the chief United States economist at High Frequency Economics.

One big question is what will happen to Chinese oil demand.

China has been the biggest driver of global energy demand in recent years, experts said. From 2000 to 2007, China’s energy demand grew by 65 percent, contributing to a 12 percent jump in global oil demand. In that period, China accounted for a third of the total increase in oil consumption around the world.

This year, Chinese oil demand is expected to grow by 5.6 percent, thanks mostly to increases in gasoline and diesel consumption. This growth would account for nearly half of the rise in oil consumption worldwide, which is expected to reach nearly 900,000 barrels a day, according to the International Energy Agency.

But that too may be changing, some economists said.

“We have seen the economies of emerging countries, like China, India, and Brazil begin to slow down,” Mr. Baumohl said. “That should begin to soften the price of oil.”
 

Kate Galbraith contributed reporting.

    Energy Prices Are Bright Sliver in Grim Economy, NYT, 30.7.2008, http://www.nytimes.com/2008/07/30/business/30crude.html

Home Prices Fall in May;

Consumer Confidence Is Flat

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

Two trouble spots in the economy showed little sign of improvement in the last few months, as home prices fell again in May and consumer confidence stagnated in July, according to a pair of reports out Tuesday.

Home prices, already falling at the steepest rate in two decades, tumbled again in May, according to the Case-Shiller index, a widely watched survey that measures prices in 20 major metropolitan areas.

Prices were down 15.8 percent from May 2007, including a 0.9 percent one-month drop in May alone. The 10-city price index, which dates to 1988, dropped 16.9 percent, its sharpest decline on record.

All 20 cities measured by the index showed annual declines in home values, and 10 cities have suffered double-digit percentage declines in the last year. Miami and Las Vegas have fared the worst, with prices in each city dropping more than 28 percent since May 2007.

There were some signs that the decline has started to abate. Prices in seven regions, including Boston, Dallas and Charlotte, improved in May, some for the second straight month. Boston, for example, was up 1.05 percent in May, though values are still 6.2 percent below where they were a year prior.

The report “does seem to suggest the rate of decline of existing home prices is slowing,” Ian Shepherdson of High Frequency Economics wrote in a note. “To be sure, prices are still falling very rapidly, and there is no prospect of any rebound this year and probably next, but a slower rate of fall is welcome nonetheless.”

Las Vegas, Miami and Phoenix had the sharpest declines in May, with Miami losing 3.6 percent. The city recorded a 28.3 percent price drop for the last 12 months.

Another month of falling home values may continue to put pressure on investors who are concerned the housing crisis is fueling the credit problems on Wall Street. Last week, a dip in sales of newly built homes helped lead to a sharp decline in the stock market.

In a separate report on Tuesday, the Conference Board, a private research group, said that Americans remained unhappy about the state of their economy in July, though their confidence did not change markedly from a month prior.

The group’s consumer confidence index rose to 51.9 from 51 in June, and a measure of expectations about the economy’s prospects rose to 43 from 41.4. Those figures are historically very low.

“It is not a particularly good sign that consumer confidence and sentiment levels remain as low as they are, even after almost $100 billion of tax rebates have hit consumer’s wallets in the past several months,” Joshua Shapiro, the chief domestic economic at MFR, said in a note.

The Conference Board sends its questionnaire to 5,000 households.

    Home Prices Fall in May; Consumer Confidence Is Flat, NYT, 30.7.2008, http://www.nytimes.com/2008/07/30/business/economy/30econ.html?hp

OPINION

Obamanomics Is a Recipe for Recession

July 29, 2008
Page A17
The Wall Street Journal
By MICHAEL J. BOSKIN

What if I told you that a prominent global political figure in recent months has proposed: abrogating key features of his government's contracts with energy companies; unilaterally renegotiating his country's international economic treaties; dramatically raising marginal tax rates on the "rich" to levels not seen in his country in three decades (which would make them among the highest in the world); and changing his country's social insurance system into explicit welfare by severing the link between taxes and benefits?

The first name that came to mind would probably not be Barack Obama, possibly our nation's next president. Yet despite his obvious general intelligence, and uplifting and motivational eloquence, Sen. Obama reveals this startling economic illiteracy in his policy proposals and economic pronouncements. From the property rights and rule of (contract) law foundations of a successful market economy to the specifics of tax, spending, energy, regulatory and trade policy, if the proposals espoused by candidate Obama ever became law, the American economy would suffer a serious setback.

To be sure, Mr. Obama has been clouding these positions as he heads into the general election and, once elected, presidents sometimes see the world differently than when they are running. Some cite Bill Clinton's move to the economic policy center following his Hillary health-care and 1994 Congressional election debacles as a possible Obama model. But candidate Obama starts much further left on spending, taxes, trade and regulation than candidate Clinton. A move as large as Mr. Clinton's toward the center would still leave Mr. Obama on the economic left.

Also, by 1995 the country had a Republican Congress to limit President Clinton's big government agenda, whereas most political pundits predict strengthened Democratic majorities in both Houses in 2009. Because newly elected presidents usually try to implement the policies they campaigned on, Mr. Obama's proposals are worth exploring in some depth. I'll discuss taxes and trade, although the story on his other proposals is similar.

First, taxes. The table nearby demonstrates what could happen to marginal tax rates in an Obama administration. Mr. Obama would raise the top marginal rates on earnings, dividends and capital gains passed in 2001 and 2003, and phase out itemized deductions for high income taxpayers. He would uncap Social Security taxes, which currently are levied on the first $102,000 of earnings. The result is a remarkable reduction in work incentives for our most economically productive citizens.

The top 35% marginal income tax rate rises to 39.6%; adding the state income tax, the Medicare tax, the effect of the deduction phase-out and Mr. Obama's new Social Security tax (of up to 12.4%) increases the total combined marginal tax rate on additional labor earnings (or small business income) from 44.6% to a whopping 62.8%. People respond to what they get to keep after tax, which the Obama plan reduces from 55.4 cents on the dollar to 37.2 cents -- a reduction of one-third in the after-tax wage!

Despite the rhetoric, that's not just on "rich" individuals. It's also on a lot of small businesses and two-earner middle-aged middle-class couples in their peak earnings years in high cost-of-living areas. (His large increase in energy taxes, not documented here, would disproportionately harm low-income Americans. And, while he says he will not raise taxes on the middle class, he'll need many more tax hikes to pay for his big increase in spending.)

On dividends the story is about as bad, with rates rising from 50.4% to 65.6%, and after-tax returns falling over 30%. Even a small response of work and investment to these lower returns means such tax rates, sooner or later, would seriously damage the economy.

On economic policy, the president proposes and Congress disposes, so presidents often wind up getting the favorite policy of powerful senators or congressmen. Thus, while Mr. Obama also proposes an alternative minimum tax (AMT) patch, he could instead wind up with the permanent abolition plan for the AMT proposed by the Ways and Means Committee Chairman Charlie Rangel (D., N.Y.) -- a 4.6% additional hike in the marginal rate with no deductibility of state income taxes. Marginal tax rates would then approach 70%, levels not seen since the 1970s and among the highest in the world. The after-tax return to work -- the take-home wage for more time or effort -- would be cut by more than 40%.

Now trade. In the primaries, Sen. Obama was famously protectionist, claiming he would rip up and renegotiate the North American Free Trade Agreement (Nafta). Since its passage (for which former President Bill Clinton ran a brave anchor leg, given opposition to trade liberalization in his party), Nafta has risen to almost mythological proportions as a metaphor for the alleged harm done by trade, globalization and the pace of technological change.

Yet since Nafta was passed (relative to the comparable period before passage), U.S. manufacturing output grew more rapidly and reached an all-time high last year; the average unemployment rate declined as employment grew 24%; real hourly compensation in the business sector grew twice as fast as before; agricultural exports destined for Canada and Mexico have grown substantially and trade among the three nations has tripled; Mexican wages have risen each year since the peso crisis of 1994; and the two binational Nafta environmental institutions have provided nearly $1 billion for 135 environmental infrastructure projects along the U.S.-Mexico border.

In short, it would be hard, on balance, for any objective person to argue that Nafta has injured the U.S. economy, reduced U.S. wages, destroyed American manufacturing, harmed our agriculture, damaged Mexican labor, failed to expand trade, or worsened the border environment. But perhaps I am not objective, since Nafta originated in meetings James Baker and I had early in the Bush 41 administration with Pepe Cordoba, chief of staff to Mexico's President Carlos Salinas.

Mr. Obama has also opposed other important free-trade agreements, including those with Colombia, South Korea and Central America. He has spoken eloquently about America's responsibility to help alleviate global poverty -- even to the point of saying it would help defeat terrorism -- but he has yet to endorse, let alone forcefully advocate, the single most potent policy for doing so: a successful completion of the Doha round of global trade liberalization. Worse yet, he wants to put restrictions into trade treaties that would damage the ability of poor countries to compete. And he seems to see no inconsistency in his desire to improve America's standing in the eyes of the rest of the world and turning his back on more than six decades of bipartisan American presidential leadership on global trade expansion. When trade rules are not being improved, nontariff barriers develop to offset the liberalization from the current rules. So no trade liberalization means creeping protectionism.

History teaches us that high taxes and protectionism are not conducive to a thriving economy, the extreme case being the higher taxes and tariffs that deepened the Great Depression. While such a policy mix would be a real change, as philosophers remind us, change is not always progress.

Mr. Boskin, professor of economics at Stanford University and senior fellow at the Hoover Institution, was chairman of the Council of Economic Advisers under President George H.W. Bush.

    Obamanomics Is a Recipe for Recession, WSJ, 29.7.2008, http://online.wsj.com/article/SB121728762442091427.html?mod=hpp_us_inside_today

Gas prices drive push to reinvent America's suburbs

29 July 2008
USA Today
By Haya El Nasser

MARICOPA, Ariz. — Mayor Tony Smith proudly waves a thank-you letter from a major builder telling him that no city has ever reached out to him in his 30-year career the way Maricopa did.

What Maricopa has been doing is unusual, especially for a distant suburb. This city about 35 miles south of Phoenix is asking builders not to develop just isolated subdivisions behind walls, but whole communities that encourage walking by including stores, schools and services nearby.

"The people of Maricopa don't want to be a bedroom community, a city of rooftops," Smith says. "They want a self-sustained community."

Especially today. As gas prices hover around $4 a gallon, the nation's far-flung suburbs — which have boomed because they could provide larger homes at cheaper prices to those willing to drive farther — are losing their appeal.

Soaring energy costs and the foreclosure epidemic have jolted many Americans into realizing that their lifestyles are at risk. For many, ever-lengthening commutes in the search for affordable homes no longer make financial sense.

In Maricopa and elsewhere, a movement is underway to transform suburbs from bedroom communities that sprang up during an era of cheap gasoline to lively, more cosmopolitan places that mix houses with jobs, shops, restaurants, colleges and entertainment.

Suburbs on the far edge of metro areas are turning aside strip malls and creating new downtowns and neighborhoods that favor pedestrians. They're trying to attract more employers and services such as hospitals, colleges and small airports.

The appeal of urbanism is spreading to far suburbs such as Rancho Cucamonga, Calif.(about 42 miles east of Los Angeles), and Huntersville, N.C., about 16 miles north of Charlotte. Centers that combine residential, retail, office and entertainment are becoming popular far from urban centers.

Small historic towns on the edge of metropolitan areas such as Brighton, Colo., northeast of Denver, and Plainfield, Ill., southwest of Chicago, are emphasizing their Main Streets and history to provide a sense of community outside the walls of sprawling subdivisions.

Mass transit is being embraced by towns that wouldn't have been born without the automobile. Here in Maricopa, the city introduced bus service to Phoenix and Tempe this year, providing the first mass transit alternative to residents, many of whom commute about 35 miles to Phoenix.

Such changes could have a profound effect on the way the nation develops as it prepares to absorb an estimated 100 million more people by about 2040.

The scent of change is in the air in Maricopa, even in the way city officials talk. Words such as "bedroom community" have become dirty words. "Green," "sustainable," "walkable," "mass transit," "conservation," "open space" and "energy-efficient" punctuate the suburban dialogue.

"Absolutely, suburbs are not going to go away," says David Goldberg, spokesman for Smart Growth America, a national coalition of groups pushing for conservation and sustainable growth. "But the math is becoming very clear."

Until now, people were willing to drive increasingly far for a home they could afford. "Drive-till-you-qualify collapsed," Goldberg says. "It's done. It's not going to work as a housing strategy anymore."

Living costs soar

In the past year, as gas prices skyrocketed, the housing bubble burst and transit ridership soared, the cost of living farther out for many Americans went from manageable to pricey.

An analysis of real estate data by Fiserv Lending Solutions shows that home prices have fallen more in towns and neighborhoods far from urban centers than in close-in suburbs.

Developers traditionally have flocked to fields at the edge of metro areas to avoid the stricter zoning rules and higher fees they face in older, more densely populated communities. But that could be changing.

"The trends that pushed housing demand toward distant suburbs and rural areas were not sustainable," says David Stiff, chief economist at Fiserv. "The problem is that it can be two, three, four times as expensive to develop in close-in neighborhoods vs. outlying neighborhoods, if there's any space at all."

If gas prices continue to climb or government provides incentives to build more densely and closer in, development patterns should evolve, planners say.

"People respond to economic incentives," Stiff says. "Reducing commuting costs, trying to be more environmentally conscious and trying to find the cheapest housing affect decisions simultaneously."

"We're sort of stuck with retrofitting the suburbs," says Scott Bernstein, head of the Center for Neighborhood Technology, which for years has urged that transportation costs be a criterion for mortgage qualification. "That's not all that bad. … There's nothing like a crisis to get people to try something."

Fresh ideas about development are spreading. A new website gives "walk" scores for more than 2,500 neighborhoods in the 40 largest cities (walkscore.com). Bernstein's group publishes a housing and transportation affordability index for 52 metropolitan areas (htaindex.cnt.org/).

Kenneth Himmel says now is "the perfect moment to be doing everything we're talking about."

The developer of the Reston Town Center in Virginia, the Time Warner Center in New York and City Place in West Palm Beach, Fla., says: "Some people will say, 'For $300,000 to $325,000, what are my options to live closer?' Maybe it's a smaller home. … Do they want to drive or do they want to be five or 10 minutes from their office? People will make the trade."
 

The new reality

The Phoenix area is legendary for sprawl. The city alone covers 517 square miles. Surrounding it is 14,000 square miles (twice the size of New Jersey) of desert dotted by seas of rooftops.

Foreclosures have hit the region hard — more than 5,500 the first six months of this year. Home construction permits have slowed by more than half in many communities. Still, building crews are grading tracts of land far from downtown.

Buckeye, more than 30 miles west of Phoenix, and Maricopa, a similar distance to the south, are the suburbs that have the highest number of new single-family home permits.

It's there that the seeds of change are taking root.

"We've got to get jobs to keep people from driving," says Buckeye Mayor Jackie Meck, who worries that gas "could easily go to $8, $10" a gallon.

Meck and town manager Jeanine Guy say Buckeye's goal was never to be a bedroom community but a gateway to California and the Pacific Rim. Already, developers of a master-planned community on 1,100 acres 30 miles beyond Buckeye — 60 miles from Phoenix — are rethinking their project because of fuel costs. They want to turn it into a distribution center that would cut gas costs for truckers from the West who are delivering goods to the Phoenix area.

In Maricopa, the city for the first time is encouraging builders to create sustainable communities that use alternative forms of energy or are near jobs, goods and services. Already, the city is home to Arizona's first ethanol plant and a facility that uses recycled water to flush toilets. And there are the commuter buses to downtown Phoenix and Tempe.

When gas prices inched toward $4 a gallon, Donna Nance bemoaned her 40-mile, one-way commute to work her job as the court clerk in downtown Phoenix. Gas would now cost her $60 a week, a blow for a single mom who had moved here to get a house at a better price.

She considered moving closer, at the risk of giving up her three-bedroom, single-family home and might have done it if Maricopa had not introduced Phoenix-bound commuter buses in April. Nance, 43, now drives 7 miles to the bus stop and enjoys the ride. Even if gas prices keep climbing, Nance says she has no reason to leave.

"We hit a sweet spot starting a transit program here," Mayor Smith says.

It's a reflection of how some suburbs are trying to replace their "middle of nowhere" image with a "there." "Maybe gas drops to $3 a gallon and people will say we don't need to do this anymore," says Guy, the Buckeye town manager. "We do."

    Gas prices drive push to reinvent America's suburbs, UT, 29.7.2008, http://www.usatoday.com/news/nation/2008-07-29-nosale_N.htm

White House Predicts $482 Billion Deficit

July 29, 2008
The New York Times
By ROBERT PEAR and DAVID M. HERSZENHORN

WASHINGTON — The White House predicted Monday that President Bush would leave a record $482 billion deficit to his successor, a sobering turnabout in the nation’s fiscal condition from 2001, when Mr. Bush took office after three consecutive years of budget surpluses.

The worst may be yet to come. The deficit announced by Jim Nussle, the White House budget director, does not reflect the full cost of military operations in Iraq and Afghanistan, the potential $50 billion cost of another economic stimulus package, or the possibility of steeper losses in tax revenues if individual income or corporate profits decline.

The new deficit numbers also do not account for any drains on the national treasury that might result from further declines in the housing market.

The White House forecast was prepared before passage of the huge housing assistance package that Mr. Bush has promised to sign. That legislation would put taxpayer money at risk in numerous ways, especially if housing prices continue to decline.

Mr. Nussle predicted Monday that the deficit would more than double in the current 2008 fiscal year — to $389 billion, from $162 billion in 2007 — before shooting up to $482 billion in the 2009 fiscal year, which begins in about two months.

The deficit projected for 2009 would be the largest in absolute terms, easily surpassing the record of $413 billion in 2004. The White House and many economists prefer to measure the deficit as a share of the economy. The projected 2009 deficit would be 3.3 percent of the economy. That is the largest share since 2004, but well below the percentages recorded in the 1980s and early 1990s. In 1983, the deficit was 6 percent of the overall economy.

The bleak outlook for the budget will crimp the ability of the next president to carry out ambitious spending plans. And it adds to fiscal pressures that were already building because of the growth of Medicare and Social Security.

Senator John McCain of Arizona, the presumptive Republican presidential nomination, said the new report showed “the dire fiscal condition of the federal government.”

“There is no more striking reminder of the need to reverse the profligate spending that has characterized this administration’s fiscal policy,” Mr. McCain said.

Jason Furman, the economic policy director for the campaign of Senator Barack Obama of Illinois, the presumptive Democratic nominee, said Mr. Obama would cut wasteful spending, close corporate tax loopholes and roll back tax cuts for the wealthiest Americans, “while making health care affordable and putting a middle-class tax cut in the pocket of 95 percent of workers and their families.”

Mr. Furman said Mr. McCain was “proposing to continue the same Bush economic policies that put our economy on this dangerous path.”

The new estimate of the 2009 deficit was $74 billion higher than Mr. Bush and Mr. Nussle had predicted in the president’s budget just six months ago.

Mr. Nussle said the deterioration of the fiscal outlook resulted from “a softening of the economy,” and a reduction in anticipated revenue. He attacked Congressional Democrats, saying they had allowed spending to grow out of control.

Representative John M. Spratt Jr., Democrat of South Carolina and chairman of the House Budget Committee, said the new deficit figures confirmed “the dismal legacy of the Bush administration.”

“Under its policies,” Mr. Spratt said, “the largest surpluses in history have been converted into the largest deficits in history.”

The recently passed housing bill authorizes the Treasury Department to spend virtually unlimited amounts to rescue the nation’s two mortgage finance giants, Fannie Mae and Freddie Mac, should they be at risk of collapse. The Congressional Budget Office estimated the new rescue authority could add a total of $25 billion to the deficit in the next two years.

The budget office said there was a better than even chance the rescue authority would not be used, so there would be no cost. On the other hand, it said there was a 5 percent chance that one or both of the mortgage giants would need such assistance to cover as-yet-unrecognized losses greater than $100 billion.

Robert L. Bixby, executive director of the Concord Coalition, a nonpartisan budget watchdog group, said of the federal commitment: “It may not cost anything. But if it costs a little bit, it may begin to cost a lot. You start to deal with market psychology here. It all adds up to a pretty scary picture.”

On Monday, the Bush administration announced a new program that could reduce some of taxpayers’ huge exposure to Fannie Mae and Freddie Mac and, at the same time, reduce the dominance of the companies.

Treasury Secretary Henry M. Paulson Jr. said that four of the nation’s largest banks had endorsed an administration effort to create a new market in a financial instrument that could be used to finance mortgages. The instrument, known as covered bonds, could provide a new source of cash for lending institutions.

When Mr. Bush took office, he predicted that federal debt held by the public — the amount borrowed by the government to pay for past deficits — would shrink to just 8 percent of the gross domestic product in 2009. He now estimates that it will amount to 40 percent.

Senator Kent Conrad, Democrat of North Dakota and chairman of the Senate Budget Committee, said, “President Bush will be remembered as the most fiscally irresponsible president in our nation’s history.”

Mr. Nussle bristled when asked about the Democrats’ suggestion that Mr. Bush had transformed a surplus into deficit.

“There is much more to the book than the first page and the last page,” Mr. Nussle said. “There are many, many pages and chapters in between. Democrats seem to have not read all of them.”

Mr. Nussle asserted that Mr. Bush had inherited a recession and had to make up for years of inadequate spending on the military, intelligence and homeland security under President Bill Clinton.

The new White House report also includes these predictions:

¶Total federal revenues will decline slightly from 2007 to 2008.

¶In 2008 and in each of the next three years, corporate income tax collections will be lower than the amount collected in 2007.

¶Federal spending will increase nearly 8 percent this year and then 6.5 percent in 2009. In 2009, federal spending will be equivalent to 21.1 percent of the economy, the largest share since 1993.

The White House now predicts that the economy will grow 1.6 percent this year, after accounting for inflation, compared with its estimate of 2.7 percent in February. The estimate of growth for 2009 was also lowered, to 2.2 percent, from 3 percent.

Edward P. Lazear, chairman of the president’s Council of Economic Advisers, pointed to oil prices as a culprit. “Every time oil prices go up, it takes off some growth from our economy,” Mr. Lazear said.

Spending on some domestic programs — like veterans’ medical care, unemployment benefits and food and nutrition assistance — is growing faster than in the comparable period last year.

Another factor adding to the deficit is the distribution of tax rebates to individuals under the economic stimulus package signed into law by Mr. Bush in February. About $79 billion has been paid out through June.

Stephen Labaton contributed reporting.

    White House Predicts $482 Billion Deficit, NYT, 29.7.2008, http://www.nytimes.com/2008/07/29/washington/29budget.html?hp

The Downfall of a California Dreamer

July 29, 2008
The New York Times
By VIKAS BAJAJ

PASADENA, Calif. — After his mortgage company nearly crashed a decade ago, Michael W. Perry set a new course. He bought a bank so the company, soon rechristened IndyMac Bank, would never run short of money again.

The financial world now knows how this story ended. Just before 3 p.m. on July 11, federal regulators arrived at Mr. Perry’s headquarters here and seized IndyMac, which was buckling under its burden of bad loans. The debacle, one of the biggest bank failures in American history, could cost the Federal Deposit Insurance Corporation as much as $8 billion. Shareholders have been all but wiped out.

The collapse of IndyMac, one of the nation’s largest mortgage lenders, was the most vivid example to date of the dangers now confronting the nation’s banks and their investors. Two more lenders, both of them relatively small, were taken over by the government last Friday, and many analysts believe more banks will fail as home prices weaken and loan defaults mount.

Fears about the banking industry continue to haunt the stock market. The Standard & Poor’s 500-stock index fell 1.9 percent on Monday, and financial stocks tumbled 4.6 percent.

The F.D.I.C. is still trying to unravel the mess at IndyMac. The tableau of the collapse was shocking, replete with a run on the bank, snaking lines of anxious customers and sober assurances from Washington. Not since the 1980s has an American bank failed so spectacularly.

How could this happen? There has been a lot of finger-pointing. The Office of Thrift Supervision, the federal regulator that oversaw IndyMac, contends that Senator Charles E. Schumer, Democrat of New York, caused a panic among customers by issuing dire warnings about the bank.

Mr. Schumer maintains that the Office of Thrift Supervision was slow to spot the problems at IndyMac, an offshoot of the Countrywide Financial Corporation, the giant mortgage company that has come to symbolize many of the excesses of the subprime era.

But behind the political pyrotechnics is a simple truth: Executives at IndyMac, like many people on both Wall Street and Main Street, apparently never dreamed that home prices might fall. To the contrary, IndyMac made many loans on terms that implicitly assumed prices would keep rising.

Since 2000, IndyMac collected deposits from customers and used the money to make lucrative — and, it turns out, perilous — mortgages a rung above subprime. The bank also let people borrow money without their providing documentation to verify their income and assets.

As long as home prices continued to go up, the company’s strategy was very lucrative for executives, employees and shareholders. Analysts say the boom perpetuated an insatiable hunger for mortgages and a complacency about the risks they posed.

“The sales culture took over, and the sales division really drove the company,” said Paul J. Miller Jr., an analyst at Friedman, Billings, Ramsey.

Mr. Perry, whom friends and co-workers described as a hands-on manager who sometimes personally weighed in on mortgage applications, pushed the boundaries of his trade. But apparently not even Mr. Perry, who spent much of his career at IndyMac and its predecessor companies, saw the trouble until it was too late. He was predicting as recently as February that the bank would not only weather the downturn in the housing market but that it would even turn a profit this year.

Through a spokesman, Mr. Perry declined to comment for this article on the advice of his lawyers.

Formed in 1985 as a small division of Countrywide, IndyMac started making loans in the 1990s and became fully independent in 1997. The company nearly went under when the credit markets seized up in 1998, but Mr. Perry steered the company through that crisis by reducing its reliance on Wall Street financing. In July 2000, he acquired a savings bank to gain access to what was widely presumed to be a more stable source of financing: customers’ deposits.

“He certainly never forgot that experience,” Thomas K. Brown, chief executive of Second Curve Capital, said of IndyMac’s troubles in 1998. Mr. Brown, whose hedge fund had owned 5 percent of IndyMac late last year, described Mr. Perry as an “eternal optimist.”

Mr. Brown said Mr. Perry often referred to IndyMac’s previous hardships by saying, “We have made tough decisions in the past.”

Most of this decade was a golden era for IndyMac, whose profits grew threefold from 2001 to 2006. The company specialized in alternative-A, or alt-A, mortgages, which are made to borrowers with good credit but are not quite as conservative as the prime loans eligible to be bought by Fannie Mae and Freddie Mac, the mortgage giants.

For a long time, Mr. Perry disputed the growing belief that the problems in subprime mortgages would infect alt-A loans.

“That’s like saying that our headquarters in Pasadena is ‘in between’ Los Angeles and Las Vegas,” he said in March 2007. “True enough, but there’s the question of degree: Pasadena is 11 miles northeast of Los Angeles and Las Vegas is 262 miles northeast of Pasadena.”

While alt-A loans have, in fact, defaulted at much lower rates than subprime mortgages, they have nonetheless proved problematic. IndyMac’s biggest problem was a $10 billion portfolio of loans that it had been unable to sell last summer when credit markets froze up.

By the spring of this year, Mr. Perry and his board were working feverishly to raise money, find an acquirer or sell parts of the company, an effort known inside the bank as “Project Iron Man.” Several private equity firms, including Cerberus Capital Management and Oaktree Capital Management, talked to the company, but none of them made a hard offer, according to several people briefed on or involved in the talks.

By late June, IndyMac executives realized no savior would emerge soon, and the Office of Thrift Supervision told the bank it was no longer “well capitalized.” Mr. Perry began laying out plans for closing IndyMac’s mortgage lending business and dismissing half the company’s employees. The bank hoped to reduce its portfolio of loans but continue its profitable reverse-mortgage business to buy time until the housing market stabilized.

What came next stunned IndyMac and its regulators. Mr. Schumer wrote a letter to the Office of Thrift Supervision and F.D.I.C. questioning the bank’s viability. Reports of the letter created a run: In three days, customers withdrew $100 million.

Mr. Schumer later said regulators were “on top of the situation,” but confidence in IndyMac continued to ebb. By Day 11, more than $1.3 billion had been withdrawn from the bank, according to the Office of Thrift Supervision. Many of the customers who withdrew their money had balances of less than $100,000, the maximum amount insured by the F.D.I.C.

“Because there were so few bank failures in recent years, people didn’t fully understand deposit insurance,” said John Bovenzi, the chief operating officer at F.D.I.C. who was appointed chief executive of IndyMac Federal Bank, the government-run successor to IndyMac.

Mr. Bovenzi sat at a conference table in Mr. Perry’s former office, a bare room that had been stripped of the former chief executive’s personal effects save one forlorn plant. In the hallways, business cards of F.D.I.C. officials were taped outside offices, many of which still had names of former IndyMac officials on them. The F.D.I.C. said it has kept all the bank’s former top executives, except Mr. Perry.

In the aftermath of the failure the O.T.S. and Mr. Schumer traded barbs about who was responsible. The O.T.S. director, John Reich, said Mr. Schumer’s remarks “undermined the public confidence essential for a financial institution.” Mr. Schumer retorted that the Office of Thrift Supervision should have moved earlier to check “IndyMac’s poor and loose lending practices.”

Analysts said IndyMac would have gone under or been sold sooner or later, but added that Mr. Schumer’s remarks may have sped up the process by a few months.

IndyMac executives suspected the end was near even before the regulators turned up. Examiners do not warn banks they are coming, but they typically take over failing institutions on Fridays so they can have a weekend to put things in order and reopen under government control on Monday.

As the lines grew outside IndyMac branches during the week of July 7, Mr. Perry talked with an Office of Thrift Supervision official to assess the situation.

“We’ll talk to you on Friday,” the official said, according to one bank official briefed on the call. As word of the call spread through IndyMac, executives began packing their personal belongings.
 

Stephen Labaton contributed reporting from Washington and Louise Story from New York.

    The Downfall of a California Dreamer, NYT, 29.7.2008, http://www.nytimes.com/2008/07/29/business/29indymac.html

Write-Down Is Planned at Merrill

July 29, 2008
The New York Times
By LOUISE STORY

Only 10 days after stunning Wall Street with a huge quarterly loss, Merrill Lynch unexpectedly disclosed another multibillion-dollar write-down on Monday and sought to bolster its finances once again by selling new stock to the public and to an investment company controlled by Singapore.

Moving to purge itself of the tricky mortgage-linked investments that have brought the once-proud firm to its knees, Merrill said that it had sold almost all of the troublesome investments, once valued at nearly $31 billion, at a fire-sale price of 22 cents on the dollar.

As a result, Merrill expects to record a write-down of $5.7 billion for the third quarter. Such an outcome could push Merrill into the red for a fifth consecutive quarter if revenue remains weak and would bring its charges since the credit crisis erupted last summer to more than $45 billion.

The problems at Merrill, the nation’s largest brokerage, underscore how bankers and policy makers are struggling to contain the damage to the financial system and the broader economy caused by the collapse of housing-related debt. The latest news came on a day when the International Monetary Fund said there was no end in sight to the housing slump, a forecast that depressed financial shares as well as the broader market.

To shore up its finances, Merrill said it would raise $8.5 billion in new capital from common shareholders, including $3.4 billion from the investment arm of the Singapore government, Temasek Holdings, which, with an 8.85 percent stake as of June 30, is already Merrill’s largest shareholder. Those shares and a conversion of preferred securities into common stock will dilute the value of stock held by current shareholders by about 40 percent.

John A. Thain, who has struggled to turn Merrill around since becoming chief executive in December, said the sale of the worrisome investments, known as collateralized debt obligations, or C.D.O.’s, was “a significant milestone in our risk reduction efforts.”

The C.D.O.’s have plunged in value over the last year, forcing Merrill to take one write-down after another and sapping investors’ confidence. Merrill’s share price fell 11.6 percent on Monday, before the news of the write-down and stock sale were announced after the close of trading. Merrill is trading near its lowest level in a decade.

But the sale of the C.D.O.’s, to an investment fund based in Dallas, may enable Merrill to move on, investors said.

“What they sold, from a headline standpoint, is certainly constructive because they have reduced risk in a very sensitive area,” said Thomas C. Priore, chief executive of Institutional Credit Partners, a $12 billion hedge fund and C.D.O. manager in New York.

Merrill had been working on the C.D.O. sale and the effort to raise capital before its earnings call but did not finalize the actions until recent days.

Merrill’s sales could cause further write-downs at other Wall Street firms with C.D.O. exposure. If those companies — the likes of Citigroup and Lehman Brothers — have similar C.D.O.’s valued at prices higher than those at which Merrill sold, the firms may be forced to take additional charges to reflect the difference.

Merrill recently moved to raise money by selling its 20 percent stake in Bloomberg L.P., the financial news and data company, for $4.425 billion. Mr. Thain hinted at the C.D.O. sale in the quarterly earnings call, in response to a question from Meredith Whitney, an analyst with Oppenheimer & Company.

“Why not, at this point, be the first to purge assets and get it over with? And, if that means raising capital, raise capital,” Ms. Whitney said.

Mr. Thain responded that Merrill had been selling assets but had not yet sold any C.D.O.’s.

“Your question is a very leading one, and that would certainly be something that we would hope that we could do,” Mr. Thain said.

Merrill sold the investments at a steep loss. The United States super senior asset backed-security C.D.O.’s that Merrill sold were once valued at $30.6 billion. As of the end of second-quarter, Merrill valued them at $11.1 billion — or 36 cents on the dollar. And Merrill sold them for $6.7 billion to an affiliate of Lone Star Funds, the Dallas private equity firm.

Merrill provided 75 percent financing to Lone Star Funds, which means Merrill lent the private equity fund about $5 billion to complete the sale.

The discounted sales will cause the majority of Merrill’s write-down in the third quarter.

Merrill also said it had settled a battle with the reinsurance company XL Capital Assurance, which had insured some of the firm’s C.D.O.’s.

    Write-Down Is Planned at Merrill, NYT, 29.7.2008, http://www.nytimes.com/2008/07/29/business/29merrill.html?hp

Fuel Subsidies Overseas Take a Toll on U.S.

July 28, 2008
The New York Times
By KEITH BRADSHER

JAKARTA, Indonesia — To understand why fuel prices in the United States have soared over the last year, it helps to talk to the captain of a battered wooden freighter here.

He pays just $2.30 a gallon for diesel, the same price Indonesian motorists pay for regular gasoline. His vessel burns diesel by the barrel, so when the government prepared for a limited price increase this spring, he took to the streets to protest.

“If the government increases the price of fuel any more, my business will collapse totally,” said the boat captain, Sinar, who like many Indonesians uses only one name.

From Mexico to India to China, governments fearful of inflation and street protests are heavily subsidizing energy prices, particularly for diesel fuel. But the subsidies — estimated at $40 billion this year in China alone — are also removing much of the incentive to conserve fuel.

The oil company BP, known for thorough statistical analysis of energy markets, estimates that countries with subsidies accounted for 96 percent of the world’s increase in oil use last year — growth that has helped drive prices to record levels.

In most countries that do not subsidize fuel, high prices have caused oil demand to stagnate or fall, as economic theory says they should. But in countries with subsidies, demand is still rising steeply, threatening to outstrip the growth in global supplies.

President Bush warned about the effects of subsidies on July 15. “I am discouraged by the fact that some nations subsidize the purchases of product, like gasoline, which, therefore, means that demand may not be causing the market to adjust as rapidly as we’d like,” he said.

Indeed, the biggest question hanging over global oil markets these days may be how much longer countries can keep paying the high cost of subsidizing their consumers. If enough countries start passing the true cost of oil through to their citizens, many economists believe, demand growth will slow, bringing the oil market into better balance and lowering prices — although the long-term economic rise of China and other populous countries makes it unlikely that gasoline prices will plunge back to the levels of several years ago.

China raised gasoline and diesel prices on June 21, though still keeping them below world levels. World oil prices plunged more than $4 a barrel within minutes on the expectation that Chinese demand would slow.

In Indonesia, the government spends six times as much on energy subsidies as it does on agricultural investments, even as rice prices have skyrocketed this year.

Many countries, like India, have raised oil prices considerably in recent months, only to watch world prices climb even further, pushing up the cost of subsidies once again. China’s estimated $40 billion in subsidies this year is up from $22 billion last year, mainly for this reason, although consumption has also risen, with Chinese buying 18 percent more cars in the first half of this year than in the period a year earlier.

Political pressures and inflation concerns continue to prevent many countries — particularly in Asia, where inflation has become an acute problem — from ending subsidies and letting domestic prices bounce up and down.

“You talk about subsidies, you’re not only talking about the economy, you’re talking about politics,” said Purnomo Yusgiantoro, Indonesia’s minister of energy and mineral resources. He ruled out further price increases this year beyond one in May that raised the price of diesel and regular gasoline to $2.30 a gallon.

Nobuo Tanaka, executive director of the International Energy Agency, said that subsidies were clearly a big factor contributing to the mismatch in supply and demand that has helped push up world oil prices. “We think the price mechanism is not working enough to make consumers more efficient,” he said.

Indonesia spends more on fuel subsidies, $20 billion this year, than any country except China. Some economists estimate that fuel use in Indonesia would fall by as much as a fifth if the government were to eliminate subsidies entirely.

Malaysia’s government incited public anger on June 4 when it raised gasoline prices by 40 percent. The prime minister, Abdullah Ahmad Badawi, announced the following week that he would retire, although he has since said that he will not do so until 2010.

Before adjusting the prices, Malaysia was spending 7.5 percent of its entire economic output on fuel subsidies, a greater share than any other nation. Indonesia follows with 4 percent.

Coming elections in Indonesia and India make further subsidy reductions less likely in both countries. And big oil exporters like Saudi Arabia have so much revenue right now that they can easily afford to subsidize fast-growing domestic demand.

Chinese fuel policy is the hardest to predict: the country’s leaders are struggling to reduce inflation and are not expected to take any action on fuel until after the Olympics, at the earliest. But they are also campaigning for greater energy efficiency and less reliance on fuel imports.

Many in Asia bridle at being told to reduce oil use, particularly by the United States, a country of sport-utility vehicles and big houses.

“What about the energy consumption in the United States? Isn’t it one of the highest in the world?” said Irvan Saefurrohman, a student activist in Jakarta who organized a fuel-price demonstration in May that turned violent as protesters threw rocks at police and set cars on fire.

Making matters worse, Asia’s own oil production has barely risen over the last decade.

Indonesia, with extensive oil fields that made it a top target for Japanese conquest during World War II, became a net oil importer in 2004. Output from its aging fields has fallen almost 40 percent since 1995, and the country plans to withdraw from OPEC at the end of this year.

So Asian nations increasingly compete with the West to import oil from the Mideast and Africa.

In Asia, subsidies have been particularly prevalent for diesel, although many countries subsidize gasoline as well. The subsidies have been an important reason diesel prices have climbed almost twice as quickly as gasoline prices have over the last year in the United States.

Many governments see diesel as more important because truckers and ship captains need it to distribute goods; if diesel prices rise, consumer prices often follow. Diesel is essentially the same fuel as heating oil, so high diesel prices mean high prices for heating oil. Spiraling prices already have some in the Northeast United States worried about how families will afford to heat their homes this winter.

To be sure, subsidies are not the only cause of high crude oil prices. Strong global economic growth, particularly in Asia, is requiring a lot of energy. Political tensions between the United States and Iran and market psychology have played a role.

Additional factors have contributed to strong demand for diesel in particular. European automakers have been shifting toward the production of more cars with diesel engines, which typically get more miles to the gallon than gasoline-powered cars — although the cost advantage of burning diesel is disappearing with higher prices.

When Vietnam reduced fuel subsidies on July 21, it raised domestic gasoline prices by 31 percent, to $4.22 a gallon for 92-octane fuel. But Vietnam increased diesel prices by only 14.3 percent, to $3.54 a gallon.

The fast-growing demand in China is skewed toward diesel as well. Automakers are on track to sell half as many gas-powered cars in China this year as in the United States. But in China they already sell at least 50 percent more medium- and heavy-duty trucks, the workhorses of a manufacturing economy. Virtually all of those run on diesel.

The cheapest fuel per gallon in many Asian countries is not diesel but kerosene, commonly used for cooking by the very poor. In India, for example, the government subsidizes kerosene so heavily that it sells for just 97 cents a gallon, compared with $5 a gallon in the United States.

While the subsidies encourage greater consumption, eliminating them is not easy. “If you reduce the subsidy for kerosene, people are likely to forage in the forests for fuel, and environmentally that is very bad,” said Ifzal Ali, the chief economist of the Asian Development Bank.

Kerosene is similar to jet fuel, so strong Asian demand has helped push up costs for airlines.

Some spending on subsidies is simply wasted: Mr. Yusgiantoro, the Indonesian official, said that fishing boats take drums of subsidized diesel out to sea for resale to foreign fishing vessels. But a lot of subsidies are delaying what could otherwise be a slowing of economic activity.

Mr. Sinar, the freighter captain, said that his vessel hauls cement to outlying islands with limited cement production of their own. Higher diesel costs would make it much costlier to move the cement, which would force builders to accept the prices of their local cement producers and probably cause a construction slowdown.

The nearly 30 percent increase in prices for low-octane gasoline, which Indonesia put in place in May, has already prompted some less affluent families to drive less. Subrata, a 34-year-old who sells gasoline in glass bottles to local motorcyclists in Karawang, Indonesia, said that the increase had halved his sales — and that plenty of motorists were upset.

If the price rises further, he said, “people will not buy it and it will be a heavy blow for the lower classes.”

    Fuel Subsidies Overseas Take a Toll on U.S., NYT, 28.7.2008, http://www.nytimes.com/2008/07/28/business/worldbusiness/28subsidy.html?hp

Worried Banks Sharply Reduce Business Loans

July 28, 2008
The New York Times
By PETER S. GOODMAN

Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.

Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by withholding capital from many companies, just as joblessness grows and consumers pull back from spending in the face of high gas prices, plummeting home values and mounting debt.

“The second half of the year is shot,” said Michael T. Darda, chief economist at the trading firm MKM Partners in Greenwich, Conn., who was until recently optimistic that the economy would continue expanding. “Access to capital and credit is essential to growth. If that access is restrained or blocked, the economic system takes a hit.”

Companies that rely on credit are now delaying and canceling expansion plans as they struggle to secure finance.

Drew Greenblatt, president of Marlin Steel Wire Products, figured it would be easy to get a $300,000 bank loan to finance a new robot for his factory in Baltimore. His company, which makes parts for makers of home appliances, is growing and profitable, he said. His expansion would add three new jobs to an economy hungry for work.

But when Mr. Greenblatt called the local branch of Wachovia — the same bank that had been aggressively marketing loans to him for years — he was distressed by the response.

“The exact words were, ‘We’re saying no to almost everybody,’ ” Mr. Greenblatt recalled. “This is why God made banks, for this kind of transaction. This is going to slow down the American economy.”

Earlier this year, credit extended by banks to companies and consumers was still growing at double-digit rates compared with three months earlier, according to an analysis of Federal Reserve data by Goldman Sachs. By mid-June, bank credit was declining at an annualized pace of more than 6 percent.

That is a drop of nearly $150 billion, an amount much larger than the value of the tax rebates the government has sent to households this year in an effort to spur economic activity.

Financial industry executives say tighter credit from major banks represents a swing back to a realistic assessment of risk, after years of handing out money with abandon. Those practices produced a mortgage crisis whose losses could reach $1 trillion, by many estimates.

“Before, they wouldn’t verify income and they were loose on the valuations of collateral,” said John W. Kiefer, chief executive of First Capital, a private commercial lender. “Now they’re tightening down on the ability to repay. They go off the reservation, and now they come back to basics. It’s preservation for many of them at this point. It’s survival.”

But if the newfound caution of American banks is prudent in the long run, the immediate impact is amplifying the troubles with the economy. The Federal Reserve has been lowering interest rates aggressively to make money flow more loosely and to spur economic activity.

The financial system is not going along: As banks hold on to their dollars, mortgage rates are climbing. So are borrowing costs for corporations.

Some suggest that the banks, spooked by enormous losses, have replaced a disastrously indiscriminate willingness to hand out money with an equally arbitrary aversion to lend — even on industries that continue to grow.

“There’s been a lot of disruption in the credit market, and a lot of traditional lenders have really tightened up,” said Gregory Goldstein, president of Macquarie Equipment Finance, which leases computer gear and other technology to companies. “Before, some of the standards they lent on were weak, but we think they have overshot and gone too far on the other end.”

Such was Mr. Greenblatt’s reaction, as he learned that an infusion of credit for his Baltimore factory would not come easily. His company has been enjoying double-digit sales growth. This month, it received the two largest orders in its history, he said.

“It was jubilation,” he said. “I was doing the Funky Chicken.”

The initial call to Wachovia left him dismayed.

“I’m stunned,” Mr. Greenblatt said. “God is smiling on this factory. We’re at such an exciting inflection point, and this is what a bank is supposed to do. There’s sand in the gears.”

No loan meant one fewer order for the factory in Chicago that makes the robot Mr. Greenblatt wants to buy, and fewer hours for workers there. It meant less business for the truck driver who would have hauled the robot to Baltimore, and no help-wanted ads for Marlin Steel Wire Products.

Mr. Greenblatt eventually got oral approval for the loan, though after more than a week. He was still waiting for the money at the end of last week.

Wachovia, which lost $8.9 billion in the second quarter, declined to discuss the loan. But the bank confirmed that it has been reducing its lending in troubled areas of the economy.

“We’ve got industries that we consider to be stressed industries, and we’re looking at those a lot harder,” said Carlos Evans, a wholesale banking executive for Wachovia, listing as examples housing construction, building products and distributors for those goods. “Our loan growth slowing is more indicative of the economy than anything else.”

Still, Wachovia’s commercial and industrial loans grew by 13 percent in June compared with the prior year, Mr. Evans said.

“We’re saying yes daily,” he said.

But recent signs suggest that tight lending is spilling from housing into other areas of the business world. Companies with solid credit and profitable businesses can generally still get loans, but rates are higher and wait times are longer.

According to a survey of senior loan officers conducted by the Federal Reserve in April, 55 percent of American banks tightened lending requirements for commercial and industrial loans to large and midsize companies — up from about 30 percent in the previous survey, in January. About 70 percent of the respondents said they have made such loans more expensive.

“Banks will be much more cautious and keep raising the bar, and that will lead to an outright decline in total commercial and industrial loans,” predicted Stuart G. Hoffman, chief economist at the PNC Financial Services Group in Pittsburgh. “Banks clearly have to rebuild their capital base. They’re going to look a bit more nervously before they make those loans.”

Until last summer, banks lent freely, banking experts say, because they sold most of the loans they issued, making them less concerned about whether the customer could handle the payments: If the loan went bad, that was someone else’s problem.

But in the wake of the mortgage crisis, that system has all but shut down. Banks are now stuck with the loans they extend, making them more motivated to scrutinize their customers, particularly younger and smaller businesses.

“It’s the small business guy who creates most of the jobs,” said Mr. Kiefer, the First Capital chief executive. “If they can’t borrow to employ people, then we’ve got a mess on our hands.”

For the last six months, Saul Epstein has been trying in vain to get a $2 million line of credit for his company, Global Harness Systems. The company, based in Bala Cynwyd, Pa., has a factory in Mexico, where it makes parts for engines. The factory gets paid for its wares weeks after they have shipped, necessitating credit to finance the upfront costs of production — raw materials, labor and transportation.

Mr. Epstein figured that getting a loan would be easy. Since he became chief executive last year, Global Harness has gone from break-even to profitable. Sales should reach $20 million this year, up from $17 million last year, he said. But in this new era of caution, banks are focused on the fact that Global Harness lost money in 2005.

“They keep saying, the way the times are, we need a longer track record,” Mr. Epstein said.

Mr. Epstein, forced to limit his production to what he can finance with his existing cash flow supplemented by his own money, has been tightening credit himself: He has been turning down orders from companies with any whiff of financial troubles, lest his company fail to get paid.

“The same way the bank is hesitant to lend to me, you’re concerned about taking on a customer that might go into bankruptcy,” he said.

George Rosero, president and chief executive of Atlanta Pediatric Therapy, has been trying for more than a month to increase his roughly $500,000 credit line to about $1 million.

His company, profitable for the last two years, offers therapy to children with speech and physical impediments, he said. Mr. Rosero aims to expand by adding four sales people. He wants to buy new software to better manage communications with patients and hire a consultant to improve the work environment.

All of that is on hold.

“Three or four years ago, I could just make a phone call and get an increase,” Mr. Rosero said. “Now, they’re asking me for a lot more information.”
 

    Worried Banks Sharply Reduce Business Loans, NYT, 28.7.2008, http://www.nytimes.com/2008/07/28/business/economy/28credit.html?hp

Working Long Hours, and Paying a Price

July 27, 2008
The New York Times
By KELLEY HOLLAND

DO you ever mutter under your breath at a dry cleaner with the temerity to open as late as 7 a.m.? Have you snapped at a neighbor who asks if you plan to attend the 7:30 p.m. town council meeting? Does your child have trouble remembering which country you are in this week?

If you answered yes to more than one of these questions, chances are you have been working the long hours that are increasingly common for many salaried employees.

Officially, the average workweek has changed little in the last two decades. But those figures mask a shift in who works the most. In 1983, the lowest-paid workers were more likely to work long hours, according to the National Bureau of Economic Research. But by 2002, the most highly paid workers were twice as likely to work long hours as the lowest paid.

After my last column, on obesity as a workplace issue, my inbox was full of messages describing long days of sedentary work — along with lunches gulped down in the office, frequent travel and BlackBerrys that never seem to quit.

Is all this work a bad thing?

Truth be told, as a society we have been ambivalent about work hours as long as — well, as long as we have been a society. There have been demands for shorter work hours since the late 18th century, when it was not uncommon to spend 70 or more hours each week performing some kind of manual labor. In 1791, for example, Philadelphia carpenters went on strike, demanding a 10-hour workday. And in the 1840s, the Lowell Female Labor Reform Association petitioned the Massachusetts legislature for a 10-hour workday for mill workers. (Both efforts failed.)

But our Puritan work ethic has been part of our culture for just as long. Some employees are drawn to challenging, demanding work and the outsize financial rewards that can follow. A survey of highly paid American workers published in 2006 by the Center for Work-Life Policy found that 21 percent of them — mostly men, it should be noted — said they worked at least 60 hours a week under highly stressful conditions. Two-thirds of those respondents said they loved their work.

“Americans do seem to want to work longer, and you ask them, ‘Do you like your job?’ and we like our jobs more than other people do,” said Robert Whaples, a professor of economics at Wake Forest University who has studied work hours.

Professor Whaples theorized that when most people were working 12 hours a day or more, obtaining any amount of leisure time was more of a priority. But the general reduction in work hours has helped ease the need for downtime for at least some workers.

Alternatively, he said, “Maybe we’ve convinced ourselves this is what we should be doing” in a world of conspicuous consumption.

Still, long days at work take a serious toll. For starters, it is very hard for employees to maintain a healthy lifestyle when work and commuting consume 60 or more hours a week. It is probably not a coincidence that obesity has become more prevalent as work hours have expanded for some.

Too many hours at the office can also wind up being counterproductive. Employees who are overtired or preoccupied with neglected personal issues are unlikely to perform at their peak. They fall behind, spend more unproductive time at work to catch up, and so on.

It is in managers’ interests to help employees find ways to get more done in less time, and some are trying.

Sprint Nextel, for example, offers its employees time-saving services like the ability to fill prescriptions at work and help with travel planning, said Collier Case, Sprint’s director of health and productivity. There are also incentives to stay active at work: the headquarters in Overland Park, Kan., has covered pathways between buildings, and stairwells are designed to be inviting. (Also, some elevators operate at deliberately slow speeds.)

Other companies are addressing the problems of long hours head on. About a year ago, the financial services asset management group at Ernst & Young began trying to cope better with its busy season, roughly February to May, when long stretches of 11- and 12-hour days and weekend work are the norm. Arthur Tully, the partner in charge of the group, went to his manager, who offered to pay for consultants who could help change the group’s work style.

The consultants emphasized the inefficiency of multitasking (nothing gets done very well); the need for adequate sleep, exercise and a healthy diet; and the importance of scheduling time for restorative personal priorities.

Things changed. Free fruit was supplied twice daily, and bagels and cream cheese were replaced with granola and fruit. Employees were also urged to limit weekend work to one day when feasible, and get home to their families on Friday nights.

“There’s a view that the longer you work, the better you are,” Mr. Tully said. “But that’s not true at all.”

It was the group’s busiest season ever, Mr. Tully said, but employees’ hours declined over all. He does not yet know what effect the program had on turnover, but at least one part of it has been made permanent. The fruit deliveries ended after the busy season, and employees objected immediately. The fruit, Mr. Tully said, is back.

    Working Long Hours, and Paying a Price, NYT, 27.7.2008, http://www.nytimes.com/2008/07/27/jobs/27mgmt.html

Stocks Mixed After Spate of Hopeful Economic Reports

July 26, 2008
The New York Times
By MICHAEL M. GRYNBAUM

An unexpected spate of good news about the economy lifted stocks on Friday, as Wall Street hoped a rise in consumer confidence and better-than-expected business spending would buoy investors’ spirits after a bumpy week.

The major stock indexes shot upward at 10 a.m., moments after a report showed that confidence about the economy rebounded in July. Americans surveyed by the University of Michigan and Reuters said they felt better about the economy than any time since April, although the numbers remained far below those at the beginning of the year.

Americans’ expectations stayed subdued, and consumer surveys are considered relatively volatile. Wall Street shrugged off those caveats, with the Dow trading up more than 50 points. The broader Standard & Poor’s 500-stock index was up 0.6 percent. Stocks are trying to recover from Thursday’s painful losses.

A separate report showed that orders for big-ticket items rose last month, beating economists’ expectations. A surge in export orders and investment in military-related products sent durable goods orders up 0.8 percent in June from a revised 0.1 percent in May, the Commerce Department said. Excluding orders for military-related goods, orders were up only 0.1 percent.

Sales of newly built homes dropped 0.6 percent in June, but the decline was less than expected, a separate Commerce Department report showed. Inventories dipped as well, as sales fell to a 530,000 seasonally adjusted annual rate.

Sales were up in the Northeast and Midwest, but down in southern and western states. The median price for a new home ticked up slightly, to $230,900, up from $227,700 in May. Home prices are still 2 percent below their level from a year ago.

At the current sales rate, it would take 10 months to work off the current inventory.

“New sales are now very close to their population-adjusted low in 1982, after the last big bust, and we doubt they can fall a great deal further,” Ian Shepherdson, an economist at High Frequency Economics in London, wrote.

The durable goods report, which refers to items designed to last for several years, suggested that the manufacturing sector may be able to muddle through the economic downturn, although it has recorded deep job losses in the last few months.

A widely watched gauge of spending by businesses rose 1.4 percent after falling slightly in May, an encouraging sign for manufacturing companies that are otherwise struggling through one of the worst downturns since the Great Depression. The gauge measures orders of capital goods that exclude aircraft and military-related products.

Demand for transportation products declined 2.6 percent, as high oil prices caused problems for that portion of the economy.

Demand for electronic equipment was one of June’s biggest drivers, rising 5 percent. Heavy machinery orders were up 2.3 percent after falling 3.7 percent in May. Orders for metals also surged by more than 5 percent.

Computers and telecommunications equipment saw less demand. Civilian aircraft orders declined 25 percent, although that figure swings from month to month.

“We expect to see further weakness ahead in orders as access to credit remains under pressure and the consumer sector weakens more rapidly,” James Knightley, an economist at ING Bank in London, wrote in a note to clients.

    Stocks Mixed After Spate of Hopeful Economic Reports, NYT, 26.7.2008, http://www.nytimes.com/2008/07/26/business/economy/26econ.html?hp

Foreclosure Filings More Than Double in Second Quarter

July 25, 2008
Filed at 8:38 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

NEW YORK (AP) -- The number of households facing the foreclosure process more than doubled in the second quarter compared to a year ago, according to data released Friday.

Nationwide, 739,714 homes received at least one foreclosure-related notice during the quarter, or one in every 171 U.S. households, Irvine, Calif.-based RealtyTrac Inc. said.

Soft housing sales, declining home values, tighter lending standards and a sluggish U.S. economy have left strapped homeowners with few options to avoid foreclosure. Many can't find buyers or owe more than their home is worth and can't refinance into an affordable loan.

Foreclosure filings increased year-over-year in all but two states, North Dakota and Alaska.

Nevada, California, Arizona, and Florida continued to clock in the highest foreclosure rates. One in every 43 Nevada households received a filing during the quarter.

Cities in California and Florida accounted for 16 of the worst 20 metro foreclosure rates. Stockton, Calif., had the worst rate, with one in every 25 homes in the town receiving a foreclosure filing. That's nearly seven times the national average.

RealtyTrac monitors default notices, auction sale notices and bank repossessions. Banks took back more than 222,000 properties nationwide in the second quarter, the company said. Bank repossessions accounted for 30 percent of total foreclosure activity, up from 24 percent in the previous quarter.

Economists estimated 2.5 million homes nationwide will enter the foreclosure process this year, up from about 1.5 million in 2007.

    Foreclosure Filings More Than Double in Second Quarter, NYT, 25.7.2008,http://www.nytimes.com/aponline/business/AP-ForeclosureRates.html

For Ford, the Road Ahead Is Full of Smaller Cars

July 24, 2008
The New York Times
By BILL VLASIC

DEARBORN, Mich. — In recent months, as Ford Motor Company executives watched $4 a gallon gas and a softening economy take a growing toll on sales and market share, the chief executive, Alan R. Mulally, prodded his management team for answers.

“Everybody says cut and cut some more, but how are we going to sustain this company?” Mr. Mulally said in one meeting in his office on the 12th floor of Ford headquarters, according to people in attendance. “What does a sustainable Ford look like, gentlemen?”

In less than two years since he arrived as an outsider from Boeing to run Ford, Mr. Mulally had already mortgaged the company to raise cash, sold off three brands and cut truck production in the face of rising gas prices.

“Why are we in business?” he repeatedly asked the group. “We are in business to create value. And we can’t create value if we go out of business.”

On Thursday, the company will officially announce its response to those questions — a huge shift in production to build more small cars, and fewer pickups and sport utility vehicles.

It’s a big bet on the future of the American auto industry, involving the redirection of billions of dollars in investment, that Mr. Mulally hopes will help Ford thrive, not just survive.

There are no guarantees that it will pay off, of course. But industry analysts are beginning to see Mr. Mulally as an executive who is willing to take big chances to reinvent a way of doing business in Detroit. The old way, relying on sales of big, profitable trucks and S.U.V.’s, increasingly looks out of step with the times.

“He has become the symbol of change for the American auto industry,” said John Casesa of the consulting firm Casesa Shapiro Group. “Because he’s from the outside, he’s not tied to the past.”

Mr. Mulally, who will turn 63 next month, has been unavailable for interviews in advance of Thursday’s announcement of Ford’s new direction and its second-quarter earnings.

Rapidly shifting consumer tastes have forced Mr. Mulally to quickly find a way to break Ford’s dependence on pickups and sport utility vehicles for profits in North America.

After losing a combined $15.3 billion in 2006 and 2007, Ford surprised the industry by posting a $100 million profit in the first quarter of this year.

But with gas prices rising and truck sales collapsing, Mr. Mulally stunned the industry less than a month later by announcing that Ford was abandoning its 2009 profit goal and drastically scaling back truck production.

Analysts said the company, long considered the least nimble of Detroit’s automakers, usually would have waited at least until another quarter passed before dropping such bombshell.

“Mulally is far more of an activist than the traditional Ford chief executive who was a 35-year lifer in the company,” said David Healy of Burnham Securities.

Mr. Mulally has also made a believer of Kirk Kerkorian, the financier who has invested more than $1 billion in Ford stock since April.

Mr. Kerkorian had previously taken large stakes in General Motors and Chrysler, and then sold out after running afoul of management. But his interest in Ford appears primarily based on Mr. Mulally’s leadership and strategic direction.

In fact, Mr. Kerkorian substantially increased his stake in Ford after his top deputy, Jerome York, had a meeting with Mr. Mulally. “Alan is the real deal,” Mr. York said.

On Thursday, Ford is expected to report a second-quarter loss that includes charges to cover the temporary shutdowns of several assembly plants and reductions in its salaried and hourly work forces.

But investors and analysts will be focusing more on Ford’s radical plan to shift production to smaller cars and crossover vehicles.

“This is not a sure thing by any means,” said Rebecca Lindland, an auto analyst with the forecasting firm Global Insight. “The question is whether Ford can produce the styling and quality in cars that consumers want.”

Where once Ford built its car line around the midsize Taurus sedan, the company will now make its compact Focus the linchpin of the lineup.

Restoring Ford’s car business has been a paramount concern for Mr. Mulally since he succeeded William C. Ford Jr., a Ford family scion, as chief executive.

As recently as 2004, two-thirds of Ford’s United States sales were of truck-based products. Many people in the company were skeptical that Ford could be profitable with more small cars in the showroom.

But Mr. Mulally has challenged those notions.

At a town hall-style meeting this year, he expressed frustration when one employee suggested that making small cars was a money-losing proposition.

“Why can’t we make money on small cars?” Mr. Mulally said, according to two people in attendance. “Do you think Toyota can’t make money on small cars?”

At virtually every management meeting, Mr. Mulally would repeatedly refer to charts showing that smaller vehicles constituted 60 percent of the global automotive market.

Each time an executive suggested that Ford’s future lay in expanding its truck business, Mr. Mulally pulled the charts out.

“Let’s see, the global share of large vehicles is 15 percent,” he said at one such meeting, according to people in attendance. “And you’re telling me you want to invest more in them?”

He often exhorts his employees to “take a point of view of the future,” and then devise a plan supporting it.

By betting on the growth of small cars, Ford will move billions of dollars in investments away from the pickups and S.U.V.’s that have provided the bulk of its profits for nearly two decades.

Mr. Mulally is committed to building global platforms for Ford cars that can be sold throughout North America, Europe and Asia.

And his senior managers have been hand-picked for their expertise in international markets.

Mark Fields, who heads Ford’s Americas division, was formerly a top executive with Ford’s Japanese partner Mazda. Derrick Kuzak, the company’s product chief, previously ran European vehicle programs.

Mr. Mulally also recruited James Farley from Toyota to lead Ford’s global sales and marketing efforts.

Besides recasting his executive team, Mr. Mulally changed how they worked together.

Ford had been famous for its culture of executive fiefs that insulated senior officials from one another. One of Mr. Mulally’s first tasks was to institute regular Thursday meetings of top managers to review business plans and encourage debate among departments.

He also created a new mantra for all employees to help break down walls: “One Ford, One Team, One Plan, One Goal.”

Having spent 37 years with Boeing, Mr. Mulally often refers to his old company in describing how Ford can emerge from crisis conditions.

As head of engineering for the Boeing 777 airliner in the early 1990s, Mr. Mulally would urge employees to stay focused even as the economy and airline industry struggled.

In a documentary film about the making of the aircraft, Mr. Mulally repeatedly stressed that sticking to the plan was paramount, words that could as easily apply to Ford today.

“We can’t let the anxiousness of today’s environment in any way slow us down,” he said. “Don’t let current events affect our intensity of getting this program done.”

    For Ford, the Road Ahead Is Full of Smaller Cars, NYT, 24.7.2008, http://www.nytimes.com/2008/07/24/business/24ford.html

Fed Report Says Economy Continued to Slow

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

WASHINGTON — The country slogged through slower economic growth and rising prices during the summer, packing a double whammy to people and businesses alike.

The Fed’s new snapshot of business conditions, released Wednesday, also underscored the challenges confronting the Federal Reserve chairman, Ben S. Bernanke, and his colleagues as they try to get the economy back on track.

For now, many economists predict the Fed will probably leave a key interest rate alone when it meets on Aug. 5 — given all the economic crosscurrents. Increasing rates to fend off inflation would hurt the fragile economy and the already crippled housing market. On the other hand, the Fed is not inclined to lower rates because that would aggravate inflation.

Growth and inflation barometers turned worse in the summer, according to the Fed report. Some worry that the country may be headed for a bout of stagflation, that toxic combination of stagnant growth and stubborn inflation last seen in the 1970s.

Mr. Bernanke has said, however, that he does not believe the economy will suffer from stagflation.

Information from the Fed’s 12 regional banks around the country suggested that “the pace of economic activity slowed somewhat since the last report” issued in June, the Fed report said.

Consumer spending — the economy’s lifeblood — was reported as “sluggish or slowing” in nearly all the 12 Fed regions, although the government’s tax rebate checks spurred sales for some items, especially electronics. Sales at many other stores, particularly for housing-related goods, were typically characterized as “weak or falling,” however.

Looking ahead, “the outlook for retail activity was also generally downbeat,” the Fed report said. Sales expectations were described as “grim” among retailers in the Dallas Fed region and “subdued” in the Atlanta region.

Auto sales, meanwhile, were characterized as “almost uniformly weak” across all Fed regions. Sales were especially poor for gas-guzzling S.U.V.’s, trucks and some minivans.

On the manufacturing front, activity declined in many Fed regions. Production of housing-related goods — like construction equipment, wood products, home furnishings and heating and cooling systems — were particularly hard hit. On the positive side, though, overseas demand for exports remained “generally high.”

The drooping value of the dollar, which makes American-made goods and services cheaper and more attractive to foreign buyers, has helped to increase export growth. That export growth has been a crucial force keeping the economy afloat.

The Dallas region noted strong overseas sales of high-tech products. The Fed regions of Cleveland, Richmond, Chicago and Kansas City all reported continued high demand for exports.

Meanwhile, food manufacturers in the Fed’s San Francisco region said they were continuing to operate at, or near, full tilt because of persistently high demand.

Turning to inflation, all Fed regions described “overall price pressures as elevated or increasing,” the Fed report said.

Businesses continued to be hit by rising prices for fuel, metals, food and chemicals, among other things. Many Fed regions said manufacturers planned to raise prices to customers as a way of coping with the higher production costs. Some worried about a drop in customer demand and overall sales volume because of price increases.

Some companies in the Philadelphia Fed region indicated that sluggish demand has made it difficult to raise prices. Meanwhile, some businesses in the Atlanta region were hesitant to pass along their higher costs as price increases because of cutbacks in discretionary spending by consumers.

Retail prices went up in several Fed regions. In the Kansas City region, for instance, companies reported higher prices at hotels, restaurant and resorts. Chicago retailers reported raising prices charged to consumers in response to higher wholesale prices.

By contrast, the Fed regions of New York and Cleveland reported relatively stable retail prices. One major retail chain in New York said that while costs under existing contracts were not up substantially, ”some escalation in prices was expected within the next year,” the Fed report said.

The government last week reported that consumer prices in June rose at the second-fastest pace in a quarter century. Wholesale prices went up sharply, too.

In a dose of good news, oil prices retreated Wednesday. They are now hovering above $127.44 a barrel. Oil prices marched to a new high above $147 a barrel less than two weeks ago, but have been ebbing in recent sessions.

At the gas pump, prices dipped. A gallon of regular dropped more than a penny to an average of $4.042 nationwide, according to the auto club AAA, the Oil Price Information Service and Wright Express.

On the jobs front, most Fed regions said employment conditions were about the same or slightly weaker. Employers have cut jobs for six straight months as they try to keep work forces lean amid the economic slowdown. Housing, credit and financial problems all have weighed on growth. The unemployment rate, at 5.5 percent in June, is expected to climb in the months ahead.

Wage pressures, meanwhile, were described as ”generally modest.” Economists look to wages for clues about inflation.

Businesses in the Fed regions of Cleveland, Atlanta, Chicago and Kansas City reported very little upward wage pressures, except for very skilled workers and those in the energy field. But the Boston and Dallas regions said more workers were requesting higher wages to supplement cost of living increases.

Mr. Bernanke has said he does not see a repeat of the 1970s-style situation where workers demanded — and got — higher wages to keep up with ever-rising prices. But Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, has warned that the Fed should not wait for signs of something like that to emerge before taking corrective action.

The Fed’s survey is based on information supplied by the its 12 regional banks. The information was collected before July 14.

    Fed Report Says Economy Continued to Slow, NYT, 24.7.2008, http://www.nytimes.com/2008/07/24/business/economy/24econ.html

Bush Drops Opposition to Housing Bill

July 24, 2008
The New York Times
By SHERYL GAY STOLBERG and DAVID M. HERSZENHORN

WASHINGTON — The White House said Wednesday that President Bush had dropped his opposition to the housing bill moving through Congress, clearing the way for a broad package of legislation that would shore up the nation’s troubled mortgage companies, Fannie Mae and Freddie Mac, and help struggling homeowners refinance loans.

The House is expected to vote on the bill as early as Wednesday, and it could be sent to Mr. Bush’s desk by the end of the week.

Mr. Bush had voiced objections to a $3.9 billion provision that would give grants for local governments to purchase and refurbish foreclosed properties — a provision that the White House regards as a bailout.

But Mr. Bush set aside those objections on the advice of the Treasury secretary, Henry M. Paulson Jr., who told him that the overall package was necessary to help stabilize the housing and credit markets, according to the White House press secretary, Dana Perino, who announced the switch Wednesday morning. Ms. Perino said the gravity of the crisis, coupled with Congress’ plans to recess later this summer, was the reason for the reversal.

“The president would not have signed this bill if we had a lot of extra time on our hands,” Ms. Perino said. “We don’t.”

Mr. Bush believed he could have won a veto fight with the Congress, she said, but “had concluded a prolonged veto fight would not be good for the housing industry.”

The $3.9 billion provision had been a subject of dispute between Mr. Bush and Congressional Democrats for months, and for a time, at least, Democrats seemed ready to concede. Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said that if removing the grants from the bill was needed to get Mr. Bush’s signature, he was prepared to do so.

But when the White House issued yet another warning of a veto last week and reiterated its opposition to the grants — even after Mr. Paulson asked Congress to include the rescue plan for Fannie Mae and Freddie Mac in the bill — the House speaker Nancy Pelosi virtually dared Mr. Bush to follow through.

“Let me get this straight,” she said at a news conference. “The president is asking us to do something quite significant to address this housing crisis, which has long been neglected by his administration, and he is going to resent the ability of state and local governments to buy up these properties, which used to be on the revenue rolls, which are now abandoned properties taking down communities, taking down the values of their neighbors’ homes?”

The bill would include authority for the Federal Housing Administration to insure up to $300 billion in refinanced mortgages to help borrowers in danger of foreclosure, allowing hundreds of thousands of homeowners trapped with mortgages they cannot afford to stay in their homes by getting new, cheaper loans. It also includes a provision that Mr. Bush has been seeking for years, a plan to modernize the Federal Housing Administration and create a regulatory agency to oversee Fannie Mae and Freddie Mac. Mr. Bush first announced his support for such a plan in 2003, and last August, he called for Congress to pass legislation to put it in place.

The grants are a relatively minor provision. But Ms. Perino said the administration had “serious concerns” about the provision, which it views as a nearly $4 billion giveaway that could largely benefit irresponsible and even predatory mortgage lenders who have seized and now own the foreclosed properties, but cannot find buyers or are faced with selling them at a steep loss.

“It does nothing to help people actually stay in their homes and in fact there are people who believe it would actually cause more foreclosures for others,” Ms. Perino said.

But the provision has broad support among many urban lawmakers whose districts have seen an increasing number of properties fall into foreclosure, and become abandoned, depleting property tax rolls and blighting neighborhoods.

    Bush Drops Opposition to Housing Bill, NYT, 23.7.2008, http://www.nytimes.com/2008/07/24/business/24housing.html?hp

Woes Afflicting Mortgage Giants Raise Loan Rates

July 23, 2008
The New York Times
By VIKAS BAJAJ

Mortgage rates are rising because of the troubles at the loan finance giants Fannie Mae and Freddie Mac, threatening to deal another blow to the faltering housing market.

Even as policy makers rushed to support the two companies, home loan rates approached their highest levels in five years.

The average interest rate for 30-year fixed-rate mortgages rose to 6.71 percent on Tuesday, from 6.44 percent on Friday, according to HSH Associates, a publisher of consumer rates. The average rate for so-called jumbo loans, which cannot be sold to Fannie Mae and Freddie Mac, was 7.8 percent, the highest since December 2000.

Loan rates are rising because of concern in the financial markets about the future of Fannie Mae and Freddie Mac, which own or guarantee nearly half of the nation’s $12 trillion mortgage market. The federal government has proposed a rescue, and has urged Congress to approve it quickly.

But bond investors, worried that the companies may not be as big a support to the market as they have been, are driving up interest rates on securities backed by home loans. That added cost is being passed on to consumers through the mortgage markets. For a $400,000 loan, the increase in 30-year rates in the last few days would add $71 to a monthly bill, or $852 a year.

The rise in rates is of greatest concern for homeowners whose mortgages required them to pay only the interest on their loans for the first few years. If such borrowers are unable to refinance into lower-cost loans, many of them will face the prospect of having to pay both interest and principal at higher, adjustable rates.

For borrowers with a $400,000 loan, such a jump could send their monthly payments to $2,338 from $1,417, estimates Louis S. Barnes, a mortgage broker at Boulder West Financial in Boulder, Colo.

While mortgage rates approached these levels earlier this year and in 2007 during times of stress in the financial markets, the latest move adds urgency to the government’s efforts to restore confidence in Fannie Mae and Freddie Mac. Lawmakers are expected to vote this week on a measure that would give the Treasury Department authority to lend more money to the companies and buy shares in them if they falter.

The uncertainty surrounding the two companies is the latest in a series of pressures bearing down on the housing market and the broader economy. Higher interest rates make it harder and more expensive to refinance existing debts and to buy homes.

“When we get to rate levels like this, the market just shuts down,” Mr. Barnes said.

While mortgage rates remain relatively low by historical standards, they are higher than what homeowners and the economy became accustomed to during the recent housing boom. Lending standards have also tightened significantly in the last 12 months, and many popular loans are no longer available.

A government report based on data on Fannie Mae and Freddie Mac loans said on Tuesday that home prices fell 4.8 percent in May from a year earlier. That compared to a 4.6 percent decline in April. Other home price indexes that track a broader set of loans show much bigger declines.

Worries about Fannie Mae and Freddie Mac have led to weaker demand for securities backed by home mortgages, analysts say. Inflation, which tends to send bond prices down and bond rates up, is another concern.

In a securities filing released on Friday, Freddie Mac suggested that it might have to pare or slow the growth of its mortgage portfolio to bolster its capital.

Freddie and Fannie together own about $1.5 trillion in mortgage securities and home loans, and they guarantee an additional $3.7 trillion in securities held by other investors. The companies had a combined net worth of $55 billion as of March. Analysts and critics say the companies need significantly more capital to cushion the blow of growing losses on the more-risky mortgages made during the boom.

Important players in the mortgage market for decades, the two companies have become even more vital in the last year as several large lenders have gone out of business and investors have lost confidence in mortgage securities that are not backed by the government, or by Fannie or Freddie.

This year, the regulator overseeing the companies gave them more leeway to use their capital and the companies responded by increasing their portfolios. Freddie’s holdings grew 6.9 percent in the first five months of the year from the end of 2007; Fannie’s portfolio increased 1.8 percent.

But now it appears the companies, particularly Freddie Mac, might have to slow their purchases of mortgage securities. In its filing, Freddie Mac said it aims to increase its portfolio by a total of 10 percent in 2008. A spokeswoman for Fannie Mae declined to comment on its plans.

“That’s one of the ways in which the agencies can increase capital, by slowing down their purchases,” said Derrick Wulf, a bond portfolio manager at Dwight Asset Management. “I don’t think the market expects a dramatic slowdown in purchases but there clearly is uncertainty about that.”

Mortgage rates have been driven up in part by a rise in the yield on Treasury notes and bonds. On Tuesday, bond prices, which move in the opposite direction of the yields, slumped after the president of the Federal Reserve Bank of Philadelphia, Charles I. Plosser, said the central bank might need to raise interest rates to combat inflation “sooner rather than later.”

Some analysts say the rise in mortgage rates can be explained by technical factors in the bond market that are forcing mortgage companies and banks to sell securities to manage their portfolios. These analysts add that at current prices the mortgage securities guaranteed by Fannie and Freddie should be attractive to investors. Mortgage bonds backed by Fannie Mae, for instance, are trading at a 2.1 percentage point premium to the 10-year Treasury note, up from 1.8 points on July 14.

“I don’t see how anyone could argue that the fundamentals of mortgages are not attractive,” said Matthew J. Jozoff, an analyst at JPMorgan.

In March, for instance, mortgage rates surged after some big investors were forced to sell billions in mortgage bonds. But rates fell back slowly in the spring after the selling pressure eased and other investors, including Freddie Mac and Fannie Mae, made big purchases.

This time, the coming Congressional vote on the Treasury plan to support the companies could help allay investors’ fears, said W. Scott Simon, a managing director at Pimco Advisors, the giant bond fund firm, which owns mortgage securities. “It will go a long way toward reviving demand.”

    Woes Afflicting Mortgage Giants Raise Loan Rates, NYT, 23.7.2008, http://www.nytimes.com/2008/07/23/business/23rates.html

Women Are Now Equal as Victims of Poor Economy

July 22, 2008
The New York Times
By LOUIS UCHITELLE

Across the country, women in their prime earning years, struggling with an unfriendly economy, are retreating from the work force, either permanently or for long stretches.

They had piled into jobs in growing numbers since the 1960s. But that stopped happening this decade, and as the nearly seven-year-old recovery gives way to hard times, the retreat is likely to accelerate.

Indeed, for the first time since the women’s movement came to life, an economic recovery has come and gone, and the percentage of women at work has fallen, not risen, the Bureau of Labor Statistics reports. Each of the seven previous recoveries since 1960 ended with a greater percentage of women at work than when it began.

When economists first started noticing this trend two or three years ago, many suggested that the pullback from paid employment was a matter of the women themselves deciding to stay home — to raise children or because their husbands were doing well or because, more than men, they felt committed to running their households.

But now, a different explanation is turning up in government data, in the research of a few economists and in a Congressional study, to be released Tuesday, that follows the women’s story through the end of 2007.

After moving into virtually every occupation, women are being afflicted on a large scale by the same troubles as men: downturns, layoffs, outsourcing, stagnant wages or the discouraging prospect of an outright pay cut. And they are responding as men have, by dropping out or disappearing for a while.

“When we saw women starting to drop out in the early part of this decade, we thought it was the motherhood movement, women staying home to raise their kids,” Heather Boushey, a senior economist at the Joint Economic Committee of Congress, which did the Congressional study, said in an interview. “We did not think it was the economy, but when we looked into it, we realized that it was.”

Hard times in manufacturing certainly sidelined Tootie Samson of Baxter, Iowa. Nine months after she lost her job on a factory assembly line, Ms. Samson, 48, is still not working. She could be. Jobs that pay $8 or $9 an hour are easy enough to land, she says. But like the men with whom she worked at the Maytag washing machine factory, now closed, near her home, she resists going back to work at less than half her old wage.

Ms. Samson knows she will have to get another job at some point. She and her husband still have a teenage daughter to put through college, and his income as a truck driver is not enough. So Ms. Samson, now receiving unemployment benefits, is going to college full time — leaving the work force for more than two years — hoping that a bachelor’s degree will enable her to earn at least her old wage of $20 an hour.

“A lot of women I know, all they did was work at the Maytag factory,” said Ms. Samson, who joined Maytag’s assembly line 11 years ago. “They can’t find another job like it and they deal with this loss by dropping out.”

The Joint Economic Committee study cites the growing statistical evidence that women are leaving the work force “on par with men,” and the potentially disastrous consequences for families.

“Women bring home about one-third of family income,” said Carolyn Maloney, Democrat of New York and vice chairman of the Joint Economic Committee. “And only those families with a working wife have seen real improvement in their living standards.”

The proportion of women holding jobs in their prime working years, 25 to 54, peaked at 74.9 percent in early 2000 as the technology investment bubble was about to burst. Eight years later, in June, it was 72.7 percent, a seemingly small decline, but those 2.2 percentage points erase more than 12 years of gains for women. Four million more in their prime years would be employed today if the old pattern had prevailed through the expansion now ending.

The pattern is roughly similar among the well-educated and the less educated, among the married and never married, among mothers with teenage children and those with children under 6, and among white women and black.

The women, in sum, are for the first time withdrawing from work with the same uniformity as men in their prime working years. Ninety-six percent of the men held jobs in 1953, their peak year. That is down to 86.4 percent today. But while men are rarely thought of as dropping out to run the household, that is often the assumption when women pull out.

“A woman gets laid off and she stays home for six months with her kids,” Ms. Boushey said. “She doesn’t admit that she is staying home because she could not get another acceptable job.”

The biggest retreat has been in manufacturing, where more than one million women have disappeared from payrolls since 2001. Like men, many have not returned to jobs in other sectors.

Wage stagnation often discourages them from pursuing new jobs, says Lawrence Katz, a labor economist at Harvard. “While pay was rising solidly in the 1990s, you had women continuing to move into the work force,” Mr. Katz said.

Pay is no longer rising smartly for women in the key 25-to-54 age group. Just the opposite, the median pay — the point where half make more and half less — has fallen in recent years, to $14.84 an hour in 2007 from $15.04 in 2004, adjusted for inflation, according to the Economic Policy Institute. (The similar wage for men today is two dollars more.)

Not since the 1970s has that happened to women for so long a stretch — and because this is a new experience for them, “women may be even more reluctant than men to accept declining wages,” said Nancy Folbre, an economist at the University of Massachusetts.

Joyce Call, 39, of Howell, Mich., near Detroit, certainly fits that description. She took an accounting job in January 2006 at Forming Technologies, which supplies plastic to auto companies.

The pay, $14 an hour — more than $25,000 a year — was acceptable, she said, but not the raises, which came to only 28 cents an hour over two years, or the Christmas bonus: $150 the first year and nothing the second.

“I was treated poorly,” she said, explaining her departure.

For the moment, Ms. Call is home-schooling one of her two sons, falling back on her husband’s $70,000 income as a plumber, and looking for another job, to return to a work force she has seldom left since finishing high school in 1988.

“People are just not hiring in Michigan,” she said. What’s more, she is reluctant because of the high cost of gasoline to commute more than an hour each way to the next job. “It would be a tough decision to accept a job that required me to go farther,” she said, adding that she and her husband were cutting back on discretionary spending until she is employed again.

What helped drive up the percentage of women in the work force were the thousands who came off welfare and took jobs in the 1990s, pushed to do so by the welfare-to-work legislation. A strong economy eased the way. So did tax credits and more subsidized child care. Now as the economy weakens and employers shrink their payrolls, many of these women struggle to find work.

Lisa Craig, 42, is among them. Raising three sons in her native Chicago, she had worked only occasionally since high school and started receiving welfare benefits in 1993. For the next seven years she took courses in office skills, was a volunteer in a day care center and served for a while as an unpaid intern for a college vice president.

And then in 2000 she went to work. For most of that year she earned $10 an hour as a salesclerk at a duty-free shop at O’Hare Airport, selling luxury items, but left the job to move to Milwaukee with her children to be near her sister.

“I was in a bad marriage,” she said, “and I was getting a divorce.”

Over the last eight years in Milwaukee she has worked only sporadically although, as she puts it, she has applied for hundreds of jobs, struggling to supplement a $628-a-month welfare check that goes almost entirely to rent, plus $500 a month in food vouchers. The longest tenure, 11 months, was as a salesclerk earning $7.75 an hour at a Goodwill Industries clothing store.

She lost that job last November, but is volunteering at the Milwaukee office of 9to5, National Association of Working Women, hoping to draw a modest salary soon as a community intern.

Ms. Samson, the former Maytag worker, says she can afford not to work because she qualified under the terms of the plant closing for two years of unemployment benefits as long as she is a full-time student. She lost health insurance but shifted to her husband’s policy.

His $40,000 income as a truck driver and her $360 a week in jobless benefits gets them by while she takes an accelerated program at a William Penn University campus near her home. Graduation is scheduled for January 2010.

“If I were a single parent or did not have benefits,” Ms. Samson said, “I would have had to find a job. I could not have gone back to school to get my degree and the promise it holds of a better job.”

That for Ms. Samson is a good reason to drop out. Just working, which she has done nearly all of her adult life, is unappealing, she says. Even interior design, for which she once earned an associate’s degree, does not excite her anymore, she says, mainly because people can no longer afford to fix up their homes.

“A business degree will put me in a position to work for any company,” Ms. Samson said, “and put me in a position to work up into a well-paid human resources job.”

    Women Are Now Equal as Victims of Poor Economy, NYT, 22.7.2008, http://www.nytimes.com/2008/07/22/business/22jobs.html?hp

Ford to Make Broader Bet on Small Cars

July 22, 2008
The New York Times
By BILL VLASIC

DEARBORN, Mich. — The Ford Motor Company, which devoted itself for nearly 20 years to putting millions of Americans into big pickup trucks and sport-utility vehicles, is about to drastically alter its focus to building more small cars.

The struggling automaker, reacting to what it sees as a rapid and permanent shift in consumer tastes brought on by high gas prices, plans to unveil its new direction on Thursday, when it will report quarterly earnings.

Among the changes, Ford is expected to announce that it will convert three of its North American assembly plants from trucks to cars, according to people familiar with the plans.

And as part of the huge bet it is placing on the future direction of the troubled American auto industry, Ford will realign factories to manufacture more fuel-efficient engines and produce six of its next European car models for the United States market.

The company will also end speculation about its Mercury division by making the brand an integral part of its new small-car strategy, according to these people, who spoke on the condition that they not be quoted by name because of the timing of the official announcement on Thursday.

The sweeping changes are the result of months of strategic discussions by Ford executives, and represent a dramatic response to the woes afflicting Detroit’s automakers.

United States vehicle sales have slumped 10 percent so far this year, with Ford down 14 percent, and the industry is headed for its worst annual sales in more than a decade.

Moreover, $4-a-gallon gas and a weak economy have battered the market for big S.U.V.’s and pickups, and sent automakers scrambling to revamp their product lineups.

No company has more at stake than Ford, which popularized the S.U.V. in the 1990s with its truck-based Explorer and led the boom in pickups with its best-selling F-series model.

After losing $15.3 billon in 2006 and 2007 combined, Ford had hoped to stabilize its operations this year and return to profitability in 2009.

But rising fuel prices and the collapsing truck market forced the company, the second-biggest United States automaker, to abandon its profit target in May and accelerate its shift to smaller vehicles.

Since then, Ford’s chief executive, Alan R. Mulally, has directed an unprecedented overhaul of the company’s future products.

Mr. Mulally, who joined the company from aircraft maker Boeing in 2006, is committed to reducing Ford’s dependence on large vehicles, according to people familiar with his plans.

“We don’t have a sustainable company if we don’t do this,” Mr. Mulally recently told members of his management team.

For at least a decade, about 60 percent of Ford’s United States sales came from trucks and S.U.V.’s, compared to 40 percent from cars and car-based crossover vehicles.

Eight of the company’s 14 plants in North America now build trucks, S.U.V.’s and full-sized vans.

Those numbers are shifting rapidly as consumers turn away from large vehicles, and the chief goal internally is to make cars and crossovers the bulk of its product lineup to better align the company with market demand.

A Ford spokesman, Mark Truby, declined to comment Monday on the details of the company’s plans.

“We said when we made our June announcement about accelerating our transformation plan that we would have more details to share when we report our second quarter financial results in July,” he said.

Industry analysts believe Ford cannot wait any longer to reshape its manufacturing operations and step up production of smaller cars.

“Trucks and S.U.V.’s have been so central to their strategy for so long, but the bottom line is that consumers have moved on,” said David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

The sharp drop in vehicles sales this spring and summer has raised fresh concerns about the viability of Detroit’s automakers.

With its stock hovering around $10 a share and speculation growing about a possible bankruptcy filing, General Motors last week announced broad plans to cut costs and increase its cash reserves by $15 billion.

Ford has already slashed more than 40,000 jobs in the past three years, and sold off three of its European luxury brands to raise money.

But the company is now about to address its long-term, and increasingly precarious, reliance on big vehicles by transferring billions of dollars in product development and manufacturing costs into car programs.

Ford is expected to convert three of its big assembly plants from truck-based products to cars, including its so-called Michigan Truck plant in Wayne, Mich., that builds Ford Expedition and Lincoln Navigator S.U.V.’s.

The company plans to use the plant to increase its output of the Ford Focus, a compact car that has become one of its best sellers this year. Ford also plans to retool two of its V-8 engine plants to add production of more fuel-efficient 4-cylinder and V-6 engines.

A large part of its future car lineup will be based on vehicles currently under development for the European market. By 2010, Ford plans to begin assembling six of its upcoming European car models in North America, starting with the Ford Fiesta subcompact.

And while Ford has shed upscale brands like Land Rover and Jaguar, the company will keep the Mercury brand and use it as another distribution channel for small cars.

Some analysts have speculated that Ford might abandon Mercury as it streamlines its overall operations.

By shifting to smaller cars, Ford is attempting to reverse a strategy that generated big profits in the 1990s.

The automaker, along with G.M. and Chrysler, created sport-utility vehicles to combat the popularity of cars made by Toyota and Honda.

“The baby-boom generation didn’t want American cars,” said John Wolkonowicz, an auto industry analyst with the forecasting firm Global Insight. “But the Ford Explorer was the first family-friendly, four-door sport utility, and people bought it like crazy.”

In the mid-1990s, Ford introduced its full-size, seven-passenger Expedition and Navigator S.U.V.’s, which were built on a pickup-truck chassis.

The big vehicles got less than 15 miles a gallon of gas, but consumers hardly cared when gas was inexpensive. Other manufacturers followed suit, and the big S.U.V. became fashionable.

Ford and other automakers earned up to $15,000 in profit on each full-size sport-utility vehicle. At the company’s Michigan Truck plant, employees worked weekends to keep up with demand.

“It’s hard to blame Ford for building vehicles that consumers wanted to buy,” said Mr. Wolkonowicz.

Cheap gas also fueled the astronomic growth of the pickup truck market. In 2004, Ford sold a record 939,000 full-size pickups, and nearly two-thirds of its overall sales in the United States were trucks, vans and S.U.V.’s.

At the same time it invested in the growing truck market, Ford cut back spending on its cars. Its Taurus sedan, once the market leader, fell to a distant third behind the Toyota Camry and Honda Accord.

While it concentrated on trucks, Ford fell out of step with larger market trends. In 2004, only 28 percent of its United States sales were cars, compared to 43 percent for the overall market.

When Mr. Mulally was recruited as Ford’s chief executive in September of 2006, he began questioning the company’s dependence on pickups and S.U.V.’s.

Ford managers said Mr. Mulally repeatedly referred to charts that showed large vehicles constituted only 15 percent of the global automotive market. Small cars, by comparison, made up 60 percent.

At Mr. Mulally’s urging, Ford embarked on a longer-term strategy to globalize its car platforms and expand its car lineup in the United States market.

But the task took on greater urgency this spring, when rising gas prices drove consumers away from trucks in droves.

Between January and June, pickups tumbled from 13 percent of the overall market to 8 percent, and unsold S.U.V.’s stacked up on dealer lots. The company announced wholesale cutbacks in truck production and the elimination of 15 percent of its white-collar workforce.

Almost every day for the past three months, Mr. Mulally assembled his senior executives in his office to pore over future product plans. A consensus emerged to accelerate the switch to cars and further downsize truck production.

The plans will begin to take effect later this year when production of the Expedition and Navigator is moved from the Michigan Truck plant to another factory in Kentucky.

Then, in a move that symbolizes the company’s overall change of direction, workers will quickly shift to making body panels for the Focus compact.

    Ford to Make Broader Bet on Small Cars, NYT, 22.7.2008, http://www.nytimes.com/2008/07/22/business/22ford.html?hp

Economy hobbles Calif. town

21 July 2008
USA Today
By Edward Iwata

VALLEJO, Calif. — His roots run deep here. As a kid, 55-year-old contractor Randy Golovich played baseball, worked at the corner gas station, chased girls at the local soda counter. He helped his late father, a foreman at the old Mare Island Naval Shipyard, rebuild the family house.

The chummy, fast-talking Golovich also earned a good living in this waterfront suburb an hour's drive northeast of San Francisco. As Vallejo grew, his contracting business, Randu Originals Ceramic Tile, hauled in millions of dollars in sales over the years. The jobs kept coming. The economy kept booming. Traffic filled Tennessee Street outside his showroom.

Not now. The mortgage crisis, the limping economy and a recent bankruptcy filing by Vallejo — the first municipality to do so since Desert Hot Springs, Calif., in 2001 — have hobbled this town of 120,000. Golovich's business is hurting. Jobs and phone calls from customers have dried up. He's cut his staff and fleet of trucks in half, to six employees and four vehicles.

Golovich also could lose his home. When the interest rate on his $500,000 adjustable-rate mortgage rose to 10% from 7%, his monthly payment shot up to $4,000, and he could not afford it. Hoping to ward off foreclosure, he and counselors at the non-profit Vallejo Neighborhood Housing Services are working with his lender on a new payment plan.

Despite his woes, Golovich is hopeful.

"Driving through this town is depressing. It tears your heart out," he says. "But Vallejo's going to come back big, and when it does, I'm going to be the last tile store standing. I've just got to hold on and keep my house."

Vallejo's closely watched Chapter 9 bankruptcy filing in federal court in Sacramento may be a warning sign of dangers that could befall other cash-strapped municipalities.

Bankruptcy Judge Michael McManus will hear arguments starting Wednesday on whether to let the case go forward.

Vallejo's attorneys say the city faces a $17 million deficit and cutbacks in public services for the fiscal year started July 1. The city's police and fire department unions contend that Vallejo is not insolvent but that city officials are trying to dodge labor agreements and obligations to union members and retirees.

Vallejo's financial woes aren't unique, according to municipal-bond analysts and bankruptcy attorneys.

A convergence of forces — the housing bust and credit crunch, tax revenue shortfalls, pension fund costs for public employees and the shaky economy and financial markets — are making it increasingly hard for municipalities to balance their budgets.

"We're seeing a lot of governments around the country entering a period of flat or declining revenues," says Gabriel Petek, a municipal-bond analyst at Standard & Poor's. "I don't expect this to turn into an avalanche, but there may be isolated instances of distress."

Defaults' damage rises

Across the USA, 59 bond issues of $1.2 billion have defaulted this year, according to Richard Lehmann, publisher of Distressed Debt Securities newsletter and president of Income Securities Advisors, an investment research firm. The dollar total is almost higher than the past two years combined, he says.

Over the past 20 years or so, 1,100 municipal issuers defaulted on their debt, according to Standard & Poor's. Orange County, Calif., endured the largest municipal bankruptcy in U.S. history in 1994 after suffering $1.6 billion in investment losses.

Despite the defaults, Petek observes that most local governments in recent years have adopted strong financial-management practices, such as building up cash reserves that will cushion their municipalities during economic slumps.

Vallejo's $119 million in bonds in the bankruptcy case aren't in danger of defaulting, Lehmann believes. Most of the city's debt is backed by bond insurers or letters of credit, he says.

Even amid harsh economic times, the majority of municipalities manage to avoid bankruptcy, says Chris Hoene, director of policy and research at the National League of Cities.

Typically, states have stepped in to oversee municipalities such as New York City, Detroit and Camden, N.J., that were on the verge of bankruptcy in the past.

"I don't think we're going to see a rash of municipal bankruptcies nationwide," Hoene says.

But Vallejo may be different. California cannot take receivership of its municipalities. The strong anti-tax movement and laws in the Golden State limit local government bodies from raising tax dollars. And Vallejo's high labor costs for its public employees make it tougher to deal with its budget shortfall, Hoene says.

Fading opportunities

Long before its bankruptcy filing, Vallejo had been an economic haven and a thriving bedroom community known as the City of Opportunity.

Through the 1980s, thousands of commuters were enticed by the town's affordable homes, the fresh bay breezes, the nearby wine country of Napa Valley. A Six Flags theme park and the naval shipyard, which built hundreds of warships and nuclear submarines since the 19th century, anchored the local economy.

But after the shipyard closed 10 years ago, the economy sputtered and, some say, never fully recovered.

Then the mortgage crisis struck last year. The weak housing market throttled Vallejo's revenue growth to 3%, while labor costs for the city's police officers and firemen rose 11%.

Vallejo has cut 87 jobs and slashed funding for parks, a library, a senior citizens' center and other public services. City and labor leaders agreed this year to temporarily roll back union salaries 6%, but it wasn't enough to hold off the bankruptcy filing.

Meanwhile, the housing crisis seems to worsen in some regions.

According to RealtyTrac, an online foreclosure research firm, foreclosures in California have doubled to 381,000 this year compared with the same period in 2007. In Vallejo, foreclosures rose 61% to 2,900 in the first six months of this year, compared with the same time in 2007.

Carol Hardy, interim executive director of Vallejo Neighborhood Housing Services, says that phone calls from financially strapped homeowners in Vallejo have poured in by the hundreds recently.

Many have received foreclosure warnings from lenders, or they're having trouble making higher mortgage payments when their adjustable interest rates rise.

"They were refinancing their homes like ATMs," Hardy says. "They weren't thinking two steps ahead, to what happens when their loan readjusts."

While residents wrestle with possible foreclosure, the city and its unions — the Vallejo Police Officers Association, the International Association of Fire Fighters and the International Brotherhood of Electrical Workers — gird for legal battle this week.

In court papers, the unions contend that Vallejo is not bankrupt, that it still is paying bondholders and that it had $136 million in cash when it filed for bankruptcy. The filing, the unions allege, is a ploy to force the unions to renegotiate their contracts.

Harvey M. Rose Associates, a San Francisco accounting firm hired by the unions, states in a court filing that Vallejo could balance its budget and build a surplus of millions of dollars by slashing costs, selling city land and increasing fees and assessments.

Unlike similar nearby towns, such as Richmond, that boast more diverse and thriving economies, Vallejo did not rejuvenate its economy and tax base enough to ward off financial woes, says Dean Gloster, an attorney at Farella Braun & Martel, who represents the unions.

"The truth is that Vallejo has been in serious financial trouble for over a decade," he says. "It's a very poorly managed city."

Vallejo officials say in court filings that the mortgage meltdown and high labor salaries and benefits, rising to $79 million in the current fiscal year, have forced the city to file for bankruptcy. The city, they argue, cannot balance its budget unless the unions make concessions.

Marc Levinson, a lawyer at Orrick Herrington & Sutcliffe, who represents Vallejo, denies that the city is sitting on $136 million in cash and assets, or that Vallejo "deliberately manufactured bankruptcy to break its labor contracts." He contends that the Rose report is flawed.

Says Levinson, "The city can't afford to pay the contracts. The city has cut to the bone. There is nowhere else to go."

A tough fight ahead

If similar bankruptcy cases are any indication, the unions face a tough legal fight, according to Bruce Bennett, an attorney at Hennigan Bennett & Dorman, who worked on the Orange County bankruptcy and is not involved in Vallejo's case.

"There were extensive negotiations prior to the case," says Bennett, who read the key bankruptcy filings, "and it does not appear the city has misrepresented its actual, current financial condition."

Beyond the filing, Vallejo's economy — mostly retailing, business services and manufacturing — could get a boost from development projects and a $300 million cancer research center planned by Touro Universityon Mare Island.

Back on Tennessee Street, the quiet main road from the highway to Mare Island, contractor Golovich waves at friends and business people driving by. The economy, he believes, will start rumbling soon.

"This street is going to be booming again, I'm certain of it," he says. "You can see the traffic picking up now."

    Economy hobbles Calif. town, UT, 21.7.2008, http://www.usatoday.com/money/economy/2008-07-21-vallejo-city-bankruptcy_N.htm

The Nation

Too Big to Fail?

July 20, 2008
The New York Times
By PETER S. GOODMAN

IN the narrative that has governed American commercial life for the last quarter-century, saving companies from their own mistakes was not supposed to be part of the government’s job description. Economic policy makers in the United States took swaggering pride in the cutthroat but lucrative form of capitalism that was supposedly indigenous to their frontier nation.

Through this uniquely American lens, saving businesses from collapse was the sort of thing that happened on other shores, where sentimental commitments to social welfare trumped sharp-edged competition. Weak-kneed European and Asian leaders were too frightened to endure the animal instincts of a real market, the story went. So they intervened time and again, using government largess to lift inefficient firms to safety, sparing jobs and limiting pain but keeping their economies from reaching full potential.

There have been recent interventions in America, of course — the taxpayer-backed bailout of Chrysler in 1979, and the savings and loan rescue of 1989. But the first happened under Jimmy Carter, a year before Americans embraced Ronald Reagan and his passion for unfettered markets. And the second was under George H. W. Bush, who did not share that passion.

So it made for a strange spectacle last weekend as the current Bush administration, which does cast itself in the Reagan mold, hastily prepared a bailout package to offer the government-sponsored mortgage companies, Fannie Mae and Freddie Mac. The reasoning behind this rescue effort — like the reasoning behind the government-induced takeover of Bear Stearns by J. P. Morgan Chase just a month before — sounded no different from that offered in defense of many a bailout in Japan and Europe:

The mortgage giants were too big to be allowed to fail.

Big indeed. Together, Fannie and Freddie own or guarantee nearly half of the nation’s $12 trillion worth of home mortgages. If they collapse, so may the whole system of finance for American housing, threatening a most unfortunate string of events: First, an already plummeting real estate market might crater. Then the banks that have sunk capital into American homes would slip deeper into trouble. And the virus might spread globally.

The central banks of China and Japan are on the hook for hundreds of billions of dollars worth of Fannie’s and Freddie’s bonds — debts they took on assuming that the two companies enjoyed the backing of the American government, argues Brad Setser, an economist at the Council on Foreign Relations.

Commercial banks from South Korea to Sweden hold investments linked to American mortgages. Their losses would mount if American homeowners suddenly couldn’t borrow. The global financial system could find itself short of capital and paralyzed by fear, hobbling economic growth in many lands.

Nobody with a meaningful office in Washington was in the mood for any of that, so the rescue nets were readied. The treasury secretary, Henry Paulson Jr., announced that the government was willing to use taxpayer funds to buy shares in Fannie and Freddie. The chairman of the Federal Reserve, Ben Bernanke, said the central bank would lend them money.

The details were up in the air as the week ended, but some sort of bailout offer was on the table — one that could ultimately cost hundreds of billions of dollars. Whatever the dent to national bravado, or to the free-enterprise ideology, the phrase “too big to fail” suddenly carried an American accent.

“Some institutions really are too big to fail, and that’s the way it is,” said Douglas W. Elmendorf, a former Treasury and Federal Reserve Board economist who is now at the Brookings Institution in Washington. “There are no good options.”

Still, there are ironies. Since World War II, the United States has been the center of global finance, and it has used that position to virtually dictate the conditions under which many other nations — particularly developing countries — can get access to capital. Letting weak companies fail has been high on the list.

Mr. Paulson, who announced the bailout, made his name as chief executive of Goldman Sachs, the Wall Street investment giant, where he pried open new markets to foreign investment. As treasury secretary, he has served as chief proselytizer for American-style capitalism, counseling the tough love of laissez-faire. In particular, he has leaned on China to let the value of its currency float freely, and has criticized its banks for shoveling money to companies favored by the Communist Party in order to limit joblessness and social instability.

All through Japan’s lost decade of the 1990s and afterward, American officials chided Tokyo for its unwillingness to let the forces of creative destruction take down the country’s bloated banks and the zombie companies they nurtured. The best way out of stagnation, Americans counseled, was to let weak companies die, freeing up capital for a new crop of leaner entrants.

But as Japan’s leaders engaged in bailouts and bookkeeping fictions to keep banks and companies breathing, they offered those words of justification now heard here: The companies were too big to fail.

In 2002, the government engineered the rescue of Daiei, a huge, debt-laden grocery chain. In 2003, it injected some $17 billion into Resona Bank to keep it upright. Each time, Japan’s leaders said failure was not an option. It would pull too many others into a downward spiral.

Today, among strict adherents of laissez-faire economics, the offer to bail out Fannie and Freddie is already being criticized as a trip down the Japanese path of putting off immediate pain while loading up the costs further along.

For one thing, this argument goes, taxpayers — who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel — will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly, or the Fed can print more money — a step that encourages further inflation.

“They are going to raise the cost of living for every American,” said Peter Schiff, president of Euro Pacific Capital Inc., a Connecticut-based brokerage house that focuses on international investments. “The government is debasing the value of our money. Freddie and Fannie need to fail. They are too big to save.”

Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf. Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds. And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.

Meanwhile, as American debts swell and foreigners hold more of it, nervousness grows that, some day, this arrangement will end badly. The dollar has been declining in value against other currencies. Some foreigners have begun to hedge their bets by buying more euros. “Obviously, this is going to come to an end,” Mr. Schiff said. “Foreigners are not charitable organizations, and they’re going to demand that we pay them back.”

No single country owning large amounts of dollar-based investments is inclined to dump them abruptly; nobody aims to start a panic. But fears have begun to grow that one day a country may get spooked that another is about to dump its dollars — and that could trigger pre-emptive panic selling.

“Foreigners could decide it’s just not worth the risk and sell,” says Andrew Tilton, an economist at Goldman Sachs. “The really dire scenarios have become a lot more likely than they were a year or two ago.”

Still, as Mr. Tilton and others are aware, one fundamental reality continues to offer assurances that foreigners will still buy American debt:

In the global economy of the moment, the United States itself is too big to fail.

The logic for that assurance goes like this:

The American consumer has for decades served as the engine of world commerce, using borrowed cash to snap up the accoutrements of modern living — clothes and computers and cars now manufactured, in whole or in part, in factories from Asia to Latin America. Eliminate the American wherewithal to shop, and the pain would ripple out to multiple shores.

Globalization, in other words, allowed China and Japan to amass the fortunes they have been lending to the United States.

But globalization also emboldened American capitalists to take huge risks they might have otherwise avoided — like borrowing to erect forests of unsold homes from California to Florida, delivering the speculative disaster of the day. They were operating with bedrock confidence that money would never run out. Someone would always buy American debt, delivering more cash for the next go.

And this same interconnectedness appears to have reassured regulators in Washington about the health of the American financial system, as they declined to intervene against highly speculative lending during the real estate boom. Mortgages were being distributed to investors around the globe, and so were the risks, the regulators reasoned. Anyone who bought into that risk would have a strong interest in seeing that the American financial system stayed upright.

In other words, in the estimation of people in control of money, the United States cannot be allowed to collapse, just as Fannie and Freddie cannot be allowed to fail. Too much is riding on their survival.

The central truth of that logic still seems to be apparent as the Treasury keeps finding takers for American debt.

So the government offers its rescue of the mortgage companies, and foreigners keep stocking the government’s coffers. “They don’t want the U.S. to go into the worst downturn since the Depression,” Mr. Tilton says.

But all the while, the debt mounts along with the costs of an ultimate day of reckoning. Debate grows about the wisdom of leaning on foreign credit, and about how much longer Americans will retain the privilege of spending and investing money that isn’t really theirs.

Bailouts amount to mortgaging the future to stave off the wolf howling at the door. The likelihood of a painful reckoning is diminished, while the costs of a reckoning — should one come — are increased.

The costs are getting big.

    Too Big to Fail?, NYT, 20.7.2008, http://www.nytimes.com/2008/07/20/weekinreview/20goodman.html?hp

Fair Game

Borrowers and Bankers: A Great Divide

July 20, 2008
The New York Times
By GRETCHEN MORGENSON

THE credit crisis has exposed and worsened a dangerous and deepening divide in this country between a vast number of average borrowers and a fairly elite slice of corporations, banks and executives enriched by the mortgage mania.

Borrowers who are in trouble on their mortgages have seen their government move slowly — or not all — to help them. But banks and the executives who ran them are quickly deemed worthy of taxpayer bailouts.

On the ground, this translates into millions of troubled borrowers, left to work through their problems with understaffed, sometimes adversarial loan servicing companies. If they get nowhere, they lose their homes.

Taxpayers, meanwhile, are asked to stand by with money to inject into Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants, should they need propping up if loan losses balloon.

The message in this disconnect couldn’t be clearer. Borrowers should shoulder the consequences of signing loan documents they didn’t understand, but with punishing terms that quickly made the loans unaffordable. But for executives and directors of the big companies who financed these loans, who grew wealthy while the getting was good, the taxpayer is coming to the rescue.

To be sure, bailouts are becoming increasingly necessary in our highly leveraged, interconnected financial world. One obvious reason that huge companies are not allowed to fail is that so many people are hurt by such debacles. If a family files for bankruptcy or loses a home, the pain still hurts, but its emotional and financial ripples are confined.

And in the heat of a financial crisis, there is often little time to think through who deserves a bailout and who does not. In especially dire circumstances, leaders have no choice but to rescue companies. Think about Bear Stearns: even though it was relatively small in size for a brokerage firm, its demise had to be averted because of a possible domino effect that might have also taken down its many trading partners. In that multibillion-dollar bailout, it was Bear’s big and wealthy counterparties who benefited.

Fannie Mae and Freddie Mac, however, present an exponentially larger problem. They are unquestionably too big to fail. With $5.2 trillion in mortgages either on their books or guaranteed by them, their bailout was completely predictable. If those companies had been left for road kill, the mortgage market would have ground to a halt and a financial conflagration of historic and devastating proportions would have resulted.

Not all big banks get bailouts, of course. IndyMac Bank, one of the nation’s largest savings and loans, was closed down by regulators last week.

Nevertheless, we are in dangerous territory today where bailouts are concerned, and not only because they feed Americans’ suspicions that only the rich and powerful get help in our country.

Bailouts are also ticklish affairs because of the precarious state of our economy. As Americans are being asked to shore up reckless financial companies, they are also being punished by high oil prices, rocketing food costs and a stomach-churning slide in the buying power of their currency, the once-almighty dollar.

So asking Main Street to bail out Wall Street leads to this inevitable question: Weren’t the financial folks the ones who helped create the mess we’re in?

Yet last week, regulators gave a nice boost to Wall Street and other members of the financial club. Christopher Cox, the chairman of the Securities and Exchange Commission, devised an emergency rule change for traders wishing to sell short the shares of 19 financial companies, including Lehman Brothers, Merrill Lynch, Fannie Mae, Bank of America and Citigroup. The rule states that if you haven’t borrowed the shares you intend to sell short, you can’t make the trade. It extends until July 29.

There are several interesting aspects to this change. First, if the S.E.C. believes that shorting without previously borrowing shares is a problem in the market, why not apply the rule to all stocks? After seeing many of the 19 companies’ stocks shoot higher after the plan was announced, executives at General Electric, the American International Group and MBIA, companies whose shares have also been pummeled in the financial crisis, must surely feel left out of the fun.

Once again, this emergency action smacks of the regulatory responses of recent years: do nothing to curb the deal-making mania while it is occurring, but when the rout comes along, hurry up and rein it in.

Of course, people prefer rising stock prices to declining ones. Wouldn’t it be wonderful if shares never fell? But such actions call into question the claim that ours is a free-market system. More and more, our version of free markets holds that they are free only when asset values rise. When they fall, the markets must be managed.

HERE is a question: Might not the routs, which inevitably follow the manias, be less painful if things were not allowed to get wild and crazy on the upside? Might not the American people be better off with regulators who curb market enthusiasm — whether in the form of errant lending or voracious, ill-considered deal making — when it reaches manic levels, to protect against the free fall, and the bailouts, that ensue?

No, no, no — perish the thought, especially when the taxpayer is there to pick up the bill.

Which returns us to the dispiriting divide between those who receive help and those who don’t.

“The banks are too big to fail and the man in the street is too small to bail,” said John C. Bogle, the founder of the Vanguard Group, the mutual funds giant, who is a philosopher of finance.

Mr. Bogle is working on his seventh book, titled “Enough,” which is scheduled to be published in November. He said he was disturbed by the extreme speculation that spread into the entire economy during the housing boom and that now threatens both consumers and investors.

“I predicted last summer that this would be my 10th bear market,” he said. “But this one is different. The others were more marketlike, reflecting problems in the market, not problems in the society and the economy as this one does. As a result, we’re in for a much more troublesome era than after the other big bear markets.”

Mr. Bogle, like most investors, is an optimist at heart. But he believes that we must work to correct the growing imbalances in our country. “We Americans are one lucky bunch,” he said. “But, let’s face the truth. While the Declaration of Independence assures us that ‘all men are created equal,’ we’d best face the fact that we may be created equal but we are born into a society where inequality of family, of education and, yes, even opportunity begins as soon as we are born.”

“But the Constitution demands more,” he adds. “We the people are enjoined to form a more perfect union, to establish justice, ensure domestic tranquillity, and to promote the general welfare and to secure the blessings of liberty to ourselves and our posterity. So it’s up to each of us to summon our unique genius, our own power and our own personal magic to restore these values in today’s imbalanced society.”

Not a bad idea, bringing a little 18th-century enlightenment to this moment of 21st-century gloom.

    Borrowers and Bankers: A Great Divide, NYT, 20.7.2008, http://www.nytimes.com/2008/07/20/business/economy/20gret.html?hp

Given a Shovel, Digging Deeper Into Debt

July 20, 2008
The New York Times
By GRETCHEN MORGENSON

The collection agencies call at least 20 times a day. For a little quiet, Diane McLeod stashes her phone in the dishwasher.

But right up until she hit the wall financially, Ms. McLeod was a dream customer for lenders. She juggled not one but two mortgages, both with interest rates that rose over time, and a car loan and high-cost credit card debt. Separated and living with her 20-year-old son, she worked two jobs so she could afford her small, two-bedroom ranch house in suburban Philadelphia, the Kia she drove to work, and the handbags and knickknacks she liked.

Then last year, back-to-back medical emergencies helped push her over the edge. She could no longer afford either her home payments or her credit card bills. Then she lost her job. Now her home is in foreclosure and her credit profile in ruins.

Ms. McLeod, who is 47, readily admits her money problems are largely of her own making. But as surely as it takes two to tango, she had partners in her financial demise. In recent years, those partners, including the financial giants Citigroup, Capital One and GE Capital, were collecting interest payments totaling more than 40 percent of her pretax income and thousands more in fees.

Years of spending more than they earn have left a record number of Americans like Ms. McLeod standing at the financial precipice. They have amassed a mountain of debt that grows ever bigger because of high interest rates and fees.

While the circumstances surrounding these downfalls vary, one element is identical: the lucrative lending practices of America’s merchants of debt have led millions of Americans — young and old, native and immigrant, affluent and poor — to the brink. More and more, Americans can identify with miners of old: in debt to the company store with little chance of paying up.

It is not just individuals but the entire economy that is now suffering. Practices that produced record profits for many banks have shaken the nation’s financial system to its foundation. As a growing number of Americans default, banks are recording hundreds of billions in losses, devastating their shareholders.

To reduce the risk of a domino effect, the Bush administration fashioned an emergency rescue plan last week to shore up Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance companies, if necessary.

To be sure, the increased availability of credit has contributed mightily to the American economy and has allowed consumers to make big-ticket purchases like homes, cars and college educations.

But behind the big increase in consumer debt is a major shift in the way lenders approach their business. In earlier years, actually being repaid by borrowers was crucial to lenders. Now, because so much consumer debt is packaged into securities and sold to investors, repayment of the loans takes on less importance to those lenders than the fees and charges generated when loans are made.

Lenders have found new ways to squeeze more profit from borrowers. Though prevailing interest rates have fallen to the low single digits in recent years, for example, the rates that credit card issuers routinely charge even borrowers with good credit records have risen, to 19.1 percent last year from 17.7 percent in 2005 — a difference that adds billions of dollars in interest charges annually to credit card bills.

Average late fees rose to $35 in 2007 from less than $13 in 1994, and fees charged when customers exceed their credit limits more than doubled to $26 a month from $11, according to CardWeb, an online publisher of information on payment and credit cards.

Mortgage lenders similarly added or raised fees associated with borrowing to buy a home — like $75 e-mail charges, $100 document preparation costs and $70 courier fees — bringing the average to $700 a mortgage, according to the Department of Housing and Urban Development. These “junk fees” have risen 50 percent in recent years, said Michael A. Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on mortgages.

“Today the focus for lenders is not so much on consumer loans being repaid, but on the loan as a perpetual earning asset,” said Julie L. Williams, chief counsel of the Comptroller of the Currency, in a March 2005 speech that received little notice at the time.

Lenders have been eager to expand their reach. They have honed sophisticated marketing tactics, gathering personal financial data to tailor their pitches. They have spent hundreds of millions of dollars on advertising campaigns that make debt sound desirable and risk-free. The ads are aimed at people who urgently need loans to pay for health care and other necessities.

It is not just financial conglomerates that are profiting on consumer debt loads. Some manufacturers and retailers can generate more income from internal financing arms that lend to their customers than from their primary businesses.

Tallying what the lenders have made off Ms. McLeod over the years is revealing. In 2007, when she earned $48,000 before taxes, she was charged more than $20,000 in interest on her various loans.

Her first mortgage, originated by the EquiFirst Corporation, charged her $14,136 a year, and her second, held by CitiFinancial, added $4,000. Capital One, a credit card company that charged her 28 percent interest on her balances, billed $1,400 in annual interest. GE Money Bank levied 27 percent on the $1,500 or so that Ms. McLeod owed on an account she had with a local jewelry store, adding more than $400.

Olde City Mortgage, the company that arranged one of Ms. McLeod’s loans, made $6,000 on a single refinancing, and EquiFirst received $890 in a loan origination fee.

Such fees and interest rates are a growing burden on Americans, especially those who rely on credit cards to make ends meet.

And recent changes in the bankruptcy laws, supported by financial services firms, make it all the harder for consumers, especially those with modest incomes, to get out from under their debt by filing for bankruptcy.

But with so many borrowers in trouble, some bankruptcy experts and regulators are beginning to focus on the responsibilities of lenders, like requiring them to make loans only if they are suitable to the borrowers applying for them.

The Federal Reserve Board, for instance, recently put into effect rules barring a lender from making a loan without regard to the borrower’s ability to repay it.

Henry E. Hildebrand III, a Bankruptcy Court trustee in Nashville since 1982 and one of the nation’s busiest, has seen at first hand what happens when lenders do not take some responsibility for loans that go bad. “I look across the table at people who are right out of school and have more debt than they can handle, and they are starting out life in a bankruptcy,” he said.

Ms. McLeod used debt to keep going until she was fired from her job in March for writing inappropriate e-mail messages. Since then, she has been selling her coveted handbags and other items on eBay to raise money while waiting to be evicted from her home.

“I think a lot of people in this country have a lot more debt than they let the outside world know,” Ms. McLeod said. “I worked in retail for five years. And men, women would open up their wallets to pay and the credit cards that were in some of the wallets just amazed me.”

Borrowing to Shop

For decades, America’s shift from thrift could be summed up in this familiar phrase: When the going gets tough, the tough go shopping. Whether for a car, home, vacation or college degree, the nation’s lenders stood ready to assist.

Companies offered first and second mortgages and home equity lines, marketed credit cards for teenagers and helped college students to amass upward of $100,000 in debt by graduation.

Every age group up to the elderly was the target of sophisticated ad campaigns and direct mail programs. “Live Richly” was a Citibank message. “Life Takes Visa,” proclaims the nation’s largest credit card issuer.

Eliminating negative feelings about indebtedness was the idea behind MasterCard’s “Priceless” campaign, the work of McCann-Erickson Worldwide Advertising, which came out in 1997.

“One of the tricks in the credit card business is that people have an inherent guilt with spending,” Jonathan B. Cranin, executive vice president and deputy creative director at the agency, said when the commercials began. “What you want is to have people feel good about their purchases.”

Mortgage lenders took to cold-calling homeowners to persuade them to refinance. Done to reduce borrowers’ monthly payments, serial refinancings allowed lenders to charge thousands of dollars in loan processing fees, including appraisals, credit checks, title searches and document preparation fees.

Not surprisingly, such practices generated dazzling profits for the nation’s financial companies. And since 2005, when the bankruptcy law was changed, the credit card industry has increased its earnings 25 percent, according to a new study by Michael Simkovic, a former James M. Olin fellow in Law and Economics at Harvard Law School.

The “2005 bankruptcy reform benefited credit card companies and hurt their customers,” Mr. Simkovic concluded in his study. He said that even though sponsors of the bankruptcy bill promised that consumers would benefit from lower borrowing costs as delinquent borrowers were held more accountable, the cost of borrowing from credit card companies has actually increased anywhere from 5 percent to 17 percent.

Among the most profitable companies were Ms. McLeod’s creditors.

For Capital One, which charges her 28 percent interest on her credit card, net interest income, after provisions for loan losses, has risen a compounded 25 percent a year since 2002.

GE Money Bank, which levied a 27 percent rate on Ms. McLeod’s debt and is part of the GE Capital Corporation, generated profits of $4.3 billion in 2007, more than double the $2.1 billion it earned in 2003.

Because many of these large institutions pool the loans they make and sell them to investors, they are not as vulnerable when the borrowers default. At the end of 2007, for example, one-third of Capital One’s $151 billion in managed loans had been sold as securities.

Officials at General Electric declined to comment. Capital One did not return phone calls.

As the profits in this indebtedness grew, financial companies moved aggressively to protect them, spending millions of dollars to lobby against any moves lawmakers might take to rein in questionable lending.

But consumers are voicing anger over lending practices. A recent proposal by the Federal Reserve Board to limit some abusive practices has drawn more than 11,000 letters since May. Most are from irate borrowers.

A Rising Tide of Bills

Just two generations ago, America was a nation of mostly thrifty people living within their means, even setting money aside for unforeseen expenses.

Today, Americans carry $2.56 trillion in consumer debt, up 22 percent since 2000 alone, according to the Federal Reserve Board. The average household’s credit card debt is $8,565, up almost 15 percent from 2000.

College debt has more than doubled since 1995. The average student emerges from college carrying $20,000 in educational debt.

Household debt, including mortgages and credit cards, represents 19 percent of household assets, according to the Fed, compared with 13 percent in 1980.

Even as this debt was mounting, incomes stagnated for many Americans. As a result, the percentage of disposable income that consumers must set aside to service their debt — a figure that includes monthly credit card payments, car loans, mortgage interest and principal — has risen to 14.5 percent from 11 percent just 15 years ago.

By contrast, the nation’s savings rate, which exceeded 8 percent of disposable income in 1968, stood at 0.4 percent at the end of the first quarter of this year, according to the Bureau of Economic Analysis.

More ominous, as Americans have dug themselves deeper into debt, the value of their assets has started to fall. Mortgage debt stood at $10.5 trillion at the end of last year, more than double the $4.8 trillion just seven years earlier, but home prices that were rising to support increasing levels of debt, like home equity lines of credit, are now dropping.

The combination of increased debt, falling asset prices and stagnant incomes does not threaten just imprudent borrowers. The entire economy has become vulnerable to the spending slowdown that results when consumers like Ms. McLeod hit the wall.

That First Credit Card

Growing up in Philadelphia, Diane McLeod never knew financial hardship, she said. Her father owned six pizza shops and her mother was a homemaker.

“There was always money for everything, whether it was bills or food shopping or a spur-of-the-moment vacation,” Ms. McLeod recalled. “If they worried about money, they never let us know.”

Hers was a pay-as-you-go family, she said. Although money was not discussed much around the dinner table, credit card debt was not a part of her parents’ financial plan, and sometimes personal purchases were put off.

When Ms. McLeod married at 18, she and her husband carried no credit cards. She stayed at home after her son was born, but when she was 27 her husband died.

She remarried a few years later and continued as a homemaker until her son turned 13. Between her husband’s job laying carpets and her own, money was not exactly tight.

In the mid-’90s, Ms. McLeod got several credit cards. When the marriage began to founder, she said, she shopped to make herself feel better.

Earning a livable wage at Verizon Yellow Pages, Ms. McLeod finally decided to leave her marriage and buy a home of her own in February 2003. The cost was $135,000, and her mortgage required no down payment because her credit history was good.

“I was very proud of myself when I bought the house,” Ms. McLeod explained. “I thought I would live here till I died.” Adding to her burden, however, was about $25,000 in credit card debt she had brought from her marriage. Because her husband did not have a regular salary, all the cards were in her name.

After she had been in the house for a year, a friend who was a mortgage broker suggested she consolidate her debts into a new home loan. The property had appreciated by about $30,000, and once again she put no money down for the loan. “It was amazing how easy it was,” she recalled. “But that’s a trap, and I didn’t know it then.”

Naturally, the refinance had costs. There was an $8,000 penalty to pay off the previous mortgage early as well as roughly $1,500 in closing costs on the new loan.

To cover these fees, Ms. McLeod dipped into her retirement account. Only later did she realize that she had to pay an early-withdrawal penalty of $3,000 to the Internal Revenue Service. Short on cash, she put it on a credit card.

Soon she had racked up another $19,000 in credit card debt. But because her home had appreciated, she once again refinanced her mortgage. Although she was making $50,000 a year working two jobs, her income was not enough to support the new $165,000 loan. She asked her son to join her on the loan application; with his income, the numbers worked.

“Boy, would I regret that,” she said. The decision would drive a wedge between mother and son and damage his credit profile as well.

Almost immediately after she refinanced, in late 2005, the department store where she worked her second job, as a jewelry saleswoman at night and on weekends, cut back her hours. She quit altogether, and her son moved out of the house, where he had been helping with the rent, to live with a girlfriend. Ms. McLeod was on her own and paying $1,500 a month on her mortgage.

Because the house had been recently appraised at $228,000, she said, she felt sure she could refinance again if she needed to pay off her credit card. “You felt like you had a way out,” she said.

But as happens with many debt-laden Americans, an unexpected illness helped push Ms. McLeod over the edge. In January 2006, her doctor told her she needed a hysterectomy. She had health care coverage, but she could no longer work at a second job.

She made matters worse during her recovery, while watching home shopping channels. “Eight weeks in bed by yourself is very dangerous when you have a TV and credit card,” Ms. McLeod said. “QVC was my friend.”

Later that year, Ms. McLeod realized she was in trouble, squeezed by her mortgage and credit card payments, her $350 monthly car bill, rising energy prices and a stagnant salary. She started to sell knickknacks, handbags, clothing and other items on eBay to help cover her heating and food bills. She stopped paying her credit cards so that she could afford her mortgage.

A year ago she was back in the hospital, this time with a burst appendix. Her condition worsened, and she lost the use of one kidney. She spent 19 days in the hospital and six weeks recuperating. Her prescription-drug costs added to her expenses, and by September she could no longer pay her mortgage.

When her father died in early January, she was devastated. About a month later, on Feb. 14, Ms. McLeod was suspended and soon afterward fired from Verizon.

Toting up her financial obligations, Ms. McLeod said she owed $237,000 on her home mortgage. Of that, sheriff’s costs are $4,350, and “other” fees related to the foreclosure come to $3,000. A house of similar size down the street from Ms. McLeod sold for $153,000 in January.

Her credit card debt totals around $34,000, she said. Each month the late fees and over-limit penalties add to her debt. Ms. McLeod said she would probably file for bankruptcy.

Patricia A. Hasson, president of the Credit Counseling Service of Delaware Valley, said Ms. McLeod would probably wind up having to repay 40 percent to 60 percent of her credit card debt. The owner of her mortgages could come after her for the difference between what she owes on her loan and what her house ultimately sells for. The first mortgage was sold to investors; Citigroup declined to say whether it held onto the second mortgage or sold it to investors.

A sheriff’s auction of her home on June 12 received no bidders, Ms. McLeod said. The bank will soon evict her.

“Oh, I definitely have regrets,” Ms. McLeod said. “I regret not dealing with my emotions instead of just shopping. And I regret involving my son in all this because that has affected him and his finances and his self-esteem.”

Ms. McLeod says she hopes to be living in an apartment she can afford soon and to get back to paying her bills on time.

She does not want another credit card, she said. But even though her credit profile is ruined, she still receives come-ons.

Recently an envelope arrived offering a “pre-qualified” Salute Visa Gold card issued by Urban Bank Trust. “We think you deserve more credit!” it said in bold type.

A spokeswoman at Urban Bank said the Salute Visa is part of a program “designed to provide access to credit for folks who would not otherwise qualify for credit.”

The Salute Visa offered Ms. McLeod a $300 credit line. But a closer look at the fine print showed that $150 of that would go, as annual fees, to Urban Bank.

    Given a Shovel, Digging Deeper Into Debt, NYT, 20.7.2008, http://www.nytimes.com/2008/07/20/business/20debt.html#

Why No Outrage?

Through history, outrageous financial behavior has been met with outrage.
But today Wall Street's damaging recklessness has been met with near-silence, from a too-tolerant populace,
argues James Grant

July 19, 2008
The New York Times
Page W1
By JAMES GRANT


"Raise less corn and more hell," Mary Elizabeth Lease harangued Kansas farmers during America's Populist era, but no such voice cries out today. America's 21st-century financial victims make no protest against the Federal Reserve's policy of showering dollars on the people who would seem to need them least.

Long ago and far away, a brilliant man of letters floated an idea. To stop a financial panic cold, he proposed, a central bank should lend freely, though at a high rate of interest. Nonsense, countered a certain hard-headed commercial banker. Such a policy would only instigate more crises by egging on lenders and borrowers to take more risks. The commercial banker wrote clumsily, the man of letters fluently. It was no contest.

The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed's crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn't the nation's small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as "triple-A." Yet it's the savers who took a pay cut -- and the savers who, today, in the heat of a presidential election year, are holding their tongues.

Possibly, there aren't enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people's money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people's wrath?

The American people are famously slow to anger, but they are outdoing themselves in long suffering today. In the wake of the "greatest failure of ratings and risk management ever," to quote the considered judgment of the mortgage-research department of UBS, Wall Street wears a political bullseye. Yet the politicians take no pot shots.

Barack Obama, the silver-tongued herald of change, forgettably told a crowd in Madison, Wis., some months back, that he will "listen to Main Street, not just to Wall Street." John McCain, the angrier of the two presumptive presidential contenders, has staked out a principled position against greed and obscene profits but has gone no further to call the errant bankers and brokers to account.

The most blistering attack on the ancient target of American populism was served up last October by the then president of the Federal Reserve Bank of St. Louis, William Poole. "We are going to take it out of the hides of Wall Street," muttered Mr. Poole into an open microphone, apparently much to his own chagrin.

If by "we," Mr. Poole meant his employer, he was off the mark, for the Fed has burnished Wall Street's hide more than skinned it. The shareholders of Bear Stearns were ruined, it's true, but Wall Street called the loss a bargain in view of the risks that an insolvent Bear would have presented to the derivatives-laced financial system. To facilitate the rescue of that system, the Fed has sacrificed the quality of its own balance sheet. In June 2007, Treasury securities constituted 92% of the Fed's earning assets. Nowadays, they amount to just 54%. In their place are, among other things, loans to the nation's banks and brokerage firms, the very institutions whose share prices have been in a tailspin. Such lending has risen from no part of the Fed's assets on the eve of the crisis to 22% today. Once upon a time, economists taught that a currency draws its strength from the balance sheet of the central bank that issues it. I expect that this doctrine, which went out with the gold standard, will have its day again.

Wall Street is off the political agenda in 2008 for reasons we may only guess about. Possibly, in this time of widespread public participation in the stock market, "Wall Street" is really "Main Street." Or maybe Wall Street, its old self, owns both major political parties and their candidates. Or, possibly, the $4.50 gasoline price has absorbed every available erg of populist anger, or -- yet another possibility -- today's financial failures are too complex to stick in everyman's craw.

I have another theory, and that is that the old populists actually won. This is their financial system. They had demanded paper money, federally insured bank deposits and a heavy governmental hand in the distribution of credit, and now they have them. The Populist Party might have lost the elections in the hard times of the 1890s. But it won the future.

Before the Great Depression of the 1930s, there was the Great Depression of the 1880s and 1890s. Then the price level sagged and the value of the gold-backed dollar increased. Debts denominated in dollars likewise appreciated. Historians still debate the source of deflation of that era, but human progress seems the likeliest culprit. Advances in communication, transportation and productive technology had made the world a cornucopia. Abundance drove down prices, hurting some but helping many others.

The winners and losers conducted a spirited debate about the character of the dollar and the nature of the monetary system. "We want the abolition of the national banks, and we want the power to make loans direct from the government," Mary Lease -- "Mary Yellin" to her fans -- said. "We want the accursed foreclosure system wiped out.... We will stand by our homes and stay by our firesides by force if necessary, and we will not pay our debts to the loan-shark companies until the government pays its debts to us."

By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar. So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share).

Thus, the Wall Street of the Morgans and the Astors and the bloated bondholders is today an institution of the mixed economy. It is hand-in-glove with the government, while the government is, of course -- in theory -- by and for the people. But that does not quite explain the lack of popular anger at the well-paid people who seem not to be very good at their jobs.

Since the credit crisis burst out into the open in June 2007, inflation has risen and economic growth has faltered. The dollar exchange rate has weakened, the unemployment rate has increased and commodity prices have soared. The gold price, that running straw poll of the world's confidence in paper money, has jumped. House prices have dropped, mortgage foreclosures spiked and share prices of America's biggest financial institutions tumbled.

One might infer from the lack of popular anger that the credit crisis was God's fault rather than the doing of the bankers and the rating agencies and the government's snoozing watchdogs. And though greed and error bear much of the blame, so, once more, does human progress. At the turn of the 21st century, just as at the close of the 19th, the global supply curve prosperously shifted. Hundreds of millions of new hands and minds made the world a cornucopia again. And, once again, prices tended to weaken. This time around, however, the Fed intervened to prop them up. In 2002 and 2003, Ben S. Bernanke, then a Fed governor under Chairman Alan Greenspan, led a campaign to make dollars more plentiful. The object, he said, was to forestall any tendency toward what Wal-Mart shoppers call everyday low prices. Rather, the Fed would engineer a decent minimum of inflation.

In that vein, the central bank pushed the interest rate it controls, the so-called federal funds rate, all the way down to 1% and held it there for the 12 months ended June 2004. House prices levitated as mortgage underwriting standards collapsed. The credit markets went into speculative orbit, and an idea took hold. Risk, the bankers and brokers and professional investors decided, was yesteryear's problem.

Now began one of the wildest chapters in the history of lending and borrowing. In flush times, our financiers seemingly compete to do the craziest deal. They borrow to the eyes and pay themselves lordly bonuses. Naturally -- eventually -- they drive themselves, and the economy, into a crisis. And to the scene of this inevitable accident rush the government's first responders -- the Fed, the Treasury or the government-sponsored enterprises -- bearing the people's money. One might suppose that such a recurrent chain of blunders would gall a politically potent segment of the population. That it has evidently failed to do so in 2008 may be the only important unreported fact of this otherwise compulsively documented election season.

Mary Yellin would spit blood at the catalogue of the misdeeds of 21st-century Wall Street: the willful pretended ignorance over the triple-A ratings lavished on the flimsy contraptions of structured mortgage finance; the subsequent foreclosure blight; the refusal of Wall Street to honor its implied obligations to the holders of hundreds of billions of dollars worth of auction-rate securities, the auctions of which have stopped in their tracks; the government's attempt to prohibit short sales of the guilty institutions; and -- not least -- Wall Street's reckless love affair with heavy borrowing.

For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street's biggest broker-dealers could hardly bear to look themselves in the mirror if they didn't extend themselves three times further. At the end of 2007, Goldman Sachs had $26 of assets for every dollar of equity. Merrill Lynch had $32, Bear Stearns $34, Morgan Stanley $33 and Lehman Brothers $31. On average, then, about $3 in equity capital per $100 of assets. "Leverage," as the laying-on of debt is known in the trade, is the Hamburger Helper of finance. It makes a little capital go a long way, often much farther than it safely should. Managing balance sheets as highly leveraged as Wall Street's requires a keen eye and superb judgment. The rub is that human beings err.

Wall Street is usually described as an industry, but it shares precious few characteristics with the metal-fasteners business or the auto-parts trade. The big brokerage firms are not in business so much to make a product or even to earn a competitive return for their stockholders. Rather, they open their doors to pay their employees -- specifically, to maximize employee compensation in the short run. How best to do that? Why, to bear more risk by taking on more leverage.

"Wall Street is our bad example because it is so successful," charged the president of Notre Dame University, the Rev. John Cavanaugh, in the time of Mary Lease. He meant that young people, emulating J.P. Morgan or E.H. Harriman, would worship the wrong god. The more immediate risk today is that Wall Street, sweating to fill out this year's bonus pool, runs itself and the rest of the American financial system right over a cliff.

It's just happened, in fact, under the studiously averted gaze of the Street's risk managers. Today's bear market in financial assets is as nothing compared to the preceding crash in human judgment. Never was a disaster better advertised than the one now washing over us. House prices stopped going up in 2005, and cracks in mortgage credit started appearing in 2006. Yet the big, ostensibly sophisticated banks only pushed harder.

Bear Stearns is kaput and Lehman Brothers is reeling, but Morgan Stanley perhaps best illustrates the gluttonous ways of Wall Street. Having lost its competitive edge on account of an intramural political struggle, the firm, under Chief Executive John Mack, set out to catch up to the rest of the pack. In the spring of 2006, it unveiled a trillion-dollar balance sheet, Wall Street's first. It expanded in every faddish business line, not excluding, in August 2006, subprime-mortgage origination (the transaction, intoned a Morgan Stanley press release, "provides us with new origination capabilities in the non-prime market, which we can build upon to provide access to high-quality product flows across all market cycles"). Nor did it pull in its horns as the boom wore on but rather protruded them all the more, raising its ratio of assets to equity to the aforementioned 33 times at year-end 2007 from 26.5 times at the close of 2004. Naturally, it did not forget the help. Last year, Morgan Stanley paid out 59% of its revenues in employee compensation, up from 46% in 2004.

Huey Long, who rhetorically picked up where Lease left off, once compared John D. Rockefeller to the fat guy who ruins a good barbecue by taking too much. Wall Street habitually takes too much. It would not be so bad if the inevitable bout of indigestion were its alone to bear. The trouble is that, in a world so heavily leveraged as this one, we all get a stomach ache. Not that anyone seems to be complaining this election season.

SCOUNDRELS ON THE STREET


There's a gripping story behind every financial scandal. Here's a roundup of movies that examine the money-making industry's dark side:


'Clancy in Wall Street' (1930)
Starring: Charles Murray, Lucien Littlefield, Aggie Herring and Eddie Nugent
An Irish-American plumber, Clancy (Murray), happens on some good stock-market bets , eventually making millions and elevating him in society. But once the market crashes and he's left with nothing, he returns to his roots in hopes that old friends will take him back.


'It's a Wonderful Life' (1946)
Starring: James Stewart, Donna Reed and Lionel Barrymore
Generally filed away in the holiday-favorite category, this film's run-on-the-bank scene and its fallout is a classic example of financial duress on the silver screen.


'Wall Street' (1987)
Starring: Michael Douglas, Charlie Sheen, Daryl Hannah and Martin Sheen
Oliver Stone's classic film centers on Gordon Gekko (Douglas, pictured right), a ruthless Wall Street corporate raider who takes an ambitious young stockbroker (Charlie Sheen) under his wing and exposes him to the perks and pitfalls that come with the high-stakes territory.


'Glengarry Glen Ross' (1992)
Starring: Al Pacino, Jack Lemmon, Alec Baldwin and Alan Arkin
In this film based on David Mamet's Pulitzer Prize-winning play, a group of tough real-estate salesmen struggle to deal with a downturning housing market -- or face the ax.


'Rogue Trader' (1999)
Starring: Ewan McGregor, Anna Friel, Yves Beneyton and Betsy Brantley
In this film, based on a true story, Ewan McGregor plays a trader working in Singapore who makes illegal trades to cover up his losses. He ends up in jail.

A LIBRARY OF MARKET MAYHEM



Some classic nonfiction and fiction on financial troubles.

'L'Argent' by Émile Zola (1891)
First published as a newspaper serial, Zola's "L'Argent" ("Money") tells of Aristide Saccard, a down-and-out financier who founds a bank. As speculation flourishes, Saccard goes to great lengths to keep the stock rising, lying to investors and covering up schemes.

'Little Dorrit' by Charles Dickens (1855-57)
The novel features Mr. Merdle, a banker whose schemes lead to financial ruin for many.

'Extraordinary Popular Delusions & The Madness of Crowds' (1841)
Scottish writer Charles Mackay's classic examines the psychology of crowds, touching on everything from the popularity of beards to witch hunts. The last three chapters look at financial manias, such as the Dutch tulip bubble of the 17th century.

'The Great Crash 1929,' by John Kenneth Galbraith (1954)
A best seller when it was first published in 1954, this book by the noted Harvard economist details the U.S.'s most famous crash and the events that precipitated it.

James Grant is the editor of Grant's Interest Rate Observer.

    Why No Outrage?, WSJ, 19.7.2008, http://online.wsj.com/article/SB121642367125066615.html?mod=home_we_banner_left

THE INTELLIGENT INVESTOR

By JASON ZWEIG

How to Control Your Fears In a Fearsome Market

Scientists Are Showing How to Erase Your Fright So Your Portfolio Survives

July 19, 2008
The Wall Street Journal
Page B1

What goes on inside your head when your portfolio implodes?

One of the fear centers in your brain, the amygdala, can respond to upsetting stimuli in 12 milliseconds, or one-25th the time it takes to blink your eye. These brain cells fire when an attack dog snarls at you, a spider drops down your shirt or the Dow Jones Industrial Average takes a dive.

Merely reading the words "market crash" in this sentence can instantaneously jack up your pulse and your blood pressure, the output of your sweat glands and the tension in your muscles. Stress hormones will flood your bloodstream. Your eyes will widen and your nostrils flare, making you hypersensitive to any further danger. All this occurs automatically, involuntarily and unconsciously. You can't be an intelligent investor if, without even knowing it, you are thinking with the panic button in your brain.

The countless people who bailed out of the market in the horrifying plunge of October 2002 missed out on the generous returns of 2003 through 2007, when stocks returned 12.8% annually. The same is likely to be true of those who cut and run in today's turbulent market.

Fortunately, you can train your brain to stay calm when the markets are gripped by panic. Last week, I spent an afternoon in Kevin Ochsner's neuroscience lab at Columbia University in New York, practicing what he calls "cognitive reappraisal."

I sat at a computer and viewed a series of photographs, each preceded by one of two words: look or reappraise. look was my cue to respond naturally without trying to change my feelings. reappraise told me I should "actively reinterpret" the photo, using my imagination to spin another, less emotional scenario that could have resulted in the same image.

Dr. Ochsner had warned me to eat an early, light lunch, and I immediately realized why: I gasped at the sight of a man's hand from which most of the fingers had been freshly hacked off. But my instruction had been to reappraise, so I forced myself to ask whether this image might actually be a still from a horror movie. Magically, the moment I imagined it was a film prop, the raw flesh seemed to look a bit like plastic, and I felt myself exhale.

If I can think away blood, you can calmly face the red arrows on a market Web site. "Emotions are malleable," Dr. Ochsner said, "but people often don't realize how much [of what you feel] is under your own control."

Here are some ways you can control your fears.

Reappraise. Forget what you paid for that stock or fund; instead, imagine it was a gift. Now that it is priced, say, 20% more cheaply than in December, should you want to return the gift? Or should you buy more while it is on sale? (If rethinking a fallen price this way doesn't make you feel better, maybe you should sell.)

Step outside yourself. Imagine that someone else has suffered these losses. Think of questions you might ask to give that person advice: Other than the price, what else has changed? Is your original rationale for this investment still valid?

Control your cues. Even witnessing someone else's pain, or glancing into another person's frightened eyes, can fire up your amygdala. Because fear is as contagious as the flu, quarantine yourself from anyone who obsesses over the momentary twitching of the Dow. Tear yourself away from the computer or television; better yet, while the market is closed, make an advance date with friends or family to get your mind off stocks during market hours.

Track your feelings. Fill in the blanks in this sentence: "Today the Dow closed down [or up] ___ points, and that made me feel __________." Your emotions shouldn't be hostage to the actions of the roughly 100 million other people who compose the collective beast that Benjamin Graham called "Mr. Market." You need not be miserable just because Mr. Market is.

Finally, if the market is open, your portfolio should be closed. Sleep on any sell decision until the next day, when your fears may have faded. Intelligent investors act out of patience and courage, not panic.

    How to Control Your Fears In a Fearsome Market, WSJ, 19.7.2008, http://online.wsj.com/article/SB121642720591866951.html?mod=home_we_banner_left

Texas Approves a $4.93 Billion Wind-Power Project

July 19, 2008
The New York Times
By KATE GALBRAITH

Texas regulators have approved a $4.93 billion wind-power transmission project, providing a major lift to the development of wind energy in the state.

The planned web of transmission lines will carry electricity from remote western parts of the state to major population centers like Dallas, Houston, Austin and San Antonio. The lines can handle 18,500 megawatts of power, enough for 3.7 million homes on a hot day when air-conditioners are running.

The project will ease a bottleneck that has become a major obstacle to development of the wind-rich Texas Panhandle and other areas suitable for wind generation.

Texas is already the largest producer of wind power, with 5,300 installed megawatts — more than double the installed capacity of California, the next closest state. And Texas is fast expanding its capacity.

“This project will almost put Texas ahead of Germany in installed wind,” said Greg Wortham, executive director of the West Texas Wind Energy Consortium.

Transmission companies will pay the upfront costs of the project. They will recoup the money from power users, at a rate of about $4 a month for residential customers.

Details of the plan will be completed by Aug. 15, according to Damon Withrow, director of government relations at the Public Utility Commission, which voted 2 to 1 to go ahead with the transmission plan. The lines will not be fully constructed until 2013.

Wind developers reacted favorably.

“The lack of transmission has been a fundamental issue in Texas, and it’s becoming more and more of an issue elsewhere,” said Vanessa Kellogg, the Southwest regional development director for Horizon Wind Energy, which operates the Lone Star Wind Farm in West Texas and has more wind generation under development. “This is a great step in the right direction.”

Ms. Kellogg said that the project would be a boon for Texas power customers, whose electricity costs have risen in conjunction with soaring natural gas prices across the state. “There’s nothing volatile about the wind in terms of the price, because it’s free,” she said.

The Texas office of the consumer advocacy organization Public Citizen also lauded the news.

“We think it’s going to lower costs, lower pollution and create jobs. We think that for every $3 invested, we’ll probably see about an $8 reduction in electric costs,” said Tom Smith, the state director.

The transmission problem is so acute in Texas that turbines are sometimes shut off even when the wind is blowing.

“When the amount of generation exceeds the export capacity, you have to start turning off wind generators” to keep things in balance, said Hunter Armistead, head of the renewable energy division in North America at Babcock & Brown, a large wind developer and transmission provider. “We’ve reached that point in West Texas.”

Jay Rosser, a spokesman for Boone Pickens, the legendary Texas oilman who plans to build what has been called the world’s largest wind farm in the Texas Panhandle, welcomed the announcement.

But because about a quarter of the Pickens project capacity will come online by 2011, two years before the Texas lines are fully ready, “we will move forward with plans to build our own transmission,” he said.

Lack of transmission is a severe problem in a number of states that, like Texas, want to develop their wind resources. Wind now accounts for 1 percent of the nation’s electricity generation but could rise to 20 percent by 2030, according to a recent Department of Energy report, if transmission lines are built and other challenges met.

But other states may find the Texas model difficult to emulate. The state is unique in having its own electricity grid. All other states fall under the jurisdiction of the Federal Energy Regulatory Commission, adding an extra layer of bureaucracy to any transmission proposals.

The exact route of the transmission lines has yet to be determined because the state has not yet acquired right-of-way, according to Mr. Withrow of the utility commission.

The project will almost certainly face concerns from landowners reluctant to have wires cutting across their property. “I would anticipate that some of these companies will have to use eminent domain,” he said, speaking of the companies that will be building the transmission lines.

    Texas Approves a $4.93 Billion Wind-Power Project, NYT, 19.7.2008, http://www.nytimes.com/2008/07/19/business/19wind.html

To Save Gas, Shoppers Stay Home and Click

July 19, 2008
The New York Times
By STEPHANIE ROSENBLOOM

To go shopping these days, more Americans are trading in their car keys for a keyboard.

Online shopping is gaining at a time when simply filling up a gas tank to head to the mall can seem like a spending spree.

A number of retailers — including Gap, Victoria’s Secret and J. C. Penney — are experiencing double-digit sales growth at their shopping Web sites, creating a surprising bright spot during an otherwise gloomy time for sales in brick-and-mortar stores.

One popular strategy for getting shoppers’ attention is offering free shipping, in contrast to many other businesses, like airlines, that are adding surcharges and other fees to offset their higher costs.

The Web sites of Neiman Marcus, Saks, Nordstrom, Bloomingdale’s, Macy’s, Bon-Ton Stores, Aéropostale, American Eagle Outfitters, Target and Kmart were all offering a deal on shipping this week.

“With gas being such an issue, we know that mall traffic is down more than off-mall traffic,” said Mike Boylson, chief marketing officer for J. C. Penney, which had an 8.7 percent increase in Internet sales in the first quarter of this year.

That is in contrast to a 7.4 percent decrease in sales at stores open at least a year, known as same-store sales and a measure of retail health. “We see more people turning to online because it’s much more efficient in terms of time and money,” Mr. Boylson said.

Retailers are walking a fine line in encouraging online sales. Of course, they are happy to attract more shoppers to their Web sites, but not at the expense of in-store sales — an important measure for investors.

Then again, the Web can drive in-store business, whether shoppers go into a store to return an online purchase or whether they buy an out-of-stock item through a computer at the store.

Lately Nichelle Hines, an actress in Los Angeles, has been shopping online for everything but gas itself — pet supplies, books, DVDs, water filters, kitchen appliances, a dress, her favorite health drink and materials to build a voiceover booth so she does not have to drive to a recording studio.

“It has saved us,” said Ms. Hines, who lives with her boyfriend, Charles, the builder of the booth. “And we really just started doing this three or four months ago just from sheer desperation of spending money on gallons of gas.”

When she does have to drive somewhere, Ms. Hines says she goes online first to note the location of the nearest gas station.

“I’m a computer illiterate person,” she said. “But I’m becoming much more literate as a result of gas prices.”

Victoria’s Secret, too, has had an online sales increase. Its catalog and Internet sales were up 11 percent in the first quarter of this year while same-store sales declined 8 percent, according to Maggie Taylor, vice president, senior credit officer at Moody’s Investors Service.

Gap had an 11 percent decline in same-store sales in the first quarter, but a 21 percent increase in online sales. About six weeks ago, just in time for the back-to-school shopping season, Gap reinvented its e-commerce operations, enabling consumers to shop the Web sites of all of its brands — Gap, Old Navy and Banana Republic as well as its newest, Piperlime, an online shoe store — with a single virtual shopping cart and a flat $7 shipping fee.

“Parents don’t want to drive to four different stores, two different malls,” said Kris Marubio, a spokeswoman for Gap Inc. The new Web design “helps time-pressed and gas-price sensitive parents achieve their back-to-school shopping goals in less time and at less cost,” she added.

The number of shoppers visiting Web sites that offer discounts has jumped, too. Over all, the number of visits to what are known as coupon Web sites increased 21 percent from June 2007 to this June, according to the Internet audience measurement company comScore Media Metrix.

CouponWinner.com, which works with more than 2,000 retailers, had an 186 percent increase in traffic from February to June of this year, according to comScore. Another such site, ShopItToMe.com, which sends alerts to members when their favorite brands go on sale in their sizes at retailers including Saks, Bloomingdale’s, Nordstrom, Ralph Lauren and J. Crew, has more than doubled its membership in the last three months, according to the site’s founder, Charlie Graham.

“People are feeling less comfortable going out to the stores or driving two hours to outlet stores because of gas,” Mr. Graham said. “It almost doesn’t pay for itself.”

Online retail sales, often made all the more alluring by the lack of sales tax, have grown right from the start, but still represent a small percentage of total retail sales. And while e-commerce growth has slowed in the current economic downturn, analysts do not expect it to cease. In fact, online sales represent one of the only positives for many retailers.

“E-commerce, when you compare it to store retail is a bright spot because whereas store growth is in the middle low single digits e-commerce is still growing at least in the mid to highteens,” said Jeffrey Grau, retail e-commerce senior analyst with eMarketer.

Internet sales are expected to surpass $200 billion this year, up from $175 billion in 2007, according to Forrester Research. Given that growth, Moody’s, the credit rating agency, said last month that it would begin giving retailers’ Internet sales and strategies more weight when analyzing the companies. And retailers like J. C. Penney and Target have begun including online sales in their same-store sales figures.

“Online is starting to matter, and it is performing well,” said Ms. Taylor of Moody’s. “Now that it is big enough to matter, companies want to call it out.”

To encourage the trend, retailers are investing in online operations and experimenting with new marketing techniques. Even retailers that are scaling back in their physical stores are expanding or enhancing online operations, which are by and large the fastest growing parts of their company. The shopping Web sites themselves are becoming speedier, easier to navigate and filled with more products.

A couple of months ago, Sears Holdings began working with a company called RichRelevance, which makes technology that monitors 15 to 25 consumer behaviors — like how visitors navigate through a retailer’s Web site and how they arrived at the site — and then suggests products the consumer may like.

“We want to make sure customers are finding these products,” said Imran Jooma, vice president for e-commerce at Sears, who explained that such online initiatives are “just the beginning for us.”

Investing in online operations is less risky than investing in real world stores because Web sites do not require the same level of personnel or resources.

What is potentially risky, though, is an emerging fuel-centric marketing technique.

“Do you really want to remind people how much it costs to fill up their tank?,” said Scott Silverman, executive director of Shop.org, a retail industry group.

For some retailers the answer is yes. EBags.com, a purveyor of items like dainty clutches and backpacks, sent more than a million members an e-mail message late last month with an illustration of gas pumps set at various migraine-inducing prices. Then there was a pump that said “eBags.” It was set at $0.

“Paying too much to get from here to there?” the accompanying text read. “Skip the mall. We’ll ship it to you for free.”

Then again, these days some consumers do not mind paying for shipping.

“A lot of shipping costs are $3 and $5,” said Jessica Delmar, 23, a manager for a technology company in San Francisco who says she rarely sees the inside of stores anymore. “That’s even less than a gallon of gas now.”

    To Save Gas, Shoppers Stay Home and Click, NYT, 19.7.2008, http://www.nytimes.com/2008/07/19/business/19shop.html

Op-Ed Contributor

Eyes Off the Price

July 19, 2008
The New York Times
By DAN ARIELY

Durham, N.C.

AS I stand at the gas station filling my tank, the meter tallies how much it’s going to cost me. At this station, a gallon is $4.26, and as the meter passes the $20 mark, then the $30, I realize that I am paying too much attention to the price of gasoline. I bet you are too.

Looking back at my family’s expenses over the past few years, I see big increases in our health care costs and in how much we pay for food. The rise in what we spend on gas is not nearly as extreme as our increases in categories like electricity and telephone. So why does the amount we spend on gasoline feel so enormous? I think it is because of the way we buy gas.

For the several minutes that I stand at the pump, all I do is stare at the growing total on the meter — there is nothing else to do. And I have time to remember how much it cost a year ago, two years ago and even six years ago.

Yet I have no such memory about the prices of items in any other category. I have no idea how much milk was six years ago, how much bread was three years ago or how much yogurt was a week ago. But I suspect that if I stood next to the yogurt case in the supermarket for five minutes every week with nothing to do but stare at the price, I would also know how much it has gone up — and I might become outraged when yogurt passed the $2 mark.

Another odd thing about the way we buy gasoline is that we usually buy multiple units. I just bought 13 gallons for a little more than $55. The sticker shock isn’t as intense when I see the price per gallon as it is when I’m faced with the total cost. Fifty-five dollars! I remember when I filled my tank for $20 and $25 and $30! Maybe if we bought 13 loaves of bread at a time or 15 gallons of milk we might become just as sensitive to how much we spend on those items.

While we concentrate our anger on gas prices, we are ignoring increases in electricity, food and health insurance — expenses that might actually have a greater effect on our budgets.

I’ve read news reports about people who drive 20 miles from California to Mexico just to buy cheaper gas, and about people who trade in the gas-guzzling S.U.V.’s that they bought only a year ago for more fuel-efficient cars. Of course, buying cheaper gas and driving cars that use less of it is desirable. But I wonder if the person driving to Mexico considers the cost of the entire trip, including his time and wear and tear on the car. And I wonder if the person who takes a $20,000 loss on his S.U.V. ends up paying more for the trade than he can possibly save at the pump.

Perhaps it would be better if gas station attendants filled the tank for us, as they used to, so we did not stand at the pump watching the rising price of our gasoline. Maybe it would help if gas pumps came with bigger hoses so that filling up would go faster and we’d spend less time watching the meter. Or maybe we should just learn to examine all our purchases and expenses more holistically so that we see where rising costs make the biggest difference.
 

Dan Ariely, a professor of behavioral economics at Duke University, is the author of “Predictably Irrational: The Hidden Forces That Shape Our Decisions.”

    Eyes Off the Price, NYT, 19.7.2008, http://www.nytimes.com/2008/07/19/opinion/19ariely.html

Uncomfortable Answers to Questions on the Economy

The New York Times
July 19, 2008
By PETER S. GOODMAN

You have heard that Fannie and Freddie, their gentle names notwithstanding, may cripple the financial system without a large infusion of taxpayer money. You have gleaned that jobs are disappearing, housing prices are plummeting, and paychecks are effectively shrinking as food and energy prices soar. You have noted the disturbing talk of crisis hovering over Wall Street.

Something has clearly gone wrong with the economy. But how bad are things, really? And how bad might they get before better days return? Even to many economists who recently thought the gloom was overblown, the situation looks grim. The economy is in the midst of a very rough patch. The worst is probably still ahead.

Job losses will probably accelerate through this year and into 2009, and the job market will probably stay weak even longer. Home prices will probably keep falling, shrinking household wealth and eroding spending power.

“The open question is whether we’re in for a bad couple of years, or a bad decade,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, now a professor at Harvard.

Is this a recession?

Officially, no. The economy is not in recession until a panel at a private institution called the National Bureau of Economic Research says so. Unofficially, many economists think a recession started six or seven months ago, even as the economy has continued to expand — albeit at a tepid pace.

Many assume that if the economy expands at all, then it isn’t a recession, but that’s not true. The bureau defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months.” If enough people lose their jobs, factories stop making things, stores stop selling things, and less money lands in people’s pockets, it is probably a recession.

Whatever it is called, it is a painful time for tens of millions of people. Indeed, this may turn out to be the most wrenching downturn since the two recessions in the early 1980s; almost surely worse than the recession that ended the technology bubble at the beginning of this decade; perhaps worse than the downturn of the early 1990s that followed the last dip in real estate prices.

But, despite what some doomsayers now proclaim, this is not the Great Depression, when unemployment spiked to 25 percent and millions of previously working people woke up in shantytowns. Not by any measure, even as your neighbors make cryptic remarks above dusting off lessons passed down from grandparents about how to turn a can of beans into a family meal.

How bad is housing?

Bad in many markets, awful in some, and still O.K. in a few.

The downturn has its roots in the real estate frenzy that turned lonely Nevada ranches into suburban ranch homes and swampland in Florida into condominiums. Speculators drove home prices beyond any historical connection to incomes. Gravity did the rest. After roughly doubling in value from 2000 to 2005, home prices have fallen about 17 percent — and more like 25 percent in inflation-adjusted terms — according to the widely watched Case-Shiller index.

Even so, most economists think house prices must fall an additional 10 to 15 percent to get back to reality. One useful measure is the relationship between the costs of buying and renting a home. From 1985 to 2002, the average American home sold for about 14 times the annual rent for a similar home, according to Moody’s Economy.com. By early 2006, home prices ballooned to 25 times rental prices. Since then, the ratio has dipped back to about 20 — still far above the historical norm.

With mortgages now hard to obtain and speculation no longer attractive, arithmetic has replaced momentum as the guiding force for housing prices. The fundamental equation points down: Even as construction grinds down, there are still many more houses on the market than there are people to buy them, and more on the way as more homeowners slip into foreclosure.

By the reckoning of Economy.com, enough houses are on the market to satisfy demand for the next two-and-a-half years without building a single new one.

The time it takes to sell a newly completed house has expanded from an average of four months in 2005 to about nine months, according to analysis by Dean Baker, co-director of the Center for Economic and Policy Research.

And many sales are falling through — more than 30 percent in some parts of California and Florida — as buyers fail to secure financing, exacerbating the glut of homes, Mr. Baker said.

No wonder that in Los Angeles, San Francisco, Phoenix and Las Vegas, house prices have in recent months declined at annual rates of more than 33 percent.
 

When will banks revive?

So far, they have written off more than $300 billion in loans. Many experts now predict the toll will rise to $1 trillion or more — a staggering sum that could cripple many institutions for years.

Back when home prices were multiplying, banks poured oceans of borrowed money into real estate loans. Unlike the dot-com companies at the heart of the last speculative investment bubble, the new gold rush was centered on something that seemed unimpeachably solid — the American home.

But the whole thing worked only as long as housing prices rose. Falling prices landed like a bomb. Homeowners fell behind on their loans and could not qualify for new ones: There was no value left in their house to borrow against. As millions of people defaulted, the banks confronted enormous losses in a bloody period of reckoning.

In March, the Federal Reserve helped engineer a deal for JPMorgan Chase to buy troubled investment bank Bear Stearns. Many assumed the worst was over. But, this month, the open distress of Fannie Mae and Freddie Mac — two huge, government sponsored institutions that together own or guarantee nearly half of the nation’s $12 trillion in outstanding mortgages — sent a signal that more ugly surprises may lie in wait.

To calm markets, the government last weekend hurriedly put together a rescue package for Fannie and Freddie that, if used, could cost as much as $300 billion. The urgent need for a rescue — together with another round of billion-dollar write-offs on Wall Street — has unnerved economists and investors.

“I was a relative optimist, but I’ve certainly become more pessimistic,” said Alan S. Blinder, an economist at Princeton, and a former vice chairman of the board of governors at the Federal Reserve. “The financial system looks substantially worse now than it did a month ago. If the Freddie and Fannie bailout were to fail, it could get a hell of a lot worse. If we get more bank failures, we have the possibility of seeing more of these pictures of people standing in line to pull their money out. That could really scare consumers.”

In one respect, Mr. Blinder added, this is like the Great Depression. “We haven’t seen this kind of travail in the financial markets since the 1930s,” he said.

More than two years ago, Nouriel Roubini, an economist at the Stern School of Business at New York University, said that the housing bubble would give way to a financial crisis and a recession. He was widely dismissed as an attention-seeking Chicken Little. Now, Mr. Roubini says the worst is yet to come, because the account-squaring has so far been confined mostly to bad mortgages, leaving other areas remaining — credit cards, auto loans, corporate and municipal debt.

Mr. Roubini says the cost of the financial system’s losses could reach $2 trillion. Even if it’s closer to $1 trillion, he adds, “we’re not even a third of the way there.”

Where will the banks raise the huge sums needed to replenish the capital they have apparently lost? And what will happen if they cannot?

The answers to these questions are unknown, an unsettling void that holds much of the economy at a standstill.

“We’re in a dangerous spot,” said Andrew Tilton, an economist at Goldman Sachs. “The big threat is more capital losses.”

Banks are a crucial piece of the economy’s arterial system, steering capital where it is needed to fuel spending and power growth. Now, they are holding tight to their dollars, starving businesses of loans they might use to expand, and depriving families of money they might use to buy houses and fill them with furniture and appliances.

From last June to this June, commercial bank lending declined more than 9 percent, according to an analysis of Federal Reserve data by Goldman Sachs.

“You have another wave of anxiety, another tightening of credit,” said Robert Barbera, chief economist at the research and trading firm ITG. “The idea that we’ll have a second half of the year recovery has gone by the boards.”

Is my job safe?

Economic slowdowns always mean job losses. Unemployment already has risen, and almost certainly will increase more.

The first signs of distress emerged in housing. Construction companies, real estate agencies, mortgage brokers and banks began laying people off. Next, jobs started being cut at factories making products linked to housing, from carpets and furniture to lighting and flooring.

But as the real estate bust spilled over into the broader economy, depleting household wealth, the impacts rippled out to retailers, beauty parlors, law offices and trucking companies, inflicting cutbacks throughout the economy, save for health care, farming and energy. Over the last six months, the economy has shed 485,000 private sector jobs, according to the Labor Department. Many people have seen hours reduced.

The unemployment rate still remains low by historical standards, at 5.5 percent. And so far, the job losses — about 65,000 a month this year — do not approach the magnitude of those seen in past downturns, particularly the twin recessions at the beginning of the 1980s, when the economy shed upward of 140,000 jobs a month and the unemployment rate exceeded 10 percent.

But Goldman Sachs assumes unemployment will reach 6.5 percent by the end of 2009, which translates into several hundred thousand more Americans out of work.

These losses are landing on top of what was, for most Americans, a remarkably weak period of expansion. From 1992 to 2000 — as the technology boom catalyzed spending and hiring — the economy added more than 22 million private sector jobs. Over the last eight years, only 5 million new jobs have been added.

The loss of work is hitting Americans along with an assortment of troubles — gasoline prices in excess of $4 a gallon, over all inflation of about 5 percent, and declining wages.

“In every dimension, people are worse off than they were,” said Mr. Roubini, the New York University economist.

Are consumers done?

That is a major worry.

The fate of the economy now rests on the shoulders of the American consumer, whose spending amounts to 70 percent of all economic activity.

When people go to the mall and buy televisions and eat out, their money circulates through the economy. When they tighten their belts, austerity ripples out and chokes growth.

Through the years of the housing boom, many Americans came to treat their homes like automated teller machines that never required a deposit. They harvested cash through sales, second mortgages and home equity lines of credit — an artery of finance that reached $840 billion a year from 2004 to 2006, according to work by the economists James Kennedy and Alan Greenspan, the former Federal Reserve chairman. That allowed Americans to live far in excess of what they brought home from work.

But by the first three months of this year, that flow had constricted to an annual rate of about $200 billion.

Average household debt has swelled to 120 percent of annual income, up from 60 percent in 1984, according to the Federal Reserve.

And now the banks are turning off the credit taps.

“Credit is going to remain tight for a time potentially measured in years,” said Mr. Tilton, the Goldman Sachs economist.

This is the landscape that has so many economists convinced that consumer spending must dip, putting the squeeze on the economy for several years.

“The question is, will it get as bad as the 1970s?” asked Mr. Rogoff, recalling an era of spiking gas prices and double-digit inflation.

Long term, Americans may have no choice but to spend less, save more and reduce debts — in short, to live within their means.

“We’re getting a lot of the adjustment and it hurts,” said Kristin Forbes, a former member of the Council of Economic Advisers under President George W. Bush, and now a scholar at M.I.T.’s Sloan School of Management. “But it’s an adjustment we’re going to have to make.”

Who’s to blame?

There is plenty to go around.

In the estimation of many economists, it starts with the Federal Reserve. The central bank lowered interest rates following the calamitous end of the technology bubble in 2000, lowered them more after the terrorist attacks of Sept. 11, 2001, and then kept them low, even as speculators began to trade homes like dot-com stocks.

Meanwhile, the Fed sat back and watched as Wall Street’s financial wizards engineered diabolically complicated investments linked to mortgages, generating huge amounts of speculative capital that turned real estate into a conflagration.

“At the end of this movie, it’s clear that the Fed will have to care about excesses,” Mr. Barbera said.

Prices multiplied as many homeowners took on more property than they could afford, lured by low introductory interest rates that eventually reset higher, sending many people into foreclosure.

Mortgage brokers netted commissions as they lent almost indiscriminately, offering exotically lenient terms — no money down, no income or job required. Wall Street banks earned billions selling risky mortgage-linked securities around the world, aided by ratings agencies that branded them solid.

Through it all, a lot of ordinary Americans borrowed a lot more money then they could afford to pay back, running up enormous credit card bills and borrowing against the value of their homes. Now comes the day of reckoning.

    Uncomfortable Answers to Questions on the Economy, NYT, 19.7.2008, http://www.nytimes.com/2008/07/19/business/economy/19econ.html?hp

Morgan Reports a Drop of 53% in Quarterly Net

July 18, 2008
The New York Times
By ERIC DASH

JPMorgan Chase said Thursday that its second-quarter income dropped 53 percent, as credit card and home loan losses spread to borrowers with the strongest credit histories.

The bank set aside an additional $1.3 billion to cover future loan losses as the housing market and the economy worsen. JPMorgan marked down the value of unsold buyout loans and complex mortgage investments by about $1.1 billion. And it said it would take about a $540 million charge to cover the first wave of losses and litigation costs related to its acquisition of Bear Stearns in March.

So far, JPMorgan has weathered the tight credit market better than most, though its shares have been battered along with the rest of the financial sector. Shares were up more than 11 percent Thursday after rising 15.86 percent on Wednesday.

Still, the rising number of defaults in mortgages, home equity loans and credit cards suggested that the worst was not over. Chase, the bank’s big consumer arm, set aside $3.8 billion in reserves, about twice the amount from the previous year, to cushion its expected losses.


Although the bank is widely praised for its strong balance sheet and management under its chief executive, James Dimon, Thursday’s results showed that it was not immune to economic and competitive pressure. The bank loosened lending standards and was caught off guard by the severe downturn in home prices along with many of its rivals.

“We were wrong,” Mr. Dimon said in a conference call with analysts and investors. “We obviously wish we hadn’t done it.”

“Our expectation is those mortgage losses could triple from there,” Mr. Dimon said. “We had $100 million a quarter and we could go to $300 million a quarter sometime in 2009.”

He cautioned that conditions could get worse.

“Our expectation is for the economic environment to continue to be weak — and to likely get weaker — and for the capital markets to remain under stress,” Mr. Dimon said in a statement.

Net income fell more than half to $2 billion, or 54 cents a share, in contrast to $4.2 billion, or $1.20 share, a year earlier. Analysts surveyed by Thomson Financial had expected 44 cents a share. Revenue dipped 1 percent, to $19.7 billion.

The second quarter was difficult, with challenges in each of the bank’s six main businesses on top of the Bear Stearns acquisition.

Mr. Dimon said that the “highly complex” acquisition was going as planned

JPMorgan took a charge of almost $540 million to reflect losses from about a two-month period ended May 30. But that was partially offset by a gain on the sale of MasterCard shares, which been among the industry’s highest fliers.

The finance chief, Michael J. Cavanagh, said the bank now expected to take $10.5 billion in total charges to clean up Bear Stearns’s balance sheet and pay for litigation and other merger expenses.

JPMorgan scooped up the investment bank two months ago, when Bear Stearns was pushed into its arms to avoid the possibility of bankruptcy and widespread financial panic. The Federal Reserve helped by guaranteeing a $29 billion loan to facilitate the transaction.

Still, JPMorgan raised about $6 billion in fresh capital that insiders say could be used to offset the losses. Others suggested it could be used to provide a layer of protection for its “fortress balance sheet” — or perhaps another acquisition.

Mr. Dimon and his lieutenants have been looking at troubled retail banks for months, and many analysts think he is searching for another deal.

“Nothing is impeding us, but it is not only up to us,” he said, adding that the bank planned to gather more deposits from weakened competitors.

The commercial bank and treasury services division delivered record revenue and earnings in the quarter from double-digit growth in loans and deposits. But its much larger consumer franchise and investment bank struggled in a highly volatile market.

Investment banking swung to a $785 million loss, dropping 67 percent after it wrote down $1.1 billion in unsold buyout loans and complex mortgage related securities. Trading revenue was weak in both the equities and fixed-income divisions.

JPMorgan also highlighted the performance of its commodities trading business, currently the hottest area of the markets, but it is still building its business in that sector. Investment banking fees were the second highest ever as its participation in several big fund-raising efforts shielded the bank from an industrywide decline.

Chase Card Services, the bank’s credit card arm, had its second-quarter profit fall 67 percent, to a $509 million loss as charge-offs continued rising. Its loss rate climbed to about 5 percent in the second quarter.

Chase Retail Services, the bank’s consumer unit, reported a $179 million loss after a 23 percent drop in profit. The division was hurt by losses on home equity loans as well as mortgages as more borrowers stopped making their monthly payments.

“It continues to deteriorate, and we expect it to continue to weaken in the near term,” Mr. Cavanagh said. “There is some slowdown in the pace of deterioration of home equity.”

Chase’s auto finance arm also had higher loan losses, as more consumers found their budgets stretched by higher gas and food prices.

The asset management division booked a $395 million profit, down 20 percent from last year, despite an influx of new money.

    Morgan Reports a Drop of 53% in Quarterly Net, NYT, 18.7.2008, http://www.nytimes.com/2008/07/18/business/18bank.html

Postcards From the Hedge: Faking a Vacation at Home

Cost-Conscious 'Staycationers' Simulate the Travel Experience; A Tent in the Living Room

July 16, 2008
The Wall Street Journal
By MARY PILON
Page D1

Karen Ash is about to take a weeklong Japanese vacation. She'll buy postcards and souvenirs at a traditional Japanese market. She'll admire bonsai plants and view Japanese films. She'll eat ramen, ordering in Japanese.

And she'll never leave the Bronx.

Ms. Ash, a legal assistant who lives in that New York City borough, called off her plans to travel to Japan this summer. The ballooning cost of airfares, weak dollar-to-yen exchange rate and difficulty saving travel money while keeping pace with bills forced her to rethink her summer plans. So she's determined to have the ultimate "staycation," or vacation spent at home.

While more hard-pressed Americans are spending their vacation time at home lately, not everyone is happy about it. Barbecues and reruns don't match the thrill of travel. So some are going to great lengths to foster the illusion of a wayfaring vacation. They'll sample foreign tourism, wilderness camping, hotel living and beach-going without ever leaving their living rooms.

Some entrepreneurs have even developed new businesses to help faux-travelers with the ruse. Bob Porter, a literary editor from Pacific City, Ore., for one, has taken on the additional career of staycation planner.

What's the farthest you'll travel for vacation this summer? Vote in the Question of the Day.Last spring, a friend of Mr. Porter complained that he was too broke to travel, so Mr. Porter, as a joke, furnished his apartment like a hotel. He plugged in a TV, hung "Do Not Disturb" signs and even placed fresh soaps and towels in the bathroom. Since the joke, word-of-mouth has spread. Mr. Porter has repeated the hotel stunt 11 times since April, sparking a small business. For two nights of the faux-hotel experience, he charges $50 to $60. (He buys the items from real hotels.)

He's expanded to include room service (delivery from a local restaurant), offering wake-up calls and maid service. "I really need to buy one of those maid carts like they really use at a hotel," he said. He'll plug in a stocked mini fridge and hang pastel-toned paintings of the ocean on the walls. The toilet seat bears the sealing strip of paper across the lid and seat, ensuring recent sanitization. A Gideon Bible rests in the nightstand drawer.

Most of Mr. Porter's clients are young couples "who see the humor in it" and are coping with the high cost of travel. Often, the hotel stunt is a surprise. One of his customers hired Mr. Porter to revamp their home while his wife was out. When she returned, he told her "this is as close to vacation as we're gonna get."

The Bason family in Oakland, Calif., passed on their trip to Hawaii this year for a camp-out in their living room. Clem Bason and his wife, Francoise Barton, set up a tent in their living room (the yard was too small) so that their three-year-old and one-year-old sons wouldn't miss out on the adventure of travel. They cooked s'mores over a candle and ate hot dogs prepared in the kitchen. Camp stories were read in the tent. And Mr. Bason took a lamp from his older son's room and placed it in the living room to create the effect of moonlight on a summer's night.

"Every single night, my son asks me if we can camp out," Mr. Bason says. He anticipates that they'll repeat the camp-in once a month until the end of summer.

Stephanie Worrell's family has spent at least 10 days in California every summer for the past 15 years. This year the Boise, Idaho, family could only go for a weekend, to fulfill a promise to her daughter that she could celebrate her 10th birthday at Sea World. Since the normally long vacation was cut short, Mrs. Worrell is revamping her backyard as a campsite and designing a light and water show for her front yard. She's still designing the spectacle but anticipates that it will involve lots of Christmas lights and sprinklers.

Mrs. Worrell says she hopes that when she's done, her children and the neighbors will be reminded of Niagara Falls. "With gas prices and the general cost of living sky-high," she said, "It seems like I'll be showering at home versus the Hilton."

But staying at home doesn't stop some consumers from buying for the beach. Danna Pomeroy with Fiji Time Swimwear owns a store in Fountain Hills, Ariz. But with gas prices so high, she decided she could snare more business by going to her customers and throwing bikini-fitting parties for women in their own living rooms. Partygoers sip on tropical cocktails, sport seashell leis and listen to Fijian music. Often her customers are groups of girlfriends or mother-daughter parties.

Ms. Pomeroy says the faux-beach atmosphere inspires some customers to buy suits, even if they'll never actually get to the beach. "People want to relax now," she said.

Ms. Ash, who is planning her Japanese staycation in the Bronx, won't deal with airlines or currency exchanges, but even after months of meticulous preparation for her July trip, Ms. Ash has some of the same anxieties she would if she was actually Japan-bound.

"Tokyo ramen is going to be completely different from Osaka ramen," she said. "God forbid I get confused and ask for the wrong one at the wrong restaurant."

The only thing American about Ms. Ash's trip, she insists, will be the U.S. dollar she uses to buy her miso soup. Her detailed itinerary includes participating in a tea ceremony at the Urasenke Chanoyu Center in the Upper East Side, a taiko drumming concert in the Upper West Side, reading Japanese newspapers and an evening of watching "trashy Japanese soap operas" on DVD. She'll stroll around the city with her fanny pack and camera, unafraid of conspicuously looking like a tourist.

While wandering through Manhattan a couple of weeks before her staycation, Ms. Ash saw some Japanese postcards and refused to buy them because she wasn't technically on vacation yet. But seeing the images inspired trickery. In addition to sending postcards to her friends who know about her at-home vacation, she'll also send some to her friends who haven't realized that she's never leaving the area. "I'd love to try and trick a couple of people that I went somewhere," she said. "I hope the postmark doesn't give it away."

    Postcards From the Hedge: Faking a Vacation at Home, WSJ, 16.7.2008, http://online.wsj.com/article/SB121615848493356053.html?mod=hpp_us_inside_today

Fed Chief Bleak on Economic Outlook

July 16, 2008
The New York Times
By STEVEN R. WEISMAN

WASHINGTON — A sense of economic gloom gripped Washington on Tuesday as President Bush urged Americans not to lose faith, the Federal Reserve chairman offered a mostly bleak assessment of the difficulties ahead for the economy, and the administration’s latest effort to help the housing sector faced tough questioning in Congress.

Despite widespread concern about losses suffered by Fannie Mae and Freddie Mac, the two giant housing finance companies, the Bush administration’s call for quick passage of legislation to authorize the use of government funds to save them ran into heavy fire, especially among some Republicans concerned about taxpayer liability.

The opposition threatened to slow down the rescue plan, especially if lawmakers insist on making major changes to the package, which would allow the Bush administration to use the United States Treasury to help Fannie and Freddie by lending them money and buying their stock.

The latest trouble in the financial markets, rising energy prices and spreading joblessness were also sowing new discord among lawmakers, with Democrats calling for, and Republicans resisting, a new round of spending programs and tax cuts to stimulate the economy.

A day after reports of losses by regional banks, causing some depositors to pull their money out, Mr. Bush held an unscheduled news conference at which he felt compelled to remind Americans that their deposits were insured up to $100,000.

“My hope is that people take a deep breath and realize that their deposits are protected by our government,” the president said. He added that economic growth “was not the growth we’d like” but expressed confidence that the country would overcome “a time of uncertainty.” The nation’s troubled financial system is “basically sound,” he added.

Reacting to the latest dismal news, the Dow Jones industrial average closed down almost 93 points after a roller-coaster session, with the shares of the two mortgage finance companies continuing their steep slide. Fannie Mae fell 27 percent and Freddie Mac, 26 percent.

The Fed chairman, Ben S. Bernanke, testifying before the Senate Banking Committee, avoided the word “recession” but presented a generally gloomy picture, saying that consumer spending and exports were keeping growth “at a sluggish pace” while the housing sector “continues to weaken.”

“The economy has continued to expand, but at a subdued pace,” Mr. Bernanke said at another point. In one rare note of optimism, he revised upward the Fed’s growth estimate for the year and added that consumer spending had somewhat exceeded expectations.

The Fed chief spent the early morning testifying alone, as part of his twice-a-year appearances before Congress, and then joined Treasury Secretary Henry M. Paulson Jr. and Christopher Cox, chairman of the Securities and Exchange Commission. Sitting with them, he endorsed Mr. Paulson’s plan, unveiled on Sunday, to seek legislation to give the federal government temporary power to help Fannie and Freddie, and he also defended the Fed’s opening its own lending facility to the two agencies.

Mr. Bernanke offered no timetable for improved economic performance, declaring that while the risks to the overall economy were still “skewed to the downside,” inflation “seems likely to move temporarily higher in the near term.” The Fed, he said, needed to guard against higher prices’ spreading through the economy.

That mixed warning about rising costs and a downturn reinforced the message of last month’s meeting of the Federal Open Market Committee, the central bank’s policy-making body, that it would not cut interest rates further and, indeed, that higher rates might be necessary to combat inflation.

Despite snaking around branches of IndyMac Bank and a report from the chairwoman of the Federal Deposit Insurance Corporation that more banks were expected to run into trouble, Mr. Bernanke said he did not think there was a significant danger to the banking sector, most of which he said remained profitable.

“Of course, all banks are being challenged by credit conditions now,” the Fed chief said in response to a question from Senator Richard C. Shelby, an Alabama Republican on the banking panel. “The good news is that the banking system did come into this episode extremely well capitalized, extremely profitable.”

But concerns that consumer banking could succumb to the ills of the credit crisis clearly rattled official Washington, as Mr. Bush’s citation of the federal government’s insurance of bank deposits made clear.

“The bottom line is this: We’re going through a tough time,” Mr. Bush said. “But our economy’s continued growing, consumers are spending, businesses are investing, exports continue increasing and American productivity remains strong.”

The main reasons for Mr. Bernanke’s sober assessment, he told senators, were rising commodity prices, especially energy, and continued weakness in the housing sector. He suggested that housing prices might turn around next year, but that high energy prices were likely to persist because demand was outstripping supply.

Over all, he suggested in his initial comments, economic growth “is projected to pick up gradually over the next two years.”

The Fed chief’s discussion of energy issues provoked some of the liveliest exchanges of the day as several Democrats and some Republicans suggested that heavy investment in the futures market was artificially driving prices upward.

He said several times that he did not view “speculation” as necessarily bad, adding that some investors, like airlines, needed to buy energy futures to hedge against volatility in prices. Rather than blame speculators, or even “manipulation” of the market, Mr. Bernanke, a former professor of economics at Princeton, sought to explain to senators that energy prices were driven by fundamental factors.

“Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil,” Mr. Bernanke said. “On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years.”

He also dismissed the suggestion that the precipitous fall in the value of the dollar against other currencies had contributed to high oil prices. Some economists say that because oil is priced in dollars and the value of the dollar has weakened — in part because of low interest rates fostered by the Fed — investors are fleeing to commodities, driving their prices up.

He said that the decline in the dollar had “contributed somewhat” to higher oil prices but insisted that the “principal drivers” were supply and demand.

As always, senators sought assurances that Mr. Bernanke understood that average Americans were suffering even if the economy itself was not technically in a recession.

Mr. Bush, at his news conference, also sought to demonstrate that he understood the hardships of Americans. “It’s been a difficult time for many American families who are coping with declining housing values and high gasoline prices.”

When asked about his statement in February that he had not heard forecasts that gasoline prices could reach $4 a gallon, Mr. Bush interrupted and replied, “Aware of it now.”

Mr. Bernanke was asked many times whether he would endorse the call by some Democrats for a new stimulus package, but each time he demurred, saying it was too early to draw conclusions.

Senator Christopher J. Dodd, the Connecticut Democrat who is head of the Senate banking panel, cited another Democratic theme, that a stimulus package should contain money to build roads, bridges and other infrastructure.

Mr. Bernanke said such projects might be worthy, but spending for them would not provide an immediate lift to the economy because of the lag time between approving large construction programs and spending the funds.

Reporting was contributed by Steven Lee Myers, Stephen Labaton and David M. Herszenhorn in Washington, and Michael M. Grynbaum in New York.

    Fed Chief Bleak on Economic Outlook, NYT, 16.7.2008, http://www.nytimes.com/2008/07/16/business/economy/16econ.html?hp

With Warning, G.M. Takes Wide Cost Cuts

July 16, 2008
The New York Times
By BILL VLASIC

DETROIT — With concern growing among investors about a possible bankruptcy filing, General Motors on Tuesday announced sweeping cost cuts and other measures to bolster its tenuous cash position.

But even as G.M. unveiled plans to increase its liquidity by $15 billion, the automaker warned of more tough times ahead.

The broad cutbacks included a 20 percent reduction in payroll for salaried workers, elimination of health care for older white-collar retirees, and suspension of G.M.’s annual stock dividend of $1 a share.

G.M.’s chairman, Rick Wagoner, said the sharp downturn in the American auto market forced “difficult decisions” to protect the company’s future.

“I’m determined and highly confident that G.M. will be a survivor,” Mr. Wagoner said in an interview. “We can do what we need to do.”

Rising gas prices and a weak economy have driven G.M.’s United States sales down 16 percent this year and crippled the market for its big pickups and sport utility vehicles.

The steep fall in sales is eating into G.M.’s cash reserves at the rate of more than $1 billion a month, according to some analysts, provoking fears on Wall Street that the company will run out of money before the market rebounds.

While G.M. had about $24 billion in cash at the end of the first quarter, Mr. Wagoner said the company needed to take drastic action now.

“What we wanted to demonstrate today is that we have a lot of capability to improve liquidity,” he said.

G.M.’s plan calls for $10 billion in cost cuts, combined with $5 billion in new financing from asset sales and debt offerings.

The automaker developed the plan with the assumption that industrywide vehicle sales in the United States would not rise above 14 million this year or in 2009 — the lowest sales level in more than a decade.

G.M.’s shares opened lower on Tuesday but rallied to close at $9.84, a gain of about 5 percent.

“This won’t solve most of the company’s problems, but it will buy them some time,” said John Casesa of the consulting firm Casesa Shapiro Group.

Analysts generally said that the depth of the cost cuts exceeded their expectations, but that the fund-raising efforts were smaller than anticipated. Moreover, analysts said they were left with more questions than answers about how G.M. would adapt to consumers’ rapid shift from large vehicles to smaller, more fuel-efficient cars.

“The announcements offered little sense of a new G.M. strategy or shift in organizational culture that might set the stage for a more dramatic reinvention,” said Brian Johnson of Lehman Brothers.

G.M., the nation’s largest automaker, has been struggling for several years to make money in North America and develop passenger cars that compete with models from the Japanese automakers Toyota and Honda.

The company, along with Ford and Chrysler, its Detroit rivals, has relied heavily on sales of pickups and S.U.V.’s for profits.

But the advent of $4-a-gallon gas has dried up the market for bigger vehicles, forcing the Detroit automakers to sharply scale back their production.

G.M. said Tuesday that it would reduce its truck production by 300,000 vehicles by next year, doubling the cutbacks it announced earlier this summer.

The automaker’s president, Frederick Henderson, said the reductions would be achieved by accelerating previously announced plant closings in Wisconsin, Ohio, Canada and Mexico, as well as additional downsizing.

“I’m not going to get into today how many additional people will be affected,” he said. “These are going to be some pretty tough measures.”

The company also will slash its salary costs by 20 percent by the end of the year through buyouts, early retirements, attrition and possibly layoffs. G.M. has about 40,000 white-collar workers in the United States and Canada.

While G.M. has been methodically cutting jobs since 2006, the decision to eliminate health care benefits for salaried retirees over the age of 65 was unexpected.

The generous health plans for retirees has long been considered a pillar of the benefit system at G.M. The company pledged to increase pensions to offset the loss of coverage.

Still, retirees interviewed Tuesday said that they were blindsided by the move.

One retiree, William Parker of Towson, Md., said he was recently prescribed a new cancer drug that normally costs $2,700 a month, but only $50 under his G.M. plan.

“G.M. was good to me and I hate to be bitter,” said Mr. Parker, 74, who retired in 1987 after 28 years with G.M. “But I don’t know what the hell I’m going to do. I’m fighting for my life here.”

Other cost-cutting components of the plan included delaying $1.7 billion in payments to a health care trust for retired hourly workers, and the elimination of executive bonuses and pay raises for salaried workers.

Beyond the personnel moves, Mr. Wagoner said G.M. would cut costs in its sales and marketing units, limit its capital spending to $15 billion through 2009, and tighten inventory controls on engines and other parts.

But Mr. Wagoner was less specific on how G.M. would raise additional cash. The company hopes to generate up to $4 billion by selling assets, but executives declined to say what might be sold besides the Hummer S.U.V. brand.

Also, Mr. Wagoner declined to provide details about a planned debt offering to raise $2 billion or more, only that the company would seek the financing when market conditions were most advantageous.

G.M. also said it planned to speed up delivery of some new products, like the Chevrolet Equinox crossover vehicle and the Cadillac CTS coupe.

The scope of initiatives addressed virtually every area of concern voiced by investors about G.M. But the top priority for executives was to quash any further talk that bankruptcy was a possibility for the company.

“At some point, these analysts should learn that car companies don’t die that fast,” said Robert Lutz, G.M.’s vice chairman and chief product officer.
 

Nick Bunkley contributed reporting.

    With Warning, G.M. Takes Wide Cost Cuts, NYT, 16.7.2008, http://www.nytimes.com/2008/07/16/business/16auto.html

Profit Rises 25% at Intel on Strong Global Demand

July 16, 2008
The New York Times
By LAURIE J. FLYNN

SAN FRANCISCO — Finally, some good news for Wall Street.

Despite high gas prices and widespread fears of an economic downturn, Intel, the largest chip maker, reported a sharp rise in profit on Tuesday and said strong demand worldwide for computer chips would continue in the current quarter.

“Independent of the climate, we had a great second quarter,” Stacy J. Smith, Intel’s chief financial officer, said in an interview on Tuesday. “What we’re seeing is pretty strong demand.”

The company said its net income for the quarter rose 25 percent to $1.6 billion, or 28 cents a share, from the year-ago quarter.

The company said revenue rose 9 percent to $9.5 billion for the second quarter that ended June 30.

The net income was well above the expectations of Wall Street analysts, who had projected earnings of 25 cents a share and revenue of $9.32 billion, according to a survey of analysts by Thomson Financial.

“As we enter the second half, demand remains strong for our microprocessor and chipset products in all segments and all parts of the globe,” Paul S. Otellini, Intel’s chief executive, said in a statement.

Intel’s results included $96 million in revamping charges, rather than the $250 million in charges it had previously expected.

Intel’s gross margin, a closely watched barometer of profitability, rose to 55.4 percent, slightly lower than the roughly 56 percent the company had predicted, but an improvement over 46.9 percent in the year-ago period and 53.8 percent in the first quarter.

Intel executives said the company had missed its projections because computer makers shifted to lower-priced chips, like the Atom processor that is used in low-cost mini-notebook PCs known as netbooks.

Despite its optimism, Intel’s missing its target on profit margins tempered Wall Street analysts’ enthusiasm. Intel shares rose only slightly in after-hours trading to $20.95. Before the earnings report was released, the stock had increased 24 cents to close at $20.71.

“Intel is executing as well as they have in 10 or 15 years,” said Cody Acree, an analyst with Stifel Nicolaus.

Mr. Acree added that electronics were proving to be somewhat immune to much of the slowdown that is hitting other consumer products. “This is a segment of the economy that is continuing to see very resilient demand,” he said, pointing to the huge sales of the Apple iPhone 3G last week.

In a conference call with analysts, Mr. Otellini said that notebook sales overtook sales of desktop computers for the first time during the second quarter, faster than expected. “The crossover happened six months sooner than we thought,” he said.

Intel, based in Santa Clara, Calif., has been buoyed lately by a wave of new products. The new Atom processor takes Intel into a high-growth sector that analysts hope will open up markets in emerging countries while expanding the company’s market in the United States.

On Monday, the company released the second generation of its Centrino mobile technology, which offers higher performance and faster Wi-Fi than the 2003 original while using far less power. Analysts expect the product to further bolster Intel’s mobile division.

Mr. Otellini said that the company was continuing to take steps to alleviate the problem of an oversupply of NAND flash-memory chips, which drove down prices, but he declined to elaborate on the measures.

Intel’s second-quarter report comes amid broadening concerns about the economy and its impact on demand from consumer and corporate spending. Intel expects revenue in the third quarter could increase as much as 5 percent to $10.6 billion and its gross margin could rise to 58 percent. Analysts have forecast revenue of $10.07 billion, on average.

Intel faced some setbacks during the second quarter, including the news that the Federal Trade Commission was formalizing its investigation of Intel’s business practices. The company was also fined $25 million by the Fair Trade Commission of South Korea, which charged that it had violated antitrust law there.

Still, Intel has continued to benefit from the missteps of its chief rival, Advanced Micro Devices, which for the last year and a half has endured product delays, technical problems and high costs related to its acquisition of the graphics chip maker ATI Technologies.

“I’d be a little surprised if we didn’t gain share, but I’ll wait for the numbers,” Mr. Smith said, referring to the industry practice of releasing market share figures immediately after earnings season.

On Friday, A.M.D. announced it would take $880 million in charges in the second quarter, as well as a $32 million revamping charge, largely from severance payments. In April, A.M.D. posted its sixth consecutive loss; the company is scheduled to report earnings on Thursday.

During the second quarter, A.M.D. overhauled its mobile chip lineup, giving investors hope that its competitive position could improve.

    Profit Rises 25% at Intel on Strong Global Demand, NYT, 16.7.2008, http://www.nytimes.com/2008/07/16/technology/16chip.html

More Homeowners Consider Taking in Boarders

July 16, 2008
The New York Times
By JOHN LELAND

BALTIMORE — When Barbara Terry fell behind on her mortgage payments earlier this year, she did the previously unthinkable. Through a local housing organization, she and her daughter, Imani, 9, rented part of their single-family house to a stranger.

“I had to do something,” said Miss Terry, 46, who helps formerly homeless people move into new housing. “I said, I am not going to lose this house. Thinking about having a stranger was not a pleasant thought. I have a daughter. But the positive part was that I needed extra help, and I wanted to help someone.”

With residential mortgage foreclosures still on the rise, more homeowners nationwide are considering Miss Terry’s choice: whether to take in a boarder to keep their homes. Modest but growing numbers are turning to agencies nationwide like the St. Ambrose Housing Aid Center Homesharing Program in Baltimore, which screen boarders to find appropriate matches and relieve some of the fear of strangers.

“We’re seeing greater numbers of marginal people,” said Kirby Dunn, executive director of HomeShare Vermont, one of several hundred programs around the country that have been formed since the 1980’s to help elderly or disabled homeowners exchange spare rooms for income or, more often, help around the house, but now being pressed to meet different needs.

“Historically,” Ms. Dunn said, “the people who come to us have been looking for someone to provide services in the home. But now, money is the bigger issue for folks. There’s definitely an increase in people looking for a revenue stream.”

Ms. Dunn said volume at the agency was up this year, with three or four times as many people seeking rooms as seeking boarders.

On a recent Saturday morning, while Miss Terry attended a training session at her church, Katherine Ongiri, 47, celebrated her first week of living in Miss Terry’s two-story house, where she pays $500 a month, in weekly installments. The women work different schedules, but have shared an occasional meal. Miss Terry helped Ms. Ongiri, who does not drive, get her check cashed, and treated her to lunch at Burger King.

“She’s good company,” Miss Terry said. “And I don’t mind helping because I know how hard it is when you’ve got to take the bus, because I’ve been there.”

Ms. Ongiri said of Miss Terry and her daughter, “I don’t mind helping her keep a roof over that girl’s head, because I know what it’s like.”

The two women’s routes to St. Ambrose Housing Aid Center, which culminated in Ms. Ongiri’s moving into Miss Terry’s attic, describe the multiple hazards of the current economic downturn: stagnant wages, rising energy and food prices, exotic mortgages, job insecurity, neighborhood instability and the challenges for single working women to find safe environments for themselves and their children.

“A lot of prayer comes in,” Miss Terry said. “You don’t want someone to try to take over, or cause problems once they get a foot in the door.”

Miss Terry bought her home six years ago, in a hilly neighborhood in northeast Baltimore, for $92,000, with a government-backed mortgage and monthly payments of about $800. She had never owned a home before, and was excited to move out of subsidized housing.

After two refinance loans, like many homeowners she does not understand her current mortgage, which is an interest-only loan. What she knows is that her payments are now more than $1,000 per month, and that she cannot afford them.

“Everything was going up except my paycheck,” Miss Terry said. “During the refinance, people tell you you can get money to upgrade your home, and your mortgage will go up a little bit. O.K., but my paycheck is not rising.”

Ms. Ongiri had housing and financial problems of her own. Earlier this year, after a cut in her income — she works as an airport wheelchair escort, for $6.25 an hour plus tips — she moved into a rented room, only to learn the house was in foreclosure. When she moved into another rented room in a rougher part of town, she discovered that the other residents were three men. “It could’ve been very unsafe for me,” she said. “I wasn’t afraid, but I was uncomfortable.”

Roy Miller, a housing counselor at nearby Belair-Edison Neighborhood Inc., said most of the distressed homeowners he saw were unwilling to rent part of their houses to strangers, especially if there were children at home. Most home-sharing agencies have fewer than 100 matches at any time.

But Miss Terry did not know where else to turn. She was behind on mortgage payments, but the idea of placing an advertisement in the newspaper or online scared her — anyone might show up at her door. (In the current movie “Kit Kittredge: An American Girl,” in which a Depression family takes in boarders to save its home, a motley assortment of strangers unsettle family life.) Miss Terry turned to St. Ambrose, she said, on the advice of her supervisor, who said the agency would screen potential housemates to find a match.

Like other home-sharing agencies, St. Ambrose conducts background checks on both parties, screening out people with criminal records or histories of drug or alcohol abuse, or those who cannot afford to be stable homeowners or renters. A 10-point questionnaire sorts candidates’ feelings about pets, smoking, overnight guests and other points of compatibility.

“So far we’ve had no bodily damage,” said Annette Brennan, the program’s director (St. Ambrose provides a full range of housing services). “I say that quietly so as not to jinx it.”

In some communities, local zoning laws or homeowner associations may limit the number of nonrelated people who can live in a house. Ms. Brennan said that home-sharing could help some people caught in the housing downturn, but that its benefits were limited.

“Where we see it being of value is if someone is having short-term problems,” she said. “The average stay of a sharer is about a year, and some are much less. It’s good for someone leaving a marriage or a relationship, or going to school. You can’t count on it as a regular income. It’s a stopgap.”

After counselors from St. Ambrose interviewed Miss Terry and Ms. Ongiri, Miss Terry drove to the house where Ms. Ongiri was living alongside three men. Right away, Miss Terry said, “I’m like, she don’t need to be living here with three males. I felt as if I could help her, get her out of that area and that living arrangement. I hoped she felt the same way.”

Ms. Ongiri said she was relieved to know “I wasn’t going to move in and find the house was in foreclosure or something equally distressing.”

Agencies have different procedures for resolving conflicts, none of them perfect. Ultimately the onus is on the home-sharers. In Maryland, owners have to give renters 60 days’ notice to break their arrangement; renters must give 30 days’ notice.

At the Human Investment Project, also known as HIP Housing, in San Mateo County, Calif., Laura Fanucchi said her organization called both parties every three months, “to see if there’s any red flags.” But the organization cannot help with eviction, other than to refer the owner to appropriate government agencies.

For Ms. Terry and Ms. Ongiri, the arrangement has been smooth so far. Ms. Ongiri said she hoped to wash the chairs on the wooden porch as a surprise for Miss Terry.

“This is a good thing for me,” Ms. Ongiri said. “I’m in a stable environment. I’m not worried about being held up in the neighborhood. I can keep a job, and look for a better one.” The other day, she said, she saw a job advertisement that might suit Miss Terry, so she clipped it for her.

Miss Terry said if Ms. Ongiri were to fall behind on rent, “I feel we would be able to work out an arrangement. She wants to go to school. That encourages me more, having someone striving in the house. It’s not like this job is it for her. She wants more than that. When I see that in people, it encourages me to want to help. That’s my job.”

Renée Drell, executive director of HomeSharing Inc., in Bridgewater, N.J., where home-shares rose 14 percent last year, said that as mortgage payments, heating costs and taxes have all risen, homeowners are asking for higher rents to share their homes, often more than seekers can afford.

But Ms. Dunn, of HomeShare Vermont, said people should not look at home-sharing only as a last resort or a financial Band-Aid. “When you look at the data on people living alone, they tend to die younger and be sicker. We’ve done surveys, and people say they’re happier, sleeping and eating better, and feel safer in their homes with someone around. If I sold you that as a drug, you’d pay thousands of dollars.”

    More Homeowners Consider Taking in Boarders, NYT, 16.7.2008, http://www.nytimes.com/2008/07/16/us/16share.html?hp

A Shortage at the Pump: Not of Gas, but of 4s

July 15, 2008
The New York Times
By KEN BELSON

If one is the loneliest number, then four is the hottest — at least when it comes to gasoline.

With regular gas in New York City at a near-record $4.40 a gallon, station managers are rummaging through their storage closets in search of extra 4s to display on their pumps. Many are coming up short.

That’s why Vishal Nair, who runs the Lukoil station at Eighth Avenue and 13th Street in Greenwich Village, took another plastic number last week, turned it over and scribbled “4” on it with a black magic marker. The result was an obviously homemade “$4.47,” but it would have to do until he received the extra 4s he ordered months ago.

“Typically, we have a lot of 9s and 1s, and we had a shortage of 3s before we got a lot of 3s in,” Mr. Nair said.

The missing digits are an unanticipated barometer of how frequently prices are changing. The average price of regular gasoline in New York City has risen by 35 percent this year, forcing station managers to change their price displays almost every time they get a delivery, which can be daily at some stations.

Franchises often order numbers from their parent companies, though like independent station owners, they can buy directly from sign companies. Sets of 40 include equal numbers of each digit, which are magnetic or slip into plastic holders. Digits, which are often in a Helvetica font, are sold individually for as little as a $1.50. In New York, numbers must be 4.5 or 9 inches tall.

When prices passed $4, many stations ran out of 4s, and managers improvised by photocopying signs or stenciling numbers by hand.

The makeshift digits are legal as long as they are similar to the neighboring numbers, said John Browne, the assistant director of enforcement for the city’s Department of Consumer Affairs’ petroleum unit.

“As long as the color and size are correct and it is apparent what the number is, they are fine,” said Mr. Browne, who inspected Mr. Nair’s handiwork last Friday at the Lukoil station.

Jessica Chittenden, a spokeswoman for the state’s Department of Agriculture and Markets, which regulates gas stations, said inspectors were being lenient because prices were changing so rapidly and because few manufacturers made the signs.

“People are running out of 4s and 5s, so we’re allowing them to post makeshift numbers as long as they are the right size,” she said.

Sanjay Thakker, president of Gasoline Advertising in Clifton, N.J., said that sales of his magnetic digits had risen as much as 20 percent this year, though because it costs only about $10 to outfit the signs above the pumps with enough numbers, the product is not a huge money maker.

Until extra digits arrive, improvising can be tricky. Alex Kubotki, 27, who runs the Exxon on Coney Island Avenue at Caton Avenue in Brooklyn, ran out of 4s for his large sign on the corner. So on Sunday, he painted a fresh “4” that was roughly the same as the manufactured digit, and avoided using a paper number because it might bleed in the rain.

“Everybody’s doing the same thing,” he said.

Even stations in New Jersey, where gasoline prices have only recently breached the $4 barrier, are getting ready. At the Getty station on Tonnelle Avenue in North Bergen, Jatinder Sarin, the manager, said he will order a bunch of new magnetic numbers next month. He was selling a gallon of regular gasoline for $3.85, but assumed that $4 a gallon was inevitable.

“We know it’s going to go up,” he said. “Usually it goes a digit up, and it stays there five or six months. Let’s hope they stay at 4.”

But back in New York, stations are already grappling with the next problem.

“Now that we seem to be going to go to $5 a gallon,” Mr. Nair said, “we might order more 5s, too.”

In fact, diesel prices are already over $5 a gallon.

On Monday, at a BP station on Coney Island Avenue and Lancaster Avenue in Gravesend, Brooklyn, a “2” had been turned upside down to make a 5 for the large sign on the corner.

“I don’t have enough 5s,” said Serdal Ozumer, 51, a clerk. “I got to talk to the manager.”

Ann Farmer, Daryl Khan and Nate Schweber contributed reporting.

    A Shortage at the Pump: Not of Gas, but of 4s, NYT, 15.7.2008, http://www.nytimes.com/2008/07/15/nyregion/15four.html?hp

Confidence Ebbs for Bank Sector and Stocks Fall

July 15, 2008
The New York Times
By LOUISE STORY and ERIC DASH

Even as the Bush administration moved to rescue the nation’s two largest mortgage finance companies, confidence in the banking sector spiraled downward Monday.

In Southern California, lines snaked around branches of IndyMac Bancorp, the large lender that was seized by federal regulators on Friday, as customers hurried to withdraw their money. As the anxiety spread through the financial markets, two other big banks, one in Ohio and another in Washington State, were compelled to assert that they were sound.

Even as federal regulators issued assurances that depositors’ savings were safe, Wall Street analysts circulated lists of lenders that might be vulnerable. Shares of regional banks plunged in one of the sharpest declines since the 1980s.

Many investors fear that the government’s resolve to help Fannie Mae and Freddie Mac, the giant companies at the center of the nation’s mortgage market, will not hold back the rising tide of bad loans unleashed by the weakening housing market and faltering economy.

Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, said the F.D.I.C. expected a small number of the nation’s banks to run into trouble over the next year. But she asserted that the worries driving down banking shares, fed by rumors in the marketplace, did not presage widespread failures.

“People should not assume that just because the stock price has been going down, that we’re going to close their bank,” Ms. Bair said. “In addition to our credit problems, I don’t want to have to start worrying about bank runs.”

Wall Street staged its own sort of bank run. Investors fled banking stocks en masse. The Standard & Poor’s 500 Bank Index fell nearly 10 percent. Washington Mutual, the nation’s largest savings and loan, lost more than a third of its value, prompting the lender to issue a statement that it was “well capitalized.” National City Corporation of Cleveland, which is the largest bank in Ohio, fell almost 15 percent. That bank also took the unusual step of issuing a statement saying that it was sound. The stock prices of large lenders in Tennessee, Alabama and Florida also swooned.

Nervous investors sent all three major stock indexes down on Monday. The Dow Jones industrials closed down 0.41 percent, at 11,055.19. The Standard & Poor’s 500-stock index lost 0.9 percent, to close at 1,228.30, and Nasdaq fell 1.17 percent, to 2,212.87.

The worries about the financial industry that gripped Wall Street when Bear Stearns imploded in March spilled over to Fannie Mae and Freddie Mac last week. They are now buffeting small and midsize banks, many of which are heavily exposed to weakening local property markets and loans to home builders. Some investors fret small institutions will not receive the kind of federal support that rescued Bear Stearns and the two mortgage giants.

“The market wonders: which institution is too small to bail out?” said William H. Gross, the chief investment officer of Pimco, the large money management company. Traders “seem to have picked on the regional banks as potential candidates to be the ones too small to bail out.”

Several bank analysts issued dire warnings about the banking industry, particularly smaller, regional lenders. Goldman Sachs said regional banks may be forced to cut their dividends to safeguard their finances, driving down shares of banks like Zions Bancorporation of Utah and the First Horizon National Corporation of Tennessee.

Rumors swirled that customers at National City were pulling money from the bank. There were no indications of mass withdrawals at the Ohio bank or any others aside from IndyMac, the lender based in Pasadena, Calif., which was seized by regulators last week.

“Look, we are not experiencing any unusual depositor or creditor activity today,” said Kristen Baird Adams, a spokeswoman for National City. “There is widespread speculation and rumors in the markets today.”

The rumors continued to rip through the markets despite a warning from the Securities and Exchange Commission on Sunday that it would crack down on traders who spread false rumors. More bad news is likely this week from large banks like Citigroup, which are expected to report bleak quarterly earnings. On Monday, M&T Bank kicked off the string of earnings releases, saying its profits dropped 25 percent from a year ago. The bank’s stock price fell 15.6 percent on Monday.

Regulators and investors are bracing for a small number of banks to fail over the next 12 to 18 months. Analysts predict that 50 to 150 banks might stumble. In the first quarter this year, the F.D.I.C. listed 90 banks as troubled, which is far lower than the levels during the savings and loan crisis of the 1980s. Still, Ms. Bair said that number would increase. IndyMac, for example, was not on that first quarter list at the F.D.I.C. but was still seized by regulators.

“We’ve been saying for a long time that the number of troubled banks will go up, the number of failed banks will go up,” Ms. Bair said. “It’s going to be well into the next year at least.”

Ms. Bair said her agency was prepared to handle the problem banks, after an extensive staffing increase. The F.D.I.C. has about $53 billion to pay back consumers for deposits that are lost at failed banks and is already working on plans to raise more money to cover the depositor balances at IndyMac. The agency will raise the money from banks, she said, with riskier banks paying more. She emphasized that the number of failed banks still appears to be significantly less than those closed in the 1980s. Some banks may avoid failing because they are purchased just in time.

Nevertheless, the financial markets are reacting to even small rumors, so every bank failure presents the potential for panic, analysts said.

“It’s about to start getting real bad,” said Richard Christopher Whalen, managing director at Institutional Risk Analytics, a research firm based in Torrance, Calif. The government, he said, should just move on with the process and “close not just one but a half-dozen institutions at the same time.”

The government’s plan for Fannie Mae and Freddie Mac initially seemed to calm nervous markets on Monday morning. The Dow Jones industrial average opened more than 100 points higher. The announcement should help regional banks that hold Fannie or Freddie bonds as well as Wall Street firms that do a significant amount of business for the government-sponsored entities.

Some investors said the government’s plan simply reaffirmed negative fears about the mortgage market.

“One could argue that government measures validated concerns about how bad things really are,” said David Bullock, managing director of Advent Capital Management, an investment fund in New York. “We are closer to the Depression scenario than not.”

Customers at two National City branches in the Cleveland area did not seem worried, despite the near panic in the stock market. They said they had heard about the bank’s drop in stock value from local radio and television news, but were not concerned enough to withdraw money from their accounts.

“Why, there’s no run on the bank, is there?” said Bernie Bragg, 60, who lives in Fairview Park, a Cleveland suburb. “It’s no big deal to me. The government said it’s going to bail out Freddie Mac and Fannie Mae. This thing with National City is small potatoes compared to that.”

The benchmark 10-year Treasury note rose 27/32 on Monday, to 100 5/32. Its yield, which moves opposite its price, fell to 3.86 percent, from 3.96 percent.

Following are the results of Monday’s Treasury auction of three- and six-month bills:

Christopher Maag contributed reporting from Ohio.

    Confidence Ebbs for Bank Sector and Stocks Fall, NYT, 15.7.2008, http://www.nytimes.com/2008/07/15/business/15bank.html?hp

Fed Sets Rules Meant to Stop Deceptive Lending Practices

July 15, 2008
The New York Times
By STEVEN R. WEISMAN

WASHINGTON — The Federal Reserve adopted sweeping rules on Monday aimed at barring abusive or deceptive mortgage lending practices of the kind that analysts say have led to widespread delinquencies and foreclosures, a collapse of the housing market and an economic downturn.

The rules, which are modifications of draft proposals issued in December, do not take effect until Oct. 1, 2009, in order to give lending institutions time to adjust. The rules will apply only to high-cost loans for people with weak credit.

The Fed chairman, Ben S. Bernanke, said the agency adjusted the original draft in December, making it tougher on lenders in some cases but also incorporating changes that lenders had lobbied for as they warned that too many restrictions would dry up the mortgage market.

The goal, he said, was to end abuses while not aborting a recovery in the housing sector.

“Although the high rate of delinquency has a number of causes,” Mr. Bernanke said, “it seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower.”

He added that because the new rules apply to all mortgage lenders, not just those banks supervised by the Fed, they would “level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers.”

The rule change had been set in motion well before the Fed’s interventions to stabilize financial markets. These included its work to facilitate the sale of the investment bank Bear Stearns in March and the more recent opening of its lending window for the troubled mortgage giants, Fannie Mae and Freddie Mac.

In December, the Fed acknowledged for the first time that lenders had aggressively sold deceptive loans, and it proposed that in the future, mortgage companies demonstrate that their customers could realistically afford to borrow.

Some critics said at the time that the Fed was doing too little, too late. But many others praised the Fed for reversing course after a long period of laissez-faire toward the lending industry that had contributed to the housing bubble.

The new rules would bar lenders of “higher-priced mortgage loans” from ignoring a borrower’s ability to repay from income and assets other than the home itself.

In a concession to consumer groups and other advocates for borrowers, the Fed dropped a provision that would have required a borrower seeking to sue a lender to demonstrate that the lender had engaged in a “pattern or practice” of deceptive activities.

“It’s a major step that the Fed got rid of the ‘pattern or practice’ requirement,” said Deborah Goldstein, executive vice president of the Center for Responsible Lending. “It would have been difficult otherwise for borrowers to make the case for deceptive practices.”

In another adjustment since December, the Fed shifted the burden somewhat to the borrower to prove a deceptive practice.

In its original form, the Fed proposed that if a lender does not adhere to certain precautions — like verifying the borrower’s income and ability to pay — the borrower can sue. The new rule says that a lender is presumed to have complied with the law if it verifies the consumer’s income and takes other precautions.

The change in the way the rule defines the presumptions was welcomed by the lending industry as lessening the chances of consumer lawsuits.

The Fed tightened one restriction on lenders, banning them from penalizing homeowners for paying off their loans ahead of schedule. The new rule applies if the payment itself can adjust during the initial four years of the mortgage.

An official at the Independent Community Bankers of America said that the change was helpful because it clarified the circumstances under which prepayments can be barred.

“We are comfortable with some control on prepayment penalties in order to protect consumers,” said Karen M. Thomas, executive vice president of the community bankers group.

The Fed also modified how it will define high-cost mortgages by saying the determining factor is a survey of mortgage rates, rather than an index of rates for Treasury bills. This change was welcomed by both consumer and banking groups as more precise and likely to capture about the same number of mortgages.

The Fed says that with the new rules, the overwhelming majority of subprime loans would be covered. The so-called subprime category, loans that have higher interest rates because of weaker credit histories by borrowers, increased substantially in the last years as housing values soared.

Several other practices were outlawed for subprime mortgages, including a ban on coercing or encouraging an appraiser to misrepresent a home’s value.

The new rule would require advertising to contain additional information about interest rates, monthly payments and other features for all mortgages, not just subprime mortgages.

The rule would also ban “deceptive or misleading” advertising practices for all mortgages, particularly in the representation of when a rate or payment is fixed and when it can change.

The Fed’s actions brought guarded praise from Democrats in Congress. Senator Christopher J. Dodd of Connecticut, who is chairman of the Senate Banking Committee, said that the rule was “a positive first step,” but that it should have applied to a broader array of mortgages.

The changes in the rule from December were overseen by Randall S. Kroszner, a Fed governor, who said more than 4,500 comments came from community groups, industry representatives and consumer advocates.

“Abusive loans that strip borrowers’ equity or cause them to lose their homes should not be tolerated,” Mr. Kroszner said. “Listening carefully to the commenters, collecting and analyzing data, and undertaking consumer testing, I believe, has led to more effective and improved final rules.”

    Fed Sets Rules Meant to Stop Deceptive Lending Practices, NYT, 15.7.2008, http://www.nytimes.com/2008/07/15/business/15lend.html

Scramble Led to Rescue Plan on Mortgages

July 15, 2008
The New York Times
By STEPHEN LABATON

WASHINGTON — The Bush administration hastily arranged the dramatic Sunday evening rescue of Fannie Mae and Freddie Mac after Wall Street executives and foreign central bankers told Washington that any further erosion of confidence could have a cascading effect around the world, officials said on Monday.

Treasury Secretary Henry M. Paulson Jr. and other top officials were warned, after Fannie and Freddie lost nearly half their stock market value on Friday morning, that any more turmoil threatened to reduce the value of trillions of dollars of the companies’ debt and other obligations, which are held by thousands of domestic and foreign banks, pension funds, mutual funds and other investors, government officials said.

The warnings of a potential systemic failure led to the resulting rescue package, and one of the most striking — though unspoken — regulatory shifts in modern times. For decades, Treasury secretaries and Federal Reserve chairmen have insisted that the government did not stand behind the debt of Fannie and Freddie. But the safety net Mr. Paulson announced on Sunday sends the opposite message: that the government is determined not to let either one fail.

For the second time in four months, the housing crisis prompted the government to scramble over a weekend to rescue a major financial institution. While the danger of a systemic failure arising from Fannie and Freddie’s market problems was not as immediate as in March when Bear Stearns stumbled, the stakes were exponentially bigger.

Fannie and Freddie have combined debts of $1.5 trillion. They own or guarantee $5 trillion in mortgages. They have contracts with other institutions worth $2 trillion more to hedge the risks behind those mortgages.

The rescue package was cobbled together on Saturday and Sunday during a series of telephone calls and meetings involving senior officials at the Treasury and the Federal Reserve.

As he announced the plan, Mr. Paulson became the first Treasury secretary in more than a decade to use the steps of the imposing Treasury building as a backdrop. It seemed like a well-scripted moment aimed at calming the markets, as Robert E. Rubin, a Treasury secretary in the Clinton administration, once did.

But in fact, it was happenstance. Because it was a Sunday, the Treasury Department’s security measures would not allow large numbers of reporters to enter the building, forcing Mr. Paulson to make his announcement outside.

Just three days earlier, Mr. Paulson was the picture of calm when he told a Congressional committee that there was no need for any new or additional legislation beyond what he had previously sought because, he said, there “isn’t a silver bullet” to restore the markets.

“I have grown up in a world where you don’t always have all the tools you’d like to have and where I’ve very seldom seen a perfect hand that someone has to play,” he told the members of the House Financial Services Committee, noting that it was better to do things right than to rush through legislation that did not correctly address bigger systemic issues.

But by Sunday afternoon, Mr. Paulson was telling lawmakers that the plan he was about to make public in a few hours would arm him, and his successors, with “a bazooka in my pocket to pull out when we need it to shoot down” problems that the companies might face in the financial markets, several lawmakers recalled.

The plan calls on Congress to give officials the power to inject billions of dollars into the beleaguered companies through investments and loans. Until the plan is adopted, the Federal Reserve has agreed to let the companies have access to its so-called discount lending window, a move that most regard as a symbolic gesture intended to show the markets that the government stands ready to help the companies if they need cash.

Officials said the prospect of eroding confidence in the debt securities of Fannie and Freddie was far more worrisome to them than either the declining stock price of the companies or the results of a $3 billion debt auction on Monday by Freddie Mac. Those events, they said, were significant only insofar as they could more broadly threaten to undermine confidence in the companies.

The concern, they said, was that if those Fannie and Freddie debt securities began to decline in value, then thousands of institutions — including all of the nation’s major banks, and many large mutual funds, money market funds and pension funds — might have to recognize losses on their portfolios.

That, in turn, could have lasting effects on economies here and abroad already struggling from slumping housing markets, spiking energy prices and sharp declines in consumer confidence. The debt securities of Fannie and Freddie are nearly as ubiquitous as the debt issued by the United States government. In the minds of most investors, they are also almost as safe.

By Friday morning, Mr. Paulson began a quiet retreat from his testimony of a day earlier. After a weekly breakfast with Ben S. Bernanke, the Fed chairman, at the Treasury, the two men separately began to call lawmakers and tell them they were considering a range of options to stem the tide.

That morning, the markets were signaling another brutal day, as the stocks in both companies precipitously declined. Hoping to buy the administration a weekend of time to consider its options, Mr. Paulson issued a statement that morning suggesting to the markets that the administration had no interest in nationalizing either company.

By the end of the day, the companies’ shares had rebounded somewhat, though both had suffered significant declines for the week.

By all accounts, Mr. Paulson was the engineer of the rescue package. Only days earlier, he had lost his right-hand adviser on Wall Street issues, Robert Steel, who left as Treasury under secretary, with virtually no notice, to head Wachovia Bank. For their part, Fed officials decided that since the problems in the markets did not reflect a liquidity problem — meaning that Fannie and Freddie had access to plenty of cash — they would take a secondary role to the Treasury.

In a 10 a.m. Saturday telephone conference call led by Mr. Paulson, and which included Mr. Bernanke and senior officials from the Securities and Exchange Commission and other agencies, Mr. Paulson suggested that a housing bill now moving through Congress could provide a legislative vehicle to get a rescue package adopted quickly, an official recalled.

During the hourlong call, Mr. Paulson discussed the idea of enlarging a credit line to the Treasury that both companies have. For nearly 40 years, each has had a $2.25 billion line of credit. While large when it was set by Congress, the amount is now considered quite small compared with the overall obligations of the two companies.

Other participants considered providing the companies access to the Fed’s discount lending window, at least temporarily, as a confidence-building measure.

Mr. Paulson told the participants that he planned through the day to reach out to the leaders in the House and Senate, including Speaker Nancy Pelosi of California and Majority Leader Harry Reid of Nevada. He talked about the timing of reaching out to a lawmaker who was in Europe.

The rescue package did not come together until late Saturday, officials said, after Mr. Paulson had received assurances from lawmakers that the measure would have support in Congress. At that point, Mr. Paulson made a round of late-evening phone calls to top executives at the two companies. It was after 11 p.m. when he spoke to Daniel Mudd, the chief executive of Fannie Mae and the son of the former CBS newsman Roger Mudd.

The Fannie and Freddie chief executives endorsed the plan after consulting with their directors.

After Mr. Paulson called Mr. Bernanke on Saturday evening to apprise him of the prospects for a plan, Mr. Bernanke called the governors of the Fed to alert them that there would be a meeting at 1 p.m. on Sunday to consider letting the companies have access to the discount window.

Two hours after that meeting began, Mr. Paulson convened another conference call with the same officials who had been on the Saturday call. On that call, a participant said, Mr. Paulson outlined how he expected the day’s developments would unfold.

After completing the call, Mr. Paulson phoned more lawmakers from his corner office overlooking the White House, telling them more details of the plan he would make public that evening.

On Capitol Hill, House Democrats said they would move quickly to approve the Treasury Department plan as part of a major package of housing legislation, and that the bill could be returned to the Senate, adopted, and sent to the White House for President Bush’s signature, perhaps by the end of this week.

Representative Barney Frank, Democrat of Massachusetts, the chairman of the Financial Services Committee, and a main author of the housing legislation, began working on Monday to incorporate Mr. Paulson’s plan into the bill. And Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said he would hold a hearing on the proposal on Tuesday, with testimony expected by Mr. Paulson, Mr. Bernanke and Christopher Cox, the chairman of the S.E.C.

In an interview, Mr. Dodd said the legislation was needed “to restore some confidence to a market that has been gripped by fear for the last couple of days.” If the House acted quickly, Mr. Dodd said, he hoped the Senate would follow suit. “I’d love to be able to do it by the end of the week.”

But there were also signs that the proposal could encounter resistance. Senate Republicans, including some who have been unhappy about the outsize role that Fannie Mae and Freddie Mac have assumed in the mortgage market, were largely silent on the proposal. An aide said that Senator Mitch McConnell, the Republican leader, was reviewing the plan. And Representative Jeb Hensarling, Republican of Texas, began circulating a letter among fellow conservatives urging House leaders to call committee hearings, hold a full debate and allow lawmakers to offer amendments — a potentially lengthy process.
 

Reporting was contributed by Gretchen Morgenson and Jenny Anderson from New York, Sheryl Gay Stolberg and David M. Herszenhorn from Washington and Eric Dash from London.

    Scramble Led to Rescue Plan on Mortgages, NYT, 15.7.2008, http://www.nytimes.com/2008/07/15/washington/15fannie.html?hp

The Silence of the Lenders

July 13, 2008
The New York Times
By GRETCHEN MORGENSON

DAN A. BAILEY JR. was desperate when he sat down on May 19 to send an e-mail message to his mortgage lender, the Countrywide Financial Corporation, pleading, yet again, for help.

Behind on his payments and fearful of losing his home of 16 years — a 900-square-foot bungalow in Wilmington, N.C. — Mr. Bailey had spent the previous six months unsuccessfully lobbying Countrywide, at the time the nation’s largest home lender and loan servicer.

Mr. Bailey, 41, promised in his e-mail message that he would pay every nickel he owed if Countrywide would modify his mortgage in a way that allowed him to keep his home. He sent the message to a grab bag of Countrywide e-mail addresses, which he had received from www.LoanSafe.org, an online forum for borrowers.

Among the recipients of his e-mail was someone he had never heard of before: Angelo R. Mozilo, Countrywide’s co-founder and chief executive. Lo and behold, Mr. Mozilo replied — inadvertently, as it turned out.

“This is unbelievable,” Mr. Mozilo said in his message. “Most of these letters now have the same wording. Obviously they are being counseled by some other person or by the Internet. Disgusting.”

Within days, Mr. Mozilo’s e-mail was widely circulated on the Internet and in the news media, offering a rare instance when candid comments from a powerful C.E.O. entered the public realm. For Mr. Bailey, however, the disdain that Mr. Mozilo expressed was depressingly familiar.

After all, Mr. Bailey had received little else from Countrywide after he began trying to renegotiate an adjustable-rate loan that he could no longer afford. Until then, he says, the only guidance the lender provided was a suggestion from an employee of Countrywide’s “home retention team” that he cut back on groceries to pay his mortgage.

“I told her that I probably spend $10 a day on groceries,” Mr. Bailey recalls. “And she said ‘Maybe you can eat less.’ ”

As record numbers of homeowners try to avoid foreclosure, the responses of big lenders and loan servicers like Countrywide are drawing increased scrutiny. While these companies maintain that they’re doing all they can to help imperiled borrowers, critics contend that homeowners routinely meet roadblocks.

Many borrowers have trouble even reaching a workout specialist; others soon find that the modifications they received are as unaffordable as the mortgages they replaced. Some homeowners, eager to sell their homes before the value falls further, say they are impeded by loan servicers’ inaction or incompetence.

“We continue to rely on lenders to fix the problems they created by making reckless loans in the first place, but it’s clear that foreclosures keep rising,” says Deborah Goldstein, executive vice president of the Center for Responsible Lending, a nonprofit group that assists borrowers. “We need federal regulators to step in or court-supervised loan modifications — any solution that might standardize the process better.”

With two of the nation’s most important mortgage concerns, Fannie Mae and Freddie Mac, continuing to falter last week — raising the possibility that they may need a federal bailout or takeover — foreclosure problems are likely to become even more complex.

Countrywide, which administers $1.48 trillion of loans across the United States, finds itself at the center of the foreclosure mess. As of the most recent quarter, 2.67 percent of the loans that Countrywide services were more than 90 days delinquent. (The Bank of America Corporation acquired Countrywide on July 1 and is now overseeing the Countrywide portfolio.)

Lenders and servicers like Countrywide are inundated with requests for help from borrowers who cannot afford their loans. Alas, these companies’ operations weren’t set up for such work; servicing units were originally intended to collect monthly checks from borrowers and then disburse the payments to mortgage holders. During the boom years, there was little need to advise borrowers or restructure loans.

Now, however, the demand from borrowers, politicians and regulators for these services is enormous — and growing ever larger. The nation’s 27 biggest lenders have joined what is called Hope Now, an alliance meant to help borrowers stay in their homes.

A vast majority of modifications industrywide offer a temporary and modest interest rate reduction, accompanied by an increase in the overall principal owed because of added — and what critics contend are often bogus — fees larded onto the loan in the delinquency period. Because the principal increases, sometimes substantially, new monthly payments can wind up only slightly lower than those of the original loan.

And if new fees for underwriting, document preparation and title searches are added, savings can quickly shrink or disappear.

“The fact is, little is known about the effectiveness of the loan modifications or workouts that are being provided by servicers,” Ms. Goldstein says. “Hope Now’s data provides no clue if its members’ efforts are resulting in long-term, sustainable solutions for homeowners.”

BOTH Bank of America and Countrywide are members of Hope Now. Jim Mahoney, a Bank of America spokesman, said the company is committed to keeping as many people in their homes as possible.

Bank of America is “taking a very hard look at the ongoing foreclosure mitigation efforts that have been under way at Countrywide,” Mr. Mahoney said. “We have outlined a projection to work out $40 billion worth of Countrywide loans and we are really rolling up our sleeves.”

Through the first six months, Countrywide has performed 86,000 loan modifications, Bank of America said; it is completing more than two workouts for every completed foreclosure.

To be sure, not all homeowners can benefit from a restructured loan; renting is a better option for some. And almost everyone agrees that speculators, who bought houses on the gambit that they could flip them to a higher bidder, deserve no special assistance.

That said, foreclosures are vastly outnumbering loan workouts today, a year and a half after the subprime mortgage debacle began creeping into the headlines. In May, for example, even as Hope Now conducted 70,000 loan modifications, an estimated 85,000 families lost their homes to foreclosure. That same month, 276,000 loans either entered or completed foreclosure.

According to an April report by the State Foreclosure Prevention Working Group, a unit of the Conference of State Bank Supervisors, a regulatory alliance, about 70 percent of delinquent borrowers weren’t getting help in renegotiating their mortgages.

“Based on our analysis,” the working group reported, “the collective efforts of servicers and government officials to date have not translated into meaningful improvement in foreclosure prevention outcomes.”

Even when borrowers receive modifications, their loans can still be unaffordable or problematic. According to the working group, 32,000 loans that were recently modified are already delinquent again. One reason may be that very few modifications involve reducing the principal balance on the loan.

In California, an epicenter of the mortgage crisis, only 1.3 percent of loan modifications struck between January and May this year involved a reduction of principal, according to the state’s Department of Corporations. A total of 356 of 21,359 loan modifications in the month that ended May 17 involved a cut in the principal balance, it said.

With the housing bust in full swing, servicers are in something of a vise, to be sure. Their predicament is among the more thorny results of a securitization process that made so much money available for home loans.

When mortgages are pooled into a securitization trust, investors who own them rely on loan servicers to keep track of payments, loan payoffs and other administrative tasks. Servicers have a duty to investors to extract every dime they are owed from borrowers.

Because working out a loan can mean less income or outright losses for investors, servicers have been understandably reluctant to modify mortgages en masse. That could partially explain the small number of workouts done by lenders in recent months.

Even those borrowers lucky enough to receive loan modifications may still be imperiled by the new terms.

“Unless these are zero-cost, zero-added-principal loans, we really have to look closely at these workouts,” says Michael Kratzer, president of FeeDisclosure.com, a Web site intended to help consumers reduce fees on home loans. “If they are adding anything to your principal, whether it is late fees or processing fees, you may not be far ahead and you could end up behind.”

But few borrowers, desperate to keep their homes under any circumstances, are likely to question the terms of a loan modification, said Moe Bedard, president of Loan Safe Solutions, a firm that performs forensic loan audits on mortgages for borrowers’ lawyers. “Fees are one of my biggest issues with loan modifications,” Mr. Bedard says. “Say you owe $32,000 in arrears that the lender is going to put on the back of the loan with a 6 percent rate. Nobody questions what the $32,000 is and lenders do not substantiate these fees.”


CONSIDER the loan modification Countrywide gave in May to Mr. Bailey, a photographer who is divorced and has no children. Immediately after he posted Mr. Mozilo’s e-mail on LoanSafe.org, Mr. Bailey said he received a call from Countrywide offering the assistance he had sought for so long. (Mr. Mozilo also sent him an apology via e-mail. “I hope and trust that you understand our sincere efforts to help those who are truly in need,” it said.) With the Internet lit up with chatter over Mr. Mozilo’s initial e-mail message, Countrywide pressed Mr. Bailey to sign the loan modification quickly, he said. The company also told him that if he spoke with the media about the modification, it would be rescinded.

“I signed their second paperwork,” Mr. Bailey says. “They were in such a rush to do it and I thought it was the only way I could save my house.”

On May 22, three days after Mr. Bailey sent his e-mail to Mr. Mozilo, he and Countrywide agreed to the loan modification. Under its terms, Countrywide added to the original principal the missed payments and fees Mr. Bailey owed as a result of his delinquency. The new loan is interest-only for three years and carries a rate of 6 percent. After that, the interest rate rises to 7 percent and principal is added to the payments.

Mr. Bedard has analyzed Mr. Bailey’s original loan, sold to him by Argent Mortgage, as well as the Countrywide loan modification. He found problems with both, he says.

For example, Countrywide didn’t provide Mr. Bailey with an assessment of total costs of the new loan, Mr. Bedard said. He’s now asking Countrywide to reduce Mr. Bailey’s principal and interest rate. But the company, he says, is declining to go that route.

Scott Silvestri, a Bank of America spokesman, said it could not comment on specific borrowers’ cases because of privacy constraints. But in general, he said, “Countrywide seeks to provide a meaningful explanation of the terms of each workout it offers, including capitalization of arrearages and fees, to the extent it is possible.”

Mr. Bedard, whose firm charges a flat fee to analyze loans, said he has found problems in at least 80 percent of the 300 mortgages he has examined so far for clients. These include failings in the notary process, and what he called violations of both the Truth in Lending Act and the Real Estate Settlement Procedures Act, or Respa. A common complication, he said, occurs when the interest rates or fees change between the time a borrower initially receives a cost estimate on the mortgage and when the borrower finally closes on the loan.

“It’s the Wild West again with these loan mods,” Mr. Bedard says. “A lot of people are getting mods that are unaffordable.”

When presented with these findings, Mr. Bedard said, most lenders and servicers quickly agree to a loan modification. Many of the deals that his firm has arranged have initial interest rates in the 3 percent range.

Using what is known as a qualified written request under Section 6 of Respa, LoanSafe also asks the servicers whose loans it is examining to detail the amounts owed by a borrower as well as asking it to justify all fees.

“Magically, when we do that, we will get an offer of a modification and those fees often go away,” Mr. Bedard says.

Because servicers must answer such requests within 60 days, Mr. Bedard suggests that all borrowers make them. (A sample letter is on the Web site of the Department of Housing and Urban Development, at www.hud.gov/offices/hsg/sfh/res/reslettr.cfm.)

Borrowers and their lawyers say that even as regulators turn up pressure on lenders to modify loans, reaching workout representatives remains difficult.

Carrie Mateos, 38, scrimped for years to save enough money for a down payment and a cash cushion to buy a home in Miami. In June 2007, she and her husband, Daniel, got two loans totaling $409,000 from Countrywide that helped them realize that dream. Both had sterling credit scores at the time.

At the closing, Ms. Mateos says she discovered that the loan terms had changed from the initial estimate; the interest rate was higher on the first loan, for example. Because they were in the midst of the closing, the couple felt that they had to sign the documents.

Weeks later, Ms. Mateos was laid off from her job as an office manager. By last January, she still hadn’t found work and the couple’s $80,000 rainy-day fund had dwindled to $5,000. To raise money, Ms. Mateos had three yard sales, even selling the family’s dining-room and living-room furniture.

But Ms. Mateos said she was worried that they would soon fall behind on their mortgage. In March, she called Countrywide to ask if she could skip one payment and make it up in the following months. She had found a new job but said she knew that it would take some time to rebuild the family’s finances.

Getting through to someone at the company was almost impossible, she said; calling the toll-free number it provided meant “being bounced around the Countrywide black hole.”

“They would transfer me to their Hope department, then they would send you to customer service, then to loan retention,” she added. “I would send stuff to them certified mail and get back the forms saying they had received it. But they would tell me they didn’t get it.”

WHEN she finally got through to a person at the company, she was told that, under company rules, Countrywide couldn’t do anything until the Mateoses were at least three months behind. “Then I find out you don’t have to be three months behind; you just have to have a hardship,” she says. “I was showing I had a hardship; I just wanted them to help me get back on track.”

Although the Mateoses were never behind on more than one payment, the fees started climbing. In May, she said, Countrywide offered to reduce the couple’s first mortgage payment to $2,242 from $2,405 for two months but that they would then owe $5,299 at the end of the third month. That meant the deal would cost the couple an extra $2,568, because of what Countrywide called “fees and adjustments.”

The couple declined.

Now Ms. Mateos is questioning Countrywide about why the interest rates on her original loan changed before the closing. “It’s frustrating,” she says. “They’re trying to get away with giving as little help as possible.”

    The Silence of the Lenders, NYT, 13.7.2008, http://www.nytimes.com/2008/07/13/business/13mail.html?hp

Protected by Washington, Fannie and Freddie Grew

July 13, 2008
The New York Times
By JULIE CRESWELL

As the Bush administration scrambles to address the sudden decline of the country’s two largest mortgage finance companies, some of their longtime critics say the crisis has been building for years.

Among them is Jim Leach, a Republican former representative from Iowa, who began arguing two decades ago in Congress that the government-chartered mortgage companies, Fannie Mae and Freddie Mac, were unfairly insulated from the real world.

They were not subject to the same financial standards and tax burdens as their competitors, he warned, and if they ran into trouble, an implicit government guarantee to back them up meant taxpayers would be left with the losses.

“There are times in public policy making that one can feel like Don Quixote,” Mr. Leach said of his repeated legislative battles to rein in the two companies’ growth.

Congress established Fannie Mae during the New Deal to make homes more affordable for lower- and middle-income Americans, and Freddie Mac was established later with a similar purpose. Neither provides home loans. Instead, the companies buy mortgages from banks and take on the risks of possible defaults — allowing banks to make even more mortgages.

Today they own or guarantee about half of the country’s $12 trillion in mortgage debt, so the free fall of their share prices last week amid concerns that they were undercapitalized has created chaos for Wall Street and Washington.

The dominant role Fannie and Freddie play today is no accident. The companies, Wall Street firms, mortgage bankers, real estate agents and Washington lawmakers have built up an unusual and mutually beneficial co-dependency, helped along by robust lobbying efforts and campaign contributions.

In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.

And as Fannie and Freddie grew, so did the fortunes of Wall Street, which reaped rich fees from issuing debt for the two companies, as well as the mortgage and housing industries, which banked billions of dollars as the housing market boomed.

Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.

Lots of perks came with Fannie and Freddie’s charters and government backing: exemptions from state and federal taxes, relatively meager capital requirements, and an ability to borrow money at rock-bottom rates.

James A. Johnson, a longtime member of the Washington establishment who previously worked as a campaign adviser to former Vice President Walter F. Mondale, ran Fannie for most of the 1990s.

“Jim Johnson was the architect of Fannie’s lobbying strategy. He was the muscle guy, if you will. The guy who would walk the halls of Congress,” said Bert Ely, a banking consultant in Arlington, Va., and longtime critic of the companies. Freddie, Mr. Ely said, soon copied Fannie’s playbook.

Mr. Johnson could not be reached for comment. Fannie declined to comment; Freddie did not respond to an interview request.

An early, and for some analysts, seminal attempt to overhaul regulation of Fannie and Freddie occurred in the early 1990s when the country was still licking its wounds from the savings and loan debacle.

As legislators debated who would regulate Fannie and Freddie and what sort of capital cushions should be established for the entities, the companies enlisted a bipartisan mix of Washington insiders to represent them.

Fannie and Freddie were careful to include powerful Democrats and Republicans as executives, board members and lobbyists to make sure they had access to top government officials and clout on Capitol Hill, no matter which party was in power.

The strategy that started two decades ago continues. They have hired many officials who have worked for the last two administrations alone. Fannie hired Jamie Gorelick, a former deputy attorney general in the Clinton administration; Thomas E. Donilon, who was that administration’s chief of staff to the secretary of state; and Franklin D. Raines, who was President Clinton’s budget chief.

Among Republicans, Fannie hired Robert B. Zoellick, now the head of the World Bank and a former official in both Bush administrations; Stephen Friedman, the onetime top economic adviser to the current President Bush; and Michele Davis, now an assistant secretary of the Treasury under Henry M. Paulson Jr.

Fannie’s board once included Frederic V. Malek, a longtime friend of the Bush family and a former business partner of the current President Bush.

The outcome of the regulatory tussle in the early 1990s did little to change things. Fannie and Freddie got a new but fairly weak regulator, the Office of Federal Housing Enterprise Oversight, while still having to meet less onerous capital requirements than some lawmakers wanted. The companies also stymied efforts to get the Securities and Exchange Commission more actively involved in regulating them.

Later on, Mr. Johnson ramped up the influence of its charitable arm, the Fannie Mae Foundation, by doling out money to thousands of nonprofit groups and similar organizations. (Mr. Johnson was compelled to step down as the head of Senator Barack Obama’s vice-presidential search team last month after he was criticized for receiving mortgages on favorable terms from Countrywide Financial.)

Fannie and Freddie also forged alliances with various interest groups, including affordable-housing advocates that previously criticized the companies for not doing enough for low- and middle-income homeowners.

Mr. Leach, the Iowa representative, later accused Fannie and Freddie of effectively buying off activist groups by making charitable contributions to them. By providing much-needed grant money to the nonprofit groups, it made it hard for them to criticize the mortgage titans, said Jonathan GS Koppell, an associate professor at the Yale School of Management.

“Likewise, there were another set of entities, essentially a huge industry, that profits from every additional loan that Fannie or Freddie can buy,” Mr. Koppell said. “The more loans they purchase, the more business there is for them and so they’re willing to work with the enterprises.”

Fannie also opened up what it called Partnership Offices. They were billed as regional oversight offices for various housing projects financed by Fannie. In reality, critics, including the Department of Housing and Urban Development, said they were used primarily to influence Congress by providing local politicians and business leaders with ample ribbon-cutting ceremonies and photo opportunities.

The offices were often run by and populated with former Congressional staff members. Several of those offices were staffed by family members of legislators, said Joshua Rosner, an analyst at Graham-Fisher in New York.

Of course, foes of Fannie and Freddie began their own lobbying efforts, the most muscular of which had the backing of banks eager to get their own piece of the companies’ lucrative mortgage business.

Some Wall Street firms joined these efforts, but they typically did not push too hard over fears that Fannie might retaliate by withholding business — and the rich fees associated with it.

From 1990 to 2000, as each company’s stock grew more than 500 percent and top executives earned tens of millions of dollars, much criticism appeared on opinion pages of newspapers, in reports by free-market research groups and in Congressional testimony. Much of it was sponsored by a loose coalition of Washington lobbyists and consultants who were paid to portray Fannie and Freddie as too big and risky.

Ultimately, what most hurt the companies was the failure of home buyers to pay off subprime and other risky mortgages that were packaged into bonds and sold to investors by Wall Street banks like Bear Stearns, Lehman Brothers and Citigroup, with Fannie and Freddie playing a lesser role. But they are suffering from the reverberations of the foreclosure wave, as the value of their mortgage assets declines along with home prices everywhere.

Supporters of Fannie and Freddie say the companies’ lobbying machines have largely been taken apart in the wake of the accounting scandals, which resulted in billions of dollars of financial restatements and the ouster of major executives. Fannie’s Partnership Offices have been closed and its charitable foundation shut down.

Critics say that current housing legislation before Congress could give even more power to Fannie and Freddie by allowing them to venture into new mortgage-related businesses. That, they say, is evidence enough that the companies have not been fully defanged.

At the same time, the Senate version of that legislation, which was passed overwhelmingly on Friday, would also create an independent regulator to oversee Fannie and Freddie.

“For sure, the political machine has not been dismantled,” said Thomas H. Stanton, a finance professor at Johns Hopkins University. “For every interest that might lose if Fannie and Freddie expands into what it does, you have someone else who wants to do business with them.”

    Protected by Washington, Fannie and Freddie Grew, NYT, 13.7.2008, http://www.nytimes.com/2008/07/13/business/13lend.html?hp

Chasing an American Dream

July 12, 2008
The New York Times
By JAVIER C. HERNANDEZ

The sun had barely pierced the indigo morning sky when Francisco J. Perez made the call. He gripped the street pay phone and spoke of his knack for spreading concrete, his expertise in carpentry, his love for painting. He paced and fidgeted, picking at his jagged, mud-encrusted fingernails, and then slammed down the receiver in triumph.

On this day, unlike the week before or that day in March when the bosses tricked him into working without pay, he would make money.

By 6:30 a.m. on Wednesday, the street pageant of day laborers had begun. Dozens of burly men in dusty Timberlands joined Mr. Perez on the four corners at Ditmas and Coney Island Avenues in Brooklyn. They rolled up their sleeves and tightened their belts, hoping that a flash of brawn would bring passing construction vans to a halt. The less robust among them whipped out immigration papers, some on the verge of disintegration, praying that on this day, their legal status might give them an edge.

To watch the shape-up of day laborers at one New York City intersection is to glimpse desperation, entrepreneurship and clannishness take form and then dissolve in three hours — three turns of the clock in the corner Dunkin’ Donuts, 180 jumps of the minute hand on their scratched-up Casio wristwatches.

By 9:30 or 10, the construction vans were gone and only a dozen or so of the nearly 50 who had gathered actually got work. The unsuccessful began their tired walks back home, but they knew that the odds would still get them out of bed the next morning.

From the start, prospects on Wednesday looked dim. Traffic was light. The sun gave a hint of the afternoon’s heat. They stared as each car passed a construction supply shop across the street, waiting to jump at the screech of brakes.

Mr. Perez, a 22-year-old Honduran immigrant, sat alone in the shade, using his work clothes as a cushion.

That morning, at the recommendation of a friend, he had called a construction company to make his pitch and arrange for the pickup.

Within the group of day laborers that formed on this day, Mr. Perez’s success bred quiet jealousy. On his corner, men from Guatemala, Ecuador, and Mexico stood at a distance, chatting about the outrageous joke on the radio the day before, the good-looking girl in the supermarket, and how hard it was to get jobs.

Mr. Perez, electrified by the $85 in sight for 10 hours of work, was optimistic. A single man with skin darkened by his days in the sun, he said he looked forward to coming to the corner each day.

“For me, this is a good life,” he said in Spanish. “If I knew English, I would have a better job, but this isn’t bad at all.” At 6:45, the black construction van came and whisked him away.

The remaining men arranged themselves by region, Latin Americans in one spot, Pakistanis in another, Nepalese and Tibetans in their own huddle. Down the block from Mr. Perez, the group of Pakistani men began their morning ritual of smoking and snacking. They puffed cigarettes and picked berries from the mulberry trees, licking each morsel on their purple-stained hands. This was breakfast. “Eat,” they told each other. “Eat!”

Standing at a distance was the group’s reclusive, white-whiskered elder. They called him Beardman, and he tried to wave down vans with his hitchhiker’s thumb. In the middle of the gathering stood Jacky Sing, a homeless man who seemed hopeful of getting a job, but in the meantime drank a Budweiser and showed off his overgrown toenails.

The eight Pakistani men talked about the hard life in America — how everything was fine until this year, when the construction jobs began to vanish. Mohammad Ejaz, 58, said he was getting about half the number of jobs he did last year. Zahid Shad, 41, said he had worked four days in the past two months.

Tariq Bukhari, 45, said he came to this country five years ago looking for a way to support his five children back home.

“People have a dream that America has big money,” Mr. Bukhari said. “You shake a tree and money falls. That’s a big dream. It’s not true.”

Across the street, 19-year-old Lucas Puac waited with three other Guatemalans hoping that youth and flexibility would make them stand out. Mr. Puac, an illegal immigrant, said he had built a reputation with several contractors and typically worked four or five days a week, usually painting or helping spread concrete. But he said he felt abused by the low wages, which amounted to $600 to $1,000 a month.

“The bosses know we’re illegal,” Mr. Puac said in Spanish, “but they don’t think we’re entitled to a decent living.” Around 8:15, a van pulled into the Dunkin’ Donuts parking lot, and Mr. Puac and his friends crowded around. It was a false alarm; they already had enough workers.

The intersection’s center of gravity lay cater-corner to Mr. Puac, outside the Three Star Food Mart. It was there that the rookies came to network and the old pros, eager to tout their expertise, flaunted paint-spattered T-shirts and saw-eaten jeans.

The food market is also a nexus of daily conflict. At least once a week, Shiraz Azam, a cashier who works the 10 p.m. to 10 a.m. shift, calls the police to break up the swarm gathered at the storefront. The crowds have become so rowdy, he said, that the store moved its fruit and vegetable stand inside.

“Sure, everyone needs a job,” he said. “But what do they do? They throw garbage and bother customers. Don’t interfere in someone else’s job.”

The two dozen or so laborers outside the store were primarily in their 20s and 30s, Central American, and illegal immigrants. A reporter’s notepad and camera aroused fears of an undercover immigration operation and sent some scattering to the back streets for a while.

Bryam Tax, a former schoolteacher who said he paid $8,000 to be smuggled into the United States from Guatemala last summer, was one of the few who did not get skittish. In Brooklyn, he shares a two-bedroom, one-bathroom apartment with 12 other laborers and sleeps in a bunk bed. He dreads the morning routine, he said, but he has to support his wife and 2-year-old son.

“In Guatemala, we didn’t earn as much, but at least there was nice living space,” he said in Spanish, his metallic front teeth glistening. “It’s very hard work.”

On the same corner, Pasang N. Sherpa, 35, stood in a huddle of Tibetans and Nepalis. They helped each other with the foreign English phrases, passing them down their line, each one contributing a word or two of translation.

Mr. Sherpa, who tries to send money every three months or so to his four children and wife in Tibet, was pessimistic from the beginning. “There are no jobs,” he said. “No good.”

When Mr. Sherpa showed up at the corner at 6:40, he said he would leave no later than 9 if he did not get work. But as 9 came and went, his hopeful stare down Coney Island Avenue continued. “Just a few more minutes,” he promised. Then he would go home and sleep.

At 9:25, Mr. Sherpa decided there would be no job for him that day. He picked up his knapsack and turned his back on the intersection.

Tomorrow would be another day.

    Chasing an American Dream, NYT, 12.7.2008, http://www.nytimes.com/2008/07/12/nyregion/12shapeup.html?hp

Your Money

How Fallout Could Affect Main Street

July 12, 2008
The New York Times
By RON LIEBER

The stock market swoon over Fannie Mae and Freddie Mac this week has left many consumers scratching their heads, wondering if buying a home is a worse idea than it was seven days ago or whether to take down the “for sale” sign in the yard.

So now is a good time to step back and assess the landscape.

Thus far, the biggest damage has been mostly to Fannie’s and Freddie’s investors, though the overall stock market has recoiled as the companies stumbled. In the housing market, consumers are still moving into new homes, and people continued to close on new loans Friday.

But if you are shopping for a home or a mortgage or considering selling a home, you may wonder what will happen next if things get worse for Fannie and Freddie. Will mortgage rates rise, and home prices fall further? Could the troubles affect the rates you are charged for other loans? Answering these questions starts with a brief (I promise) primer on what the two entities do and why they’re important.

In the beginning, there’s a mortgage lender. It can lend you money it has taken in from deposits on checking accounts and certificates of deposit if it wants. But many lenders choose to sell most or all of their home loans once they make them, and then use the proceeds of the sale to make even more loans.

Fannie Mae and Freddie Mac are the buyers for many of these loans, which makes them crucial to the continued ability of companies to lend money to you and me for a house. Freddie likens itself to a wholesaler supplying a retail store: the retail store is a bank selling money.

Once Fannie and Freddie have bought enough loans, they turn many of them into bonds and sell those bonds to investors. Your mutual funds may hold many of them, something many consumers may just be noticing, after letting out a sigh of relief because they were not planning to buy or sell a home anytime soon.

The mortgage financing system hums along until Fannie and Freddie have trouble raising money to buy loans, or it costs them more to raise the money. And that’s what is happening now. “That increased cost must be passed along; it’s the nature of the beast,” says Keith T. Gumbinger, vice president of the financial publisher HSH Associates, where he has tracked mortgage rates for more than two decades.

The question then is how, if at all, any of these higher costs will be passed along through the mortgage lenders to consumers.

As of Friday, not much had changed, and mortgage bankers were putting on a brave face. “It is business as usual, and rates have held steady for the past two days,” said David G. Kittle, chairman elect of the Mortgage Bankers Association and chief executive of Principle Wholesale Lending in Louisville, Ky. He said the company locked in rates for one buyer and two people who were refinancing on Friday morning, as the stocks plummeted, and that the hand-wringing over Fannie and Freddie amounts to a “media feeding frenzy.”

Karen Shaw Petrou, managing partner of policy consultant Federal Financial Analytics, sees a remote possibility that mortgage rates could in fact fall. If the federal government took control of Fannie and Freddie, a possibility that the Treasury secretary, Henry M. Paulson Jr., seemed to discount in a statement Friday, the companies’ financing costs would probably drop some because government control suggests a government guarantee. Until now, the government has provided credit lines to the companies but stopped short of such a promise.

Many mortgage experts, however, expect rates to rise a quarter percentage point to half a point in the coming weeks. The average rate on Thursday for a prime 30-year fixed-rate nonjumbo mortgage was about 6.45 percent for someone not paying special fees known as points to lower the rate, according to HSH Associates data. That kind of spike wouldn’t be too unusual at a time when rates often rise and fall by at least that much over a period of weeks, for any number of reasons.

Over the longer term, a dysfunctional Freddie and Fannie could send mortgage rates higher than they would have been otherwise, relative to key market rates like Treasury securities.

For now, if you’re considering buying a house or refinancing a mortgage, and that rate rise is enough to make a difference, then maybe the deal is not affordable. “If someone is so tight that a quarter point kills a deal, they probably ought to be rethinking what they’re doing,” says Bert Ely, a banking consultant in Alexandria, Va.

For mortgage shoppers comfortable with loans at today’s prices, now is the time to lock in, or guarantee, an interest rate with the lender, which can effectively set the rate over the life of a fixed-rate loan. Given the current uncertainty, there’s always the possibility that lenders will be less willing to offer rate locks in the coming weeks.

Outside the mortgage industry, there is some concern that a further crippled Fannie and Freddie could make it harder for consumers to borrow in all forms. “There is a contagion effect. If investors in various kinds of loans get concerned about one kind of capital market, it can spread to other markets,” said Mark Kantrowitz, who runs the college financing site FinAid.org and saw this firsthand in student loans over the past year or so. “They tend to pull back from everything, not just their initial area of concern.”

All the consternation this week only highlights how much rests on the value of our homes and shows that loan pricing and availability can keep the value from falling further. “The implications run everywhere, through to consumer spending and state and local governments,” said Mark Zandi, chief economist of Moody’s Economy.com. “Anything that exacerbates the problem is very bad news. It’s just sticking a finger into an already deep and festering wound.”

Mr. Zandi said he thought the federal government would step in to stabilize the situation if mortgage rates rose much more than that quarter or half point.

The government might take any number of steps to buck up the two ailing entities. The bonds that Fannie and Freddie sell are held all over the world, by mutual funds and foreign governments. Any hint that those securities are in peril could further undermine faith in the United States economy, given that Fannie and Freddie were created and chartered by the American government.

In an election year, meanwhile, with the housing market already lousy in most places, the federal government will almost certainly do everything in its power to make sure that banks have continued access to Fannie and Freddie funds for loans to creditworthy home buyers.

    How Fallout Could Affect Main Street, NYT, 12.7.2008, http://www.nytimes.com/2008/07/12/business/smallbusiness/12money.html?hp

Worst Fears Ease, for Now, on Mortgage Giants’ Fate

July 12, 2008
The New York Times
By STEPHEN LABATON

WASHINGTON — A day that began with a stomach-churning drop in stock prices for the two largest mortgage finance companies ended with a measure of relief, after government officials and lawmakers managed to calm investors worried about the health of the two companies.

Bush administration officials had worked into the early morning hours on Friday drawing up contingency plans to rescue the companies, Fannie Mae and Freddie Mac, should their financial plight worsen. And when both companies’ stocks fell 50 percent initially, some investors feared the worst.

But by the end of the day, the shares rebounded after both were able to easily continue the regular borrowing of money they need to finance their day-to-day operations and keep the nation’s mortgage machinery humming.

If Fannie and Freddie had been cut off from borrowing by other financial institutions, the government might have been forced to step in and support them.

Still, the modest relief on Friday was tempered by concerns over what might unfold in coming weeks, should the housing market’s woes continue and further weaken the finances of Fannie and Freddie.

Uncertainty about the financial stability of the companies, which lie at the heart of the nation’s housing market, underscored their size and complexity.

Both companies, which already have suffered $11 billion in losses in the last nine months, could report new quarterly losses in August if foreclosures continue.

The financial markets continue to show signs of stress, underscored by the decline in the Dow Jones industrial average, which fell below 11,000 on Friday for the first time in two years before closing at 11,100.54, down 1.1 percent.

Shares of Freddie Mac closed at $7.75, down more than 45 percent for the week. Fannie Mae settled at $10.25, a 30 percent slide for the week. And a fresh sign of industry problems emerged on Friday when the Federal Deposit Insurance Corporation seized IndyMac Bank, making it the largest bank to fail since the 1990s.

The company, an offshoot of Countrywide Financial and once one of the nation’s largest independent mortgage lenders, was a major issuer of subprime loans.

After meeting with his economic policy team on Friday morning, President Bush said that he had been briefed about the problems confronting Fannie and Freddie by the Treasury secretary, Henry M. Paulson Jr.

“Freddie Mac and Fannie Mae are very important institutions,” the president said. “He assured me that he and Ben Bernanke will be working this issue very hard,” referring the chairman of the Federal Reserve.

Earlier in the day, Mr. Paulson sought to calm investors concerned that the stock of Fannie and Freddie could be wiped out if the government took over one or both of the companies and placed them under the control of a conservator, as the law permits. The administration has prepared such a plan if the companies continue to decline, people briefed on the plan have said.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Mr. Paulson said. Officials said Mr. Paulson wanted to convey the message that even under a conservatorship, the companies would not be nationalized. Instead, a conservator would have to prepare a plan to restore the company to financial health, much like a company in Chapter 11 bankruptcy proceedings.

Federal Reserve officials took pains to dismiss rumors swirling through the markets and in Washington that the central bank was considering a new program to lend money directly to the companies through its so-called discount window. The Fed began two such programs to lend money to the nation’s largest investment banks last March.

“Fed officials are following the situation closely,” said Michelle A. Smith, the Fed’s chief spokeswoman. “We’ve had no discussions with the companies about the discount window. We don’t discuss the range of options we are considering.”

After a flurry of phone calls with administration and Fed officials, senior Democrats in Congress also said they were persuaded that the steep declines in the stock of the two companies did not reflect new underlying financial problems, and that the companies had the financial wherewithal to get through the turmoil. Their comments went far beyond the cautiously worded assurances by senior officials earlier in the week that had done little to calm the markets.

“There is a sort of a panic going on and that’s not what ought to be,” said Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate banking committee. “The facts don’t warrant that reaction, in my view.”

Mr. Dodd said that he was persuaded by conversations with Mr. Paulson and Mr. Bernanke that the two companies “are fundamentally sound and strong.”

He said that housing legislation the Senate approved on Friday evening, part of which would overhaul the regulation of Fannie and Freddie, could be completed by Congress and signed into law by President Bush by next week. The measure, sponsored by Mr. Dodd, must go back to the House to be reconciled with its version adopted in May.

Investors, left dizzy by the rapid-fire turns in Freddie and Fannie’s shares, suffered through one of the most volatile days in the market since the Bear Stearns debacle in March.

The day began darkly with investors confronting figures that once seemed unthinkable: Freddie Mac’s stock was down a whopping 50 percent, with Fannie Mae not far behind. As rumors of a government bailout made their way across trading desks, Mr. Paulson’s statement — suggesting that no government takeover of Fannie and Freddie was imminent — seemed to only increase the uncertainty.

“Paulson jumped in earlier today and tried to be reassuring, but in many ways it backfired,” Edward Yardeni, an investment strategist, said. “He really didn’t say anything that he hadn’t before.”

But some investors saw the depressed shares as a buying opportunity. At the close, Freddie finished down just 3 percent, a relief to investors who had feared the worst. Fannie, however, sold off 22 percent of its value.

As they watched the markets, senior officials at the Treasury and the Federal Reserve were described on Friday as being less fixated on the stock prices of Fannie and Freddie and more interested in the companies’ ability to raise money to continue to fund their daily operations and buy new mortgages from banks and other lenders.

The two companies already own or guarantee more than $5 trillion in mortgages. They need to borrow money constantly so they can buy mortgages from lenders, repackage them as securities and sell them to investors.

Fannie and Freddie hold some of the mortgages they buy in their own investment portfolios; the rest are sold to pension funds, mutual funds and other investors, with Fannie and Freddie guaranteeing each mortgage against default by the homeowner. Officials noted that the companies’ ability to raise money had improved in recent months, including on Friday, allowing the companies to borrow at rates close to those of the United States Treasury.

One interpretation of this is that the debt markets believe that the federal government will take steps to bail out the companies should they become insolvent. Moreover, the insurance premiums that are paid by the buyers of the debt securities issued by the companies declined significantly on Friday, a sign that the markets do not believe the companies are on the brink of failure.

“In these volatile markets, share price is not the most reliable measure for judging Fannie and Freddie and will not dictate the responses by the regulators,” said Senator Charles E. Schumer, Democrat of New York, who has held discussions all week with senior administration officials. “Rather, the regulators are closely watching the performance of the companies’ bonds, and how their yields compare to U.S. Treasuries. Right now, Freddie and Fannie bonds are trading closer to Treasuries than they were in March after the Bear Stearns collapse, a reassuring signal.”

It was a crushing liquidity problem — as lenders called in existing loans and refused to lend any more — that ultimately prompted the government to rescue Bear Stearns last March from possible bankruptcy.

Normally, when a company’s stock price plunges to dangerously low levels, the company also has significant problems raising money in the debt markets because borrowers fear that they may not be repaid. But in a perverse cycle, the news this week that the government was considering putting them into a conservatorship has had the effect of making the debt of those companies more attractive.

Fannie Mae, founded in 1938, was originally called the Federal National Mortgage Association, but adopted its nickname as a formal title in the 1990s. Its younger and smaller sibling, Freddie Mac, was begun in 1970.

Michael M. Grynbaum contributed reporting from New York.

    Worst Fears Ease, for Now, on Mortgage Giants’ Fate, NYT, 12.7.2008, http://www.nytimes.com/2008/07/12/business/12fannie.html?hp

By Large Margin, Senate Votes to Help Homeowners and Overhaul Loan Agencies

July 12, 2008
The New York Times
By DAVID M. HERSZENHORN

WASHINGTON — The Senate overwhelmingly approved a package of housing bills on Friday, including a rescue plan aimed at helping hundreds of thousands of borrowers avoid foreclosure and a regulatory overhaul for Fannie Mae and Freddie Mac, the battered mortgage finance companies.

The new rules include the creation of an independent regulator with broad authority to order the companies to raise capital and even, if necessary, to put one or both in receivership and assume control of their operations.

The bill now returns to the House, where related tax provisions and other details need to be worked out. Supporters of the Senate bill urged the House to approve the bill quickly.

“It’s time for us to do something in a real way to move this government forward on the side of homeowners and on the side of the economy,” said Senator Richard J. Durbin, Democrat of Illinois. “Let’s really move forward as quickly as we can to give confidence to the American people.”

The Senate approved the bill 63 to 5 in the third in a series of procedural votes. The House approved its version in May, and though the White House has issued a formal veto threat — and repeated it on Friday — administration officials have indicated that a compromise was likely.

Previous votes on the housing bills showed that a presidential veto could easily be overridden.

Until the shares of Fannie Mae and Freddie Mac went into free fall this week, the main focus of the legislation was the foreclosure rescue plan, which aims to help as many as 400,000 troubled borrowers refinance with more affordable, 30-year fixed-rate loans insured by the Federal Housing Administration.

But this week, there was renewed attention on the provisions in the bill that overhaul regulation of Fannie Mae and Freddie Mac, government-chartered mortgage finance companies.

Under the legislation, an independent agency called the Federal Home Finance Agency would be created to oversee the mortgage companies. Its director would also be a member of a four-person oversight board, along with the Treasury secretary, the secretary of housing and urban development and the chairman of the Securities and Exchange Commission.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said that the new regulator could require the companies to raise new capital and clarify their two-part mission: to provide a return for investors and to provide market liquidity and capital to expand homeownership.

“That dual mission, you want to make sure that is going to be pursued,” Mr. Dodd said. “And a strong regulator helps you get there.”

Mr. Dodd hailed the vote on Friday as a crucial step and praised the measure as “the most important housing legislation in a generation.”

The foreclosure rescue bill would authorize the housing administration to insure up to $300 billion in refinanced mortgages, enabling borrowers now saddled with unaffordable loans to refinance. To take part in the program, lenders would first have to agree to lower each homeowner’s debt obligation to 90 percent of a home’s current value.

Approval in the Senate came after two weeks of procedural wrangling, forced by Senate Republicans, over unrelated measures. As a result, Democrats were forced to schedule votes on Friday afternoon. Votes on Fridays are rare because most lawmakers would prefer to be in their home states or on their way there.

The five opposing votes came from Western Republican senators: John Thune of South Dakota; Jon Kyl of Arizona; Michael D. Crapo of Idaho; and Michael B. Enzi and John Barrasso, both of Wyoming.

There has been little doubt among members of both parties that the housing legislation would be approved before Congress left for its summer recess in August. But even as the housing market has continued to decline, lawmakers have not been in much of a rush.

Barney Frank, the Massachusetts Democrat who is a main author of the housing package, said on Thursday that he hoped to get House approval as quickly as possible and return the bill to the Senate, where it would need one final vote before being sent to the White House for President Bush’s signature.

In its statement on Friday reiterating its veto threat, the White House said it remained concerned about a provision providing nearly $4 billion in grants to local governments for the purchase and rehabilitation of foreclosed property.
 

David Stout contributed reporting.

    By Large Margin, Senate Votes to Help Homeowners and Overhaul Loan Agencies, NYT, 12.7.2008, http://www.nytimes.com/2008/07/12/washington/12housing.html?ref=business

Bush urges Congress to open new areas to oil drilling

Fri Jul 11, 2008
6:13pm EDT
Reuters

WASHINGTON (Reuters) - President George W. Bush urged Congress on Friday to act before its August break to open new areas for oil exploration in the United States to help ease record high oil prices.

"The members of Congress, particularly the Democratic leadership, must address this issue before they go home for this upcoming August break," Bush told reporters after a briefing from his economic advisers at the Department of Energy.

"They have a responsibility to explain to their constituents why we should not be drilling for more oil here in America to take the pressure off of gasoline prices," said Bush, who announced last month he favored lifting the restrictions on offshore drilling.

"One way to deal with supply problems is to increase supply here in America," said the president. "And yet the Democratic leaders of Congress just consistently block opening up these lands for exploration."

Democrats say there is no need to give oil companies protected areas to drill, because they already have 68 million acres under federal leases that have yet to be drilled.

Crude oil prices hit a record high on Friday near $147 a barrel, spurred by growing worries of threats to supplies from Iran and Nigeria and the possibility of a strike by Brazilian oil workers next week.

High oil prices have begun to have an impact on the U.S. economy, and Bush last month urged Congress to end a ban on offshore oil drilling in a bid to ease consumer anxiety over $4-a-gallon gasoline prices.

Bush advocated opening federal land off the U.S. East and West coasts, where oil drilling has been barred by both a presidential executive order and a congressional moratorium. He has estimated offshore drilling could yield 18 billion barrels of oil.

The president also advocated opening up the Arctic National Wildlife Refuge (ANWR) in Alaska to drilling, as well as promoting the exploitation of oil shale in the U.S. West.

Drilling in the closed areas would not lower prices in the short-term. Experts at the Energy Department say it would take at least 10 years to bring any ANWR oil to market, and five to 10 years to develop new offshore fields.

(Editing by David Gregorio; Editing by David Gregorio)

    Bush urges Congress to open new areas to oil drilling, R, 11.7.2008, http://www.reuters.com/article/newsOne/idUSMOL15913820080711

Oil hits record above $147

Fri Jul 11, 2008
3:58pm EDT
Reuters
By Rebekah Kebede

NEW YORK (Reuters) - Oil prices jumped $5 to a record high above $147 a barrel on Friday amid growing worries about threats to supplies from Iran and Nigeria and a strike by Brazilian oil workers next week.

Analysts said oil's rally could run further if problems with U.S. mortgage companies Fannie Mae and Freddie Mac feed into the commodities boom by reducing the chances of an interest rate hike by the Federal Reserve.

The troubles with the mortgage giants -- which control $5 trillion in debt -- helped pare crude's gains after it hit new highs as dealers focused on U.S. economic turmoil that has already slowed oil consumption in the world's top energy user.

U.S. crude settled at $145.08 a barrel, up $3.43, after climbing as high as $147.27 earlier in the day and adding to gains of $5.60 from Thursday. London Brent crude settled at $144.49 a barrel, up $2.46.

"I'm seeing profit-taking here after the run-up to a new record, but we are going into a weekend and with all these things being reported on Iran, you wouldn't want to go short," said Daniel Flynn, an analyst at Alaron Trading.

In addition, Iraq's Defense Ministry said on Friday that it had no knowledge of Israeli air force drills in its airspace, contrary to a media report carried on the Jerusalem Post website that sparked crude early Friday. An Israeli security source also said the report was wrong.

"As martial rumors are denied, participants are reverting their gaze on the deteriorating global economy," said Mike Fitzpatrick, vice president at MF Global in New York.

Missile tests this week by Iran, against a backdrop of rising tensions with Israel and the United States, has left the oil markets worried about a potential supply disruption from the world's No. 4 exporter.

Iran has threatened to strike back at Tel Aviv and U.S. interests in a key oil shipping route if it is attacked over its nuclear program, which Israel and the West fear is aimed at making weapons.

Support also came from supply threats in Nigeria and Brazil. The main militant group in OPEC nation Nigeria's oil-producing region said it was abandoning a cease-fire to protest against a British offer to help tackle lawlessness.

Workers at Brazil's Petrobras plan to launch a five-day strike on Monday that would affect all 42 Campos basin offshore platforms, which pump than 80 percent of the nation's 1.8 million bpd of output.

Oil prices have risen seven-fold since 2002 amid surging demand from China and other emerging markets, and jumped 50 percent this year alone, battering the economies of consumer nation's already hit hard by the global credit crunch.

Concern in the United States that Fannie Mae and Freddie Mac could run short of capital added to inflation worries. Analysts said the U.S. Federal Reserve could be hindered in any efforts to raise interest rates by the problems.

"Mounting anxiety about the health of Fannie and Fred now effectively guarantees the Fed will remain on the sidelines for the next few months -- whatever happens to inflation," said John Kemp, commodities analyst at RBS Sempra in London.

Investors also have flocked to oil and other commodities this year as a hedge against inflation and a weak dollar.

(Additional reporting by Richard Valdmanis in Portland, Maine, Santosh Menon in London and Felicia Loo in Singapore; Editing by Matthew Robinson and Christian Wiessner)

    Oil hits record above $147, R, 11.7.2008, http://www.reuters.com/article/newsOne/idUST14048520080711

Dow Chemical Buying a Rival for $15.3 Billion

July 11, 2008
The New York Times
By ABHA BHATTARAI

Dow Chemical said Thursday that it had agreed to buy Rohm & Haas, a specialty chemical maker, for about $15.3 billion in cash.

The deal, the biggest in Dow’s 101-year history, is being financed with equity investments of $3 billion by Berkshire Hathaway, Warren E. Buffett’s huge holding company, and $1 billion by the Kuwait Investment Authority.

The deal, expected to close by early 2009, will create one of the nation’s largest specialty chemical companies at a time when the industry is floundering and commodity prices are at record highs.

Dow said it would pay $78 for each share of Rohm & Haas, a 74 percent premium on the company’s closing price of $44.83 a share on Wednesday.

Dow, which is based in Midland, Mich., will absorb $3.5 billion of Rohm & Haas debt.

“There are many jewels out there, and this is one of them,” Andrew N. Liveris, chairman and chief executive of Dow, said in a conference call. “The bottom line is, this is a powerful new Dow.”

But analysts said they were worried that Dow may have unrealistic growth expectations.

“It’s going to be a challenging environment for Dow,” said Frank Mitsch, an analyst at BB&T Capital Markets, which downgraded its rating of Dow shares to hold from buy on Thursday. “It’s a heck of a premium, especially at a time when industry fundamentals are suffering.”

Rohm & Haas will continue to do business under its own name and will maintain its headquarters in Philadelphia. Last year, Rohm & Haas reported revenue of $8.9 billion.

Its products include electronics technologies, coatings, and packaging and building materials.

“I have relentlessly talked to our employees, customers and stockholders about the imperative to seek opportunities for transformative change,” said Raj L. Gupta, the chairman and chief executive of Rohm & Haas. “In its 100-year history, Rohm & Haas has constantly reinvented itself, and this agreement offers outstanding potential to do the same yet again.”

The deal, unanimously approved by the boards of both companies, must be approved by Rohm & Haas shareholders.

Shares of Rohm & Haas rose 65 percent in midday trading, to $73.99, while shares of Dow were down as much as 6.5 percent.

    Dow Chemical Buying a Rival for $15.3 Billion, NYT, 11.7.2008, http://www.nytimes.com/2008/07/11/business/11chemical.html?hp

Officials Rush to Reassure Markets About Loan Agencies

July 11, 2008
The New York Times
By STEPHEN LABATON and CHARLES DUHIGG

WASHINGTON — Senior Washington officials on Thursday sought to to reassure the markets about the financial health of the nation’s two largest mortgage finance companies as their stock prices plunged to their lowest level in 17 years on fears that they could face the possibility of a government bailout.

The rapid sell-off of shares of Fannie Mae and Freddie Mac came after comments from a former central banker that they may not be solvent, as well as a critical report about Freddie Mac from an analyst at UBS. The turmoil also shook the debt of the companies, with one main measure indicating that their cost of borrowing has risen to the highest level since mid-March, when the government rescued Bear Stearns.

At a Congressional hearing on Thursday morning, both Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, chairman of the Federal Reserve, said that the regulator of both Fannie and Freddie had found that they were, in the words of Mr. Paulson, “adequately capitalized,” meaning that they had sufficient cash and other assets to withstand the turbulence in the markets.

“Fannie Mae and Freddie Mac are also working through this challenging period,” Mr. Paulson said early in his testimony before the House Financial Services Committee. “They play an important role in our housing markets today and need to continue to play an important role in the future. Their regulator has made clear that they are adequately capitalized.”

Mr. Bernanke said that Fannie and Freddie “are well capitalized in the regulatory sense” but added that they, along with other major financial institutions, need to raise their capital levels further.

But market analysts said that as the cost of borrowing rose for both firms, it increased the possibility that they could enter a spiral that could force the government to intervene.

“If you have to borrow at a high rate, and what you buy with that borrowed money pays you only a small amount, then you’re not earning enough to cover expenses, and that’s when companies go out of business,” said Sean J. Egan, managing director of Egan-Jones Ratings, an independent credit ratings firm. “In the absence of any sort of federal guarantee of these companies’ debt, they effectively go into bankruptcy.”

Fannie Mae did not return calls seeking comment. Sharon McHale, vice president for public relations at Freddie Mac, said: “Our regulator has emphasized that we have continued to maintain the highest capital rating, and we are in the market everyday. We’ll continue to do so.”

Shares of Freddie Mac plunged more than 30 percent and Fannie Mae’s more than 20 percent in the first hour of trading on Thursday. By 2:45 p.m., both had recovered somewhat, with Freddie Mac down 21 percent, to $8.03, and Fannie Mae down about 12 percent, to $13.36. It was the second straight day of declines for the companies.

The two companies play a central role in the marketplace by buying hundreds of billions of dollars in mortgages from lenders, repackaging them as securities and then either holding them in their portfolios or selling them to investors. While their stocks trade on the New York Stock Exchange, they were created by Congress to promote housing and the marketplace has long come to believe that they would be bailed out should they become insolvent. They hold a far lower level of capital than banks. In recent years, they have both suffered from accounting scandals and management shake-ups.

Despite the assurances at the hearing before the House Financial Services Committee, the two officials were guarded on their overall assessment of the problems confronting the mortgage finance companies, clearly concerned that they did not want to say anything that could further erode confidence in them. Neither official would address a question posed by Representative Dennis Moore, a Kansas Democrat, who asked whether the failure of either institution would pose a risk to the entire financial system.

“In today’s world I don’t think it is helpful to discuss any financial institutions and whether they pose systemic risk,” Mr. Paulson said.

Nor would they answer a question about whether Congress needs to give the regulators more tools to deal with the possible insolvency at either company.

“I don’t think we should be speculating about what if’s with Fannie and Freddie,” Mr. Paulson said, as Mr. Bernanke sat silently at his side. “What I’m emphasizing is the tools I want” to reform the entire regulatory system.

There were few signs that Washington officials were planning a quick intervention. Sources close to Freddie Mac said the company has had no conversations with the Federal Reserve, the Treasury or the companies’ regulator, the Office of Federal Housing Enterprise Oversight. Similarly, key Congressional Democrats and Republicans said they had not been briefed on any plans for a quick intervention, and that they are focused on the reform legislation currently working its way through Congress, which could take weeks to go into effect once it passes into law.

The problems of the two companies spilled onto the campaign trail on Thursday when Senator John McCain, the presumptive Republican nominee for president, said he supported federal intervention to save Fannie or Freddie from collapsing.

“Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes, and they will not fail, we will not allow them to fail,” Mr. McCain said during a stop at the Senate Coney Island Restaurant in Livonia, Mich. “They are vital to Americans’ ability to own their own homes. And we will do what’s necessary to make sure that they continue that function.”

Jason Furman, the economic policy director for the presidential campaign of Democratic Senator Barak Obama of Illinois, said that Mr. Obama “believes the Bush administration’s willful neglect of warning signs in housing, in financial markets and in the job market, have compromised the nation’s housing finance system.”

“The challenges facing Fannie and Freddie are part of the broader weakness in our economy,” Mr. Furman said.

Senator Charles E. Schumer, Democrat of New York and chairman of the Joint Economic Committee, said that the markets should rest assured that the mortgage giants have a "federal lifeline" and would not be allowed to fail — though he said he thought a government rescue would not be needed and should be a last resort.

Mr. Paulson sought to minimize a front-page article in The Wall Street Journal that the administration had been preparing contingent plans in the event one of the two companies faltered. In what appeared to be a thinly veiled reference to the article, he said that it was common for the administration, like previous administrations, to have plans in place for a wide array of potential problems in the marketplace and elsewhere.

“We have to always have contingency plans and be prepared for eventualities,” Mr. Paulson said. “We’ve been doing that from before these problems arose, and before I arrived in Washington.”

Liquidity problems at the two firms, which operate under an implicit government guarantee, could cause catastrophic consequences for the American economy. Analysts expect the companies to announce a new round of write-downs and possibly be forced to raise capital by issuing additional stock, which would dilute their value for current shareholders.

In the last week alone, Freddie has lost 47 percent of its value, and Fannie is off 28 percent. Expectations of default at the companies has also risen; it costs three times as much today to guarantee a two-year Fannie bond as it did three years ago.

Another crisis pressing both companies is their continued ability to raise money from investors. Freddie Mac had previously announced that it intended to raise $5.5 billion later this year. Both Freddie and Fannie are widely expected to post additional losses later this year that would require them to raise more money from investors. But with their stock prices plummeting, such fund-raising may be made difficult.

Thursday’s sell-off caps a week of painful days for the two giant lenders, which are by far the biggest providers of financing for domestic home loans. Investors and analysts are increasingly anxious that the companies do not have enough capital on-hand to guarantee their loans.

The market problems for the two companies was prompted in part by comments by a former president of the St. Louis Federal Reserve, William Poole. In an interview on Wednesday, Mr. Poole, a longtime critic of the two companies, called Fannie and Freddie “insolvent” and said the government may be forced into a bailout.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Mr. Poole told Bloomberg News.

In an interview, Mr. Poole said it “may be impossible” for Fannie and Freddie to raise new capital. “We are potentially looking a crisis in the face, and we must not allow this to happen,” he said. “The government must intervene.”

Analysts at UBS, the investment bank, issued a report on Thursday that also expressed doubts about Freddie Mac’s ability to maintain a sufficient amount of capital.

“Although the company has announced a $5.5 billion capital raise, we are still trying to determine if the resulting level of capital will be sufficient in the circumstance that the company’s credit quality deteriorates in a manner more consistent with our expectations,” the analysts wrote.
 

Stephen Labaton reported from Washington and Charles Duhigg from New York. Michael M. Grynbaum contributed reporting from New York, David M. Herszenhorn from Washington, and Michael Cooper from Livonia, Mich.

    Officials Rush to Reassure Markets About Loan Agencies, NYT, 11.7.2008, http://www.nytimes.com/2008/07/11/business/11fannie.html?hp

Abu Dhabi Buys 90% Stake in Chrysler Building

July 10, 2008
The New York Times
By CHARLES V. BAGLI

The government of Abu Dhabi bought a 90 percent stake in the Chrysler Building on Tuesday for $800 million from German real estate investors and Tishman Speyer.

But while it might seem that the buyer, the Abu Dhabi Investment Council, got a controlling interest in the Art Deco tower, a landmark, for that kind of money, that was not the case.

Despite having only a 10 percent holding, Tishman Speyer Properties will continue to control the property and manage it, much as it has since 1997, because it controls the land beneath the 77-story tower, with its trademark stainless steel crown, gargoyles and elevator cabs that evoke the chrome-laden autos of the 1930s.

Tishman Speyer Properties and the Abu Dhabi Investment Council, an arm of the Gulf emirate government, which tends to shun publicity, did not return calls requesting comment.

Teresa Miller, a spokeswoman for Prudential Real Estate Investors, which managed the German fund, confirmed on Wednesday that “we no longer own a 75 percent stake in the Chrysler Building.”

Ms. Miller declined to disclose the fund’s sale price. But real estate executives who were told about the transaction said that Tishman Speyer sold the investment council an additional 15 percent, and that the total price was $800 million. The investment council is also negotiating to buy the retail space in the seven-story glass Trylons, or pavilion, that Tishman Speyer built next to the Chrysler Building.

Tishman Speyer and its partner, Travelers Group, bought the Chrysler Building, at 42nd Street and Lexington Avenue, and the adjoining Kent Building in 1997 for about $220 million from a consortium of banks and the estate of Jack Kent Cooke.

Jerry I. Speyer, the chairman of Tishman Speyer, outmaneuvered competing bidders for the property by pre-emptively securing a 150-year lease with Cooper Union, which owns the land underneath the tower.

The tower was built in 1930 by Walter P. Chrysler, the automaker, and was briefly the tallest building in New York, losing out months later to the Empire State Building.

The Chrysler Building’s lobby featured African marble and chrome, and the Sky Club on the 66th floor offered spectacular views.

But by the 1970s, the building was badly in need of refurbishing.

Tishman Speyer poured $100 million into a three-year renovation, which included erecting a retail pavilion on East 42nd Street under three glass pyramids between the Chrysler Building and the 32-story Kent Building, which was not included in the sale.

Less than four years later, Travelers sold its 75 percent stake for $300 million to the German real estate fund, TMW. “Tishman Speyer will maintain a controlling interest and full decision-making authority” over the building, Mr. Speyer said at the time.

Prudential later acquired TMW and sold its share of the Chrysler Building on Tuesday. Such funds generally buy assets for five to seven years and are not interested in being long-term owners of real estate.

Ms. Miller of Prudential Real Estate said that the fund had earned a 20 percent annual return on its investment in the Chrysler Building, the last property in that fund to be sold before it closes.

Last year, TMW and Tishman Speyer sold 666 Fifth Avenue, a 1.5-million-square-foot office tower, for $1.8 billion. They had bought it in 2000 for $518 million from Sumitomo Realty, a Japanese company that acquired the building in 1988 for $488.6 million.

Japanese companies and institutions flooded into New York during the 1980s real estate boom, with Mitsubishi Estate’s purchase of Rockefeller Center touching off an outcry over foreign control of American property.

The Japanese lost a fortune after property values plunged by 50 percent during a recession in the early 1990s.

Since 2000, German groups have been vying with Middle Eastern interests to be the top foreign investors in New York office towers, apartment buildings and hotels, according to Real Capital Analytics, a research firm. Together, they have accounted for $22 billion of the $30.2 billion invested by foreign entities over the past seven years.

In 2001, German investors accounted for virtually all of the foreign investment in New York. But with prices escalating sharply in 2007, Middle Eastern interests spent $4.4 billion for New York property, compared with the Germans’ $1.8 billion.

Still, with American companies like BlackRock and Apollo raising huge amounts of money from individual investors and institutions around the world, it has become difficult to determine the national origin of investment groups today, said Dan Fasulo, a managing director of Real Capital Analytics.

    Abu Dhabi Buys 90% Stake in Chrysler Building, NYT, 10.7.2008, http://www.nytimes.com/2008/07/10/nyregion/10chrysler.html

Op-Ed Contributor

Siphoning G.M.’s Future

July 10, 2008
The New York Times
By ROGER LOWENSTEIN

WHO shot General Motors? The company’s stock is at its lowest level in 50 years, and its market valuation has plunged to $5.9 billion, less than that of the Hershey candy-bar company. The automaker is weighing yet another round of layoffs — and maybe even a fire sale of venerable brands like Buick and Pontiac.

General Motors once manufactured half the cars on the American road, but now it sells barely 2 in 10. Bankruptcy is not unthinkable for Detroit’s former king. The immediate cause of G.M.’s distress, of course, is the surging price of oil, which has put a chill on the sale of gas-guzzling sport utility vehicles and trucks. The company’s failure to invest early enough in hybrids is another culprit. Years of poor car design is another.

But none of G.M.’s management miscues was so damaging to its long-term fate as the rich pensions and health care that robbed General Motors of its financial flexibility and, ultimately, of its cash.

General Motors established its pension in the “treaty of Detroit,” the five-year contract that it signed with the United Automobile Workers in 1950 that also provided health insurance and other benefits for the company’s workers. Walter Reuther, the union’s captain, would have preferred that the government provide pensions and health care to all citizens. He urged the automakers to “go down to Washington and fight with us” for federal benefits.

But the automakers wanted no part of socialized care. They seemed not to notice, as a union expert wrote, that if Washington didn’t provide social insurance it would be “sought from employers across the collective bargaining table.”

Detroit was too flush to envision that it would ever face a financial strain. Ford and Chrysler signed identical pacts with labor, so all three automakers were able to pass on their costs to customers. Besides, the industry’s work force was so young that few workers would be collecting a pension any time soon.

But pension commitments last forever. They far outlived Detroit’s prosperity.

General Motors got into the dubious habit of steadily increasing worker benefits. In 1961, G.M. was able to get away with a skimpy 2.5 percent increase in wages by also guaranteeing a 12 percent rise in pensions. Such promises significantly burdened the company’s future. As workers lived longer, the cost of fulfilling pension commitments rose. And health care costs exploded.

By the 1980s, it was clear that the Big Three automakers faced a serious threat from Japan. But General Motors and the U.A.W. were locked in a mutually destructive embrace. G.M., fearing the short-term consequences of a strike, continued to grant large increases in benefits — creating an intolerable gap between its costs and those of its foreign competitors. Union officials feared to face the rank and file without a big contract.

In the ’90s, the consequences of maintaining a corporate welfare state became too obvious to ignore. In that decade, General Motors poured tens of billions of dollars into its pension fund — an irretrievable loss of opportunity. What else might G.M. have accomplished with that money? It could have designed new cars or researched alternative fuels. Or it could have acquired half of Toyota — a company that the stock market now values at close to $150 billion.

G.M. acknowledged in its most recent annual report that from 1993 to 2007 it spent $103 billion “to fund legacy pensions and retiree health care — an average of about $7 billion a year — a dramatic competitive and cash-flow disadvantage.” During those 15 years, G.M. paid only $13 billion or so in shareholder dividends. The company has been sending far more money to its retirees than to its owners.

After falling $20 billion behind on its pension earlier this decade, G.M. doggedly put money into its plan to catch up. It has also agreed to invest more than $30 billion in a fund to cover future health-care expenses. But these efforts have starved its business.

The sorry decline of General Motors has proved Reuther right: the government is the better provider of social insurance. Let industry worry about selling products.

Unhappily, however, the fate of many public-sector pension plans is even worse than G.M.’s. Responding to the same temptation to offload expenses into the future, public employers have committed to trillions of dollars in future liabilities. In New Jersey, a huge pension liability has created a budgetary nightmare for the state. The city of Vallejo, Calif., burdened by police pensions, recently filed for bankruptcy.

Just as G.M.’s shareholders bore the burdens of its pensions, states and cities will have to force taxpayers to sacrifice in the form of service cuts, tax increases or both.

It is too late to restore G.M. to its former grandeur. But if public officials do not show courage by quickly funding the pensions they have promised to their workers, taxpayers will soon find themselves in an even worse crisis than the one G.M.’s shareholders are facing now.

Roger Lowenstein is the author of “While America Aged: How Pension Debts Ruined General Motors, Stopped the N.Y.C. Subways, Bankrupted San Diego and Loom as the Next Financial Crisis.”

    Siphoning G.M.’s Future, NYT, 10.7.2008, http://www.nytimes.com/2008/07/10/opinion/10lowenstein.html

Northwest Air to Cut 2,500 Jobs and Add Fees

July 10, 2008
The New York Times
By MICHELINE MAYNARD

Northwest Airlines said Wednesday that it would cut 2,500 jobs, including pilots, flight attendants, mechanics and other employees, reflecting its reduction in flights in the wake of high fuel prices.

Northwest also said it would join other airlines in charging many travelers $15 for the first checked bag, a move that takes effect with tickets purchased Thursday and afterward.

Northwest also joined other airlines in charging fees for frequent-flier award tickets and increased its fees for changing tickets.

Northwest is the latest airline to cut jobs as the airlines grapple with sharply higher costs for jet fuel. On Monday, AirTran said it would eliminate 480 jobs, while American, Continental and United all have announced cuts.

Last month, Northwest said it would ground 14 Boeing 757 and Airbus jets during the final three months of 2008. It also said that only 61 of its aging DC-9 jets would remain in its fleet by the end of December. It had 94 DC-9’s at the beginning of 2008, and 103 a year ago.

Over all, Northwest is reducing its domestic and international flying by up to 9.5 percent, the airline said a regulatory filing. In its previous round of cuts, announced in April, Northwest said it would reduce flying capacity by about 7 percent this year.

“Our fuel costs have more than doubled in the past year,” Douglas M. Steenland, the chief executive of Northwest, said in a statement. “In order to manage through this unprecedented fuel challenge, we have to take action to both control costs and increase our revenue.”

Mr. Steenland estimated the airline’s new fees would raise $250 million to $300 million in revenue.

Northwest said all its employee groups would be affected by the job cuts. It said it would offer a series of voluntary programs, and would only lay off workers if it does not get enough people to accept buy outs.

Northwest said it would join American, United and US Airways in charging $15 for the first checked bag. The policy applies to tickets purchased on or after Thursday, for travel starting Aug. 28 in the United States and Canada. Northwest already charges $25 for the second checked bag and $100 for three or more checked bags. Passengers on full coach tickets and elite members of its frequent flier program are exempt.

The airline is adding a “service fee” for booking tickets using frequent-flier miles. The fee applies to travel on or after Sept. 15. It will charge $25 for domestic tickets, $50 for trans-Atlantic tickets, and $100 for trans-Pacific travel.

Mr. Steenland said the fee would be temporary, and as fuel prices drop, “we will revisit this decision.”

Beginning Wednesday, Northwest’s fee for changing domestic nonrefundable tickets will rise to $150 from $100. International ticket change fees will increase by an additional $50 to $150 per ticket, depending on class of service and other restrictions.

Last month, Delta Air Lines said it would begin charging a fuel surcharge of up to $50 for booking previously free tickets with frequent-flier miles. Delta and Northwest announced a merger in April that would create the nation’s biggest airline, ahead of American. The two airlines hope to receive regulatory approval before the end of the year.

Meanwhile, the Federal Aviation Administration on Tuesday ordered airlines including American and Delta to inspect MD-80 series jets for possible cracks in the planes’ frames over the wings. The agency estimated the inspection would cost $320 for each plane.

The directive takes effect Aug. 12, and airlines have two years to comply with the directive. There are 670 MD-80 planes registered for use in the United States.

American, which has 298 MD-80s in its fleet, and Delta, which has 117 MD-88 planes, had to cancel hundreds of flights earlier this year to inspect their wiring.

The Air Transport Association, an industry trade group, argued that the airlines should be given four years to conduct the inspection and repairs. But the agency, in its directive, said two years was sufficient.

    Northwest Air to Cut 2,500 Jobs and Add Fees, NYT, 10.7.2008, http://www.nytimes.com/2008/07/10/business/10air.html

Fed Sees Turmoil

Persisting Deep Into Next Year

July 9, 2008
The New York Times
By STEPHEN LABATON

WASHINGTON — Federal policy makers have concluded that the turmoil plaguing the housing and financial markets is likely to spill deep into 2009, becoming one of the most significant domestic problems to confront the next president when he steps into the White House in January.

Ben S. Bernanke, the chairman of the Federal Reserve, publicly indicated on Tuesday that he believes the problems will persist into next year when he outlined a series of steps the Fed is considering in the coming months.

One such step would extend low-interest lending programs to Wall Street’s largest investment banks into next year. The programs, one of which was set to expire in September, can continue only if the Fed issues a finding that there are “unusual and exigent circumstances” that justify them.

Mr. Bernanke also recommended that Congress grant the Fed broader authority to monitor and supervise the financial markets to assure greater stability in the future. But with time running out on this session, lawmakers are unlikely to adopt such legislation before next year.

Treasury Secretary Henry M. Paulson Jr. said in a speech last week in London that the problems of the housing and financial markets might last longer than originally expected.

He followed up in another speech on Tuesday by saying that the Bush administration was working to prevent as many home foreclosures as possible, but that “many of today’s unusually high number of foreclosures are not preventable.” Mr. Paulson said 1.5 million home foreclosures were started in 2007 and that an estimated 2.5 million more would take place this year.

Still, the markets seemed reassured that Washington officials were redoubling their efforts to resuscitate the weak housing sector, despite the downbeat comments. The Dow Jones industrial average, which has fallen sharply in recent weeks, closed up 1.4 percent, or 152 points.

Mr. Bernanke said that the Fed would issue next week long-awaited rules to restrict new exotic mortgages and high-cost loans for people with weak credit. Such mortgages have been a central cause of the current market problems.

The Federal Housing Administration will also begin an expanded effort next week to help a larger group of troubled homeowners refinance their adjustable mortgages. Under the plan, homeowners would be eligible to refinance even if they have missed up to three monthly mortgage payments over the previous 12 months.

Homeowners who have fallen behind on their payments because of job loss, declining wages and family illness would also be eligible, even if their rates have not increased. Homeowners are now eligible only if they were current on their mortgages before their interest rate was adjusted upward.

For its part, Congress is close to completing legislation on a $300 billion foreclosure-rescue plan that would help troubled borrowers refinance into more affordable loans insured by the federal government. The Senate is expected to approve a measure by next week.

The Fed created the lending programs to Wall Street in March as part of a broader effort to prevent financial institutions from collapsing, as Bear Stearns nearly did before it was sold under heavy pressure from the Fed and the Bush administration to JPMorgan Chase.

The lending programs to the investment banks, a broad expansion of the Fed’s historic practice of providing loans only to commercial banks that the Fed supervises, are intended to provide confidence to financial institutions that they will have enough cash to meet their daily needs. And by permitting investment banks to post collateral for Fed loans, including hard-to-sell financial instruments backed by mortgages, the programs have helped prop up the enormous and troubled market in securities sold by Fannie Mae and Freddie Mac, the all-important mortgage-finance companies.

The two buyers of mortgages, which together held more than $1.4 trillion of mortgage-backed bonds as of the end of last year, have struggled in recent months through the wave of foreclosures and declining housing markets. On Tuesday, Fannie Mae closed up nearly 12 percent, and Freddie Mac rose 13 percent, after their regulator said he would probably not force them to raise more capital because of an accounting rule change. The shares of both government-chartered companies had tumbled on Monday amid concerns over the accounting rule and worries that the worst of the mortgage crisis was yet to come.

Officials said that the Federal Reserve remained concerned that the declining housing market would not reach its bottom and financial markets would not become more stable before some time next year, and that the economy would continue to suffer as a result of declining consumer confidence, a sluggish global economy and the widespread effects of the rapid jump in oil prices.

“The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning,” Mr. Bernanke said at a forum in Virginia on lending for low- and moderate-income households. He did not provide a forecast of how soon he expected markets would begin to turn.

“Although short-term funding markets remain strained, they have improved somewhat since March,” Mr. Bernanke said, reflecting both the intervention of the Fed in offering loans to Wall Street and “ongoing efforts of financial firms to repair their balance sheets and increase their liquidity.”

Officials said that the Fed privately reached the view some time ago that weakness in the housing and financial sectors would likely continue well into next year. Mr. Bernanke’s comments Tuesday were not intended to signal any change in interest-rate policy.

In his speech in London, Mr. Paulson emphasized that the financial markets have yet to adapt to the changing climate. “Working through the current turmoil will take additional time, as markets and financial institutions continue to reassess risk, and re-price securities across a number of asset classes and sectors,” Mr. Paulson said.

The Federal Housing Administration’s expanded program to help more troubled homeowners refinance, called F.H.A. Secure, was announced in April at a time when fewer than 2,000 homeowners at risk of foreclosure had been helped by it. Housing Secretary Steven C. Preston said the expanded program would help an additional 100,000 borrowers in crisis by the end of the year. So far, more than 260,000 homeowners have refinanced through the program, the vast majority of them people who have paid their bills on time. Mr. Preston predicted that 500,000 families would be helped by year’s end.

Mr. Preston warned, however, that F.H.A.’s efforts could be derailed if Congress passed housing legislation that failed to safeguard the agency’s financial stability. He said he was concerned about efforts to eliminate the agency’s plans to use risk-based pricing, which would allow F.H.A. for the first time to charge higher mortgage insurance premiums to borrowers viewed as presenting a higher credit risk.

He said he was also concerned about efforts by some lawmakers to maintain an agency program in which the seller finances the down payment on a mortgage. The program has suffered high delinquency and foreclosure rates in recent years, and the F.H.A. hopes to eliminate it.

If the Senate, as expected, adopts housing legislation by next week, differences need to be ironed out in the House, which approved a similar measure in May. Though the White House has expressed some willingness to negotiate, the administration has not rescinded a veto threat.

Senator Harry Reid of Nevada, the Democratic majority leader, urged Republican lawmakers to speed up the bill, which has been slowed by a procedural fight despite broad support among lawmakers in both parties. “Since the last stall on the housing bill, 85,000 more Americans have received foreclosure notices — 8,500 a day,” Mr. Reid said. “Tomorrow it will be over 90,000. Every day they squander the Senate’s precious time, the American people lose.”

Rachel L. Swarns and David M. Herszenhorn contributed reporting.

    Fed Sees Turmoil Persisting Deep Into Next Year, NYT, 9.7.2008, http://www.nytimes.com/2008/07/09/business/09housing.html

Fannie and Freddie Shares Plunge

July 8, 2008
By REUTERS
The New York Times

Shares of Fannie Mae and Freddie Mac, the largest providers of funding for United States home mortgages, plunged Monday on concern the companies need to raise more capital amid larger-than-expected losses.

The corporate “federal agency” debt obligations and mortgage-backed securities guaranteed by the companies also plummeted relative to government debt as investors thinned positions, analysts said.

Freddie Mac stock tumbled more than 21 percent in early afternoon trading to $11.42, while Fannie Mae shares dropped 20 percent to $15.01.

Concern that Freddie Mac could see greater losses from mortgage insurance was fueled on Monday after the research firm CreditSights said the mortgage insurer Radian could face more downgrades, forcing it to wind down its existing business. That increases risks for Freddie Mac, which had $63 billion of loans or pools of loans backed by Radian as of March 31.

The exposure to the mortgage insurer weakens the position of the government-sponsored enterprises that have been called on by Congress to do more to stabilize the housing market that analysts don’t expect will worsen into 2009.

“Fannie Mae and Freddie Mac are ground zero for mortgages,” said Steve Persky, chief executive at Dalton Investments in Los Angeles. “They’re the largest leveraged owners of mortgages out there, and that’s not a good position to be in right now.”

Greater-than-expected losses and share declines at Freddie Mac would make it more difficult for the McLean, Va.-based company to raise capital it needs to continue its business of buying and guaranteeing a huge chunk of American mortgages, said James McGlynn, a portfolio manager at Summit Investment Partners in Southlake, Tex.

A pending accounting change could also force Freddie Mac and Fannie Mae to boost capital by an additional $29 billion and $46 billion, respectively, according to Lehman Brothers.

A Freddie Mac spokeswoman on Monday said the company does not intend to raise capital until it announces second-quarter earnings, and declined to comment on the ability to raise capital as shares fall. The timing disappointed analysts since the company announced in May it would raise $5.5 billion.

    Fannie and Freddie Shares Plunge, NYT, 8.7.2008, http://www.nytimes.com/2008/07/08/business/08fannie.html?hp

At $100 for Tank of Gas, Some Choke on ‘Fill It’

July 6, 2008
The New York Times
By CHRISTOPHER MAAG

With gasoline prices high and rising, a new financial milestone has arrived: the $100 tank of gas.

Bryan Carisone, a heating and air-conditioning contractor in Raritan, N.J., “absolutely loves” his new GMC Denali XL, an extra-large sport utility vehicle with televisions built into the leather seats. But in June, one week after he bought it, he pulled into a station on a near-empty tank and watched the total climb higher and higher — to $109.

“It just about killed me,” Mr. Carisone said.

For decades, the $100 barrel stood as a hypothetical outlier in doom-and-gloom conversations about future oil prices. And nobody could even imagine an American family paying $100 to fill the tank.

But the future is here. Oil passed $100 a barrel in January and now seems headed toward $150 a barrel. Gasoline prices surpassed $4 a gallon on June 8, stalled for a while, and have been rising again in recent days, setting a record Saturday.

By late spring, owners of pickups and sport utility vehicles with 30-gallon tanks, like the Cadillac Escalade ESV and Chevrolet Suburban, started paying $100 or more to fill a near-empty tank. As gas prices continue to rise — the national average stood at about $4.10 a gallon Saturday — membership in the triple-digit club is growing. Now, even not-so-gargantuan Toyota Land Cruisers and GMC Yukons can cost $100 to fill up.

Data on exactly how often people pay $100 for a tank of gas are scarce, given price variations from market to market and day to day. But during the first five months of 2008, about 11 percent of American drivers said they bought 24 gallons or more at their last fill-up, according to a survey of 81,000 drivers by the NPD Group, a market research firm — which at today’s prices would place many of them at or around $100.

For people who love their big vehicles, the pain is acute.

Members of the Chevy Avalanche Fan Club of North America prize the Avalanche, a large sport utility vehicle, for its versatility, including a rear cab wall that slides forward for a larger pickup bed or backward for more passenger room.

But the Avalanche also has a 31-gallon tank, which would cost $127 to fill at Saturday’s national average price. Even the truck’s most dedicated fans find that galling. David H. Obelcz, who founded the club in 2002 and is still a member of the board, sold his Avalanche because he could not afford gasoline for it.

Thirty members of the fan club’s Arizona chapter used to attend off-roading and other events three times a month. But now that Avalanche owners pay more than $100 per tank, the club is lucky to attract 10 members once every two months, said Eric Tolliver, a chapter leader.

“Everybody’s trying to save money on gas, so now we mostly chat online instead of driving,” Mr. Tolliver said.

Eric Laugen, a firefighter in Seattle, is administrator of the Chevy Avalanche Fan Club of North America. For a trip to Prudhoe Bay in Alaska, he wanted to drive his truck because it has enough room for his fishing and camera gear, as well as space in the back to sleep. But he rode his motorcycle instead. That means pitching a tent every night, and no fishing.

“Motorcycle touring is a pain,” said Mr. Laugen, talking on his cellphone from a park in Alaska. “But then I looked at how much gas would cost in the Avalanche. It just doesn’t make sense anymore.”

Hummer clubs are hurting, too. In Nebraska, Ric Hines of the Omaha Hummer Owner Group — known as Omahog — stopped doing off-road trips this summer and started riding his recumbent bicycle instead.

“I get to camp either way, and biking pushes me to save a few hundred dollars on gas,” Mr. Hines said.

Mark R. Price, founder of the Illiana Hummer Club in the Chicago area, owns three Hummer H1s, which get about eight miles per gallon. “A lot of our members won’t travel 70 miles just to support a parade anymore,” Mr. Price said. “People wait for something a little closer.”

Families that were accustomed to the convenience of sport utility vehicles are having to cut back as well. Colleen Hammond of Chagrin Falls, Ohio, loves packing her three kids and all their soccer gear into her 2000 GMC Yukon XL. But she hates paying $160 to fill the 38.5-gallon tank. Last month, she parked the Yukon in her driveway and borrowed her friend’s Toyota Land Cruiser.

“I don’t know if it gets better gas mileage, but I like her car because it costs $100 to fill it,” said Ms. Hammond, 40. “I think $100 for a tank of gas is cheap now.”

Steve Burtch bought a Dodge Ram truck last year, when gas cost $3.75, because he thought gas prices had peaked and would start coming down. Instead, he pumped his first $100 tank in June. “I don’t know how much longer I’m going to be able to keep this up,” said Mr. Burtch, 43, who lives in Marion, Ohio.

It seems that plenty of other drivers are sharing his dismay. An automotive information Web site and market research firm, Edmunds.com, compiled sales data showing that in the last seven model years, Americans have bought 25.4 million vehicles with tanks 24 gallons or larger — the point at which three figures is now a real possibility. A few big trucks and sport utility vehicles have tanks exceeding 30 gallons.

But people who try to pump $100 worth of gas often find that they cannot, since most pumps that take credit cards shut off at $75 to prevent someone with insufficient funds or a stolen credit card from running off with gas. In addition, some older pumps still are not capable of registering triple-digit bills.

“It’s a huge inconvenience,” said Dr. Walter Bahr, a chiropractor in Cape Coral, Fla., who drives a Dodge Ram 2500 pickup and pays $130 per tank.

Many consumers whose tanks would easily swallow $100 worth of gas refuse to pump that much at once, just to avoid the trauma.

“Usually I don’t let it get real empty so that I don’t have to see that $100 on the pump,” said Bob Hammond, 61, of Chesterland, Ohio, who drives an Avalanche. “It’s a mental thing.”

Gary Chamberlain always pays cash for gasoline, so the pump kept right on spinning two weeks ago when he made his first triple-digit fill-up of his Ford conversion van.

“The bill was $104.98, which was a real shock,” said Mr. Chamberlain, 71, of Marion, Ohio. “I never thought I’d see the day.”

    At $100 for Tank of Gas, Some Choke on ‘Fill It’, NYT, 6.7.2008, http://www.nytimes.com/2008/07/06/business/06tank.html?hp

R.O.I.

By BRETT ARENDS

How to Declare Financial Independence

July 4, 2008
The Wall Street Journal

You've eaten the hot dogs. You've watched the fireworks.

Now it's time to declare another kind of independence -- your own. If you're like most Americans, you haven't been free in a long, long time.

Instead you're in chains. You're manacled to dozens of monthly bills you can't seem to escape.

Mortgage payments. Car payments. Credit-card payments. Cellphone, landline, cable TV. TiVo. You name it. Thousands of dollars.

Call them tribute. Or tithes.

Who's really free here?

Our Founding Fathers probably would have thrown their cable boxes into Boston Harbor. But then, they ranked liberty ahead of the pursuit of happiness.

Take a look at the chart. Maybe it should become our new national symbol.

It shows how much more we owe than our parents did.

In 1976, around the time of the bicentennial, the average family of four owed about $56,000. That's in today's dollars, after accounting for inflation, and includes mortgage, credit cards, car loans and the like.

The figure now? Oh, about $185,000.

Gosh, it's just amazing we have a credit crisis, isn't it?

Of course it must be somebody else's fault. Insert conspiracy theory here: [ ]

But instead of blaming other people for our problems, or looking to political candidates to solve them for us, maybe we could start by looking a little closer to home.

Do we really need the Super Duper Every Movie Ever Made cable package? All those meals out? The endless trips to the salon? The supersized caramel double iced latte with extra whipped cream every day on the way to work?

Really, how lazy we are. Could there be anything easier in the world to make at home than an iced coffee?

It isn't just the big bills that are shackling us. It's all the little ones. They add up. If we cut just one dollar a day from our budgets and saved the money instead, in thirty years we'd have…. about $26,000.

Yep. That's assuming we earned about 5% after inflation on our investments - a reasonable assumption, but not a heroic one.

Twenty six thousand bucks.That's in today's money. If you're not maxing contributions to your 401(k) plan, it's even more because of the tax savings. Try $34,300.

That won't buy complete freedom. But it can't hurt.

    How to Declare Financial Independence, WSJ, 4.7.2008, http://online.wsj.com/article/SB121510841350227077.html?mod=hpp_us_inside_today

World must brace for oil beyond $150

Fri Jul 4, 2008
11:31am EDT
Reuters
By Alastair Sharp - Analysis

LONDON (Reuters) - Oil's meteoric rise since the start of the year to nearly $150 has distressed consumers and policy makers the world over, but the stark reality is prices are likely to rise higher still.

For two decades, prices were relatively stable, but then they rose seven-fold from a trough below $20 in 2001. Since breaching the $100 mark on the first trading day of this year they have risen around 45 percent.

Given such momentum, politicians' efforts to bring the price down could well be a waste of energy.

"It rose so fast it's got a bubble feel, but bubbles can go on for very sustained periods, and underlying that is an extremely tight fundamental position," said Stephen Thornber, head of global energy research at Threadneedle Asset Management.

Global demand of some 86 million barrels per day is almost level with supply, and production growth is not keeping pace with soaring demand from emerging economies such as India and China.

Citing the strength of Asian demand, investment bank Morgan Stanley last month predicted oil would reach $150 a barrel by the Fourth of July holiday in the United States, usually one of the busiest U.S. travel days.

Their target proved just out of reach, with U.S. crude stopping short at a record of $145.85.

But the bulls have not gone away. Goldman Sachs, the biggest investment bank in the commodities sector, has tipped prices to hit $200 a barrel within two years.

Already prices are undoubtedly causing pain as protests at rising costs have broken out across the world.

Consumers, particularly in the world's biggest energy burner the United States, have begun to cut back on fuel use, but there is no ready substitute when it comes to transportation.

"You have to go to work, no matter what the price is," said Thornber. "Fundamental demand for transport and energy is difficult to turn off in the short term, but disposable income will be hit."

THREAT TO GROWTH

A sustained period of growth across the world was largely reliant on cheap energy and policy makers are fearful the unprecedented rally on the oil market will undo that.

"The longer it stays at this level or the higher it goes, the more pain it is going to cause in lots of different industries," said Colin Morton at Rensburg Fund Management.

Even oil companies say their gains have been muted.

"People think that at $140 we make fortunes," Repsol CEO Antonio Brufau told Reuters this week. "We pay fortunes in taxes, that's true, but the countries that benefit the most are the ones that own the reserves," he said.

For their part, the Gulf exporters -- which provide almost a quarter of the world's oil -- are suffering rampant inflation, as their dollar-pegged currencies import higher prices.

The dollar's weakness relative to other currencies has been partly responsible for the rise in oil and other dollar-denominated commodities as investors try to hedge against inflation and take shelter from battered stock markets.

For central bankers, oil is a vexed problem. It has exacerbated a slowdown in economic growth and stoked inflation.

The natural remedy for inflation should be higher interest rates, but the fear is that could add to the problem of slower growth.

"It (record oil) is constraining what policy makers can do, said Richard Batty, global strategist at Standard Life Investments.

While there are no easy policy answers, expensive oil and weaker economic performance could eventually dent fuel demand enough to lower prices.

"The oil price is not necessarily reflecting the fundamental backdrop at the moment and eventually it will have to as the fundamental backdrop continues to weaken," Batty said.

The more bullish analysts argue that even if developed countries change their habits, emerging economies will continue to drive up demand and oil prices, which are arguably still too cheap.

The Organization of the Petroleum Exporting Countries has conceded prices at current levels are expensive in relative terms, but the group's secretary general has also pointed out that per liter crude is cheaper than bottled mineral water.
 

(Additional reporting by Daniel Fineren; editing by Barbara Lewis)

    World must brace for oil beyond $150, R, 4.7.2008, http://www.reuters.com/article/newsOne/idUSL0425040720080704

Outlook Darker as Jobs Are Lost

July 4, 2008
The New York Times
By LOUIS UCHITELLE

The nation’s employers eliminated tens of thousands of jobs in June for the sixth consecutive month in a steady chipping away of the work force that seems likely to leave the economy very weak through Election Day.

Responding quickly to the government employment report, issued Thursday, the presidential candidates called for action, beyond the recent stimulus package, to reverse the deterioration. In past downturns, the Federal Reserve saved the day, or tried to, by cutting interest rates. This time, however, with the Fed having already cut rates drastically, appeals are increasingly going to the White House and Congress.

“The numbers are telling us that there is an ongoing deterioration in the labor market at a relatively rapid clip,” said Jan Hatzius, chief domestic economist at Goldman Sachs. “It is a sign that the fiscal stimulus, the tax rebates, are failing to lift the broader economy.”

Apart from the 62,000 jobs eliminated in June — and 438,000 since January — most workers lost ground to inflation last month, the Bureau of Labor Statistics reported. While the average weekly wage of most ordinary workers was up 2.8 percent in the 12 months through June, the Consumer Price Index was up more than 4 percent.

“Workers just don’t have the bargaining power to fend off this erosion,” said Jared Bernstein, senior economist at the Economic Policy Institute.

The erosion of purchasing power, in turn, helps to explain the dismally low consumer confidence numbers in recent weeks. The housing market continues to sag, with little hope of improvement soon.

Adding to the gloom, stock prices plunged this week, pushing a crucial market gauge officially into bear territory, or 20 percent off its peak. And the unemployment rate, which had jumped half a percentage point in May, stayed at 5.5 percent in June, dashing hopes that a horde of young people hunting for jobs would find them and unemployment would fall back.

Few teenagers and new college graduates found work, the bureau reported. What’s more, the percentage of unemployed adult workers, 25 and over, ticked up for the second straight month, and various forecasters said that by Election Day, the unemployment rate would probably be 6 percent or more — a level last seen in the early 1990s, in the aftermath of a recession.

During the last 50 years, each time the economy has lost jobs for six straight months, a recession was ultimately declared.

The last two recessions, in 1990-1 and in 2001, started in the very month that employment began to shrink. That might turn out to be the case this time, too, once all the data is finally revised. But with jobs disappearing, the economy managed to expand in the first quarter by a weak 1 percent and probably dodged a contraction in the second quarter as well, in the view of Nigel Gault, chief domestic economist at Global Insight, a forecasting and consulting firm.

“We have not really had a downturn quite like this one in which we lose jobs month after month but the economy somehow manages to grow,” Mr. Gault said.

He and Ian Shepherdson, chief domestic economist for High Frequency Economics, see a recession starting in the fall, just in time for the election. By then, the monthly job losses are likely to have accelerated.

As consumers lose buying power because of weakened wages and high gasoline prices, companies will respond, Mr. Shepherdson said, with bigger layoffs, like those announced this week by Starbucks and American Airlines.

“Right now, the economy is not shrinking because of the tax rebates,” he said, referring to the $107 billion in checks being mailed by the federal government to millions of Americans over three months.

As a supplement, Senator Barack Obama, the presumptive Democratic candidate, called on Congress and President Bush to enact “energy rebates” to offset the surge in fuel prices, create a fund to help families avoid foreclosure, extend unemployment insurance benefits beyond the present 26 weeks and channel money to states suffering the most in the current downturn.

Senator John McCain, the Republican candidate, asked Congress to help families facing foreclosure and to enact “a jobs-first economic plan,” as well as to lower health costs.

Responding to the jobs report, Dana Perino, the White House press spokeswoman, acknowledged that the nation was “in a period of slow growth,” which was having “an impact on employment.” So far, she said, 105 million rebate checks have gone out, totaling over $86 billion.

The job cuts were greatest in a category called professional and business services, which lost 51,000 jobs, most of them held by temporary workers. Construction, devastated by the collapse in home prices, was next on the list.

For the 12th straight month, employment in that sector shrank, this time by 43,000 workers. Manufacturing, in constant decline, lost 33,000 jobs in June. And there were job losses in a number of other areas, the Bureau of Labor Statistics reported.

Indeed, the only notable increases in the private sector were in health care, restaurant work and other food services, and in each of these areas the rise was at only half the pace of a year ago, the Bureau said.

Donald Davis, a 35-year-old truck driver in Birmingham, Ala., certainly feels the pain. He was laid off on Easter as a driver for a concrete company, and has regularly thumbed through postings at a job placement center ever since, without luck. “Everything is at a standstill,” Mr. Davis said. “Nobody wants to hire anybody right now.”

State and local governments, on the other hand, continued to hire, adding 29,000 jobs last month, and more than 100,000 over the last six months. But most of these governments were operating on budgets enacted for the fiscal year that ended last Monday. The new budgets are expected to contain sharp cost cuts and payroll reductions as the states and municipalities adjust to shrinking tax revenues because of the housing crisis and the weak economy.

“My guess,” said Mr. Hatzius of Goldman Sachs, “is that the job declines across the economy are greater than the monthly numbers we are now seeing, and that will be evident when revisions are published later this year.”

Michael M. Grynbaum contributed reporting.

    Outlook Darker as Jobs Are Lost, NYT, 4.7.2008, http://www.nytimes.com/2008/07/04/business/04jobs.html

Employers Cut Workers for a Sixth Month

July 4, 2008
The New York Times
By MICHAEL M. GRYNBAUM

About 62,000 jobs disappeared in June, the government reported Friday, the sixth consecutive month that payrolls have declined, as businesses rushed to lay off workers amid the worst economic climate in a generation.

And as job losses mount, even those still on payrolls have felt the pain: employers are cutting hours for their full-time employees and shrinking salaries, just as workers face record-high prices for gasoline and food.

The unemployment rate stayed steady in June at 5.5 percent, the highest level in four years. The elevated figure dispelled speculation among some economists that last month’s half-percentage point jump, the biggest monthly spike in 22 years, was a statistical anomaly.

Indeed, employers have been steadily shedding jobs for the last three months. Businesses cut 52,000 more workers in May and April than the government first thought, the Labor Department said, casting aside initial estimates that suggested some deceleration.

In the last 12 months, the economy had seen a net gain of only 15,000 jobs, the lowest net increase since November 2003.

In the last 50 years, the economy has entered a recession every time jobs have dropped for six consecutive months.

And most Americans who are still employed earned less money in June than they did a year ago. Wages, which have been steadily shrinking in recent months, took a sharp hit last month, growing at the slowest pace since September 2005.

Among rank-and-file workers, who make up the majority of the nation’s work force, weekly paychecks have grown 2.8 percent in the last 12 months. That was down from 3.2 percent in May and well below the rate of inflation.

Average hourly earnings grew 3.4 percent, the slowest pace since the start of 2006.

The drop in payrolls was in line with many economists’ forecasts, and stocks on Wall Street were trading higher on some relief that the June numbers were not worse.

The presumptive presidential candidates quickly weighed in on the numbers, with each calling for changes that fell along ideological lines.

“At a time when our small businesses need support from Washington, we cannot raise taxes, increase regulation and isolate ourselves from foreign markets,” Senator John McCain, the Republican candidate, said in a statement. He called for tax relief, job creation, and investment in innovation.

Senator Barack Obama, the Democratic candidate, attributed the downturn to “the failed economic policies of the past eight years” and said his opponent “has fully embraced the Bush economic agenda.”

“I’m calling on Congress and the president to enact real, immediate relief with energy rebates for working families this summer, a fund to help families avoid foreclosure, extended benefits for the long-term jobless, and assistance to states that have been hard-hit by the economic downturn,” Mr. Obama said.

June’s job losses affected a range of industries, including banks, construction companies, manufacturing firms and car dealerships. Janitors and administrative workers were the hardest hit, with about 70,000 workers losing their jobs last month alone. Temp agencies lost 30,000 jobs.

Among the few businesses still hiring were restaurants, government agencies and health care companies. Mining companies also added workers last month.

“The weak bargaining power of most workers means they are subject to pressures from three sides: declining jobs and hours, slower hourly wage growth, and faster price growth,” Jared Bernstein, of the Economic Policy Institute, wrote in a note. “This punishing combination is lowering their living standards.”

Jan Hatzius, chief domestic economist at Goldman Sachs, said the weak report suggests that the Bush administration’s efforts to revive the economy have fallen short.

“It is a sign that the fiscal stimulus, the tax rebates, are not having much of an impact on the broader economy,” Mr. Hatzius said.

And there is little relief on the horizon. The softening job market has prompted millions of families to reduce their spending, further hurting businesses and the economy as a whole. Soaring prices for food and gasoline are overwhelming modest wage gains for most workers, leaving households with even less money to spend.

“The labor market is clearly deteriorating, and it’s highly likely to keep deteriorating,” Andrew Tilton, an economist at Goldman Sachs, said earlier this week. “It’s clear that the housing downturn and credit crunch are still very much under way. Clearly, there are more jobs to be lost in housing, finance and construction — hundreds of thousands of more jobs to be lost collectively.”

The national unemployment rate climbed a full percentage point over the last year. That does not include people who are jobless and have given up looking for work, or people who have been bumped to part-time jobs from full time. Add in those people and the so-called underemployment rate rises to 9.9 percent. “The number of these underutilized workers is up over one million over the past year,” Mr. Bernstein wrote.

A separate report on Thursday revealed unexpected weakness in the services sector. An activity index devised by the Institute of Supply Management dropped to 48.2 in June from 51.7 in May, on a scale where readings under 50 show contraction. Businesses were pressured by significantly higher prices and a drop-off in customer demand. Employment levels fell as well.
 

Peter S. Goodman and Louis Uchitelle contributed reporting.

    Employers Cut Workers for a Sixth Month, NYT, 4.7.2008, http://www.nytimes.com/2008/07/04/business/04jobs.html?hp

John Branch

The San Antonio Express-News        Cagle        3.7.2008

Big Job Cuts Announced at American

July 3, 2008
The New York Times
By MICHELINE MAYNARD

American Airlines expects to cut nearly 7,000 employees by the end of the year, or about 8 percent of its worldwide work force, as it reduces flights and grounds aircraft because of high fuel costs, the airline told employees Wednesday.

American said in a regulatory filing that it expected to record a second-quarter charge of as much as $1.3 billion to account for the job reductions and to write down the value of the MD-80 and Embraer 135 regional jets that it is retiring as it eliminates flights.

The job cuts, which appear to be twice as big as those announced so far by any other carrier, could affect as many as 900 flight attendants.

In a message posted on its Web site, the Association of Professional Flight Attendants said Wednesday that it had received notice from American of its intent to lay off union members with the least seniority. The exact number will depend on how many older workers agree to take voluntary retirement packages, the airline told the union.

In an e-mail memorandum to employees, Jeffrey J. Brundage, American’s senior vice president for human resources, said the airline expected its job reductions to mirror the 8 percent cut in worldwide flights it plans by the end of the year.

American, the largest domestic carrier and a division of the AMR Corporation, announced in May that it would cut flights by 11 percent to 12 percent in the United States, and by about 8 percent over all.

“While we are still working through the specific impact to employee work groups, both voluntary and involuntary, employee reductions commensurate with the overall system capacity reductions are expected companywide as we reduce the size of the airline,” Mr. Brundage said in the memorandum.

“It’s crucial that we take the appropriate actions to operate a strong and competitive airline for both our employees and customers,” he added.

American has about 85,500 employees, so an 8 percent cut would equal about 6,840 jobs. American has previously said that it plans to cut its management and support staff jobs by about 8 percent.

“These are difficult but necessary changes given the unprecedented challenges we face with overcapacity in the industry, skyrocketing fuel prices, and a worsening U.S. economy,” said Tim Wagner, an American spokesman.

American hopes many of its job reductions can be achieved through voluntary steps, Mr. Wagner added. He said the airline did not have figures available for job cuts it plans in other areas.

The layoffs would be effective Aug. 31. American has about 18,000 flight attendants.

American is in the midst of contract negotiations with the flight attendants union and also is holding discussions with its pilots’ union.

Mr. Brundage said American had agreed on an early-retirement deal covering flight attendants and members of the Transport Workers Union, which represents mechanics and ground workers.

Airlines have been hit hard by a rise in the price of jet fuel, which is up more than 80 percent over 2007. They have raised fares, imposed surcharges and set new fees, like the $15 charge American began last month for many passengers to check a bag.

United Airlines said last month that it planned to eliminate 1,100 jobs, up from a previous estimate of 500 jobs. As part of the move, United said it planned to lay off 950 pilots, and is expected to announce further employee cuts.

Continental Airlines also announced plans to cut 3,000 jobs, although it has not been specific about which jobs will be eliminated.

Including the cuts disclosed Wednesday by American, airlines have said they plan to cut about 30,000 jobs this year.

If job cuts continue at that pace, 2008 will be the second-worst year this decade for job reductions in the airline industry, according to Challenger, Gray & Christmas, a firm that tracks employment data. Airlines laid off more than 100,000 workers in 2001 after the 9/11 attacks in New York and Washington.

Meanwhile, AirTran Airways told employees that it wanted to cut their pay by an average of 10 percent, in an effort to fight higher fuel costs.

Robert Fornaro, the chief executive at AirTran, said in an e-mail message to employees Wednesday that the airline hoped the cut would be temporary and last for six months. But “we may need to do more in the future,” Mr. Fornaro said.

The pay cut, which would range from 5 percent for some workers to 15 percent for executives, would affect all levels of employees. Mr. Fornaro said AirTran wants the cuts to begin Aug. 1, and was continuing to hold discussions with its unions.

    Big Job Cuts Announced at American, NYT, 3.7.2008, http://www.nytimes.com/2008/07/03/business/03air.html

The Struggles of Detroit Ensnare Its Workers

July 3, 2008
The New York Times
By BILL VLASIC and NICK BUNKLEY

DETROIT — Their pickups and sport utility vehicles are not selling, and now General Motors, Ford Motor and Chrysler have to pay thousands of auto workers not to make them.

With more than 15 of their assembly plants across the country set to be idled or slowed because of shift cutbacks, the Detroit automakers will temporarily lay off upward of 25,000 auto workers this summer and fall.

Because of their union contracts, G.M., Ford and Chrysler are obligated to pay workers more than half of their regular take-home wages, plus health benefits, with state unemployment benefits picking up a portion of the rest.

Despite cutting more than 100,000 jobs since 2006 through buyouts and special retirement programs, the Detroit companies still cannot match their production capacity with their steadily declining market share.

Consumers are shifting to more fuel-efficient vehicles, if they are stepping into a showroom at all. New vehicle sales plummeted 18 percent in June, and Detroit’s share of the declining market fell to a combined 46 percent.

Moreover, all three companies are losing money in North America and burning through cash reserves. On Wednesday, G.M.’s stock fell 15 percent after a Merrill Lynch analyst issued a report saying that “bankruptcy is not impossible” if the overall market continues to deteriorate.

Unlike many factories operated by Japanese manufacturers in the United States, Detroit’s plants are not flexible enough to switch their production to better-selling models.

So while some G.M. and Ford factories are scrambling to build more cars, even paying workers overtime to meet demand, other assembly lines are shutting down.

“It’s an unprecedented situation,” said Harley Shaiken, a labor professor at the University of California, Berkeley. “Despite enormous reductions in total employment, the market is forcing massive temporary layoffs.”

Detroit’s Big Three, it appears, can’t escape their past.

Since the 1980s, the companies — by dint of their contracts with the United Automobile Workers union — have parked idled workers in so-called “jobs banks” where they received full pay while doing community service or simply clocking in.

New contracts with the U.A.W. signed last year were supposed to pave the way for elimination of the jobs banks and make the companies more competitive on health care and wages for new hires.

In addition, the historic buyout and early-retirement programs were meant to better align, at enormous expense, the automakers’ workforce with demand for its vehicles. Even before this year, the companies had announced plans to close several plants.

But the restructuring plans did not account for the huge drop in sales and the shift by consumers to smaller vehicles that have resulted from soaring gas prices and the weak economy.

“You have the demand for large vehicles dropping, combined with growing demand but limited supply of smaller vehicles,” said Jesse Toprak, executive director of industry analysis for Edmunds.com, an automotive-research Web site. “What you end up with is miserable sales numbers.”

Rather than flood the market with unwanted trucks and S.U.V.’s, the Detroit automakers have announced broad, temporary layoffs on a scale unseen since the early 1990s.

“Instead of building vehicles and selling them at deep discounts, the companies are shutting the plants,” said Ron Harbour, managing partner of the consulting firm Oliver Wyman, which issues a widely followed annual report on auto manufacturing trends. “It’s painful, but it’s smarter than the alternative.”

G.M. plans to send about 11,000 United States workers home on layoffs the rest of the year, some for weeks and others for months. It also has about 1,000 workers still on the rolls of jobs banks from plants long since closed.

Ford is idling about 5,000 of its hourly employees, in addition to the estimated 500 workers it has in the jobs bank. Chrysler, which has 300 people in the jobs bank, will lay off about 9,500 workers.

There are also layoffs scheduled at plants in Canada and Mexico.

Virtually all of the laid-off workers are at plants building slow-selling pickups like the Ford F-Series or big S.U.V.’s such as G.M.’s Chevrolet Suburban and Chrysler’s Dodge Durango.

Some of those workers will, over time, be moved to car plants that are adding shifts or otherwise increasing production.

But the vast majority of the laid-off workers in the United States will stay at home and collect 95 percent of their average after-tax, take-home pay — about $816 a week, according to U.A.W. documents posted on the union’s Website.

Of that $816, the automaker pays about 55 percent and state unemployment covers the remainder. In G.M.’s case, the cost of supporting 11,000 laid-off workers averages about $1 million a day.

“It is a very expensive issue, but it’s not the critical one for Detroit,” said Mr. Shaiken. “The reason these plants are going down is that some catastrophic decisions were made in the past to continue building so many trucks.”

The companies are trying to mitigate the impact of the production changes. Ford, for example, will cut a shift at its Missouri truck plant and almost immediately move the workers to a nearby factory making small S.U.V.’s.

At a Kentucky plant that makes Explorer sport utility vehicles, Ford will slash production from two shifts to one. But rather than lay off workers, the shifts will start to alternate work weeks.

Still, the Detroit automakers are hamstrung by the inability of their factories to shift production from slow-selling vehicles to hotter models. Rivals such as Honda can quickly move from making an S.U.V. such as the Element in its Ohio plant to Civic sedans.

“The key is they are able to change the mix of products to what is selling right now,” said Mr. Harbour.

While plants operated by G.M., Ford and Chrysler have markedly improved their productivity and lowered their worker rolls in recent years, they generally are confined to making variations on a single truck or car platform.

The stunning drop in truck sales has forced the Detroit companies to make some hard decisions. Chrysler this week said it will close a minivan plant in Fenton, Mo., near St. Louis, and cut a shift at a neighboring factory that makes Ram pickups.

The double blow stunned workers. About 1,500 workers at the minivan plant will go on indefinite layoff in October, while 900 workers at the Ram factory will be idled in September.

“It’s very scary,” said Joe Wilson, a 40-year-old worker at the minivan plant. “We’d been led to believe we’d have a future. Now they pull the rug out from under us.”

Mr. Wilson said that getting a paycheck for not working is hardly a relief when his job is disappearing. He was already cutting back on expenses, and had bought an old Ford Escort to save money on gas for his commute.

“It takes three weeks to get that first check and by then we owe everybody and their uncle,” he said.

A worker at the Ram pickup plant, Dave Jacobs, said the plant’s long-term prospects have been clouded by the reduction to one shift.

“They can’t afford to run this place with one shift,” he said. “One shift pays the bills and the others are for profits.”

Laid-off workers can receive their unemployment pay for up to 48 weeks. At that time, workers can shift into the jobs bank for another two years.

But one Chrysler worker, Andy Marlow, said the cutbacks are coming so fast that employees fear the worst.

“You can sit and try to ride it out and hope the plant comes back up,” said Mr. Marlow. “But then if that pay runs out, you’re unemployed.”


Bill Vlasic reported from Detroit, and Nick Bunkley from Fenton, Mo.

    The Struggles of Detroit Ensnare Its Workers, NYT, 3.7.2008, http://www.nytimes.com/2008/07/03/business/03auto.html?hp

June Sales Fell Almost 28% at Ford

July 2, 2008
The New York Times
By NICK BUNKLEY

The Ford Motor Company said on Tuesday that its sales fell 28 percent in June, the worst month yet in a miserable year for the automobile industry.

Through the first half of 2008, Ford’s sales were off 14 percent.

Sales of pickup and sport utility vehicles, have been hit particularly hard as consumers seek out more fuel-efficient alternatives. Ford said light truck sales were down 36 percent in June and 18 percent so far this year.

“Consumer fundamentals and consumer confidence deteriorated as the first half unfolded,” James D. Farley, Ford’s marketing chief, said in a statement. “The economy enters the second half of the year with a notable absence of momentum and a high degree of uncertainty.”

Shares of Ford were down more than 7 percent in trading. General Motors shares were off nearly 6 percent. G.M. and the other automakers are scheduled to report their June sales Tuesday afternoon.

Record-high gasoline prices, a housing slump and weak consumer confidence have led to a dramatic decline in sales of many vehicles, particularly the largest and most profitable ones for domestic automakers. The Ford F-series pickup truck, which has been the best-selling vehicle in the United States for 26 years, was outsold by four fuel-efficient Japanese sedans in May.

Ford recently said it would delay introducing its new F-150 pickup by two months so that dealers could have more time to sell off the current version first.

The automakers increased discounts on many slower-selling models last month in the hopes of closing out the second quarter with some momentum. General Motors offered six-year, no-interest loans during the final week of June on most trucks and some cars, and some automakers have been discounting large sport utility vehicle prices by more than $9,000.

Pickups and S.U.V.’s were discounted more than 13 percent on average in June, according to Edmunds.com. Yet dealers say the deals have not done as much to draw in customers as huge sales did several years ago.

“Compared to a year ago, we’re off 65 to 70 percent,” said Preston Mays, sales manager for Superior Chevrolet in Decatur, Ga. Mr. Mays said no-interest loans have become less effective than cash rebates because so many shoppers owe more on their current vehicle than it is worth, and the sour economy means they need a discount more than free financing.

“People need these prices to go down,” he said. “They’re trying to put gas in the vehicle and feed their families.”

Most dealers say the slowdown has made their jobs considerably more challenging but that they already are starting to see a few more customers as gas prices have appeared somewhat more stable at around $4 a gallon.

“June actually picked up a little bit for us,” said Jerrel Richards, sales manager at Lone Star Ford in Houston. “It’s not as bad as people think. We’re still surviving. We’re still selling trucks. We’re still turning a profit.”

The three Detroit automakers have each said recently that they would significantly cut production of trucks and build more passenger cars in response to the shift in consumers’ preferences. Chrysler on Monday announced plans to close a minivan plant near St. Louis and cut a one of two shifts at an adjacent pickup plant.

G.M. is temporarily halting the assembly lines at seven truck factories in North America before closing four plants permanently within the next three years. Ford says it will build

    June Sales Fell Almost 28% at Ford, NYT, 2.7.2008, http://www.nytimes.com/2008/07/02/business/02auto.html?hp

Editorial

As Foreclosures Escalate

July 1, 2008
The New York Times

By the time the Senate returns next Monday from its July 4 recess, some 55,000 more homes will have entered foreclosure. And that’s hardly the full picture of the growing calamity. More than three million homeowners are currently at risk of default and millions more are expected to join them in the coming year as home prices drop, the economy falters and delinquencies rise. Yet the Senate went ahead with its vacation last Friday without passing a foreclosure prevention measure.

The bill was expected to pass, but the vote was derailed by petty politics. Senator John Ensign, Republican of Nevada, for example, demanded that the Senate add a multibillion dollar package of tax breaks for renewable energy. Democrats balked — not out of opposition to the tax breaks, which rightly enjoy bipartisan support, but because Mr. Ensign wanted to tack them on to the foreclosure bill without paying for them. That would threaten passage of the bill in the House, which is more committed than the Senate to pay-as-you-go governing.

This sort of delay achieves political ends, like denying Democrats the chance to campaign on the accomplishment during the recess, but it’s exceedingly poor policy. Foreclosures are feeding the nation’s severe economic problems. Turmoil in the financial markets is rooted in the collapse of the housing bubble and will not abate until house prices stabilize and sales pick up. Even Americans fortunate enough to have a down payment and a willing lender are hesitating, understandably fearful of further price drops. Rising foreclosures add daily to the glut of unsold homes, pushing prices down and foreclosures up in a vicious cycle.

That same financial turmoil, coupled with huge losses in home equity, has deprived many Americans of the means or the confidence to buy a new house or other big-ticket items, like cars. In a recent Gallup poll, a majority of Americans said they were now worse off financially than they were a year ago. That’s the first time in the 32-year history of the question that more than half the population has reported losing ground.

Unfortunately, the pessimism is justified. The Bush-era expansion was based largely on a boom in bad lending and house-price inflation — not on robust employment, wage increases or sustainable gains in household wealth. As a result, many Americans have spent the last several years taking on debt, rather than building their earning power or adding to savings. They are ill prepared to cope with a weakening economy and rising gas prices, and they know it.

This spring’s tax refunds and stimulus checks have been a boost, but it won’t last. Soon, defaults on credit cards and auto loans are likely to pick up, and lenders will respond by keeping credit tight.

The foreclosure prevention bill is not a cure-all, by any means, but is a way to try to break the cycle. It would allow many troubled borrowers to exchange their unaffordable loans for new mortgages guaranteed by the federal government — as long as the lender agreed to reduce the existing loan balance to 85 percent of the home’s current value. It is questionable whether lenders would be willing to take the loss, and there’s nothing in the law to prod them to do so.

Still, the bill’s passage, which should be the Senate’s priority next week, would be an overdue acknowledgment that the foreclosure mess requires government intervention. Lawmakers could build on the effort as needed, but it is unconscionable not to take the first step.

    As Foreclosures Escalate, NYT, 1.7.2008, http://www.nytimes.com/2008/07/01/opinion/01tue1.html

Budget Pain Hits States, With Relief Not in Sight

July 1, 2008
The New York Times
By JENNIFER STEINHAUER

Squeezed by high inflation, dwindling tax revenues and a national economic downturn, states from coast to coast have struggled to close yawning budget gaps while bracing for another difficult fiscal year, which in most states begins Tuesday.

State tax revenues, adjusted for inflation and tax cuts, fell 5.3 percent in the first quarter of 2008 compared with the same time a year ago, according to a report to be released Tuesday; it was the third quarter in a row that total adjusted revenue declined. The first quarter revenues were the weakest among states since early 2003.

Sales tax revenues, the beating heart of many budgets, were essentially flat for the first time in six years. Corporate income taxes declined 5.1 percent from January to March compared with the same period the previous year — the third straight quarterly decline. And 12 states showed a falling off in personal income taxes, though revenue from those taxes rose 4.4 percent nationwide.

Continued weakness in the national economy dims prospects for states in the near future, according to the authors of the report, by the Nelson A Rockefeller Institute of Government in Albany, which tracks state revenues.

“There are signs that the economic weakness is very widespread,” said Don Boyd, a senior fellow at the institute’s fiscal studies program. “Between this past May and three months prior, a lot more states were declining, and we have not caught up with them in the data yet.

“Many more states,” Mr. Boyd continued, “are having outright declines in their economies, and that is presumably a harbinger of budget problems.”

Many state legislatures have been embroiled in pitched budget battles, with education, social services and fees in the crosshairs.

The states with the biggest budget troubles are those where the nation’s mortgage crisis has hit the hardest.

Among them is California, which faces a $17 billion shortfall. Gov. Arnold Schwarzenegger wants to borrow against future proceeds from the state’s lottery program to shore up finances. Mr. Schwarzenegger is battling both fellow Republicans, who would like to see more spending cuts, and Democrats, who are seeking to protect education and social services.

In Nevada, where the Legislature is not officially in session, Gov. Jim Gibbons, a Republican, called last week for state agencies to cut their budgets by 4 percent on top of $914 million in previous cuts in the current two-year budget cycle — all toward closing a $275 million deficit. Layoffs are also expected.

“Revenues continue to decline,” Mr. Gibbons said in a televised address, adding that for “the first time in at least the past 30 years, the state will take in less revenue this year than it did last year.”

The Arizona Legislature struggled to end its session as lawmakers wrangled over how to pay for capital improvement projects with a $2.2 billion budget gap that was enormous in proportion to the state’s $9.9 billion spending plan.

States in the Southeast also felt a tremendous pinch. Sales tax revenues declined on average 3.8 percent in the region, which had 9 of the 23 states that posted such declines, according to the Rockefeller report.

For example, Kentucky has endured one of the largest budget problems in its history, and faces a $900 million budget gap over its next two fiscal years. While the Medicaid, K-to-12 education and corrections programs enjoyed modest increases, the majority of other agencies were forced to cut by 12 percent, said Mary Lassiter, the state’s budget director.

Ms. Lassiter said the state was unable to keep up with expenditures that began during the good times a few years back and, as the Rockefeller report cited for other states, inflation, particularly in gasoline prices, further hampered the budget.

“The same dollar is not buying as much, especially in the fuel area,” she said. “Many of our agencies have large transportation costs.”

Tennessee dealt with its woes by offering a voluntary buyout package that it hopes will yield 2,000 fewer state jobs. April was the worst month on record for revenue growth in the state.

Unlike other economic downturns, when states were hurt by faltering corporate and personal income tax revenue, problems this time appear to be led by declines in sales taxes, prompted in large part by the issues with the housing market.

This has been particularly painful for states like Florida and Tennessee that have no personal income tax and rely on people buying things.

“We saw a problem with the sales taxes, and it just got worse,” said Lola Potter, a spokeswoman for the Tennessee Department of Finance and Administration. “Most people would agree that consumer confidence was down a bit. If they’re not buying, we’re not collecting the sales tax.”

Other states, like California, have looked to their lotteries for revenue growth or borrowing; some, including New York, raised the tax on cigarettes. Many continued to be constrained by high Medicaid costs, even as they sought to increase access to health insurance.

Acrimony between the governor and the legislature has marked the budget processes in some states. In other places, though, elected officials have hunkered down to undertake the grim task of cutting.

“This was one of the smoothest sessions I have ever been part of,” said Ken Pruitt, the president of the Florida Senate, where $6 billion in cuts were needed to compensate for the hammered housing market. “And a lot of that had to do with the cold hard reality of a tanking economy.”

    Budget Pain Hits States, With Relief Not in Sight, NYT, 1.7.2008, http://www.nytimes.com/2008/07/01/us/01taxes.html

Saudi king says oil cheap, output hike will not help

Tue Jul 1, 2008
10:23am EDT
Reuters

KUWAIT (Reuters) - Current oil prices are cheap when compared to other sources of energy and would not ease even if production was raised because speculation and taxes are behind the soaring market, Saudi Arabia's King said in press remarks.

"Looking at experts reports I say the current price for oil is considered cheap if compared with the prices of other alternative sources of energy that are also witnessing an increasing rise because of the increasing demand or cost of their production," al-Seyassah quoted King Abdullah as saying on Tuesday.

"People who think that oil prices will go down once production is raised are wrong because there are indications the prices will remain high," the ruler of the world's largest oil exporter was quoted as saying by sister paper the Arab Times.

"Consuming countries should adapt with the prices and tools of the market and to solve their issues with a fair logic," he told al-Seyassah.

The Saudi king added that speculators and duties on fuel in some countries were among reasons for the high prices.

"Starting from the establishment of OPEC, we have always been keen on keeping the price of oil at a normal level to reduce the burden on both the producers and consumers...We have nothing to do with the rising prices of oil in the world," he said.

Oil rose more than $3 on Tuesday after the International Energy Agency revived concerns about long-term supply shortages and tension between Israel and Iran raised fears about possible outages in the much nearer term.

U.S. crude rose $3.05 to $143.05 a barrel by 1336 GMT. London Brent crude rose $3.33 to $141.16.

On Monday, U.S. crude hit an all-time high of $143.67 a barrel in intra-day trade, but later eased, with traders citing evidence high prices were eroding demand, especially in the United States.

In Madrid, where he is attending the World Energy Congress, Oil Minister Ali al-Naimi said on Tuesday Saudi Arabia would not sell its crude at below market rates to try to rein in oil's record rally, but was willing to supply every barrel its customers needed.

Riyadh has already promised to pump 9.7 million barrels per day (bpd) in July, marking an increase in output of 550,000 bpd since May.

The kingdom summoned the world's energy powers to an unprecedented meeting in Jeddah in June in response to record price moves.

(Reporting by Ulf Laessing and Rania El Gamal;

Editing by Summer Said)

    Saudi king says oil cheap, output hike will not help, R, 1.7.2008, http://www.reuters.com/article/GCA-Oil/idUSL0156289120080701