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News of the Competition (03/31/2009)

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MADISON, Wis. (4/1/09)
* Responding to pressure from New York State, JPMorgan Chase agreed to stop charging a new $10 monthly fee to credit cardholders, New York Attorney General Andrew Cuomo announced Monday. He said the firm also agreed to refund the proceeds collected since the fee was introduced in January. Cuomo said more than 184,000 cardholders will receive $4.4 million in refunds. Chase Bank pegged the reimbursement at $3.3 million, and said it decided to end the fees because of consumer feedback. Cuomo said Chase offered consumers balance transfers at a promotional interest rate for a one-time transaction fee. Then in November, the bank informed customers it would begin charging a $10 monthly fee (Reuters via The New York Times March 31) … * California’s financing authority has agreed to a settlement with two Wachovia Corp. units and one Citigroup unit to buy back $4.7 billion of auction-rate securities (ARS) from investors to settle allegations that the brokerages misrepresented the safety of the securities. An investigation by California’s Department of Corporations concluded that Wachovia Securities, Wachovia Capital Markets, and Citigroup Markets misrepresented ARS as safe, cash-equivalent products. Instead, the securities faced liquidity risks, and the auction for ARS failed last year (The Wall Street Journal Online March 31) … * In one of the largest fines against a Wall Street firm, Merrill Lynch has been ordered to pay $39.8 million in a case related to the collapse of financial firm Refco Inc. Merrill is now part of Bank of America. The Financial Industry Regulatory Authority awarded $30.6 million in compensatory damages and $9.2 million in interest to the trustees of the Masonic Hall and Asylum Fund, an endowment for a health-care facility in Utica, N.Y. The fund filed a claim against Merrill Lynch, alleging that a subsidiary broker-dealer advised it to buy a limited partnership interest in Sphinx Managed Futures Index Fund, a fund in a business unit of Refco, which collapsed after announcing that its chief executive hid $430 million in bad debts from auditors. Merrill Lynch was granted the right to pursue damages against the Refco unit in bankruptcy proceedings (The Wall Street Journal Online March 31) ... * Home-mortgage bonds without government backing rebounded from record or near-record lows after the government announced plans to finance the purchase of the securities. Average prices for super-senior securities backed by prime-jumbo mortgages increased 4 cents per dollar to 67 cents last week, according to Barclays Capital. Similar bonds of option adjustable-rate mortgages rose 2 cents to 35 cents. “Since the much-awaited announcement about the Public-Private Investment Program to tackle legacy real estate assets hit the newswires on Monday, there has been a significant rally in senior bonds,” wrote the Barclays analysts (Bloomberg.com March 30) …

Market News (03/31/2009)

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MADISON, Wis. (4/1/09)
* Home prices plunged at a record pace in January amid an inventory glut, tight lending standards and record foreclosures. The Standard & Poor’s/Case-Shiller index of home prices is 20 major cities tumbled 19% from a year earlier, the biggest decline since the index was launched in 2000. The 10-city index fell 19.4%, also a record in that index, which dates back to 1988. Since the peak hit in the second quarter of 2006, the 20-City Composite is down 29.1%, and the 10-City Composite is down 30.2%. Prices have dropped back to levels last seen in late 2003. The three cities with the steepest declines continued to be in the Sun Belt. Phoenix saw a 35% drop, followed by Las Vegas (down 32.5%); and San Francisco (down 32.4%). Dallas (-4.9%); Denver (-5.1%); and Cleveland (-5.2%) saw the smallest declines. Analysts say home prices have further to fall (Associated Press and Reuters via Yahoo! News March 31) … * Consumer confidence steadied near a record low in March as consumers continued to worry about mounting job losses and declining earnings. The Conference Board’s Consumer Confidence Index edged up to 26, from a revised 25.3 in February, which was the lowest level since the index was launched in 1967. “Apprehension about the outlook for the economy, the labor market, and earnings continues to weight heavily on consumers’ attitudes,” said Lynn Franco, director of the Board’s Consumer Research Center. The percentage of respondents saying jobs are “hard to get” rose to 48.7% from 46.9%. Those saying jobs are “plentiful” was unchanged at 4.6%. A record-low 7.5% said they expect an increase in their incomes, down from 7.9%. Consumer buying plans were down across the board. Just 3.9% of respondents said they planned to purchase a vehicle within the next six months, down from 4.7%. Only 2% planned to buy a home, down from 2.3%, while 24% planned to buy a major appliance, down from 25% (Associated Press via Yahoo! News, Bloomberg.com, and Moody’s Economy.com March 31) … * The government’s financial rescue is approaching $12.8 trillion--a sum that is almost the value of everything the U.S. produced last year, according to Bloomberg.com (March 31). The nation’s gross domestic product (GDP) totaled $14.2 trillion in 2008. The money equals $42,105 for every adult and child in the nation. It’s 14 times the $899.8 billion of currency in circulation. The government’s commitment has surged by 73% since November, when Bloomberg first estimated the total in funding, loans and guarantees at $7.4 trillion. “The comparison to GDP serves the useful purpose of underscoring how extraordinary the efforts have been to stabilize the credit markets,” said Comerica Bank Chief Economist Dana Johnson … * General Motors’ new CEO said more plants will shut down as part of the firm’s efforts to meet the federal government’s tough requirements for financial aid. The company already announced plans to shut down five plants. CEO Fritz Henderson said he expects the firm will “need to take further measures” in terms of plant shutdowns. He said GM probably will offer another employee buyout plan as well. Henderson became the automaker’s new CEO after the administration asked former Chief Executive Rick Wagoner to resign. Also on Tuesday, GM introduced a new program that would make new-vehicle payments for customers who lose their jobs. Customers must be eligible for state unemployment to quality for the program. Ford Motor announced a similar plan Tuesday. Ford also is offering zero-percent financing on certain Ford, Lincoln, and Mercury models. On Monday, President Barack Obama said the federal government will back new vehicle warranties issued by GM and Chrysler, which have received federal bailout money (Associated Press via Yahoo! News March 31) … * Almost 70% of the Pentagon’s 96 biggest weapons programs went over budget in 2008--at a combined cost of $296 billion, according to a Government Accountability Office (G.A.O.) report. The programs also were behind schedule by an average 22 months, up from 21 months the previous year, and 18 months in 2003. Despite modest improvements, the Pentagon’s management of defense contracts remains poor, and cost overruns are “still staggering,” said Gene L. Dodaro, acting comptroller general for the G.A. O. The administration has pledged to overhaul the programs. The “days of giving defense contractors blank checks are over,” said President Barack Obama (The New York Times March 31) …

News of the Competition (03/30/2009)

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MADISON, Wis. (3/31/09)
* Banks agree that compensation for top executives contributed to the financial crisis, and they’re trying to realign compensation based on performance and the long-term interests of shareholders, according to a report by the Institute of International Finance. The IIF said banks realize that huge compensation packages have damaged their reputations. In the survey, 98% of banks said they “believe the compensation structures were a factor underlying the crisis.” However, bankers are concerned that they don’t have dependable measures to assess risks. They’re also concerned that in complex business matters, the only employees with a sufficient understanding of risks are those directly involved (Reuters via Yahoo! News and The Wall Street Journal Online March 30) … * Bank of America is considering changes in how some employees are compensated, stressing salaries over bonuses to reward people in its investment-banking unit. The bank plans to boost some investment bankers’ salaries by as much as 70%, say people familiar with the matter. Annual base pay for some managing directors would be increased to about $300,000. Salaries for less-senior directors would rise to about $250,000. Vice presidents’ pay would increase to $200,000. The increases are partly intended to align the salaries of BofA employees with workers at Merrill Lynch, which BofA acquired (The Wall Street Journal Online and Bloomberg News March 30) … * Bank of America effectively set up a branch in a Long Island office that helped Nicholas Cosmo conduct a $380 million Ponzi scheme, according to a class-action lawsuit filed in Federal District Court in Brooklyn last week. The suit claims the bank “established, equipped, and staffed” a branch office in the headquarters of Agape Merchant Advance, Cosmo’s company. The suit alleges that BofA “assisted, facilitated and furthered” Cosmo’s fraud. It claims the bank “established a fully functional bank branch manned by its own representatives within Agape’s office, which is contrary to normal banking practices.” The government alleges that Cosmo conducted a fraudulent trading scheme in which investors were solicited to provide short-term bridge loans. Money obtained for investors instead went to commodities trading contracts that lost money (The New York Times March 30) … * HSBC Financial Corp., the U.S.-based mortgage unit for Europe’s largest bank, is facing a securities fraud trial this week in Chicago. Plaintiffs claim a corporate predecessor hid predatory lending from shareholders. The shareholders’ suit was filed in 2002, seven months before HSBC Holding acquired Household International Corp., and its Household Finance Corp. mortgage unit. Household paid a $484 million fine in October 2002 to settle claims from a dozen states that it deceived borrowers about their mortgage terms. Concerns about regulatory investigations of the firm’s lending practices eroded share values. HSBC contends that none of the challenged business practices were concealed from investors (Bloomberg.com March 30) … * Cincinnati-based Fifth Third Bancorp announced Monday that it is selling a majority stake in its payment-processing business to global buyout firm Advent International for $561 million. Fifth Third Processing Solutions LLC processes debit, credit, and merchant transactions. The sale, which follows a $3.4 billion government injection into Fifth Third, is expected to increase the bank’s tangible common equity and Tier 1 capital by $1.2 billion. Fifth Third lost almost $2.2 billion during the fourth quarter, reflecting higher loan defaults, charges on goodwill, and credit costs (Associated Press via The New York Times March 30) …

Market News (03/30/2009)

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MADISON, Wis. (3/31/09)
* Neither General Motors nor Chrysler has proposed large enough changes to justify further big federal bailouts, said President Barack Obama on Monday. He said the automakers need further “painful concessions” from creditors, unions, and others to help them survive. Still, the president said the administration will offer GM “adequate working capital” during the next 60 days to give the firm time to submit an acceptable reorganization plan. Administration officials forced GM CEO Rick Wagoner into retirement on Sunday. Obama formally announced Wagoner’s departure Monday. He also said the government will give Chrysler 30 days to surmount obstacles related to a merger with Fiat. Obama said the government will consider loaning Chrysler as much as $6 billion to help the plan go forward (Associated Press via Yahoo! News March 30) … * Unemployment will soar worldwide this year amid the global economic crisis, the Organization for Economic Cooperation and Development (OECD) said Sunday. “By the end of 2010 the unemployment rate could be approaching double digit figures in all G8 countries with the sole exception of Japan, as well as in the OECD area as a whole,” said the OECD in its forecast. The economy of the 30-nation bloc is expected to contract by 4.2% in 2009. That’s up sharply from a November forecast of a mild 0.4% contraction. The OECD is urging leaders to “intervene quickly and effectively to avoid the financial crisis becoming a full-blown social crisis with scarring effects on vulnerable workers and low-income households.” The G8 consists of the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia (Reuters via The New York Times March 30) … * Consumer lending has increased in many midsized cities, according to statistics provided to The Wall Street Journal (March 30) by Moody’s Economy.com and Equifax Inc. The data indicates that many midsized cities are weathering the recession better than large cities and rural towns. Some of the cities that are boosting consumer lending didn’t see speculative housing bubbles, while others are benefiting from government spending. Many of the better-performing cities also have below-average unemployment rates. In Huntsville, Ala., consumer borrowing increased 13.2% per household in the fourth quarter, compared with a year earlier. Problem consumer and commercial loans at Huntsville-based financial institutions made up just 2.2% of total loans in the fourth quarter, compared with the 4.92% national median. The unemployment rate there was 6%, compared with an 8.5% national rate. “We are very blessed,” said Joe Newberry, president and chief executive of Huntsville’s Redstone FCU … * The default rate on home mortgages insured by the Federal Housing Administration (FHA) surged in February. An FHA spokesman said 7.5% of FHA-insured loans were seriously delinquent--90 days or more overdue, in the foreclosure process, or in bankruptcy--at the end of February, up from 6.2% a year earlier. Most people who can’t afford big downpayments on mortgages have turned to the FHA since the housing market collapsed. The FHA share of the mortgage market surged to almost one-third of loans originated during the fourth quarter, compared with about 2% in 2006, according to trade publication Inside Mortgage Finance. In January, the highest FHA default rates were in Punta Gorda, Fla. (18%); Detroit (15.6%); Flint, Mich. (15.1%); Fort-Myers-Cape Coral, Fla. (15%); and Elkhart-Goshen, Ind. (12.1%) (The Wall Street Journal Online March 30) … * Sales of second homes--vacation and investment--plunged to 30% of all sales transactions last year--from 33% in 2007, the National Association of Realtors (NAR) reported Monday (realtor.org March 30). In 2005, the peak year for home speculation, 40% of sales were second homes. However, more than 40% of investment buyers and more than 30% of vacation-home buyers paid cash for their properties in 2008. Large percentages indicated that portfolio diversification was a factor in their purchase decisions. The market share of homes purchased for investment was 21% last year, unchanged from the previous year. Another 9% were vacation homes, down from 12%. The median price of a vacation home was $150,000 last year, down 23.1% from the previous year. The typical investment property cost $108,000, down 28% from 2007. “As in the market for primary residences, it appears that many sales of deeply discounted distressed homes are puling down the median price in the second-home market as well,” said NAR Chief Economist Lawrence Yun …

Market News (03/27/2009)

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MADISON, Wis. (3/30/09)
* Long-term mortgage rates fell to another record low last week, according to Freddie Mac. The average 30-year, fixed rate mortgage (FRM) dropped 13 basis points to 4.85%. That’s a record low in Freddie’s survey, which dates back to 1971 for the 30-year FRM. The 15-year FRM edged down 3 basis points to 4.58%, a record low for that series, which dates back to 1991. The one-year, adjustable-rate mortgage (ARM) declined 6 basis points to 4.85%. “The Federal Reserve’s announcement that it intends to purchase Treasury securities over the next six months caused bond yields to drop and mortgage rates followed,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “Rates for 30-year FRMs peaked last year at 6.63% on July 24th. With this week’s 30-year FRM, the interest rate difference is almost 2 percentage points, which amounts to a savings of about $225 in monthly mortgage payments for a $200,000 loan,” added Nothaft. For CUNA's Daily Financial Rates, use the link … * California remains ground zero for the housing crisis, according to a report by the state Association of Realtors. The median price for an existing, single-family home plunged 41% from a year earlier to $247,590 in February. In comparison, the U.S. median home price dropped 16% over the period. Foreclosed homes push down median prices because they typically are sold at a discount. California has one of the highest foreclosure rates in the U.S., according to Irvine, Calif.-based RealtyTrac Inc. Falling prices have lured homebuyers. Home sales in California jumped 83% in February from a year earlier, the state realtors group reported. And sales are clearing out inventories. At the current sales pace, the number of months needed to exhaust the supply of homes on the market in California fell to 6.5 months, down sharply from 15.3 months in February 2008 (Bloomberg.com March 25) … * Seven states saw unemployment rates of more than 10% in February--up from 4 states in January, the Labor Department reported Friday. At 12%, Michigan had the highest jobless rate in the country, followed by South Carolina (11%) and Oregon (10.8%). North Carolina’s rate rose to a record-high 10.7%. Rhode Island’s rate increased to a record-high 10.5%. California’s rate also was 10.5%, while Nevada saw a 10.1% rate. Nationwide, the unemployment rate rose to a 25-year high of 8.1% in February. Analysts expect the rate to hit 10% by year end (Associated Press via Yahoo! News March 27) … * Even hedge fund managers are suffering in the deep recession, relatively speaking. Top hedge fund managers on average earned 48% less in 2008 than the previous year, but top managers James Simons, John Paulson, John Arnold, and George Soros still received more than $1 billion each, according to Alpha Magazine. The 25 top managers made an average of $464 million each last year--down from a record $892 million each in 2007. “The fact remains that $464 million is a kingly sum, especially during a year of global recession, stock market wipeouts and vanishing wealth,” noted the magazine. The credit crisis hit the hedge-fund industry hard last year, forcing many managers to sell assets and return money to clients. Managers lost more than 18%, on average, according to Hedge Fund Research--the weakest results since the research firm started tracking the data in 1990. Hedge-fund investors expect another $168 billion to leave the industry this year, according to a Deutsche Bank poll (MarketWatch March 26) … * Personal income declined last month while spending slowed, the Labor Department reported Friday. Personal income fell 0.2% in February, the fourth decline in the last five months. Personal consumption expenditures (PCE) rose 0.2%, slowing from a 1% advance in January. However, much of the small gain in consumer spending last month was due to an increase in prices. Real (inflation-adjusted) PCE fell 0.2%. Real income declined 0.4%. Income from wages and salaries dropped 0.4% in February, the fourth consecutive decline, as job losses continued to mount. The personal savings rate fell to 4.2% from 4.4%. Inflation remained tame last month. The core PCE price index, the Federal Reserve’s preferred inflation gauge, rose 1.8% over the past year, within the Fed’s comfort zone … * Consumer confidence remained near a 28-year low in March. The Reuters/ University of Michigan Surveys of Consumers’ final index of sentiment edged up to 57.3, from 56.3 in February and not far from the 28-year low of 55.3 hit in November. The record low for the survey was 51.7 in May 1980. Consumers anticipated the smallest annual income gains ever recorded, at –0.2%, compared with 2.5% a year earlier. The index of consumer expectations, which is correlated with consumer spending, increased to 53.5 from 50.5. The index of current conditions fell to 63.3 from 65.5. “Although the data indicate that the downward momentum in confidence ended in the closing months of 2008, there is no evidence that consumers expect their finances to improve any time soon,” said Survey Director Richard Curtin (Reuters via CNNMoney.com and Bloomberg.com March 27) …

News of the Competition (03/27/2009)

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MADISON, Wis. (3/30/09)
* A Michigan banker sued Citizen’s Republic Bancorp Inc., claiming he was fired for questioning the legitimacy of a $7.5 million bonus for the company’s CEO on the eve of a federal bailout payment. John D. Schwab alleged he was fired from his position of executive vice president by then-CEO William Hartman. Schwab opposed a four-year contract for Hartman that included the bonus. Schwab filed the lawsuit Tuesday in Genesee County Circuit Court in Flint, Mich. The suit alleges that Hartman had sought the deal in anticipation of obtaining $30 million in federal aid (Workforce Management March 26) … * The Federal Deposit Insurance Corporation (FDIC) is seeking public comment until April 10 on it plan to auction and sell toxic assets. FDIC is asking a wide range of questions on the matter--such as which assets should be eligible, and how the fees for government-guaranteed debt should be assessed. The FDIC plan asked what priorities the government agency should consider in deciding which pools to set for the initial auction and what the best size and characteristics of the pool should be, analysts said. “How can the FDIC best encourage a broad and diverse range of investment participation?” the agency's plan asked. “How can the FDIC best structure the valuation and bidding process to motivate sellers to bring assets to the “public-private investment funds?” (American Banker March 27) … * Less strain in the U.S. financial system is the apparent reason for U.S. banks and financial companies borrowing less from the Federal Reserve's discount window in the latest week. Total borrowings averaged $134.34 billion per day in the week ended March 25--a drop from a daily rate of $138.18 billion a week earlier. However, the Fed’s balance sheet--a general barometer of its overall lending--grew slightly to $2.055 trillion Wednesday from $2.051 trillion a week earlier. Analysts said the majority of the increase is due to the start of the government’s Term-Asset-backed Securities Loan Facility--otherwise known as TALF--last week (Reuters March 26) … * Card issuers’ profits are being threatened by rising unemployment, according to a report issued Thursday by Keefe, Bruyette & Woods Inc. Large card issuers could handle up to a 12% unemployment rate--even though that would create substantially higher charge-offs---but a higher unemployment rate would create significant liquidity and capital problems, according to the report’s author, Sanjay Sakhrani. The report predicts that American Express Co. will have charge-off rates of roughly 8.7% for the first quarter and 13.2% for the fourth quarter. MasterCard and Visa are fairly well-positioned to get through the downturn, Sakhrani said (American Banker March 27) …

News of the Competition (03/26/2009)

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MADISON, Wis. (3/27/09)
* An analyst at J.P. Morgan Securities resumed coverage of American Express Co. (AmEx) Wednesday with an “underweight” rating and a target price of $10.50. Andrew Wessel said in a research note to clients he expects charge-offs to increase well into next year because card members will face continuing economic challenges. Although AmEx should remain profitable during that time, significant earnings growth is not expected until 2011, Wessel said. For 2009, Wessel predicts earnings of 50 cents per share, compared with estimates of 93 cents per share for the full year, as the average estimate expected for the full year, according to analysts polled by Thomson Reuters. “We view American Express as overvalued, given the revenue and credit pressures it is facing,” Wessel wrote in the note (Associated Press March 25) ... * Due to declining interest rates sparking new business, Freddie Mac purchased $40 billion worth of mortgages in February--an 84% increase from the previous month--the government sponsored enterprise (GSE) said Wednesday. Purchases in the month were down 16% compared with a year ago. Freddie holds $123 billion of whole loans--not securitized--in its portfolio--an increase of 43% over the past 12 months. The GSE ended February with a retained portfolio of $822 billion--up 16% from a year earlier American Banker March 26) ... * After posting a 36% rise in net profit in 2008, Industrial and Commercial Bank of China (ICBC) Ltd. reached agreement with Goldman Sachs Group for a possible sale by the U.S bank of its 4.9% stake--presently valued at $7.6 billion--in ICBC. Also, American Express Co.--which owns 0.4% of ICBC--said it is contemplating selling its stake when lockups on its shares expire in April and October (The Wall Street Journal March 27) … * ING Bank, the second-largest U.S. thrift, has taken a rare action by filing a racketeering lawsuit in federal court that alleges criminal conspiracy by a mortgage broker, an escrow agent and 10 couples to use falsified mortgages to defraud the bank of at least $6 million. The bank--which is part of Netherlands-based ING Group, also seeks a court order to foreclose on eight properties in four counties, because the borrowers failed to pay their mortgage in a timely manner, and allegedly made false statements in their loan applications (The Seattle Times March 16) …

Market News (03/26/2009)

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MADISON, Wis. (3/27/09)
* The economy contracted more during the fourth quarter than previously estimated, the Commerce Department reported Thursday. The nation’s gross domestic product--the total output of goods and services--declined at an annual rate of 6.3%, the weakest showing since 1982. In a preliminary estimate, the decline was pegged at 6.2%. The economy contracted at a 0.5% pace during the third quarter. The fourth-quarter contraction mostly reflected negative contributions from exports, personal consumption expenditures, equipment and software, and residential fixed investment. These factors were partially offset by a positive contribution from federal government spending. Profits fell 16.5% from the previous quarter, the largest drop since 1953, noted Bloomberg.com (March 26). Profits were down 10.1% for all of last year, the largest decline since 1970. For all of 2008, the economy expanded 1.1%, the same as previously estimated, as exports and tax rebates during the first six months offset a plunge in consumer spending during the last half of the year … * The economy will remain weak this year before beginning to recover in 2010, according to the UCLA Anderson School of Management’s quarterly economic forecast. The recession is expected to last 19 to 24 months--even longer than the 16-month recession of the early 1980s, wrote David Shulman, a senior economist with the project. The report estimates that 7.5 million jobs will be lost during the recession, as the unemployment rate surges to 10.5% by mid-2010. “We still forecast a tepid recovery in 2010 as the contractionary forces become spent (i.e. housing can’t get much lower) and the near-term positive impacts of monetary and fiscal policy take hold.” Specifically, the forecast calls for the nation’s gross domestic product to contract at a 6.8% annual rate during the first quarter, followed by a 4.5% decline in the second quarter, and a 1.7% drop in the third quarter. Average quarterly growth of just 2.7% is expected for 2010 (CNNMoney.com March 25) … * The job market continues to weaken. Continuing claims surged by 122,000 during the week ending March 14 to 5.56 million, the Labor Department reported Thursday. That’s a ninth consecutive record and the highest total on records going back to 1967. As a percentage of the workforce, the number of people receiving jobless benefits is at the highest level since May 1983. The total of 5.6 million is nearly twice that of a year ago, when 2.8 million people were continuing to receive unemployment benefits. In addition, another 1.47 million people are receiving benefits under an extended program approved by Congress in 2008. The nation’s unemployment rate is now at a 25-year high of 8.1%. Analysts expect the rate to hit 10% by year end (Associated Press via The New York Times March 26) … * International Business Machines (IBM) is poised to announce another round of large job cuts in the U.S. as it shifts the positions to operations in India, say people familiar with the matter. The cuts would come on top of the 4,600 jobs the firm eliminated earlier this year. IBM, which reported $4.42 billion in earnings for the fourth quarter, is in negotiations with competitor Sun Microsystems about a takeover of that company. The planned job cuts show that even firms that have remained profitable in the economic slump are slashing workers, some of them by turning to cheap Asian workers. Microsoft Corp. announced plans to cut 5,000 workers earlier this year. IBM had 398,500 employees worldwide at year-end 2008, up from 386,558 at the end of 2007. However, its U.S. workforce declined--to 115,000 at year-end 2008, down from 236,000 at the end of 2007 (The Wall Street Journal Online March 25) … * General Motors announced Thursday that 7,500 United Auto Workers members have signed up for buyouts the firm needs as a condition to keep $13.4 billion in government aid. Retirement and buyouts will allow GM to hire replacement workers at half the union rate. The government’s rescue package for automakers requires firms to match the labor costs of Japanese auto manufacturers in the U.S. GM, Ford Motor and Chrysler have eliminated more than 124,800 hourly employees during the past three years (Bloomberg.com March 26) …

News of the Competition (03/25/2009)

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MADISON, Wis. (3/26/09)
* More than $1 billion in assets from Bernard Madoff’s businesses have been located, said an attorney for the trustee attempting to recoup money for defrauded investors. Attorney David Sheehan said a $75 million account in Gibraltar boosts the sum of located assets over the $1 billion mark. Assistant U.S. Attorney Barbara Ann Ward said U.S. prosecutors are working with law-enforcement people in other countries to identify the location of funds. Madoff was sent to prison two weeks ago after pleading guilty to a huge $65 billion Ponzi scheme that defrauded investors worldwide (Associated Press via Yahoo! News March 24) … * Morgan Stanley has agreed to pay more than $7.2 million to settle regulatory allegations that its brokers convinced dozens of employees at Eastman Kodak and Xerox Corp. to retire early and open accounts that lost much of their value. The Financial Industry Regulatory Authority (FINRA) accused brokers of promising employees they could earn 10% or more annually on their accounts, and that they could withdraw money for living expenses without losing principal. However, the regulator said the employees instead experienced “financial hardships” including market losses and reduced principal. And they couldn’t withdraw as much money as they were promised. Former broker Michael Kazacos is permanently barred from the securities industry. Former broker David Isabella was charged with misconduct. Ira Miller, their manager, was suspended from acting as a principal for one year. Morgan Stanley spokeswoman Christy Pollak said the company has increased oversight since the alleged misconduct occurred (Reuters via CNNMoney.com March 25) … * Minneapolis-based U.S. Bancorp announced Tuesday that it has signed a deal with Western Union to offer its money transfer services via the bank’s 2,791 branches in 24 states. The new deal ends a five-year relationship between U.S. Bancorp and MoneyGram International. The new partnership is part of a push to widen Western Union’s business past the traditional core of “underbanked” consumers, said Stewart Stockdale, an executive vice president and president of the Americas at Western Union. The money-transfer company completed more than 188 million consumer-to-consumer transactions worldwide last year (American Banker and BUSINESS WIRE March 24) … * A program funded by the Bill and Melinda Gates Foundation is helping poor people in Africa, Latin America, and other underbanked regions gain access to financial transactions. The foundation provides grants, loans, and equity to organizations that create nonprofit banks in poor nations or partner with for-profit institutions in those countries. The foundation’s funds are used to provide financial services in a number of innovative ways, such as equipping buses and vans with ATMs and using cell phones to transfer funds into savings accounts. One of the grantees is Opportunity International, which has launched 17 nonprofit banks abroad. Such efforts help poor people by offering them secure savings opportunities, noted Dennis Ripley, senior vice president of international business development at the Oakbrook, Ill.-based firm. He said the programs also strengthen banks in developing regions by broadening their deposit base (American Banker March 25) …

Market News (03/25/2009)

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MADISON, Wis. (3/26/09)
* New-home sales jumped 4.7% to a seasonally-adjusted annual rate of 337,000 in February, the Commerce Department reported Wednesday. Still, the pace was down 41.1% from a year earlier. And though revised upward, home sales for January were the weakest since the government began tracking comparable data in 1963. The median sales price of new homes sold in February was $200,900--down a record 18% from a year earlier. At the current sales price, it would take 12.2 months to exhaust the supply of new homes on the market. Earlier this week, the National Association of Realtors said sales of previously owned homes jumped 5.1% to an annual rate of 4.72 million in February. It was the biggest gain since July 2003. The median price for existing homes was $165,000--down 15.5% from a year earlier. Investors cheered the new-home sales report yesterday, despite negatives in the data. Analysts are hoping the government’s $8,000 first-time homebuyer tax credit will help lead the housing market towards recovery (commerce.gov and Associated Press via Yahoo! News March 25) … * The Federal Reserve’s announcement on the mortgage-backed securities program prompted a decline in mortgage rates and a surge in refinance activity last week, the Mortgage Bankers Association (MBA) reported Wednesday (mbaa.org March 25). The trade group’s Market Composite Index surged 32.2% to 1159.4. The Refinance Index soared 41.5% to 6363.2, while the Purchase Index rose 4.2% to 267.8. “Mortgage rates fell sharply to low levels not seen in six decades following the Federal Reserve’s announcement on the Treasury bond and mortgage-backed securities programs,” said Orawin Velz, associate vice president of economic forecasting at the MBA. “The drop offered a sizable refinance incentive for most homeowners sparking a pickup in refinance activity,” added Velz. The average 30-year, fixed-rate mortgage (FRM) tumbled 26 basis points to 4.63% last week, while the 15-year FRM dipped 4 basis points to 4.48%. The fiscal stimulus program, the Homeowners Affordability and Stability Plan, and the Treasury’s plan to purchase toxic assets will all improve mortgage lending, said Moody’s Economy.com (March 25). However, the housing market still will not gain much ground until late this year, when home prices begin to recover … * An index that tracks subprime mortgage-backed securities (MBS) got a boost from the Treasury Department’s plan to encourage investors to purchase illiquid assets from banks. The ABX.HE.AAA index, series 7-2, surged more than one percentage point to 25.29 on Monday, reports publisher Markit. The index had plunged 66% so far this year. The current reading means that each dollar invested in a MBS is worth about 25 cents. The government plan channels $50 billion to $100 billion in Treasury funds into government loans and guarantees to clear out MBS and other hard-to-value assets from banks’ balance sheets. There is an estimated $2.1 trillion worth of such securities, based on values, according to Barclays Capital (MarketWatch March 24) … * Orders for big-ticket durable goods unexpectedly surged in February amid increased demand for machinery, computers, and defense equipment, the Commerce Department reported Wednesday. Orders jumped 3.4%, rebounding from a 7.3% decline in January and the largest gain in more than a year. Excluding transportation equipment, orders rose 3.9%, the strongest gain since August 2005. Demand for non-defense capital goods excluding aircraft, a proxy for future business investment, jumped 6.6% last month, following an 11.3% drop in January. Analysts cheered the report as suggesting a possible end to the recession later this year. “Once businesses achieve a reduction in their inventories they will pick up their new orders and production,” said Stephen Gallagher, chief U.S. economist at Societe Generale in New York (Bloomberg.com March 25) … * Undeserving companies have received millions of dollars in federal contracts from the $8 billion government program intended to help small businesses in poor neighborhoods, the Government Accountability Office reported Wednesday. The Small Business Administration repeatedly failed to verify paperwork and perform audits to weed out companies deceptively claiming to have their main headquarters in poor areas, said the report. Investigators discovered 19 ineligible companies in cities including Dallas, Huntsville, Ala., San Antonio, and San Diego that received almost $30 million in federal contracts. The head of a Fort Worth, Texas, company admitted that she subcontracted 71% to 89% of her work out to large firms and other businesses. She said businesses typically use such companies as “contract vehicles” (Associated Press via Yahoo! News March 24) … * The hotel industry saw an estimated $1 billion in cancellations during January and February--due in part to the restrictions placed by the government on companies receiving bailout money, according to a preliminary survey by the U.S. Travel Association. Saying it might send the wrong signal to taxpayers, Wells Fargo canceled a four-day trip to Las Vegas. The travel industry already was experiencing problems last year. Spending on travel and tourism declined 0.4% in 2008--the first annual drop since 2001, the Commerce Department reported last week (Bloomberg News via American Banker March 24) …

News of the Competition (03/24/2009)

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MADISON, Wis. (3/25/09)
* Treasury Secretary Timothy Geithner told Congress yesterday that the government needs the authority to shut down troubled non-bank financial firms like American International Group (AIG) to prevent future government bailouts. Federal Reserve Chairman Ben Bernanke also called for new authority to take over large non-financial companies that are in trouble. “AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms,” Bernanke told Congress. “If a federal agency had had such tools on Sept. 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate,” said Bernanke. Geithner and Bernanke agreed that a program could be modeled on the way the Federal Deposit Insurance Corp. (FDIC) takes over banks. However, Bernanke said the FDIC should be the agency to have that authority, while Geithner said the Treasury Department should have the power (The New York Times and The Wall Street Journal Online March 24) … * New York Attorney General Andrew Cuomo announced late Monday that 15 of the top 20 recipients of the $165 million in retention bonuses from American International Group (AIG)’s Financial Products (FP) unit have agreed to give their bonuses back to the firm. In all, AIG FP employees have returned about $50 million in bonus money to the company. Some employees have quit the firm amid the controversy about the bonuses. Others expressed outrage that they were being asked to return bonuses. One employee compared the situation to the fascist strategies of Europe during the 1940s, said a person familiar with the matter. Cuomo estimates that about $85 million of bonuses went to people outside the U.S., and these people thus can’t be pursued by U.S. authorities (The Wall Street Journal Online and The New York Times March 24) … * The Internal Revenue Service is challenging some of the tax transactions structured by AIG Financial Products, the unit of American International Group that stirred up a political firestorm over the $165 million paid out in bonuses to employees. Some of the banks that received taxpayer-funded payouts to settle contacts with AIG also used the insurer to help cut their income taxes in the U.S. and Europe, according to court records and people familiar with the business. AIG’s tax deals allowed U.S. firms and foreign banks to claim credit for a single tax payment, in part through the use of an offshore AIG subsidiary. AIG’s tax-cutting clients included Bank of America, Bank of Ireland, and Credit Agricole SA of France. Bank of America worked with AIG on at least one tax structure and also conducted a big business selling such deals, according to a person familiar with the matter. An AIG spokesman declined to talk about the tax transactions in detail but said they were proper and justified (The Wall Street Journal Online March 24) … * Finger Interests Number One Ltd., a group that owns about one-fifth of one percent of Bank of America stock, is battling to get shareholders to vote against re-electing CEO Ken Lewis and two others to the firm’s board of directors. They say the board didn’t protect shareholders’ interests during its acquisition of Merrill Lynch. They claim the board didn’t offer proper disclosures about Merrill’s rising losses until after shareholders voted on the acquisition. The board election will take place on April 29. Another shareholder group, Change to Win Investment Group, also is seeking to have Lewis fired because of the Merrill acquisition. And two large pension funds are seeking to lead a class-action suit against Bank of America, saying the firm’s management “misstated or omitted” important information about Merrill’s financial condition before the acquisition was closed (Associated Press via Yahoo! News March 24) …

Market News (03/24/2009)

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MADISON, Wis. (3/25/09)
* The Mortgage Bankers Association (MBA) has boosted its forecast of mortgage originations this year by more than $800 billion, due to an expected surge in refinancings spurred by low interest rates (mbaa.org March 24). The trade group now expects originations to total $2.78 trillion in 2009, the fourth-highest year on record. Refinancings are forecast to increase to $1.96 trillion this year, from an estimated $765 billion last year. This year’s originations will be almost all Fannie Mae and Freddie Mac eligible loans, or eligible for FHA insurance, said the MBA. In contrast, the previous record years of 2002, 2003, and 2005 had big amounts of subprime and jumbo loans. The trade group predicts that purchase mortgage originations will total $821 billion this year, down slightly from $854 billion in 2008, reflecting continued declines in home sales and lower prices on homes that are sold … * Banks are boosting mortgage-origination fees as refinancings surge, according to data compiled by the Federal Housing Finance Agency. The average cost of obtaining a mortgage was $640 per $100,000 in December and January--the highest since October 2000. That compares with a record-low $280 per $100,000 in 2005, at the end of the five-year housing boom. Banks are boosting fees before an April 1 increase in the “adverse market” fee that Fannie Mae and Freddie Mac charge lenders. And they are benefiting from the decline in the fed funds rate, which is near zero. “Banks are able to borrow short and lend long,” noted Nigel Gault, chief U.S. economist at IHS Global Insight. “They get their financing at rock bottom rates and charge higher fees, meaning their margins are extremely high,” said Gault (Bloomberg.com March 24) … * Home prices nationwide declined 6.3% in January, compared with a year earlier, according to the Federal Housing Finance Agency. Prices were up 1.7% from December, reflecting changes in the geographic mix of sales, said the agency. Most of the month’s home sales took place in strong housing markets. Home prices are down 9.6% from the peak hit in April 2007. The agency’s data probably underestimates the decline in home prices because it relies on data collected by Fannie Mae and Freddie Mac, so it excludes non-conforming loans such as those purchased with jumbo loans (Associated Press via Yahoo! News and Moody’s Economy.com March 24) … * The head of China’s central bank is calling for the creation of a new international currency reserve that would replace the dollar. Zhou Xiaochuan said a new currency system controlled by the International Monetary Fund is needed because the global economic crisis has revealed the “inherent vulnerabilities and systemic risks in the existing international monetary system.” At almost $2 trillion, China has the largest foreign exchange reserves in the world. And more than half that sum consists of U.S. Treasuries and other dollar-denominated bonds. “Chinese are quite concerned that the large U.S. government deficits will eventually lead to inflation, which will erode the purchasing power of the dollar-denominated financial assets which they hold,” said Nicholas Lardy, an economist and China specialist at the Washington-based Peterson Institute (The New York Times March 24) … * Global airlines are on track to lose $4.7 billion this year as the global recession shrinks demand, the International Air Transport Association (IATA) said Tuesday. The forecast is up sharply from a December prediction that the industry would lose $2.5 billion this year. “The state of the airline industry today is grim,” said IATA Director-General Giovanni Bisignani. “The relief of lower fuel prices is overshadowed by falling demand and plummeting revenues. The industry is in intensive care,” added Bisignani. The trade association estimates that the industry lost $8.5 billion last year. North American airlines are expected to post stronger results than airlines in other regions this year because of previous capacity cuts and less fuel hedging, which lets carriers benefit from falling oil prices. North American airlines are forecast to post a $100 million profit in 2009 (Reuters via Yahoo! News March 24) …

Market News (03/23/2009)

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MADISON, Wis. (3/24/09)
* Sales of existing homes rose unexpectedly in February, rising 5.1% to an annual rate of 4.72 million from 4.49 million units in January, according to the National Association of Realtors Monday (www.realtor.org March 23). It was the largest sales jump since July 2003 but the sales were still 4.6% below the 4.95 million units sold in February 2008. Analysts had expected sales to fall to 4.45 million units. First-time homebuyers accounted for half of all home sales last month, said Lawrence Yun, NAR chief economist. "Because entry level buyers are shopping for bargains, distressed sales accounted for 40% to 45% of transactions in February," Yun said. Distressed homes typically sell for 20% less than the normal market price, and this contributed to a drop in the overall median price--the price where half of the homes sold for more and half sold for less. The national median price for existing homes was $165,000 in February, down 15.5% from the $195,800 median a year earlier. It was the second-largest drop on record. The number of unsold homes on the market rose 5.2% to 3.8 million, typical for winter months. At February's sales pace, it would take 9.7 months to sell all the properties in today's market (The New York Times March 23) … * Banks are requesting more credit checks on commercial borrowers, on pace to increase 5% to 10% this quarter, compared with first quarter 2008, says Skokie, Ill.-based PayNet Inc., which analyzes payment history data (American Banker March 23). The data indicate that banks are being more cautious about lending and taking steps to do more due diligence. PayNet President William Phelan said the data indicate that credit markets are starting to thaw, with banks getting back to fundamentals of lending. However, Jeff Davis, director of research, Howe Barnes Hoefer and Arnett, said commercial and industry lending may increase marginally this quarter but the lion's share of loan applications likely comes from the most strained businesses. PayNet's study of 14 million commercial contracts showed banks still lending to small businesses, middle-market companies and large firms. While overall commercial loans dropped 24% from 2007 to 2008, bank loans to companies was off by 11%. Loans from captive finance companies and independent lenders declined 28% and 44%, respectively. In 2008, banks financed 51% of all commercial loans, up from 43% a year earlier … * The Federal Reserve Bank of Chicago's National Activity Index increased to -2.83 in February from January's downwardly revised -3.74 (from -3.45). The three-month average rose to -3.48 from a downwardly revised -3.61 and remained below the -0.7 threshold consistent with recession. Since 1967, the index has dropped below -0.7 seven times, six times coinciding with recession (Moody's Economy.com March 23). February's improvement, however slight, is consistent with the Conference Board's leading economic indicator, which suggests the pace of economic decline is moderating. Most major categories improved in February. The production and income category rose to -0.79 from -1.40 with industrial production declining more slowly. Improved retail sales helped the consumption and housing category, which contributed -0.55, up from -0.61 in January. Employment-related indicators were the most significant negative contributors to the index, at -1.29 in February, up from -1.51 in January. Monthly job loss continued past 600,000 and likely will not reverse soon, said Moody's … * Global businesses remain remarkably pessimistic in business confidence, according to Moody's Economy.com Survey of Business Confidence (March 23) for the week ended March 20. European business confidence is at a low, and confidence everywhere else is at near record lows. Sales dropped sharply last week to a new record low and pricing power continued to fade with nearly one-third of businesses saying they were cutting prices for their goods and services. Sentiment was bleakest among manufacturing and business service firms. Around the globe, the difference between the percentage of all positive responses and all negative responses to the survey questions was -30% last week, and -29% on a four-week moving average basis. In the U.S. confidence stood at -30% last week and -28% on a four-week moving average. Readings between 25% and 30% are consistent with an economy that is expanding at potential. Readings below 10% indicate a recession. The all time peak was nearly 40% at year-end 2005 …

News of the Competition (03/23/2009)

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MADISON, Wis. (3/24/09)
* A unit of American International Group (AIG) and Countrywide Financial Corp.--which is now part of Bank of America Corp.--have sued each other over insurance losses from subprime mortgage loans now in default. Each alleges the other is in breach of contract. AIG’s United Guaranty Mortgage Indemnity Co. sued Countrywide Thursday in a California federal court, charging that Countrywide misrepresented risks connected to more than $1 billion of mortgage loans that United Guaranty insured. The filing was made one day after Countrywide sued United Guaranty in California state court, alleging that United Guaranty was trying to circumvent its obligations to provide insurance coverage. United Guaranty issues mortgage insurance, which protects lenders in the event a borrower defaults on a loan (Reuters March 20) … * Vikram Pandit, CEO of Citigroup Inc., said taxing bonuses in the financial services industry would make it more difficult to retain workers. In response to controversy surrounding compensation at financial companies, Pandit sent a memo to employees in which he said the tax would affect “countless” people who would have a hard time repaying their bonuses. The tax could be a high as 90% if the U.S. House of Representatives version is passed. Controversy over bonuses came about after it was learned that American International Group (AIG)--which has received funding from the federal government to keep it operational--was paying out about $165 million in bonuses, with some of the bonus payments going to those directly responsible for the company’s large losses. Pandit noted that AIG removed the workers responsible for the financial problems and moved quickly to streamline its operations. Not all financial-service workers are to blame for the current economic troubles, Pandit added (Dow Jones Newswires March 20) ... * Rising unemployment levels and growing credit card defaults may cause American Express Co. (AmEx) to post losses in 2009 and 2010, and a dividend cut at the credit card company is looming, according to analysts at Friedman, Billings, Ramsey Group Inc. “In our view, a dividend cut to five cents per quarter from 18 cents presently appears to be prudent and would conserve nearly $1 billion in capital,” analysts Scott Valentin and Ram Shankar said in a client note. The analysts forecast a loss of 41 cents per share for 2009, and a 22-cent-per-share loss in 2010. They earlier predicted a profit of 90 cents per share in 2009, and $1 per share in 2010. Current consensus earnings estimates of 95 cents per share in 2009, and $1.45 per share in 2010 are too optimistic, the analysts said. Earlier last week, AmEx said its net charge-off rate increased to 8.7% in February from 8.3% in January (Reuters UK March 20) … * About 1,200 workers, including its 200 “top employees” were asked by ING Groep NV--the first Dutch bank to access a government rescue package--to return their 2008 bonuses. ING joins rivals that include ABS AG in trimming employee pay to mitigate taxpayer criticism. The Amsterdam-based bank also is deferring variable cash compensation in 2009 for all employees until a new policy is put in place in 2010, according to a message sent to employees and obtained by Bloomberg News Monday. “Given the continuing public scrutiny of variable pay practices in our industry, ING is moving to align its variable compensation practices with the new reality,” the company said (Bloomberg.com March 23) …

News of the Competition (03/20/2009)

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MADISON, Wis. (3/23/09)
* The Federal Deposit Insurance Corp. (FDIC) announced late Thursday that it completed the sale of IndyMac Federal Bank, which the agency took over last July. The FDIC said it lost $10.7 billion on the sale. OneWestBank, a newly organized federal savings bank in Pasadena, Calif., will assume IndyMac’s deposits. OneWest also will purchase about $20.7 billion in assets, at a discount of $4.7 billion. The sale calls for the new investors to take on the first 20% of the bank’s loan losses. The FDIC will shoulder most of any following losses. OneWest also agreed to continue the mortgage-loan modification program launched by FDIC Chairman Sheila Bair in August. A total 25 bank failures occurred in the U.S. last year. IndyMac’s failure was the second largest, only after the failure of Washington Mutual in September (MarketWatch and Associated Press via Yahoo! News March 20) … * Another 19 states have launched investigations of the bonuses paid out by American International Group (AIG). New York Attorney General Andrew Cuomo said Thursday that AIG complied with a subpoena requesting a list of employees who have received bonuses. AIG paid out $165 million in bonuses last week. The company has received $173 billion in federal bailout money. States requesting information from AIG about bonus recipients include Arizona, Delaware, Illinois, Kentucky, Louisiana, Maine, Michigan, Mississippi, Montana, Nebraska, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Washington and West Virginia (Bloomberg.com March 20) … * A unit of American International Group (AIG) has filed a lawsuit against Countrywide Financial Corp., alleging that the mortgage lender misrepresented the financial condition of loans that it insured, prompting huge losses. The suit filed by United Guaranty Mortgage Indemnity Co. accuses Countrywide of breach of contract, fraud, negligence, and unfair competition and business practices. The suit alleges that Countrywide “abandoned its own underwriting guidelines to boost its market share and then misrepresented the quality of its loans so that United Guaranty would provide insurance coverage for them.” Countrywide was the largest mortgage lender in the U.S. at the time of its acquisition by Bank of America in July. Bank of America received billions of dollars in federal money to absorb mortgage losses at Countrywide (Associated Press via Yahoo! News March 20) … * General Electric said its expects its GE Capital lending unit to be profitable this year. Stress testing, based on the Federal Reserve’s base-case economic scenario, indicates profits could total $2 billion to $2.5 billion, said GE Capital CEO Michael Neal. “Even in the adverse case we’re probably break-even to slightly profitable,” added Neal. GE Capital plans to use some of the $60 billion left under the Temporary Liquidity Guarantee Program to pre-fund debt due to mature next year, said company Treasurer Kathy Cassidy. Concern about loan defaults have helped erode GE’s stock, which is down about 71% this year (Reuters via Yahoo! News March 20) …

Market News (03/20/2009)

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MADISON, Wis. (3/23/09)
* Regulators may need to modify capital and accounting rules so that they don’t intensify volatility in the financial markets, said Federal Reserve Chairman Ben Bernanke. In a speech to a community bankers convention in Phoenix on Friday, Bernanke also said the central bank has “generally been encouraged” by the market response to its many lending programs. The speech came only two days after the Fed announced it would buy up to $300 billion in Treasury securities while it adds hundreds of billions of dollars to existing mortgage-related facilities. “These purchase are intended to improve conditions in private credit markets,” said Bernanke. “In particular, they are helping to reduce the interest rates that the [government sponsored enterprises] require on the mortgages that they purchase or securitize, thereby lowering the rate at which lenders, including community banks, can fund new mortgages” (The Wall Street Journal Online and Reuters via The New York Times March 20) … * The Obama administration on Thursday pledged up to $5 billion to help auto suppliers whose financial strength is critical to the survival of domestic automakers. The financial aid is the first action of the government’s new autos task force. Auto suppliers had asked for up to $25.5 billion in emergency aid. Suppliers have said that two-thirds of the 5,000 companies in the industry are in financial distress because of the huge cutbacks in production by automakers. U.S. vehicle sales plunged nearly 39% during the first two months of this year, to the lowest level in 27 years. Payments to auto suppliers from U.S. automakers will drop to $2.4 billion in March, from $8.7 billion in December, according to a forecast by the Motor and Equipment Manufacturers Association (Reuters via The New York Times March 20) … * Americans are worried that home-price declines will accelerate over the next year despite government programs to aid the housing market, according to a Reuters/ University of Michigan survey released Friday. Respondents expect their homes values to decline by another 2.2% over the next year, compared with a 1.9% drop expected in a February poll. Concern about home and stock declines have eroded consumer psychology and spending this year. “Even after the decline ends, the plunge in home pries has been so steep that it will be years before these concerns are completely erased and the negative wealth drag on spending growth disappears,” said Richard Curtin, director of the survey. Home prices have fallen more than 26% since peaking three years ago, according to the Standard & Poor’s/ Case-Shiller index (Reuters via Yahoo! News March 20) … * The global economy will contract this year--for the first time in 60 years, the International Monetary Fund (IMF) said Friday. The total amount of goods and services produced worldwide is forecast to decline by 1%, compared with 3.2% growth in 2008. The U.S., Europe, and Japan are expected to lead the decline in global output. The world’s emerging and developing economies are expected to expand by about 2.5%, following 6.1% growth last year. A global rebound in growth is forecast for 2010. “The turnaround depends critically on more concerted policy actions to stabilize financial conditions, as well as sustained strong policy support to bolster demand,” said the IMF (CNNMoney.com March 20) … * The size of the Federal Reserve’s balance sheet jumped 8.8% to $2.07 trillion last week, as the central bank purchased mortgage-backed securities in an effort to lower mortgage rates. Holdings of mortgage bonds tripled to $236.5 billion. Fed assets are still lower than the $2.31 trillion peak hit on Dec. 17. Discount-window lending to commercial banks dropped to $64 billion last week, from $65.5 billion the previous week. Wall Street bond dealers boosted their borrowings from the central bank to $20.1 billion from $19.6 billion. The Fed report doesn’t reflect its Term Asset-Backed Securities Loan Facility (TALF) program, which is designed to support the markets for auto, credit card, education and small-business loans. The $200 billion program will begin disbursing funds on March 25 (Bloomberg.com March 20) … * The federal budget deficit will swell to $1.9 trillion this year, according to the Congressional Budget Office (CBO). That’s higher then the White House forecast of a $1.75 trillion deficit. The CBO predicts that the deficit will decline slightly to $1.4 billion in 2010. The latest forecast for 2009 is up sharply from a $1.18 trillion shortfall the CBO predicted in January (Bloomberg.com March 20) …

News of the Competition (03/19/2009)

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MADISON, Wis. (3/20/09)
* A New York state judge has rejected a move by Bank of America to keep details confidential about employees who received more than $3.6 billion in bonuses at Merrill Lynch just before its merger with the bank on Jan. 1. BofA was seeking to modify a subpoena by New York Attorney General Andrew Cuomo to include a confidentiality provision. “The record indicates that Bank of America has not taken the kind of measures to protect the secrecy of its employee-compensation information that one would expect it to have taken if this information were a trade secret,” said New York State Supreme Court Justice Bernard Fried. The attorney general’s office has subpoenaed the bank for a list of names of the 39,000 employees who received bonuses (The Wall Street Journal Online March 19) … * Federal authorities have broadened their criminal investigation of offshore tax fraud at Zurich-based UBS to include independent attorneys and accountants from Switzerland and the U.S. who worked with the bank, say people briefed on the situation. The Justice Department is building criminal cases against the individuals, whom they suspect worked with UBS bankers to help U.S. clients evade taxes. Last month UBS paid $780 million to settle federal charges that it helped wealthy Americans evade taxes. The Internal Revenue Service is pressuring UBS to provide the names of its U.S. clients (The New York Times March 19) … * Thirteen of the 23 top recipients of government funds through the Troubled Asset Relief Program owe unpaid federal taxes, according to a House oversight committee. The 13 firms owe a combined $220 million in unpaid taxes. Rep. John Lewis, D-Ga., said the Treasury Department should have asked the firms to prove they didn’t owe back taxes. “Treasury did not ask these banks and companies to turn over their tax records. Treasury relied on the signed statements when it agreed to invest billions of taxpayer dollars,” said Lewis (The Wall Street Journal Online March 19) … * Community banks have a mixed response to the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program, which is designed to inject liquidity into the banking system. Most small banks are enthusiastic about the unlimited deposit coverage on zero-interest accounts. However, few are participating in a program in which the agency covers unsecured debt in the event of default. That’s because transaction costs are high and many community banks don’t issue debt. But some banks are collaborating with other small banks to issue debt. For example, the Pooled Funding Trust 1 reportedly attracted about 30 community banks, which are each seeking to issue $5 million to $10 million. Community banks can lower their transactions costs by teaming up with other small banks. A pool also diversifies risk, noted Kip Weissman, a partner at Washington-based Luse Gorman Pomerenk & Schick PC (American Banker March 19) …

Market News (03/19/2009)

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MADISON, Wis. (3/20/09)
* Long-term mortgage rates followed bond yields down after the Federal Reserve announced an ambitious plan to purchase Treasury bonds. The 30-year FRM declined by 5 basis points to 4.98% this week--the lowest since the week of Jan. 15, when it hit a record low of 4.96%, Freddie Mac reported Thursday. “Following the March 18 Federal Reserve monetary policy statement, which announced further spending initiatives on financial assets, long-term bond yields plummeted,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. “Yields on 10-year Treasury bonds fell by about half a percentage point after the announcement, marking the largest one-day decline since Oct. 20, 1987,” added Nothaft. Analysts say the 30-year FRM may settle in a range of 5% to 5.25%, however, because lenders are seeing a refinancing boom and have little incentive to offer lower rates. Mortgage refinancings jumped almost 30% last week, according to the Mortgage Bankers Association. “When originators are getting all the business they can handle, they don’t compete as aggressively on price,” noted Arthur Frank, director of mortgage-backed –securities at Deutsche Bank Securities (MarketWatch March 19). For CUNA's Daily Financial Rates, use the link … * Continuing unemployment claims set a new record for an eighth consecutive week, the Labor Department reported Thursday. Continuing claims, the number of people still on the benefit rolls after an initial week of aid, surged by 185,000 during the week ending March 7 to a record-high 5.473 million. That’s up from 2.85 million a year earlier. An additional 1.5 million people are receiving jobless benefits under a separate program approved by Congress last year. The surge in continuing claims suggests people are having a tough time finding new jobs after they’ve been laid off, as employers continue to slash positions. The government also reported that initial claims for unemployment insurance edged down by 12,000 during the week ended March 14. However, the four-week moving average of jobless claims rose by 3,750 to 654,750--the highest level since October 1982 (Associated Press via The New York Times March 19) ... * Job insecurity and the weak housing market slowed migration across the nationwide, according to Census Bureau data. During past recessions, migration slowed only in certain regions. But migration has slowed almost everywhere in the U.S. during the current recession because the economic slowdown is widespread. The biggest migration declines are in the weakest housing markets. Las Vegas saw a net 14,000 increase in domestic migrants last year, two-thirds less than two years earlier. Phoenix and California’s Riverside-San Bernardino area saw similar slowdowns. A continued migration slowdown could in turn further delay the economic recovery (The Wall Street Journal Online March 19) … * A measure of economic activity declined last month, suggesting further deterioration ahead. The Conference Board’s index of leading economic indicators declined by 0.4% in February, following a meager 0.1% gain in January and a 0.1% dip in December. “Financial market volatility remains strong, and the credit market freeze is relenting very slowly,” said Conference Board Economist Ken Goldstein. “A return to strong growth will not likely occur until 2010,” added Goldstein. Four of the index’s 10 indicators were negatives in February--led by a surge in average weekly unemployment claims. The largest positive was the interest rate spread, the difference between the 10-year Treasury and the fed funds rate (Associated Press via Yahoo! News March 19) … * Auto suppliers are seeking $5 billion in government aid to avoid bankruptcies, the Treasury Department said Thursday. The auto suppliers asked for $18.5 billion in aid last month, saying a failure to receive help could prompt the loss of 1 million jobs. Automakers already are receiving government funds. General Motors and Chrysler, which are operating on $17.4 billion in loans from the federal government, are seeking additional aid of as much as $21.6 billion (Bloomberg.com March 19) … * Discount-retailer Wal-Mart Stores, which has seen its business boom in the recession, is awarding its hourly employees $2 billion in financial incentives. The total includes $933.6 million in bonuses, $788.8 million in profit sharing and 401(k) contributions, millions of dollars in merchandise discounts, and contributions to its employee stock-purchase plan. “While economic challenges forced others to step back, we moved forward,” said Wal-Mart CEO Mike Duke (Reuters via Yahoo! News March 19) …

Fed pulls out all stops CUs brace for refinancings

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MADISON, Wis. (3/19/09)--"The Fed has pulled out all the stops in its attempt to revive a contracting economy," said Steve Rick, Credit Union National Association (CUNA) senior economist. And that will impact credit unions' net margins and may boost bottom lines. The Federal Reserve announced Wednesday that it will purchase up to $300 billion in longer-term Treasuries over the next six months, and it will purchase an additional $750 million in mortgage-backed securities, in a move designed to lower mortgage rates (The Wall Street Journal Online March 18). The additional mortgage-backed securities purchases will boost mortgage-related facilities to as much as $1.25 trillion. As expected, Fed policymakers took no action on interest rates, holding the target for the fed funds rate at a range of zero to 0.25%. The discount rate was unchanged at 0.5%. " The purchase of up to $300 billion in long-term government bonds over the next six months is tantamount to monetizing part of the record $1.75 trillion 2009 federal budget deficit," Rick told News Now, adding, "Shortly after the announcement, the 10-year Treasury yield dropped nearly one-half a percentage point to 2.533%. "That action, along with the Fed's announcement that it would purchase an additional $750 billion of government-sponsored enterprise (GSE) guaranteed mortgage-backed securities, will flatten the yield curve and lower the yield on credit union assets going forward. This will reduce credit unions' net interest margins," Rick said. "Offsetting this 'rate effect' will be a 'mix effect' as credit union assets shift from low-yielding investments to higher-yielding mortgage loans as lower interest rates stimulate home demand and refinancings," he said. "Moreover, if these actions are able slow the decline in house prices and reverse the upward trend in home foreclosures, credit unions will experience fewer loan losses than would otherwise have occurred, boosting their bottom lines. For the near term, credit unions should brace themselves for a surge in mortgage refinancing activity," Rick said. In a statement following Wednesday's meeting, the Fed explained its move. “Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.” The Fed also noted that U.S. exports have declined as the nation’s trading partners have fallen into recession. “Although the near-term economic outlook is weak, the committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.” The central bank said inflation is tame. “Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and prices stability in the longer term.”

News of the Competition (03/18/2009)

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MADISON, Wis. (3/19/09)
* Bernard Madoff’s accountant was arrested yesterday and charged with fraud in connection with Madoff’s $65 billion Ponzi scheme, which may be the largest fraud in U.S. history. David Friehling faces up to 105 years in prison if convicted of the fraud charges. Friehling isn’t accused of knowing about the Ponzi scheme, said U.S. Attorney Lev Dassin. He instead is accused of deceiving investors by falsely certifying that he audited the financial statements of Madoff’s firm. Madoff pleaded guilty on March 12 to defrauding investors by using money from new investors to pay off old investors. He faces up to 150 years in prison (Associated Press and Bloomberg.com March 18) ... * New Jersey Governor Jon Corzine announced Tuesday that the state has filed a lawsuit against Lehman Brothers executives and directors for “fraud and misrepresentation.” New Jersey is seeking to recover $118 million that state pension funds lost. The state also is suing Lehman Brothers auditor Ernst & Young for letting the company “improperly account for and disclose its true financial condition.” Lehman filed for bankruptcy in September 2008 after failing to secure federal bailout money. The state cannot sue the firm because of the bankruptcy. The New Jersey suit charges the Lehman executives with violating securities laws, fraud, and “aiding and abetting” (Reuters via Yahoo! News March 18) … * Citigroup’s global markets unit has been fined $2 million by the Financial Industry Regulatory Authority (Finra) for trade-reporting violations, including publishing flawed quotes, which indirectly caused other companies to execute transactions at prices unrelated to the market value of the securities. Finra also censured and fined Comerica’s securities operation $750,000. The company agreed to repurchase auction-rate securities from customers who were subject to auctions that were not successful as of Sept. 16 (Dow Jones Newswires March 18) … * Hedge funds were liquidated at a record pace last year, according to Hedge Fund Research (HFR). About 1,471 funds closed down in 2008, or 15% of all funds. Hedge funds, lightly regulated investment pools of wealthy people and large institutions, posted record losses last year as the stock markets plunged. Hedge funds lost an average 19% in 2008, the weakest return since Chicago-based HFR began tracking the statistics in 1990. The fourth quarter accounted for more than half of last year’s closures. About 778 funds were shut down during the quarter, as investors withdrew $150 billion (Bloomberg.com and Reuters March 18) … * Mortgage-insurer PMI Group said Monday that it needs to raise capital because of losses in its U.S. insurance business. PMI lost $179 million in the fourth quarter. The firm said it is considering alternatives, including seeking funds from the Troubled Asset Relief Program, obtaining reinsurance, and debt or stock offerings (National Mortgage News via American Banker March 18) …

Market News (03/18/2009)

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MADISON, Wis. (3/19/09)
* Some of the taxpayer funds paid out to insurer American International Group (AIG) will benefit hedge funds that bet on a housing downturn, according to people familiar with the situation and documents reviewed by The Wall Street Journal (March 18). That means the U.S. government, which is trying to prop up the housing market, is at the same time putting up money that may be used to pay off investors who bet housing prices will collapse. AIG’s housing-related bets have cost taxpayers about $52 billion out of the $173 billion the government has committed to the insurer’s bailout. “AIG’s financial-products division went heavily into the business of speculation, and its gambling debts are what taxpayers are paying off right now,” noted investment consultant Martin Weiss. AIG has put some funds in escrow for at least one major bank, Deutsche Bank AG, whose hedge-fund clients made bets against the housing market. The money will be released to Deutsche if mortgage defaults increase above a certain level. An AIG spokeswoman declined to comment on the matter. A Deutsche spokesman said the bank’s “exposure to AIG was well-collateralized and hedged” … * Consumer prices increased last month as gasoline prices surged, the Labor Department reported Wednesday. The Consumer Price Index (CPI) rose by 0.4% in February following a 0.3% increase in January. The gains followed three consecutive monthly declines that raised the specter of deflation. About two-thirds of February’s increase was due to an 8.3% surge in gasoline prices. The food index fell 0.1% last month. Excluding food and energy, the core CPI rose 0.2% in February and was up 1.8% over the past year, compared with a 0.2% annual gain in the overall CPI. “The last two readings on core inflation have almost certainly given the Fed some comfort, easing fears that last quarter’s figures presaged a quick slide into deflation,” said JPMorgan economist Michael Feroli (Associated Press via CNNMoney.com March 18). Still, weak consumer spending and rising unemployment could prompt firms to cut prices in the months ahead, noted Jay Bryson, a global economist for Wachovia Corp. “I don’t think we’re out of the deflationary woods at this point,” said Bryson. Declining prices can deepen a recession by dampening workers’ wages and further weakening home and stock prices … * Mortgage applications surged last week as declining mortgage rates spurred more homeowners to refinance. The Mortgage Bankers Association’s Market Composite Index jumped 21.2% during the week ending March 13 to 876.9--the highest level since mid-January. Refinancings soared 29.6% to 4,497.6, while purchase applications edged up 1.5% to 257.1. Refinancings accounted for 72.9% of overall applications last week--up from 67.9% the previous week and 50.6% a year earlier. The average 30-year, fixed-rate mortgage (FRM) declined 7 basis points to 4.89% last week, while the one-year, adjustable-rate mortgage (ARM) edged down 1 basis point to 6.2%. Purchase applications will continue to lag in the months ahead, despite low mortgage rates, as rising unemployment and tight credit deter potential homebuyers (Reuters via Yahoo! News and Moody’s Economy.com March 18) … * More consumers are putting off purchases of big-ticket items as the economy continues to deteriorate and job losses mount. In the latest CNN/Opinion Research Corp. survey, 60% of respondents said they have postponed a major purchase such as appliances or furniture over the last six months. That’s up 10 points from December. About one-third of respondents said they’ve also cut back on necessities such as food or medicine. “That hits lower-income households the hardest,” noted CNN Polling Director Keating Holland. “A majority of those making less than $25,000 a year say they have cut back on food or medicine. But even a quarter of those making more than $50,000 say they have had to cut back on necessities,” said Holland (CNNMoney.com March 18) … * The U.S. current account deficit fell 7.9% to $673.3 billion last year as world trade contracted in the global economic slowdown, the Commerce Department reported Wednesday. The current account deficit is the government’s broadest measure of trade because it combines balances on trade in goods and services, income, and net unilateral current transfers The current account deficit rose for five consecutive years before edging down in 2007. The deficit equaled 4.7% of the overall economy in 2008, down from 5.3% in 2007. The decline in the deficit last year resulted from increases in the surpluses on income and on services. These gains were partly offset by increases in net unilateral current transfers to foreigners and in the deficit on goods. The nation’s trade deficit continues to narrow this year. The Commerce Department reported Friday that the trade deficit declined to $36 billion in January, down 9.7% from December and the lowest since October 2002 (commerce.gov and Associated Press via Yahoo! News March 18) …

News of the Competition (03/17/2009)

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MADISON, Wis. (3/18/09)
* Officials at Citigroup, Morgan Stanley and other financial institutions that have received federal bailout money are considering boosting base salaries and using other methods to sidestep new bonus restrictions, say people familiar with the matter. Treasury officials plan to issue new guidance on how to interpret the restrictions by the end of this month. “The trend is to increase the base pay in light of the reduced bonuses,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable. The public and politicians expressed outrage this week following news that American International Group plans to pay $165 million in bonuses to executives after the firm received more than $170 billion in federal bailout money (The Wall Street Journal Online March 17) … * New York Attorney General Andrew Cuomo said Tuesday that American International Group (AIG) paid bonuses of $1 million or more to 73 employees, including 11 who no longer work at the firm. Cuomo subpoenaed information from AIG Monday to determine whether the bonus payments constitute fraud under state law. Ten Democratic senators sent a letter to AIG Chairman and CEO Edward Liddy this week, asking him to renegotiate the $165 million paid out in bonuses to executives at the firm’s financial products unit, which was primarily responsible for the company’s problems. Senate Democrats also are preparing legislation that would levy an excise tax on the bonuses (The Wall Street Journal Online March 17) … * Bankrupt Lehman Brothers Holdings is auctioning a thrift and an industrial bank it owns, said a source familiar with the matter. Investment bank Lazard Ltd. is handling the sale of Lehman Brothers Bank and Woodlands Commercial Bank. A U.S. bankruptcy judge in January let Lehman pump cash into the two financial institutions to avert a seizure by regulators. Lehman filed for bankruptcy on Sept. 15, in the largest bankruptcy in U.S. history. Lehman once was the nation’s fourth-largest investment bank. In other news, jumbo-mortgage provider Thornburg Mortgage Inc. said Tuesday that it may file for Chapter 11 bankruptcy protection. The firm ran short of capital last year after investors stopped purchasing its loans. Thornburg reported a loss of $2.75 billion for the first nine months of 2008 (Reuters via Yahoo! News March 17) … * The Federal Home Loan Banks, which provide loans to more than 8,000 banks, thrifts, and credit unions nationwide, recorded a combined loss of $672 million for the fourth quarter. For all of 2008, net income fell 56% from a year earlier to $1.25 billion. The fourth-quarter loss resulted mostly from writedowns in the value of mortgage securities. The 12 Home Loan Banks owned $76.2 billion of private-label mortgage securities as of Sept. 30, according to Moody’s Investors Service. They held total capital of $51.4 billion as of Dec. 31. Some of the banks have needed to eliminate dividends and suspend member stock repurchases to rebuild their capital (The Wall Street Journal Online March 17) … * Guaranty Bank of Milwaukee is being operated under strict guidelines set by the Office of Thrift Supervision after the agency said the bank “engaged in unsafe and unsound banking practices.” The agency noted that the practices caused “diminished capital levels, poor earnings, a high level of classified assets and inadequate policies and procedures.” The agency issued a cease-and-desist order against the firm on March 11. Guaranty faces restrictions on increasing its total assets, adding or replacing board members, making contractual agreements with senior executives or directors, declaring dividends, and accepting brokered deposits. Guaranty Bank President/CEO Doug Levy said the order lets the bank “work with regulators toward a common goal of improved financial performance” (milwaukee.bizjournals.com March 17) …

Market News (03/17/2009)

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MADISON, Wis. (3/18/09)
* Hopeful economic reports greeted the Federal Reserve’s Open Market Committee as they met to evaluate policy options Tuesday. The Fed will release a statement Wednesday after concluding its two-day meeting. Analysts expect the central bank to reaffirm its expectation for interest rates to remain low and again commit itself to the programs it has enacted to ease credit conditions. The Commerce Department reported yesterday that housing starts jumped 22.2% in February, a possible sign of a recovery in the sector. And the Labor Department said its producer price index rose 0.1% following a 0.8% gain in January, easing analysts’ fears about deflation (The New York Times March 17) … * Housing starts jumped 22.2% in February to a seasonally adjusted annual rate of 583,000 units, the Commerce Department reported Tuesday. Starts had declined for the previous eight months. However, starts were down 47.3% from a year earlier. And the volatile multifamily market drove February’s gain (Moody’s Economy.com March 17). Multifamily starts jumped 82% to 124,000 in February. New construction of single-family homes rose just 1.1% to 357,000 in February, and were down 51% from a year ago. In a hopeful sign, permits for new construction rose 3% to an annual pace of 547,000 units last month. However, homebuilders’ confidence remained at a historically low level in March, suggesting further weakness ahead. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index held steady at 9 in March, just one point above the record low of 8 hit in January (nahb.org March 16). “The economy continues to be the main drag on home sales activity right now, in terms of consumer confidence across most of the country,” said NAHB Chief Economist David Crowe … * The Producer Price Index (PPI) rose 0.1% in February, largely reflecting rising prices for energy, following a 0.8% gain in January, the Labor Department reported Tuesday. Wholesale prices had declined during the previous five months, prompting concern about deflation. Still, prices were down 1.3% from a year earlier in February, the largest year-over-year decline since 2002 (The Wall Street Journal Online March 17). Excluding food and energy, core prices rose 0.2% in February and were up 4% from a year earlier. Inflation should remain tame in the months ahead, giving Federal Reserve policymakers room to continue their easing policy … * Auto delinquencies increased during the fourth quarter, according to credit-reporting agency TransUnion. The percentage of auto loans 60 days or more overdue rose to 0.86%, from 0.79% in the fourth quarter of 2007. The rate will increase to 1.13% by the end of 2009--the highest since TransUnion began tracking the data 10 years ago, predicts Peter Turek, automotive vice president at the firm’s financial services group. “There’s continued pressure on consumers in managing their debt burden. The overall economy, the weak labor market and disposable income will continue to plague them as they try to deleverage,” said Turek. Delinquencies rates in the fourth quarter were the highest in Mississippi (1.62%); California (1.46%); and Louisiana (1.37%) (Associated Press via Yahoo! News March 17) … * Credit card defaults rose in February as the economy continued to deteriorate. American Express said its net chargeoff rate increased to 8.70%, from 8.30% in January. Citigroup’s default rate rose to 9.33% from 6.95%. At JPMorgan, the rate rose to 6.35% from 5.94%. Capital One’s default rate increased to 8.06% from 7.82%. Analysts predict that overall credit card chargeoffs will increase to 9% to 10% this year, from 6% to 7% at year-end 2008. Losses could total $70 billion to $75 billion this year. Credit card lenders are tightening credit limits, raising standards, and closing accounts to protect themselves. Credit card lines will be slashed by $2.7 trillion, or 50%, by year-end 2010, predicts bank analyst Meredith Whitney (Reuters via The New York Times March 17) … * Mortgage fraud surged by 26% in 2008, even though fewer mortgage loans were issued, according to a study conducted by the Mortgage Asset Research Institute for the Mortgage Bankers Association. Report authors said the jump in fraud last year reflected both more aggressive reporting by lenders and the tight lending environment, which is prompting borrowers and lenders to act illegally. “The data suggest that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud,” said co-author Denise James. Rhode Island topped the list for mortgage fraud last year, followed by Florida, Illinois, Georgia and Maryland (washingtonpost.com March 17) …

News of the Competition (03/16/2009)

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MADISON, Wis. (3/17/09)
* Citigroup granted CEO Vikram Pandit $10.82 million in compensation last year, even as the federal government infused $45 billion in taxpayer money into the firm. Citigroup has posted more than $85 billion of writedowns and credit losses since mid-2007. Last year Pandit was given a $958,333 salary, $9.84 million in stock and option awards, and $16,193 in other compensation, according to a Securities and Exchange Commission filing. “If I were a shareholder, $11 million would be hard to justify for a year where the company’s shares fell almost 80%,” said Walter Todd, a portfolio manager at Greenwood Capital Associates (Reuters via Yahoo! News March 16) … * Federal prosecutors have notified a New York court that they are seeking the assets of Bernard Madoff’s wife, Ruth. Madoff pleaded guilty to 11 counts of securities fraud and perjury last week, for operating the largest Ponzi scheme in history. He admitted to paying off early investors with proceeds from new investors. Madoff’s attorneys have suggested that Ruth Madoff was entitled to keep as much as $69 million in assets that are in her name. But prosecutors are seeking $62 million in cash and securities in her name, $10 million in furnishings, and $10 million for a yacht and other boats (Associated Press via Yahoo! News March 16) … * Wells Fargo and HSBC Holdings defended their lending practices Friday after the National Association for the Advancement of Colored People (NAACP) announced that it was filing lawsuits against the two banks for engaging in “systematic, institutionalized racism” in their lending. The allegations “are totally unfounded and reckless,” said Wells in a statement. An HSBC spokeswoman said the bank is confident that it is treating consumers “fairly and with integrity.” The NAACP claims the two banks steered black borrowers into mortgages with higher interest rates than those given to white borrowers with similar credit statuses (The Wall Street Journal Online March 16) … * The Federal Home Loan Bank of Atlanta reported Friday that it still managed to see a profit last year despite sizeable charges related to mortgage holdings. The bank recorded $253.8 million in net earnings for 2008 even as it took $186.1 million in other-than-temporary-impairment (OTTI) charges, the Atlanta Home Loan bank said it a press release. Earnings were down 43% from 2007. “The bank continues to satisfy the funding requests of its members and remains fundamentally sound during this most difficult of market environments,” said CEO Richard Dorfman. “We are committed to continuing to provide stable and reliable funding that can assist in stabilizing the banking industry and the broader economy.” OTTI charges at the nation’s 12 Home Loan banks totaled nearly $2 billion in 2008 (/PRNewswire/ and American Banker March 16) …

Market News (03/16/2009)

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MADISON, Wis. (3/17/09)
* The recession “probably” will end this year if the government succeeds in getting the financial system to function more normally, said Federal Reserve Chairman Ben Bernanke in a taped interview with CBS’ “60 Minutes” television program on Sunday. However, he said the unemployment rate will keep rising even after the recession ends. Bernanke said the largest political danger is a lack of “political will” to solve the financial crisis. He also acknowledged the breadth of public resentment against financial institutions like American International Group (AIG) that have received tens of billions of dollars from the federal government. “Of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG,” said Bernanke. “Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, they had a--we had a situation where the failure of that company would have brought down the financial system” (Associated Press and Reuters via The New York Times March 16) … * After receiving more than $170 billion in bailout money from the federal government, insurer American International Group (AIG) plans to pay out $165 million in bonuses to executives in the same business unit that almost brought the firm to bankruptcy last year (The New York Times March 16). AIG defended the bonuses, saying the firm is contractually obligated to pay them. President Barack Obama said Monday that he plans to stop AIG from paying out the millions of dollars in executive bonuses (Associated Pressvia Yahoo! News March 16). “How do they justify this outage to the taxpayers who are keeping the company afloat,” said Obama. He said AIG is in financial trouble because of its “recklessness and greed.” AIG also announced over the weekend that it used more than $90 billion in bailout money to pay domestic and foreign banks. Some of the biggest recipients were Goldman Sachs ($12.9 billion); France’s Societe Generale ($11.9 billion); Germany’s Deutsche Bank ($11.8 billion); and Britain’s Barclays PLC ($8.5 billion) … * Foreign demand for long-term U.S. financial assets declined in January, reflecting sales of corporate and government agency debt and China’s smallest net purchase since June. Net sales of long-term stocks, notes, and bonds totaled $43 billion, compared with purchases of $34.7 billion in December, the Treasury Department reported Monday. Foreign demand for U.S. debt from firms including Fannie Mae and Freddie Mac continued to decline. Net sales totaled $22.5 billion in January, the fourth consecutive month of selling. A protracted decline in foreign holdings could be a problem for the U.S., which is issuing huge amounts of debt to finance its financial rescue programs (Bloomberg.com and AFP via Yahoo! News March 16) … * The industrial sector weakened further last month amid soft domestic and foreign demand. Industrial production plunged by 1.4% in February, the fourth consecutive decline, the Federal Reserve reported Monday. Production has declined during 10 of the past 12 months. February production was 11.2% below its year-earlier level and was at the lowest level since April 2002. Production in the manufacturing sector fell 0.7% last month, while the output of mines was down 0.4%. Utilities output fell 7.7% amid above-average temperatures. The total capacity utilization rate declined to 70.9% in February, matching the historic low set in December 1982 … * Global businesses are extremely worried about all aspects of their operations--including sales, hiring, and investments, according to the latest Moody’s Economy.com Survey of Business Confidence. Confidence is very weak across all sectors, especially manufacturing. Pricing power has collapsed. More than one-third of companies say they are cutting prices. The survey results suggest the global economy is experiencing a severe synchronized recession that isn’t expected to end anytime soon … * Consumer worries about unemployment have tripled over the past year, according to a survey by CNN/Opinion Research Corp. In the latest poll, 36% of respondents said unemployment is the most important economic issue in the U.S., up from 13% last April. The economy is respondents’ top concern, cited by 63%. “Last spring, Americans were spooked by rising gas prices,” said CNN polling director Keating Holland. “Now they’re spooked by high unemployment figures and the growing concern that good jobs aren’t available,” added Holland. The nation’s unemployment rate jumped to a 25-year high of 8.1% in February …

News of the Competition (03/13/2009)

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MADISON, Wis. (3/16/09)
* Wells Fargo and HSBC forced blacks into subprime mortgages while whites with identical loan qualifications received lower rates, the National Association for the Advancement of Colored People (NAACP) told Associated Press (The New York Times March 13). Class-action suits were to be filed against the banks on Friday, said Austin Tighe, co-lead counsel for the NAACP. He said blacks are three-and-a-half times more likely to receive a subprime loan that white mortgage borrowers. And they’re six times more likely to be given a subprime rate when refinancing their mortgages. Similar NAACP suits are pending against 12 other lenders. “This is systematic, institutionalized racism,” said Tighe … * Bank of America said Friday that its mortgage-origination business is booming following the purchase of Countrywide Financial Corp., as low mortgage rates prompt a surge in refinancings. Freddie Mac reported last week that the average 30-year, fixed-rate mortgage fell to 5.03%. Barbara Desoer, head of mortgage, home equity and insurance at Bank of America, said the acquisition of Countrywide has paid off because mortgage volume is strong. “Thank goodness we have it,” said Desoer. She also said the bank is seeking to make more jumbo mortgages. She said BofA sees an opportunity to make more jumbo loans with Merrill Lynch’s “mass-affluent” customers, even as it continues to integrate with the firm. Desoer said the bank has added about 3,000 employees to its origination unit to keep up with demand. The firm also has shifted 500 employees form its home-equity unit (Bloomberg.com March 13) … * Citigroup doesn’t need any more capital infusions from the government, Chairman Richard Parsons told Reuters (March 13) in an interview. “Citi is actually one of the better capitalized banks in the world,” said Parsons. He dismissed any prospect of the government nationalizing Citigroup. “I don’t think the administration is heading in that direction.” Citi has received a total of $45 billion in taxpayer money since October. Earlier last week, Citi announced that it was profitable in the first two months of 2009. The stock markets staged a rally following that news … * The Federal Reserve’s asset holdings head steady at $1.90 trillion last week--compared with a high of more than $2 trillion at the beginning of the year, the Fed said Thursday. However, the launch of the Term Asset-Backed Securities Lending Facility on March 25 will boost the Fed’s balance sheet. The facility is designed to expand the availability of consumer and small business loans. Last week total borrowing from the Fed’s discount window stood at $134.67 billion, down from $140.34 billion the previous week. The value of a loan to insurer AIG grew to $42.78 billion from $41.97 billion (Dow Jones Newswires March 13) … * Some investors plan to use government financing to invest $10 million to $20 million each in bonds backed by cards and other consumer and small-business loans. The Federal Reserve plans to provide $200 billion of loans under its Term Asset-Backed Securities Loan Facility, beginning March 25. With a $9 million Fed loan, a firm can leverage $1 million to purchase $10 million of asset-backed securities. Mark Fontanilla, a managing director at CapitalFusion Partners LLC, said his company plans to invest $10 million to $20 million through the program (Dow Jones Newswires March 13) …

Market News (03/13/2009)

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MADISON, Wis. (3/16/09)
* Mortgage rates retreated last week following news of a weaker job market, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage dropped 12 basis points to 5.03%, while the 15-year FRM fell 8 basis points to 4.64%, and the one-year, adjustable-rate mortgage (ARM) declined 6 basis points to 4.80%. The weak job market “may slow consumer spending and keep inflation at bay,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. He said today’s low mortgage rates give homeowners a good reason to refinance. “For instance, the Bureau of Economic Analysis reports that the effective mortgage rate for loans outstanding in the fourth quarter of 2008 was around 6.2%, or almost 1.2 percentage points above this week's average rate for 30-year fixed-rate mortgages,” noted Nothaft (MarketWatch March 13). For CUNA's Daily Financial Rates, use the link … * Consumer confidence held near a 28-year low in March amid mounting job losses and a deepening recession. The Reuters/ University of Michigan’s preliminary index of consumer sentiment inched up to 56.6, from 56.3 in February and not far from the 28-year low of 55.3 hit in November. Consumers became gloomier about current economic conditions, but slightly more upbeat about the future. The index of current conditions fell to 62.3 from 65.5, while the index of consumer expectations for six months from now rose to 53 from 50.5. Inflation expectations were mixed. Respondents expect an inflation rate of 2.2% over the next 12 months, up from 1.9% in the February poll. They expect a 2.8% rate of inflation over the next five years, down from 3.1% (Bloomberg.com and Reuters via The New York Times March 13) … * Almost one-third of consumers said it will be a year before their families are better off than they are now, according to a survey conducted by America’s Research Group for Reuters (March 11). More than one-fourth of respondents said it will take even longer for their families to be better off than they are today. A majority said they were unsuccessful in their attempts to save money. In other findings, 75% said they were using cash more often to pay for purchases, and 51% said they had stopped using their credit cards for purchases. “We’re looking at a retail meltdown much worse than anyone could have imagined six months ago,” said Britt Beemer, founder and chief executive of America’s Research Group … * The nation’s trade deficit plunged to a six-year low in January as the recession dampened demand for imports. The trade deficit totaled $36 billion, down 9.7% from December and the lowest level since October 2002, the Commerce Department reported Friday. The deficit has fallen for the past 6 consecutive months, a record string of declines. Exports of goods and services dropped 5.7% to $124.9 billion. But imports declined even more, by 6.6% to $160.9 billion. That’s the lowest import level since March 2005. The nation’s trade deficit is on track to total $432 billion this year, down almost 37% from $681.1 billion in 2008. “The narrowing reflects the ongoing economic downturn,” said Mark Zandi, chief economist at Moody’s Economy.com. “U.S. consumers are pulling back and that’s resulting in fewer imports while exports are falling. It reflects how bad economic conditions are everywhere,” added Zandi. Global trade is expected to decline this year, for the first time since 1982, in response to the global economic slowdown and financial crisis (Associated Press and Reuters via Yahoo! News March 13) … * Consumers probably will continue to see food prices increase, despite falling commodity prices, as farmers cut back production. In response to weaker demand in the recession, prices of corn, wheat, and rice have declined by one half or more this year from last year’s highs. But farmers are responding to lower commodity prices by cutting production of food crops. The USDA expects the production of meat to decline this year, for the first time since 1973. Retail food prices will increase another 2.5% to 3% this year, after surging by 5.5% in 2008, predicts Wells Fargo Economist Michael Swanson. And agricultural analysts predict that commodity prices will surge again next year as global demand strengthens, and as federal mandates for alternative fuels prompt stronger demand for corn (The Wall Street Journal Online March 13) …

News of the Competition (03/12/2009)

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MADISON, Wis. (3/13/09)
* Bernard Madoff pleaded guilty yesterday to 11 criminal counts in one of the largest investment frauds in history. “I operated a Ponzi scheme,” Madoff told U.S. District Judge Denny Chin. The 70-year-old Madoff, who spent three months under house arrest in his $7 million penthouse in Manhattan, was remanded to jail following the plea. He faces a maximum sentence of 150 years. Madoff admitted that he never invested clients’ money, but instead used new investments to pay off earlier investors. The fraud wiped out life fortunes and charities, and apparently drove at least two investors to suicide. Victims ranged from elderly retirees in Florida to Nobel Peace Prize winner Elie Wiesel and actors Kevin Bacon and Kyra Sedgwick. Prosecutors have estimated the size of the fraud at $64.8 billion (The Wall Street Journal Online and CNNMoney.com March 12) … * Several U.S. banks in Miami have been sued by the government of Chile for allegedly assisting former dictator Augusto Pinochet in stealing $26 million from his country’s government. Damages from the four lawsuits filed Wednesday probably will run into the tens of millions of dollars. After seizing power in 1973, Pinochet was president until 1990. He then was Chile’s army commander and a senator until 2004. He died at the age of 91 in 2006. One bank facing a lawsuit from the Chilean government is Pittsburgh-based PNC Financial Services Group, which acquired Washington-based Riggs Bank in 2005. Riggs paid billions of dollars in fines to the U.S. for its dealings with Pinochet (Associated Press and CBS4 via Yahoo! News March 12) … * Merrill Lynch may have misled Congress in saying last November that it planned to make bonus-payout decisions at year-end, when instead it had decided to accelerate those payouts to December, said New York Attorney General Andrew Cuomo. Traditionally, Merrill waited until January to make payouts. The attorney general also said traders at the firm may have delayed reporting huge losses late last year until after $3.62 billion in bonuses were set. Merrill lost $15.84 billion during the fourth quarter. Cuomo made the allegations in filings with the New York State Supreme Court in Manhattan on Wednesday (Reuters via Yahoo! News March 12) … * Bank of America is now the largest bank in the U.S. following its acquisition of Merrill Lynch, according to a report by SNL Financial. BofA has $2.49 trillion in assets, topping JPMorgan Chase, No. 2, by $301.4 billion. Citigroup ranks No. 3, followed by Wells Fargo, HSBC, PNC, US Bancorp, Bank of New York Mellon, SunTrust, and Capital One. The top four largest banks hold 66% of the nation’s bank assets and 58% of total deposits. These four banks also have received more than $144 billion in government bailout money (TheStreet.com via msn.com March 12) … * Visa Inc. and Master Card International plan to introduce new fees for merchant acquirers. Starting April 18, MasterCard will collect a network access and brand use fee of 1.85 cents per transaction. However, it will cut its acquirer access fee by half a cent to 0.15 cents per authorization. Starting July 1, Visa will charge a U.S. acquirer processing fee of 1.95 cents per transaction. “Most, if not all, acquirers will pass these increases along to merchants,” predicts Greg Cohen, president of Moneris Solutions U.S. The Food Marketing Institute is angry about the new charges. “The announced 200% increases in the Visa access fee and MasterCard brand usage fee will cost even relatively small companies hundreds of thousands of dollars,” said Jennifer Hatcher, group vice president of government relations at the trade association (American Banker March 12) …

Market News (03/12/2009)

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MADISON, Wis. (3/13/09)
* Foreclosure filings jumped 30% in February from a year earlier as the deteriorating economy offset efforts by lenders and the government to stem foreclosures, RealtyTrac Inc. reported Thursday. Nationwide, 290,631 homes received a default or auction notice or were seized by the lender. February filings were up 6% from January. One in 440 households received a foreclosure filing last month. The increase occurred despite temporary moratoriums by Fannie Mae and Freddie Mac, and by top banks JPMorgan Chase, Citigroup, and Bank of America. Nevada, Arizona, California and Florida had the highest foreclosure rates in the country. Some of the nation’s top lenders now own as many as 700,000 foreclosed homes that haven’t yet been offered up for sale, noted Rick Sharga, executive vice president for marketing at Irvine, Calif.-based RealtyTrac. “At least for the foreseeable future, it’s going to continue to be pretty ugly,” said Sharga (Bloomberg.com and Associated Press via Yahoo! News March 12) … * Facing mounting damages from the housing crisis, Freddie Mac said Wednesday that it plans to ask the government for almost $31 billion in additional aid. That’s on top of $13.8 billion the firm received from the government last year. The company posted a loss of more than $50 billion for 2008, reflecting losses on hedged trades and writedowns on mortgage-backed securities. Freddie said 1.7% of the single-family loans it owns or guarantees were delinquent at year-end 2008, up from 0.65% a year earlier. The number of foreclosed properties Freddie owns rose to more than 29,000, about twice the level at year-end 2007 (Associated Press via The New York Times March 12) … * Americans’ net worth declined last year, for the first time since 2002, as the value of households’ homes and stock market portfolios plunged. Net worth--the difference between assets and liabilities--was $51.5 trillion in 2008--down 18% from 2007, according to Federal Reserve data. The decline erased four years of gains and sent net wealth back to levels lower than 2004. Homeowners’ equity as a percentage of the value of their homes dropped to 43% last year--down almost six percentage points from 2007. The value of stock-market holdings declined to $12.1 trillion--from $20.6 trillion in 2007 and the lowest level since 1997. People shifted more money into banks as stock prices plunged. Total bank deposits jumped almost 5% to $7.7 trillion last year (The Wall Street Journal Online March 12) … * The job market continued to deteriorate last week, according to the Labor Department. First-time claims for unemployment insurance rose by 9,000 during the week ending March 7 to 654,000. The four-week moving average, which smoothes out weekly volatility, increased by 6,750 to 650,000. Continuing claims ---the number of people still on the benefit rolls after an initial week of aid--jumped by 193,000 during the week ended Feb. 28 to 5.3 million. That’s the highest level on records dating back to 1967, and the sixth time in the past seven weeks that claims set a new record (Associated Press via The New York Times March 12). As a proportion of the workforce, the number of people receiving jobless benefits is the highest since June 1983 … * California, South Carolina, Michigan and Rhode Island saw double-digit unemployment rates in January, the Labor Department reported Wednesday. Many economists expect the nation’s jobless rate to hit 10% by the end of this year, and to peak at 11% or more by mid-2010. The unemployment rate in California surged to 10.1% in January, from 8.7% in December, amid soaring job losses in construction, finance, and retail. Michigan’s unemployment rate jumped to 11.6%, from 10.2% in December and the highest in the nation. The rate in South Carolina rose to 10.4%, up sharply from 8.8% a month earlier and the second-highest rate in the nation. Rhode Island’s unemployment rate rose to 10.3%, from 9.4% and a record high for that state in federal records going back to 1976 (bls.gov and Associated Press via Yahoo! News March 11) … * Retail sales edged down 0.1% in February following a 1.8% gain in January, the Commerce Department reported Thursday. February sales were down 8.6% from the same month last year. Gasoline-station sales plunged 32.3% from a year earlier, and vehicle and parts sales dropped 23.5%. Mounting job losses, tight lending standards, and very low consumer confidence will weigh on retail sales going forward, noted Moody’s Economy.com (March 12). Worried consumers probably will continue conserving cash until signs of a stronger economy and slowing job losses occur …

News of the Competition (03/11/2009)

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MADISON, Wis. (3/12/09)
* Bernard Madoff plans to plead guilty to 11 felony counts, including securities fraud and perjury, for one of the largest investment frauds in U.S. history, his attorney told a Manhattan judge Tuesday. The 70-year-old former Nasdaq chairman faces a prison sentence of up to 150 years for allegedly running a Ponzi scheme that defrauded billions of dollars from retirees, charities and school trusts. Prosecutors now estimate the size of his alleged fraud at $64.8 billion. “While the alleged crimes are not novel, the size and scope of Mr. Madoff’s fraud are unprecedented,” said U.S. Attorney Lev L. Dassin in a press release (Associated Press via Yahoo! News March 11) … * Merrill Lynch has agreed to pay $7 million to settle charges by the Securities and Exchange Commission (SEC) that it gave day traders improper access to confidential information from “squawk boxes,” which internally broadcast pending orders from institutional customers. The agency said several Merrill brokers from 2002 to 2004 placed their telephones next to the squawk boxes, letting day traders at other companies learn in advance about trades planned by Merrill’s clients. They then traded ahead of those orders. The brokers were compensated by the day traders with commissions and cash. Without admitting wrongdoing, Merrill agreed to tighten policies to ensure that customer orders are confidential (Reuters via msn.com March 11) … * Freddie Mac on Wednesday named John Koskinen as interim replacement for its chief executive. He will replace David Moffett, who announced his resignation last week. Koskinen, who has been Freddie’s non-executive chairman since September, is a former corporate restructuring expert. He also worked as the chief administrator of the District of Columbia. Freddie named board member Robert Glauber to replace Koskinen as interim non-executive chairman. Freddie is working with regulators to appoint a permanent chief executive (Associated Press via The New York Times March 11) … * Hedge funds, which cater to wealthy individuals, may slash 20,000 employees worldwide in 2009--a record 14% of the industry’s workforce, as investment losses and client defections reduce fee income. The layoffs will come in addition to the 10,000 jobs that were eliminated last year, according to Options Group. The executive-search firm noted that employment peaked at 155,000 in 2007. About 920 hedge funds, or 12%, shut down last year, according to Hedge Fund Research (HFR). An estimated 70% of the 6,800 single-manager funds that remain lost money last year. Hedge funds can’t collect performance fees until those losses are recovered. HFR estimates that hedge funds have declined 0.59% so far this year, less than the declines in stocks and bonds (Bloomberg.com March 10) …

Market News (03/11/2009)

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MADISON, Wis. (3/12/09)
* American taxpayers are paying investment banks millions of dollars in fees for bond auctions that never occurred, according to statistics compiled by Bloomberg News (March 10). State and local governments will spend $211 million for the failed sales this year, based on the 0.25 percent average annual fee charged on $84.5 billion of outstanding securities. The bonds require issuers to pay their investment bankers, even if the auctions fail. The market for auction-rate bonds collapsed last year after investment banks that supported the market for the previous 20 years retreated. The fees paid by state and local governments are enriching investment banks, even as those banks receive billions of dollars in federal bailout money. And cash-strapped local governments continue to pay the fees even though they’re facing huge budget shortfalls. Houston is giving investment banks--including Goldman Sachs and JPMorgan Chase--the standard 0.25% fee, amounting to about $1.2 million a year. New York’s Metropolitan Transportation Authority (MTA) pays $2 million a year to banks to arrange unsuccessful auctions, according to MTA Finance Director Patrick McCoy … * Mortgage insurer Radian Group said it expects to incur “significant” losses this year as the deteriorating economy and surging unemployment boost the probability that borrowers will default on their mortgages. The firm also said declining home prices have increased the chance that borrowers “may voluntarily default” on mortgage payments “when their mortgage balances exceed the value of their homes,” even if they are financially able to make the payments. And Radian said some borrowers may voluntarily default to “take advantage of certain loan modification programs currently being offered.” The Philadelphia-based firm noted that some Radian policyholders with good credit scores may refinance their loans to obtain lower interest rates. Those borrowers might obtain loans that don’t require insurance, thus leaving riskier borrowers as a bigger share of policyholders. Radian said it is “actively exploring alternatives” for raising more capital, including issuing stock or selling its 22% stake in Sherman Financial Group (The Philadelphia Inquirer via Yahoo! News and Bloomberg News via American Banker March 11) … * Loans by commercial banks during this recession are essentially flat, according to statistics compiled by Moody’s Economy.com. Adjusted for inflation, loans at commercial banks increased 3.7% last year. However, that increase reflected banks’ acquisition of $266.6 billion of assets from nonbank institutions in October. Loan volumes at banks fell by $144.6 billion, or 2%, between October 2008 and January 2009. Economy.com Chief Economist Mark Zandi predicts that bank loans will start to decline even more sharply in the months ahead. Banks are “contributing to the credit crunch as they ratchet up their lending standards,” said Zandi (The Wall Street Journal Online March 11) … * Mortgage activity rebounded last week as long-term rates tumbled, the Mortgage Bankers Association reported Wednesday (mbaa.org March 11). The trade group’s Market Composite Index rose 11.3% during the week ending March 6 to 723.4. The Refinance Index jumped 13.3% to 3470.7, and the Purchase Index rose 7.1% to 253.3. The 30-year, fixed-rate mortgage (FRM) fell 18 basis points to 4.96% last week, while the 15-year FRM dropped 19 basis points to 4.54%. The one-year, adjustable-rate mortgage (ARM) rose 8 basis points to 6.21%. The 30-year FRM is down 140 basis points from a year ago, while the one-year ARM is down 51 basis points, noted Moody’s Economy.com (March 11). The research firm predicts that a housing-market rebound is still several months away, and home prices probably won’t begin to increase until late this year … * Ford Motor announced Wednesday that its new agreement with the United Auto Workers union will help the firm achieve parity with the wages paid by foreign-based automakers in the U.S. Ford said its labor and benefit costs would total $55 an hour by year end, compared with $48 to $49 an hour at foreign automakers’ U.S. factories. Ford expects the concessions to result in annual savings of $500 million. The company also plans to offer a buyout to most of its hourly employees (Associated Press via The New York Times March 11) … * Americans turned to public transportation more last year than they have in 52 years amid high energy prices and the economic downturn. Americans took 10.7 billion trips on trains, subways, and buses in 2008--up 4.7% from 2007 and the highest level in 52 years, the American Public Transportation Association (APTA) reported Monday. Auto usage declined 3.6%, or about 108 billion miles, last year. Many people are continuing to ride public transit even though gasoline prices have retreated, said APTA Vice President Rosemary Sheridan. However, she predicts that rising unemployment will reduce ridership this year (Reuters and AFP via Yahoo! News March 9) …

News of the Competition (03/10/2009)

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MADISON, Wis. (3/11/09)
* Some upbeat news from Citigroup prompted a stock market rally Tuesday. In a letter sent to employees yesterday, CEO Vikram Pandit said the bank has been operating profitably through the first two months of this year. He said the first-quarter performance so far is the strongest since the third quarter of 2007, the last time it posted net income for a full quarter. Citi’s projected earnings before taxes and one-time charges would be about $8.3 billion for the first quarter. Led by financial stocks, the Dow Jones Industrial soared more than 300 points following the news. All the major indexes jumped more than 4.5%. Citi shares surged 50%, while Bank of America shares gained 26%. Financial stocks have plunged in recent months. Citi shares declined to under $1 last week. However, some analysts said yesterday’s stock gains are a bear-market rally, a surge that soon disappears as pessimism returns to investors (Associated Press via Yahoo! News March 10) … * Freedom Bank of Georgia was shut down by regulators Friday--the 17th bank to fail this year. The failure is expected to cost the Federal Deposit Insurance Corp.’s deposit insurance fund $36.2 million. Northeast Georgia Bank agreed to assume the deposits of Freedom Bank of Georgia, which had assets of $173 million and deposits of $161 million. Last year, 25 banks were seized by regulators, up from just 3 in 2007. The largest financial institution to fail was Seattle-based Washington Mutual, which was shut down last September (Reuters via Yahoo! News March 10) … * The Federal Home Loan Bank (FHLB) of Seattle announced Monday that it didn’t meet a regulatory capital requirement at the end of February because of the declining value of mortgage-backed securities. Because of this capital deficiency, the Seattle bank said it is disallowed from paying a dividend or repurchasing capital stock. The San Francisco FHLB also has warned about a potential capital shortage. Moody’s Investors Services predicts that as many as eight of the 12 FHLBs may fall short of capital requirements after writedowns of nonagency mortgage securities. The 12 FHLBs lend funds to more than 8,000 commercial banks, credit unions, and savings and loans (Bloomberg.com March 9) … * New York Attorney General Andrew Cuomo and U.S. Rep. Barney Frank (D-Mass) sent a letter to Bank of America CEO Kenneth Lewis on Monday, demanding that he immediately provide information about employees who received bonuses of $1 million or more at Merrill Lynch in December. “We believe that as a matter of transparency and disclosure, taxpayers have a right to know where their tax dollars go once received by TARP recipients,” said Frank and Cuomo in the letter. Bank of America has received about $45 billion from the Troubled Asset Relief Program. Bank of America has asked a New York judge to order Cuomo to keep details about who received bonuses confidential. Cuomo said that Merrill Lynch gave bonuses to more than 39,000 employees shortly before the firm was acquired by Bank of America. About 700 employees received more than $1 million each. The bonuses were distributed, even as the firm posted a huge loss (The Wall Street Journal Online March 10) …

Market News (03/10/2009)

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MADISON, Wis. (3/11/09)
* The economy should begin to recover later this year, according to a survey of private economists by the Blue Chip Economic Indicators newsletter. The consensus calls for the nation’s gross domestic product (GDP) to plunge at a 5.3% annual rate in the first quarter and a 2% pace in the second quarter. The economy is then expected to expand at a 0.5% rate in the third quarter and a 1.8% pace in the fourth quarter. Respondents said economic growth will pick up in the second half of the year as declining energy costs, tax cuts, and looser credit boost consumer spending. Still, the economy is forecast to shrink by 2.6% this year--the largest annual contraction since the Great Depression. And unemployment is expected to remain stubbornly high. “The unemployment rate now is expected to average 8.6% this year and 9.1% in 2010, the highest back-to-back years of unemployment since 1982-1983” (Reuters via Yahoo! News March 10) … * The unemployment rate will jump to 9.4% this year and remain high at least through 2011, according to a survey of economists by Bloomberg News (March 10). The government reported last week that the jobless rate rose to a 25-year high of 8.1% in February. The economy has lost 4.4 million jobs since the beginning of the recession in December 2007. In the Bloomberg poll, the median forecast calls for the nation’s gross domestic product (GDP) to decline by 3.6%, peak-to-trough, during the current recession--the second-steepest contraction since World War II. The cumulative GDP decline was 3.75% in the 1957-58 recession … * Hiring will remain weak this year, Manpower Inc. reported Tuesday. In the staffing agency’s poll, 67% of employers said they expect no change in their second-quarter hiring plans, up from 60% a year ago. Just 15% expect to hire more employees, down from 26% a year earlier, while 14% expect to lay off workers, up from 9%. The net employment outlook for the second quarter declined to a minus 1, from 15 in the same period last year. The severity of job declines and the loss of jobs across a wide range of industries is like the early 1980s recession, said Manpower CEO Jeff Joerres. In contrast, job losses in the 2001 recession were concentrated in the technology sector, and job losses in the 1991 contraction were concentrated in manufacturing. Job losses are steep during the current recession because the global economy is contracting, noted Joerres. “It really compounds the effect of the downturn when the whole world gets into it at the same time,” Joerres said (CNNMoney.com and Reuters via Yahoo! News March 10) … * Some companies are hiring during the recession, according to Labor Department statistics. Currently, there are more than 2 million job openings. However, an average five people are competing for each opening. In contrast, two people competed for each job opening in December 2007, when there were 4 million job openings. The number of unemployed people jumped to 12.5 million in February, from 7 million when the recession started. The sectors where job openings are strongest now are education, health care and the federal government. Mortgage lenders and servicers also are beginning to hire because larger competitors have shut down and low interest rates have prompted a surge in mortgage refinancings. The recession has benefited discount retailers, as cash-strapped consumers hunt for bargains, and liquidators-- companies that sell the assets of bankrupt firms. Both types of firms are scrambling to hire new workers (Associated Press via washingtonpost.com March 10) … * Eastman Kodak, MGM Mirage, and American Airlines parent AMR Corp. are among 283 U.S. companies that are at the highest risk of default, according to Moody’s Investors Service. Automakers Chrysler, Ford and General Motors also are on Moody’s “Bottom Rung” list. In all, more than 23% of all U.S. speculative-grade firms are on the list, up from 9% before the credit crisis began. Moody’s predicts that 45% of Bottom Rung companies will default within the next 12 months. Firms with exposure to weak consumer spending--auto, retail, and media companies--are “highly represented” on the list, noted Moody’s. Some companies dispute their inclusion in the list. “Any speculation, however informed, suggesting that Kodak is less than financially sound is irresponsible,” said company spokesman David Lanzillo. “Kodak is financially solid, and we are taking the right actions to ensure that we remain a strong and enduring competitor,” added Lanzillo (Bloomberg.com and CNNMoney.com March 10) … * Businesses continue to slash stockpiles in the face of slumping demand. Wholesale inventories fell 0.7% in January--the fifth consecutive decline, the Commerce Department reported Tuesday. That’s the longest stretch of declines since the 2001 recession. Sales at the wholesale level tumbled 2.9% in January, the seventh consecutive decline. Wholesale inventories make up about 25% of all business stockpiles. Factories hold about one-third, while retailers hold the remainder. Analysts say companies will continue to slash inventories as demand weakens further, prompting more job losses (Associated Press via Yahoo! News March 10) …

News of the Competition (03/09/2009)

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MADISON, Wis. (3/10/09)
* The Supreme Court ruled Monday that consumers sometimes can resist credit card firms’ demands to move disputes about finance charges and late fees to arbitration. The justices voted 5 to 4 in favor of Betty Vaden in her dispute with Discover Bank. The bank filed a lawsuit against Vaden, claiming she owed $10,000 on her account. She filed a class-action counter suit, claiming the firm’s finance charges and fees violated state laws. Discover Bank asked a federal court to force her into arbitration. Writing for the majority, Justice Ruth Bader Ginsburg said state courts sometimes are the proper place for such suits. “Here, the controversy between Discover and Vaden was triggered by Discover’s garden-variety, state-law debt-collection claims against Vaden,” said Ginsburg. Arbitrators often rule in favor of credit card firms, according to a study by Public Citizen, a consumer advocacy group (Associated Press via The New York Times March 9) … * Capital One Financial became the latest financial firm to cut its dividend on Monday in a move that it said would save $500 million annually. The firm plans to cut its dividend by 87%, to 5 cents a share, beginning in the second quarter. Capital One, one of the nation’ largest issuers of Visa and MasterCard credit cards, said it is facing increased credit card losses as the economy continues to deteriorate. Its annual net chargeoff rate rose to 8.29% in January, from 7.23% in December. The company’s shares, which have declined 72% this year, rose 7% after the dividend-cut announcement. The markets generally perceive companies’ efforts to preserve capital as positive, said Anton Schutz, president of Mendon Capital (Reuters via Yahoo! News March 9) … * Bank stocks got a lift Monday from some upbeat remarks by billionaire investor Warren Buffet. “The banking system largely will cure itself,” said Buffet during an interview with CNBC yesterday. “Citigroup may be a special case. I mean, and I’m afraid that in a sense, the American public has sort of taken its view of all banks from what they read about Citigroup all the time. But there are 7,400 banks or something like that in the U.S. and most of them are just fine,” said Buffet. He noted that banks are cutting dividends, a positive sign, “so they can build equity and they’ll build equity at a very rapid rate.” Buffet also repeated his calls for a more progressive tax system. “In the past … I think guys like me have gotten off too light” (Barron’s via msn.com March 9) … * Some banks and mortgage investors are turning to renters as foreclosures mount. Renters give banks some cash flow and lower the chance a home will be vandalized. Some banks also are offering rent-to-own agreements, which give renters the option to purchase the home at a preset price. Rent-to-own is “a viable exit strategy for investors who want to cash-out but can’t sell,” said Steven Horne, founder and president of Wingspan Portfolio Advisors, a servicer of defaulted mortgages. “And it reduces the unsold inventory and absorption time lines by taking the properties off the market,” added Horne. He said the rent-to-own strategy is “an emerging niche” in his industry (American Banker March 9) …

Market News (03/09/2009)

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MADISON, Wis. (3/10/09)
* Consumer borrowing rebounded modestly in January after declining for three consecutive months, the Federal Reserve reported Friday. Consumer credit rose at an annual rate of 0.8% in January, following a 3.5% decline in December. Revolving debt, which includes credit cards, rose at a 1.2% annual pace after a 9.5% drop, while non-revolving debt--which includes student and auto loans--rose at a 0.6% annual pace after a 0.1% gain. Special factors, including pay raises for government workers and a cost of living increase on transfer payments, boosted personal income and spending in January, noted Moody’s Economy.com (March 9). However, consumer spending and revolving-credit balances are both expected to continue declining as the weakening job market causes consumers to retrench … * Consumers are managing their credit and spending better as the recession deepens. The percentage of consumers overdue on their bankcard payments by 90 days or more declined to 1.21% in the fourth quarter--down 11% from 1.36% a year earlier, according to a report by TransUnion. Consumers also didn’t spend as much on holiday gifts as in past years. Average borrower debt edged up just 1.96% to $5,729. The data show that consumers know they have to pay their credit card bills on time, and use their cards less, said Ezra Becker of TransUnion’s financial services group. “Consumers are taking a more conservative, and frankly a more healthy and more mature perspective on managing their credit,” said Becker (Associated Press via Yahoo! News March 9) … * Employment will decline further in the U.S. as a plunge in consumer spending prompts employers to cut costs, according to a Conference Board report. The Employment Trends Index fell 3.2% in February to 91, the lowest level since 1994. The index was down 22% from a year earlier, the largest 12-month decline in the 35-year history of the index. “As job losses persist, the drop in overall earnings makes a rebound in consumer spending unlikely for the next few months,” said Conference Board Senior Economist Gad Levanon. “The decline in employment will only moderate once companies anticipate some revival in domestic and global economic activity” (Bloomberg.com March 9) … * The global economy and global trade will both decline this year--for the first time since World War II, according to a new report by the World Bank. It noted that the crisis that started with sour mortgages in the U.S. is causing turmoil in poorer nations, as they face declining exports, falling commodity prices, and tight credit. “This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis,” said World Bank President Robert Zoellick. “We need investments in safety nets, infrastructure, and small and medium-size companies to create jobs and to avoid social and political unrest,” added Zoellick. The World Bank is calling on richer countries to contribute to a “vulnerability fund” to help stabilize poorer nations (The New York Times March 9) … * The value of global financial assets--including stocks, bonds, and currencies--probably plunged by more than $50 trillion in 2008--representing a year of global gross domestic product, according to an Asian Development Bank report. Global stock markets lost about $28.7 trillion last year. Another $6.6 trillion has been destroyed so far this year. “Poor macroeconomic and regulatory policies allowed the global economy to exceed its capacity to grow and contributed to a buildup in imbalances across asset and commodity markets,” said Claudio Loser, author of the report and a former International Monetary Fund director. He predicts that growth will decline by half in developing and emerging countries this year. A recovery in the global economy isn’t expected until late 2009 or early 2010 (Bloomberg.com March 9) …

Rise in savings assets halts capital accumulation

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MADISON, Wis. (3/10/09)--While the recession is causing credit union members to save more--increasing credit unions’ assets--it is having a halting effect on credit unions’ capital accumulation, according to Steve Rick, Credit Union National Association (CUNA) senior economist. The movement’s overall capital-to-asset ratio has decreased to about 10.5% in January from 11.0% in December, according to the January CUNA monthly sample of credit unions.
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“The severe recession has brought the era of credit union capital accumulation to an abrupt end,” Rick told News Now. “Total credit union capital reached $89.5 billion in January 2009, only 0.6% higher than one year earlier. The credit union movement's capital-to-asset ratio fell to 10.56% in January 2009, from 11.40% in January 2008. The ratio hasn't been this low since July 2004,” he said. “Over the past 12 months, the low capital growth was dwarfed by an 8.5% asset growth,” he continued. “The recession reduced credit union earnings while inducing credit union members to save more. CUNA Chief Economist Bill Hampel predicted a banner year for savings growth. “People aren’t spending and they are afraid to put their money anywhere else,” Hampel said. “CUNA’s economists are forecasting double digit asset growth in 2009, with little-to-no capital accumulation,” Rick said. “This would push capital-to-asset ratios down to the low 9% range by year-end, the lowest since 1994.”
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January statistics indicate that credit union savings balances increased 1.5%, to $711 billion in January 2009 from $700 billion in December 2008. Share drafts led savings growth, rising 6.2%, followed by money market accounts (2.1%), one-year certificates (1.4%), and individual retirement accounts (0.8%). Regular shares decreased 0.2%. Credit union loans outstanding went up 0.25% during January, compared with an increase of 0.03% during the same period last year. Adjustable-rate first mortgages led loan growth, rising 2.3%, followed by home equity loans (2.0%) and used-auto loans (0.87%). New-auto loans declined 0.17%, credit card loans decreased 1.0%, unsecured personal loans declined 1.03%, and fixed-rate mortgages dropped 1.7%. The loans-to-savings ratio decreased slightly, to 82.5% in January from 83.5% in December. The liquidity ratio increased to 17.3% in January from 16% in December. Regarding asset quality, credit unions’ 60-plus-day delinquencies edged up to 1.5% in January from 1.4% in December.

News of the Competition (03/06/2009)

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MADISON, Wis. (3/9/09)
* Wells Fargo became the latest bank to cut its dividend on Friday in a move that it said would save $5 billion per year. The nation’s fourth-largest bank lowered its quarterly payout to 5 cents a share, from 34 cents. Other banks to lower their dividends include Citigroup, JPMorgan Chase, PNC Financial Services Group, Bank of America and US Bancorp. Wells Fargo’s shares have tumbled 72.5% so far this year. Wells CEO John Stumpf called the dividend cut “absolutely right for our company and our shareholders” because it will help the firm boost its market share. He said the bank will “return to a more normalized dividend level as soon as practical.” The firm hopes to repay its $25 billion loan from the federal government “at the earliest practical date” (Reuters and Associated Press via The New York Times March 6) … * American Express shares tumbled below $10 on Friday for the first time in 14 years, as investors fretted that credit losses will soar amid rising unemployment (Reuters via Yahoo! News March 6). The company’s shares fell 4.45% to $9.87 in morning trading on the New York Stock Exchange. Its stock has plunged 77% over the past year. American Express’ U.S. net chargeoffs surged to 6.5% in the fourth quarter, from 3.7% a year earlier. Analysts say default rates could jump to more than 10% as unemployment increases to double-digit numbers. The Labor Department reported Friday that the nation’s jobless rate jumped by 0.5 percentage point to 8.1% in February. The economy has lost 4.4 million jobs since the recession began in December 2007 … * General Electric’s GE Capital financial unit will be profitable in the first quarter and full year and won’t need more capital or government assistance under an unlikely disaster scenario, said Chief Financial Officer Keith Sherin. He said GE has enough capital to fund itself through next year. His remarks came a day after GE’s shares plunged to 18-year lows. Sherin said GE’s holdings of commercial mortgage-backed securities are only $2.9 billion--much less than the $45 billion that has been rumored. GE officials met with credit-ratings agencies last week. They are considering lowering GE’s AAA ratings, said Sherin. But he said it’s not likely the ratings would be downgraded below AA (The Wall Street Journal Online March 6) … * Merrill Lynch, the investment bank acquired by Bank of America early this year, announced Friday that it had “discovered an irregularity” during a recent review of its trading operations (Dow Jones Newswires March 6). Merrill said it has informed regulators and is working with them to investigate the matter. Also on Friday, The New York Times reported that risk officers three weeks ago discovered that a London currency trader who had posted a $120 million trading profit for the fourth quarter may actually have lost a large sum … * The Federal Deposit Insurance Corp. (FDIC) announced low Community Reinvestment Act (CRA) grades for several institutions Thursday. The agency announced “needs to improve” ratings for Advanta Banks Corp., CIT Bank, and Republic Bank and Trust Co. The FDIC said Salt Lake City-based CIT purchased $3.1 billion in subprime loans with “predatory characteristics.” In another report, the FDIC said Draper, Utah-based Advanta violated a consumer law prohibiting unfair and deceptive prices by using “deceptive marketing practices” in a cash-back rewards program. Another report said Republic Bank of Louisville violated Regulation B though its tax refund-anticipation loans. The agency also announced “needs to improve” ratings for two smaller banks, West View Savings Bank in Pittsburgh, and Coldwater Native Bank of Coldwater, Kan. (American Banker March 6) …

Market News (03/06/2009)

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MADISON, Wis. (3/9/09)
* Nonfarm payroll employment continued to plunge in February, with employers slashing another 651,000 jobs, the Labor Department reported Friday. Upward revisions to the previous two months showed the loss of an additional 161,000 jobs. Employment has fallen by 2.6 million over the last four months. About 4.4 million jobs have been lost since the recession began in December 2007. The unemployment rate jumped to 8.1% last month, from 7.6% in January and the highest rate since 8.3% in December 1983 … * The number of people forced to work part time for economic reasons jumped by 787,000 to 8.6 million last month, according to the Labor Department report. These people would like to work full time but were working part time because their hours have been cut or because they were unable to find full-time jobs. If these part-time workers and discouraged workers--those who have given up seeking employment--are factored in, the unemployment rate would have been 14.8% in February--the highest on record, going back to 1994 (Associated Press via Yahoo! News March 6). The number of long-term unemployed--those jobless for 27 weeks or more--rose by 270,000 to 2.9 million in February. That number is up by 1.6 million over the past 12 months … * Job losses were large and widespread across almost all major sectors in February, the Labor Department reported Friday. Employment in professional and business services plunged by 180,000. The temporary-help sector lost 78,000 jobs. Temporary-help employment has plunged by 27% since the recession began. The manufacturing sector lost 168,000 jobs in February. The construction sector lost another 104,000 jobs. Employment in that sector has declined by 1.1 million since peaking in January 2007. Employment in financial services fell by 44,000 last month and has dropped by 448,000 since peaking in December 2006. Retail-trade employment fell by 40,000 last month and has dropped by 608,000 since December 2007 … * Retailers saw a larger-than-expected same-store sales gain of 0.3% in February--reflecting a 5.1% gain at discounter Wal-Mart Stores. Excluding Wal-Mart, sales fell 4.7% in February. Wal-Mart attributed its strong sales to lower gasoline prices, which freed up consumer spending on other categories. Analysts said more sales gains would have to occur in coming months to forecast a turnaround in retail sales. “We would want to see several more months along this line to come out and say we’ve made a turn here,” said Retail Metrics President Ken Perkins. In contrast with discounters last month, apparel chains saw a 5.6% year-over-year decline last month, while department-store chains posted a 9% drop (Reuters via Yahoo! News March 5) … * Mortgage rates followed bond yields up last week amid weak economic news, Freddie Mac reported Thursday. The average 30-year, fixed-rate mortgage (FRM) rose 8 basis points to 5.15%, while the 15-year FRM increased 4 basis points to 4.72%, and the one-year, adjustable-rate mortgage (ARM) rose 5 basis points to 4.86%. “Mortgage rates followed bond yields higher this week following reports of record continuing jobless claims and a downward revision in economic growth in the fourth quarter of 2008,” said Freddie Mac Vice President and Chief Economist Frank Nothaft. He also noted that new-home sales plunged 10.2% in January to the weakest pace since the Commerce Department began tracking the data in 1963. Long-term rates remain much lower than a year ago, when the 30-year FRM averaged 6.03% and the 15-year FRM was at 5.47%. However, the one-year ARM averaged 4.94% a year ago, only 8 basis points higher than last week’s 4.86% rate. For CUNA's Daily Financial Rates, use the link … * The outlook for the world’s developed countries worsened in January, as the Organization for Economic Cooperation and Development’s (OECD) leading indicator moved closer to lows last seen during the early 1970s oil crisis. The OECD’s leading indicator for 30 developed countries fell to 92.3--from 93.3 in December and near the low of 91.7 set back in late 1974. The group said there is “little clear indication of stabilization soon.” Adding to the global gloom, the OECD said economic conditions continue to deteriorate in the non-OECD major economies, including Brazil, China, India and Russia. Developing nations are seeing their economies weakened by the recessions in wealthier nations (The Wall Street Journal Online March 6) …

Hampel Everything falling but government spending

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WASHINGTON (3/9/09)--With the exception of government spending--all other economic drivers such as business investment--are falling, Bill Hampel, chief economist for the Credit Union National Association (CUNA), told the Associated Press Thursday. CUNA’s affiliated credit unions are reporting record increases in deposits, Hampel said. The national savings rate rose to 5% in January from 0% last spring, according to government figures. January’s rate is the highest since 1995 and constitutes a much faster savings increase than expected, Hampel told the news service. Consumer spending accounts for about 70% of the total U.S. economy. Spending maxed out at 71% in 2005, but it will likely drop just two-to-three percentage points over the next few years, Hampel added.

News of the Competition (03/05/2009)

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MADISON, Wis. (3/6/09)
* More than a dozen Wall Street trading firms cheated customers out of $58.4 million by improperly taking profit from trades, federal regulators said Wednesday. They said the companies, which included units of E*Trade Capital Markets, Goldman Sachs Execution, and TD Options, engaged in “front-running,” which involves trading ahead of customer orders or timing trades to grab profits. While not admitting or denying the charges, the 14 firms agreed to pay a total of $69 million in forfeited profits and penalties. “These firms violated the public trust by abusing the privileged position they had as specialists on the various exchanges,” said James Clarkson, acting director of the Securities and Exchange Commission’s New York regional office (The New York Times March 5) … * CtW Investment Group is calling for the dismissal of Bank of America Chairman and CEO Kenneth Lewis. The group, which works with union pension funds, is faulting him for not backing out of the merger with Merrill Lynch, for not disclosing Merrill’s losses in a timely manner, and for letting Merrill pay $3.6 billion in bonuses right before the merger was finalized. CtW, whose affiliated funds own 116 million Bank of America shares, said Lewis’s actions helped prompt the 90% plunge in the bank’s share price since Sept. 15. New York Attorney Genera Andrew Cuomo is investigating whether the bonuses paid out to Merrill executives violated securities laws (Reuters via The New York Times March 5) … * Former General Re Corp. Senior Vice President Christopher Garand was sentenced Wednesday to a year and a day in federal prison for an accounting fraud that artificially boosted the stock price of insurer American International Group (AIG). Prosecutors say the fraud cost AIG shareholders more than $500 million. They say AIG secretly paid Gen Re to take out reinsurance policies with the company in 2000 and 2001, a scheme that inflated AIG’s stock prices. Two other executives have been sentenced. Former Gen Re Chief Executive Ron Ferguson was sentenced to two years in prison in September. Former AIG Vice President Christian Milton was sentenced to four years in prison. Two other executives are awaiting trial (Associated Press via Yahoo! News March 4) … * Citigroup, which once was the world’s largest bank by market value, saw its stock decline below $1 in New York trading for the first time yesterday. At its late-2006 peak, Citigroup stock was worth $55.70, giving the firm a $277.2 billion market value. Its stock dropped to 99 cents in late morning trading yesterday on the New York Stock Exchange, giving the company a $5.5 billion market value. Citigroup has reported more than $37.5 billion in net losses during the past five quarters (Bloomberg.com March 5) … * Colonial BancGroup of Montgomery, Ala., is operating under a “memorandum of understanding” with regulators as it tries to raise capital or find a buyer. The firm is promised $536 million in government aid if it can raise $300 million in private capital by March 31. Colonial said SunTx Capital Partners of Dallas is considering a 24.9% stake. Colonial also has reached out to three other potential investors, and is talking with competitors SunTrust Banks, Regions Financial Corp., and BB&T Corp. about a possible acquisition, said people familiar with the matter (The Wall Street Journal Online March 4) …

Market News (03/05/2009)

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MADISON, Wis. (3/6/09)
* Mortgage delinquencies soared to a record high at year-end 2008, the Mortgage Bankers Association (MBA) reported Thursday. The delinquency rate was 7.88% at the end of the fourth quarter--up 89 basis points from the third quarter and 206 basis points from a year earlier. The rate is the highest since the trade association began tracking the data in 1972. The rate includes loans at least one payment overdue, but excludes loans in the process of foreclosure. The percentage of loans in the process of foreclosure at the end of December was 3.30%--up 33 basis points from the third quarter and 126 basis points from a year earlier. That means a record-high 11.18% of loans were at least one payment overdue or in the foreclosure process at the end of last year. The trade association predicts “a shift away from delinquencies tied to the structure and underwriting quality of loans to mortgage delinquencies caused by job and income losses,” said Jay Brinkman, MBA chief economist and senior vice president for research and economics. “While California, Florida, Nevada, Arizona and Michigan continue to dominate the delinquency numbers, some of the sharpest increases we saw last quarter in loans 90 days or more delinquent were in Louisiana, New York, Georgia, Texas and Mississippi, signs of the spreading impact of the recession,” added Brinkman (mbaa.org March 5) … * The economy sank further into recession at the beginning of 2009--prompting widespread job losses, according to the Federal Reserve’s latest Beige Book survey of the economy. Ten of the 12 Fed districts reported weaker economic activity. “The deterioration was broadbased, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions,” said the report. The Fed said a significant economic rebound won’t occur until late 2009 or early in 2010. It said there were “steep declines” in manufacturing in some sectors, and “pronounced declines overall.” And the service sector saw a “significant drop in activity accompanied by widespread job cuts.” As a result, consumer spending was “very weak,” and vehicles sales were “exceptionally sluggish.” Fed policymakers will use the report when they meet March 17-18 to discuss the economy (Associated Press via Yahoo! News March 4) … * First-time claims for unemployment insurance fell by 31,000 during the week ending Feb. 28 to 639,000, the Labor Department reported Thursday. The four-week moving average, which smoothes out weekly volatility, edged up by 2,000 to 641,750. Continuing claims, the number of people continuing to collect jobless benefits after an initial week of aid, declined by 14,000 during the week ended Feb. 21 to 5.106 million. However, an additional 1.4 million people receive jobless benefits under a separate extended program (Associated Press via The New York Times March 5). That brings total jobless benefit rolls to 6.5 million--up sharply from 2.8 million a year earlier … * U.S. nonfarm productivity was much weaker than first estimated in the fourth quarter as output declined at the largest pace since 1982, according to a Labor Department report. Productivity fell at a revised 0.4% annual pace, down sharply from the initial estimate of a 3.2% increase. Output declined a revised 8.7% in the fourth quarter. For all of 2008, productivity rose an unrevised 2.8%, the largest gain since 2003. Unit labor costs rose 0.9% last year (MarketWatch and Reuters via Yahoo! News March 5) … * Investors won’t recoup their stock-portfolio losses for three years, or perhaps almost six years, say most investment advisers surveyed by Charles Schwab. Fifty-five percent of advisers say it will take as long as three years just for investors’ portfolios to get even again. Thirty-five percent say it will take until year-end 2014. Respondents are divided on the economy, with 44% predicting that the recession will be over by year-end, and 41% expecting the downturn to last into 2010. Nearly 70% of advisers say consumer savings will increase as unemployment continues to rise and home values continue to decline (MarketWatch March 4) … * General Motors Corp.’s auditors have raised “substantial doubt” about the automaker’s ability to continue its operations, GM said in a filing with the Securities and Exchange Commission. “The corporation’s recurring losses from operations, stockholder’s deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern,” said Deloitte & Touche auditors in a report. GM, which has received $13.4 billion in loans from the federal government, is seeking another $16.6 billion. The company has until March 31 to submit a restructuring plan to the government. The auditor’s warning doesn’t mean the firm is headed for bankruptcy, said Harlan Platt, a professor at Northeastern University in Boston. He said union concessions and other restructuring moves will make GM strong again when vehicle sales recover (Associated Press via Yahoo! News March 5) …

News of the Competition (03/04/2009)

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MADISON, Wis. (3/5/09)
* Merrill Lynch’s top 10 executives were paid a total of $209 million in cash and stock last year, even as the firm’s net loss soared to $27.6 billion, according to an analysis by The Wall Street Journal (March 4). That’s up from $201 million paid to the top ten in 2007. Much of last year’s compensation came from bonuses. Some of the top earners ran units that performed well last year. However, some traders and investment bankers saw only small compensation cuts even though the units they ran experienced huge losses. New York Attorney General Andrew Cuomo has subpoenaed information about the bonuses paid to Merrill employees just before it was acquired by Bank of America … * Bank of America’s credit rating was lowered for the second time in the last three months on Tuesday. “We downgraded BofA one notch because we believe that the economic weakness will persist and that, in turn, earnings pressure for Bank of America will be more intense than we anticipated as recently as Dec. 19,” when the firm’s rating was last lowered,” said Standard & Poor’s analyst John Bartko. S&P said further writedowns associated with the bank’s acquisitions of Merrill Lynch and Countrywide Financial are a possibility. In an interview this week, BofA CEO Ken Lewis said the firm’s request for $20 billion of government money to shore up its acquisition of Merrill Lynch was a “tactical mistake” that made the company seem as weak as Citigroup (FT.com March 4) … * TCF Financial Corp. said it plans to return more than $361 million in funds it received from the federal government four months ago. “The rules have definitely changed,” since TCF took the funds under the Troubled Asset Relief Program (TARP), said Chairman and CEO Bill Cooper. “As a result, public perception views those banks that took the TARP money as having done so out of weakness and a need to survive without distinction among TARP programs or individual bank capital adequacy,” added Cooper (Associated Press via Yahoo! News March 4) … * The Office of the Comptroller of the Currency (OCC) was slow to mandate changes at two banks that were taken over by the government last year, according to a report by the Treasury Department’s Office of Inspector General. Despite identifying various problems over several years at First National Bank of Nevada and First Heritage Bank, the report said the OCC didn’t move quickly enough to ensure a change in the banks’ behavior. The two banks were taken over by the government in July, at a cost of $862 million to the Federal Deposit Insurance Corp.’s insurance fund. The report found that the OCC flagged problems at First National Bank of Nevada as early as 2002. “We believe the OCC did not issue formal enforcement action for any of the banks in a timely manner, and was not aggressive enough in its supervision of the banks in light of their weak management practices,” said the report (The Wall Street Journal Online March 4) … * Nonbankers are seeing more acquisition targets in the financial services industry, even as banks shy away from acquisitions. For example, real-estate attorney Frank Chapman formed Palm Financial Inc. with his wife to acquire SouthFirst Bancshares. They see many bargains in the sector as valuations plunge. Gary Kennedy, director of advisory services for Sheshunoff & Co. Investment Banking, represented SouthFirst in the deal. Kennedy said he’s working with other non-banker groups that are seeking bank acquisition deals (American Banker March 4) …

Market News (03/04/2009)

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MADISON, Wis. (3/5/09)
* Vehicle sales slumped further last month as the economy weakened and credit remained tight. Vehicles sold at a seasonally adjusted annual pace of only 9.1 million units in February--compared with 9.5 million in January and 15.3 million in February 2008. Last month’s sales pace was the weakest since 1981. Sales declined for almost all manufacturers. However, Detroit’s Big Three domestic automakers were especially hard hit. The Big Three’s sales declined to 4 million units in February--compared with an average 11 million units at the beginning of the decade. Vehicle sales are expected to continue deteriorating as job cuts mount, and as consumers continue to watch their stock portfolios and homes lose value (Moody’s Economy.com March 4) … * More than 8.3 million mortgages were “upside down” at the end of December--meaning homeowners owed more on their mortgages than their homes were worth, according to a report released Wednesday by First American CoreLogic. That’s up from 7.6 million at the end of the third quarter. In other words, 20% of people with mortgages were underwater at the end of last year, up from 18% three months earlier. Conditions are expected to deteriorate further as home prices continue to decline. The report found that an additional 2.2 million mortgages are approaching negative equity. At the end of last year, California led the nation in the number of underwater borrowers, at 1.9 million, followed by Florida (1.3 million); Texas (497,000); Michigan (459,000); and Ohio (435,000). CoreLogic predicts that in coming months the biggest increases in underwater borrowers will occur in states--including New York, New Jersey, Montana, and Hawaii--that haven’t yet seen large home-price declines (MarketWatch and CNNMoney.com March 4) … * Corporations announced 186,350 job cuts in February--down from a seven-year high of 241,749 in January but up 158% from a year earlier, according to a report by the outplacement firm Challenger, Gray & Christmas. So far this year, employers have announced 428,099 layoffs--up 191% from the first two months of last year. The auto sector announced 61,288 layoffs in February, accounting for one-third of the total. Retailers announced 18,759 job cuts. The outplacement firm expects the job market to begin to stabilize. “The decline in job cuts last month offers some hope that January was the peak and we will now see layoffs begin to fall or at least stabilize,” said John Challenger, CEO of the Chicago-based firm. The report covers only a small portion of the employees who actually lose their jobs each month (MarketWatch and Moody’s Economy.com March 4) … * The service sector contracted for a fifth consecutive month in February as the recession deepened. The Institute for Supply Management’s (ISM) non-manufacturing index, which includes banks and retailers, fell to 41.6--from 42.9 in January and below the 50 level that signals expansion in the sector. About 75% of Americans work in the service sector. Respondents in the poll said they “are concerned about the soft market conditions, the negative outlook for employment, and the overall state of the economy,” said Anthony Nieves, chairman of the group’s non-manufacturing business survey committee. Hiring remained weak, with the employment index at 37.3, up from 34.4. The new-orders index fell to 40.7 from 41.6. The report followed Monday’s release of the ISM factory index, which edged up to 35.8 from 35.6. Manufacturing fell at a “rapid rate” last month, said Norbert Ore, director of the manufacturing survey (Associated Press via Yahoo! News and The Wall Street Journal Online March 4) … * Mortgage activity retreated again last week as both purchase and refinancing applications declined, the Mortgage Bankers Association reported Wednesday. The trade group’s Market Composite Index tumbled 12.6% during the week ending Feb. 27 to 649.7. The Refinance Index plunged 15.3% to 3063.4, and the Purchase Index dropped 5.6% to 236.4. Refinancings made up 66.9% of overall applications last week, down from 69.7% the previous week but up from 52.4% a year earlier. Mortgage rates were mixed. The average 30-year, fixed-rate mortgage rose 7 basis points to 5.14%, while the one-year, adjustable-rate mortgage was unchanged at 6.13% (mbaa.org March 4) … * Luxury homebuilder Toll Brothers reported Wednesday that its loss narrowed in the fiscal first quarter as lower expenses offset plunging revenue. The company lost $89 million in the quarter ending in January, compared with a $96 million loss a year earlier. “Faced with a plunging stock market, weak consumer confidence, growing job loss, challenging credit markets, and a hobbled economy, we continue to focus on maintaining a strong balance sheet and significant liquidity,” said Chairman/CEO Robert Toll. The company expects to deliver 2,000 to 3,000 homes this year (Associated Press via Yahoo! News March 4) …

Consumer filings for bankruptcy up 29 in February

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MADISON, Wis. (3/5/09)--The number of U.S. consumers filing for bankruptcy in February rose 29% from a year earlier, which could mean some challenges for credit unions. With economic troubles worsening, that percentage is expected to continue rising, the American Bankruptcy Institute (ABI) said Tuesday (Reuters March 3). “The latest bankruptcy numbers do not bode well for credit union asset quality in 2009,” Steve Rick, senior economist at the Credit Union National Association (CUNA), told News Now. “Numerous factors are placing immense stress on household finances,” Rick said. “From falling equity and home prices eviscerating consumers’ wealth, to job losses and pay cuts decimating their incomes, loan delinquency and charge-off rates will reach highs not seen in a generation. “Credit union loan charge-offs as a percent of total loans climbed to 0.84% in 2008, up from 0.51% in 2007,” he added. “CUNA is forecasting charge-offs could reach 1.25% in 2009.” In February, 98,344 consumers filed for bankruptcy, according to ABI data, compiled from the National Bankruptcy Research Center. “We expect at least 1.4 million bankruptcies this year,” ABI Executive Director Samuel Gerdano said in a statement.

News of the Competition (03/03/2009)

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MADISON, Wis. (3/4/09)
* The nation’s four largest banks--Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo--may have to raise as much as $800 billion in additional capital to weather further loan losses and investment-banking writedowns, according to Lord, Walen LLC’s Institutional Risk Analytics. The study put the banking industry through a stress test using fourth-quarter statistics. The average measure of stress surged 15% to 1.77 in the fourth quarter. The test was probably “two or three times more severe” than the stress testing the Treasury Department is planning to conduct, said Christopher Whalen, managing director at the company. Still, he said large banks will need much more capital regardless of the severity of stress testing (Financial Planning.com via Yahoo! News March 3) … * Banks increasingly are deciding not to accept government funds, or are paying them back, because they don’t want to be seen as weak banks, and because they don’t want to accept public criticism and government control of their operations. Northern Trust Corp of Chicago sent a letter last week to U.S. Rep. Barney Frank (D-Mass.) saying it planned to repay its $1.6 billion loan after it was criticized in the media for sponsoring a golf tournament. Oak Financial Corp of Byron, Michigan declined a $20 million investment last week. “We became increasingly concerned with the constraints, both existing and proposed, of the program and with the excessive political posturing surrounding it,” said President/CEO Patrick Gill in a press release (American Banker March 2) … * Maurice “Hank” Greenberg, the former CEO of American International Group (AIG), filed a lawsuit against the company on Monday, claiming the firm misled investors about its exposure to subprime mortgages. Greenberg, who led AIG for 38 years, said the company destroyed his fortune by lying about its financial strength. He was the firm’s largest non-institutional shareholder. AIG’s stock plunged to just 42 cents Monday after the firm received a new $30 billion lifeline from the federal government. The company has received a total of more than $170 billion from the government. “We believe the suit is without merit and we will defend ourselves vigorously,” said AIG spokeswoman Christina Pretto (Associated Press via The New York Times March 3) … * Citigroup announced Tuesday that it will lower the mortgage payments of some homeowners to an average $500 a month for three months as part of a program to help the unemployed. Those qualifying for help in the Homeowners Unemployment Assist program include those that are 60 days or more overdue on their mortgage payments or in foreclosure and can pay the lower mortgage payment. Citigroup said thousands of homeowners probably will be eligible for the program over the next two years (Associated Press via Yahoo! News March 3) …

Market News (03/03/2009)

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MADISON, Wis. (3/4/09)
* The percentage of mortgage holders at least 60 days overdue on their mortgage payments jumped to 4.58% in the fourth quarter of last year--up 16% from 3.96% in the third quarter and 53% from 2.99% in the fourth quarter of 2007, according to a report by TransUnion LLC. It was the eighth consecutive quarterly increase in delinquency. While not unexpected, the huge increase from last year was “alarming,” said Keith Carson, senior consultant in the financial services group at TransUnion. He noted that the main driver of delinquencies is negative equity. “When homeowners owe more on their mortgages than the houses are worth, data show a higher likelihood that consumers will simply walk away.” The credit-reporting agency predicts that delinquency rates will hit 8% by year end. The mortgage outlook isn’t expected to improve until mid-2010 (Associated Press via The New York Times March 3) … * Pending home sales fell to a record low in January, even as housing affordability increased to a record high, the National Association of Realtors (NAR) reported Tuesday. The trade group’s Pending Home Sales Index dropped to 80.4--from 87.1 in December and the lowest level since the index was launched in 2001. It’s ironic that housing affordability has improved dramatically even as sales are down, said NAR President Charles McMillan. “With the drop in interest rates, a median-income family can afford a home costing $20,000 more than a year ago for the same monthly mortgage payment,” said McMillan. NAR’s Housing Affordability Index jumped 13.6 percentage points to 166.8 in January, the highest level since tracking began in 1970. The index means a family earning the median income of $59,800 can afford a home costing $283,400 with a 20% downpayment. However, worries about mounting job losses are prompting many prospective buyers to postpone purchases (realtor.org March 3) … * U.S. vehicle sales will probably plunge another 30% to 40% and may never recover to previous levels because easy credit and cheap gasoline are a thing of the past, according to Canadian Imperial Bank of Commerce’s World Markets report. “Detroit’s biggest problem isn’t that it’s producing the wrong type of vehicles but, rather, that it’s producing too many vehicles--far too many,” said CIBC World Markets Chief Economist Jeff Rubin. The report predicts that Americans will purchase just 8 million to 9 million vehicles a year over the next five years, about half the volume purchased during the prior five years. Rubin predicts that gasoline prices will rebound to the $4 a gallon level after the recession ends. These trends will prompt U.S. consumers to be more like Europeans, owning fewer cars and taking more public transit (Dow Jones Newswires March 2) … * Ford Motors announced Tuesday that its U.S. sales plunged 48% in February, as low-rate financing and generous rebates failed to lure worried consumers. The automaker sold 99,060 vehicles during the month, compared with 192,248 in February 2008. Industrywide, vehicle sales plunged in January to the lowest level since December 1981. Analysts expect February data to be even weaker, as consumers worried about losing their jobs keep their vehicles longer, or opt to purchase a used vehicle instead of a new one (Associated Press via The New York Times March 3) … * Japan will dip into its $1 trillion of foreign currency reserves to lend dollars to its struggling exporters--an action that could help Toyota Motor and other exporters cope with the global financial crisis. About $5 billion in reserves will finance a government-backed bank that will make dollar-denominated loans. Toyota’s auto-loan unit could be an early beneficiary of the new lending facility. Toyota Financial Services wants more cash to help it make loans to its U.S. customers. Japan’s auto exports have plunged as the global economy has fallen into recession. Japan’s economy contracted at a 12.7% annual pace in the fourth quarter, the largest contraction in decades (The New York Times March 3) … * Small businesses and consumers increasingly are using the Troubled Asset Relief Program (TARP) to criticize banks for tight credit, lavish bonuses, and private jets. For example, Granite Development, a North Carolina commercial real estate builder, filed a lawsuit against Wachovia, claiming that it tried to force the company to accept “onerous and unreasonable terms” on loan extensions. The complaint referred to the $25 billion in TARP money received by Wells Fargo, which acquired Wachovia on Dec. 31. Public relations analysts say remarks to Congress by President Barack Obama have encouraged consumers and small firms to criticize the tight credit policies of lenders who’ve received bailout money. Obama told Congress last week that he would hold banks “fully accountable for the assistance they receive, and this time they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer” (American Banker March 2) …

News of the Competition (03/02/2009)

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MADISON, Wis. (3/3/09)
* Senior officials at the Office of Thrift Supervision (OTS) ignored warnings about dangerous risks at IndyMac Bancorp, the California mortgage lender that failed in July, according to a report released last week by the Treasury Department’s inspector general. The report said OTS officials overlooked basic problems and ignored warnings from their own employees. In some instances, officials identified problems, but didn’t require reforms. Regulators had blamed U.S. Sen. Charles E. Schumer (D-N.Y.) for prompting IndyMac’s failure when he publicized the firm’s problems. The report said Schumer wasn’t the cause for the failure because IndyMac “was already on a course for probable failure.” Schumer’s office said the report showed the system “needs to be rebuilt from scratch.” It shows regulators “not only turned a blind eye to IndyMac’s reckless lending practices, but also actively participated in a cover-up to help the bank avoid scrutiny” (washingtonpost.com Feb. 28) … * Two more banks failed on Friday, pushing the total number of failures this year to 16. Last year, 25 banks failed. The failures of Security Savings Bank of Henderson, Nevada and Heritage Community Bank of Glenwood, Ill., on Friday will cost the Federal Deposit Insurance Corp.’s (FDIC) Deposit Insurance Fund about $110.7 million. Bank of Nevada agreed to assume all of Security Savings Bank’s deposits and purchase $111.3 million of its assets. MB Financial Bank of Chicago agreed to purchase all of Heritage’s deposits and $230.5 million of its assets. The FDIC’s list of troubled banks rose to 252 in the fourth quarter, the highest level since 1994 (CNNMoney.com Feb. 27) … * Community bankers say the Federal Deposit Insurance Corp.’s new deposit insurance premium assessments are unfair because they didn’t cause the hits to the deposit insurance fund. And they say the special assessment will erode their earnings at the same time the government is pressuring them to boost lending. “Apparently, history has taught us nothing,” said Grand Rapids State Bank President/ CEO Noah Wilcox. “The federal Deposit Insurance Fund bailed out the S&Ls in the 1980s and now we are pouring the risk of large, systemically important institutions on to the back of the community banks.” Republic Bancorp CEO Steven Trager said he’s mad that his firm must pay for the mistakes of its large competitors. “I am frustrated that they continue to protect and aid those that made bad decisions” (American Banker March 2) … * HSBC PLC, Europe’s largest bank, announced Monday that it plans to cut 6,100 jobs as it shuts down its consumer loan business in the U.S. The company also reported a 70% plunge in net profit for 2008, and said it will raise $17.7 billion in new capital through a share issue. HSBC said it will cut its dividend and forgo bonuses for top executives. HSBC will shut down its HFC and Beneficial brands in the U.S., but will retain its HSBC Bank USA branch banking business. “Management believes it will take years before property values return to the levels seen prior to the decline and, as such, has concluded that recovery in the sub-prime mortgage lending business is uncertain and the industry is unlikely to stabilize for a number of years,” said HSBC in a statement (Associated Press via The New York Times March 2) …

Market News (03/02/2009)

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MADISON, Wis. (3/3/09)
* The Dow Jones Industrial Average plunged below the critical 7,000 level Monday for the first time in more than 11 years as investors became more pessimistic about the health of banks and the overall economy. A huge $61.7 billion quarterly loss at insurer American International Group ignited new fears about the financial system. And government reports on manufacturing and construction showed economic weakness spreading. The Dow tumbled 226.52, or 3.2%, to 6,836.41 in midday trading. The index last closed under 7,000 on May 1, 1997. The economic crisis has cut half the Dow’s value since it hit a record high of more than 14,000 in October 2007 (Associated Press via Yahoo! News March 2) … * The federal government agreed Monday to provide another $30 billion in taxpayer money to insurer American International Group (AIG), which reported a $61.7 billion loss for the fourth quarter, its largest quarterly loss in history. AIG wrote down $25.9 billion in assets, including credit-default swaps and mortgage-backed securities. The government already owns almost 80% of AIG’s holding company because of three earlier interventions. Federal officials said they had to prop up AIG further because its business activities are so completely interwoven throughout the global financial system. Fitch Ratings reaffirmed some of AIG’s ratings following news of the added government aid (The New York Times March 2) … * The manufacturing sector continued to slump in February. The Institute for Supply Management’s (ISM) factory index edged up to 35.8, from 35.6 in January. Readings under 50 indicate contraction in the sector. Manufacturing fell at a “rapid rate” last month, said ISM survey director Norbert Ore. “Survey respondents appear generally pessimistic about recovery in 2009,” noted Ore, though “some express hope that the stimulus package will help their industry.” Employment continued to contract in February. The employment index sank to 26.1, from 29.9 and the lowest level on record. Inflation remained tame. The prices-paid index was unchanged at 29 (The Wall Street Journal Online March 2) … * Construction spending plunged for a third consecutive month in January to a four-year low, the Commerce Department reported Monday. Spending tumbled 3.3% to an annual rate of $986.2 billion, the lowest since June 2004, after falling 2.4% in December and 3.5% in November. Construction spending was down 9.1% from a year earlier in January. Private residential spending was down 28% year over year to a $291.5 billion rate, the lowest level in more than 10 years. Public construction rose 4.4% (census.gov and Reuters via Yahoo! News March 2) … * Consumer spending rebounded in January, reflecting purchases of food and other nondurable goods, the Commerce Department reported Monday. Consumer spending rose by 0.6%, the first gain in seven months. Spending on nondurables rose 1.3%, while spending on durables such as vehicles rose just 0.1%. Personal income increased 0.4%, reflecting pay increases for government employees and cost-of-living adjustments to federal transfers. Wages and salaries dropped 0.2%, the third consecutive decline. Personal savings as a percentage of disposable personal income rose to 5% in January, from 3.9% the previous month and the highest level since 1995. Inflation remained tame. The core PCE deflator, the Federal Reserve’s preferred inflation measure, rose 1.6% over the 12 months ending in January, the smallest increase since December 2003. Consumer spending and income gains are expected to remain weak as the economic downturn continues to boost unemployment (bea.gov and Associated Press via Yahoo! News March 2) …