Finance Blog number 1

The U.S. government’s emergency rescue of Citigroup Inc. offers a new model for bank bailouts: explicitly insuring against losses on toxic assets, with taxpayers footing the bill.

The Citigroup plan extends the federal commitment beyond the previous framework of capital injections from the Treasury and credit from the Federal Reserve. Now, the U.S. is a partner in the performance of $306 billion in real-estate loans and securities, sharing losses beyond $29 billion on what are likely to be some of Citigroup’s worst holdings.

“Everybody and his brother has got to have their hand out now,” said Eric Hovde, chief investment officer at Hovde Capital Advisors, which manages $1 billion in financial-services stocks. “The whole problem is so much bigger and deeper than the Fed and Treasury ever understood.”

Taxpayers are likely to be at greater risk from the new template, which may be used to help more companies as debt writedowns continue to climb, analysts said.

“Every situation will need to be evaluated on a case by case basis, but obviously we are able to draw from our experiences as we work through these issues in the financial system,” Treasury spokeswoman Brookly McLaughlin said.

Citigroup’s crisis escalated as it was forced to take on its balance sheet a number of special units created to invest in riskier securities. The New York-based bank’s shares lost 60 percent last week, and then recouped some of those losses yesterday after the government’s rescue. Other lenders remain vulnerable.

Weakened Banks

Wells Fargo & Co. is absorbing Wachovia Corp., the bank that regulators pushed in September to merge amid mounting losses from $120 billion in a portfolio of home loans. Bank of America Corp. has taken on both Countrywide Financial Corp., once the biggest independent mortgage lender, and Merrill Lynch & Co., the securities dealer hobbled by $24 billion of losses. Morgan Stanley slumped almost one third in the past three months.

Other banks “are going to show up” and ask for the Citigroup deal, predicted Joseph Mason, a professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.

The loss-sharing plan is another twist in the saga of Treasury Secretary Henry Paulson’s management of the $700 billion Troubled Asset Relief Program. Since the rescue fund was approved by Congress and enacted last month, Paulson has been criticized by lawmakers and others for not having a clear design for using the money. President-elect Barack Obama joined the chorus yesterday.

‘Confusion’ on Strategy

There has been “confusion on what the overall direction might be” of the Bush administration’s plans, Obama said in a press conference in Chicago. At the same time, he pledged to “honor the commitments” of the outgoing team.

“The model is that there is no model,” said V business cards. Gerard Comizio, senior partner in the banking practice at the Paul, Hastings, Janofsky & Walker law firm in Washington. “It is an improvisation battle plan.”

Under the terms of the agreement, Citigroup will cover the first $29 billion of pretax losses from the $306 billion asset pool, in addition to reserves it already set aside.

Citigroup will accept 10 percent of losses above that amount, with the government responsible for 90 percent. The Treasury is second in line, taking $5 billion in losses, and the Federal Deposit Insurance Corp. is third, absorbing up to $10 billion. If the portfolio plummets through those triggers, the Fed steps in with a loan for the remaining assets.

Initial $25 Billion

U.S. authorities acted after the second-biggest U.S. bank by assets touched $3.05, the lowest level since 1992, threatening confidence among its depositors and counterparties. Citigroup had already received a $25 billion infusion under Paulson’s $250 billion capital-injection program.

“The Treasury and the Fed are doing what they can do to hold the pieces together, and it hasn’t been easy,” said Martin Regalia, chief economist at the U.S. Chamber of Commerce, which lobbies on behalf of 3 million businesses. “If we don’t keep the financial system going that is going to impose costs on the American public that will be real and palpable.”

The Fed’s exposure in the deal also represents a tack in the way the central bank has approached the crisis.

Since what was an effective purchase of $29 billion Bear Stearns Cos. assets in March, Fed officials have shown a preference for providing short-term credits for firms facing a cash squeeze.

Assets Swell

The central bank’s balance sheet expanded $1.3 trillion in the past year as the Fed auctioned $415 billion of cash to banks and purchased $272 billion of commercial paper.

Fed officials have pushed to keep the risks involved in future bailouts at the Treasury, which would be forced to negotiate with Congress about the use of taxpayer funds.

Now, the Fed is stepping outside the liquidity boundary once again. The central bank took a step toward risk sharing earlier this month when it opened two new facilities with up to $52.5 billion in loans to help American International Group Inc. wind down its portfolio.

“It is clear that regulators still lack a comprehensive plan to address problems in our financial markets,” Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said through his spokesman Jonathan Graffeo. “It is unclear whether they have carefully considered the implications of their continued ad-hoc approach.”

Source

Five years after Federal Reserve Chairman Ben S. Bernanke helped stamp out the risk of deflation, the threat is returning as the financial crisis and a worsening economic slump pull inflation lower.

Fed policy makers now predict the U.S. economy will contract until the middle of next year, according to minutes of their Oct. 28-29 meeting released yesterday in Washington. Government figures showed that consumer prices excluding food and fuel costs fell for the first time since 1982 last month.

The minutes, along with a slide in financial stocks to the lowest level in 13 years, increased the odds that the Fed will cut its benchmark interest rate next month. Bernanke may also need to revisit the unorthodox policy options, such as purchases of U.S. government debt, that he outlined as a board member in 2003, Fed watchers said.

“The Federal Reserve put deflation back on the table as a significant policy concern,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. “There does not appear to be any barrier to lowering'' main rate below the current 1 percent level, he said.

Deflation, or prolonged declines in prices, hurt the economy by making debts harder to pay off and lenders more reluctant to extend credit. Japan is the only major economy to have suffered the phenomenon in modern times.

`Lesson' for Kohn

“A lesson I take from the Japanese experience is not to let that get ahead of us, to be aggressive,'' Bernanke's deputy, Vice Chairman Donald Kohn, said in answering questions after a speech yesterday in Washington. “Whatever I thought that risk was four or five months ago, I think it is bigger now even if it is still small.''

Kohn and Bernanke were both at the Fed in 2003, when the central bank's preferred consumer-price gauge reached a low of 1.3 percent, spurring then-Chairman Alan Greenspan to cut the key rate to 1 percent.

Some policy makers saw a risk last month that the inflation rate will fall below their mandated goal of “price stability.'' “Aggressive easing should reduce the odds of a deflationary outcome,'' they said, while noting that the low federal funds rate target “would pose important policy challenges'' in that case.

The Fed's actions so far, including unprecedented injections of liquidity, haven't been enough to spur lending. Banks may make it even harder to get loans as their share prices plummet. Citigroup Inc. closed at a level unseen since 1995. The Standard & Poor's 500 Financials Index fell 12 percent to 139.84.

Hedge-Fund Risk

Fed officials expressed concern at last month's meeting at the risk for “financial strains to intensify if some investors, such as hedge funds, found it necessary to sell assets and as lending institutions built reserves against losses cash loan in one hour.''

“Credit availability certainly hasn't increased,'' said Lyle Gramley, a former Fed governor. “That has to be a major concern for the Fed because historically the way we get out of recessions is having the Fed push down hard on the accelerator. If that is not working very well, we have to look somewhere else for salvation.''

Future action by the central bank might include “aggressively buying long-term Treasury issues,'' Gramley, now a Washington-based senior economic adviser for Stanford Group Co., said in a Bloomberg Television interview.

Fannie, Freddie

Michael Feroli, a JPMorgan Chase & Co. economist who used to work at the Fed, said the central bank could also purchase the debt of Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government in September.

“Before ramping up'' such programs, the Fed might “first communicate to the markets that the nature of the current economic woes should keep rates low for an extended period,'' Feroli wrote in a note yesterday.

The Fed's balance sheet has already doubled to almost $2 trillion as officials introduced programs to inject liquidity into the economy.

“Several'' participants at last month's Federal Open Market Committee meeting judged the extraordinary programs will need to be “unwound appropriately as the financial situation normalized,'' the minutes said.

Bernanke, a scholar of the Great Depression and former Princeton University professor, detailed possible assets the Fed could buy to fight deflation in a November 2002 speech when he was a governor. “Sustained deflation can be highly destructive'' and “should be strongly resisted,'' he said.

Ready to Act

Fed officials at last month's meeting “agreed to take whatever steps were necessary to support the recovery.''

Policy makers projected the Fed's preferred gauge of inflation at 1.5 percent to 2 percent next year, with a further slowdown in the next two years, reaching 1.3 percent to 1.7 percent in 2011, yesterday's report showed.

Some officials “suggested that additional policy easing could well be appropriate at future meetings,'' the minutes said.

“The door is wide open for a rate cut of half-a-point at the December 16 meeting,'' said Allen Sinai, chief economist at Decision Economics in New York. He predicts the central bank will pare the main interest rate to 0.25 percent in January.

Source

Indonesia's economy grew at the slowest pace in six quarters as declining prices of palm oil, rubber and coal reduced the value of exports.

Southeast Asia's largest economy expanded 6.1 percent in the third quarter from a year earlier, after growing 6.4 percent in the preceding three months, the Central Statistics Bureau said in Jakarta today. That's more than the median 5.9 percent forecast of 22 economists in a Bloomberg News survey.

Exporters in Indonesia, the world's biggest producer of palm oil and the second-largest maker of rubber, are reeling from a slump in commodity prices amid recessions in the U.S. and Europe. Japan fell into its first recession since 2001, according to a Cabinet Office report today in Tokyo, after the world's second-largest economy unexpectedly shrank in the third quarter.

“Export demand will feel the impact of global slowing going forward,'' said David Cohen, director of Asian forecasting at Action Economics in Singapore. “Sentiment is likely to be impacted as the stock market has slipped and people are just nervous.''

The rupiah fell 2 percent to 11,810 against the dollar at 2:52 p.m. in Jakarta.

The government last month cut next year's target for Indonesia's overseas-sales growth to below 11.9 percent. Frozen credit markets are making it difficult for companies to obtain the letters of credit needed to secure payment for their shipments.

`Financial Turmoil'

“A few months ago I had five out of six containers already on their way to the port returned because the client suddenly called and said he couldn't secure the payment,'' said Umar Chotob, owner of CV Java Marindra Jaya, which exports wooden furniture. “The impact of the financial turmoil is remarkable. It's overwhelming.''

Exports growth slowed to 14.3 percent in the quarter from a year earlier. Farm output grew 2.4 percent in the three months ended September, the slowest pace in six quarters creditscore.com. Construction increased 7.5 percent, the least since the quarter ended December 2005.

Rising prices of coal, palm oil, coffee and rubber earlier this year increased the income of farmers and miners. That helped boost sales of motorcycles to a record 612,032 in August, after Indonesians purchased an unprecedented 60,830 cars in July.

Since then, commodity prices have tumbled. Power station coal prices at Australia's Newcastle port, a benchmark for Asia, fell 6.2 percent in the week to Nov. 14 amid declines in global energy prices.

“All export prices are down and you can't compensate that with extra volume because demand is not there,'' said Tony D. Costa, the president of PT Bank Rabobank International Indonesia, a unit of the world's biggest agricultural lender. Consumer spending is slowing and “motorcycle sales will be much lower. That means the economy will slow.''

Global Slump

Indonesia's economic growth may ease to as low as 5 percent next year as the world tilts toward a recession, Finance Minister Sri Mulyani Indrawati said on Nov. 9.

“It will be very, very challenging for us to maintain growth under the current circumstances,'' Sri Mulyani said. “Just like other developing countries, we have to be prepared for a longer period of weakening in the economy.''

Government spending rose 16.9 percent, the fastest pace since the three months ended June 2006.

“Private consumption may still be able to sustain Indonesia's growth trajectory amidst deteriorating external trade position,'' said Enrico Tanuwidjaja, an economist in Singapore at Oversea-Chinese Banking Corp.

The statistics agency forecasts 2008 economic growth to be a “minimum'' 6 percent and less than 6 percent next year.

Source

The Federal Reserve and other U.S. regulators told banks to maintain lending to “creditworthy'' borrowers, and warned them against levels of dividend payments that would curb lending and cause a deeper economic slump.

Government supervisors “will take action when dividend policies are found to be inconsistent with sound capital and lending policies,'' according to a joint statement today from the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision. Dividends shouldn't be at a level that would hurt a bank's ability “to meet the needs of creditworthy borrowers short-term cash loans.''

Regulators will “encourage'' banks to “practice economically viable and appropriate lending activities'' to avoid deepening the economic downturn, the agencies said.

They also urged lenders and servicers to adopt “systematic'' ways to modify troubled loans. In addition, banks' executive compensation policies should “prevent short-term payments for transactions with long-term horizons,'' the statement said.

Source

Miami Heat star Alonzo Mourning wants to develop a 190-unit affordable rental housing community for families and the elderly in downtown Miami’s Overtown neighborhood.

The Alonzo Mourning Charities wants to lease 5 acres of Miami-Dade County-owned land at the southwest corner of Northwest Third Avenue and 17th Street for a $1 a year. The Miami-Dade County Housing Agency currently calls the site home.

Miami-Dade’s Economic Development and Human Services Committee is scheduled to hear the request on Wednesday. It then is set to go before the Miami-Dade County Commission on Dec. 2. Commissioner Audrey Edmonson, who sponsored the resolution, did not return calls for comment.

In addition to being part of the Heat’s championship team in 2006, Mourning has, through his nonprofit organization, sponsored the annual Zo’s Summer Groove all-star basketball game to raise money for his charity. The charity was behind construction of the Overtown Youth Center in 2003 and sponsors the Honey Shine mentoring program for young girls.

According to the nonprofit’s most recent tax return available, it had $2.8 million in revenue and spent $2.1 million on programs and services in 2006. It was $90,480 in the red at the end of that year.

If the county commission approves the rental-housing proposal, it would be a first for the nonprofit.

“We are not in a position to talk about it at this time,” said Lisa Joseph, development director for Mourning Charities. She did not answer an e-mailed question about the project’s funding source.

Joseph referred questions to developer Shawn Wilson, executive VP of the Housing Trust Group, a Coconut Grove-based for-profit real estate investment, development and management company, which has completed other affordable housing projects in South Florida.

Wilson confirmed that Mourning’s charity plans to construct three buildings with about 190 units total, as listed in the resolution Faxless pay advances. About 95 of the two- and three-bedroom units would be reserved for families with an income at or below 60 percent of the county’s adjusted median income. Elderly residents will have to meet the same income criteria to qualify for the 95 planned one-bedroom units.

Wilson said his company and the charity would form a joint venture to develop the property. He declined to say whether the land would be put into a land trust.

Properties developed by land trusts pay property taxes. But, appreciation in land value is limited through the terms of a long-term lease.

Mourning’s charity plans to apply for tax credits from the Florida Housing Finance Corp., according to the county resolution.

“This is a fantastic concept,” Wilson said. “It is something we are all very excited about.”

Although Wilson said he recognized the joint venture is seeking use of a county-owned asset, he would not provide more information than what was in the resolution.

“We would be happy to discuss all the details on the development as soon as the county commissioners have voted,” he said.

In 2007, the Housing Trust Group built Green Cay Village, a 400-unit community in Delray Beach with condominium units and townhomes that were for sale and rent. It was Palm Beach County’s first affordable housing development marketed to teachers, police officers and other public service jobs, according to the project Web site.

The Housing Trust also developed Malibu Bay, a 264-unit rental apartment building in West Palm Beach. The project, which was completed in 2005, was developed on a former golf course that had been declared a brownfield.

Source

Top U.S. economists say the economy has fallen into a recession that will continue throughout 2009, according to a new survey.

The National Association of Business Economists reports that 90 percent of the 102 members responding are more pessimistic about the economy than they had been in July.

Those economists indicated that a recession is likely to continue at least through the end of next year, with 79 percent saying the economy will grow less than 1 percent, and 38 percent saying the economy will shrink next year.

With the economy mired in a prolonged credit crisis, the Federal Reserve has slashed the rate for overnight bank loans several times, most recently cutting them by a half-percentage point, to 1 percent, on Oct same day cash advance. 29.

But just 36 percent of respondents say the rate cuts and other initiatives by the Fed to unfreeze credit markets are having a positive impact. And 58 percent say the programs are having little impact.

The survey was completed on Oct. 23, before the Fed’s last rate cut.

Source

Fidelity Investments announced plans to lay-off 2.9 percent of its employees later this month. The financial giant employs 44,400 employees in its business units.

A second lay-off is scheduled for early next year, but how many jobs will be shed in that round has not been finalized. Fidelity is one of Greater Cincinnati’s largest employers, with several offices in the area. The company didn’t specify where the cuts would come from.

Fidelity executives attribute the cutbacks to global economic conditions, the unsettled stock markets, and the need to position the company to better take advantage of opportunities in a rebounding business climate companies making payday loans.

Fidelity Investments is the largest provider of workplace retirement savings plans with custody of $3.0 trillion in assets. The company also provides benefits outsourcing services to 24 million employees and is the largest purveyor of mutual funds in the United States.

Source

German Chancellor Angela Merkel's Cabinet agreed on a package of measures aimed at unlocking 50 billion euros ($65 billion) of investment to shore up the economy amid a global slowdown.

The two-year program ranges from tax breaks for buyers of new cars to greater financial help for improving buildings' energy efficiency. The measures will cost 23 billion euros in the four years through 2012, of which 10.9 billion euros will come out of the federal budget, the Finance Ministry said.

The government aims to “avert a credit squeeze for small and medium-sized companies,'' Economy Minister Michael Glos told a news conference in Berlin today after the Cabinet met. “It's a tailored economic growth package, not a classic stimulus program — we want to strengthen the power of the economy to resist the impact of the crisis.''

The government program for the economy, Europe's biggest, comes two days after the European Commission forecast stagnation in Germany in 2009, an election year. The government last month slashed its own forecast for 2009 growth to 0.2 percent from 1.2 percent, citing weakening demand for exports as the financial crisis feeds into the global economy.

`Bold and Targeted'

“We will have difficulties in 2009,'' Merkel told reporters today. “We want to do something to counter this with investment incentives.'' The program, which also includes increased tax relief on household repairs, loans to small and medium-sized businesses and money for roads and railways, is “bold and targeted'' and will act as a bridge to revive economic growth in 2010, she said.

Even so, the package “is too small and is designed mainly for capital spending instead of consumer spending,'' Stefan Bielmeier, an economist with Deutsche Bank AG in Frankfurt, said in a Nov. 3 note. “We believe that the growth impulses will be smaller than expected by the government. But it could help to shorten the period of negative GDP growth in Germany.''

Germany follows the U.S. in attempting to prime the wider economy after the financial crisis triggered the collapse of Lehman Brothers Holdings Inc. in September, forcing government bank bailout programs. Germany rushed a 500 billion-euro bank- rescue plan through parliament Oct pay day loan lenders. 17.

U.S. Comparison

President George W. Bush signed a $168 billion economic stimulus package into law in February that sent tax rebates of as much as $600 to individuals and $1,200 to couples. The package is equivalent to about 1.2 percent of gross domestic product, according to Bloomberg calculations.

U.S. lawmakers are moving toward a second fiscal-stimulus bill after Federal Reserve Chairman Ben S. Bernanke endorsed the idea. Democratic President-elect Barack Obama has called for a measure worth $175 billion.

The German steps, equivalent to about 2 percent of gross domestic product, will have “double the effect of the Bush program,'' Jens Ehrhardt, who oversees $12 billion at Munich- based Dr. Jens Ehrhardt Kapital AG, told yesterday's edition of Handelsblatt newspaper.

The measures will hurt attempts to balance the federal budget by 2011, which will remain a “goal'' for the government in the next legislative period after the election, Merkel said in a speech to the BDA employers' federation yesterday.

National Elections

Finance Minister Peer Steinbrueck, a Social Democrat, told reporters today that the budget may be balanced by the end of the next legislative period, in 2013. Merkel's Christian Democrats and her Social Democrat coalition partners will contest national elections in September next year.

In a related development, a panel of fiscal experts meeting in Hildesheim, about 140 kilometers (90 miles) south of Hamburg, gave new estimates for tax revenue showing that total revenue will hold up next year in the face of the economic slowdown.

Revenue at federal, state and municipal level next year will be 572 billion euros compared with a May estimate of 571 billion euros, the Finance Ministry said, citing the panel's findings.

“Merkel needs every cent of tax revenue she can get next year — the crisis rescue packages are a huge burden on the budget,'' Rainer Kambeck, a fiscal policy specialist at the Essen-based RWI economic institute, said in an interview. “The forecast is surely a relief.'' RWI is a member of the tax panel.

Source

U.S. stock markets appeared headed higher Tuesday as polls opened for the presidential election.

Futures tied to the Standard & Poor's 500 Index gained 20 points to 999 at 7:15 a.m. Dow Jones Industrial Average futures gained 181 points to 9513. Nasdaq 100 futures added 30 point to 1371.50.

European stock markets built on gains in Asia overnight. At 8:01 a.m. the FTSE 100 Index was up 89 points, or 2 percent, to 4532 on the London Stock Exchange loan until payday. The Dax Index added 91points, or 1.8 percent, to 5118 on the Frankfort Stock Exchange.

The Nikkei 225 gained 537 points, or 6.27 percent, to 9114 on the Tokyo Stock Exchange Tuesday.

Source