Finance Blog number 1

Former U.S. Treasury Secretary Henry Paulson says in his new memoir that he was prepared to support a government backstop to prevent the bankruptcy of Lehman Brothers Holdings Inc. until he learned the firm’s assets were so mis- marked it would have guaranteed a loss to taxpayers.

Going into a Sept. 12, 2008, meeting at the New York Federal Reserve Bank with the leaders of the largest Wall Street firms, Paulson and then-New York Fed President Timothy Geithner agreed that “if a Bear Stearns-style rescue was the only option, we would take it,” the ex-secretary wrote in “On The Brink.”

Although the book isn’t scheduled for release until Feb. 1, Bloomberg News purchased a copy at a New York bookstore.

The government was able to facilitate the merger of Bear Stearns Cos., a failing New York investment bank, and JPMorgan Chase & Co. by having the Fed guarantee $29 billion of Bear Stearns’s assets. A similar rescue of Lehman proved impossible because a deal to sell the investment bank couldn’t be completed, Paulson wrote. The executives gathered at the New York Fed also concluded Lehman had overvalued its assets by at least $37 billion, he said.

“The toxic quality of Lehman’s assets would have guaranteed the Fed a loss,” Paulson 63, wrote, meaning the central bank couldn’t legally make a loan.

The U.K. government ultimately was responsible for forcing Lehman into bankruptcy, Paulson said. Lehman executives had reached a deal to sell the bank to Barclays Plc, a British bank, on Saturday, Sept. 13.

Chief Executives

The same day, the chief executives of the other New York banks gathered at the New York Fed had agreed their firms would, along with Barclays, collectively finance the Lehman shortfall, Paulson said. The group included Lloyd Blankfein of Goldman Sachs Group Inc., John Mack of Morgan Stanley, Jamie Dimon of JPMorgan Chase, Vikram Pandit of Citigroup Inc., Brady Dougan of Credit Suisse Group AG, and Robert Kelly of Bank of New York Mellon Corp. They agreed to backstop the deal even though under mark-to-market accounting rules, they would have to immediately recognize a $10 billion loss on the Lehman assets, he wrote.

The U.K. government, however, refused to waive a requirement that Barclays submit the deal to a shareholder vote, in spite of a personal plea by Paulson to Chancellor of the Exchequer Alistair Darling. Darling, Paulson wrote, was concerned that if Lehman’s bad assets hurt Barclays, it might affect the entire U.K. banking system.

“The British screwed us,” Paulson, a former chairman of Goldman Sachs, said he told the U.S. bankers the next day.

Accounts Frozen

The former Treasury secretary said he, Geithner, and Fed Chairman Ben S. Bernanke were well aware the bankruptcy of Lehman would cause havoc in financial markets, although the consequences were much worse than they had anticipated. That was in part because Lehman’s U.K. bankruptcy receiver, PricewaterhouseCoopers, froze all of the firm’s accounts in that country, refusing to transfer collateral back to Lehman creditors, Paulson said.

Panicked investors then tried to withdraw funds from other financial institutions, including Morgan Stanley and Goldman Sachs, and credit markets froze. Concerned that publicly admitting the government couldn’t help them would lead to a run that would bankrupt those firms, Paulson said he maintained at the time the government wouldn’t help because it would contribute to moral hazard, a belief the government would always bail out investors.

‘Strict Line’

“In retrospect I’ve come to see that I should have been more careful with my words,” Paulson wrote. “Some interpreted that to mean that we were drawing a strict line in the sand about moral hazard, and that we just didn’t care about a Lehman collapse or its consequences. Nothing could have been further from the truth.”

Paulson wrote that he personally liked Lehman chief executive Richard Fuld, and had made more than 50 phone calls to Fuld, discussing ways to save Lehman, in the months between the Bear Stearns rescue and Lehman’s bankruptcy.

Fuld “was direct and personable, a strong leader who inspired and demanded loyalty,” Paulson said. “But like many ‘founders’ his ego was entwined with the firm” and Fuld waited too long before making a serious effort to sell the company, Paulson wrote.

Bear Stearns savior Jamie Dimon is described in the book as “technically proficient and deeply self-assured.” Other bank executives, however, were convinced Dimon was working against them in an effort to put them out of business, Paulson wrote.

He praises Bernanke as “easily one of the most brilliant people I’ve known,” and Geithner, the current Treasury secretary, for his “keen analytical mind and a great sense of calm.”

‘Scary Smart’

Democratic Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, is “scary smart, ready with a quip and usually a pleasure to work with.” During the crisis, however, Senate Finance Committee Chairman Christopher Dodd, a Connecticut Democrat, was “distracted by his unsuccessful campaign” for president, Paulson said.

Much of the crisis played out during the 2008 presidential campaign, and Paulson said he spoke often with Democratic candidate Barack Obama. “I was impressed with him,” he wrote. “He was well informed, well briefed, and self-confident,” Paulson said. “The day after the election, Obama abruptly stopped talking to me.”

Sarah Palin

He spoke less frequently with Republican candidate Senator John McCain of Arizona, and he did not get along with vice presidential candidate Sarah Palin, then the governor of Alaska, according to the book.

“Right away she started calling me Hank” during the first briefing he gave her, Paulson said. While almost everyone addressed him by his nickname, “for some reason, the way she said it over the phone like that, even though we’d never met, rubbed me the wrong way.”

Paulson also wrote that Chinese officials were very helpful during the crisis. He spoke often with Wang Qishan, vice premier of China’s financial and economic affairs, who pledged his country wouldn’t sell its large holdings of U.S. Treasury and agency bonds.

Russia, however, tried to take advantage of the turmoil in U.S. markets, he wrote. While he was attending the Summer Olympic Games in Beijing in early August 2008, he learned that “top-level” Russian officials suggested to the Chinese that the two countries sell a large amount of the Fannie Mae and Freddie Mac bonds they owned in order to force the U.S. to bail out those firms.

The Chinese refused, Paulson said.

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The Toronto stock market headed for a lower open as oil prices fell on concerns about reduced demand and a stronger U.S. dollar.

The Canadian dollar was down 0.29 of a cent to 97.42 cents US.

U.S. futures also pointed to a negative open despite an earnings report from chip giant Intel Corp. after the market close that blew past expectations on earnings and revenue. But investors were less happy with results from JPMogan Chase, which beat earnings expectations but missed on revenue.

The Dow Jones industrial futures fell 44 points to 10,619, the Nasdaq futures declined 9.25 points to 1,879 and the S&P 500 futures were off 6.8 points to 1,138.4.

JPMorgan Chase earned US$3.28 billion or 74 cents a share during the final three months of 2009, primarily because its investment banking and trading businesses were still profiting from a 10-month market rally. The showing easily topping analysts expectations of 61 cents but total revenue fell below expectations and the company’s stock fell about two per cent in pre-opening trading.

“Even though actual earnings rose fourfold from a year earlier, investors are not happy with the fact that the retail bank operation still reported a loss for the quarter and boosted its loan loss reserves,” observed Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.

“Well, after the almost unbelievable run higher in bank stocks last year you have to expect some disappointments along the way.”

Intel Corp. turned in a profit of US$2.3 billion or 40 cents a share, much higher than the 30 cents a share that analysts forecast. It also beat revenue forecasts and the number one maker of computer microprocessors delivered a bright profit outlook for 2010 short term personal loan.

Oil prices moved down for a fifth session with the February crude contract on the New York Mercantile Exchange 51 cents lower to US$78.88 a barrel.

The latest dip came even as the International Energy Agency predicted in its monthly report that oil demand will average 86.3 million barrels a day this year, or 1.4 million barrels a day more than in 2009.

The February bullion contract on the Nymex moved down $7 to US$1,136 and March copper was unchanged at US$3.39.

Before the markets open, the U.S. government provides two fresh readings on the economy.

The Labour Department is likely to report that consumer prices in December rose 0.2 per cent after rising 0.4 per cent in November, according to forecasts of analysts polled by Thomson Reuters. The report is also likely to show that consumer prices for 2009 posted their first annual drop since 1954.

Later in the morning, the Federal Reserve issues its report on production from factories, mines and utilities for December. Economists predict that industrial production rose 0.6 per cent, after rising 0.8 per cent the previous month.

Overseas, Japan’s Nikkei 225 stock average advanced 0.7 per cent while Hong Kong’s Hang Seng slipped 0.3 per cent.

London’s FTSE 100 index eased 0.24 per cent, Frankfurt’s DAX dropped 0.94 per cent while the Paris CAC 40 declined 0.6 per cent.

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As credit card companies continue raising rates and fees, lawmakers are considering bills to stop such hikes until new credit card laws take effect.

In the House, a key committee passed a bill to move up by nearly three months the start date of new laws aimed at cracking down on the way credit card issuers raise fees and assess credit risk. The new start date would be Dec. 1, up from Feb. 22.

"It was argued … that they needed more time, and we granted them more time, but it was under the understanding that abusive practices would not continue, and double and increase dramatically," said Rep. Carolyn Maloney, D-N.Y., a bill sponsor, debating amendments to it.

The House Financial Services committee passed it on a voice vote.

In the Senate, Sen. Chris Dodd, D-Conn., Sen. Charles Schumer, D-N.Y., and others have introduced a bill to freeze credit card interest rates until the new legislation takes effect Feb. 22.

"We worked long and hard to enact the safeguards included in the Credit CARD Act," Dodd said. "And no sooner had it been signed into law, but credit card companies were looking for ways to get around the protections this Congress and the American people demanded."

Congressional watchers say that the odds are against passage for either bill, especially since the two are not identical.

"For now, this seems to be much more about scoring political points by beating up on unpopular credit card companies than on pushing legislation that can get enacted quickly," said Jaret Seiberg, an analyst with Concept Capital’s Washington Research Group.

Public up in arms

Still, public outrage continues to boil over on the topic, especially as card issuers continue to hike rates.

On Tuesday, the Pew Charitable Trusts released a study showing that interest rates rose by an average of 23% from December 2008 to July 2009.

Also, they found that all the largest banks and card issuers had engaged in practices that would be prohibited under the new credit card laws, such as hiking penalty rates on those who are just barely late on a credit card payment default payday loan. The new law would only allow such a hike if the cardholder is more two months late.

"The unfair and deceptive practices that the credit card act targets remain widespread, and in some cases we’ve seen it getting worse," said Nick Bourke, manager of the Pew Safe Credit Cards Project.

The banks say that tinkering with the new law start date is unnecessary. They say rates are rising because customers and economic times are riskier. Record number of cardholders have been walking away from card debt, unable to pay, according to Federal Reserve data.

"We oppose it, because the two main factors driving the changes are the increased risk of nonpayment from the borrower and the riskiness of the economy," said Scott Talbott of the Financial Services Roundtable, a business lobbying group.

Last week, Republicans on the House panel pointed to a letter from Federal Reserve Chair Ben Bernanke about the consequences of moving up the effective date. Bernanke said advancing the date could be tough on companies and would prevent the Fed from getting feedback on its proposed new rules cracking down on fees.

"Although a December 1 effective date could provide benefits for consumers, the Board continues to believe that. . .card issuers must be afforded sufficient time for implementation to allow for an orderly transition and to avoid unintended consequences," Bernanke wrote.

The Credit CARD Act was signed into law by President Obama on May 22, with a first round of changes — including giving cardholders 45 days notice before a hike takes effect — taking hold in August. The more substantial changes were slated to take effect about six months later.

Among other things, the new law bans rate hikes unless a consumer is more than 60 days late — and then restores the previous rate after six months if minimum payments are made. It also makes it harder for people under age 21 to get credit cards. 

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Slowing inflation may give the upper hand to Federal Reserve policy makers who want to keep interest rates low for a long time to support a recovery from the worst recession since the 1930s.

The consumer-price index rose 0.2 percent last month, after a 0.4 percent increase in August, figures from the Labor Department showed today in Washington. Compared with a year earlier, consumer prices were down 1.3 percent.

Recent comments have shown a growing rift between policy makers who believe the central bank has plenty of time to act before inflation flares and those saying rate increases may happen sooner, or with more force, than some investors anticipate. Bond-market trading shows investors expect inflation over the next 10 years to exceed the latest readings.

The Fed “can keep it low for quite some time,” said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York, referring to the benchmark rate. “There’s a lot of excess slack built into the system, and it’s not going to go away quickly.”

Ricchiuto forecasts central bankers won’t raise rates at least through the middle of 2011. The median estimate of economists surveyed by Bloomberg News from Oct. 1 to Oct. 8 showed policy makers will wait until the third quarter of 2010 to start raising that target for the overnight borrowing cost between banks as unemployment rises and inflation slows.

The rate has been near zero since December, the lowest on record.

Fed Minutes

The minutes of the policy-making Federal Open Market Committee’s Sept. 22-23 meeting, released yesterday, showed officials weighed the risks that an anemic recovery would lead to “subdued and potentially declining wage and price inflation.”

Fed Vice Chairman Donald Kohn, echoing the concerns of New York Fed President William Dudley, said this week that inflation and growth will probably stay below the Fed’s objectives for some time, warranting low interest rates for an “extended period.” In contrast, Kansas City Fed President Thomas Hoenig and Fed Governor Kevin Warsh have been among those saying rate increases may be needed sooner.

Today’s report on consumer prices showed the so-called core index, which excludes food and energy, climbed 0.2 percent in September, pushed up by health-care and a rebound in automobile prices. Compared with September 2008, prices climbed 1.5 percent after a 1.4 percent increase in the 12 months ended in August.

Inflation Outlook

The difference between rates on 10-year notes and TIPS, which reflects the outlook among traders for consumer prices, was at 1.97 percentage points today, the most in more than two months. The spread, which signals the expected inflation rate over the next 10 years, is little changed from the 2.18 percentage points average over the last five years.

Categories such as rents and food are among those making a pickup in inflation less likely, economists said. Rents, which account for almost 40 percent of the core index, dropped 0.1 percent last month, the fist decrease since 1992. Record levels of vacancies will probably continue to restrain those costs.

Food prices were down 0.2 percent in the 12 months to September, the first year-over-year drop since 1967.

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Iceland’s central bank left the benchmark interest rate unchanged as policy makers try to support the currency before capital restrictions are scaled back later this year.

Reykjavik-based Sedlabanki kept the repo rate at 12 percent, according to a statement on its Web site today. The bank has lowered the rate four times this year from a record 18 percent since obtaining a $5.1 billion loan from a group led by the International Monetary Fund.

Iceland’s economic collapse, sparked by the failure of its biggest banks in October, forced the island to impose capital controls to prevent a sell-off of the krona at the end of last year. Restrictions failed to prevent a 7.9 percent krona decline against the euro this year and the IMF has warned that the central bank needs to focus on keeping the currency stable as Iceland targets relaxing capital controls from November.

“The central bank’s main focus is on maintaining the rate of the krona, which should limit the chances of policy rate changes into the second quarter of 2010,” Ingolfur Bender, head economist of Islandsbanki, said before the announcement.

At 12 percent, Iceland’s benchmark is Europe’s joint highest, together with Serbia’s two-week repo rate.

Iceland’s currency is undervalued, Governor Mar Gudmundsson said in an Aug. 26 interview, and the bank’s main challenge is to “find opportunities” to lower rates without harming the krona as capital controls are eased. The bank hasn’t ruled out raising interest rates to prevent the value of the krona from decreasing, once capital controls are removed.

Stricter Surveillance

The central bank announced on Sept. 18 that it would impose a stricter surveillance of the island’s capital restrictions, after breaches weakened the currency. The bank is investigating “dozens” of violations of the capital controls, it said then.

The krona rate will average 169.2 against the euro this year and 168.9 in 2010, the central bank said on Aug. 13. That compares with 183.01 against the euro yesterday and an average rate of 180.52 since the end of June.

Iceland will allow new investors to avoid capital controls starting Nov. 1, provided the island meets a set of economic conditions, including stabilizing its financial system and currency, the central bank said on Aug. 5. Controls will be lifted in two stages, with the first step allowing foreign- currency inflows linked to new investments to circumvent controls and the second step freeing long-term outflows.

Drive Policy

Franek Rozwadowski, the IMF’s representative on the island, said in a July 2 interview that the target of keeping the krona stable is “what should drive monetary policy.”

Inflation slowed to an annual 10.9 percent in August, from 11.3 percent in July, the statistics office said on Aug. 27.

The central bank expects inflation to approach its 2.5 percent target early next year, it said on Aug. 13. There is also the “possibility” of “temporary deflation” in late 2010 and 2011, the bank said.

The central bank estimates Iceland’s economy will contract by 9.1 percent this year. Household spending will slump 19.7 percent and fixed investment will plunge 48.4 percent, according to the bank.

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Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

G-20 Steps

“We aren’t doing anything significant so far, and the banks are pushing back,” said Stiglitz, a Columbia University professor. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”

G-20 leaders gather Sept. 24-25 in Pittsburgh and will consider ways of improving regulation of financial markets and in particular how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers earlier this month reached a preliminary accord that included proposals to reduce bonuses and linking compensation more closely to long-term performance.

“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary free 3-in-1 credit report. Yes they’ll do something, the question is: Will they do as much as required?”

Global Economy

Stiglitz, former chief economist at the World Bank and member of the White House Council of Economic Advisers, said the world economy is “far from being out of the woods” even if it has pulled back from the precipice it teetered on after the collapse of Lehman.

“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”

The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

“The question then is who is going to finance the U.S. government,” Stiglitz said.

Stiglitz gave the interview before presenting a report to French President Nicolas Sarkozy that urged world leaders to drop an obsession for focusing on gross domestic product in favor of broader measures of prosperity.

GDP’s Shortcomings

“GDP has increasingly become used as a measure of societal well being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said.

Assessing government’s contribution to economic output, which ranges from 39 percent in the U.S. to 48 percent in France, is one of the shortcomings of the GDP model, as is its difficulty in estimating improvements in quality of products such as cars instead of just quantity, Stiglitz said.

Similarly, increased household debt may drive up output numbers, even though that doesn’t amount to a real increase in wealth, he added.

While Stiglitz doesn’t recommend dropping GDP altogether, he wants governments to consider such matters, along with issues of environmental sustainability, in policy making.

“Most governments make a fetish out of it. If you take one message out of our report, make it avoid GDP fetishism,” he said. “The message is to encourage political leaders away from that.”

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European Central Bank council member Axel Weber said price pressures will remain subdued as the euro- region economy struggles to recover from its worst recession since World War II.

There is little risk that the ECB’s policy of flooding banks with cash will stoke inflation and it will take some time before the economy is growing fast enough to push up prices, Weber said in a speech in Frankfurt today. “All in all, inflation fears, understandable as they may be, are unfounded.”

The ECB last week left its benchmark interest rate at a record low of 1 percent and said it will continue to lend banks as much money as they want at that rate for up to 12 months. It remains wary of nipping the euro-region recovery in the bud by tightening policy too soon as rising unemployment and the expiry of government rescue packages threaten to damp expansion next year.

Weber, who heads Germany’s Bundesbank, said the economic recovery will be “protracted” and interest rates are “appropriate” for the inflation outlook. “It’s too early” to withdraw the monetary stimulus, he said, adding a “timely exit” is nevertheless vital.

ECB President Jean-Claude Trichet said last week that, when the time comes, many of the bank’s stimulus measures will “naturally unwind” as existing loans mature and demand for additional cash wanes paydayloans. The ECB can also use fine-tuning operations to absorb excess liquidity if needed, he added.

Long-Term Loans

Weber said lending should be scaled back “gradually,” and while the ECB will probably reduce the number of its long-term refinancing operations, it’s unlikely to reduce them to pre- crisis levels.

Weber said the timing of the ECB’s exit should be guided by signals from money-supply and credit data, which he said are currently not pointing to any inflation risks.

“As soon as upside risks to price stability in the medium term become visible, it is time to make monetary policy more restrictive,” he said.

Weber also restated his view that it might be wise to tighten policy before any threats to price stability emerge in order to prevent future crises. That could present policy makers with a communications challenge, particularly if unemployment is rising at the time, he said.

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Employers kept Americans’ working hours near a record low in August, signaling that economic growth is poised to reward companies with added profits while postponing any recovery in the job market.

The average workweek held at 33.1 hours, six minutes from the 33 hours in June that was the lowest since records began in 1964, the Labor Department said yesterday. The report also showed that while payrolls fell by the least since August 2008, the unemployment rate rose to a 26-year high of 9.7 percent.

The preconditions for gains in payrolls, including giving the army of part-timers longer hours and taking on additional temporary employees, weren’t met last month. At the same time, with economic growth forecast to resume this quarter, the figures set the stage for a surge in worker productivity and drop in labor costs that will stoke corporate profits.

“It’s disappointing and it tells us that we are not quite there yet,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York who used to work at the Federal Reserve. “It’s great for business and terrible for households” for coming months, Feroli said.

There were almost 9.1 million Americans working part-time last month who would rather have a full-time job, up 278,000 from July, yesterday’s report showed. It almost matched May’s reading, when it reached the highest level since records began in 1955.

Total Hours

The index of total hours worked, which takes into account changes in payrolls and the workweek, fell 0.3 percent last month to the lowest level since 2003.

“It tells us payrolls aren’t turning positive any time soon,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said on a conference call yesterday, referring to the workweek figures. “This wasn’t a friendly report.”

A measure of unemployment, which includes the part-time workers who would prefer a full-time position and people who want work but have given up looking, reached 16.8 percent last month, the highest level in data going back to 1994.

The workweek for factory employees, which held at 39.8 hours last month, leads total payrolls by about three months, LaVorgna said auto loan. Once it reaches at least 41 hours and once payrolls for temporary workers stabilize, then an increase in total employment can be expected months later, he said.

Payrolls for temporary workers started turning down in January 2007, 11 months before the recession began. They dropped by another 6,500 workers in August, the government’s report showed yesterday.

On the Mend

At the same time, the report did underscore that the economy is on the mend and pulling out of the deepest recession since the 1930s. The drop in payrolls slowed for the sixth time in seven months, to 216,000 in August. Declines in temporary jobs have also slowed in recent months. Companies cut 90,400 temporary staff in November of last year.

It’s a step in the right direction, Tig Gilliam, chief executive officer of Adecco Group North America, said in an interview. “That has to happen first,” he said. “That is a pre-indicator for improvement in the overall market.” Adecco SA, based in Glattbrugg, Switzerland, is the world’s largest supplier of temporary workers.

Gilliam projects the U.S. economy will not start adding jobs until early 2010 and that unemployment will reach at least 10 percent next year. The jobless rate climbed to 9.7 percent last month, the highest level since 1983, from 9.4 percent in July, yesterday’s report showed.

Total Hours

Total hours worked are down at a 2.8 percent annual pace so far this quarter, according to calculations by Ian Morris, chief U.S. economist at HSBC Securities USA Inc. in New York.

Morris, who projects the economy will expand at a 4 percent to 6 percent pace this quarter, says that means worker productivity may exceed the second quarter’s 6.6 percent jump, which was the biggest gain in almost six years.

“This is set to flow straight into the corporate bottom line,” he said in an e-mail to clients. That indicates the “strong” earnings for companies in the Standard & Poor’s 500 Index in the three months to June will continue this quarter, he said.

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The billionaire co-founder of top data storage equipment firm EMC Corp, Richard Egan, died on Friday, a spokesman for the company said in an emailed statement.

Egan, the “E,” behind the EMC name, co-founded the Hopkinton, Massachusetts-based company 30 years ago with Roger Marino, according to the company’s web site.

Listed in Forbes’ 2009 list of the world’s billionaires with net worth of $1 billion, Egan led the management team that took EMC company public in 1986 and was elected chairman of the board in 1998. He also held the position of president and CEO until 1992, EMC’s web site said.

Egan stepped down from the role of chairman in 2001 and retired from the board that year, when he took on the role of U.S. Ambassador to Ireland, a position he held until 2003 according to details published on the American Ambassadors web site.

“Dick’s vision became one of the world’s top technology companies, and his legacy will live on through the tens of thousands of lives he affected in so many positive ways,” Joe Tucci, EMC Chairman, President and CEO, said in a statement car loans. “We have all lost a great mentor and friend.”

The Boston Herald reported on its web site that Egan was battling terminal cancer and died of a self-inflicted shotgun wound to the head, citing police and other sources. A spokesman for EMC declined comment beyond the statement.

Egan grew up in Boston, Massachusetts, earned a degree in Electrical Engineering from Northeastern University and then studied at the Massachusetts Institute of Technology, according to the American Ambassadors web site. Prior to forming EMC he worked at technology companies including Intel Corp, the website said.

(Editing by Nick Macfie)

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Spain’s unemployment rate rose to 17.9 percent in the second quarter, more than twice the European Union average and the most in a decade, as companies cut payrolls to weather the deepest recession since World War II.

The number of unemployed jumped by 126,700 to 4.14 million people from the previous three months, the Madrid-based National Statistics Institute said today in an e-mailed statement. From a year earlier, 1.76 million people have lost their jobs.

Spain accounts for more than half of the past year’s rise in euro-region unemployment. The economy, suffering from the crash of its once-booming housing market, has more people out of work than Germany, which has twice its population. The European Commission expects the recession to drag on longer in Spain than elsewhere, pushing the jobless rate to 20.5 percent next year.

“The worst is probably passed after this second-quarter data in terms of the rate of increase,” said Dominic Bryant, an economist at BNP Paribas in London. He forecasts unemployment will peak at 22 percent in late 2010 and 2012 is “the earliest you could hope to see a marked improvement.”

The government forecast in June that unemployment would be 17.9 percent this year and peak at 18.9 percent in 2010.

Shedding Jobs

ArcelorMittal, the world’s largest steelmaker, said on June 3 that it may cut working hours at its Spanish unit by as much as 40 percent, idling part of the workforce for the rest of the year life insurance companies. Mecalux SA, Spain’s largest maker of warehouse equipment, said in May it was reducing the working hours of almost 1,000 employees and Nicolas Correa SA, a milling-machine maker, also announced job cuts on July 20.

Almost 30 percent of all unemployed people in the euro area live in Spain, Eurostat says. More than half of Spaniards think their country’s biggest problem is unemployment, a poll by the state-run Center for Sociological Research showed.

The crisis has had a political price. Prime Minister Jose Luis Rodriguez Zapatero’s Socialist Party, reelected last year on pledges of full employment, lost June’s European elections as the opposition People’s Party won 42 percent of the vote.

Spain, riding the wave of a construction boom, created about half the new jobs in the euro region in the five years through 2006. Still, at the height of the boom, about a third of all job contracts were temporary, the most in the 30 countries of the Organization for Economic Cooperation and Development, making it easier for workers to be let go as the crisis hit.

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